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

Good afternoon, everybody. I'm Jason Kupferberg, the payments processors and IT services analyst at Bank of America. We're very excited to have Western Union with us here today for a fireside chat. We have Raj Agrawal, CFO; and he is joined by Brad and Brendan from Investor Relations. So thank you, guys, for joining us.

Yes. Thank you, Jason, and thanks for having us, and looking forward to the discussion today.

Great. Great. Well, before we get into the details of the mid-quarter update that you issued this morning, I did want to ask about the media reports last night suggesting that Western Union has an offer to acquire MoneyGram. If you can address that, just in the context of your overall capital deployment strategy. We know that you paused your share buyback plan last month. Any comments there would be great.

Yes. Yes, absolutely, Jason. And I'll get into the results in just a moment, as you suggested. In terms of the rumors, I really can't comment. We don't comment on rumors related to mergers and acquisitions items. And so I'll just refrain from saying anything specifically on that one. From an overall capital standpoint, our capital priorities continue to be the same as they have been. Our primary goal is to continue to invest in the business to drive organic growth and expansion. And that's primarily focused in the digital areas and the digital things we're doing, and we're having a lot of success there. Obviously, payments is the other area that we're focused on. Secondly, we continue to pay a very healthy dividend, which we like a lot, and we know our investors like it a lot. We expect to continue to pay a very healthy dividend. That uses up more than $300 million a year of our operating cash flow. And then third is really looking at M&A opportunities, and I'll come back to that in just a second, Jason, on the M&A opportunity, how we think about M&A strategy. And then lastly, to the extent that we have excess cash, we will look at stock buyback as the use of excess cash, assuming market conditions are appropriate. On the M&A opportunities, we are always interested in looking at the right kind of acquisition that will fit within our cross-border payment strategy. That could certainly be a new technology or new capability, something that gives us or advances the ball for us a couple of years versus what we could do organically. We might also look at something that could be a cost player, cost efficiency play for us, but it also has to be at the right price, right? And the last large acquisition we did was in late 2011, so it's been a long time since we actually did a large acquisition, but we've continued to look at opportunities. We've done some smaller things here and there, and we've continued to evaluate opportunities, but we also have a high bar. We have a great cross-border platform. The technology that we have, the ability to deliver money in minutes all around the world in a variety of different channels, the compliance capabilities that we have, the regulatory relationships, all of these things have taken us a long time to build. And so anything that we look at really has to help fit in to that overall platform strategy and help to move the ball forward. So that's a long-winded way of just sort of summarizing how we think about capital use. And so those things really haven't changed a lot.

Okay. So I mean, is it fair to say that you would not do an acquisition that would jeopardize your dividend?

Dividend is really something we think is something that's very important to us. It's important to the Board. It's important to our shareholders. And that's not something that we take lightly. That is a key use of our cash, and it's one of the top priorities, as I mentioned to you. But acquisition opportunities also give you -- you also have some flexibility from a rating standpoint to be able to flex the level of debt and other things that you have, is it -- if it's material enough, you can certainly flex the level of debt you have without impacting your rating. And the rating agencies are typically very open to allowing you to have a path to pay down the debt over a course of time. That doesn't have to impact your other capital priorities.

Yes. Yes. Makes sense. Makes sense. Yes. So let's turn to the numbers that you released this morning. Maybe just take a little bit of time for those who might have missed some of the detail, if you can go through the highlights on what your mid-quarter update look like, and then I'll probably hit you with a couple of follow-ups on that.

