MoneyGram International, Inc.
Q3 2015 Earnings Call Transcript

Published: 30 Oct 2015

[Operator:]

Please standby, we're about to begin. Good morning and welcome to the MoneyGram International Third Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode, and the floor will be opened for your questions following the presentation. It is now my pleasure to turn the floor over to your host, Suzanne Rosenberg, Vice President of Investor Relations. Please go ahead, ma'am.

[Suzanne Rosenberg:]

Thank you. Good morning, everyone, and welcome to our third quarter 2015 earnings call. With me today are Pam Patsley, Chairman and Chief Executive Officer; and Alex Holmes, Chief Financial Officer and Chief Operating Officer. Also joining us on today's call is Larry Angelilli, Senior Vice President, Corporate Finance and Treasurer. Our earnings release and informational slides are 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 forecasts or expectations. For more information, please refer to the Risk Factors discussed in our Form 10-K for 2014. MoneyGram assumes no obligation to update any forward-looking statements. Our presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to the 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'll turn the call over to Pam.

[Pamela H. Patsley:]

Great. Thank you, Suzanne. Good morning, everyone. Before I get into our Q3 results, I'd like to call your attention to a separate press release we issued this morning, announcing the appointment of Larry Angelilli as Chief Financial Officer, effective January 1. Larry joined MoneyGram in August 2011 as Senior Vice President, Treasurer, bringing more than 30 years of financial services and treasury experience to the company. As you know, Larry has managed a significant portion of our financial operations over the past year, which allows for a seamless transition into his new role. This appointment is well deserved. I'm very excited for the future of MoneyGram with Alex and Larry in their new roles along with the leadership of our very strong management team and of course, all the dedicated and talented people at this great company. Now, on the impressive results for the third quarter, which show that our strategies are on-course and we're doing what we said we would do. Our results for the third quarter demonstrate the consistent execution of the strategic objectives we outlined at the beginning of the year. We delivered positive constant currency revenue growth and in September, we returned to transaction growth in U.S.-to-U.S. sends. Our focus on a seamless customer experience through our innovative self-service solutions, like moneygram.com, kiosks, mobile solutions and account deposit, continues to attract new customers to our brand, while driving significant growth in money transfer revenue and transactions. MoneyGram is focused on expanding our global reach and embracing robust emerging technologies that bridge the digital and cash world utilizing our self-service solutions and agent network. This hybrid model provides our customers around the world with the power to not only transact whenever and however they choose, but also to have a direct interaction through MoneyGram. Our global footprint continues to expand with our services now available in over 357,000 physical locations with 4,000 locations added in the quarter, as well as adding access to millions of bank accounts and mobile wallets during the quarter. Network growth in the quarter was led by additions in key emerging markets including China, Africa and Latin America. We also reopened our services in Greece with receives beginning late in third quarter and send transactions resuming in October. Our focus remains on high-quality agents and productive locations. We have strong brand recognition in more than 200 countries, and most importantly, this continues to grow with positive positioning in the minds of our customers. To complement our physical presence and attract new customers to our brand, we're harnessing the power of technology in the money transfer business with our suite of innovative self-service solutions. Our self-service business had an absolutely outstanding quarter and significantly accelerated its growth rate. In fact, money transfer transactions grew an impressive 71%, and revenue grew 67%. We now generate 15% of our money transfer transactions, and 12% of our money transfer revenue from self-service solutions. On an annualized basis, self-service solutions generate over $160 million in revenue. As you recall, our reimagined moneygram.com, launched in June. We are extremely pleased with the enhanced functionality and aesthetics of the new site as are our customers. This easy-to-use platform helped attract over 230,000 new active customers in the quarter, which is a substantial growth from previous quarters. Our first priority when we launched was to focus on that customer experience and design a solution from a customer's perspective. We accomplished that with great new features and key differentiating services including our Track a Transfer tool and an instant ACH option. We're embracing digital self-service and we will continue to refine this solution including our credit management and risk metrics, as we enter new markets and expand the product in the future. Moving forward, we continue to expect strong growth from our self-service business. As the denominator on this business becomes larger and we begin to grow over successful launches of kiosks last year, the rate of growth will begin to anniversary tougher comparisons. Importantly though, we are clearly progressing on our goal to have 15% to 20% of money transfer revenue generated from self-service channels in 2017. Additionally, we're driving more bill payment transactions through self-service. As a growing number of people are adopting self-service at kiosks than online, over 11% of our bill payment revenue originated from these sources. We continue to invest in these differentiating strategic assets to ensure our long-term success. Now, let's turn to just the overall strong results of our overall money transfer business. Total money transfer transaction growth this quarter accelerated to 11% compared to 6% growth in the second quarter of this year; that's on the strength of our U.S. Outbound and Non-U.S. send. Our Non-U.S. send transactions grew 17% and our U.S. Outbound business grew 10% year-over-year. Money transfer revenue increased 9% on a constant currency basis and increased 4% on a reported basis. It's important to call out that MoneyGram has significantly diversified to the point where 50% of our money transfer revenue now originates outside the United States. And in this context, our reported topline was impacted by the stronger dollar. In terms of pricing, we continue to see stability in the industry. In fact, during the third quarter, pricing had virtually no impact on our results with the exception of course of the impact from lower U.S to U.S pricing implemented on October 31 of last year. As you know, geopolitical conditions can have a mixed impact on our business. However, one of the great things about our diversified model is that we can be on both sides of a trend. For example, economic conditions in Russia have certainly been challenging lately, but because of our global network, during the quarter, our Russia sends declined while our receives into Russia increased yielding slight total transaction growth compared to last year. We've seen this before in other country payors such as Spain and Romania, demonstrating the power of our business. During the quarter, we also saw strength in Asia, especially in China and the Philippines. Now, let's review our regional performance in more detail beginning with our Non-U.S. sends and U.S. Outbound. Together, money transfer revenue from these two categories grew 15% on a constant currency basis in the quarter, and accounted for 87% of total money transfer revenue. This is strong growth on an already large base. So first the Non-U.S. During the quarter, Non-U.S transaction growth was 17% and constant currency revenue growth was 18%. In Europe, we signed a new agreement with VASP, the leading retail distributor of media publications in Portugal, which will expand our services to their large network of retail partners. We launched our services with Gondural (09

