The Western Union Company (WU) Earnings Call Transcript & Summary

Okay. I think we're going to get started, everyone. Yes. Okay. Good afternoon, everyone. I'm Sean Kennedy from Goldman Sachs, Global Investment Research Division. I'm pleased to welcome Western Union CEO, Hikmet Ersek; and CFO, Raj Agrawal. Welcome, Hikmet and Raj.

Hi.

Thank you, Sean.

And I think Raj wanted to make some comments about the recent earnings.

Yes. We announced our earnings yesterday, and many of you may or may not have had a chance to listen, but we're very pleased with the results and the outlook that we gave. Fourth quarter operating results were really good, we obviously had some noise with some unusual-type items, taxes were a little bit higher as well. But overall, we really met our objectives for last year. We were very pleased to be able to give a very strong outlook for this year. Our EPS guide is in the teens range. If you look at the -- depending on which side of the range you go to. We also are increasing margins on an adjusted basis by 100 basis points. So we're very pleased with that. And we have continued to have a lot of success on the digital side. Digital business grew 25% in the fourth quarter. And we have a very strong outlook for that this year as well. So very pleased overall with the results and the outlook and look forward to talking more about some of the things that are going on at Western Union.

Yes. And I know it's just from the earnings. Transactions were a little soft, and pricing was stronger. I guess could you -- I guess, speak to those trends, I know price has been stable over the last few years, but is this the dynamic pricing that's helping out there? And I guess, if you could also kind of go into why transactions were soft in a competitive environment or macroeconomic...

Yes, they were -- I think, overall, we feel really good about the operating results of the fourth quarter. There were some unique things that impacted all at once, I would say, in the fourth quarter. We don't see those being long-term items, and we see those going away here in the early part of the year. Certainly, the domestic part of our business, which is less of a focused area for us has continued to decline. We are managing that business for good cash flow. So that has some mix impact. Also, to your question around pricing. And then we had things like Lebanon and Syria and unrest in Chile and the Mexico market itself slowed down. So some unique things that are not necessarily going to continue as we go forward, maybe in the early part of this year. So I mean, as we look at this year, we continue to have really high expectations for the digital business, which includes both our wu.com and white label offerings. Our B2B business grew 4% last year, we expect it to continue to grow really well this year. And then our retail business has been a great cash flow producer, and we continue to optimize that business and improve the customer experience, and we look for good things there as well.

At General level, I just said on that, fundamental has not changed. I think the environment industry is doing good. People are moving money despite all the noise about protective environment, not protective environment antiglobalization, not antiglobalization. People do move money. We, as we've seen in -- as we are in 200 countries, we see the differences in different areas. For instance, people move money within the Africa, our Africa business is growing within intra-Africa very good than -- the U.S. outbound business is doing very well. And people are also changing some behavior, without cannibalizing our existing business, they do use new digital devices. And our platform is responding to the new use cases. A very strong growth on our digital, like 25%. And -- but 80% of our wu.com customers are new to our network. They didn't use our -- the last 2 years, and they really use different. Then one of the strongest growing parts is our account payout, although it's still small from the portfolio. But it's a different customer segment because I'm saying that because if you send money on a cash payout to a retail, you -- the average amount is about $300. You send money to an account is about $1,000. So you could see it's a different use cases, and we are tracking with our digital, with our account payout, real-time account payout in more than 25 countries and soon to be in 100 countries through new customer segments. So that's -- I think the environment is good. We had some noise in Q4, but it has nothing with the performance of the business to do. Things being uncertain, look, 7 countries at the same time happen, you forget Hong Kong issue also. Then we had Colombia issues, we had different Lebanon. And you mentioned few of them happen at the same time. We do -- we know that in -- being a global company, that something happens worldwide, but 7 countries at the same time happened was a little bit onetimer we see. It's a onetimer.

Two other things of note that the dividend increase that we had, 13% raise, given the strong earnings outlook this year. And then what we didn't discuss a lot yesterday was the expiration of our deferred prosecution agreement with the DOJ. That was a 3-year period, and we're now past it. We do believe that the DOJ will file for dismissal of the DPA in the coming days. And there was a lot of heavy lifting by the organization and a bigger accomplishment to have that behind us.

I think it shows also -- on the DPA, it shows also what our compliance programs are competitive, right? I mean that's a compliment to our people, how we upgraded recent year, our compliance programs, our anti-money laundering programs. And that also gives us a competitive advantage operating in 200 countries.

And I wanted to ask 200 countries. I guess are you -- looking ahead to 2020, are there certain countries or areas that you're keeping an eye on either for strength purposes? Or maybe that might be a little weak heading into 2020?

