MGI (2019 - Q2)

Good morning. And welcome to the MoneyGram International Inc. Second Quarter 2019 Earnings Release Conference Call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. It is now my pleasure to turn the floor over to your host, Wendi Schlarb, Head of Corporate Communications. Please go ahead, ma'am. Wendi Sc

Thank you. Good morning. And thank you for joining us today. On the call with me are Alex Holmes, Chairman and Chief Executive Officer and Larry Angelilli, Chief Financial Officer. On the MoneyGram Investor Relations Web site, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides a reconciliation of differences between GAAP and non-GAAP financial measures. We will refer to non-GAAP metrics on the call. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the company's quarterly performance in addition to the impact that these items and events have on the financial results. Please note that today's call is being recorded. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, in the comments made during this conference call and in the Risk Factor section of our Form 10-K, Forms 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. And with that, I'll turn the call over to Alex.

Great. Thank you, Wendi. Good morning, everyone, and thank you for joining us today. Financial results in the second quarter were impacted by the slower than anticipated recovery of the U.S. outbound market along with the continuing market challenges in the U.S. to U.S. business. Importantly, however, we reported accelerated growth from our digital platforms and returned to year-over-year growth in many key corridors, as we saw a sequential increase in active, returning and new customers. These trends along with the successful execution of our cost saving initiatives enabled us to deliver sequential improvements to both revenue and adjusted EBITDA. As Larry will walk you through in a bit, we continued to outperform on expenses. And for the quarter, we were $33 million or 19% favorable on non-commission expenses as compared to 2018. From a top line perspective, while off to slower than anticipated start, we are beginning to see a return to growth in a number of areas. In the second quarter, we reported an increase in total money transfer transaction volume on a sequential basis. We posted a return to year-over-year transaction growth for our non-U.S. markets, led by non-U.S. online transaction growth of more than 100% on a year-over-year basis. We saw more than half of our top 100 corridors achieved year-over-year transaction growth. And this momentum has also continued into July. I'm pleased to say that excluding the U.S. to U.S. market, we returned to positive transaction growth in the month of July. Importantly, all of this has been driven by our digital transformation initiatives with a focus on improving the customer and agent experience, while leading the industry and protecting consumers from fraud. I truly cannot say enough about the success of our new app, our redesigned website launched during the quarter and the expansion of these platforms to 24 countries. Turning now to Slide 6. Over the quarter, we also completed three important achievements that collectively helped improve our long-term capital structure and credit standing. First, we successfully completed our debt refinancing. Second, we sold $74 million in pension liabilities to reduce our future expenses and funding needs. And third, we launched a strategic partnership with Ripple that also included an equity investment and a significant premium to our stock price at the time of closing. As you know, when our new partnership, Ripple, has become our key partner for cross border settlement using digital assets. And I am so excited to announce today that MoneyGram is now live and transacting on the Ripple xRapid platform. We've started executing trade earlier this week and all signs point to this being a tremendously beneficial relationship for all parties involved. We're literally settling currencies in second, and to quote my friend Larry, this is really cool. One of the core strengths of MoneyGram is our global liquidity and settlement engine that enables millions of customers to move billions of dollars across 200 countries and territories using over 120 currencies. We believe our settlement engine is a key asset with additional applications and use cases that can lead to new revenue streams down the road. Our partnership with Ripple will help further improve this core strength. Our internal innovation lab continues to explore new and exciting use cases for crypto, DLT and blockchain as we look to build the business model of the future. Turning the Slide 8. A key part of our digital transformation and our corporate strategy is to deliver a differentiated customer experience. As such, we're also working to digitize and improve the agent experience to enable our partners to quickly and easily serve our shared customers. To do this, we've enhanced our ability to directly communicate with agents. We've rolled out our new Web based portal, and we've launched a new Web based point of sale system. As a result of these improvements and our improved agent customer support, we've seen agent satisfaction and ease of use scores increase approximately 20% to the first half of the year. Sifting now to other customer experience improvements, we couldn't be more pleased with the success of our new app. We now have the highest rating of anyone in the industry. These digital assets enable us to compete head on with any FinTech or legacy competitor as we focused on bringing our best in class experience directly to the consumer. We've previously reported that nearly $50 million consumers utilize the MoneyGram platform on an annual basis. And as you can see here, we're excited about the growing numbers of returning users and new customers who consistently use the app each month. With 70% of our digital transactions initiated on a mobile device, we are focused on accelerating growth through this channel and positioning our leading FinTech capabilities to even younger consumers. In addition to our new app, over the quarter, we launched our redesigned Web site, but the team did an extraordinary job building the design with the customer at the center of each step in the process. The end result is a simpler design with intuitive navigation that also provides a more personalized experience and faster load times. Together, the app and the Web site are driving strong digital growth outside the U.S. And as you can see here on Slide 11, digital transactions have increased 109% year-over-year and revenue has increased nearly 50%. The growth has been driven by both the strength of the user experience in