MoneyGram International, Inc.
Q1 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Good day ladies and gentlemen and thank you for standingby. Welcome to the MoneyGram International, Inc. First Quarter 2018 Earnings Release Conference Call. Today's conference is being recorded. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. It is now my pleasure to turn the floor over to your host, Suzanne Rosenberg, Head of Investor Relations. Please go ahead, ma'am.

[Suzanne Rosenberg:]

Thank you. Good morning, everyone and welcome to our first quarter 2018 earnings call. With me today are Alex Holmes, Chairman and Chief Executive Officer and Larry Angelilli, Chief Financial Officer. Our earnings release is available on our website at moneygram.com. Please note that today's call is being recorded and some of the information you will hear contains forward-looking statements. Actual results or trends could differ materially from our forecast or expectations. For more information, please refer to the risk factors discussed in our Form 10-K for 2017. MoneyGram assumes no obligation to update any forward-looking statements. Our presentation also includes certain non-GAAP financial measures to provide additional information to investors. All Non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation tables within our earnings release issued this morning and in the Form 8-K submitted to the SEC. And now, I will turn the call over to Alex.

[W. Alexander Holmes:]

Great, thank you Suzanne and good morning everyone and thank you for joining us. It has been well over a year since we held a formal conference call and clearly much has taken place in that time. When we last spoke here at the beginning of a journey to transform MoneyGram from a transaction focused physical network into one that is much more digitally enabled and 100% focused on our customers and their need. Our recently terminated deal with Ant Financial represented an unique opportunity to accelerate this journey and leap frog MoneyGram into a new world. As you know this deal was unfortunately terminated in January when it became clear that the U.S. government would not approve the transaction. With that being the case it doesn’t change our focus. The same set of core assets that made us so valuable to Ant are global network of physical and digital location, our trusted brand name, local compliance and regulatory knowledge and global Mets are -- are the same set of assets that continue to make us extremely valuable today. While short-term revenue headwinds from new compliance standards and the new Wal-Mart white label service will impact this year's results. Moving forward we continue to execute our digital transformation with a solid strategy in place and we are positioned to win. Our strategy is simple, deliver differentiated customer experience rejoice in convenience. Capitalize on the strength of our network by optimizing our physical network and accelerating our digital touch points, modernizing operations and improved efficiency and technology investments and lead in compliance. Collectively we have a solid plan in place to position us for long-term growth and improved cash flow. Given all the recent news I think it made sense to start our discussion this morning with our objective to lead in compliance. Compliance has in many ways become the primary focus of our business. Without this focus we would not be able to properly execute the other elements of our strategy. Every year we continued to witness increases in global risk. Additionally U.S. governments focus on terrorist financing and correspondent banking is pushing many foreign governments to better comply with global status standards, a trend that is forecasted to continue. This is going to increase requirements for our industry to improve compliance standards and in some cases obtain new licenses from governments around the world. These compliance standards are further augmented by our own internal requirements described by our DPA and monitor recommendations. Increased risk and heightened obligations require us to make continuous investments in compliance, fraud prevention, information and cyber security, and regulatory oversights. Protecting our assets, our customers data, and ensuring compliance with global standards are paramount to our success. In order to be as effective as possible compliance programs and the technology they rely on require more information about customers as U.S. regulatory standards currently require money transfer companies to collect. Therefore to better protect MoneyGram's consumers and the integrity of our money transfer network we must go beyond what is required. Earlier this year we launched new global consumer verification standards for all money transfer sends and received, a pioneering move for the money transfer industry. We have chosen to be the leader in consumer protection by being first to market with Customer ID requirements for all transaction. In addition to ID all consumers are now required to provide their name, address, phone number, and date of birth for every transaction, data that we believe enables us to better identify and protect customers. We have also implemented increased data collection standard requirements for higher dollar transactions including ID verification in many cases. Better consumer ID standards are just one aspect of strengthening our controls, lowering consumer risk profiles is also important and to that end we are derisking our business by implementing global rules that limit transaction frequency, controls the limit the total amount of money individuals can send within certain time periods. In addition new four door specific controls targeted at jurisdictions with the highest levels of fraud and money laundering risks have also been implemented. In many respects MoneyGram is now asking for more data from customers in the physical world than any other money transfer company and in 2018 we will push this even further. From an efficiency and risk perspective these changes have been highly effective and we're already seeing improved risk mitigation. At the same time however others in the industry aren’t implementing any types of restrictions so we have seen an impact on revenue, a trend that we also expect to continue throughout 2018. What is most important however though is that MoneyGram is providing its customer with highest standards of protection above and beyond what is currently required by law and without comparison in the industry. We're committed to enhancing our world class compliance platform to strengthen and integrate service, reduce fraud and money laundering risk, and enhanced security for all customer transactions. With respect to fraud the government continues to place pressure on MoneyGram to eliminate consumer fraud from the industry. Consumer fraud occurs when a sender is scammed into sending money to someone they don't know in exchange for promise that is never delivered. IRS tax scams, person in need scams, and romance scams are all of common examples. Consumer scams are on the rise and every day more and more people are falling victim