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

Terrific. Welcome, everyone. This is Tien-Tsin Huang. I'm the payments, processing and IT services analyst at JPMorgan, joined by my colleague, Puneet Jain, who I think many of you guys know. And so really excited to have Western Union back with us again at the tech conference, the 48th annual but the first one that's virtual. So we're all getting used to this, but it's great to see everybody's faces. So Hikmet Ersek, the President and CEO of Western Union; Raj Agrawal, the CFO; of course, Brad Windbigler, who's the Head of Treasury as well as heads up Investor Relations and does a great job with that. So like the other sessions, we're going to do fireside chat. Again, I've gathered a lot of the questions really from you, the investors. So we'll try and get through some of that. But we will be taking questions from the Q&A feature here within Zoom. So feel free to hit that, and we'll try and work that in to the extent that we have time, obviously. But again, welcome to the team.

I think if we start out with just the obligatory question on what you're seeing on the ground, especially for those that maybe didn't catch the earnings call live. Hikmet, if you want to give us an update on what you're seeing on the ground. Maybe walk us around the globe a little bit, and I'd love to hear your thoughts on what a path to recovery might look like. Thanks for being with us.

Thank you for having me, Tien-Tsin, virtually. I think it's always great to join your conferences and so looking forward to that. So obviously, we just announced our earnings, and we gave some outlook about the environment -- how the economical environment is. I just have to say that, that's something that we've never seen. I've been now in this industry for 20 years. I saw the financial crisis, I saw different changes of industry, but this is unusual. Obviously, our industry and our business get impacted as many industries because the people just couldn't go out and make a transaction, and the lockdowns that impacted our business and plus the financial stress, right, the mobility -- limited mobility of the people and the financial stress had an impact to our business, especially in our retail business after 15 of March. We saw the first signs in -- very little signs in China and Italy as it started. Obviously, we have such a big global business. None of our countries are more than 7% of our revenue. And so we could see the portfolio, really the developments. And being so global, you could see the first signs there. And then we -- as it became more to the West, the pandemic, and more and more countries get impacted at March 15, mid of March as the lockdown started, we immediately saw the impact. We had a good quarter. Beginning of the quarter, we were within our expectations. Our digital business, pretty much growing very well. Our pricing environment has been very stable. But since March 15, we had some minus trends, like minus 30% on transactions. And then after a few days, after, I would say, 2, 3 weeks, we started to see some recovery in some countries, especially in countries where a social safety net is given like in Germany, like in Scandinavian countries or Netherlands, Switzerland and Austria, where government still could distribute their funds for the people and have some stimulus packages. There's people -- and the lockdowns got eased and people immediately start to send money because the need to send money is always there, especially for the loved ones in receiving developing countries where they also get impacted. And we even saw some positive trends end of April in Germany, for instance, right? I mean not in the negative, even turn into positive. That doesn't mean that it's all over the world. It's different because, as you know, different parts of the world, there are different dynamics. In the Gulf states, for instance, besides the pandemic there, also the oil prices are all-time low. And so the cash flow environment is different, though -- plus the lockdowns there, right? So our Gulf state numbers, especially driven by Saudi Arabia, has been doing pretty well because we launched a new product there, a third-party white labeling product, which we have significant capture in market share there also from the competition. And that helped us to respond to that. But just to put it in perspective, our oil-producing countries are about 15% -- 10%, 15% of our revenue. So it is still -- it's big, but still a limited amount, that impact there. And then if you go more to Italy, Spain, where it got impacted more, the -- we still see that transactions are still down. It's coming slowly up, getting much better than it was in March, but it's still not there yet. Then in the U.S., we had various U.S. -- outbound business has been -- North America business, U.S. outbound business has been impacted definitely also, but has been strong. One example is the U.S. to Mexico business. It's a big corridor, as you know. We are gaining market share there. We are growing faster than the market. And so generally, I would say that, that's the kind of environment. In the receiving countries, the lockdowns don't help us because people can't pick up the money. Especially in the receive side, the retail network is still very important because it's -- in the sense that the digital, very important; on receive side, retail, very important because the economical environment is asking for cash pickup. People in the rural areas of India, like Bihar, want to get cash. In the urban areas, they want to have account payout. But in the rural area -- and the lockdowns there, yes, had impact on our business. Now as more and more locations on the receive side are opening, you could even see immediate turnback. So people are waiting to send money to support their loved ones. I would say, look, putting this in perspective, I see hope end of -- light end of the tunnel. But at the same time, it will take some time because of the dynamics of that, and Q2 will definitely impact our business. It will be probably worse during the year. Once the economy and the financial stress is over, I think immediately, our numbers will come back.

