MoneyGram Q3 Earnings Call Transcript

123jump.com Staff
17 Nov, 2008
New York City

The Global funds transfer and payment systems company reported net third quarter revenue of $305 million and net loss of $38.6 million or 80 cents a compared to $341 million in revenues and $34 million in net income or 42 cents a share profit. The fund transfer fee rose 18% in the quarter.

MoneyGram International, Inc. ((MGI))
Q3 2008 Earnings Call Transcript
November 6, 2008 5:00 pm ET

Executives

David J. Parrin – Chief Financial Officer & Executive Vice President
Anthony P. Ryan – Chief Executive Officer & Executive Vice President

Analysts

Craig Maurer – Calyon Securities
Anurag Rana – KeyBanc Capital Markets
David Parker – Merrill Lynch
Robert Dodd – Morgan Keegan & Co
Michael Cohen – Sunova Capital

Presentation

Operator

Good afternoon and welcome to the MoneyGram International third quarter 2008 earnings conference call. As a reminder today’s conference is being recorded. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Dave Parrin, Chief Financial Officer. Please go ahead sir.

David J. Parrin -- Chief Financial Officer & Executive Vice President

Thanks operator and good afternoon to everybody. Welcome to our third quarter 2008 conference call. With me on the call today is Tony Ryan, our Executive Vice President and Chief Operating Officer. If you’ve not yet seen our earnings release, you can find it on our website at www.moneygram.com. We have also posted a brief slide presentation regarding today’s results on our website. I must remind you that the various remarks we make about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor Provisions in the Private Securities Litigation Reform Act of 1985. Actual results may differ materially from expectations, plans and prospects contemplated in any forward-looking statements as a result of various factors including those discussed in our filings with the SEC.

I encourage everybody to read our SEC filings, including our 10-Q for the period ended September 30, 2008 which is expected to be filed to the SEC on November 10th, 2008. Additionally I want to note that this presentation includes certain non-GAAP financial measures including a presentation of EBITDA and adjusted EBITDA. The slides in our earnings release include a full reconciliation of these non-GAAP financial measures to the related GAAP financial measures.

With that out of the way I’ll now hand the call over to Tony to discuss our business results, Tony.

Anthony P. Ryan – Executive Vice President and Chief Operating Officer

Thanks David, and thanks to all of you for joining us on our third quarter 2008 conference call. I’ll start with the highlights from the quarter and offer an update on our business and the opportunity that we continue to see in money transfer. Dave will cover the financials including segment information and then I will wrap up with a summary before we go into the Q&A portion of our call. We invite you to follow along our presentation which is posted on our website at www.moneygram.com.

Before we begin let me take a moment to thank our employees for their continued efforts to drive growth and profitability during the third quarter and to deliver on our purpose, to help people and businesses by providing affordable, reliable and convenient payment services. Starting with slide 4, MoneyGram delivered another strong financial performance despite the turbulence in the financial markets and the economy in general. We continue to maintain a strong balance sheet. Our unrestricted assets were $369 million as of September 30th, 2008. As we committed to do, we maintained the conservative composition of our portfolio, which is comprised of 90% cash and cash equivalents and 8% agency securities as of September 30th, 2008. Our results in the third quarter were driven by solid increases in money transfer agent locations which increased by 17% over the third quarter of last year.

This led to growth in money transfer including bill payment transactions of 14% while fee revenue from money transfer and bill payment transactions increased by 19%. Our official check product is now profitable as we benefited from the full effects of the re-pricing efforts in the quarter. We generated adjusted EBITDA of $74.5 million while reported EBITDA was $14 million for the quarter. While we are pleased with our strong performance we are not complacent. We have seen some deterioration in corridors such as Mexico and Spain due to construction related employment issues in the immigration debate. On a relative basis our performance has been strong in these countries. We are capitalizing on additional opportunities where we have less market penetration such as France, Germany, Asia and Eastern Europe and as you would expect in an uncertain time we are also diligently managing our expense base and carefully scrutinizing our capital expenditures.

Moving on to slide 5 I will cover some key highlights. We delivered a solid quarter in our money transfer business with transaction growth of 14% year-over-year. The global diversification of our biggest segment, global funds transfer, is enabling us to deliver consistent results in a challenging economy. Transactions originating internationally or outside North America grew 15% and now account for 21% of our volume. Domestically originated money transfers including bill payment grew 16% driven by continued expansion of our agent network and our MoneyGram Rewards Loyalty program.