to them as evidenced by recent stories in the news and I'm sure all of you have received a phone call recently from the IRS. MoneyGram despises these scams and the fraudsters that attempt to take advantage of our hardworking customers. The government believes it is our job to prevent these from occurring. We believe it is everyone's responsibility. We continue to invest millions of dollars to prevent these types of fraud from occurring. I am proud to say that through the end of April our fraud rates as a percent of transactions or phase 10 [ph] are at six year low and our capabilities continue to improve. While these initiatives put the company at a short-term competitive disadvantage, it is a trade off that we are willing to make. In fact I'm aware already of several examples of non-exclusive agents in the U.S. adding new providers into their stores because of our new compliance standards. Certain people in the industry recently referred to this as a compliance headache, I can assure you this is not a headache but a reality of the world that we live in today. Recent stories on [indiscernible] Facebook illustrate the risks involved with digital money movement and social media. It's unfortunate that other players in the industry have not been targeted in the same way by the government as getting everyone an equal footing would be welcome and a point that we continue to emphasize in Washington as we push for better compliance standards. With respect to our own DPA as you know since late last year we've been in discussions with the government and we have accrued $95 million related to the matter. Included in our 8-K filed this morning we notified you that we are extending the term of the DPA by another 45 days to continue to discussions. At this point I cannot comment any further on this matter until we reach a final resolution. Now digital acceleration and corresponding send and receive options are enabling us to take a different view of the agent, country, and code orders which are the cornerstones of a more profitable business model. Despite claims made by digital competitors our physical network is in fact a competitive advantage and we're excited to leverage that advantage. Make no mistake we believe our cash network is an extremely valuable asset and one that we will leverage to win. We're proud of the business we've built and the agent partners that operate with us. That being said our network is not without its inefficiencies. The presence of unproductive locations and dormant locations and what we call the long tail of the network simply don't add value and in fact in many cases increase costs and risk. So to that end we're working to optimize the network size which place more emphasis on value creating locations by eliminating unproductive ones. During the first quarter we continue to assess the profitability of our agents and their locations. We also began a process of closing owned stores in the U.S. and several other stores around the world that don't meet our new margin hurdle rates. With respect to Wal-Mart I am extremely pleased and honored to have been selected to provide their outbound white label service. This was a competitive RFP process and while the result will adversely impact the revenue and profitability over the short-term, over the long-term this is a contract better to have won than to have lost. In fact since the launch of Wal-Mart2World 15% of the customers using this service had not previously used MoneyGram and this is before our marketing has even started. In addition we also extended our agreement with Wal-Mart to provide U.S. to U.S. and U.S. outbound money transfers along with bill pay and money order services for another two years. Our relationship with Wal-Mart is strong and we will continue to work hard every day to earn their business. Over the past six months we've renewed many of our top send agents. We know eight of our top agents under contract for at least two more years. Securing these relationships for years to come is illustrative of the value and brand we continue to bring to market and also illustrative of the continued relevance of cash. When you combine our network with our digital capabilities and the strategies that we have in place we have all the assets to win and we will be successful. All these accomplishments initiatives that I've laid out go hand in hand with an overall focus on cost reduction and modernization of operations through technology investments. As we disclosed in our press release we initiated the restructuring of the organization program in the first quarter. Specifically we're positioning the company to better compete in a more digital world. This includes simplifying our cash business and optimizing our network, accelerating our investments in digital to deliver more differentiated customer experience, and reducing our cost of distribution to more efficient go to market platforms and technologies. Once this program is complete we expect to achieve cost reductions of $45 million on an annual run rate basis. As I mentioned earlier without our focus on compliance we will not be able to properly execute the other elements of our strategy. Consumer protection initiatives has forced us to think differently about our products and we are leveraging this to deliver a differentiated customer experience through choice and convenience. An improved view of our customers enabled us to better synchronize our online physical presence. Mobile apps, customer registration, insights and analytics, pricing and promotions, offers and rewards are now all key foundational items of the new MoneyGram. Today's customer centric world is about experience and we are on track to deliver a differentiated experience. In the coming months we'll update you on these changes and provide detail into how we're pushing the company further into a world of consumer insights that will transcend both the physical and digital world. In this new world we also need to think differently about our network, the acceleration to digital enables us to optimize our network. Earlier this year we launched MoneyGram into new countries and plan to add more than 20 new countries to MoneyGram on line in the coming months. In addition as part of our ongoing collaboration with ANT Financial we added mint [ph] in the Philippines for mobile volumes. The expansion of our digital solutions through wallets and account deposits is part of our strategic plan. This will be complemented by improvements to our mobile app and many corresponding programs, a combination of which will make our digital capabilities second to none. We are of course also finding out new ways of moving money in our exploration hot chain [ph] is just one example how MoneyGram is opening its doors to a new world of opportunity. We're also preparing for a world where lower cost and lower prices improve the lifetime value of our customers. While we believe our brand and global network will continue to provide competitive and differentiated value, we believe pricing will continue to come down in the industry and at MoneyGram. And with that I'll turn the call over to Larry.

