MoneyGram International, Inc.
Q3 2014 Earnings Call Transcript

Published: 31 Oct 2014

[Operator:]

Welcome to the MoneyGram International Third Quarter 2014 Earnings Release Conference Call. (Operator Instructions). It is now my pleasure to turn the floor over to your host, Mr. Eric Dutcher, Vice President of Investor Relations. Please go ahead, sir.

[Eric Dutcher:]

Thank you. Good morning, everyone and welcome to our third quarter 2014 earnings call. With me today are Pam Patsley, Chairman and Chief Executive Officer and Alex Holmes, Chief Financial Officer and Chief Operating Officer. Our earnings release and accompanying slides are 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 2013 and our Form 10-Q filed in 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 their related GAAP measures in accordance with SEC rules. You will find reconciliation tables within our earnings release issued this morning and in the Form 8-K submitted to the SEC. Now I'll turn the call over to Pam.

[Pam Patsley:]

Great. Thanks Eric and good morning everyone. As you can see from our two press releases this morning there is a lot going on at MoneyGram. When the competing white label product was announced we said that we would measure, thoughtful and targeted in our response and working in close partnership with our agents. We also said we would monitor growth at non-Wal-Mart locations. We still saw U.S. to U.S. growth outside of Wal-Mart in that category with 7% transaction growth and 5% revenue growth but there was significant deceleration in the quarter. When we last spoke we shared with you that we had implemented price test in certain DMAs both inside and outside of Wal-Mart. Based on the results of these test and after seeing the impact of the white label pricing for a full fixed month we’re taking action. It's the right thing for our agents and very importantly it's the right thing for our consumers. I think everyone also has to recognize that the U.S. to U.S. fee structure has been unique and an outlier to most all other quarters. We’re launching a nation-wide multi-channel marketing campaign to promote new low prices in the U.S. to U.S. market with a strong marketing message and new low prices we aim to recapture our momentum in this quarter. For transactions with the face value of $50 and below our prices remain the same. For transactions with face values of 51 up to $900 the price is now $11.50 and for transactions greater than 900, our fee is now equivalent to 2% of the face-value spent. These new prices are being rolled out today across all 50 states post-Puerto Rico and at all agents. We believe this additional offering brings value to the consumer by offering them choice with over 41,000 locations to send and pick-up. As mentioned the new pricing is being supported by a robust marketing campaign including radio, TV and social media. We have this full support of our agent partners and they are excited about the campaign. It should be obvious from the 41,000 locations that it's worth noting this is being actively supported and marketed at Wal-Mart as well. Let's talk through what happened in the quarter that helped define our strategy and our approach. Our U.S. to U.S. business represented 20% of total money transfer transactions and 17% of money transfer revenue in the quarter. Total Wal-Mart revenue including bill pay and money orders represented 21% of total company revenue for the quarter versus 27% last year. The third quarter was the first full quarter with the competing Wal-Mart U.S. to U.S. white label product in the market. As a result U.S. to U.S. MoneyGram transactions originated at Wal-Mart declined 57% and revenue declined 60% versus the prior year. In the second quarter the transaction declined was 31%. We said that we expected the cannibalization rate to increase into the third quarter but the 57% certainly exceeded our expectations to the downside. Transactions declined across all bands. Seeing a decline in the bands over $900 indicate that consumers might be sending multiple smaller transactions to avoid higher fees on one larger transaction over 900. Our new price offering simplifies all bands. Money transfer revenue growth for SIMs in the U.S. not originating at Wal-Mart declined from 13% growth in the second quarter to 5% growth in the third quarter. By taking this pricing action now we’re ensuring that all of our agents maintain their competiveness in this market. Now let's discuss the whole of the money transfer business, total money transfer transactions decreased 3% while revenue decreased 6% on a reported and constant currency basis. Excluding U.S. to U.S. transactions originated at Wal-Mart money transfer transactions increased 11% while revenue grew 6%. We ended the quarter with 347,000 locations worldwide which was in addition of 2000 locations from the second quarter, or 4% growth compared to last year. It's worth mentioning that these additions are net of a couple 1000 locations which were closed during the quarter in Russia, Ukraine and the Crimea region. We have added net 13,000 locations to our network over the last year. We also continue to secure our base business. For example, ACE Cash Express, a 25 year partner signed a 7-year extension to provide money transfer, bill payment and money orders at its 1400 locations. With this extension, we have secured eight of our top 10 agent contracts through the first quarter of 2017 or beyond. Within the quarter July results were solid followed by a very weak August across multiple geographies. We saw some uptick that was promising in September. From an economic perspective the euro zone stalled during the summer compounding the economic malice with a geo-political and regulatory environments in certain markets. Issues ranged from central bank policies, currency devaluation, political unrest and health concerns all of which dampened our revenue growth but there were some very bright spots. And let's begin with U.S. outbound. We gained market share again in U.S. outbound remittances both transaction and revenue grew an impressive 15% the same growth we posted last quarter. U.S. outbound represents 42% of total money transfer transactions and 35% of money transfer revenue for the quarter. In the U.S. to Mexico corridor, MoneyGram has grown to 13% market share and our 17% transaction growth continued to outpace Banco