Overall domestic growth was impacted by softness in our urgent bill payment product while economic conditions and immigration concerns have dampened the growth in the US to Mexico corridor. MoneyGram transactions to Mexico decreased only 1% and we outperformed the market which according to Banco de Mexico was down 2.8% in the third quarter of 2008. We increased our fee revenue in our core money transfer and bill payment business by 19% to $260 million in Q3 2008 from $219.1 million in Q3 2007. This was driven primarily by transaction growth, pricing stability, product mix and a benefit from the stronger Euro. Our adjusted EBITDA was $74.5 million for the third quarter providing substantial cash flow for continued investment in the core money transfer and bill payment products as well as to service our debt. On a reported basis EBITDA was $14 million. We have a reconciliation to GAAP, on slide 16. With the repositioning of our smaller official check business we have seen markedly improved profitability as a result of our re-pricing initiative.

Moving to slide 6 as I mentioned during our last quarter call, we are focused on five key corporate priorities and they are pursue profitable global growth, focus on operating efficiencies to drive margin expansion, invest capital only when meeting appropriate ROI thresholds, emphasize cash flow generation and maintain an investment portfolio strategy with minimal risk and volatility. During our review of the financials Dave will illustrate how we are driving margin expansion and free cash flow, prudently investing capital and maintaining a low risk stable investment portfolio strategy. But before we get into that I wanted to take a few moments to demonstrate how we have been able to drive profitable global growth. As you may recall in our second quarter call we had four key strategies which support this corporate goal. The first strategy is to expand our distribution. We continue to grow the money transfer business by maximizing existing agent relationships within our premier global agent network. Wal-Mart continues to roll out its dedicated money centers which are currently in 700 of its retail locations.

We are excited to be a part of this continued expansion as it brings Wal-Mart’s dedicated financial services offerings to more locations over time. In the US we have been preparing for the roll out of the CVS Pharmacy chain. Before roll out began in mid-October we now have nearly 1,400 installed locations and it is our expectation to have more than 6,000 locations live by year end. This is a big win for us as CVS has the largest footprint of any pharmacy chain in the US. Last quarter we announced that we renewed that we renewed our multi-year agreement with Canada Post. We are rolling out 220 new locations in the fourth quarter and expect to bring our money transfer services to 2,000 additional Canada Post locations by mid-year 2009.

We also announced in the second quarter that we extended our agreement with Thomas Cook. During the quarter we have been preparing for the launch of their Going Places locations which are currently schedule to begin roll out in early November. We’re also expanding our distribution by adding new countries. We entered Serbia during the quarter through Agrobanka’s extensive network of 120 branch locations. We added the Czech Republic to our network in the quarter with the signing of Chequepoint. We’re currently in 28 Chequepoint locations and expect to grow the network to nearly 150 locations by the end of the year. We launched our services with BGD in Gabon, a Central African market with strong potential. We continue to grow our presence in high potential markets. In Poland we signed three key agents, the post office, Bank DPS and Poland’s largest electronic bill payment provider. This more than triples our network in this important country. In Germany we launched with GE Money Bank in six cities. We will go live with GE Money Bank’s 95 location network in December giving us nationwide coverage.

We expanded our presence in South Korea with the signing of Kyongnam Bank one of the largest regional banks in the country. The bank’s 150 locations represent a key add because they are primarily in more rural underserved areas. In Bangladesh we added our tenth bank agent, Islami Bank Bangladesh and in Latin America through our new agents Grupo Elektra and Banco Azteca we added more than 225 locations to Guatemala, Honduras, Panama and El Salvador. Grupo Elektra is already installed and processing transactions. As you can see we have delivered strong growth in emerging regions. Eastern Europe is up 54%, Asia Pacific and the Indian subcontinent have grown 25% and Africa is up 20% year-over-year. Our global network now stands at 163,000 up 17% from the prior year.