Yes. No, I agree with all of that. So I'm curious to get your thoughts on the World Bank report. I was quite surprised by that, when they called for remittances to be down 20% this year. It seems quite harsh and virtually no assumption of recovery, as you've described, in some places. So your thoughts on that report and how the world might be different than what you see.

Well, definitely, we do see those are too pessimistic, the World Bank numbers because looking at our development, we are in May now for the year, right, for 2020, and we could see that it will -- growth has really had to fall apart more than it is now to have that for us, at least for a number. You never know in these days, but I don't see it yet. We see the very pessimistic World Bank numbers. Seeing that, we develop scenarios, of course, what happens if the Middle East recovery, oil recovery will take longer or U.S. will have -- or North America gets more impacted. We do have different scenarios, but I believe that our scenarios, given the feedback from customers, what we hear -- and we do weekly surveys with the customers. We asked our customers, and we do see also a very strong digital growth on the send side. And the interesting thing on the digital growth is they are still new, 75% to 80% of the customers are new to our network and we did not use our network for the last 2 years, right? And that's a good sign, actually, Tien-Tsin, because the people are looking. And what we didn't see -- looking for Western Union for money transfer. What we do is also we compare the Google clicks, when you look on other money sending. And then you could see the difference to the competition. Western Union stays really high there. So people are looking for sending money in terms of trusted brands. With these -- all these factors, I believe the World Bank number are really a little too pessimistic for us. And the beauty of our business also be open to new customer segments, not only in a certain customer segment, which is only using cash to send money, also account holders which do use digital because to do a digital transfer, you need a credit card, debit card or a bank account where the funds are. That's, by nature, a different customer segment than -- to do that. So World Bank may have also other factors there like paying directly your sellers to an account from the other party, maybe have that also part of the remittances. Look, the thing -- the times are different, right? It's hard to make a prediction. That's why we also withdrew our guidance for year-end guidance and especially for the top line, right? We feel quite comfortable with our cost initiatives and effectiveness but the top line is hard to predict currently. And within that environment, we still believe that World Bank numbers are too pessimistic.

Yes. No, I agree. And look, we've both been in this business a long time. I didn't think we'd see this kind of sticker shock, whether it be in the remittance business or the merchant services business or card processing. To see this kind of data is pretty incredible. And I think all of your peers have withdrawn guidance, so not a surprise. But let's talk about the digital a little bit because I think it does feel like there is a pickup in some of the digital trends. So the question there is -- you mentioned it's all new. How sticky are these new customers that are coming to Western Union? Have you seen some of those customers stay on and think about long-term value of those new customers that are coming aboard? And then also if you can maybe chime in on the profitability of those customers relative to your traditional business.