[Larry Angelilli:]

Thanks Alex. First I'd like to point out four items which particularly impacted our quarterly results. First other income included $30 million related to our terminations of the merger agreement with Ant Financial. We had an accrual of $10 million reflecting a possible resolution of the DPA. This is in addition to the 85 million that we put up in the fourth quarter of 2017. There were 7 million of restructuring costs and we had provisional income tax of 14.8 million compared to 2.5 million last year which I will discuss a bit later. These four items all had a material impact on our results and also have the effect of adding complexity to understanding our bottom line for this quarter. Total revenue for the quarter was 380 million, money transfer revenue was 337 million, a decrease of 6% on a constant currency basis. On a reported basis money transfer revenues decreased 1%. As Alex discussed we have implemented a number of new global compliance standard and as we suspected these new rules have caused some reduction in revenues as customers react to MoneyGram's stricter rules versus the competition. In addition to the impact of these rules, the U.S. to U.S. market continues to be challenging where there is an increasingly aggressive market pricing and a variety of new competitors. Africa continues to be impacted by currency controls in some of our key markets. On a positive note our core business continues to do well in growth in the Middle East, Latin America, and Europe. We also continued to see strong increases in our mobile and online business which grew 21% in the quarter. Looking ahead to the rapid growth of our online business and our digital transformation we believe that our financial disclosures need to reflect the changing cost structure of transactions. Over time we expect significant increases in the number of transactions that have volume related expenses that are not commissions. We need to display our cost structure to reflect this. Therefore in the first quarter of 2018 we changed the presentation of certain operating expenses related to the processing of money transfer transactions such as authentication and funding costs. These expenses were previously captured in the transaction and operations to point line adding our consolidated P&L, now these expenses are grouped with commission expenses and presented in the line item entitled total commissions and direct transaction expenses. The prior year reporting period was also updated and reflect this change in the presentation. Commissions and/or transaction expenses as a percent of revenue for the first quarter were 49% which is an improvement of 100 basis points year-over-year in part due to our continuing focus on margin expansion. And as a reminder commissions will vary throughout the year as our business is affected by quarter mix and seasonality. Total reported non-commission and non-directions action operating expenses for the quarter increased approximately 19 million over the prior year due to restructuring cost and the accrual of 10 million in connection with the possible resolution of the DPA. Without these two items total non-commission and non-direct transaction operating expenses increased to [indiscernible]. Total reported compensation and benefits for the quarter increased 9 million over the prior year due to restructuring costs primarily driven by severance changes in exchange rates due to weaker U.S. dollar and higher employee stock based compensation expense. Excluding restructuring cost of events increased $3 million. First quarter transactions and operating support increased primarily due to the DPA accrual as mentioned. Excluding that accrual transaction and operating support decreased primarily due to a decrease in outsourcing independent contractor consultant cost and other cost savings initiatives. Our focus on optimizing our cost structure was evident over the last year and a half as we've improved margins without the benefit of revenue growth. And it's also our focus on productivity not only with our operations but with our agent relationships. Profitable growth is our priority. As Alex mentioned our restructuring and reorganization program is designed to accelerate our digital initiatives and transform our company into a customer centric model versus our historically agent facing model. This includes reducing the size of our workforce in areas where we already have scale and eliminating infrastructure that supports older and less efficient products. We believe that improving the customer and agent experience has the additional benefit of reducing friction and costs. We began this process in the first quarter and we expensed over $7 million, this substantially should be complete by the fourth quarter and we anticipate expensing approximately 15 million for the four part project. We expect that this will be accretive for fiscal 2018 and upon completion we will produce run rate savings as Alex mentioned of approximately $45 million a year on an annualized basis. Regarding taxes the company recognized the provisional tax expense of 14.8 million compared to 2.5 million in last year's first quarter. As we discussed in the past MoneyGram moved last year to a more efficient and streamlined corporate structure which impacted our U.S. tax. In December with the passage of the Tax Cuts and Jobs Act we are now experiencing a material increase in our U.S. tax rate. The new legislation includes in our tax base certain income generated outside of the U.S. whether or not we repatriate those earnings. The impact can double or sometimes even triple taxation on single items of income and also creates regressive taxation for U.S. corporate tax payers. Our effective tax rate was 68% in the first quarter primarily due to the following four factors; one, income taxes paid outside of the U.S. is limited in terms of credibility against our U.S. tax base which results in double taxation. Secondly, certain inter-company payments seems to erode our U.S. tax base which creates an alternative minimum tax system. Thirdly, the new law restricts the deductibility of certain performance based compensations and the company accrued 10 million related to the DPA which is not expected to be tax deductible. Over time as we make the necessary adjustments to our operations we expect our effective tax rate to normalize over time to a lower level than what was recorded in the first quarter. Once corrections are made to the Act we expect our tax rate to be higher than it would have been if the law had not changed. Before we streamlined our operations and our corporate structure MoneyGram had experienced effective tax rate of about 38% and without any corrections to the law we expect that our normalized effective tax rate in future years will be slightly lower than that. So all due in part to our tax rate net income was 7 million compared to 9 million last year for the quarter. First quarter adjusted EBITDA was 67 million which was flat on a reported basis and down 4% on a constant currency basis. Adjusted EBITDA margin was 17.5%, an improvement from last year's 17.2%. Adjusted free cash flow for the quarter was 29 million compared to 27 million last year. Agent signing bonuses were 12 million for the quarter and capital expenditures decreased 6 million. We ended the quarter with $199.7 million in cash in addition to 3.5 billion in common assets. In our outlook we expect the impact of RPM's compliance rules and the revenue and income effect of the new Wal-Mart agreement will lead to lower revenue and EBITDA for 2018. We expect that our restructuring will be accretive to 2018 results but not of a magnitude to be a full offset. Including the company's first quarter results, the company estimates full year 2018 constant currency revenue to decline between 4% and 6%. We expect capital expenditures to be roughly flat to 2017 at $85 million and we expect signing bonuses of approximately $50 million for the year. Adjusted EBITDA on a constant currency basis was expected to decline between 8% and 10%. And now I will turn the call back to Alex.