Well, our general assumption has not changed, right, until -- since last year, I think the environment is robust. It's not shiny, but it's robust and being in 200 countries helps us to grow our business. We do as every year, adjust our marketing expenses, our investments, where the opportunities are, right? We -- and our pricing investments, where the opportunities are probably [ harbored ] because competitive advantage and our DNA is that operating in 200 countries is our portfolio. We know exactly where the people are moving, where the goods are moving, how the money is moving, and we know exactly -- we have the real-time data and money moves, right? We have about 200 million customers worldwide in -- sorry, 150 million customers worldwide from 200 countries. We have thousands of businesses, which they use, hundreds of universities, which they use us, and we know exactly where the students will study next year or not study next year. And where they want to go to abroad to get their degrees or not their degrees or where the people are going to send money or not send money. So that allocation will continue to happen, but we don't see big changes. Raj, do you see any changes?

No, pretty consistent.

Yes.

Got it. And then at your most recent Analyst Day, you guided to low single-digit constant currency revenue growth over the next few years. What are the most likely factors that could swing either the top or bottom of that range?

Well, we do feel comfortable with our assumptions of 2% to 3% to achieve our margin expansion of 23% by 2022. And also, our EPS growth rates, which are impressive, right? So from that point of view, we feel quite comfortable. I think we feel even comfortable from delivering our bottom line and EPS growth, even economical environment or whatever it happened that the revenue is even slower. So quite comfortable to return good money back to shareholders. From a growth perspective, the upside could definitely happen if our digital growth -- let's start at retail, we think that retail will be flattish. 1% or 2% addition on retail, revenue growth is huge, obviously, because it's a big base. But the growth will come from digital. Our digital-first strategy is going doing very well. We do offer our digital business westernunion.com business in 75 countries now. And some countries are new, opened new, that could be an upside over the years, right? When you enter a country and you open wu.com business. Besides that, we also, for our white label, we opened our platform. If you go to a market, you offer your westernunion.com, and the partner says, well, I want to keep my brand. You say, okay, then use our platform. We can drop money for you in 200 countries immediately in real-time and 550,000 locations and billions of accounts using your name. That happened the same in Russia, it's Sberbank or in Saudi Arabia with Saudi Telecom Corporation. And they said, okay, we want to keep our brand, can we use your platform? And that digital expansions continue to happen, it's 25%. I think that could be upside, if we get more STCs, more Sberbanks in our network. And besides that, our B2B business has been solid. We had 4% growth last year. And we -- I really, really believe also the connection of B2B, C2B, it's huge. Amazon is one of the examples of C2B. People buying globally online and paying locally, and we really connect the consumer with a business called Amazon, and Amazon is getting more customer segments. It's a product of Amazon, but we are the payment device for them. So that's...

Going into that partnership, can you -- like, I guess, can you give us some background on it? And like, have you been pleased? How it has performed thus far? And has it made your expectations? And was the main goal to diversify your revenue stream? Or I guess, tap into new customer base?

Sure. First of all, it's new, right? Amazon's customer. Amazon is trying to expand, obviously, as every company does, finding new customers. And if you are a Colombian customer, you have -- most of the Colombian customers have local currency cards or local currency methods to pay their purchase, but they buy globally. So what happens is that you go online from your phone or from your device, you shop at amazon.com or whatever page that is. And then you get a code, say that, okay, you can't use your card, obviously, you say, pay by code at Western Union location. So the customer has the ability to pay or to buy online, pay locally in their currency and the purchase is sent immediately to the customer. That's huge. And we translate that local currency to -- in that case, dollars for Amazon. We settle overnight with Amazon. Amazon has new customer segments and enter to the new area, which people are maybe different banked than usually banked in the U.S. or in the western countries. That's a big opportunity. So now we are in 17 countries, Raj?

21 countries.

21 countries with Amazon...

Including the U.S. as well.

On U.S. that's -- I'm going to come to that, yes. Actually, we are in 21 countries. And people -- some countries are doing well. Some countries are still growing, right? It's also -- people have to talk about that. People have to trust. And you can't build a payment business in a corner office in a day, you know that from Western Union. And it takes some time. But -- and the interesting is also, we recently announced with Amazon in the U.S. because people -- some people don't want to use their credit cards. And they want to use cash to pay for the goods, and they go to Western Union locations then we collect for Amazon the money.

Interesting. And then you mentioned the other white label partnerships, Sberbank and Saudi Telecom. Can you discuss how the economics of these partnerships are different than, I guess, the traditional business? And then what do you expect from, I guess, the white label partnerships moving forward?

I'm for the big picture. Why don't you just go for the...