[W. Alexander Holmes:]

Great, thanks Pam. Building on the momentum that's started in the second quarter, we delivered solid third quarter results. Our money transfer business returned to double-digit transaction growth and total company constant currency revenue growth accelerated. Additionally, we returned to positive operating income and adjusted free cash flow in the quarter, while still investing in future growth initiatives. Total revenue for the quarter was $368.6 million, growing 3% on a reported basis. On a constant currency basis, revenue increased 8%, a 700-basis-point improvement as compared to the second quarter. As Pam outlined, increased growth from Non-U.S. sends along with U.S.-to-U.S. send volumes propelled this improvement. Gross margin in the quarter was 54.2% about flat as compared to the prior year driven by a small improvement in our money transfer commission rate. We anticipate gross margin to be roughly flat in the fourth quarter as compared to the third quarter, which is consistent with our full-year outlook. Compensation and benefit costs were $73.1 million in the quarter, an increase of $4.2 million on a reported basis as a result of higher achievement on performance metrics, partially offset by good results from our cost takeout and restructuring efforts. On an adjusted basis, compensation benefit costs were flat sequentially compared to the second quarter. Looking ahead to the fourth quarter, we anticipate compensation and benefit costs to increase about $15 million on a year-over-year basis, as last year's fourth quarter reported numbers benefited from a net reversal of stock-based compensation costs and lower performance based compensation. On an adjusted basis, compensation and benefit costs, in the fourth quarter of 2015, should be in line with our third quarter adjusted costs. Transaction and operations support costs were $78.2 million, on a reported basis, which was a slight reduction in expense on a year-over-year basis. This favorability was largely due to the timing of marketing expenses and reduced spend on the compliance enhancement program and reduced spend on our global restructuring efforts, partially offset by increased loss provision associated with our new instant ACH product. On an adjusted basis, transaction and operations support costs were $71.5 million, down sequentially as compared to the second quarter, but up about $7 million as compared to the prior year, reflecting our continued investments in self-service solutions and increased utilization of outsourced service providers. Looking ahead to the fourth quarter, we anticipate transaction and operations support costs on an adjusted basis, to increase about $5 million, as compared to the third quarter, primarily driven by the timing of marketing initiatives. On a reported basis, this year's fourth quarter transaction and operations year-over-year cost comparison was showing $11 million benefit as last year's fourth quarter was negatively impacted by a one-time legal settlement expense. Our third quarter pre-tax profit was $5.4 million and net income was $4.9 million marking a return to profitability. Adjusted diluted earnings per share, was $0.24, a 9% increase year-over-year. Third quarter adjusted EBITDA was $65.6 million and I am pleased to say that in September, the company returned to positive adjusted EBITDA growth. Adjusted EBITDA margin for the quarter was 17.8%. This was a 170-basis-point improvement from the second quarter, driven by increased revenue from the money transfer business and the timing of certain marketing initiatives, partially offset by incremental investments in self-service solutions. Now as we looking at the segments, the third quarter Global Funds Transfer segment revenue was $351 million. On an adjusted basis, operating margin for this segment was 9.8%. In the Financial Paper Products segment, total revenue was $17.6 million and operating income was $3.4 million. Investment revenue in the third quarter was $2.8 million. Looking at the balance sheet and cash flow, higher gross profit and lower signing bonus payments led to a free cash flow of $16.5 million or 4.5% of revenue. In the quarter, agent signing bonus payments were $7.5 million and cash payments for capital expenditures were $29.1 million, mostly related to the global transformation program. We ended the quarter with cash and cash equivalents of $151.6 million, up $23 million from last quarter. As mentioned in our earnings press release this morning, our outlook for the year remains unchanged. Now, before I turn it back to Pam, I'd just like to add to her comments about Larry's appointment as our next CFO. Larry brings an incredible financial services background and a high level of enthusiasm to his new role. It's truly been a great pleasure working with Larry over the past several years, and I couldn't be more excited to have him as our CFO for the next phase of MoneyGram's journey. And with that, I'll turn it back to Pam for her closing thoughts.