Let me start. It's a great question actually. So the new -- the digital business, we have 2 ways of going to the market with digital: with our own brand, westernuinion.com; and with our third parties. They have their own ecosystem and we offer our platform. To be successful at digital business, what you shouldn't forget is you have to have the best payout network and best compliance programs and best settlement programs. Over the years, we built -- our engine here is unique. As I presented at September -- on our September Investors Day 2019 -- Analyst and Investor Day, the platform's unique. So it enables 75 dot-com countries worldwide to drop money in a way that -- hundreds of currencies that other's companies can't do that. And of course, especially because commerce banking can't do that because, by nature, in the correspondent banking, you need messaging system and you have to have many, many stops to that transaction. So within that, the secret of digital growth is, first of all, that you have this payout network, for instance, 550,000 locations worldwide in real time, in 137 currencies. The second thing is that you have 4 billion accounts and more and in 100 countries, and 50 countries of them are real time. This is huge, right? You can tell to the sender you can drop money real-time in India. And then plus, you can really drop real-time in wallets like in Philippines, right, or other countries. So this combination of that -- communicate that to the sender, to send site gives us new customer segments. Why I'm saying that, new customer segment? By tradition, the customer who has the funds has a bank account because you need to open an account to send a transfer online. And in the retail model, you use a third-party, an agent model, who is a kind of a common customer, right? It's -- the customer there on the send side is a customer of La Banque Postale and Western Union. The La Banque Postale's aim is getting customers in their network to get more additional products. At the westernunion.com, the customer by nature is that Western Union's customer, direct customer. Western Union is basically, by its own, the largest agency worldwide and has -- as you know, 2019, we had a revenue of about $600 million. By far, we are the largest digital business there and growing very fast. And we know exactly the customer behavior at westernunion.com to watch them. Because we have the data of the customer, to build this ecosystem is different. And we know that -- how many times the customer using us, how many times they are repeating, how many times they're repeat customers, which language they use, which corridor they use. We have a resend button. We have the loyalty programs and the ideas can build the ecosystem, adding additional products around this customer in the future. We started to test insurance products, which works pretty well. Could that be also other financial products in the future to build that? As you know, we have a unique capability in Europe. We have a full bank license -- European -- in European Union. Can we build that ecosystem and add additional products around that? So today, the customers are new, and they are repeat customers. Once they're in, they're using us more and more, and it's definitely more loyal than a retail customer, the digital customer. Saying that, though, I don't want to create the impression that retail is not important. We won't be successful, as I said, if we don't have the agent network, especially on the receive countries. If you don't have the best payout network, you won't be successful on the send side.

Rajesh here. I'll take the profitability question. Tien-Tsin, you asked about profitability. Most of this is incremental business, so incremental revenues and profits for the company, and that's really the way we look at it. However, if you look at the wu.com as just a branded offering, that's the largest component of our digital business globally, and that's a very profitable business. It has a relatively high revenue per transaction compared to retail -- retail is higher clearly. But wu.com revenue per transaction is not too much lower than that. It is lower but not significantly lower, and we know the gross margin percentage from wu.com on a percentage basis is actually quite similar to the retail business. So every incremental transaction we get there is incrementally very profitable for Western Union, and that's really the way we look at it. Marketing dollars are more heavily geared towards the wu.com business, but we're not increasing the marketing spend for the company dramatically. It really is a shifting of where we put the marketing dollars. And then as we've talked before, the digital partnerships we have are a different model. We're a processor of transactions there. We get a customer that's delivered to us that has good funds, they want to move money around the globe. So we don't spend the money to acquire that customer. We just facilitate the transaction. So the starting point for revenue per transaction is lower. It's a processing model. We also don't have a lot of cost in the process. So the margins are much higher than you see in the rest of our branded business. So the dollar contribution, even though it might be a little bit lower than the other things we have, it's still very attractive to us to keep pushing that business. So it's a very attractive business. It's incremental in nature, and it produces good revenues and profits overall.

Yes. And I recognize you're early in ramping up countries. I know you've gone up to 75 but the density and the maturity of some of the earlier ones are clearly more productive than the recent ones. So is there a path here to maybe accelerating or slowing down the country growth to focus on the ones that you're at?