Moving on to slide 11, another part of expanding our distribution is to control our network in selected markets where it makes sense be it regulatory, competitive or other factors. During the quarter we finalized our acquisition of two super agents in Spain, MoneyCard World Express and Cambios Sol. We expect to complete our process to merge the two companies in the first quarter of 2009. These important acquisitions provide us with a money transfer license in Spain which we will use to open additional locations in high traffic areas. We continue to grow our own retail locations in France and Germany. In Germany we expanded our own retail locations to 29 and in France we now have 21 locations. We are seeing impressive year-over-year growth in both countries. The second strategy in pursuing profitable global growth is providing our consumers with a superior value. The primary vehicle for us providing value is the MoneyGram Rewards Loyalty card.

Our most loyal consumers receive faster transactions at the point of sale, tiered discounts based on usage, notification of receipt of the funds sent and account management via www.Mymoneygram.com. The MoneyGram Rewards program was launched in January of this year and we have already exceeded our annual goals for consumer acquisition and transaction usage. Another part of our value proposition that continued during the quarter is the roll out of our multi-currency platform which provides consumers more choices in how they receive funds. In China we began offering pounds sterling and expanded our euro payout services and in Poland we’re offering the zloty, euro and the US dollar. The multi-currency options allow consumers to receive the currency of their choosing.

We now offer local currency or a choice of currencies in 127 countries and territories. A third element of driving profitable global growth is our strategy to deliver a superior low cost service platform to our agents and consumers. During the quarter we acquired a retail point of sale platform that we believe will significantly improve our efficiency as well as the customer service experience in our retail locations in France and Germany and in our own super agent businesses in Germany and Spain.

We are also continuing to roll out the platform which allows our consumers to conduct transactions without needing to complete a sent form. This option is now live in 15 countries, provides added convenience to our customers, faster transaction speed for our agents and reduced forms expense. Additionally we continue to invest in our MoneyGram Rewards platform which provides faster transaction speed and other benefits for our agents and consumers. MoneyGram Rewards is currently only offered in the US. However we plan to roll it out to selected markets during 2009. Our final strategy to drive profitable global growth is to deliver enhanced payment product offerings for our customers. On the send side we continue to enhance our capabilities through products such as eMoney Transfer. Our consumers are responding positively as evidenced by online money transfer and bill payment transactions increasing 45% over the third quarter of last year.

We are also pleased to announce a multi-year agreement with Cardtronics. This opens up a new channel by combining our form free platform with ATMs. Through the agreement we’ll be offering money transfer and bill payment services for walk up customers without the aid of an in store clerk in more than 2,007 such locations nationwide. On the receive side we are providing our consumers with better control and choice over how their money is being delivered to recipients. As we mentioned last quarter we launched our cash-to-account services in Mexico and Poland allowing senders to deposit money directly into a bank. Based on these early successes we are planning to continue adding this convenient service to our customers in other receive markets. Now I’ll turn it over to Dave to discuss our financials, Dave.

David J. Parrin

Great, thanks. As Tony discussed our third quarter results demonstrate the strength of our business, our relationships with our customers and agents and the commitment and talent of a great employee base. I’ll take the next few minutes to give you a view of our results excluding the items that do not have a significant impact on our operations. As you can see in our slides and earnings tables we have adjusted certain measures by excluding net securities gains and losses as we believe these adjusted measures provide information useful to you in understanding the underlying operations of the company. If you look at slide 16 you’ll see that our adjusted EBITDA was $74.5 million this year compared to $75.3 million in the third quarter of last year.

As we said last quarter because of material changes in our capital structure we believe EBITDA is a more relevant measure of our performance. We’ve removed significant items that are not expected to recur or are portfolio related and reconciled those back to income taxes of income before income taxes. So our EBITDA performance reinforces our corporate priority to drive cash flow.

The $74.5 million adjusted EBITDA provides ample financial flexibility to pursue our growth strategy and gives us a solid debt service coverage. Third quarter 2008 EBITDA increased from the second quarter because we saw an immediate benefit from the Q3 Fed Funds rate reduction in our commission’s expense. At the same time we benefited from a lag in that Fed Funds rate reduction on our investment yield. We had the benefit of our official check re-pricing and lower marketing spend in the third quarter. Higher marketing in support of fourth quarter agent roll outs and the stronger dollar that catch up from the Q3 Fed Funds rate reduction on the investment portfolio and the timing of Ramadan which increased our international money transfer realization by about 3% in the quarter will likely bring EBITDA in the fourth quarter more in line with the second quarter of 2008.