[Pamela H. Patsley:]

Thanks, Alex. While you can see, there are a lot of great things taking place at MoneyGram, I believe we have the most capable management team in the industry, leading MoneyGram through exciting developments in technology, and in product offerings, all derived and designed from our customers' point of view. We are successfully bridging the digital and cash world through our hybrid business models. We're investing in a world-class compliance engine that is not only core to our business, but a true competitive advantage that we can leverage in the future. I'm so proud of the entire team at MoneyGram, everything they do, each and every day, is truly what sets us apart. We're very well positioned to continue our momentum. With that, thank you as always for your interest in MoneyGram. And I'll now turn it over to the operator, and begin our Q&A session.

[Operator:]

Thank you. And we'll take our first question from Bob Napoli with William Blair.

[Robert Napoli:]

Thank you. Good morning. The double-digit – you say – reiterate the double-digit revenue, the top and EBITDA growth in the fourth quarter. Now, are you – when you talk – the revenue, are you talking constant currency revenue growth or reported revenue growth? And doesn't money transfer revenues typically increase a little bit seasonally in a fourth quarter?

[Pamela H. Patsley:]

We are talking constant currency as called out in our press release, and yes, fourth quarter, typically is a higher volume quarter, so that – if you just track, as you know Bob, from following us for years, as we've grown in a more diversified way, less reliant just on U.S., there are lot of other holidays and seasonal things, so the drama of that fourth quarter isn't as great as it was say six years ago.

[Robert Napoli:]

Okay. And then, do you – in 2016, do you expect to be able to continue the double-double?

[Pamela H. Patsley:]

Well, we're not giving 2016 guidance today. As always, we kind of give the next year's guidance, when we do fourth quarter results, and then we lay out that year for you.

[Robert Napoli:]

Okay. And then, the Walmart relationship, obviously you extended it, three months, and if nothing is announced by year-end, it automatically rolls over a year or you must be close to announcing a long-term agreement, if you extended three months. Would be – is that fair to assume?

[Pamela H. Patsley:]

Well, I think, everything we have to say, is kind of out there in the 8-K. So, I don't want to get into any kind of tricked on the communication, it is the agreement that we have in place and the extension are there for you to see, and I would just say, we have a very robust relationship with Walmart. I called out some of the new services that we're launching, we work closely with them, we really like value and appreciate, and importantly, because I think, we're so aligned on our approach to the customer. And it's really all about, what does the customer want, ease of service, so we're very aligned on those points as we continue to work on initiatives.

[Robert Napoli:]

And last question on the balance sheet, I mean, how do you think about the balance sheet strength today and the need to pay down debt versus investing for growth or even potentially doing some smaller tuck-in acquisitions?