[W. Alexander Holmes:]

Great, thanks Larry. Thank you again as always for your interest in MoneyGram and I think we're ready to turn it over to the operator for Q&A.

[Operator:]

[Operator Instructions]. And we will go first to Rayna Kumar with Evercore ISI.

[Nikolai Cremo:]

Good morning, this is Nik Cremo on behalf of Rayna Kumar. Just wanted to start with when do you think MoneyGram will return to revenue growth and what will be the key drivers?

[W. Alexander Holmes:]

Yeah, it is a great question Nik, thanks for taking the time this morning. Yeah, no the -- listen, I mean the business as Larry indicated in certain pockets and certain markets around the world is doing quite well. We're doing that against the backdrop of a few challenging markets. I think Larry called out Africa and a couple countries in the Middle East where we continue to see some challenges related to ongoing currency challenges and employment challenges, etc. So, those are sort of I think inherent in the business and something that we continue to deal with. Clearly last year those had a pretty broad impact on revenue growth. I think this year is a little bit different. First and foremost we have the new compliance rules we've put in place and we're anticipating a good portion of our decline this year to be related to the elimination of revenue associated with historically high dollar advance or increased transaction frequency in certain markets. And so that will dissipate throughout the year and fully impact us in the first quarter and we will continue to impact us on a go forward basis. And in addition we have the new Wal-Mart white label product and I think clearly we're anticipating growth from that product and we're very excited about the positioning of that product and how that service is going to play out over time. But that being said obviously there's lower prices associated with it and so we have to absorb those throughout the year. So given where we are in guidance I think we're looking at next year before we begin to see the revenues acceleration. You know we are very focused on that. I think at the same time we are rolling out a number of initiatives across the digital platform adding a number of new markets on the digital front, we continue to see excellent growth in MoneyGram online and continued excitement around a lot of our wallets and account deposit services. So I think it's a bit of a mix shift going on and I think certainly that will continue to weigh on the top line results. But it's against the backdrop of a plan we're executing against then outside of kind of the normal market variation. It's against our -- or within our expectations I should say.

[Nikolai Cremo:]

Thank you and just as follow up, what is your domestic and cross border pricing strategy going forward, do you continue to be -- do you plan to be the value pressures of the market?

[W. Alexander Holmes:]

Yeah, that is a great question. I think value is an interesting word. I mean I think we have a great value product today but I think if you look out what's happening in the markets and you look at either from the continued growth of competition in a number of markets, some of the smaller players in the retail space and then you drop that against the background of continued focus from the digital players to I think disrupt the traditional markets by pushing low prices across a number of markets. And then you also have things like the World Bank that are -- they had a 5% initiative and now they are pushing that to 3%. And if you look at how will that -- there's a lot of choice for consumers in the marketplace and I think we have to get our business position to compete in that market. I think that we need to get our cost down on per transaction basis so as we can bring our prices down at the same time and we have an interesting focus on that as an organization to begin to look at not just markets and pricing and growth but also profitability by consumer and profitability by specific code order and how we can accentuate the business a little bit differently. So listen I think prices are going to come down, I think it's the natural order of where the business is going to go and I think it's part of how we're going to compete in the future. Obviously in order to do that you have to change cost base and change your per market by market and code order by code order so that you can understand the background and the parallel associated with these individual pricing opportunity. But, yeah, when we look out the market the people we're competing with are evolving quite quickly and we're seeing a lot of the traditional players bring down prices in a number of markets around the world as they begin to reposition their businesses and compete as well. So that's something that we need to do and something we'll continue to do.

[Nikolai Cremo:]

Thank you.

[Operator:]

We will go next to David Scharf of JMP Securities.

[David Scharf:]

Hi, good morning and thank you as well. Welcome back to the conference call circuit Alex. I guess I had a fair amount of questions, I mean obviously you discussed a lot of high level strategic repositionings and I'm wondering and I appreciate some of the specificity on the compliance side for example regarding customer information but can you provide a little more help on understanding maybe the impetus for investing in I guess in your words above and beyond what's required by law and may not -- you know, it's certainly a little different for most of us to see the company that's aging and that kind of force. I'm wondering are there specific regulatory bodies, whether it's FTC, CFPB, individual states, I mean or something that came from the Ant Financial process that has led you to decide to invest more than what arguably is required?