addition to our country expansion with the app, and having a Web site now live in 24 countries. Again, we're excited about the acceleration of our digital growth. Later this month, we will go live with Visa partnership that we're eager to launch. We believe Visa's platform and combination with the innovation we're bringing to the cross border market has a huge potential to further transform our business. We're looking forward to providing an update on our continued growth in this channel on our next call. And now I'd like to talk about our performance across the regions. As we discussed in our prior earnings call, getting the U.S. outbound market back to growth continues to be an important area of focus for us. From a trend perspective, we continue to see a sequential improvement in transactions and revenue as we transition from Q1 to Q2. Specifically, we saw an 8% sequential increase in total U.S. outbound transactions, and our year-over-year rate of declines slowed by over 400 basis points in the quarter. More importantly, with a very strong May with a solid Mother's Day helping to improve sends across the board. Unfortunately, June was an unusually soft month and we lost some of the momentum that it has been building. July, in contrast, however, was a good month and much of the momentum has been regained. Looking at the market from a corridor perspective, it's obviously important to highlight the continuing impact on the business of the compliance controls that we're implemented in 2018, particularly in the higher front corridors such as the U.S. to U.S., U.S. to Jamaica, U.S. to Nigeria, U.S. to Ghana and U.S. to China. Collectively, these corridors alone impacted our total company transaction growth by about 4 percentage points in the quarter on a year-over-year basis. In addition, our new compliance standards have also had a larger than anticipated impact on U.S. outbound sends to Latin America. While those corridors are recovering that recovery has been at a much slower pace than expected. This has largely been the case in the non-exclusive retail market where almost all of our competitors have leveraged their [loser] compliance policies to exploit our tightened controls. Now that said, our compliance controls are working extremely well and continue to have the intended impact on fraud. I'm pleased with our compliance performance as we again saw decrease in reported fraud, and we continue to report the lowest fraud rates in the industry. A critical component of this success has been our ongoing partnership with our agents who have stepped up to support our efforts and embrace our compliance standards. Recently, we were referred to by a competitor as being the problem with respect to their U.S. to U.S. growth rate for the large agent. In reality, those statements are not only incorrect but also show a complete lack of understanding of the clients risks associated with operating at today's especially higher risk environment. I truly can't say enough about the value of ID collection at $1. And in contrast to those statements, I'll simply say that Walmart and all of our agents continue to be great partners for MoneyGram. And collectively, our compliance standards are leading industry and improving the quality of our business hence down. Our focus on returning the U.S. market to growth centers around three primary initiatives. First, we're revitalizing our sales force and improving our incentive structure. Second, we're deploying new pricing strategies and are now more aggressively taking on the online in niche walk-in competitors. And third, we're more actively working with our agents to improve our position at the point of sale. The combination of these three initiatives are already having a positive impact on the business, as not only evidenced by our July performance, but also evidenced by the continued increase in new, returning and active customers. In the online space, our leading platform continues to propel us forward. During the quarter, our online U.S. business reported a nearly 15% sequential quarter transaction increase, following the launch of our new digital capabilities, pricing actions and a huge success of our loyalty program. And again, all of this has accelerated in the month of July. We're excited about how the loyalty program continues to outperform with strong month-over-month growth in addition to members averaging a much higher number of transactions than non-members, almost 3 times. Given these successes, we're now preparing to launch the program globally later this year. In Canada, we continue to be excited about our position in the market and our ongoing partnership with Canada Post. Earlier this year, we partnered to launch online staging. And in June, we launched simplified pricing to better serve consumers across Canada. Sends in the Latin America region has been another bright spot for the company with several markets reporting revenue growth in excess of 30%. We've also expanded our coverage in the region overall. In Mexico, specifically, one of our key recent signings, [indiscernible] is already live. In the Asia Pacific region, we're particularly excited about the launch of a new partnership with Korean fintech, Sentbe. This service is already bringing in a significant number of new customers and volume to MoneyGram, and we're very appreciative and excited for this partnership. In Bangladesh, one of the largest received markets in the world, our account deposit and capability announced in the last call is now live and usage is gaining steadily. The Middle East was one of our best performing regions during the first half of the year. Overall volumes are increasing on both the year-over-year and quarter-over-quarter basis. And again, here I couldn't be more pleased with the efforts of our partners in the region who have worked with us to help regain our strength in is critically important market. In Africa, we continue to see great success with our wallet partnerships, including Zeepay, which continues to perform at an accelerated pace. In other parts of Africa, while we are returning to growth, we still have some work to do. And we're working hard and working actively with our partners to reinvigorate that growth and we're optimistic about the strong recovery in the second half of the year. In Europe, while performance in the UK continues to be a drag on growth as a result of Brexit and other parts of the region the number of our key partners, have already returned to growth. In addition, we are seeing particularly strong performance in some of the emerging markets with total customers in some areas increasing as much as 70% on a quarter-over-quarter basis. And with that, I'll turn the call over to Larry.