[W. Alexander Holmes:]

Yeah. No, it's a great question. Certainly, our cash position strengthened a bit in the quarter, which is positive. I think, our leverage, we're maintaining a comfortable ratio there. And so, I certainly think, as we look ahead, debt paydown will be an important factor to consider as we look at cash flow and excess cash. But certainly, with everything underway right now, the global transformation program, reducing our costs, getting the compliance program right, completing our obligations under the DPA, investing in new technologies is pretty paramount for the company to position us for long-term success. I think we've done a very nice job over the last several years really balancing our needs from a balance sheet perspective and we'll continue to do that.

[Robert Napoli:]

Great. Thank you, and congratulations Larry on your promotion.

[Lawrence Angelilli:]

Thanks, Bob.

[Pamela H. Patsley:]

Thanks.

[Operator:]

And we'll take our next question from James Schneider with Goldman Sachs.

[James Edward Schneider:]

Good morning. Thanks for taking my question. Obviously good traction in the online programs at this point; can you maybe talk about what kind of marketing you've done against – to drive that growth? And specifically, as you go forward as the online continues to grow, should we expect a corresponding uptick in the marketing expenses tied to online?

[W. Alexander Holmes:]

Yeah. The online business has performed extremely well. We are very, very excited about all that's been happening with the – what we call MoneyGram.net, the new launch of our product, and the experience online reimagined, and we're very happy with that. We continue to work through a number of learnings with it. Obviously, the launch of the instant ACH has been a learning for us, and that's something we continue to look at from a credit metrics and scoring perspective, and we'll continue to learn as we go forward. We like where the business is headed, and the customers that we're attracting to the service. It's actually, I would probably say, we have spent a little bit less on marketing, than I think we initially intended to. I think the product has to some degree largely sold itself, which is a real testament to the team, and the efforts they've put in, in building that product. But we have a lot of ideas, a lot of initiatives underway in terms of how we can continue to build momentum in that business, how marketing becomes important, but it's interesting as you look at marketing in the online space, it's not just about that marketing for the online business, it's about getting that balance between your walk-in customers, and your online customers, all of which are now connected through online media formats, and our most valuable customers are actually those customers that not only use the walk-in business, but also utilize the online service, and so we're really looking at the balance of how marketing evolves over time.

[James Edward Schneider:]

That's helpful. And then, just as a follow-up, I'm wondering if you could kind of directionally address the compliance spending from kind of this quarter forward, and how would you expect that to trend over the next few quarters, and into 2016?

[W. Alexander Holmes:]

Yeah, that's a really good question. And again another one that's – it's been an interesting balance over the last couple of years. Certainly this is a very large scale initiative. There are a lot of moving parts associated with that investment. And as you look at the amount of spend left, our estimate, I believe last quarter was in the neighborhood of $35 million or so; we spent about $5 million this quarter. And we'll – right now that seems to be our best outlook, but as I mentioned before, getting that system done, getting our compliance completely revamped to the way we want it, being a leader in compliance is so critical for us and not just for compliance with our GPA, but also for relationships with banks and global initiatives around the world. So, we'll continue to invest until we get it right, but we feel good about the outlook we have right now.

[James Edward Schneider:]

So a few more quarters of $5 million range before we tail off?

[W. Alexander Holmes:]

Yeah, $5 million – more or less. I think, as we look at some launches in the first quarter of next year, the spend may go up as we have some more modules getting ready to come due at that time.

[James Edward Schneider:]

Thank you.

[Operator:]

We'll go next to Sara Gubins with Bank of America.

[Sara Rebecca Gubins:]

Hi, thanks. Good morning. The pricing really does seem quite stable in the market. I'm wondering in online if you're seeing anything that would mean more pricing pressure. And broadly as you look into 2016, I know it's early, but as you look into 2016, do you see anything that makes you think that the broader pricing environment would change?

[Pamela H. Patsley:]

I'll just take the latter part of that question first, because I think it's good context. We don't see anything right now, and I think, you heard from others, it feels pretty good where things are. I think, a lot of different corridors, particularly U.S.-to-U.S. that stood out as a bit of an outlier from its (27

[Sara Rebecca Gubins:]

Okay, great. And then continuing in online, could you talk about your experience so far with instant ACH, you mentioned that's a learning experience. Any color you could give us on loss rate so far, and how you're managing that?