Let’s look at the income statement on slide 17. We had positive adjusted operating income of $22 million for the third quarter reflecting the ongoing strength of our core business. We increased fee and other revenue 18% driven by continued growth in the money transfer product. Investment revenue was down 68% reflecting reduced yields on a much lower risk investment portfolio, declining market interest rates and lower investment balances. The second results start on slide 18 with global funds transfer. The total reported revenue increased 9% despite a $19.3 million decrease in investment revenues. Most importantly total fee and other revenue increased 18% and continues to be driven by the growth in the money transfer product. Retail money order and other fee revenues you see on the slide increased 13% primarily from the acquisition of PropertyBridge in October of 2007.

However the retail money order fee and other revenue related to retail money orders for the third quarter 2008 declined 3% compared with the third quarter of 2007 and volume declined on money orders 5% year-over-year. We anticipate higher volume declines in the fourth quarter. Investment revenue in global funds transfer decreased 78% in the third quarter because of lower balances from the money order product and lower yields on lower risk assets as well as decline in market interest rates. Approximately 75% of our commission’s expense growth was driven by higher money transfer transaction volume. The remainder was due to tiered commissions that went into affect the fourth quarter of last year. In the third quarter of 2008 commissions expense includes a higher commission rate on the extended Wal-Mart agreement as well as a higher signing bonus amortization.

Reported operating income in the third quarter was $39.5 million which was affected by lower investment revenue and net securities loss of $2 million resulting in an operating margin of 14.1% for the third quarter. On an adjusted basis you can see the operating income and margins are slightly better than reported but are down from 2007 due to significantly lower investment revenue. Moving on to payment systems segment on slide 19 last quarter we restructured the official check business by re-pricing the commission rates and exiting several large customer relationships. We anticipate the balances associated with these institutions will continue to run off over the next year or so. Additionally we are negotiating the exit of a handful of other official check relationships.

Most importantly on an adjusted basis operating income increased nearly 45% driven in large part by the re-pricing initiatives. We are pleased with the overall progress we’ve made in right sizing and re-pricing this business with the goal of improving profitability which we’ve achieved in a very short timeframe. If you look at slide 20 our realignment of the investment portfolio to highly liquid assets supports our corporate priority to minimize risk and minimize volatility in our investment portfolio. At September 30th about 90% of the portfolio was in cash and cash equivalents and the remainder in government agency securities. Slide 20 provides more detail on the portfolio and the shift to the lower risk investments. At the end of the third quarter we also owned auction rate securities with a market value of $30 million which does not reflect a potential recovery for the pending settlement with our broker.

We also own CDOs with a market value of $52 million which represents a clearing value on an average of 7% of face value. While our goal is to sell these securities over time we believe they pose limited risk at current clearing values. At the end of the quarter our assets available to cover payment service obligations totaled $6.5 billion. With payment service obligations at $6.1 billion our unrestricted asset position stood at a healthy $3.69 million which of course you can see on slide 21. The repositioning of the investment portfolio into lower risk assets has substantially changed our investment portfolio risk profile and the recapitalization was specifically designed to provide the liquidity and capital necessary to operate and grow our business. If you recall our discussion from last quarter auction rates for the CDOs that remain in the portfolio had an assumed zero value at the time of the recapitalization.

Assuming a zero value for these securities unrestricted assets are $286 million at September 30th an increase of nearly $30 million from the $257 million at June 30, 2008. So to wrap up the financials let me summarize a few items that will affect our results for the full year. Money transfer transaction volume and revenue are expected to grow albeit challenged by the global economic situation. We continue to expect global funds transfer adjusted margins for the full year to be between 12% and 13%. Investment revenue will continue to decline on a year-over-year basis in both segments with the change in our investment strategy, lower interest rates and declining balances. We told you last quarter that we expected a net spread for the payment system segment to be about 135 to 145 basis points for the remainder of the year.

The actual spread in Q3 was 1.66%. This is primarily due to higher investments driven by customer balances in equity and to a lesser extent the lower Fed Funds rate. Keep in mind that in a falling Fed Funds environment we typically have a benefit on increasing rates and have a negative impact on the spread. Many of these factors are likely to continue to have a favorable impact on the net investment spread in Q4. However given the variability of the market we’re not providing projection for the fourth quarter. We may see some additional mark-to-market losses on our auction rate securities and CDOs although the potential market value losses don’t affect our liquidity as we ascribe zero value as I discussed earlier.