Thanks, Alex. During the quarter, we completed a number of financing transactions that had a significant impact on the company's capital structure and EBITDA. First, we incurred a non-cash charge of $31.3 million in the quarter relating to the sale of $74 million or about 57% of the obligations in our defined benefit pension plan. The positive impact of this sale is that it significantly reduces our future funding requirements, as well as the future administrative costs of the plan. This did not have any impact on the current cash and liquidity of the company as the non-cash charge represented an acceleration of the cumulative investment losses that were already incurred over the entire life of the plan. We also completed the refinancing of our total debt and we improved the capital structure of the company. We reduce our senior debt to $645 million and extended the maturity to 2023, while adding $245 million tranche of five year second lien notes. We also renewed and extended our revolving credit for three years, while reducing the facility to $35 million. And lastly, we obtained $30 million equity infusion from Ripple, which was in conjunction with the commercial agreement to jointly develop markets for the blockchain and cryptocurrency technology over the next two years. Over the life of this agreement, we can draw another $20 million in equity. And we believe the benefits to the company will offset the dilution attributable to the existing investment and the future equity is sold to Ripple. But some of these transactions resulted in the company's cash position remaining well within our targets at $133.5 million at June 30th. As Alex referenced, we expected to achieve sequential growth this year. This was the case in the second quarter where revenues were $324 million, up 3% sequentially from the first quarter, while down 14% on a year-over-year basis. The majority of the negative impact was in June and mostly related to the impact of our previously imposed compliance rules in the U.S., in addition to continuing headwinds in the U.S. to U.S. market. The U.S. to U.S. market is now about 7% of our total revenue. The pattern that's emerging is that we're seeing success from our efforts to win back share in key markets with 52 of our top 100 corridors showing year-over-year growth in transactions with July improving to 60 of our top 100 corridors selling year-over-year growth. This translates to the majority of our key corridors outside the U.S. returning to healthy growth in both volume and revenue. As a result, we believe the foundation is in place for year-over-year growth in revenue in the latter part of this year. In our digital business, we continue to new markets through our online and mobile business with disruptive introductory pricing in each of these markets. As Alex mentioned, volume grew 109%, excluding the U.S. market and we continue to building a case for new users with disruptive introductory pricing. The success of this has led us to recently lower prices on our legacy markets, which will result in revenue growth headwinds, but it remains an important investment that we're making in future technologies, which continue to attract a completely new customer base for the MoneyGram brand. Non-commission expenses on an adjusted basis were $264 million for the first six months, that's down $54 million or 17% year-over-year. This improvement is independent of declines in volume. And the company continues to improve its competitive position with increasingly scalable expenses, further enhancing our ability to benefit from a return to growth. Total comps and bens or comp and benefits was decreased $12 million or 18% from the same quarter from last year. Our restructuring was essentially completed in the first quarter. This program already paid for itself last year and is currently delivering our expected run rate savings. On a reported basis total non-commissioned expenses for the first six months declined $75 million, or 21% on a year-over-year basis. On adjusted commission expenses were down 19% -- non-commission expenses were down 19% for the second quarter versus last year. And this shows that our restructuring has also created a scalable cost structure due to significant improvements in both indirect, variable and fixed costs. On a sequential basis, we also increased our adjusted EBITDA. For the second quarter, adjusted EBITDA was $54.3 million, up from $50.1 million in the first quarter. This was a decline of 9% from the second quarter of last year. Adjusted EBITDA margin improved, however, to 16.8% from 16% last year. Adjusted EBITDA was up 8% on a sequential basis and down 7% year-over-year on a constant currency basis. Another benefit from the strategic changes we've made is the quality of our agent base. Our agents are more productive on average, and their credit quality is improved. This in turn has improved our collection and lowered our credit losses on agent receivables. Capital expenditures are on track to meet or improve upon our guidance, as well as signing bonuses. And the D&A from these is starting to decline as we move away from the peak spending of three plus years ago. As we've been describing, continuing competitive pressures in the U.S., including both compliance and pricing, has slowed the pace of our recovery so far this year. On the other hand, we're pleased with our continuing success with our cost structure improvements, and our ability to grow in major corridors. And we still believe we'll return to growth with total revenue growth later this year. However, based on these existing factors and the anticipating -- we are anticipating revenue to decline approximately 8% and adjusted EBITDA to decline approximately 12% for the full year 2019 compared to last year on a constant currency basis. And now, I'll turn the call back over to Alex.

