MoneyGram International, Inc.
Q4 2015 Earnings Call Transcript

Published: 12 Feb 2016

[Operator:]

Please standby, we're about to begin. Good afternoon and welcome to the MoneyGram International Inc., Fourth Quarter 2015 Earnings Release. 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, Ms. Suzanne Rosenberg, Vice President of Investor Relations. Please go ahead, ma'am.

[Suzanne Rosenberg:]

Thank you and good afternoon, everyone. Welcome to our fourth quarter and full-year 2015 earnings call. With me today are Alex Holmes, Chief Executive Officer; and Larry Angelilli, Chief Financial Officer. 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 and our Form 10-Q filed in 2015. MoneyGram assumes no obligation to update any forward-looking statements. Our presentation today 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 afternoon and in the Form 8-K submitted to the SEC. And now, I'll turn the call over to Alex.

[Alexander Holmes:]

Great, thank you Suzanne and good afternoon, everyone. 2015 was a transition year for the Company as we repositioned our U.S. to U.S. business and continued to invest in Digital/Self-Service products, global consumer acquisition strategies, compliance, and agent productivity. Within this context I'm pleased to say we delivered on our expectations for double-digit constant currency revenue and adjusted EBITDA growth for the quarter. We posted double-digit transaction growth in U.S. outbound and non-U.S. sends and we also returned to transaction growth in U.S. to U.S. sends for the fourth quarter. 2015 was also a year of significant investments. First and foremost, I'm pleased to say that we successfully completed the majority of our reorganization and restructuring activities which have enabled us to diversify our expense base and reinvest into broader growth initiatives. On the compliance front, as you know, the current regulatory environment isn’t getting any easier and this is an area in which we must invest. In 2015 we continued to make steady progress on our compliance enhancement program activities and rolled out key functionality. While we still have a lot of work to do to complete the program, I know that we are making the right investments and that end result of this project will position MoneyGram at the forefront of our industry. Now, I think it goes without saying but the investments we've made into Digital/Self-Service technologies have translated into impressive growth, demonstrating that our customers not only want new and unique channels in which to transact but they also want a better and more convenient service. And while we continue to expect great growth from our digital channels, this doesn't mean that all of our transactions will become digital. As you know, the vast majority of our transactions, and all payments made around the world for that matter, still involve cash as part of the transaction flow. For MoneyGram, that's great news, as we are well-positioned with hundreds of thousands of physical locations around the world. What it does mean, though, is that we have a tremendous opportunity to put new solutions into the market that merge the physical and digital world and make all of our transactions, including our cash transactions, even better. Today self-service refers to all of the unique ways in which consumers can transact with MoneyGram, including kiosks, moneygram.com, account deposit, and mobile. But in an increasingly digital world, how we interact with our customers and the customer experience that they feel through all of our channels is just as important. Whether in the digital or physical world, our customers are looking for a great experience, and we think that should be a brand consistent and seamless omni-channel experience. The bottom line is this. Behind each and every one of the millions of financial connections that we enable every year are real people with unique stories and unique need. In 2016, it is estimated that international migrants will surpass 250 million, and almost all of them will be looking to send money home to friends and family. We want each and every one of them to choose MoneyGram, and we have unique, hybrid money transfer initiatives underway that will ensure that they do. But before I talk more about that, let's first take a look at our fourth quarter 2015 performance. For the fourth quarter, we saw transaction growth in all three categories of our money transfer business. Total money transfer transactions grew 10% reflecting the continued strength of our non-U.S. and U.S. outbound sends. Non-U.S. send transactions were up a very strong 15% in U.S. outbound transactions grew 10% year-over-year. Money transfer revenue increased 9% on a reported basis and 13% on a constant currency basis. MoneyGram has now diversified to the point were 50% of our money transfer revenue originates outside of United States. And while our topline was reduced by the stronger dollar, our efforts to geographically diversify our expense base helped mitigate the impact to the bottom line. Our money transfer revenue from non-U.S. and U.S. outbound sends grew 12% on a constant currency basis in the quarter and accounted for 87% of total money transfer revenue. So let's take a look at this in a little more detail. First our non-U.S. sends. During the quarter, non-U.S. transaction growth of 15% led to an impressive constant currency revenue growth of 19%. Results were driven by strong growth in Western Europe combined with increasing scales from our growing businesses across the African continent, the Middle East and Asia. Non-U.S. sends now represent 41% of money transfer transactions and 50% of money transfer revenue. In the quarter the difference between transaction growth and constant currency revenue growth came from a positive shift in corridor mix. Pricing was stable again this quarter. Our U.S. outbound business remains robust with increases in sends to Latin America and Africa. Once again this business posted double-digit growth with revenue up a 11% and transactions up 10%. U.S. outbound represented 37% of money transfer revenue in the fourth quarter. Our U.S. to U.S. business represented 13% of money transfer revenue in the quarter. And, as I mentioned before, this business posted positive transaction growth for the fourth quarter. We continue to attract high-dollar transactions as customers rely on our trusted brand for their most important financial connections. In January, we announced a new three-year agreement with Walmart extending a nearly two-decade-long relationship. We are very excited about the agreement and the continuation of our shared commitment to introduce innovation and new products that meet the evolving needs of our customers. In 2015, we worked closely with Walmart on a number of new initiatives including the launch of account deposit service which enable sends from Walmart to millions of mobile wallets around the world along with bank accounts in countries like China, India, Mexico and the Philippines. For the fourth quarter, Walmart represented 19% of total company revenue. Now let's take a look at our digital self-service channels. First, to be clear, I would like to point out that we are shifting our terminology of this business to digital to better reflect what we believe these channels are really all about. In 2015, our digital channel showed impressive growth throughout the year with fourth-quarter transactions up 42% and revenue growth of 48%. 14% of our money transfer transactions and 12% of our total money transfer revenue came from digital in the quarter. This business now represents over $163 million when annualizing fourth-quarter revenue. We are making significant progress toward our goal to have 15% to 20% of money transfer revenue coming from digital in 2017. Looking back over the past couple of years, I am extremely pleased with all of the progress that we have made. We've completely overhauled our on-line experience, launched kiosks, added millions of mobile wallets, connected to almost 2 billion bank accounts and made investments into our core compliance and point of sale technology. These investments are pushing MoneyGram closer to our customers and pulling our customers closer to us. As we move ahead, we'll be pushing digital capabilities further into the physical world through customer profiles and new point of sale technologies which will ensure that we deliver a more seamless customer experience. Providing relevant messaging and communication to our customers will ensure that their money is not only well protected, but that their experience with MoneyGram is a great one. Now, before I turn the call over to Larry, I would just like to touch briefly on the legal matter we called out in our earnings release today. We have settled the matter related to the state attorney general's civil investigative demand and we are pleased to put this matter behind us. There is no impact to our P&L in the quarter as we had previously accrued for this settlement. The related enhancements to our antifraud program, which the agreement calls for, are now incorporated into our ongoing compliance activities. And with that I will turn the call over to Larry.