With that, Tony, I’ll turn it back to you.

Anthony P. Ryan

Thanks, David. In summary MoneyGram is financially strong. We have a solid balance sheet with $369 million in unrestricted assets as of September 30th, 2008. We are generating substantial cash flow to continue to invest in the $400 billion money transfer opportunity and to service our debt. We maintain a conservative investment portfolio of 90% cash and cash equivalents and 80% agency securities as of September 30th, 2008. We achieved strong growth in our core money transfer and bill payment business with fee revenue increasing 19% and agent locations increasing by 17%. Our official check product is once again profitable after the re-pricing efforts and most importantly we are executing our plan to achieve profitable global growth.

There are enormous market opportunities available to us and while it is impossible to predict the full impact of the weakening global economy we believe we have superior value proposition, the financial discipline and the right strategies to solidify our strong emerging global money transfer position and to continue to grow our business profitably. Meanwhile we will continue to diligently manage our expenses and carefully scrutinize our capital investments as the effects of the turbulent global economy continues to play out in the days ahead.

We thank you for your time today and we’ll now open it up for questions, Ryan.

Question-And-Answer Session

Operator

(Operator Instructions) Ladies and gentlemen the question-and-answer session will be conducted electronically. If you’d like to ask a question, please do so by pressing the * key followed by the digit 1 on your touchtone telephone. Please note that if you are using a speaker phone, make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press “*1” on your touchtone telephone to ask a question. We will take our first question from Craig Maurer with Calyon.

Craig Maurer – Calyon Securities

Good afternoon.

Anthony P. Ryan

Hi Craig, how are you?

Craig Maurer – Calyon Securities

Great. Over the long term seeing where the margin is that you’re projecting for TFT this year, considering what’s going on in the global environment with the possibility that transaction values shrink while transaction growth might be steady, what do you think the long-term target is for the margin?

Anthony P. Ryan

Hi Craig, this is Tony. The first thing I’d start with is to say we believe the long term dynamics of this market are still in place. There’s an agent population in the Western economies and low growth rates within those economies the migrants will continue to search for work. So we think over the long haul here there is a real stable environment in terms of the dynamics of this market. Within that in the near-term obviously the volumes could be affected in terms of the amount that’s transferred. So within the margins then I think what you start to look at is what can we affect and what are we focused on? And I think there are several things there. Number one we believe that the formal players with more market share should have the ability to gain leverage on received commissions over time within this marketplace.

We believe that we have the scale now and the marketing front because of the size that we have to be able to leverage the marketing expense around the globe and in fact we’re actually getting some of our agents to participate as well in contributing marketing. We also can leverage the infrastructure that we built with the various regional offices. We have people on the ground in about 14 different locations now and with that headcount comes leverages because we have a lot of the disciplines represented in those offices. And then finally we’re looking at rolling out this uniform point of sale platform across our retail and super agent structures that we think will get us leverage on those platforms. So why don’t we don’t project long-term margins I did want to give you some feel for the fact that we feel that the long-term dynamics are in place and we have many leverage points on the cost side over time.

Craig Maurer – Calyon Securities

Okay. Concerning the 18% growth you had this quarter in top line fee and revenue, how do you think that’s going to be affected by what we’re seeing globally? Western Union had to take their guidance off the table because of what we’re seeing in the global economy. So, using the 18% as a baseline how do you think the next 6 to 12 months play out?

Anthony P. Ryan

Right, again I go back to if you look over the long-term we believe the dynamics in this market are in place but certainly in the near-term one of the challenges is the economic slowdown and how that will impact this consumer both in terms of the frequency and amount that they send. We’ve certainly seen challenges in markets such as Spain and Mexico due to housing, the immigration debate and so forth but we are focused on our expense base and prioritizing our investments and also looking at ways of diversifying our network as well.
So, we have good diversity and we’re starting to penetrate places like France and Germany and also we see markets that we haven’t been in before like Serbia, the Czech Republic and Algeria. So, we think that we have opportunities because of our market position in places that we’re not fully penetrated to offset some of this shifting patterns of migration, keep up with that but also offset some of the markets like Spain where we’ve seen more of a slowdown. So again, we’re not going to get into trying to project, I think it’s very difficult to do what the growth rates are going to be but we feel strongly about the long term dynamic and the fact that we have places that we can penetrate further that will offset some more challenging markets.