Thanks, Larry. In summary, I'll simply say, although, we are slightly behind where we want to be or expected to be, I suppose at this point in time, our return to growth is picking up speed. We returned year-over-year growth in many key markets and corridors, and the strong execution of our digital transformation and cost saving initiatives enabled us to deliver sequential improvements to adjusted EBITDA. As we return to growth, we'll do so with a de-risked customer base and a more scalable cost structure. We're excited for everything that's to come and we appreciate your time today. And with that, I'll turn it back over the operator and ready for your questions.

Thank you [Operator Instructions]. We'll take our first question from Ramsey El-Assal from Barclays. Please go ahead.

I wanted to ask about your digital transaction versus revenue growth. It looked like the delta between the two kind of improved versus last quarter. Is there anything -- is pricing getting a little less intense, or anything you can attribute that to?

A couple of things. We are maybe backing up a little bit. As we launched all the new Web sites around the world, we certainly want to do that as disruptively as possible. And went in with a lot of introductory pricing in a number of markets, right, we're on a customer acquisition, expansion focus here. And we've been doing I think a really good job of that. As markets grow and as we settle into them, we have been adjusting prices a bit to reflect that. So yes, when you see the growth rates for the non-U.S. market, that does reflect some changes to those prices. Although, I would say that our intention is to continue to be low price and disruptive as we grow those businesses and those platforms, and keep acquiring customers on a go forward basis. I think, as Larry talked about, our legacy business is the original platforms. That was the opposite. We had high prices there. And I think we continue to see challenges with growth and then repositioning as the competitive landscape has changed. So we brought the prices down in those markets as well, and feel very good about the repositioning of that platform. So I think it's a trend we're going to continue to see for a while in terms of transactions outpacing revenue. But I think the fact that you're seeing revenue growth against that backdrop is super positive as well.

And then I wanted to ask on the Ripple partnership, I don't know. Can you maybe help us get a sense of how much of the cost base you think you can save? Or -- I mean, clearly, there's -- I mean you guys communicated, there's some cost benefit. But just looking through the income statement, help us understand a little bit where and when we might expect to see that starting to come through?

Let me add one thing then I'll let Larry jump in on that. And I guess fundamentally, right, I love to say, there really is no way to instantly move money anywhere around the world, right? We run a giant net settlement engine and I think we do it better than anybody. That's kind of how you get money from point A to point B these days. And I think, you have two ways of doing that. You have the consumer side of it and then you have your back end settlement and trading processes. And what this product has the capability to do is actually completely streamline and transform our back end capabilities. And for the first time, I think ever really actually enable money to move instantly, or as close to instant as humanly possible. So if you think about hundreds of millions of dollars circling the world every day, waiting to be settled and sort of what we call, money trapped in transit. The ability to streamline that can drive a ton of efficiency. So I'll let Larry jump in.

And I was -- you know, we've been ramping, starting with some pretty low levels. I don't foresee really much of a material impact on Q3. We're live. We're doing stuff. We did move money in Mexico in a minute 13 seconds. But it's -- I think we're -- really we're on a ramp, but we're not going to be maxing out or stressing their system. And so it'll build gradually. I think in the fourth quarter, we'll start to see some impact. I think due to the kind of confidentiality and the unique nature of what we're doing. I don't think we can really describe, at this point, what the P&L impact is. But I would just say that we're expecting it to influence Q4.

And can you share with us in what quarters this will be operating?

No, we can't on that either.

Thank you. We're taking our next question from Kartik Mehta from Northcoast Research. Please go ahead.

Alex, just bigger picture question as you deal with this ID issue. Is it having any impact on your ability to sign agents or -- at least in the U.S., or as contracts come up for renewal, having to negotiate different financial aspects of it because of the ID issue?

No, actually. That has not been the case at all, which I think is super positive. And in fact, I was just down with a bank, having the conversation here in the U.S., quite a large very influential bank. And basically, CEO there looked at me and said and he goes, we would never transact with anybody who wouldn't give us their ID. So we're completely supportive of what you're doing, and think it's great. So, it's -- I think concepts like that that seem to permeate throughout all of our discussions, I think the conversations with the regulators have been super positive. We've had inquiries from not only domestic, but also foreign regulators in terms of what we're doing with ID collection, how we're using ID to our benefit, what value its bringing to us and these types of things. So I think that conversation is all super positive. It's really kind of back to the non-exclusive markets, particularly we have multiple competitors at the same point of sale. And it becomes a conversation on the consumers; choice, the agents' influence and these sorts of things that have probably impacted us more so than anything else. I think, as I've said maybe on the last call or last year a little bit. I think, certainly, Latin America, particularly Mexico and the Northern Triangle has probably been the ones that have been more broadly impacted on the ID requirements. And that's, I think, pretty understandable in today's immigration political debate that continues to be ongoing. And as I've said, I think there's going to be some loss there that you just going to have to, as an organization, accept as we kind of push the program forward. But that being said, we've done a lot, I think, in the last couple of quarters, to try to clarify ID collection standards, what we do with that information, what types of IDs we collect, which I also think has helped resonate well with the consumers. And I think has clarified some things for the agents, as well as they push the program forward. And we continue to see new customers come in every day. And all those new customers are complying with our standards. And so I think we continue to go through little bit of a churn where potentially some legacy customers and others have kind of turned away, and the new ones coming in, understand the policies and procedures and don't seem to have much issue with it. It's interesting too, because I think once you isolate it from those kind of Mexico Northern Triangle, the impact is not nearly as much at all. And I think more generally around the world, ID collection is more standard. So anyway, so we feel good about it. We're growing through it. I think more so than anything, it's been the smaller walk-in niche competitors that have really sold heavily against this. A lot of them are being very aggressive on price going negative on FX, increasing agent commissions quite substantially. And I think that was something that we were maybe a little bit under resourced for perhaps. And so, we've changed that. And we're finding that back now. And I think putting a better product in front of the consumer with ID or without ID, I think, you have an opportunity to influence that customer in a pretty big way. And I think we're beginning to see the signs of that moving in our favor. So yes, it's been a lot of work. But as we keep saying, we're going to get back to growth. And when we do, we're going to be doing it more compliantly than anybody else in the industry. And I think that says, volumes have been out what we can and should be doing as an industry.