[Lawrence Angelilli:]

Thanks, Alex. Total revenue for the quarter was $377 million. Money transfer revenue was $333 million an increase of 13% on a constant currency basis. Due to the translation impact of the stronger dollar, reported money transfer revenue increased 9%. For the full year total revenue was $1.4 billion. Money transfer revenue was $1.3 billion, a decline of 1% on a reported basis, but an increase of 4% on a constant currency basis. This exceeded our guidance of flat constant currency revenue as compared to last year. 2015 included challenges for MoneyGram, not just from the impact of the U.S. pricing, but also from an increasing volatile world economy. We and many of our competitors have seen several economies impacted by lower oil prices and from political instability. In some cases these countries have implemented currency controls in attempt to curtail outflows of capital. We saw this in Greece, and we've seen it in some additional countries in Africa as they struggle with weak currencies and lower currency reserves. In other parts of the world, we've seen a more difficult banking environment where our agents and some money transfer companies are not able to maintain bank accounts as banks have decreased their risk tolerance. All these factors were in play during 2015, but we were still able to grow double digits in the fourth quarter on a constant currency basis. Fourth quarter adjusted EBITDA was $65 million, representing 12% growth on a constant currency basis. Adjusted EBITDA margin was 17.3%. Full-year adjusted EBITDA was $243 million, down 12% on a reported basis and a decline of 10% on a constant currency basis. Our restructuring efforts in the diversification of employment based outside the U.S. better aligned the currency exposure of expenses and our revenue. This means that the negative currency impact of the topline was largely offset on the bottom line. Commissions as a percent of revenue for the fourth quarter were 45.2%, a 60 basis point improvement sequentially, but, as you know, commissions tend to vary throughout the year and our mix of business was affected by quarter and seasonality. Total reported non-commission operating expenses for the quarter decreased $400,000 over the prior year, primarily related to reduced restructuring costs and a lower legal accrual. On an adjusted basis, total non-commission expenses increased $13 million, primarily due to increased performance-based compensation, increase in outsourcing costs and a higher loss provision versus the prior year. With respect to moneygram.com, we saw sequential declines in fraud losses and we expect this positive trend to continue in 2016 as we further refine our credit management and our risk metrics. Compensation and benefit costs increased $12 million on a reported basis. On an adjusted basis, compensation and benefit costs increased $6 million, primarily due to higher incentive compensation. Fourth quarter transaction and operating support costs decreased $16 million on a reported basis, but on an adjusted basis T&O costs increased about $3 million. Adjusted free cash flow for the quarter was $20 million, an increase from a negative $35 million last year, due to improved gross margin and the significant reduction in signing bonus payments. Agent signing bonuses were $16 million in the quarter and capital expenditures were $21 million, flat compared to last year. Full-year adjusted free cash flow was $0.4 million, the result of a year with heavy capital investments. We ended the year with just over $164 million in cash in addition to $3.5 billion in settlement assets. We successfully navigated 2015, repositioned our U.S. to U.S. business, while facing the challenges of an increasingly unpredictable world economy. As we look to 2016, we're mindful of the uncertainties that could challenge our ability to grow. That said, we anticipate constant currency revenue and adjusted EBITDA growth in 8% to 10% range for 2016. Keep in mind, however, that we see seasonal patterns in our business which usually lead to slower growth in the first half of the year. In addition, we're not expecting growth from our bill pay and Financial Paper Products businesses and our guidance assumes business as usual with Walmart. Capital expenditures are projected to be $90 million to $100 million for the year and we are anticipating signing bonuses to be in the range of $50 million to $60 million. We are estimating adjusted free cash flow for 2016 to be about $50 million after interest and cash taxes. Another important aspect of moving beyond 2015 is the effective revenue growth combined with moderating expenses. We expect better alignment between EBITDA and adjusted EBITDA for 2016. 2016 begins a process of sustainable earnings growth and a return to positive cash flow. As a result, we can predict a solid outlook for next year, which sets the stage for a stronger MoneyGram in the future. And now I’ll turn the call back over to Alex.