Yes, absolutely. We're in unusual times, Jason. We typically have not given monthly data, but we felt it was important that -- yes, to keep giving the monthly sort of transaction performance in our consumer business, which is a large portion of our overall revenues and company. As we have mentioned in late March, we began to see some more significant declines in the business in the 30% range from a consumer transaction standpoint, and that continued into the early part of April. But we saw improvement during the course of the month of April and ended up having about a negative 21% decline in transactions in the consumer business in April, but that dramatically improves in the month of May. And we're very pleased to see that. As we said in the morning's press release, we were down 7% on transactions in the consumer business in May from minus 21% in April. So dramatic step up, I guess, in the trends. That was driven by improvement in the retail business. That's a key driver of the improvement, plus, obviously, really good growth in our digital businesses. Overall, we had about 100% transaction growth in the digital business in the month of May, and that includes about 50% growth in the dot-com business, plus additional contribution from the digital partnerships we have, in particular, Saudi Telecom as well as Sberbank in Russia. So that's very pleasing. And I would say, Jason, that as the retail business has begun to show better trends, we've been able to maintain the level of digital transactions as a percent of total at around 30%. So that's really a good positive. And that's up from around 20% in the first quarter and up from mid-teens or so last year. So we're at a different level in terms of level of digital transactions that we're seeing in the business. So we wanted to give that performance update. It's playing out largely as we had expected, maybe not the exact numbers, but we certainly thought that there could be some improvement over the course of the following few months as markets begin to open up. And as restrictions were eased, we just weren't sure exactly where they would get to, but they're certainly playing out nicely, at least through May, and we would expect there to continue to be some improvement as we move through the next few months.

Right, right, right. Okay. And I wanted to maybe take a minute to break apart the digital business a little bit more, and you alluded to this. Obviously, you've got the wu.com piece, but you do have some of the white label partnerships also. So can you talk about just the differences in transaction versus revenue trends within the 2 pieces of digital and just kind of remind the group here from an economic standpoint, exactly how you guys are getting paid on the partnership side with Saudi Telecom, for example?

Yes. Yes, absolutely. For our digital business, in general, we see the vast majority of customers that are visiting our digital business as being relatively new to the company or new to the company. They have typically not used our wu.com offering, or they've typically not used the company services in the last 1 to 2 years. So they're a new customer, and we really look at wu.com, in particular, as being new business, new revenues, new profits. And so it's incremental in nature, and that's largely true for the digital partnerships as well. The wu.com transaction, we like that a lot. It's very similar to our retail business. The principal amounts in our retail business are, let's say, approximately $300 per transaction. In the wu.com business, they're slightly lower, but the yields are a little bit higher in wu.com, given the mix of business we have today. And then the overall gross margins on a percentage basis are actually quite similar between retail and the dot-com business. So we know that each incremental transaction in the dot-com business is very profitable, similar in nature to the retail business. And so it's -- we like the transactions, whether they come to the retail channel or the wu.com channel. And then obviously, we spend a fair amount of marketing dollars for the company, and they're heavily focused on the dot-com business, right, because that's really the customer acquisition vehicle we want. But even though we've shifted dollars towards the dot-com business over the years, we haven't really increased the total marketing dollars materially for the overall company. And that's why we've really been able to manage to really solid margins for the company overall, even while we've gotten strong, strong digital growth over the last few years. So that's really a branded retail and branded dot-com offering. The nonbranded offerings or the partnerships like the Saudi Telecom and Sberbank, first thing I would say, Jason, is that they're still relatively small in revenue side, right? They don't -- they just began in the second half of last year, and so we're starting to see some good performance there, and they're more meaningful from a transaction standpoint, but the revenue side has been -- it's great, but it's certainly not the lion's share of our digital business. The biggest part of our digital business is absolutely wu.com. In total, wu.com plus the digital partners were above $600 million in size last year, and wu.com continues to be the lion's share of it. Now the white label partners and the digital partnerships, they work a little bit differently from a revenue standpoint. We are really playing the role of a processor here. So we're not acquiring the customer. We're not spending the money there. We are not incurring the fraud losses in the partnership side. And we're really being given a good customer with good funds that need to do a transaction, and we process that transaction for them. So it's a much lower cost for us to process that transaction than we would otherwise have for a similar kind of transaction in the branded business. And so even though the starting point is lower from a revenue-per-transaction standpoint, we also don't have a lot of cost there. So the margins, at least in the small number of examples we have, the margins can be actually quite high in the partnership side, but -- and the dollar contribution is likely going to be a little bit lower. But again, it's largely incremental business for us. And really, the Saudi partnership has been the one that's been driving the results in the Saudi Arabia market and the Middle East overall. So hopefully, that gives you a good summary of sort of how we look at the different pieces.

Yes, it does. And I just wanted to come back to one of the comments you made that the yield in the wu.com business is, I think you said a little bit higher relative to retail. And I was just curious what drives that?