Craig Maurer – Calyon Securities

Okay. Although I know that you have already written down the auction rate securities to zero, I was just curious your opinion if and when we might see some resolution on auction rate pricing.

David J. Parrin

Craig, we haven’t written them to zero, we’ve written them down about $30 million. The original amount is a little over $60 million. There are some settlements and we need to make a decision on that in the fourth quarter. I think if we see any up tick in the valuation it would be in the fourth quarter.

Craig Maurer – Calyon Securities

Okay, thanks guys.

David J. Parrin

Thanks Craig.

Operator

We’ll next go to Anurag Rana with KeyBanc.

Anurag Rana – KeyBanc Capital Markets

Good afternoon. This is Rana Anurag. Question on your payment systems business, I know you talked about not giving long-term margin guidance but can you give us any sense of what one might expect as far as sustainable margins in your payment systems business?

Anthony P. Ryan

We’re not giving projections or guidance into 2009 and obviously the top line revenue will be affected by where we’re investing in cash and cash equivalents and the Fed Funds rate, but we’re really looking more at the net margin of the business and as you’ll recall when we went through our re-pricing of the official check business we re-priced that at Fed Funds less about 100 basis points. We’re just South of that in terms of the average payout rate is more like Fed Funds less 85. So we’re really focused on the net spread in the business. There will be some fluctuations and obviously as the top line fluctuates with the lower rate environment that does affect how your margins look. That’s one of the reasons that we’re not getting into projecting out the margins in our business.

Anurag Rana – KeyBanc Capital Markets

Great and is your current expectation to keep that business or do you have any plans to get rid of it?

Anthony P. Ryan

I think first and foremost it’s now profitable and it has very minimal risk in terms of the portfolio and that was really the goal was to do those two things and it’s throwing off cash and we’re using that to continue to invest in our business model and to service our debt. So, we believe that we have this business in a position where it’s very stable and it’s a recurring revenue stream so we like the affects of what we’ve seen through the re-pricing and I will also say that we’ve had very good retention rates after the re-pricing with our customers. I think as anything that we have in our product portfolio we’ll continue to examine the fit over the long haul and make determinations as the situation merits.

Anurag Rana – KeyBanc Capital Markets

Thank you.

Anthony P. Ryan

Thanks Anurag.

Operator

We’ll next hear from David Parker with Merrill Lynch.

David Parker – Merrill Lynch

Good afternoon, Ryan.

Anthony P. Ryan

Good afternoon. How are you?

David Parker – Merrill Lynch

I am fine. On the transaction growth it slipped from 19% last quarter to 14% this quarter. I don’t know if you can let us know how October was trending and provide any additional color on your expectations going forward for the fourth quarter?

Anthony P. Ryan

We really don’t give any intra-period guidance as far as transaction volume. I think I’d start by saying that we believe that the transaction growth is strong at 14%. We are very happy in the economic environment with the growth that we’ve had and maybe just a little color on the quarter. The domestic growth was very solid. We continue to see expansion with Wal-Mart into their money centers and we’re very excited about the ramp up that we’ve had with some of our new customers like Advance America and we’re just getting started in the roll out now with CVS. So, we’re very excited about our domestic footprint.

Within the domestic volume is our urgent bill payment business and we did see some softness in the quarter there in a couple of sectors. The credit card and the satellite TV sector were a bit softer so that had some affect and on the international front we believe it was a very strong quarter as well but we did have some softness in certain markets like Spain. So, the big focus for us is going to be diversification of our network and also looking at bill payment verticals such as the prepaid space to continue to try to diversify our revenue stream and get into new segments of the market.

David Parker – Merrill Lynch

Okay and then the foreign exchange has been very volatile over the last few months and if the dollar continues to strengthen can you talk about the impact it will have on your model?

David J. Parrin

The impact of the foreign exchange, David?

David Parker – Merrill Lynch

The dollar, yes, the foreign exchange.