[W. Alexander Holmes:]

Yeah, well first of all thanks for the kind words. It's good to be back. And nice to speak with you again. Listen, I think end of the day the market that we're operating in is changing quite quickly. I really couldn't probably point to a specific government body or anything else. But what I could say is if I turn back the clock and look back at the last five years, the DPA has really pushed us to change the way we go to market and think about compliance. And I think what's been nice about that has been that's come at the same time that we're seeing a lot of pressure from our bank partners and the federal government generally speaking to know more about our customers and ensure that we are in compliance. And this sort of -- this concept of know your customer's customer which I recognize is now being said is really not what's required but it actually is in fact what's required. At the same time we are working very diligently to change the way there we go to market from a business and operation perspective. We are very transaction centric organization. We think about our network, the distributor network, we think about adding locations and transactions, comments, consumers walk into those locations. I think that that's a very nice model. I think it's taken us a very long way but it needs to pivot and change and it needs to pivot and change very quickly. We need to get much more direct to our customers from a digital interactive perspective and that doesn't mean that I don't want them to walk into locations. I absolutely do want them to continue to walk into locations. But I want to know more about them as they come in and there's a couple of reasons for that. One is that we can get closer to the customer. We can talk to them specifically, we can send them things like notification, we can send them receipts, we can communicate with them better. And there is a good reward for that and a good win the customer back and have them come back the next time. In order to do that you need to collect some more information about the customer. You need to get them to sign up, you need to get them to want to transact with you. And you want to win them and have them come back. But there's a risk reward that you have to play off on that which is you have to at the same time on a compliance front you've got to know more about who these customers are. And how do you figure out who they are. We have a very unique industry. We are one of the only industries that I know of that authenticates on the fly. You know someone walks in or someone goes online and they want to send money we're trying to move that money instantly and you got to understand you have to go to people are real time and it's a very unique business in that sense. And so you have to -- you have to quote that information. So how do you know who our customer is, how do you basically authenticate them more and more over the last five years as we have tried to improve our compliance and change our technologies out and look at how we go to market. We've discovered and I guess maybe this is overly simplified but the more I can collect about consumers, the more information they are willing to give us, the easier it is to authenticate, easier it is to communicate with them, and easier it is to effectuate our business from a risk reward perspective over the long-term. And so you get to the point where you see what's happening in the world, you see the risk, you see the requirements that you have as an organization and it just makes sense that you want to collect as much information as you can about customers. You look at the risk out there not only against MoneyGram and our agents but you also look at the risk against consumers and what's happening every day from identity theft and scams and other things that are going on. We need to be sure that we're working with the customers that we want to have, we need to be sure that we're doing the right things and collecting the right information. And that's the next step I think in this business and I think we -- I don't want to say we're going to become a bank or anything like that but I do think if you think about authentication very differently and the more information we collect about consumers the better our system capabilities are and that's kind of the story behind that.

[David Scharf:]

Got it and that's helpful. And maybe switching to the restructuring side, I mean reading between the lines when you discuss the digital transformation it sounded like you're taking a intent look at the size of the physical agent base and that would be some rationalization there, as we look at the 45 million of run rate savings ultimately, can you help us understand the sources of those savings, I mean is a lot of it coming from running a smaller physical network even though you don't know locations but maybe help us with maybe what the top three line items are within that 45 million?

[W. Alexander Holmes:]

Sure, and let me just touch on your first point there and then I will let Larry go into the details on the 45. But I think the first part is important and I think you picked up on the messaging but just to make it as clear if possible. We are taking a look at the network and I think it's exciting to be in over 200 countries, it's exciting to have 350,000 locations but we really need to think very differently about that network on a go forward basis. And I want to partner with agents that are productive, you want to partner with agents that are -- have the right compliance standards and with agents that consumers want to go to. And we just, I think we have far too many dormant locations in the network where we're just not getting the value that we need and you're setting yourself up for risk. I think probably 10 years ago I think my view was a little bit different, right. It was a marketing opportunity being assigned to promote your brand and get out there in the market. But I think the world has changed quite a bit. So, I think our network will change, we have new agents that we will be adding so I don't want to say that it will necessarily decrease the size of the network although that maybe an outcome as well. But we want to optimize it for sure and if you're moving money into wallet and moving money into accounts you need cash payouts but you don't need probably the same cash distribution payout network that you -- that we've had historically. So that is a big part of what we're doing there. And there's a lot of cost in adding new locations and there are lot of cost in new locations. So that is an aspect of savings as you look to optimize but I will let Larry touch on the details.

[Larry Angelilli:]

Yeah, just related to the agent network side I mean what we're doing really is just becoming much more focused in terms of the target market. The number of locations really [indiscernible] and its really the number of active locations and productive locations. So we really aligned our focus to be homing in on where those markets and those agents are and we're not just trying to have the widest, broadest geographic dispersion of location. We are much more targeted and actually save money in that process and then get a better agent at the end of the day. There's another aspect of that, there's a headcount aspect to that. We're having fewer ineffective cost associating with the network that is probably wider and broader than it needs to be. And so there's efficiencies we can get there. But really the biggest change is really coming from efficiencies. What we're doing is we are substantially redoing all of our systems and they're becoming more efficient both for the agent experience and the consumer and when you do that you just have fewer touch points that you have fewer reasons for people to be contacting us, fewer mistakes, fewer operational issues. And so instead of looking at it really as a cost cutting exercise what we're really doing is achieving the benefits of a more efficient network both from the quality agents, quality of our systems, and then you can take cross off because they are no longer necessary.

[David Scharf:]

Got it, got it. And one last one, I apologize for monopolizing, but just thinking about marketing spend with this transformation into more of a digital business, Alex I am wondering from a customer acquisition cost standpoint getting people to walk into stores and the way you have advertised historically, is it materially different when you're trying to drive people online and I guess I'm wondering somebody asked before about being price leader or value, how you have historically competed with maybe Western Union at the physical level, I'm wondering what is your perceived differentiation for MoneyGram.com versus other online offerings and how do you communicate to market that and ultimately acquire customers to get them to your site?