[Alexander Holmes:]

Thanks, Larry. We are pleased to have closed our 2015 with strong momentum and we're excited for all that's to come in 2016. Since my announcement as CEO, I have initiated an in-depth project to map the customer journey experience to help MoneyGram better identify our customers' current and future needs along with their pain point. The results of this project have so far been very energizing and given us some great insight into where we want to go and what we need to do. I'm committed and determined to add new loyal customers to our brand by delivering to them unique solutions, improved interactions, and the world's best customer experience. My goal is to ensure that MoneyGram serves our customers better than anyone in the industry, and together we build a stronger MoneyGram. Customer experience is the new marketing. It is tangible, and it can be felt. We want to be our customers' trusted contact, not just a process or a distant service. We've learned from our customers' journey, and now we will involve them in ours. Over the coming months and years we will continue to transform our business with new technologies and experiences that deliver hybrid money transfer solutions to market. We are confident that these solutions will enhance our customers' experience and ensure we are positioned at the forefront of the industry. Thank you as always for your interest in MoneyGram. And I will turn the call back to the operator and open it up for questions.

[Operator:]

Thank you. [Operator Instructions] And we will now take our first question from Kevin McVeigh with Macquarie Capital.

[Kevin McVeigh:]

Great, thanks. Hey, Alex, congratulations on the Walmart extension, I know that's about 19% of revenue today. Any sense of what that looks like, and as we work our way kind of going forward, it was obviously a big drag on the revenue, how that should kind - as that drag becomes less, how that impacts the revenue trajectory in 2016 and beyond?

[Alexander Holmes:]

Yes, thanks Kevin. Great question. No, I mean, Walmart has been a great agent partner for us for a number of years. Obviously, notwithstanding the introduction of the white label product, which obviously had an impact on the U.S. to U.S. service, but we continue to provide the U.S. to U.S. service inside Walmarts, obviously the U.S. outbound is a great business, continues to grow for us inside of Walmart and we also do bill pays and money orders. So I think at the end of the day, Walmart is Walmart. They're the largest retailer in the world. They have great locations across the U.S. I think they relate to our customer base, and we anticipate continued growth with them as we go forward. I'm very pleased to have the new three-year agreement. We have a lot of alignment on talking to and addressing and interacting with our customers in very different ways, overhauling and changing the customer experience at the point of sale. So I think our initiatives are aligned, our goals are aligned. We're really, really excited about where we're going.

[Kevin McVeigh:]

Got it. And then Alex, any sense of just the spends on compliance as a percentage of revenue in 2015? And then how that shapes up as we think about 2016?

[Alexander Holmes:]

Yes, no, it's a good question. I really we continue to look at it two different ways. We have our ongoing compliance enhancement program, which is the necessary changes to our system that we had to put in place per our compliance monitor and those pieces continue. I would anticipate probably an additional $25 million of spend related to that project in 2016, which will be down a little bit from the expense in 2015, which is good. We put a lot of things in place. We still have a lot left to do, but we’re continuing to be hopeful about where that’s going. With respect to our core compliance team and functionality that continues to build out, and that continues to grow. Obviously agent oversight, regional relationships with regulators is continuing to be very important in a number of markets around the world and so we continue to add to that front office staff along with the back office staff. Those numbers are in our numbers those are in our reported operating numbers, and we don't break that out as a percentage.

[Kevin McVeigh:]

Okay, thank you.

[Operator:]

And we’ll now take our next question from Daniel Hussain with Morgan Stanley.

[Daniel Hussain:]

Hi, Alex and Larry. Thanks for taking the question. I just wanted to ask quickly on self-service, or I guess digital, the transaction growth and the revenue growth. It looks like the transaction growth slowed down pretty dramatically about the same time. This is one of the first times we're seeing that that revenue growth actually outpaced transaction growth. So is this just an indication that you're at the point maybe where you're optimizing pricing, or is it mix, or is there something else here we should be thinking about?

[Alexander Holmes:]

No, that's a good question. I think it's a little bit of everything. We've had a great success in a number of different markets. Obviously the launch of the new moneygram.com, last year the growth of our kiosks. So we're seeing a lot of mix coming through that business. The account deposit side of the business has now reached 20 countries. We have access to about 1.8 billion bank accounts and mobile wallets. When you stop back and look at that you look at the number of activities we have in various markets, whether that's kiosks across Australia, whether that's mobile wallets in places like Africa, ATMs, other agent websites, it's really becoming a bit of a mix around the world. I think that the growth rates you know the 42 and the 48 are extremely strong and we are growing over some pretty big successes from the prior year quarter. Against that backdrop I think the growth rate is fantastic. And we’ll see what happens this year as we roll out more partners and more things become digital that growth rate is going to fluctuate, but I think for me, a lot of it is about that consumer that customer, digital interaction, how we’re pushing those products in different markets, how we're getting those set up and established in those relationships that we have in the various markets around the world. Really bridging the physical and digital worlds and thinking more digitally as we go forward is going to be extremely important for the business and for our long-term success. So we have to look not just at the straight growth rates on transactions and revenue but also kind of the returns we're getting from those investments as well. So, there's a lot going into it but I think we're very pleased with where we are, and we’ll continue to see some strong growth rates there.