de Mexico's [ph] reported remittance data. While our growth rate declined a bit compared to the more than 20% growth we reported over the last seven quarters this is not a loss of momentum but a reflection of our larger market share. In Mexico, we signed a new agent Waldo's Mart, a $1 store with over 300 locations across the country. They are our new seller of remittances with great growth potential. Pagos Intermex, a payment network of convenient retail outlet also renewed their agreement with us. U.S. outbound sends to Latin America and Africa were positive drivers for the business led by our agent expansion and quarter activation activities. The continued strong performance from this category really speaks to the health of our brand and the strength of our network both in and outside the U.S. Now during the quarter non-U.S. sends represented 38% of money transfer transactions and 48% of money transfer revenue. Transaction growth was 8% and revenue growth was 1%, the difference between transaction growth and revenue growth came from multiple areas, quarter mix a decline in face value per transaction and pricing. While pricing represented only about 1% of the difference in the quarter, transactions with lower face value were prevalent in many of our larger non-U.S. send countries leading to lower revenue per transactions. Additionally we experienced very strong growth in some low priced quarters such as the Middle East to Southeast Asia and India as our mix of business continues to shift. As you know Saudi Arabia is the second largest send country in the world and I can tell you we had awesome growth there in the quarters. In certain large send countries like Libya, Angola, Italy, France and Venezuela some combination of either the economic, geo-political issues or the regulatory regime resulted in slower growth. That said in addition to Saudi Arabia, we also saw impressive results in many countries such as the UK, Russia, the UAE, democratic Republic of Congo, Chile and a few others. We’re securing our business outside the U.S. with many agent renewals. A few examples our Kaah Express, a regional money transfer partner in Germany, UniCredit Tiriac Bank a leading financial institution in Romania and Novacambios, a prominent exchange house in Portugal. We had a great quarter signing new agents in emerging markets. We signed Government Savings Bank of Thailand, a 100 year old institution with over a 1000 branches. Pubali Bank, the largest public bank in Bangladesh with over 400 locations and Dialog, a mobile provider in Sri Lanka with over 8 million customers. MoneyGram services will be available at Dialog's high traffic retail locations which serves their predominantly prepaid mobile customer. Growing our market share outside of the U.S. remains a sizeable opportunity and a key component of our growth strategy. Looking now at self-service, we had fantastic results again from our self-service business. Transactions grew 47% while revenue grew 36%, 10% of our time transfer transactions and 8% of our time transfer revenue came from self-service in the quarter. We’re doing well on our goal to have 15% to 20% of money transfer revenue from self-service in 2017. Our MoneyGram Online channel which represents the largest portion of self-service posted 34% transaction growth and 30% revenue growth. These great results were driven by increased activity of returning customers and a 160,000 new activity customers in the quarter. If you were to consider MoneyGram Online as an individual agent it would be our second largest globally which is a testament to it's exciting growth and future potential. Online growth in U.S. and Europe outbound were especially strong in the quarter whether looking at only MoneyGram Online or our total sub-service channel we’re extremely pleased with our results compared to the rest of the industry. And really as they stand alone, in October we launched remittance services with Pesa in Kenya. There are nearly 20 million in Pesa wallets in Kenya, in just a few start weeks that the service has been live we’re seeing good volume growth and we’ve an exciting launch campaign planned in the coming weeks. Needless to say we’re very excited about the future success of this product. Additionally, we’re now live with our account deposit service to top banks in China through our new agreement with UnionPay International. Consumers can now send money via MoneyGram directly into bank accounts into three of the world's largest remittance received market, China, Mexico, and the Philippines and into the largest mobile wallet consumer bases in the world. A key differentiator for MoneyGram in self-service is our kiosk based business. MoneyGram is proud to be the leader in the kiosk money transfer space. Our dedicated staging and bulk service kiosk solutions with direct connections to retailer points of sale are transforming the industry. We have rolled out many of these kiosks at SBS locations in the quarter. The transactions from these staging kiosk has exceeded our expectations and the customer response has been very positive and that’s both consumer and of course the agent. In addition to the staging kiosk expansion, we rolled out new cash accepting kiosks in New York and New Jersey. Consumers can now conduct, cash based money transfers or pay bills in about a minute with a simple touch-screen interface. During the quarter we have vertically integrated this business by acquiring the remaining assets of Nexxo Financial. Nexxo was the software and hardware supplier for our cash accepting kiosk by vertically integrating we brought in-house over 10 years of kiosk software development and user interface experience and we will be able to roll-out new kiosk locations at a more rapid pace. One of the things I'm particularly excited about is that with this transaction we also acquired a processing platform that provides the ability to integrate a suite of alternative financial services such as check cashing, money transfer, bill payment, prepaid card loading and money orders and do this for banks and retailers. Through this solution we’re expanding our services with financial institutions and business partners in a role beyond the money transfer agent relationship. We will be unveiling the state of the art platform at Money 2020 next week. With that I will let Alex take you through the financials.