[W. Alexander Holmes:]

Yeah. No. Absolutely, the experience has been interesting, not just from getting the product up and running, but also looking at which customers are using it for which corridors. Certainly, we have seen – as we continue to adjust our credit metrics, we've seen an uptick in loss rates associated with that product. We had to play with some limit changes on transactions, first time transactions versus repeat transactions, et cetera, and we'll continues to tweak those metrics. But, so far, we're pleased with the consumer adoption of the products and the potential for it longer term, but again it is continuing to learn and get those credit metrics exactly right as we begin to score new customers coming in and looking to utilize that service.

[Sara Rebecca Gubins:]

Great. And then just last question on commissions. It looks like you're getting some leverage this year maybe with mix shift away from Walmart. How should we think about agents commission expense next year, would you expect to see more leverage there?

[W. Alexander Holmes:]

Again we'll get into some more details longer term, but I think right now that, you know, the trend has been relatively favorable, and that's – from looking at the fourth quarter, the business won't flip overnight as we roll into the first quarter. So, I think that trend will be there, but exactly how that plays out through all of 2016, we'll talk more about that later.

[Sara Rebecca Gubins:]

Okay. Thanks a lot.

[Pamela H. Patsley:]

Thanks.

[W. Alexander Holmes:]

Thanks.

[Operator:]

And our next question comes from Kartik Mehta with Northcoast Research.

[Kartik Mehta:]

Good morning, Pam and Alex. Pam, I wanted to ask you, you've talked a lot about the self service revenue, and now it represents I think you said 12% of money transfer revenue. As that revenue grows, does that change the model at all for MoneyGram or how you manage the business?

[Pamela H. Patsley:]

Well, I think – certainly everything kind of changes how we manage and look at our business, and if you just look back over the last whatever years you can see how we've continued to adjust to opportunities to ensure we're driving maximum growth, and keeping the customer at the forefront. I think, what's really great though and we called it out is – Alex called out that, our most valuable customer is those that uses both channels for us, are our most profitable customer. We separately called out how many are coming in as new to MoneyGram via moneygram.com, then maybe that more the entry point and then they can see that the physical point might be interesting another time. We think we are organized very well between kind of a mix of the geographies, with strong leadership from the product and marketing organization aligned against kind of the geographic leadership, because some of this is kind of channel driven, some of it is geography driven, and we don't want any walls around it. It has to be seamless. Does it go to a mobile wallet, does it go to a bank account, is it picked up at a physical point of presence, that's for the customer to decide and that's the great power of our brand, our network and our product offerings.

[Kartik Mehta:]

I guess, Pam, I was more wondering from the cost structure. Does the cost structure change at the organization, because self service becomes a bigger part of revenue, or does it need to become much, much bigger for that to have an impact on the company?

[Pamela H. Patsley:]

Well, I think, it does need to be – we're investing, so we're going to continue to invest. There's no question from a commission perspective thinking about another question recently asked, mobile wallet, account deposits, some of those things continue to drive commissions down, so that's a good aspect if you will; as well as, as we continue to go through the refinement on the risk analytics and metrics on the dotcom origination, over time that will also continue to be a very efficient source of SIM (33

[Kartik Mehta:]

And Alex, I want to get your thoughts on free cash flow for the year, maybe GAAP free cash flow, just to get an idea about what the cash position of the company might be by the end of the year. What would your expectations be for GAAP free cash flow for 2015 versus 2014?

[W. Alexander Holmes:]

Well, versus 2014, I mean, I'll anticipate it will be down, I think, if we can get back to some spend – let me – sorry, let me backup. The drivers of the increase right in the cash flow have been obviously less profit growth and then certainly driven by increased CapEx spend particularly on CEP and the restructuring program, and then increased signing bonuses as we've been in a cycle here of renewing and signing some pretty large agents. And so, when I look at an adjusted basis, it should be about flat. I think, the drivers of the variation on a GAAP basis will be where we end up, just on the compliance program or on the restructuring program. We certainly have a good feel for where the spend needs to be, but again these projects are fairly large scale and fluid, and so particularly on the CEP program, we'll make right investments as we go forward. But I would anticipate it to be about flat on an adjusted basis.

[Kartik Mehta:]

So, maybe on a GAAP basis negative then just because of the IRS tax payment, is that fair?