[Daniel Hussain:]

Got it. Thanks. Just thinking about your guidance, it doesn't contemplate any margin expansion. Could you just talk about where you're seeing additional costs and maybe whether the Walmart renewal has anything to do with that? Thanks.

[Lawrence Angelilli:]

Well, the last part of the question, the Walmart renewal wouldn't have any part of that I think we're saying that we're expecting that to just keep going, similar to would it was last year. There is the potential for margin expansion. We're giving a range on both revenue and EBITDA. So you could have one range higher than the other. We're not foreclosing that opportunity. The other aspect of it is that we do have some countries in the world right now that are either - they could be shut off or declining because of some of these things that we don't control. I think we're just trying to say there's some upside to this but we'd have to have some of these uncertainties resolved. So it's not foreclosing the opportunity, but it's saying we think we have can have a pretty strong year with where things are today.

[Alexander Holmes:]

Yes, I'll just add, I think that there's a lot of opportunity, but there is a background of risk. When you think about whether it's currency fluctuations, oil prices, a lot of stuff Larry called out, you look across some of those African markets, Middle East, Russia, parts of South America et cetera. The strengthening dollar, the currency issues, it's definitely something to consider. We're obviously also facing one of the largest migrant crisis of our generation coming out of the tragedies in Syria, concerns with things like Isis. So there’s a lot going on. We're a very global business. As we've talked before, the diversification of our business is a great thing as well. But it does also have to be contemplated in the markets in which we move around and we operate. So we're also continuing our new initiative investment. We talked a lot about building for growth and for scale and some of our self-service digital channels. And so there's some more money going into those as well as we move forward.

[Daniel Hussain:]

Great. Thank you.

[Operator:]

And we will now take our next question from Jim Schneider with Goldman Sachs.

[Jim Schneider:]

Good afternoon. Thanks for taking my question. I guess, first of all, just following on the previous question regarding the guidance, I understand there's a lot of volatility out there. Can you maybe help us understand how you approached the 2016 guidance in terms of either taking what you thought you would do in terms of internal plan, and then guard banding that by a certain amount, or were you looking at specific corridors and saying X, Y, and Z corridor could be worse and kind of being more conservative on that front. Any help in terms of the methodology you followed would be great.

[Lawrence Angelilli:]

Well, I think more the latter of your suggestions that we do build our plan almost on a quarter-by-quarter basis. And we're looking at that time country mix, and we're looking at where the risk is. I think that you do have different profitability by different corridors and different pricing. So we are taking some of the hot spots that we have in the world today and not projecting necessarily that they're going to come back to where they once were. Other than that, I would say we're also predicting a pretty non eventful pricing market. We're not really building any kind of significant pricing changes in. And then as we said before, Walmart business as usual.

[Jim Schneider:]

Thanks. And then as a follow-up on Walmart, you talked about not assuming any change in the current year, but can you maybe comment on the terms of the contract extension you signed in terms of lack of exclusivity or the pricing and how those might play out over the longer term in terms of volume assumption changes or anything having to do with the kind of profitability of the contract?

[Alexander Holmes:]

Sure. The contract is I mean obviously first and foremost is a non-exclusive contract. Non-exclusive contracts are something that we're very familiar with. We operate in a lot of countries around the world. It's been a trend that we've seen in many market, and obviously with Walmart themselves, we obviously have had the Walmart to Walmart U.S. product that we’ve been competing with internally. We are extremely excited about the contract we have with Walmart. As I said previously, we have a lot of similar beliefs about the business and initiatives that we want to put forward that really change the customer experience at the point of sale, just make it a better and more dynamic product. We are going to be rolling out our new moneygram.com with walmart.com, someplace for today, but we'll be changing that experience as well. So a lot of innovation, investments and these kinds of things, and my hope is that that leads to continued strong growth with Walmart, and then we have a long-term successful relationship with them. Walmart said before, the largest retailer in the world, I think we have to earn their business every day, and that's what we intend to do.

[Jim Schneider:]

And then just a quick housekeeping question, if I could. The FX headwind was about 4% in the quarter. If you marked to market for today’s rates as of right now, what would the impact be for the full-year 2016?

[Lawrence Angelilli:]

We try not to get into that. We really don't forecast foreign exchange rates. What I would tell you is that the rates that things are today, stayed the same for the year, it probably wouldn't have much of an impact at all. We do have a lot of our expenses now, and it will be probably a higher percentage next year than this year because our transitions are complete, where we'll have almost a natural hedge. That also could vary, though, based on whether everything correlates to the euro or not. So it's a lot of moving parts. It's hard to suggest right now. The euro is actually strengthened, which a lot people wouldn’t think would be normal under these circumstances. So we are kind of treating it as a neutral. We really don't have a view towards that headwind at all.

[Jim Schneider:]

That's helpful. Thank you.

[Alexander Holmes:]

Thank you.

[Operator:]

And we will now take our next question from Rayna Kumar with Evercore ISI.