Alex, I know you talk about your strategy for the digital business and maybe going into market and offering lower price. I'm just wondering on the physical side. What are the trends for pricing, have they stabilized or are they up-down, just your perspective? And if there are any markets that have been particularly aggressive?

Yes, I mean, I think that our view, I think is, continues to be very different from others in the space. I think we've continued to balance pricing as much as possible. I mean clearly -- and I'll give you actually an example, right? So, one of the large corridors, UK to Romania, has been something that's long been a good quarter, and it's dropped off quite considerably in recent times and largely related to Brexit and Romanians kind of migrating. So as part of that, right, when you see that volume drop off, one of the reactions you can have is to lower your price and see if you can win customers and volume back. When the customers simply aren't there, you're kind of giving the business away. So you can put your prices back where they were and you can continue to move on. In other cases, you lower your prices and you're going to see volume come back, and you're going to see consumers come back in, because you've been misplaced in the market. I mean, my view is small niche competitors all over the world go in with lower prices. Online competition comes in with lower prices and Western Union MoneyGram end up lowering prices and trying to adjust all the time. And honestly, it gets a little tiring and monotonous and so you need to take a very different view of your business and recognize it to be competitive you have-to-have the right price point. And so I think we're being much more aggressive on that. And I think we're trying to put a product into the market that consumers want to buy and partner with. And so in the U.S., we see a lot of niche competitors going negative on FX. The Latin America corridors, you see prices coming down and you see agent commissions going up. And so, you have to put a better product in the market but you also have to be competitive in those areas. And so, that's something that we're doing and I think doing very, very well. But that doesn't mean you have to change prices everywhere. It doesn't mean that you can't be strategic in a number of areas. And we have a lot of high value, high price corridors that continues to perform and grow very, very well. But in those more competitive ones, you just have to put the right product in the market. So I think our view is very different from others. And I think if you're generally lowering prices, and they raise in some place and that balances out your numbers, I'm not really sure that's not a competitive pricing environment.

Thank you. We're taking our next question from Bob Napoli from William Blair. Please go ahead.

Your statement of getting back to growth by the end of the year is, I mean, in order -- looking at these numbers, in order to get back to revenue growth by the end of the year, you would have to have a pretty radical, it looks like, acceleration in your business. What is your confidence? I mean, why would you stay -- what's the visibility to actually doing that?

We've undergone, I mean, a quarter-by-quarter almost an agent-by-agent kind of analysis of our business. And I think what we've been highlighting here is that really the impediments to growth have been really concentrated in the U.S. And I think that there's a lot of math there that really, if we solve the U.S. and we are solving for the U.S., that all of the sudden it's not as difficult as it used to be, because we've already returned the growth in many key corridors. The other aspect of it is, is that the rules that we put in place were rolled out over the course of last year, and they really, really hit hard in July. I think that -- and then we added new rules throughout the summer, and really into the fall. So last year, we really saw this really degrading of our growth in a lot of the U.S. markets. And what also happened was is that we targeted some of the corridors that Alex mentioned earlier that we really didn't expect those to come back. And so we have tough comps on those right now where we're -- we still hadn't really shut those down as much as they ended up being shut down this time last year. So we can see it emerging. We can see that if really things continue on their current trajectory that you see the turn coming. And the other aspect is that we have some pretty exciting new stuff that's launching. We've got some new agents that we find. And there's some really key business that we think will be additive in the second half of the year. So the combination of all those really makes us pretty confident that the turn is occurring.

And then your expense improvement this quarter was impressive and surprising. What exactly did you do to then -- so with an acceleration in revenue growth and expenses controlled. What are your thoughts on EBITDA margins? I mean, I'm looking for more color on expense control, and how that happened and margin discussion.