[Alex Holmes:]

Great. Thanks Pam. In the third quarter total revenue was $358 million, money transfer revenue was $314.4 million, a decline of 6% on a reported and constant currency basis from the prior year. Investment revenue was $2.8 million. For the quarter net loss was $3 million and diluted loss per share was $0.05, both were impacted by increased cost for the global transformation program, higher compliance cost and lower revenue and increased income tax expense. Diluted shares outstanding for the quarter were 63.3 million. In the quarter we utilized excess cash of $9.1 million to repurchase 643,000 shares or about 1% of our shares outstanding. Direct monitor cost were $3.7 million, significantly higher than previous quarters. We continue to work with our monitor fresh fields to get clarity on and better forecasting of the direct cost related to their work with MoneyGram. Adjusted EBITDA was $72 million down 6% as reported and down 7% on a constant currency basis compared to the prior year. Year-to-date adjusted EBITDA declined 3% on a constant currency basis. Adjusted EBITDA margin in the quarter was 20.1% roughly flat compared to last year despite decreased revenue as a result of solid expense management. Total commissions as a percent of revenue decreased to 45.9% driven by lower Wal-Mart to Wal-Mart commission which was partially offset by the amortization of signing bonuses. During the quarter total recorded non-commission operating expense increased $21.3 million over the prior year driven primarily by increased investments in our global transformation program. On an adjusted basis total non-commission operating expense decreased $2.3 million. Compensation cost increased $2.7 million in the quarter on a reported basis as a result of approximately $5.2 million of increased cost for global transformation activities, most related to severance. On an adjusted basis compensation and benefit cost decreased $3.2 million. Third quarter transaction operation support cost were 81.7 million which included approximately $30 million of expense related to the global transformation activities in direct monitor cost. On an adjusted basis T&O is down $1 million. Marketing expense in the quarter decreased about 600,000 over the prior year, based on planned holiday campaigns and the new pricing campaign, we expect an increase in fourth quarter marketing expense on a year-over-year basis. Despite our continued cost controls we will continue to invest in marketing as it is an important driver of our growth. We anticipate marketing as a percent of revenue to be over 5% in the fourth quarter. Book income tax expense for the quarter was $7.7 million largely due to the tax related to the cancellation of stock options. Cash taxes were $4.5 million, higher in the third quarter primarily due to the timing of foreign tax payments. For the compliance enhancement program, we incurred total cash outlays of $14.6 million comprised of operating expense of $7.1 million and capital expenditures of $7.5 million. The bulk of the operating expense related to $6.1 million in our T&O line primarily for contractor and consulting expense on systems and process redesign. We continue to make solid progress on our efforts and look forward to launching many of our new capabilities and features in 2015. For our reorganization and restructuring activities we incurred total expense of $7.8 million in the third quarter. These costs are booked primarily in the compensation and benefits line to cover severance and transitional resources and in the transaction and operational support line for other costs. Our first group of new Warsaw Global Business employees [ph] started work at MoneyGram, October 6 and we’re planning to over 250 people in our Warsaw facility by the end of the year ramping to over 500 people by the end of 2015. We’re certainly excited about these increasing activities in our new center. Adjusted free cash flow the quarter was 8.2 million considering that in the quarter we incurred $25.2 million in cash payments for capital expenditures and $23.4 million on agent signing bonuses, this cash flow is a positive outcome. We had previously provided an outlook of $70 million to $90 million for signing bonuses this year and looking into the fourth quarter we will believe we will exceed that estimate. This is a reflection of the strength of our momentum in signings and not a reflection of higher required bonuses to get deals done. On a positive note we were able to recover $15.8 million from another security settlement. This amount will be recorded in the fourth quarter. We ended the quarter with assets in excess of payment services obligations at a very strong $320.7 million although down from the $349.1 million in the second quarter. This decrease is primarily due to higher signing bonuses, cash paid for acquisitions and share repurchases of 9.1 million. Outstanding debt principles at the end of the quarter was 966.6 million. Looking at the segments, total revenue for the Global Funds Transfer segment decreased 6% to 339.5 million for the quarter. Bill payment transactions were up 2% compared to the prior year and revenue was down 3%. The segment reported operating income of $15.4 million in an operating margin of 4.5%. On an adjusted basis operating margin was 11.6% in the quarter down from 12% in the prior year and due primarily to lower revenue per transaction. Our Financial Paper Product segment had total revenue in the quarter of $18.5 million down 4.8 million compared to the prior year primarily due to the onetime gain on the legacy CDO in the prior year. Operating income was $5.8 million down from 10.5 million in the third quarter of 2013. Operating margin was 31.4% and adjusted operating margin was 41.1%. Before turning back over to Pam, I would like to spend a moment on our outlook. As you know in April we revised our revenue outlook down about a 100 million related to the introduction of the white label service at Wal-Mart. From a trend perspective in the second quarter we lost about $20 million in revenue and then in the third quarter this number increased to over 40 million and the downward trend accelerated each month. With respect to the introduction of new prices, over short period of time there are certainly many variables to bear out such as the rate of uptick in the transaction volume, a competitive response in the strength of the holiday season to name just a few of the variables. Outside of the U.S. we anticipate that an economic malice and geo-political challenges that are impacting our non-U.S. send growth in certain geographies will see some revenue growth into the fourth quarter. However these trends can change quickly. From a bottom line perspective, we’re focused on reducing our cost, cutting non-critical items and restructuring our expense base. I think our third quarter numbers reflect that and we’re executing well in this regard. However, we cannot cut our way to grand we will continue to invest in our business. With the particular focus on global sales initiatives, self-service products, marketing campaigns and our global transformation program, all of which collective best position the company for the future. Considering all of these various moving parts we estimate fourth quarter adjusted EBITDA to be between $60 million and $65 million. Now back to Pam.