I think it's not either/or, Tien-Tsin. I think we're going to continue to build on our customer growth. Like we've been in the U.S., for instance, for a longer time on dot-com, maybe the European Union longer time on dot-com, and we could see the customer -- repeat customers coming more and more. But we still have new customer segments there. Especially during the pandemic, we saw that in how new -- people are searching for a trusted brand. And our growth has been impressive, and you compare it with the kind of base here, and this growth is accelerating in April and going to continue to accelerate significantly. But it's important also being -- my theory is that if you have retail money transfer in 200 countries, you have to be in 200 countries also with digital. So there is no difference. Because if you look at the population like India, there are about 1.2 billion people, and there are enough people. They want to send money also, not only receive money. In India, people who want to send their loved ones back to universities, students, and parents want to help the students, their sons or their daughters to finish university and to send money via digital. And I think that the digital expansion, my goal is being in 200 countries, and 75 countries is a great approach. We obviously focus on the main send countries, traditional send countries or the developed countries. Now our expansion is definitely being in 200 countries. So no one can do that. Digital to digital, digital to account, digital to retail and the other side also, wallet to retail, right, and retail to retail, so this kind of combination building, that network is unique and Western Union very well positioned on that.

Yes. And I think that's important just to maybe drill down on what you just said there, Hikmet, right? A lot of folks focus on your digital competition, which I think are much more narrow in their focus on the geographies. And then as you said, there are differences in the business model from a channel perspective. So can you maybe discuss that, how you're different on the digital side versus the digital competition and also how you benchmark your pricing versus some of those digital pure plays?

So there are different approach. The biggest money movement is bank-to-bank worldwide, right? And I think the people underestimate that correspondent banking is definitely the largest part of the -- especially on the C2C, right, people use that. And we know that bank-to-bank transfer is not easy, especially if it comes to the exotic currencies, Tien-Tsin, right? Sending money from a bank to Peru or to Vietnam, it's not easy if you sit in Toronto and send that. That's why many banks are looking for alternative to satisfy their customers, and we believe we have the best network and best alternative, best platform to offer them. So you can do that in a different way. You can approach the digital approach. You can launch your own brand, Western Union, and serve your customers or you can offer your platform as a transaction platform to an ecosystem like we did it in Russia or we did in STC, we use that, and that's Saudi Arabia Telecom, as 2 examples and/or TD Bank in Canada. I believe that this is something that is unique for us. That makes the biggest differentiation. If you look at the -- if you are smaller fintech competitors, right, on the digital only, they only focus on certain corridors because they can't expand. They don't have the capability of anti-money laundering. They don't have the capability on settlement. They don't have the capability on doing all this network drop-up. And they really focus on certain customer segments. What we are doing is that, here, really a global approach and us offering our platform to new customer segment. Now we are not smarter or something like that, but it took us a while to build this. We are building on our existing fundamentals, which is huge. The existing fundamentals are the existing network, existing compliance system, existing settlement system plus the brand. The trust in the brand is huge. We know it's -- over 90% within the Western Union customers is the brand awareness, and that gives us a huge startup. So the others have to invest to grow more, and we are really -- we can build on our -- we don't need to rebuild these fundamentals, and that's why also our digital business is so successful.

Yes. So before I get into the traditional side, I don't want to forget about that, but just to complete the digital conversation, you did announce opening up the network, which opens up, obviously, a lot of partnership opportunities and also new use cases. And we've seen some like Amazon, others that are quite interesting. So can you give us an update on the opening up the network, both from a partnership standpoint? And especially, I'm interested in the new use cases and how they're performing.