[Unidentified Analyst:]

This is [Mike Mandel] in for Rayna. For 2016, can you quantify your expectation for agent signing bonuses and CapEx? And then what do you expect to be the largest areas of CapEx?

[Alexander Holmes:]

You want to take that Larry.

[Lawrence Angelilli:]

Yes, in our guidance we're giving agent signing bonuses in the range of $50 million to $60 million and CapEx of $90 million to $100 million. And that CapEx should be along the lines that we've been spending on, which is on the technology that we've been talking about, and I think a lot of the customer initiatives are involving new technology which we'll be spending CapEx on.

[Alexander Holmes:]

Yes, and I think I guess I would call it incremental portion, obviously then comes back to compliance enhancement program. We talked a lot about that. So probably have expense there, 25-ish million range and we anticipate obviously a portion of that to be CapEx.

[Unidentified Analyst:]

Got it. Thank you. What are your current debt covenant limits? And related to that, what are your top capital allocation priorities for 2016?

[Alexander Holmes:]

Our principal covenant is our leverage covenant, right now I think our quarter we should be under four times leverage. Our covenant is well in excess of that. We also have an interest coverage covenant which it's not even close to where we are. So our covenants really isn't affecting our strategy on CapEx and cash flow. And we don't have a financial covenant regarding our CapEx.

[Unidentified Analyst:]

Got it. And are you seeing any increased competition in specific corridors following PayPal's acquisition?

[Alexander Holmes:]

It’s a good question. No, not really I mean I think we continue to see the commentary, some of the capital raises have gone on for some of the other competitors, the online competitors out of London. I think we've seen a little bit of change in zoom from different quarters and different prices, but nothing that would make you think that they've changed their strategy or they’re doing anything differently. We are extremely excited about the new moneygram.com that we rolled out last year and all the opportunity we have for that. We have some great plans continued to add to the feature functionality of that, roll it out into some more countries, partner with some other agents around the world continue to connect through our mobile wallets and the bank accounts that we interact with. So we have a lot going on, and we're kind of looking forward to moving that forward. With respect to specific corridors of competition, I mean, not really. I mean, I think that the top competitive countries continue to be the top competitive markets in countries around the world, and I would say that hasn't changed much, just broadly speaking, as we look at different markets around the globe.

[Unidentified Analyst:]

And last from me for the fourth quarter. What was the year-over-year transaction growth for U.S. to Mexico?

[Alexander Holmes:]

We didn't break that out this quarter, but we continue to perform inline or better than the Banco de Mexico numbers, so we continue to be very pleased with our Mexico business.

[Unidentified Analyst:]

Got it. Thank you.

[Operator:]

And we will now take our next question from Bob Napoli with William Blair.

[Bob Napoli:]

Thank you. I just wanted to follow-up I guess on how you think about the balance sheet long-term, if you would I mean you guys delivered some pretty good numbers, done what you said you've done. You've given some pretty good guidance, but your stock doesn't - obviously we're in a very difficult environment, and companies with more debt are treated more harshly than those with less debt, it seems, in this market. With the covenants that you have fixed that the one leveraged covenant I think steps down a little bit, you're very comfortable. And what debt - you don't have - can you just maybe go over when you have debt due, how you think about the balance sheet long-term and the structure of the balance sheet?

[Lawrence Angelilli:]

Yes, I mean its bullet maturity for the most part we have modest schedule principal payments under the structure and we do have step-down covenant and we expect to gradually deliver underneath those covenants. So I think there's a gradual deleveraging or healing of the balance sheet that takes places but we don’t have significant maturities or calls on cash flow for several years. And so we're comfortable under that agreement, one of the other things that happen is - it’s an EBITDA leverage. So as we continue to reverse the trends on adjusted EBITDA we’ve also see a delevering that comes naturally with that. So all in all I think we’ve been saying that this was kind of the phase that we're going through, and I think we get back to more of the deleveraging that we were doing before the changes in the U.S. to U.S. pricing.

[Bob Napoli:]

Those bullet payments, can you maybe just give a feel for 2018 and 2020? Is that…?

[Lawrence Angelilli:]

Yes, revolver is 2018 and that's undrawn. Then the term loan is 2020.

[Bob Napoli:]

Okay. And then free cash flow conversion, you guys are still spending a fair amount on CapEx, and you still have the compliance costs coming through. What should CapEx - that's about 7% of revenue. That seems pretty high for this type of business. As we look at 2017, do you have majority of your upgrading CapEx projects behind you, such that that number comes down further as a percentage of revenue? What is reasonable there, and when do we get these compliance costs? Do some of those become permanent costs?

[Alexander Holmes:]

Thanks, Bob, for the thoughtful questions there. When I look out on the business, or even just - let's just start with today. We're in a situation where we have a lot going on in the digital world, and whether you look at that from a competitive nature or whether you just simply look at that from the way in which the world is moving and interacting, we've spent a lot of money investing in kiosk-based technology, new moneygram.com, opening bank accounts. We've done that because it's a need, it's an opportunity to have more customers, an opportunity to add more revenue. We have our - what we call our agent connect service where we go around and plug APIs into various partners around the world. And when I think about having 30 of those types of relationships in over 25 countries around the world, which are kind of our non-traditional relationships and whether that's going into places like Ooredoo in Qatar, or Econet in Zimbabwe, et cetera, we want to activate our network and so I think continuing to make enhancements to our core underlying product overlaying that with digital technologies is going to be key to our long-term success and I think we’re making the right investments on that. The regulatory environment is not getting any easier. I would say the level of scrutiny that regulators are putting on banks and MSBs and anyone else in kind of the alternative financial services space is getting harsh and not easier. And so those investments are needed and required. I mean, I've been on record saying that the compliance enhancement program, the activities associated with that are one time in nature that is building out new systems and new technology to change and sunset old systems. But our underlying core compliance costs are increasing but those are in the reported numbers that we talk about on a quarterly basis. So long-term I think we have an opportunity to lower CapEx or grow into our CapEx but right now we’re investing in the company for the future. And it's the right thing to do.