[Pam Patsley:]

Thanks Alex. This has certainly being a challenging several months but we’re focused on and energized by the exciting developments and our leadership in the industry. I know you all have heard me say this before but there is nothing about the challenges we’re facing to take away from our core assets many of which are unique in the financial services industry. We’re second largest in a robust and growing industry and all industry research points to large and growing global migration over the next several years. Our brand is strong and it's relevant to the world's and growing segment of the population. Those that are not served by traditional, financial institutions. The strength of our brand, our customer base, our agent network, the product suite and global settlement platform remain our value creating engine. MoneyGram has faced challenges before and our team has a strong track record of creating and executing successful strategies to navigate through headwinds. We are focus on delivering the global transformation program which will accelerate self-service growth, enhance our leading compliance system and reduce our cost base. This strategy will ensure that MoneyGram is the brand of choice for years to come. Thank you as always for your interest in MoneyGram. Alex and I will be in New York at two Investor Conferences week after next and hope to see many of you there and with that I will turn it over to the operator for Q&A.

[Operator:]

(Operator Instructions). We will take our first question from Kevin McVeigh with Macquarie.

[Kevin McVeigh:]

I wonder if you could give us a sense – as we came up with the price issue, Pam, one in particular, it still looks like the Olympic event – still above where some of the competitors – where some of the other competitors are right now, is that right? And just openly how you felt that that was right level that was going to hopefully stem some of this decline and ensure some stability?

[Pam Patsley:]

I think the $2 price (indiscernible) what you must be referring on discussing between the private label that was introduced in April and our $11.50 for that kind of $51 to $900 price band. I think our brand, the ability to reach and execute a transaction on either a send or receive side at 41,000 and growing locations, the ability to utilize self service solutions coupled with that I think that our brand – that's the right delta.

[Kevin McVeigh:]

And I know Wal-Mart overall is 21% of revenue today, in terms of what percentage is kind of competing directly against that – with the current run-rate of the business?

[Pam Patsley:]

I'm not sure I understand your question specifically but Wal-Mart I will tell you two other data points I don’t know if this helps what you’re driving to. But our U.S. outbound business at Wal-Mart saw continued nice growth. Our Wal-Mart.com through MoneyGram continued to see very nice growth and then we gave you some of the specifics on U.S. to U.S. at Wal-Mart.

[Operator:]

We will take our next question from Smittipon Srethapramote with Morgan Stanley.

[Smittipon Srethapramote:]

Just wondering regarding the price card, what kind of transaction acceleration do you expect to see with this? And can you also help us think about what means for potentially attracting new customers to the MoneyGram brand or what it means to reclaiming some of the lost customers that you’ve experienced in the Wal-Mart channel?

[Pam Patsley:]

Clearly, there are so many variables, it's hard to predict. We believe our marketing message that we’re going out with the momentum and energize kind of base if you will to our agent relationships will drive a lot of momentum into this new campaign and this new pricing. How fast the uptick is and how great the uptick is quite honestly Smitti, that’s the hard part to predict and as you know there are a number of variables that would go with that. What was the other part of your question?