I think if you would -- the answer is very simple, Tien-Tsin. If we wouldn't open our platform to third parties, we would have a hard time to enter that use cases. What a use case like Amazon or like STC tries to do is that build its customer relationship, their own ecosystem. And you either compete in this ecosystem, try to get the customer to you or you partner with them. I think the best way is what we think that -- our platform, with our capabilities to partner with them, is a win-win situation for the customer, for the third party and for us. And that's going to continue to be on our -- we are -- obviously, it takes time to integrate your system to the big ecosystem, and we are approaching many financial institutions. Many financial institutions are approaching us saying that, "Okay, I mean, we send money to Africa, to Sub-Saharan Africa. Can we use you as an ecosystem that you can distribute the money and you could do all these compliance and all the settlement things?" I think that's the approach that's going to continue to do, and I believe also partners like Amazon will continue to happen because Amazon has tried to get to the new customer segment, and we are enabling that in the developing country to get companies like Amazon and others to open our platform to them. Now this is high profitable. Also, as Raj mentioned earlier, one thing you don't have to do is that you don't have to promote your -- to your customers because it's already -- the customer's already there. They are promoting the new capability to their customers, which is Western Union capability.

Yes. No, it's a fun one to a...

I think it's still small though, and putting things in perspective, it's still small. It's still building. They're still new. As you know, we just announced that. And -- but over time, it will definitely help us on our growth, especially on our growth.

Yes. No, I realize it's small, but I feel like it is an important pivot for the company certainly. So we'll keep asking you about it. We'll keep asking you about it. So I know we're almost -- I don't want to miss out on not asking about the traditional business and how that's going to change in a post-COVID world. You mentioned a lot of the agents are closed, obviously, and eventually, that will open up. But how do you think you'll adapt fundamentally to the traditional business, knowing that the world is becoming more digital, et cetera?

So good news is that when the location is open, the customers are coming back. We can see that. It's not like suddenly the world's changed in a day that this customer is just -- they're not here anymore. They're just waiting to use our network to send money, and we could see that in countries where the lockdowns are getting easier and less lockdowns. And in many countries, I have to say that Western Union services are seen as essential services and the locations are open. It depends on the corridor dynamics, depends on where you send money to. It's extremely important to have a retail network, especially in this business. Really simple, I think people underestimate digital will change everything. On the send side, where -- I understand that. On the send side, where you collect the funds, you have to have a kind of a network which you can collect the funds digitally, but you have to have the ability to also collect the funds from people in a location. And if you look then -- look that down, I think we are not helping the communities as a human, and we are really excluding us to serve only the higher-income people, not the lower-income people. That has been never Western Union's mission. Western Union's mission was always serving all kinds of people, regardless of your income level. And we know that on the send side, many people have a lower income and they have daily -- weekly cash income or they get incomes where -- with a check and they go to a check casher. So it is important to collect the funds. We don't collect the funds, agents collect the funds. And we go -- then we do everything electronic for many, many years, right? And we turn the collect cash to electronic digital currency and we pay out in other currency somewhere in the world. So it's important to keep that up. At the same time, with our digital business, we know that we are getting new customer segments to our network. So on the retail side, it's important to do that. It's even more important when you have different economical environment in developing countries. If you pick up the money in Bihar, India, there, the only way you can pay your school fee is cash. Or the only way you go to a hospital, you pay your doctor is in cash. It's the only way you pay your electricity where it's cash because there are not point-of-sale systems in Bihar in India, some part of rural area. However, if you send money to Mumbai, India, it's a different ecosystem. You need the account payout or wallet payout. You do that and -- basically to pay out also in these countries like in Mumbai, where our recent account payout grew by 90%. So you could see that it's really depending on the customer segment. So my overall message to the investor and to you is that keep on going retail. At the same time, the digital is an add-on, which will help our growth and our margins long term.

Yes. Understood. Understood. It makes sense. I always remember -- I think I told you this story before. When I went to South Africa as part of a due diligence trip in the good days, visiting Western Union location, I remember we saw people getting pushed in wheelbarrows because they couldn't afford wheelchairs to go pick up their money, right, at the Western Union location. So we sometimes take for granted that -- the situations on the receive side.