Yes. Today, it is a little bit higher. Part of it is driven by the fact that the overall principal amount per transaction is a little bit lower in dot-com just given the mix of business that we have. So it's not exactly 300, it's a little bit lower than that. But the pricing is such that the yield ends up being a little bit higher than we would have in the retail side. And that's what helps to make the dollar contributions not too far apart between the 2 different businesses. And that's why we like that business. It's very good. Now as the mix of the business changes over time, so as customers fund more from an account or pay out to an account, which is really a small piece today, the mix or the principal amounts could change over time, right, but that doesn't necessarily have to impact the dollar contribution of a transaction there.

Right, right, right. And just broadly speaking, in terms of principal per transaction, I mean, regardless of channel, any appreciable differences that you've seen as you've gone from March to April to May?

Not really. I would say the principal per transaction has been relatively stable, given everything that we've seen. In fact, with some of the newer customers that we're acquiring, we see a slight uptrend there in terms of principal per transaction. But generally, it's been relatively stable. And I think it's been more about the level of transactions that we have in the business and what's been happening overall because of the COVID environment. And we haven't talked a lot about the unemployment or the GDP, but that's something that we have our focus on because the extreme declines we saw earlier were much more related to the lockdown measures and people having to stay at home and not being able to get out. But now we just need to think how long -- what does the overall economic picture look like around the world and whether it could actually get better. I mean, from our perspective, we still believe that the second quarter is likely to be the lowest quarter for us, especially given the trends that we've seen, where now we see an improvement from where we were in May in a continual improvement. So unemployment is high, probably in many markets around the world, but there are also many social safety nets in different parts of the world that are helping to mitigate any negative impact we would see or some of the negative impact we would see in our business. So we'll just have to see how that plays out. But certainly, the extreme declines we saw earlier has started to improve quite a bit, as you can see.

Right, right. Any geographic themes or trends you'd point to as countries and states have obviously started to reopen at different rates? I would love some perspective on that. And maybe as part of that answer, just talk a little bit about the physical agent network. What kind of restrictions are in place within these locations just in terms of capacity, et cetera?

Yes. Yes, absolutely. Generally, as we look at May, we saw the majority of our top key end markets that we measure show improvements. So that's really a good sign, Jason. It's been a broad-based improvement that we're seeing. And that's very positive. So not only geographic improvement across the top end markets, but also, obviously, channel improvement across a variety of channels. There are pockets of things that are happening around the world, like U.S. to Mexico continues to be a bright spot for us. We have taken share this year in this environment, U.S., Mexico. That corridor has -- we're -- we've been quite successful there over the years, as you've heard us comment before. And that continues to be case in this period. We also see markets like Saudi Arabia continued to perform well because of the digital business with Saudi Telecom, and different parts of Europe have actually gone back to where they were before the COVID crisis started. And we've mentioned some of that in the previous call. So we are seeing broad-based improvement. And that's really what you have to have to see the kind of transaction improvement that we've seen. It can't be in just 1 or 2 markets. It has to really be more broad-based as we're seeing. And then with respect to the agent locations, the vast majority of our network continues to be ready to serve. And that was also the case even in the most extreme decline that we saw. The -- if you think about our agent relationships, most of those were -- 2/3 of those are banks and post banks and financial institutions around the world. And so they are considered in the essential services camp. So they stayed open for most of this period. We also have many grocery stores chain. We also have grocery store chain relationships, which are also essential. So people have the ability to go do a transaction. It became more of a question of when would they be comfortable or when would they be allowed to get out for those kinds of things. And that's where we've seen the gradual improvement. And we still have some locations that are closed in certain markets, but each day gets a little bit better, I would say, in terms of distribution. And -- but the majority of our network continues to be open.

Okay. Do you have any initial perspective on how much of the shift in the physical agent network is likely to be permanent? I mean do you have plans to do any kind of consumer surveys to perhaps get a sense of how sticky some of this behavioral change may prove to be?