[Smittipon Srethapramote:]

Just wondering how should we think about this in terms of the new pricing being able to impact--

[Pam Patsley:]

New customers, yes. Clearly I think it's going to attract new customers and I think there is going to be a benefit to even U.S. outbound because of attracting new customers just the whole message that we’re bringing to the consumer, a rising tide kind of lift or both if you will. I think there will even be knocked impact to some of our dot com initiatives because we feel good about it and again I want to just emphasize the U.S. to U.S. historic fee structure has really stood alone to the fee structure that’s in place to other main quarters.

[Smittipon Srethapramote:]

And maybe just follow-up on this, you mentioned that agents are on-board with the price decrease, but have you gotten any push back from the agents on the new scheme and do you expect to be – to see any impact on commission percentages going forward?

[Pam Patsley:]

We have gotten very good support. Comments from lot of the leadership liked the message, liked the positioning and let's face it, all these agents, these are consumers in their locations. So you know there is no getting around it. Wal-Mart led the way an I think it was a reset in the industry and clearly the consumers benefit and the agent most importantly really valued and saw a difference that the way we partner with them is in a very communicative collaborative way.

[Operator:]

We will take our next question from Georgios Mihalos with Credit Suisse.

[Georgios Mihalos:]

I wanted to circle back on the first question maybe I would ask it another way, the decision to implement the 11.50 price, is that basically where you did test it with your other agent locations, non-Wal-Mart and you got a sense that that’s the price where consumers don’t jump at another car and go to Wal-Mart as opposed to using a local agent. Just any sort of clarity around that would be helpful.

[Pam Patsley:]

First clear to the latter part, we’re happy if our consumer jumps in their car and is at a Wal-Mart. So the price was not designed to get customers away from Wal-Mart. The price was designed to speak for what our brands stands for. What you get with the MoneyGram brand, with the MoneyGram product. Safety, Security, Reliability, our agents have a very robust compliance engine behind it. A very robust training program, a lot of different ways from a point of sale solutioning to approach the market. It's not just one of a kind, so if you will we just – there is a lot of variables. I'm not sure there was any magic formulae kind of secret code that spit out 11.50 but that’s just kind of putting all that together. We feel really good about that.

[Georgios Mihalos:]

And another follow-up just on the marketing expense coming up a little bit in the fourth quarter to 5% of revenue. Can you just remind us where that has been year-to-date and that higher rate of marketing expense is that a good way to think of sort of a jumping point going into 2015 given the new pricing initiatives?

[Alex Holmes:]

Marketing as you know it tends to be a little bit lumpy based on global campaigns and the timing throughout the year, but our average for this year through the nine months year-to-date is right around 4.3%. So it is a relatively large increase in the fourth quarter. I think we have been comfortable over the last couple of years spending in the 4% to 4.5% on marketing and that seems to be a very sustainable rate for us. I think as we look into 2015 we will determine based on the opportunities out there and what the markets look like whether we think we need to (indiscernible) that a little bit or not but I think we feel that 4% and 4.5% has served us well and we will continue at that pace for the foreseeable future.

[Georgios Mihalos:]

Just last question from me, if you guys can just remind us how the average principle per transaction differs in the U.S. versus international money remittance?

[Alex Holmes:]

I think we have been on record before talking about the global average for our money transfer is around $325 to $350. The U.S. market tends to be under 200, maybe in the 175 to 180 type range and international money transfers tend to be closer to 400 to 500.

[Operator:]

And we will take our next question from David Scharf with JMP.

[David Scharf:]

Pam, I wanted to ask a little bit about signing bonuses. I understand obviously the absolute figure is going to go up as you sign on more new agents. But these are such huge numbers when big renewals come up. From the outside looking again, how are we really supposed to assess ultimately what the terms are of these resigning? Is it their changing? When you speak about 70 million to 90 million – when you typically resign an agent is there a correlation to the number of stores that agent has? I mean can you give us a sense for excluding the commission discussion just how the actual magnitude of an individual signing or resigning is trending and what type of things the agents are focusing on?

[Pam Patsley:]

Sure. I think there is and again and with most things much at play there. But I think one way to just kind of track the manifestation of the impact of signing bonuses what you may think from a cash flow looked high this quarter is to really continue to look at what's commission expense? What's that rate? Because signing bonuses so then amortized over the life of the contract through commission expense so that’s where you see and if you don’t see large upticks in commission expense it then says that really we’re doing a pretty darn good job and being competitive in the market, kind of looking at growth vis-à-vis you know just kind of putting all things together. So that to be rather than lumpiness of the cash. I think the other thing to kind of consider is we’re kind of in that the last year or so we have been in that 5 – 6 years out from when the leverage recap took place in '08 and as you all know going through that initiative there were a lot of things that triggered, right. Customers being signed up, new contracts being entered into extended different things along with that back in '08. So there has maybe been a little bit of a heightened kind of resigning momentum just kind of the due to the aging schedule of our contracts. I will also say maybe to put your mind at ease. This phenomenon predominantly resides with the big numbers in the U.S. and a few other places. It is not every agent, it is not world over, and there has been no significant change in that trend. There is no question, it's a very competitive environment but I think all told and blending everything out we feel good about all that we have resigned and all those things and the folks that we’re talking to.