[W. Alexander Holmes:]

Oh yeah, no there is a lot to that. I think -- listen I think that the short answer is that we have A very well known and established brand and so I think that there isn't a lot of pivoting to do and our most valuable customers are still those customers that go both in-store and online and that's not actually exactly how we want it because we want those customers to have the convenience factor that they want to have. I think customers don't need to pick up cash and they want to send money in cash, that's fantastic and I think it's a huge value add to what we do and something that nobody in the digital space has. And they're not going to have and they continue to position themselves as not needing that. But I don't think that's potentially accurate. The other thing we've talked a lot about is the working capital requirements of this business and we as you know we have $100 million positioned around the world and we operate in these markets and we know the regulatory and compliance responsibilities and we have the banks and the foreign currencies and everything else positioned in those markets. So, whether we're paying out cash or whether we are depositing into wallet, we are positioned to capitalize however someone wants to move money. So when it comes down to the marketing side it's really about messaging and positioning and clearly anybody operating today not just in our industry but any industry is targeting consumers in the physical world but also drawing their attention to the digital space. So clearly you need to have better digital marketing for all your search and display and everything else you're doing online. And advertising is important but it's equally important that you just continue to position yourself in those markets and then just adding sort of the dot com presence to all those markets. One of the things that we'll be doing outside of simply transacting is also adding better functional websites and functional mobile applications. It can receive send markets and in send markets where we actually don’t have a dot com presence and so that customers can register, they can go online, they can track transfers, they can look up locations, they can look at pace we can communicate with them, and I think the reward need to set. So that's another way of contacting or reaching customers, digital receipts, digital messaging, text notifications about transfers these types of things. And rewards program and the loyalty programs associated with them give you a higher value add. So what I want to try to do and we will talk more about this probably in the next call is reposition the business a little bit and sort of saying that we are a cash business is also doing digital. It actually come out from much more digital view with the cash presence as sort of the value add side of the equation for both sends and receives and so we will be positioning ourselves that way and kind of pivoting the marketing a little bit. But I think the marketing from the customer acquisition side in today's day and age I don't think it's like a pure you've got to go spend X amount of dollars to acquire a customer. I think that's more inherent in the business and I think that you need to add those dollars to the online specific targeting but that's just a portion of what we're doing.

[Operator:]

Thank you. We will go next to James Schneider with Goldman Sachs.

[Unidentified Analyst:]

Hi, everyone this Lia Forman [ph] stepping in for Jim today. I just wanted to ask a couple of questions on the 2018 outlook and could you help us bridge the down 4% to 6% revenue growth. If we were to add that complying standards in the Wal-Mart2World, how would we seek that out, maybe quantify those impacts, those headwinds to revenue this year?

[W. Alexander Holmes:]

I mean we haven’t broken those out and won't get into the specific details. But I would argue that if you normalize both of those that's the bulk of the impact on the revenue. And then clearly I would argue the same for the bottom line. There's obviously the repositioning of the white label product service for Wal-Mart. There is a little bit more impact on the bottom line just because of the way that the contract changes that we look at the revenue and the profit associated with the transaction. So it's a little bit more of a fall through on that that maybe hitting the bottom line a little harder than perhaps the compliance pieces. But compliance and Wal-Mart definitely are the bulk of the impact on both of those. So I think growing through those over the next three, four quarters will be part of the growth associated with coming into 2019.

[Unidentified Analyst:]

Great, and then on the restructuring, so I think as opposed to 30 million expense reductions in 2018 and just trying to think how is that basically being reinvested then and then you have the EBITDA declining 8% to 10% or how do I reconcile cost savings with a better EBITDA hit?

[W. Alexander Holmes:]

Yeah, good question. I think that yes, it's all blended through, a lot of it is timing, and then a lot of it of course is projections on our part. I am not really entirely sure exactly how the compliance rules will play out over time. At the moment that's what we think is going to happen. But there could be upside just based on changing customer behaviors or maybe changes in the way that others go to market from a competitive perspective. I also think that the Wal-Mart products has -- we have to model it out and build an expectation for that and clearly if we see substantial amount of growth from that product, how the cannibalization of our current product plays out those all become factors. And what happens on that and then of course we're very in tune with the bottom line. And so we will be pushing the bottom line as much as possible. So I mean the projections are where they are right now. I think as we go through the year and we see how things are playing out I'll be able to give you a little more clarity on that and we'll certainly adjust as we need to but it is sort of the blend of the three right now that are kind of leading where we are and if you want to add to that Larry.

[Larry Angelilli:]

Just on the restructuring side, we're doing this globally so some of it just takes longer. So the difference between the 30 and the 45 is that we adjust the amount of time this year that it's going to take to complete that process. And so we're still ongoing in that process and so you don't get back -- going to get the full benefit this year.

[Unidentified Analyst:]

Great, that makes sense. And then just my last question, in the past you have driven some U.S. to U.S., U.S. outbound, and international in the metrics could you offer those up this quarter too?

[W. Alexander Holmes:]

Yeah, it is something that we're moving away from just a little bit but what I can say is that U.S. to U.S. continues to become a smaller piece of our business. U.S. outbound is obviously like a lot of the international business, it is influenced by a number of different factors that we are seeing. Some strength in certain code orders and other that's a U.S. outbound is little bit soft right now. The non-U.S. is notwithstanding the comments that Larry made sort of if you take out a couple of the African countries it is actually looking pretty good in a number of markets. So, dot com is doing very well across all code orders. So it's a little bit of a blend.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

We will go next to Mike Grondahl with Northland Securities.