Well, we have high expectations for the white label business. We only have a handful of partners today, right? And Saudi Telecom and Sberbank are the 2 biggest ones that have been the most successful. Those are the ones that we also highlighted last fall at our Investor Day. Let me compare the economics for you between how wu.com works because that's the most similar to the white label partners. The wu.com business is a branded offering. We are acquiring customers all the time. We're spending marketing dollars. We're also upgrading all of our technology and platforms and capabilities on an ongoing basis. And so the economics of wu.com, all-in is a lower margin than the rest of the company because we're spending heavily to acquire customers. On the gross margin line from a -- for wu.com on a percentage basis is actually quite similar to our retail business, right? So the business can be very profitable, but we know that we want to continue to invest in marketing and acquire customers and develop that long-term pipeline that's going to drive growth in this business long term. When you look at the white-label offerings, it's a very different setup. We are a processor, right? So we are being delivered a customer that's a good customer that has good funds that wants to do a transaction with us. We are a processor in that arrangement. So we typically will get paid a flat fee. So the starting point is going to likely be lower revenue per transaction, but the cost structure is much lower for that white label transaction, right, because we're not paying for the fraud. We're not acquiring customers. We're not paying marketing dollars, right? We're investing marketing dollars. So the margins on the white label business, at least the experience we have thus far is very high because the cost structure is very low there. So the margins are going to be very high in that business. We look at all of these digital businesses being largely incremental, whether it's wu.com or the white label offerings. And our goal -- we're not going to always have a Saudi Telecom because Saudi Telecom is one of the most successful partnerships we've had. But we don't need a Saudi Telecom everywhere. We just need 50 partners or 100 partners over the next few years. And we think the business is going to be very strong. The digital part of the remittance market, which is the focus with these is a very large opportunity for us. It's much bigger than the space that we play in currently with the retail side of our business.

So if you follow our strategy over the last 2 years. Remember, we said in 2017 and '18, digital first. We're going to open more countries, and we're going to go to more customer segments, incremental customer segment with our westernunion.com. But some partners are choosing, they want to keep their brand. And that's where we decided to open our platform when we go to the market, saying that, okay, if you want to keep your brand, you have the money -- they are moving money anyway. Sberbank is an excellent example. They were moving money to the central Asian countries...

Yes. How were they doing it before?

Yes. They were doing correspondent banking. They were doing correspondent banking. And -- but over time, they realized that the correspondent banking takes time. It's more difficult to send money even from Russia to Kazakhstan, from Russia to Uzbekistan, Tajikistan. And this -- then we went to the market with them. We said, okay, you can offer westernunion.com. But is it okay, we would like to keep our brand, and can you do real-time payments for us? And that's exactly where we jumped in. And we basically took a problem from them away. They have now better customer satisfaction because the money is in minutes there. We settle overnight with them. And it's -- we do the compliance programs. We do the Know Your Customer programs. And we pay out in minutes, we have the account payout or retail payout. And that's exactly the theory behind that. Can our platform serve westernunion.com or bank customers and replace their issue with our unique platform, which took us a while to invest there with compliance programs, with technology, but we feel -- since 2016, '17, we feel much more comfortable with much more aggressive on the market with that one.

And are you seeing, I guess, more interest from other companies as you've announced these partnerships?

You mean from more partners?

Exactly. More future partners...

Yes. I mean especially in the banking environment, we do see there is some noise, but nobody can offer our end-to-end, right? Big companies like MasterCard, Visa, everybody is looking at that area, but we do offer really an end-to-end, including payout. That's huge in real time. I think that it's currently very much focused on C2B -- C2C, consumer-to-consumer, but you could do that [ closing ] in the future for B2B, C2B and B2C. And that platform, we are upgrading our platform. We are putting many things on cloud. And we just hired excellent executive, Shelly Swanback, she was the Head of Accenture Digital. And she is really -- she was running a $20 billion business there, and she's really focused now, and she's head Of our platform. Really opening our platform, marketing our platform to the market is some of the things we are focused. At the same time, our cash flow is the Western Union brand. The 200, and our team is doing a great job with our customer loyalty programs, dynamic pricing is huge. And part of the revenue increase is the dynamic pricing, if you operate 20,000 corridors, we don't do any more on the country-to-country pricing, we do really break it down to location-to-location. ZIP code to ZIP code.

Yes. How does that work? Is it based on, obviously, like supply and demand for your services in areas? Or like can you describe how that actually works?

The best thing to compare with it is an airliner. If you fly from here, from San Francisco to Tokyo. On that plane, there are 17, 18 different prices. That's one line, right, one corridor, 17, 18. That's exactly what we are doing. If you send to one corridor money -- sending money from New York to Jamaica is different to send the money from Denver to Jamaica. And where we -- and next step is that taking to -- even breaking down to 200 million -- 150 million customers, customer-based pricing. If Raj sends money into India, 10 times, he should get different price than I send once to India price. And that's what we are doing. You will see different corridor pricing, different environment. And we are adapting that daily, weekends. FX changes, customer loyalty, what else?

Yes. No, it is also based on supply and demand, as you were suggesting, time of day, pricing.

Test it out and [indiscernible].

Sure. Absolutely. Absolutely. The trick will be, automating it and using artificial intelligence. The feedback data to us on when is the right time to do it. Today, it has -- when historically has been more manual in nature, but we can't possibly put in all the factors when we're doing it manually, we really need to have technology and automation to do that.