[David Scharf:]

And following up on that since a lot of these big resignings tend to be focused in the U.S., these big numbers. When the agency in industry where several of the leaders keep engaging and significant price cuts which ultimately should reduce their margins, potentially their commissions. When you’re entering into agent renegotiations. I mean are they potentially trying to get more upfront in the form of assigning bonus if they see an industry with price points or in perpetual decline going forward that can threaten your commission flow.

[Pam Patsley:]

I don’t think that’s really the mindset. I really doubt because I think people are very focused on the foot traffic that comes with this business. I think they want product. They want things on the shelf whether they are virtual kinds of things, service kinds of thing and they see that this is a brand and a product set and the way we interact and the way we interact and interface with consumers that can also drive stickiness in consumers to their locations. I mean they are about, I think all retailers, you know foot traffic is kind of right up there, the holy grail.

[David Scharf:]

And lastly switching to compliance cost, we certainly recognize there is got to be frustration on your end, trying to get a little more visibility into particularly the monitor cost but--

[Pam Patsley:]

We said that well.

[David Scharf:]

Yes I mean it sounds like hopefully you can give a little more color, I mean is there a sense that this is a high water mark in terms of a quarterly run-rate for those monitor cost or is--

[Pam Patsley:]

I'm old enough to know I could not possibly say that in this environment. It's certainly seems that it should be. Every indication and facts point to that it should be but [Multiple Speakers].

[Operator:]

We will take our next question from Rayna Kumar with Evercore.

[Rayna Kumar:]

Could you please help us quantify what your new U.S. to U.S. pricing strategy means for revenue and earnings in 2015 and 2016?

[Pam Patsley:]

Well we have not given any 2015 guidance yet and we will do that and talk to you about all that when we release fourth quarter numbers.

[Alex Holmes:]

Yes I mean I think we can give you preferably one piece of information that you may find useful and it's a little tricky because of this, the moving transactions inside of Wal-Mart but I would say if we went back and looked at the price. I mean the price cut is about on a RBT [ph] basis about 34% cut on kind of a blended average and so if you apply that to the September numbers and then kind of annualize that you will be looking at a price cut in the range of around 45 million to 50 million, assuming on no lift and just using kind of static numbers.

[Rayna Kumar:]

Well do you expect to grow adjusted EBITDA in '15?

[Pam Patsley:]

We’re not giving '15 guidance right now.

[Rayna Kumar:]

What are your leverage ratio commitment and your debt covenants?

[Alex Holmes:]

They are five times. So we feel very comfortable with where we’re.

[Operator:]

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

[Sara Gubins:]

I just wanted follow-up on that last question. So, your comment about if you took the 34% blended average and apply that to the third quarter view a $45 million to $50 million revenue impact. Was that a – that was a quarterly revenue impact?

[Alex Holmes:]

No, it's annual.

[Sara Gubins:]

That is annualized, okay. I wanted to just make sure. Okay. Could you help us understand – I'm trying to understand a little bit more about your U.S. transactions. What percentage are Wal-Mart to Wal-Mart? What percentage doesn't touch Wal-Mart at all? And what percentage are originated at Wal-Mart?

[Alex Holmes:]

We don't normally break that out Sara.

[Sara Gubins:]

I know, but given what's happening with Wal-Mart, is there any way you could help us get a broad sense of it? Or even just what never goes to Wal-Mart?

[Pam Patsley:]

I think you can look we gave U.S. to U.S. and then we day U.S. to U.S. without Wal-Mart and it was. I'm particularly looking at other numbers that have been reported there was still very healthy growth from our very strong network in the U.S. We had 7% transaction growth and 5% revenue growth outside of Wal-Mart in U.S. to U.S.

[Sara Gubins:]

Okay and with that 7% non-Wal-Mart originated transaction growth, do you think that there is anything negative happening in the U.S. macro or was that deceleration more of a perhaps a shift to Wal-Mart given their lower pricing?

[Pam Patsley:]

I think it's possibly a little bit of both. Some of the economic data for the U.S. looks fairly strong, but when you talk to people and you start looking at delinquency rates and you see some people writing about that, I'm not an economist, I'm not here to be the one you would take. But I think it's a mixed message.

[Sara Gubins:]

And then just last, could you help us think about incremental plans for cost take out given the pricing cut?