[Mike Grondahl:]

Yes, thanks guys. Just a little bit more follow up on the new security measures, could you talk a little bit about the sources of softer revenues. You mentioned sort of frequency of certain markets will be limited and it was just sort of the broad data collection but what are you targeting specifically with it, and how do you think that'll affect revenue?

[W. Alexander Holmes:]

Yeah, interesting question Mike. I think there's a couple different ways to look at it. First and foremost as I mentioned before, right we need to make our systems as effective as possible so we need to collect as much data about customers as we can. There are and continue to going to be a number of consumers that don't want to participate in that or volunteer that information. I think there's also an aspect to it of whether they want to or not, if they have a choice they may go to a provider that isn't asking for that type of information. I think given what's going on in the U.S. and Europe with respect to immigration and some of the challenges on the one hand I can't really blame certain consumers if they don't want to give us information about themselves. On the other hand if we don't know who these people are not willing to identify themselves that's at this point we made the decision as an organization that those aren’t people that we want to transact with. The other aspect of that is if you look at what's going on in the world from a fraud and risk. There are obviously -- when you look at your risk assessments and go through your market assessments there are high risk code orders, there are high risk transactions, and high risk individuals and so we ask for more information at certain dollar thresholds and also I think the volume of transfers that go through tend to vary by code orders. There are obviously certain code orders where people transact more frequently in lower dollar amounts and other code orders where consumers like to send high dollar amount. Obviously you have to run them through your risk assessments and come up with a profile around those and make decisions about the level of risk you're going to take and what information you need to be certain about individuals and code orders and the risks associated with that. So we have implemented what we call velocity controls that in certain instances limit how frequently someone can send, where they can send to, and what periods of time. And how many people they can sort of touch while they're doing that. And I think that for those consumers that are kind of your steady monthly senders who send money back home this will have no impact on that business for the people that are trying to do more frequent transactions. Part of our job is to flesh out exactly why they are doing that and that can be a difficult thing to do. So what we're trying to do is scope out our business model a little bit, take out some of that risk and make it easier to implement controls over the business that we need. And so I think the result has been exactly what we want them to be. There has been a couple of unintended consequences I think associated with it that we make when we see that we have pushed things too hard or we have done things that we didn't intend to. But at the end of the day I feel very good if you ask, look we're doing financial transactions, we are moving money around the world, people are relying on us to move their money home. I don't think asking someone to tell me their name and their birth date and to see their ID is asking too much in a financial service transaction. I mean you can't walk into your bank anymore and get cash out without showing your debit card and your ID. So I think it's pretty standard and we're just trying to apply those standards and it's -- I don’t know, it is nice I guess being the first to market. It's obviously going to impact the business in the short-term here but I think over time others later catch up or we will stop our business differently. So that's what's got to be.

[Mike Grondahl:]

Got it, the digital investments, it sounds like those are increasing in 2018, can you kind of quantify that increase over 2017 in terms of sort of dollars?

[W. Alexander Holmes:]

You know quantification I think is a little tough on that but I would say yeah, we're increasing our investment fairly significantly. Just across the board we have a number of markets I think as we've discussed. We are trying to move, we have just launched two more countries for our dot com business. We're going to be pushing into about 20 more relatively soon. We have a number of enhancements coming to our digital platform, the mobile applications where those are deployed around the world, how we go to market with those, loyalty program, the rewards associated with that, notifications, communicating with customers through text and email. All those type of things so there is a lot of really amazing things coming and I think actually some of the investments that we are making, the way we are looking at the business, and how we're going to position it with the consumer I think is going to be very different. So pretty excited about it. I'm hopeful that these things are rolled out and deployed the way we want so we can talk about them in more detail on the second quarter call. So, I would say stay tuned for that but yeah, we're definitely pushing harder and faster into it. And again I think it's not because I think our market is going that way but I do think that it is massive opportunity in the digital space to capture and I think there's a really unique way to reposition the cash side of our business as part of that digital transformation. And so we're really excited about that. I think it's going to be a little bit different from what you've seen others do and we're pretty focused on it right now as a team. So looking forward to that for sure.

[Larry Angelilli:]

Yeah, the other thing I would add Mike is that we are -- our CAPEX is flat this year. Last year we spent a lot on what I would call foundational issues. We in order to do what Alex just described we had to make pretty significant improvements through our backbone and our base systems. And so we did a lot of work that really didn't show up in terms of outward, you couldn't see the changes outside. This year we're going to be able to bear fruit and you will see lot of these enhancements. So it is kind of Phase 2 of a process that began a year and a half ago.

[Operator:]

Thank you. We'll go next to Robert Napoli with William Blair.

[Robert Napoli:]

Thank you. Just the issues that -- I missed the beginning of the call, did you suggest when you may fully resolve to DPA agreement, did you give any information on that?

[W. Alexander Holmes:]

What I said in the 8-K this morning we extended to 45 more days, continued discussions with the government. So, that's kind of what I covered on that. And said the famous lines of I can't comment any further on it.