David J. Parrin

Okay. Clearly with the strengthening dollar that does have an impact. In the third quarter versus a year ago to op income the year euro/dollar relationship had about a positive $2 million impact on the quarter. Clearly if the dollar continues to strengthen that benefit will start to dissipate but I’m not really in a position to project beyond that.

David Parker – Merrill Lynch
Okay. Any thoughts on the political scene, the impact that a Democrat President could have on the potential for immigration reform in the US and any general thoughts on that subject?

Anthony P. Ryan

I think that’s hard to project. I think both candidates were in favor of looking at immigration reform of some type. I think that if we go back to the long term dynamics, we believe that the Western economy is again with lower birth rates and Asian populations are going to continue to need migrants as far as their economies and I think that’s the dynamic that we’re focused on and we believe that that’s going to play out over time.

David Parker – Merrill Lynch

Okay and just a final question, I think we can assume that there’s no update on the CEO search?

Anthony P. Ryan

What I would say about that is that the Board is focused on trying to find the person that they believe will drive long-term shareholder value and they are continuing to work on that and taking their time to find the right candidate.

David Parker – Merrill Lynch

Okay great. Thanks guys, I appreciate it.

Operator

(Operator Instructions) Before we go to our next question, I’d just like to remind our phone audience that it is “*1” for question. We’ll next hear from Robert Dodd with Morgan Keegan.

Robert Dodd – Morgan Keegan & Co

Going back to currency if I can for a moment, about a third of your revenues denominated in foreign currency if I remember right. Can you give us an indication about the cost base? I mean is there essentially a natural hedge or do you have proportionally more expense overseas than you do revenue which would be my guess?

David J. Parrin

Robert, it is David, we do have expense overseas, obviously with MoneyGram International, Ltd. located in London. Much of our revenue from outside the United States of course is denominated in euro. Outside the US we also have a fair amount of euro-based expense as well as GDP based expense. The net impact of FX is relatively small. On the revenue side I have to pull out a schedule, I don’t have it right now. It was about $8 million during the quarter positive impact. As I said the op income impact was about $2 million. And it changes on a year-over-year basis. So, from that perspective it really has not had a big impact. The other place we have FX exposure is ion the settlement of the money transfer transactions and we buy spot market contracts and that exposure is relatively limited.

Robert Dodd – Morgan Keegan & Co

Moving onto pricing if I could, this is the third quarter in a row that your revenue growth has exceeded transaction growth by at least a couple hundred basis points. I mean is there anything new going on there? I imagine there are currency affects in that as well, and then product mix but if you can give us a little bit if rundown on what the current pricing environment is like at the moment?

David J. Parrin

Sure. In terms of your initial question on the spread between transaction growth and revenue growth you’re absolutely right, probably the biggest impact on that has been the Euro impact and the change and strengthening of the dollar. Beyond that in terms of pricing and Tony can probably provide a little more color but our pricing has been very stable in virtually all of our corridors. So that really has not had a real big impact. We’ve had some impact from mix of where the transactions originate. Transactions outside the Americas are slightly higher on a fee base or fee amount than in the US and in Latin America. So that’s had some impact on it but by and large it has been the Euro impact.

Anthony P. Ryan

I’d just add to that. I think most of the competition that we’ve seen has been at the corridor level from a pricing standpoint and we have the capability within our system to price at the corridor or location level. So, we’ve seen a lot of stability in terms of our domestic pricing and even some pricing power in our urgent bill pay product and online product. So as Dave was mentioning, a very stable environment there.

Robert Dodd – Morgan Keegan & Company

Thank you. One last one if I can, you mentioned on the pricing for the official check product it’s Fed funds less 85 give or take. Is there a floor in that? I assume it doesn’t go negative if the Fed cuts rates again?

Anthony P. Ryan

There is no floor in that.

Robert Dodd – Morgan Keegan & Company

So your customers can end up paying you?

Anthony P. Ryan

That would be correct.

Operator

We will take our last question comes from Michael Cohen with Sunova Capital.

Michael Cohen – Sunova Capital

Hi thanks for taking my question. The question is to how you guys are thinking about the amount of unrestricted cash or rather the sort of the $369 million? Do you think that’s kind of the right level? What do you think the right level is long-term given the risk in the portfolio?