[Alex Holmes:]

I think we've been very open and transparent about our reorder and restructuring activities. I think I indicated on the last call that we would be looking at additional phases of that and we're working diligently on that. I don't have any update for you, but certainly hope to have clarity on other things that we can do from a more broad operational structure on the next call. I think if you look at just kind of discretionary expenses, the reductions we're looking at throughout the year, I think we've been doing a very good job internally holding on all cost increases to the extent possible. And again, we don't want to take away from sales initiatives. We don't want to stop growth in investing in the business; we’re doing a lot in self-service as an example. And we need to keep building and focusing on that because those are important to our future growth and expansion plans, but we’re I think looking at every opportunity there is to cut costs and hold back on whatever may be from little things like headcount increases and travel to broader initiatives we just say we're not going to work on. So I think we continue to focus on those and we will continue to hold firm on that into the future.

[Pam Patsley:]

Yes, we're still excited about what we're doing in Warsaw and I think you know plans are already being laid for how we can accelerate and leverage that more broadly.

[Operator:]

We go next to Bob Napoli with William Blair.

[Bob Napoli:]

Just in the fourth quarter in your guidance is for the EBITDA number is there besides the marketing. I guess you're suggesting that the marketing is going to be a little bit inflated, it's comfortable around 4.5% and you said it will be over 5%. Is there anything else in the fourth quarter that is unique from an investment perspective? That would be non-recurring or not?

[Alex Holmes:]

From an investors' perspective, No, none that we see, I mean anything can always come up even in a global [ph] business. So there is nothing really embedded in there. I think probably what you're seeing in that number is really the impact from the price cuts and you're seeing also some slowness and softness. I probably better say softness in revenue from some of our global markets. I think Pam have those throughout her conversation where we're just not seeing the growth that we would have expected it and some of that is related to the economic slowdown in places like Greece, Italy and Spain type activities. We're still dealing with some pricing challenges in France and I would say when you look across places like Africa, there is a lot of investment going on foreign direct investment, you’re seeing a lot of oil boom in places like Libya but you’ve a Central Bank there as an example that does a lot with controlling flows and now you see (indiscernible) in the street that types of thing and you see that across a variety of markets in which we operate. I think Venezuela is another good example of a great remittance market. It's just been kind of stagnated by kind of government intervention. So when you net all those through we're just not seeing some of those markets to growth, though we would have expected, and that's just kind of on those fourth quarter numbers.

[Bob Napoli:]

So if you look at fourth quarter numbers and then you hit the price cut for an additional month because you’re planning it later in the quarter that might not be a reasonable way to think about the current run-rate of earnings.

[Alex Holmes:]

Yes, I mean, Bob, at this point it's probably directionally correct, but we're not going to comment on 2015 guidance at this point.

[Bob Napoli:]

And then the self-service, a portion of your business, what is – is that business profitable? What kind of margins does it generates?

[Alex Holmes:]

I don't want to go through all the various details in a short time here, but I think we've been very open about the excitement, we have around those products. I think certainly when you look at most of the products globally the kiosks and those particular pieces there certainly – definitely very profitable and certainly in-line or better margin than what we see in the core business. I think the one that we've called out is an isolated one, is MoneyGram Online, where we see lower margin today, but we have a lot of investment changes and focus on that business too to ensure increase in profitability over the future horizon. So we're investing in that business and those investments will begin to pay back. So yes, I think we feel very good about how we--

[Bob Napoli:]

Last question, the EBITDA margin, I think target of at least 20% for 2017 and would it be fair to assume that that's off the table at this point?

[Alex Holmes:]

Yes, Bob, the $2 billion in 2017 and 20% adjusted EBITDA those have been internal rallying price that we felt were valuable to share with the street. I think there are still internal rallying price. I think the difference is rather than focusing on a particular timeframe in which those happen, we just kind of continue them as internal rallying price and if you'll recall those were set out there before, the white label product was launched.

[Operator:]

Next question comes from Kartik Mehta with Northcoast Research.

[Kartik Mehta:]

Alex, I think you talked about market expenses being somewhere around 4% to 4.5%, but you've also talked about having a campaign up for this new domestic pricing. Does that mean that the dollars have to be shifted from somewhere else and could that pose a problem for your other businesses and the growth you've been sustaining?

[Alex Holmes:]

No, it's a good. I think to be very clear we've been operating in 4 to 4.5% range over the last couple of years and I think my comment there that we’re comfortable at that level. In the fourth quarter, you're going to see that number go to about 5% and most of that is incremental expense. So we're not taking from other areas, we’re incrementally investing.

[Kartik Mehta:]

And then Pam, the pricing for you for domestically in Wal-Mart still will be higher than their white label products. Is the thought that you can recapture some of those transactions or was this more of a strategic move that you maintain market share and all your other agents outside of Wal-Mart for that domestic business?