One thing I would like to mention that -- yes, I'm sorry, I interrupted you, Tien-Tsin. But the mission-driven brand vesting is important for me, and I know that it's important for my management team, I know it's important for the customers. And we have talked, especially during times like this, where the trust and the money arrives, it changes people's life. And many of our customers are nurses, homeland heroes. And they -- during this time, they kept it open. They served so many lives. And I know many Filipino nurses, they're in the hospitals, they are fighting. At the same time, they are thinking about their families back home and sending money. It's unbelievable, and Western Union will continue to support these kind of people, so it's important.

Yes. Look -- I mean, look, stock aside and everything else we've talked about, like I see what you guys are doing with the charities and the donations to COVID relief, so I obviously respect that. That's important stuff. The -- maybe, Raj, to bring you into the conversation on the expense side and what you can do to realign expenses to -- against the lower revenue in the short term here. I know -- I think you've talked about -- and we know that commissions are a big piece of the equation. I think 60% of your business is variable, but you're doing the $50 million in cost cut on top of that. So can you just catch us up on what you can do to protect the bottom line here in the short term?

Yes. As you said, we're still targeting $50 million of sales this year from the programs we announced last year, and that's going to ultimately translate into $150 million of run rate savings over the next 3 years. So that's something that we're still very committed to and moving along. In the short term, as we have the revenue pressure this year, we certainly are looking at other ways to minimize our spending, as we have said, whether it's the hiring side or travel or other discretionary things that could be delayed. And so we're certainly already taking -- doing those things. If you look back at the first quarter, we had a slight revenue decline. We were able to expand margins still. A lot of it is going to depend, Tien-Tsin, on how steep the decline in the overall revenues are. As we have mentioned, second quarter is likely to be the lowest revenue and profit margin quarter because we have -- even the short-term expense levers, we'll see the benefit of that during the course of the year. So there's going to be volatility, I would say, from quarter-to-quarter this year. We think it's still going to translate into good solid margins this year, but it's hard to tell you exactly where that's going to come out. But certainly, we're minimizing the spending wherever we can, and a lot of it will depend on how -- what the trajectory is of the overall market. We don't see the World Bank scenario playing out the way they've suggested. And as we've talked earlier and then based on the principal experience we had in the first quarter, it should be better than what the World Bank has said. And if Q2 is actually the worst quarter, we should be able to improve things in the third and fourth quarter of this year. So I'll just stay tuned there, but we're certainly doing everything we can. Obviously, the 60% variable cost structure helps us. So we have the 40% to go after, and we're doing everything we can to go after that.

Okay. Great. I know you suspended the buyback and you've secured the dividend. I'm curious from an M&A standpoint. I know it might be early to talk about M&A, but my question is more about have your M&A priorities maybe changed post COVID here in terms of the types of businesses that you'd be looking to add to the Western Union network?

I would say our M&A priorities has not changed. The market may have changed. I think our priorities have not changed. As you know, we are very much focused on shareholder return, and we've been very good on that. As I said earlier -- as you said earlier, actually, we are committed to our dividend. We are very much focused. We did pause on our stock buyback, given the environment, the uncertainty. But we're going to come to our priorities. We're going to continue to be investing in the business and then also dividends and looking, obviously, on M&A opportunities. Market may have changed within that environment. Our balance sheet is healthy. I think we feel comfortable with our position. I think it's -- when it's the right M&A opportunity, we will definitely look at it and continue to look at it in places like that because, obviously, M&A activity doesn't change from one day to another, but the market may get more attractive. Some of the multiples were, I believe, too high because the returns were not there. And some of the businesses don't need maybe other capital needs, right? And that gave us maybe opportunities to look at them. And -- but traditionally, Raj and I have been very focused on return to our shareholders. I don't think that we will like to come out of our focus, out of our strategy. Acquisition, it has to fit in with our strategy. It has to have good synergies, and while it has good synergies and change, that will be -- that good return is important for us.

Terrific. I think we're out of time. Thank you all so much for joining on this virtual session. Always enjoy talking to you all. So stay safe and healthy. Okay.

Thank you so much. Thanks, everybody.