[Bob Napoli:]

Thank you.

[Operator:]

And we’ll now take our next question from David Scharf with JMP Securities.

[David Scharf:]

Good afternoon. Thanks for taking my questions. Alex, just curious, on the margin, has there been any discernible change in principal per transaction? Anything that provides a leading indicator in terms of broader macro trends?

[Alexander Holmes:]

Yes, absolutely. I mean, I think when you look at the business in the various markets that we're in, I would say, and I always give complete credit to our consumers. They are sophisticated, savvy, and they understand what's happening in the world. They are looking at opportunities to maximize sends home, and we've talked about that as an example, sends to Mexico or sends to India are two great examples were those customers are focused on the rate that they are going to get and how much they are going to maximize and get home. Those trends continue. I think when currencies are volatile, it makes kind of that guessing game a little bit tougher, but we’ve done an amazing job internally as a company really focusing on how to get the best FX rate how to source the currencies in the right markets when you are dealing with the 122 currencies around the world you have to be thinking every day about the volatility to associate with that and how do we kind of get the best return and put the best price in the market for our customers. And so spending a lot of time on that but when you look at principal per transaction I mean it’s - it clearly for a number of markets tick down a little bit and I think a lot of that’s related to the earning power of those customers. I think the U.S. looked pretty reasonable. Western Europe looked pretty reasonable. A lot of other markets, though, it's moving around a bit so we’ve also expanded into some new growth market. I think we’ve had some good momentum in places like China and others areas where they send larger amounts home. But when you go back and look at some of those older corridors, particularly in the cash to cash business, you see a little bit of a step down in the principal pieces. So it’s really hard to read I mean you read the same headlines I do, you read the same news stories, is Europe strengthening or is it weakening, we had a good year across most of Europe including Eastern Europe. What did 2016 bring? I think it’s kind of a question back and forth. The U.S. seems to be okay, but every other article I read, it’s bound for a recession, but at the same time we see fairly steady employment numbers and good growth in sense to some of our key corridors. So it's hard to get a read on it right now. But I think our consumers continue to prove resilient. Most of our core clients, they're the hardest workers in the world. They will take the jobs that a lot of others won’t. So there is resiliency and stability, but when you start looking at currency volatilities and oil dependencies and a lot of people getting paid through government contracts, there is definitely some concern out there in some of those more volatile markets.

[David Scharf:]

Got it. That's helpful color. Shifting to the signing bonuses, it looks like you guided $50 million, $60 million this year. I guess you had about $94 million a couple of years ago, $87 million last year. Is the reduction for 2016 just related to the pipeline of who's up for renewal, or who you anticipate signing, or is there actually some little bit of less pressure on what it is costing you to sign up the incremental agent?

[Alexander Holmes:]

Well, it’s a great question. Clearly the $94 million was a year where we did some big renewals of some key agents. That's really kind of a cyclical effect of some of these longer five to seven-year contracts where we had a bunch kind of coming due at the same time, and obviously they were on our larger, more important agent size. I think we’ve been talking about renewing nine of our top 10. I think we now have 10 of our top 10. So we are very, very, very excited about that. I think the reductions in the rest of the signing bonus really is symbolic of continuing renewals of some smaller agents in various markets. It's reflective of opportunity in some of those markets, but we’ve been doing a lot without big signing bonuses. And so I would say that there's a lot of opportunity out there and that’s one of kind of the interesting things that I think. You may see a little bit of offset in some of that CapEx side. When you're doing more of the digital integration, a little of that expense is moving over there, building out kiosks or plugging in APIs and building out a service versus just paying an agent to do kind of a cash-based service. So you are seeing a little bit of that paring off, but I’m not concerned about the number dropping from not having opportunities out there. We have a lot of opportunities, and I'm pretty excited about it.

[David Scharf:]

Got it. Along the lines of those signing bonuses, just want to understand the free cash flow guidance for this year. I guess was that adjusted free cash flow of around $50 million?

[Alexander Holmes:]

Yes.

[David Scharf:]

Okay. So that does not include the roughly $25 million from the compliance enhancement program and direct monitor costs and --?

[Lawrence Angelilli:]

That’s correct.

[David Scharf:]

Okay. I mean when you think about that program, the monitor costs, I don't know if there's any more restructuring built in, is your expectation that will you generate cash this year?

[Lawrence Angelilli:]

We are looking at kind of a flattish to upward trend in cash generation.

[David Scharf:]

Okay, got it. All right. And then lastly, listen, I know you don't give quarter-by-quarter guidance, but you've always been quick to highlight seasonal aspects of the business, either on the demand side or on the marketing side. I mean given that and that we're basically halfway through the quarter, can you help us think about in the context of your annual EBITDA guidance how we ought to think about Q1?