I think from an expense control perspective, I think some of it is momentum where when we did do a restructuring that was really isolated to very specific things in order to create a restructuring charge. We've been going through the business really systematically and just looking at things that we don't need to do anymore. Part of the real hidden story here is that when you dramatically improve your systems and dramatically improve your customer experience, there's just a lot less friction and a lot less costs to cover the transaction. And what we've really done is we reduced our margin across for transactions to be really low. And so we're really a smaller leaner organization that's becoming much more efficient from an IT, and systems and customer service perspective. I really think that's the driver. I don't think the pace keeps up. I mean, we were -- it was a pretty big number. I don't think we can stay on this pace to continue to decline on expenses at this rate. But we also don't really see it as sort of an end I think this is continuing potential for future savings, going forward. And I forgot your second question…

EBITDA margins, I guess, I mean…

Yes. So this is where it gets a little interesting, because and I think really today given what's happened to our revenue, we're probably a little subscale. And I think that we can really have margin improvement with a return to growth. I think they go together. It lets us also price aggressively where we can actually take a lower gross margin, but maintain EBITDA margin. And so, that's really the strategy that we can scale our operating expense base, and get EBITDA expansion in conjunction with a return to revenue growth.

Yes, the short term focus of other investments for a variety of those…

Yes, I mean today, we're doing what we need to do to get our customers back and get our growth back.

Thank you. We're taking our next question from David Scharf from JMP. Please go ahead.

The first thing, I guess, more kind of housekeeping question for Larry. I see in the cash flow statement, the receipt of net proceeds from the Ripple investment. And my calculation is $30 million it's more share that net adds 7.32 million shares. Can you give us an updated share count, not averages, because it didn't move much from Q1 and Q2? But it seemed like you entered the quarter with about 65 million shares, and this would bring it up north of 72 million, and then the 8% more dilution protection to the junior debt holders would take that up to 78 million, 79 million shares. And I just want to get a sense for, going forward, how to think about that for purposes of market cap and valuation?

Yes, I would say you're doing that right. I think the fully, what I would call dilutive, including any employee awards as well, would be approximately 85 million to 86 million if you converted everything and including the junior warrants that we’ve put out. So you don't -- the warrants don't show up. And then you also have -- one of the things like, for example, on Bloomberg, they don't include our Series D convertible. As part of the market cap calculation, that's 8.9 million in shares for the Series D, and then you’d add the Ripple warrants, the Ripple stock, and then you have the warrants associated -- 5.4 million associated with the subordinated debt.

Okay. So around 80 million, it sounds like a fair approximation, if anyone is trying to…?

Yes, a little above that but …

We can take you through in more detail but…

That's helpful. And then, on the warrants, I guess on the Ripple transaction and I know this was asked by a previous caller. It effectively sold 10% of the company, and then 10% dilutive to existing holders and very often sizable transactions like that are based on maybe some really impactful revenue synergies. Here it was kind of unique, because it sounds like it's more on a cost synergy. But given just the magnitude of that dilution, is there any kind of quantification on how we should think about the potential cost savings in the model? Just not sure how much the real time…?

Yes, I guess I'm a little restricted in terms of where that's kind of guiding you in terms of where that's going to show up. I'm going to tell you that on an EBITDA basis, the way that potential for this is, it would offset the dilution for the entire 50 through a combination of…

And I don't want you to divulge anything, you're not permitted to but maybe a different way of asking it that you could help us with this to understand what existing settlement costs are?

Now, it really isn't that straightforward. And I -- we really just are not in a position to go there. I think that over time as this effect is felt, I think there might be a little more clarity around it. But right now, all we can say is that on an EBITDA basis, we think we have the potential to offset the entire 50 if we elect to draw down.

Fair enough. And then lastly, on the cost side, obviously both direct monitor costs and the compliance enhancement has been recurring for a number of years. And in terms of trying to gauge visibility into when they might ease, it looks like both of those actually increased quite a bit sequentially. Is there anything unique in June, is it related to that? And should they be -- any reason to expect they might be falling back down in the second half?

That's a good question. We transition during the first half of the year to a new monitor, which and part of the new extended DPA and that ramp up and first half of the year really involved them doing a lot of detailed learning, understanding and exploration of MoneyGram systems, processes, policies, procedures, understanding people and then kind of process to get them through a lot of testing and then into kind of their first reporting cycle. We anticipate that they will be more -- probably more expensive over the term than the prior. But I think our costs associated with supporting the program should be relatively stable through the rest of the year. And I think that their billings may drop off a little bit in the second half of the year, as we have some heavy testing cycles into more of a ongoing monitoring process. I will say the relationship has been great. I think that the transparency, the discussion and the dialogue has been very, very good. I'm excited about what we've done, what we're seeing and how we're working together, which I think is great. And as you look longer term, right, the DPA is May of 21. And I'd expect most of these costs to be sustainable until that time. But the expectation is that everything we're doing is going to position us to be done at that point in time. And again, our fraud rates are as low as they’ve ever been and our processes and procedures and policies are going to continue to improve. So everything that we're doing is leading towards tremendous amount of cost savings when this is over. And in the meantime, we got to do everything we have to do to get it right.