Yes. I mean we look at our own data, Jason. What we have seen in our dot-com business is that we continue to see about 80% of the customers that are visiting our dot-com business are new to the franchise, as I mentioned earlier, and that metric hasn't really changed over the last few years, as you've heard us give the same metric over and over again, and that continues to be true even in this environment. However, our digital business certainly seems to be stepping up to beyond what we've seen in the trend, right? So it is really stepping up to be a bigger business. We're seeing a lot of growth there. We do think that we're picking up share from other parts of the remittance market, probably from -- certainly from other bank providers, which is part of the market that we go after, possibly other digital providers and maybe some people shifting from retail channels generically to finding digital options. And when you do a search for money transfer online, we are -- we pop up at the top of the screen in terms of a Google search or something like that. And so that's why, I think, we're also picking up more business. And the metric of 30% of our transactions were digital in both April and May, at least for now, seems to be sticking. So we're watching that closely to see if we can maintain that even while the retail business improves.

Is the pandemic driving any noticeable change in the mix of how digital transactions are funded? And can you just talk a little bit about what percent of wu.com payouts historically have been in cash? And has that figure gone down because of COVID?

We haven't seen a lot of change there. We -- the transactions are being funded largely from a debit card or credit card or bank account, and that mix really hasn't changed for dot-com. And then the payout, we still continue to earn the majority of our revenues from a retail payout transaction. And that has continued to be the case. We have not seen any discernible change in the mix of that business. And I'm trying to put it by some of the short-term volatility, but I don't think that has changed dramatically because you really have to dig into the use cases, Jason, on how people want to receive their money and what are they receiving the money for, right? If it's $100 or $200 or $300, they need to get that money in their pockets or in their hands to go buy the food or have the local daily expenses that are typically done in cash. It doesn't really do them any good for that money to go sit in an account. And if it's money that's going to go into an account, it's probably going to be a larger principal amount, and it's probably going to sit there for a while as that money is drawn down, but it's typically not going to be for the same kind of use case that we see at retail for recipients. Now the only other thing I would just say is that vendors are much more likely to change their behavior in terms of using more technology and digital channels, and that's why we have our digital business, and we see that shift. But on the receiving side, it's much more sticky and people really are much more slow to change their behavior and that's what we see in our business. And I think that's what you've heard also from other potential players in the market, too.

Right, right. Let's talk a little bit about industry pricing. Is COVID having any appreciable impact there, whether it's in the physical channels or the digital channels? I know the general mantra on pricing pre-COVID for a while has been -- things have been pretty stable. Probably some corridors, it's down; in some corridors, it's up; and it kind of nets out. So just wanted to see if the perspective there has changed in the -- amid the COVID backdrop?

Yes. I mean, from a market standpoint, we haven't seen -- that continues to be the case that, overall, the pricing environment seems to be relatively stable. But as we rolled out at our Investor Day, our strategy around pricing is really to drive the best long-term value with our customer base. And so we want to be very dynamic in terms of how we're adjusting pricing, where we change pricing and what channels. We look at a number of different factors that help us come to the right overall answer because we want to -- if we feel that somebody is leaving our franchise, we want to make sure we throw them a coupon or do something else to make sure they transact with us before they leave us. So it really becomes about customer retention and lifetime value customers. But having said that, overall, when we look at the pricing environment globally, we really have some stability there. And I think, in this environment, there is even less likelihood for significant pricing changes just given what many of the competitors are seeing. It's more challenging, I think, in this environment. And so that's what's been the case the last several years, Jason, it's created a fair amount of stability in the overall pricing environment. And in the most competitive corridors where we have a lot of competition, we certainly our -- pricing where we need to be. We want to make sure that customers, if they're price sensitive, that they have the right kind of offerings from us. U.S. to Mexico, for example, is typically priced at $8 up to $1,000 and very competitive FX spreads. So it just depends on which corridors we're talking about. But overall, not a big change in environment there on the pricing side.

Understood, understood. Okay. Well, that's helpful. I wanted to talk about just flashing back to the Analyst Day last year, and you outlined the 3-year cost takeout target of $150 million, ratable, I believe, over the next 3 years. And I know you reiterated that on the earnings call last month. So can you just walk us through some of the key areas that are driving this enhanced efficiency and how you're able to stay committed to that target despite the significant change in the macro backdrop?