[W. Alexander Holmes:]

Yeah, that's fair. For sure, yeah.

[Kartik Mehta:]

Okay. Thank you very much. I appreciate it.

[W. Alexander Holmes:]

Yeah.

[Pamela H. Patsley:]

Thanks.

[Operator:]

And our next question comes from Danyal Hussain with Morgan Stanley.

[Danyal Hussain:]

Hi, Pam and Alex, thanks for taking my question. Just looking into, I guess, transaction growth of 11%, which is comparable again to where you were before last April, but Pam, you pointed out that September, you still saw some acceleration. So, just I guess, how is it tracking through October? And could you perhaps provide the transaction growth figure in September, if possible?

[Pamela H. Patsley:]

I'm sorry, the last...

[W. Alexander Holmes:]

Yes, can you just quickly repeat that?

[Danyal Hussain:]

So – Pam you mentioned the transaction growth was...

[Pamela H. Patsley:]

Yeah.

[Danyal Hussain:]

...it was still accelerating U.S.-to-U.S. for example...

[W. Alexander Holmes:]

Right.

[Danyal Hussain:]

So, just company-wide, how has that tracked through, how did it look in September and how is it tracking in October?

[Pamela H. Patsley:]

Well, we're not going to give early looks into fourth quarter. I think we said all we're going to say is, it's out there. September was a good month.

[Danyal Hussain:]

Okay. And then, I don't know if you've provided this before, but how much of the self-services volume would you say is incremental? And then question was sort of brought up before, but is the commission structure any different for transactions originated versus paid out through a kiosk?

[Pamela H. Patsley:]

Yeah, when you look at all of our self-service options, some are on the send side, some are receive and some could be both, particularly like kiosks, it's hard to measure, right, which one is totally incremental. But we feel, if you look just particularly where we track new active customers on moneygram.com, most are new, so I'll just – but again, we're seeing people come back in, they've been with us before, but maybe not for 12 months, they come back, they come back through a new channel. All-in-all, we feel very, very positive about the mix of more customer utilization of our longstanding customers using different options as well as the avenue to attract new consumers because of convenience. I mean, the whole thing from a consumer perspective from a customer is convenience, ease of use and solving and meeting their needs.

[Suzanne Rosenberg:]

We have some other analysts on the line, so we're going to need to move on.

[Operator:]

And we'll take our next question from Tien-tsin Huang with JPMorgan.

[Tien-tsin Huang:]

Thanks. Just a couple of questions. Just on the restructuring side, sorry if I missed it. Can you just give us an update there, where are you in the cost-cutting versus goals?

[W. Alexander Holmes:]

Yeah, no, it's a good question. The restructuring costs for the broad restructuring program associated with what we'd call the global transformation program has largely come to an end. We had some incremental costs in the quarter around a few things out and get that really ramped down. You saw a little bit of uptick in some spend broadly categorized as restructuring, and that was related to some restructuring initiatives across Western Europe which we took advantage now of our Poland operations to downsize some functions in a few of our Western European operations. So, when you net it together, we feel really good about where we are from a cost perspective as a company. We love that we're moving a lot of our expenses internationally to match where the revenue is really starting to flow from. We're getting some good leverage on that and we'll continue to look for opportunities as we go forward.

[Tien-tsin Huang:]

Okay. Good. Just one more. Just on the – heard a lot of comments on the commissions, but just on the bonus front, just wanted to clarify, anything to consider on the signing bonus front? And are there any other renewals aside from Walmart to pay attention to the next couple quarters?

[W. Alexander Holmes:]

No, not particularly.

[Tien-tsin Huang:]

Okay. Just wanted to make sure. Thank you.

[W. Alexander Holmes:]

Yeah.

[Operator:]

And we'll take our next question from Rayna Kumar with Evercore ISI.

[Rayna Kumar:]

You mentioned compliance costs may be up next year; do you anticipate excluding compliance cost from your adjusted numbers going forward, since it appears to be an ongoing cost of running your business?