And then last question, and only because it was obviously mentioned this quarter, pension accounting Larry is about 10 levels above my pay grade. So -- but can you help just as to understand in layman’s terms that the 43% of defined benefit plan assets that you've retained. Well, I guess, number one, is this desire to sell that tranche? But also maybe walk us through over the next three years, is it a -- how much of a cash event if any it is to fund those obligations?

Yes, the number has gotten small enough now where we would be in a position to fully fund it. I think part of you need to understand is that the -- there is an unfunded pension liability. So what we did was we sold plan assets along with the liabilities and the unfunded liabilities stayed with the company. However, the balance now is small enough and it reduces our funding requirements on just a normal basis to about half what they used to be and it helps us really fund this thing up over time. So yes, it's a legacy pension plan. Actually, most of the people aren't even MoneyGram employees. As part of our spin off, we want to exit it. It's a real good market to sell these things. But it'll really somewhat depend on the performance, the investments in the portfolio, and then also just what extra cash we have. But ultimately, we think this brings an exit closer to fruition.

Thank you. We take our next question from Tien-Tsin Huang from JPMorgan. Please go ahead.

I want to -- maybe just on the Walmart performance, or Walmart book versus the rest in the domestic side, or U.S. outbound side, any surprises or differences there?

No, not really. I mean, I think Walmart -- the white label service we implemented continues to perform extremely well. We continue to kind of balance the shifting of the business mix, which varies a little bit by corridor which I think is interesting to kind of see. But I think the relationship there is good. I think our strategic initiatives are aligned. And I think we're doing a lot of kind of everyday activities to continue to improve and position our product. So very happy with that. The U.S. to U.S. business, our legacy business which we still have internally there, it does continue to be a drag for us as a business opportunity. But I think that that's kind of been consistent with pretty much the last five years. So, more to come on that longer term. But it is a product that does continue to get utilized just at a lower rate. I think that performance there like others who’ve reported in the last week, the U.S. to U.S. cash market is just not what it used to be. So, there's some work to do there as well. But that's across the board, not just at Walmart.

Got it. Yes, not too surprising. So on the -- just two more. The loyalty program, did I hear correctly, Alex, 3 times more active than in the non-royalty customers? And then you're going to launch that globally?

Yes, well, globally is a relative term, isn't it? We're going to start rolling that out.

That's market by market, yes.

Yes, correct. I'm laughing at myself. But, no, yes, absolutely. So obviously, the key markets, it gives us a just a world of opportunity to think differently about our business. And the loyalty program is just a huge component of that. It's like -- I think it's outpacing our pilot by about 2x right now, which is just amazing. So we're super excited about that.

Yes, it sounds like it is the important part of the return to growth.

Yes, I mean, what was really cool is, it's self funding at this point, paying for itself, which is something that we didn't really expect either. And I think that that's just remarkable so.

Okay. We'll keep asking you about it. So on the last one from me just the xRapid, I know you can say a lot but you did mention speed as an advantage. How about other benchmarking around it? I mean cost and anything else to that you can just share relative to expectations or relative benchmarks just so we better understand the potential behind it?

I think what I would say is the following, right, is that all of this -- it's not new for Ripple, but it's new for a lot of us in terms of exploration of how we do this, right. And I think that when you think about traditional settlement and traditional foreign exchange markets, right, it's a lot of banking applications, a lot of platform and sort of a lot of internal management. So to have an integrated product into their platform, we’ve built kind of our own unique interface with them that I think the team internally is just done this amazing job. Basically, you can live real time sort of ping the market, get responses back on what those rates are. It's almost like a consumer FX platform, and to be quite honest with you. Then you can lock in those rates, you can hit the trade, and then literally money ends up in your bank account, able to use for settlement of whatever purposes you want to I think as Larry said, and Larry what do you say?