[Pam Patsley:]

This is both.

[Kartik Mehta:]

I guess how will you get those customers back at Wal-Mart if your price is still $2 more?

[Pam Patsley:]

I think what we offer for $2 more is a tremendous value and I think consumers know that. And I think Wal-Mart appreciates that too.

[Kartik Mehta:]

So then is it safe to assume – if we took just an assumption of how many transactions – you gave a percentage of revenue transactions on Wal-Mart, you've given a decline, does that mean the other transactions from the better left are going from Wal-Mart to another MoneyGram location and not Wal-Mart to Wal-Mart?

[Pam Patsley:]

I'm not sure, I followed the trail. I will say just we gave what Wal-Mart to Wal-Mart, U.S. – what our Wal-Mart U.S. to U.S. business decline. We gave total U.S. to U.S. business and we gave the growth in the mid-single digits, good number for our network outside of Wal-Mart for U.S. to U.S.

[Operator:]

We will go next to Mike Grondahl with Piper Jaffray.

[Mike Grondahl:]

Yes, you guys talked about a big advertising campaign for the price cut. What is the marketing message of that campaign? What will consumers hear?

[Pam Patsley:]

Well, I think we included even some in look at that in the slides that accompanied our release, and it really is around just as the press release says when it counts MoneyGram in there. So the convenience, the speed, reliability is really around when it counts MoneyGram is what can bring you closer to loved ones, family and friends.

[Mike Grondahl:]

Okay. And then is there any thought process, if the white label program goes international someday to get ahead of that with price cuts or do you think you'll be reactive to that?

[Pam Patsley:]

I think again I really would say, start thinking about the reality of that by looking at the current pricing in U.S. outbound, and you don't find the anomaly that really existed for all of us in the industry with the historic U.S. to U.S. pricing. So you kind of take away that big massive kind of drop because the other quarters, the main quarters you have the outbound. I can't speak for others in their private label desires. I think the prevalence and locations, different brand names for stores, it’s those are just – that’s a difference set of analysis that goes into – I think what drove the U.S. to U.S..

[Mike Grondahl:]

Okay and then just lastly quick, is there much revenue associated with the two acquisitions?

[Pam Patsley:]

Not a lot. No, very excited though for the capability that we acquired.

[Operator:]

We will go next to Lawry Berlin with First Analysis.

[Lawry Berlin:]

Just one simple question, what was the pricing for U.S. to U.S. before today?

[Pam Patsley:]

Before today, so as for instance in those kind of $500 to $900 range, you know the price could have been as high as $70.

[Lawry Berlin:]

Did it vary from place to place and online to offline and will that change to one price everywhere, including online and offline?

[Pam Patsley:]

Yes, when we’re talking about our new pricing. We're talking about walk-ins, we’re including kiosk, but we are not talking about online. And the online pricing is different, it's different because of the funding sources and other things like that. So we've been all talking about all kinds of physical presence, money transfer, U.S. to U.S. and so as you can see, this is why I say the U.S. to U.S. market really stood alone and was very unique to other quarters and the historic pricing.

[Operator:]

We will go next to Tien-Tsin Huang with JPMorgan.

[Tien-Tsin Huang:]

Kind of I guess stocks down 26%, curious what you can do to sort of support the stock, remind us of what the sort of buyback capability could be?

[Pam Patsley:]

Yes, we can buy back stock. So I think that opens up once we file the Q and we plan to support it, because it was a tough message, we knew it going to be a tough message. But we believe in what we're doing. We believe in the brand, we believe in the strength of all the relationships we have around the world and importantly what we're offering and delivering to consumers. I mean I hate to see it, I hate to see the stock down like that because I know – all the other fundamentals are really unchanged and just whether it's looking at the great performance, out performance to the industry that our self-service channels yielded, whether it's even just at the level of the functionality of our kiosk solution and how practice and well-versed we’re at that. What we're doing with our online business? The new agents that we’re bringing on board, that we’re activating, the renewals, the momentum behind all that, the fundamental is just on, you know, the migration and we had one-off in some countries when you call them out they are not the who's who list of let's put a great trip together with friends and family or at least to my way of thinking, I'm disparaging those great places, but Libya, Angola, Venezuela, there are some resets. We’re so excited Tien-Tsin about what we're doing in the Middle East. I look at our UK post renewal, it was a year ago. We renewed that for a long term contract and the energy behind that brand. We have just seen you know, out market growth in the UK and so it's tough. I mean, I think everyone knew when you say it out loud, what the pricing was for some of those bands on U.S. to U.S. I think we took action and we're committed to it and we stand behind it and most importantly we're committed to the long term and yes we will be buying back stock.

[Pam Patsley:]

I think that's it and again, thank you all so much. And I think for many of you we will be dialing you soon. Thanks have a great weekend everyone.