[W. Alexander Holmes:]

Well, we never exclude ongoing cost of compliance from our numbers. What we exclude is the outsized incremental spend that we're putting toward rebuilding our underlying compliance system, what we call the compliance enhancement program. That, I think, we have talked a lot about in prior quarters. It was laid out to be a two-year, three-year program. I think we've said on the last call that we were in the neighborhood of about $35 million spend left in that program, which would take us into 2016 and ramp down. And consistent with prior quarters, we will continue to adjust those costs. Underlying that, which we don't call out as an organization, is our ongoing compliance costs, all the costs that we incur everyday within our teams and our functions and our ongoing system costs, all the filings that we do, all the regulatory reporting; all of that is just in our business. From a broad standpoint, I would say that we anticipate compliance costs will continue to go up. There's a lot of scrutiny globally of all financial service providers, banks included. So, we'll continue to invest in compliance, get our overhaul program complete. And then, we'll continue to have ongoing compliance costs, which we do not adjust; those are in the numbers.

[Rayna Kumar:]

Got it. Could you quantify net pricing changes in the quarter and also discuss your pricing strategies for 2016 for cross-border money transfer?

[Pamela H. Patsley:]

Yeah, we called out that pricing – putting aside, the third quarter still felt the full impact of our reset on U.S.-to-U.S., we implemented it October 31, so the third quarter felt the full impact of that. Putting that U.S.-to-U.S. aside, we said pricing had no impact. I think in the second quarter we called out for you pricing impact that it's about 1%. So, we generally have been saying, pricing we expect is going to be on average 1% to 2%; it was actually below that in the third quarter. I think Rayna, there's no reason for us to kind of come out at this point with anything different than a historical look and actual experience, which is that 1% to 2%.

[Rayna Kumar:]

Okay, that...

[Pamela H. Patsley:]

That's a blending from a gazillion corridors, up, down and sideways all around the world.

[Rayna Kumar:]

That's very helpful. And if you can just call out bill-pay transaction growth through the quarter? Thank you.

[W. Alexander Holmes:]

Yeah, bill-pay transactions, I believe, were down 2%. That's an interesting business; again, it seems like the never-ending saga of how do you get that back to growth. Within that business, there's some real pockets of growth across a lot of our business. But when you look at some of those consequence payments, the auto loans and mortgages, it tends to be fairly volatile and we continue to see kind of pluses and minuses there. So, we've had some good quarters and some bad ones with that business, but we are seeing a lot of growth in the online space for that business, a good transition in that direction. We continue to put some new products through, new billers through and we'll continue to reposition and work on that business.

[Rayna Kumar:]

Thank you.

[Pamela H. Patsley:]

Thanks.

[Operator:]

We'll go next to David Scharf with JMP Securities.

[David M. Scharf:]

Thank you. Good morning. Most of mine have been answered. But, Pam, I did have a question on commissions in terms of how should we be thinking about this secularly going out a number of years? And specifically, there is always competition obviously between large global networks for those prime locations when those contracts come up for renewal. But is there any sense that the increase of alternative channels, and particularly as those channels arguably become a much bigger part of the industry, that you're seeing less pricing leverage arguably among very large agents? And I'm not discussing Walmart here, but just globally. I'm trying to understand if there is a secular decline in commission rates over the next five years, six years?

[Pamela H. Patsley:]

I think it's more of – what I feel more comfortable saying – I mean, I think that's possible. But certainly, the mix of our business will potentially yield a lower commission rate because of the blending out of different ways to receive or catch the money into an account, on to a mobile wallet, sending from online, whether it's through our own virtual agent network or directly from moneygram.com. So, I think that will have more impact on kind of the blending of that downward.

[David M. Scharf:]

Got it. But obviously, we don't want to get ahead of ourselves, and concluding the industry is going to shift materially. That's...

[Pamela H. Patsley:]

No. I don't think it's the time now. Well, first, never good to get ahead of oneself, and I certainly don't think now is the time.

[David M. Scharf:]

Okay.

[Pamela H. Patsley:]

For that bold of a statement, but maybe this time, next year.

[David M. Scharf:]

Okay. More on the granular, on the guidance front, first, I know you're not prepared to discuss 2016 in any detail. I'm just wondering directionally, is there anything on the horizon that would materially alter your effective tax rate next year? Would you be able to comment on that?

[Pamela H. Patsley:]

Well, I don't think it can go up (46

[W. Alexander Holmes:]

Materially also it's always an interesting question. I do believe that we have a number of initiatives, I know we have a number of initiatives underway, looking at again organizationally, how we're structured longer term, again very important for us that we begin to match all of our expenses to where the revenue is generated. And so, we certainly have a number of things underway internally that I do believe over time will lead to a lower tax rate as one of the outcomes of that program. There's nothing I can particularly call out today. We do try to be opportunistic. This quarter, for example, benefited from a one-time discrete item related to some R&D benefit that we've gotten from a lot of our investments in technologies. So, when we can, we look to get the rate as low as possible. But longer term, yes, we're focused on it. We know it's an issue, but more important, we know it's an opportunity for us. So we're going to look at that and continue to push forward.