Well, we just transfer them in a minute…

Transfer them in a minute, literally ends up in our bank account in like 20 minutes or something like that, which is remarkable. So when you think about how our business works, which -- and I think this is kind of the misunderstood part, but also the coolest part of it is, as a consumer, you go to send money to Mexico, right, and the Mexican peso is inherently volatile, and it's moving around all the time. And you can actually time the cash flows and settlement flows with what's happening on a per transaction basis with the customer. It's pretty remarkable, what you can start thinking about and doing with that type of technology as you think about how you manage the hundreds of millions of dollars that are moving around every single day. You can choose to trade, you can choose to not trade, you can move those things around. So, from a price perspective, from a performance perspective, from a transparency perspective and improvements in liquidity, I would say at this point, it's kind of second to none. But that doesn't necessarily mean that you're going to get the best rate on every trade, and you may not want to make that trade. And so we’re going to work -- we're kind of learning to use the platform. But certainly, with every incentive to do that, I think that the -- someone asked a question, it is largely kind of cost and efficiency driven, but I think there's some real revenue opportunities for doing a lot. As I’ve said on the call, at least in my script on more with distributed ledger technology looking more in terms of crypto assets what’s out there, what are the capabilities and also just generally speaking across blockchain, what else it is that we can and should be doing as an organization, because there's a lot of things happening in the market today. And I think we're actually probably underappreciated for the value that we can bring from an on-demand liquidity settlement perspective to a number different aspects of that growing industry. So we're, I don't know, super excited about I guess is probably how I’d phrase it.

Thank you. We're taking our next question from Mike Grondahl from Northland Securities. Please go ahead.

You talked about a sequential increase in active returning and new customers in 2Q. Can you quantifying any of that just really to get a feel for it?

It’s -- well, that's a good question. As I think I mentioned, I don't know, like a year and a half ago, sort of customer modeling is new for us and it's something that we're largely keeping internally. But I would say that as an organization, we track active customers, we track new customers. We track new customers et cetera for different categories. And it's kind of go back to, I guess the peak of customers back in probably Q4 '17, first quarter of '18, I would say that the drop off in customers really continued as we rolled out all the compliance changes that that really affected the business through the fourth quarter of last year, and probably really into kind of the February, March timeframe. But since then, we've seen those trends stabilize, and we're beginning to bring in new customers in a variety of different corridors and just across the board moving that up. If you isolate for those high front corridors, and you isolate for the U.S. to U.S. business, that growth has been much better. So we're really excited about that. So we got a lot of churn that we're still going through, particularly in some of those higher risk corridors, and then obviously with U.S. its own entity. But net-net, the progress has been good. And we continue to add, I'd say new customers, generally speaking on a monthly basis. And that is one of the advantages of this industry is that there aren't a lot of new customers, it's a huge industry, and you can continue to reposition your product every day. And it's an opportunity to bring in new customers. It's not like you have to go after the same legacy customers all the time and try to convince them. There's a lot of new customers all the time in all the markets around the world, which I think is super exciting and beneficial, particularly when you're going through as much changes as we've gone through as an organization.

Got it. You also talked a little bit about some of the success in your, I'll call it aggressive pricing in new online markets. You said that kind of caused you to go back to your legacy online markets and get more aggressive. Are you describing sort of, hey, if our legacy online markets, maybe we gave it at 15% price cut or 20% price cut, just describe in the real world what that kind of means with an example maybe?

Well, let's see. If you are a U.S. to U.S. customer online, you're probably depending on that how much you're sending, what you're probably paying fees and kind of less than $12 kind of range. And we've been exploring prices anywhere from $0.99 up to $4.99 as an example. So I would say that’s not like a 15% price cut, like a lot of percent price cut. So -- and I think resetting those platforms has been pretty critical. But what I can tell you is it as we've done that the increase in new customers, the acquisition of new customers, to new -- the views on the website, the ability to actually convert those customers, that thing and then kind of repeat and increased transaction growth has been -- has just been tremendous and actually putting us in growth rates in July in the U.S. in particular rates we haven't seen in quite a long time. So I'd say, it’s working. It’s having an intended effect. It’s obviously added some headwinds to our return to revenue growth. But I think it's absolutely the right thing to do. And we see the consumers respond to it. I think it just gives you all the confidence in the world about that your brand is relevant and your product is relevant. I think that goes in complete contrast with what a lot of people have tried to portray MoneyGram as in the last 18 months. And as we said, the changes we've made to the business have been deliberate. We've done them to ourselves, and we've done them for the right reasons. And I think to then go out and reposition the products event if that includes some re-pricing is driving customers back to brand. And I think that that's just tremendously exciting. And I think, on top of that, I'll just add that it is a competitive market, and there are a lot of services out there. And we have to differentiate. We have to make product look different and be different and better for our customers. So we're doing that, and I think the results of that are going to push back in a position of strength and growth in the coming months.

Maybe just lastly. So the takeaway, July was just -- remind us what you want us to take away for July?

If you take away the U.S. to U.S. market, we grew transactions in the month of July. And I think that that's a huge statement to be able to make. If you take nothing else away, I would say it got away.

Yes, I guess one of the takeaways is that we were -- kind of everything was moving in kind of a straight line and then June was kind of this anomaly. And we wanted to make sure that June was an indicative of a trend that actually July came back to the trajectory that we were on and I think it also ratifies that we're on the right path.

Alright, operator, I think we're out of time or maybe a little overtime. So we'll say thanks to everybody, and we'll talk to you all later.

This concludes today's call. Thank you for your participation. You may now disconnect.