[Robert Napoli:]

And just going back to transcripts from three years ago and talking about compliance and regulatory stuff and it sounds like we are hearing the same things three years later and I just -- what I am confused by is why MoneyGram who has put a lot of time and effort and money into this issue for years now is having, seems to be having a lot more challenges than our competitors and why is that, is it the decisions and compliance and controls we're light years behind the competition three years ago or what is it?

[W. Alexander Holmes:]

Well no, well listen I mean I think I don't know we really had a group -- the companies here. I mean I think Western Union just paid a substantial fine and took on and created their own relatively recently. Why the two of us are the only ones that seem to be in this category I think is a good question and one that I attempted to address earlier on the call. Little bit to your question of hearing the same things, etc, I guess the answer to that is that completely overhauling your business or our business, overhauling our system, overhauling the operation, the processes associated with that and putting in new business policies, procedures, etc. It just takes a long time. I think we have made substantial progress against the requirements under the DPA and we continue to work on it. The compliance standards that we put in place just recently I think are going to help us kind of push over the next level and I also called out on the call that the fraud rate which is affectively the challenge that the company had associated with why we entered into the DPA in the first place are at six year low. So, I think we're pushing through all of that and obviously we need to kind of resolve our ongoing discussions with the government about the DPA. But I think our compliance program has changed tremendously and what you're seeing now and what we're guiding to are the impacts of changing compliance standards at the company not the challenges associated with an inefficient business. And so we're putting in these compliance standards, we are putting in these changes because we think it's important to do that and I think it's going to make us the most successful over the long-term and we think these are the right things to do. So, yeah listen at the end of the day it's frustrating. I wish that this was somehow different and could be done differently but at the end of the day you have to address deficiencies and you have to take on the challenges associated with operating in what was a unregulated industry which is now in my view anyway an extremely regulated industry and one where the expectations have completely changed. So I think we're doing the right things and we're making the right investments and I think we're going to be quite successful with it. And yes, unfortunately there is an impact on today's business associated with those changes but they're needed and that's what we're doing.

[Robert Napoli:]

Larry the tax rate sounds like a mess to put it mildly. The tax rate, how much of that will be -- will it be a cash tax rate and it just sound messier than I have heard, is it because of the leverage, do you have and it doesn't seem like there are -- there isn't another company that I'm aware of in and around not only this industry but others that is having that, and I'm sure there are but I just am not aware of them?

[Larry Angelilli:]

Yeah, I think the tax code today is particularly punitive for global companies of a certain size. And I think what happens is that these tend to be fixed amounts of money that we have either been double or triple cash on loss deductions and so relative to our current size and our current income level it is disproportionately high. I think that these tax effects are affecting many companies. But they're probably larger than we are or having a better quarter than we've had and so the impact isn’t seen as significant. That's part of the reason why this will moderate over time, is that these impacts some of them are temporary. You know there's a couple new acronyms associated with the new tax code and some of those impacts are temporary, some of them are working on to see how we mitigate. But, this is a -- there is mistakes in this tax code. And we just happen to be lucky enough to have the impact of those against this quarter. On a cash basis I would cast basis it's a more complicated story. We do have some tax attributes that will come into play here. So it's a little early to put a cash number on the stacks and I think we will be offering more clarity on that over time. We don't see a significant cat impact this year but I think further off on that we will have to see how some of this is going to go.

[Operator:]

Thank you and we will go next to James Faucette with Morgan Stanley.

[Unidentified Analyst:]

Hi, this is Priscilla in for James. The first call is on the higher compliance costs. It seems a lot of it is going to be recurring, but are there any one time type expenses that will go way over time?

[W. Alexander Holmes:]

Yeah, no I think that the ongoing cost are being absorbed into the business and reflected in our operating expenses. And yeah, there are some continued onetime costs as we build out our systems. Obviously the cost of the monitor and legal expenses associated with all that are isolated as part of our adjustments and I think it goes in the schedules.

[Unidentified Analyst:]

Okay, great and you highlighted that the fraud rate was at a six year low, can you quantify the fraud rate across that MGI network and what's the target rate that you're trying to get to that might be acceptable internally and it appeals regulators.

[W. Alexander Holmes:]

That's a great question and I don't think I want to get into specifics on the way, it's incredibly low. As a percentage of business. I mean it's basis points so it's low. It is really at the end of the day it's not about the rate it's about your program effectiveness I mean I think that any time you get a new consumer sending to potentially a new fraudster. That is a difficult thing to detect but it's about effectiveness, repeatability of your systems and controls, and ensuring that you don't have what I would call repeat victims or repeat process trying to utilize your system to effectuate transfers. And so that's where I think the defense mechanisms are up and running and operating and I think the more efficient we can be on ensuring that we don't have repeat conduct I think the better off we're going to be. Obviously having no fraud would be ideal, it's a very difficult place to get to and I'm not sure that that's exactly the expectation. But I think the expectation is that there's policies and procedures in place to address what happens when there is fraud and there's expectations that there's policies and procedures associated preventing it to the best of your abilities and I think we are doing a very big good job with that and we will continue to improve.

[Unidentified Analyst:]

Okay, great thank you.

[W. Alexander Holmes:]

You are welcome. I think we're over the hour so I think we are about out of time. So I think we will say thank you to all and wish you a great day and thank you again for your time and interest in MoneyGram.

[Operator:]

Thank you and that concludes today's conference. Thank you for your participation. You may now disconnect.