[David M. Scharf:]

Okay. And shifting to the fourth quarter in U.S.-to-U.S., obviously you're lapping the Walmart events of last year, is it safe to say, based on the Q3 performance that we should be looking at a minimum, sort of, mid-single digit transaction growth in the fourth quarter of this year...?

[Pamela H. Patsley:]

For U.S...

[David M. Scharf:]

...recognizing the – for U.S. to U.S.?

[Pamela H. Patsley:]

Yeah. We don't predict, but your math is – generally works. And just to be clear, what we're lapping in the fourth quarter is the reset of our own pricing, not lapping any Walmart per se. We're lapping that we reset prices October 31. So two months of the fourth quarter, we'll have kind of a like-for-like rollover, but October will still be kind of the lap of that.

[David M. Scharf:]

Okay. And just one last question, sort of echoing the prior one regarding compliance spending. As it relates to the actual enhancement program, and maybe I just need a refresher, looks like you've got another $13 million, $14 million on that, what is that? I mean, is it expense software development, is it more bodies? Can you help us?

[Pamela H. Patsley:]

No, that – that – what we're calling out is the enhanced spend or the spend for the compliance enhancement program is really more – I mean, there are people involved in it, whether it is systems development, it's software purchasing, it's working and integrating really, as Alex said, the kind of recasting a new compliance engine.

[W. Alexander Holmes:]

Yeah. I mean, I would equate it largely just to have, I think, before to a large scale ERP program or maybe to someone in the emergence space who is replatforming. It's literally our compliance system – our compliance engine, hangs off of our transaction system, all the transactions flow through it, it's an integral part of what we do. And so, it's literally taking that out and replacing it with a new system, but then it's mapping it back to the current – changing all your process associated with it, mapping it back, putting the modules in place. And, a lot of what we're trying to do is, well, which I think is adding the complexity to it, and – but I think it's going to benefit us greatly down the road, is really taking a lot of what we do kind of in the back office and pushing a lot of it, kind of forward, so you're getting more intelligence in the front-end rather than some of the back-end pieces. It's also speeding up transaction time and other ways of looking at consumer data, agent data, all these types of things. So, it's a really exciting project, it's complex and obviously, the downside of course is, it's expensive, but it will benefit in the long term for sure.

[David M. Scharf:]

Got it. And, has all of that been expensed or is there actually a fair amount...

[W. Alexander Holmes:]

No, a lot of that's been capitalized.

[David M. Scharf:]

Yeah. Can you give us a sense of, kind of, I guess, to date, what's the expense versus the capitalized component there?

[W. Alexander Holmes:]

When we follow up with you, I can get you the exact number. Off the top of my head, it's been roughly 50-50.

[David M. Scharf:]

Got it. Okay. Thank you very much.

[Suzanne Rosenberg:]

Thanks, David. Operator, I think, we have time for one last question.

[Operator:]

Okay. Our last question comes from Kevin McVeigh with Macquarie. Kevin McVeigh - Macquarie Capital (USA), Inc. Great. Thanks. Hey – just I wondered if you could give us a sense, with Xoom and PayPal change now, have you seen any change to the competitive environment, particularly on the online side?

[Pamela H. Patsley:]

We haven't. We don't really expect to see anything significant that has been announced for a long time. Xoom has been around for, what, 13 years, 14 years now. I mean I think if anything, continues to broaden the awareness of availability of money transfer services online. And so it's good, good for the industry. Kevin McVeigh - Macquarie Capital (USA), Inc. Okay. Great. I'll follow up with you later on with my other ones. Thanks.

[Pamela H. Patsley:]

Okay. Thanks.

[W. Alexander Holmes:]

Thanks. Kevin McVeigh - Macquarie Capital (USA), Inc. Thanks, Pam.

[Pamela H. Patsley:]

Thanks, everyone. That concludes our call. Have a great and a wonderful weekend. Appreciate it.

[Operator:]

And that does conclude today's conference. Thank you for your participation.