Anthony P. Ryan

Yeah good question, I think that our immediate focus of course is liquidity and low risk in terms of the investment strategy. So, as you put those pieces together I mean it’s a level that we feel very comfortable with. I just think over time we’ll be able to tell what level would be the right level. There are a lot of changes going on in our official check business of course that we want to be well prepared for. But, I think the primary focus right now, particularly in this type of market place is really that liquidity perspective and I think we feel quite comfortable. Keep in mind too that $300 and some odd million includes the auction rates and the other CDOs. So I really focus more on that $250 million, $260 million. Based on the way we calculate that, it can change but it’s pretty stable. At this juncture you’re not going to see a lot of changes from market value fluctuations given the nature of the portfolio.

Michael Cohen – Sunova Capital

Is the cash requirement going to be kind of one of the primary drivers as to when you determine whether or not you’re going to pay the preferred dividend in kind or pay it in cash? In other words, if you thought that the right number was $150 would you begin using some of the excess cash to pay the preferred dividend?

Anthony P. Ryan

We look at all of our various obligations starting particularly with our debt service obligations and that’s primarily what we’re focused on. Of course, as you saw this last quarter it was cash payment on our debt. Our credit bank agreements have restrictions in terms of the payments that we can make on certain types of transactions and one of which would be paying a dividend on our preferred stock. So, right now I think just by virtue of our credit agreement we wouldn’t foresee paying cash on them.

Michael Cohen – Sunova Capital

Okay, and then not to beat a dead horse that you don’t want to get on, the margin, I understood you don’t want to sort of commit to a long-term margin and understood that you don’t want to commit to a short-term margin although you actually did give some guidance around that. Can we assume that the long-term direction is up given the positive operating leverage in the business model?

David J. Parrin

I think that the focus there is the various things that we have right that over time we would expect to certainly improve that whether it’s how we’re looking at some of the investments today, our expansion in our retail businesses in France and Germany and if those continue to grow. So, those will all have positive impacts overtime and I think the leverage that we have in the platform and the various operating aspects of the platform will help that expand over time. But, I think we’re really not in a position to put any number to that expansion. Tony, do you want to add any more to that?

Anthony P. Ryan

I think the margins are going to be affected obviously by top line growth. They’re going to be affected by our investment back in to the business model for long-term growth and they’re going to be affected by leverage points we have in our cost structure and I tried to hit those earlier in the areas of commissions, marketing, our salaries and benefits with people in the regional offices and then also this common point of sale platform across our retail locations. This whole long-term leverage points we believe will help us from a margin standpoint but obviously we have to balance that against our top line growth and also the investment back in to the core business model.

Michael Cohen – Sunova Capital

Okay and where’s CapEx running or where would you expect CapEx to run on a sort of normalized rolling 12 month basis?

David J. Parrin

This quarter I think it was roughly $9 million, about $9 million. That can vary from quarter-to-quarter because we do have signing bonuses that we pay but right now we have certainly very adequate cash flows to handle that CapEx.

Michael Cohen – Sunova Capital

Absolutely, I’m just trying to gage is $9 million representative or is $9 million low or is $9 million high? What’s a normalized level?

Anthony P. Ryan

If you take away, we’re about $27 million year-to-date. So we’re in that same range if you take the $9 and multiply it by three so that’s pretty consistent. I would say though in the fourth quarter we have a big network roll out with CVS with Cardtronics, the going places locations and so forth and so there will be additional capital expenditures as we support the roll out of those very important network additions.

David J. Parrin

That does not include our signing bonuses that Tony was just talking about.

Michael Cohen – Sunova Capital

How much would it be if you included signing bonuses?

David J. Parrin

Well, going forward I’m not going to forecast that but you can get a sense if you look at the EBITDA calculation of those signing bonuses those agreements typically run in three to five years. So you can get an idea and, we amortize them over those periods of time.

Anthony P. Ryan

That information will be in our Q when it comes out.

Michael Cohen – Sunova Capital

Great. Thanks so much for taking my question.

David J. Parrin

You are welcome.

Operator

That will conclude our Q&A session for today.

Anthony P. Ryan

Thank you for joining us today and we look forward to speaking with you on our fourth quarter call. Thank you everybody.

Operator

Ladies and gentlemen that will conclude our teleconference for the day. Thank you for your participation. Have a wonderful day.