[Alexander Holmes:]

Well, hopefully we'll have a good Q1. It usually is a smaller quarter from pure dollar perspective, maybe a little bit lower growth to as we put through some new initiatives and some spend early in the year as you get things ramped up and rolling. I think you will see that kind of carry over into Q2 as well. And then we'll get things moving, but I won't give you kind of performance so far, but I would say we're off to a good start.

[David Scharf:]

Got it. Thank you very much.

[Alexander Holmes:]

Thank you.

[Operator:]

We will not take our next question from Kartik Mehta with Northcoast Research.

[Kartik Mehta:]

Hey, good evening. I like wanted to as far as guidance is concerned, and just maybe just overall market, from a guidance perspective, how much price degradation, if any, have you built in? And where the market is right now, what are you seeing from an overall price standpoint?

[Alexander Holmes:]

We are seeing a very stable pricing market right now I think we have a lot of initiatives underway to ensure that our business remains relatively stable. I think we always kind of hedge in there about a 1% to 2%, but our expectation would be that prices remain relatively stable.

[Kartik Mehta:]

And then you've talked a lot about using self-service and digital. As you make greater use of that technology, or your consumers make a greater use of technology, what do you think the impact is to margins from a medium-term and may be you know over the next two, three years in the long-term? Is there potential that because you might have increased costs that margins could be negatively impacted, or do you think that's manageable?

[Alexander Holmes:]

I think it’s really manageable I mean certainly in a time period of kind of building out and growing and putting those pieces in place you know the margins can be down a little bit we talk about, some of the back office servicing cost and MGO is an example as the kind of scale and go through those actually we are doing better on that front by the way. But what’s really, really exciting really cool about the business is that as we acquire new customers particularly as we acquire them to our self-service channels the most loyal and profitable that we tend to have are those that use MoneyGram across multiple channels. So not only using is online or at a kiosk or using account deposit service, but then also coming into the cash side of the business as well. So those are the consumer who want to get and I really think when you look back over the years we built an amazing network we built an amazing business, but you know just adding locations and hoping customers come in is I don’t that’s just not going to work anymore on a go forward basis. You have to capture the customer you have to make them want to use MoneyGram, you have to give them a winning proposition in the market to drive into your business and then once you have them, talking to them, communicating with them keeping those customers, letting what’s going on in the world and that’s kind integrated omni-channel experience we have an amazing brand and opportunity leverage that in a huge way. And I think you know you get more and more repeat customers that’s going to impact and to the positive your profitability. So that’s what we're shooting for.

[Kartik Mehta:]

Great and just one last question, Larry. I just want to make sure I understood what you were saying about free cash flow. So it sounds like since you're expecting cash to be about flat that you would expect GAAP free cash flow to be zero - flat as well, or zero. Would that be a fair statement?

[Lawrence Angelilli:]

Yes, I mean I guess if you define it as the change in our cash amount on the balance sheet. Yes, flat to slightly up.

[Alexander Holmes:]

Yes, I just wanted to make sure that, is there something else, or is GAAP free cash flow.

[Lawrence Angelilli:]

Yes, I mean I think that, yes GAAP free cash flow and summing to a cash balance would be. We don’t think it’s negative but you know will be flattish.

[Kartik Mehta:]

Perfect. Thank you very much. I appreciate it.

[Alexander Holmes:]

Thank you, Kartik

[Operator:]

And we will take our next question from Sara Gubins with Bank of America Merrill Lynch.

[Sara Gubins:]

Hi, thanks, good afternoon.

[Alexander Holmes:]

Hi, Sara.

[Sara Gubins:]

Could you give us any details on the expectations for money transfer transaction volumes embedded into the 2016 guidance? And to the extent that you can talk, broadly speaking, about regions that would be great?

[Alexander Holmes:]

I’ll do my best, we don’t tend to break those out and guide them that direction, but I would say that we have high expectations obviously for the more transfer business next year I mean Larry touched on you know we expect bill pay to be slightly down, FPP slightly down and so you know to hit the numbers that we are looking for we are going to be looking for money transfer to lead the way. Maybe that goes without saying. But we are focused on improving our agent profitability we are very focused on improving our revenue growth and I think we moved and put our expenses in a place where we can leverage them and push for some scale. And all those pieces are going to come together, if we have good growth in the business around the world. I’d say I always start with the U.S. which is obviously our core market, we’ve seen a nice recovery in U.S. and U.S. business, we are not expecting big growth expectations there but I think sustained growth would be a very nice achievement for that market. U.S. outbound always core to what we do a very important part of what we do and I think our expectations at the U.S. seems like it’s in pretty good shape I think we’re very competitively positioned and excited about some of the opportunities that we have in the U.S. right now and pieces of the business that we can expand on there. When you look at some of our other global send markets still a big, big opportunity in places like South America I think we’re very still small I don't think you know changing that paradigm this year is not really going to change the numbers but it’s going to position us longer term so we have a lot of initiatives down south I think as you go across with great year in Western Europe. As I mentioned earlier on the call I think if the reports are - well, it depends on which report you read, but it's the reports that say things are improving a little bit and the European economy we’re going to have a hopefully another good year there I think we have some great initiatives in Africa, great initiatives across Middle East a lot of the emerging markets. And then the most amazing part about our business is that you can activate and activate in different countries. And there is always another opportunity to go after, so we still have several markets particularly in parts of Asia that are still relatively small. And I think to the extent that we can have some successes there well maintaining and hitting on the big opportunities, it should be a good year for the money transfer business but a lot of that is, again that backdrop of uncertainties, on currencies in oil prices and commodity prices and other things. So we are feeling our way through it. If it was just our business I think it would be a good year for the money transfer business.

[Sara Gubins:]

Great. Thanks. And what's your exposure to oil producing countries? I would assume it's still pretty small?

[Alexander Holmes:]

We have really small market share in the Middle East. And then Africa, I think the effects of African oil producing countries have already been felt pretty much. I think that in our view it is a significant point where we have a lot of concentration or a lot to lose. We actually we view those countries as an opportunity where we have probably some pretty significant growth prospects.

[Sara Gubins:]

Okay, great. And then just last question. So we have really seen stability in the marketplace and pricing, at least over the last year if not a little bit longer. And that follows a period that was pretty volatile in terms of pricing. Could you talk about what you think is driving the stability? Are compliance expense increases maybe taking some capacity out or preventing others from getting in? Is it something else? I guess I'm wondering if you think the stability will last or if you see reasons why that might change.

[Alexander Holmes:]

That's a great question. It's a difficult one to answer because I think I've got give you one of those it’s kind of little bit of all that. But if I go back and kind of look at some of the big changes I mean they were kind of step function changes in the market. The ones that really drove kind of a lot of revenue compression were sort of bulk price changes for large markets and whether that was kind of a repricing of the U.S. Latin America that was kind of driven, though one of the competitors something like a Walmart to Walmart or some repositioning in certain markets, a lot of that drove that. And then there’s obviously been a lot of noise, lot of conversation. You see sort of the World Bank, 5% initiative which puts pressure on prices and you get a lot of online players coming in with saying they can do it cheaper, better, faster, putting some price pressure into the markets and the online space and some other places. And so you play a little game of balancing your value and your brand with where's that right price point and I think we've been very good at balancing and you know once in a while you unfortunately have to make that big investment in pricing to kind of reset a business. I think if we had it our way, we feel very good about our prices and in fact there’s a number of markets I think we could do you a little bit more on the pricing to the positive side but again market dynamics and some competition can affect that as well. So we're feeling our way through it. I think as you look at also adding different service applications whether that’s like an account deposit type service gives you an opportunity to price that product very differently, and as you build out technology to technology, or digital to digital capabilities, you see some different prices, some different effects there as well. So as a lot going into it I think our plans for the year involve going out and running our businesses as well as can and being as competitive as we need to be, and to us I would say a very stable pricing market.

[Sara Gubins:]

Thanks a lot.

[Operator:]

And our last question comes from Tien-tsin Huang with JPMorgan.

[Tien-tsin Huang:]

Hi, thanks for taking my question and congrats on getting to the double-digit for the fourth quarter like you targeted earlier. So my question is related to that. Just the 11% in the fourth quarter and I know you're guiding to 8% to 10% for the full-year. I know it was asked in a lot of different questions, but is that just conservatism that you're guiding for the decel, or are you actually seeing signs of some of the macro impacting volumes? Just wanted to clarify.

[Alexander Holmes:]

It’s a good question. I mean again I think we put together the plan over the course of several months and we always have to look at needed investments, wanted investments, kind of breaking those out into sort of the needs and sort of nice to have buckets. I think you look at where we’ve seen growth and you put the fourth quarter together and you get a nice quarter that has some more leverage for more revenue to the extent that that is sustainable against kind of the uncertainty that we pointed out. I think we have an opportunity to have a really good year, so maybe call it a little bit of conservatism, maybe call it may be better said being a little bit cautious given some of that uncertainty, but knowing what’s out there and knowing what we have to do internally I think the guidance is consistent with that outlook.

[Lawrence Angelilli:]

The only thing I would add is we’ve seen historically that you can't just annualize our fourth quarter. There are seasonal patterns in the first half of the year, so that does move the needle slightly and I think that’s kind of what we are pointing to as well.

[Tien-tsin Huang:]

Okay. 8% to 10% is still a good outlook. Just want to make sure I'm not missing any of the details. Then just the digital piece grew 40%-plus in the fourth quarter. What's sort of embedded in your outlook for 2016? I know you don't give specific guidance there year to year, but anything to look out for?

[Alexander Holmes:]

I know if there's anything to look out for. I mean I think we had a heck of a year, and you saw some quarters, I think it was last quarter was up in the 60s kind of range. So we are growing over a really good year. We have plans to add and do more the timing of which is sometimes a bit fickle, I suppose would be a good word. So I think if we can hit that 30%-plus range, we’d be happy and then if we obviously have some successes and get more things done particularly earlier in the year and if those have good returns and good success I think we can do better than that.

[Tien-tsin Huang:]

Okay. Thanks for the update, guys.

[Alexander Holmes:]

Hey, thank you. Appreciate it very much.

[Operator:]

And there are no further questions in the queue at this time. I'd like to turn the conference back to our speakers for any additional or closing remarks.

[Alexander Holmes:]

Yes. I just want to thank everybody for their time and attention. And we are available for call and look forward to it. Thank you.

[Operator:]

And ladies and gentlemen that concludes today’s conference call. We thank you for your participation.