Yes. Sure. The -- we are still on target to achieve the $150 million of savings by year 3 or by 2022. And that is made up of $100 million of savings from the restructuring actions that we took last year and that we're finishing up this year. Those continue as planned for the most part. And that's going to translate into $50 million of savings this year with an incremental $50 million next year from the restructuring savings. And the COVID environment certainly has caused us to make some decisions here and there on the margin. But for the most part, we're still very much on track there to achieve those savings. And then the last $50 million will be from lower commission rates and opportunities we think we have on the commission side as well as optimizing our third-party spend to get that last $50 million. Now in the COVID environment, this year, Jason, we are taking some -- because of where the revenue is, we are taking some actions to reduce our spending to optimize our spending to reduce the level of discretionary spending we have, whether it's travel or other kinds of spending that might be able to be deferred or certainly hiring. So we'll save some incremental dollars this year just because of the environment we're in. But the original targets continue to stay intact to get to the $150 million run rate.

Right, right, right. Coming back just for a moment to capital deployment and with the buyback program having been paused, I mean, what do we need to see for that buyback program to potentially get restarted, even if it's at relatively modest levels? I mean is that something that could feasibly happen this year? Or should we be thinking about that longer term?

Well, look, we've been very strong returners of our capital over the many years. We've basically returned almost 100% of our free cash flow over the years through the -- through either dividends or buyback. And I think on a long-term basis, we -- our capital priorities, as I mentioned, have not changed. We're going to continue to look at capital deployment through that lens that I described earlier. Jason, we just need to see good stability and continued improved trends in the business, and we'll be back on track. Share repurchase, as you know, is one of our priorities, but we have other things that we want to make sure we get done first. We certainly believe that we were strong and healthy coming into this crisis, and we're going to be strong and healthy exiting the crisis. And we want to continue -- we want to make sure that we're investing in the business for the long term. And that means organic investment. We have our dividends. We're certainly looking at M&A opportunities. And then we want to use our excess cash for buybacks. The timing -- I don't have an answer for you today on the exact timing, but we certainly hope to be back in the market when we see some good stability in the business. And it's certainly a key part of our capital return on a long-term basis.

Right. All right. Well, I appreciate that perspective. I wanted to also come back to -- we touched briefly on just the impact, in general, of unemployment on the C2C business. And it's kind of interesting in this economy. I mean there's parts of the economy that I think people would associate with a lot of Western Union users, restaurant, hospitality, oil and, obviously, those have all been very hard hit. And then there's kind of the flip side, industries like grocery, health care, that obviously are actually seeing very low unemployment. So how should we think about that kind of netting out? I mean are there any numbers or anything you guys would be in a position to share as far as talking about the mix of industries that your customers work in?

Yes, it's possible. It's likely that some of our customer base is more heavily impacted by some of the industries that are being impacted by COVID. But you do start to see some businesses opening up again. We have also found, Jason, that our customers are quite resilient. They are migrants. They do have a desire to send money back home, and they're quite resilient in finding other opportunities to work or contribute. And we do believe that, that would be the case here as well. The U.S. to Mexico, for example, if you take the unemployment picture here in the U.S., the U.S. and Mexico business has continued to be healthy throughout this entire period. So it really depends on the segments or the corridors that we're talking about. And we have found that, over time, our customers are quite resilient. And again, as I mentioned earlier, the social safety net, the stimulus that's going out to individuals, the effort to give money to businesses, to small businesses to continue to employ their people, all of these things are certainly a mitigant to the unemployment picture and the things that we're seeing more broadly. So these things are certainly going to help. And it becomes a question of how quickly can the global economy get back on track. And a lot of the unemployment here in the U.S. is being classified as temporary unemployment. So does that mean that we actually will have more people back to work sooner than we thought? So we just need to see how that plays out. And I think that we're going to continue to improve for some time here in the business, but we just need to see what remaining impact there is in the unemployment and economic picture globally, but certainly that will have a little bit of impact to us.

Right, right. I know we're just about out of time, but I did want to sneak in one final question. Just on the Amazon partnership, I know that's one that you guys have been pretty excited about in the past and maybe kind of a little bit overshadowed just by all the macro facility. But can we get just a quick update on how that's going and whether or not it can move the needle anytime soon?

Yes. I would say that Amazon, the relationship we have there is -- the best thing that we can take away from the Amazon relationship business is it's a great use case for how we can leverage our platform because it really is not a remittance use case, right? It's for cross-border e-commerce. It does rely on our retail presence around the world. And so I would say that we certainly rolled it out to about 20 markets, and we continue to expand it within those markets. But it has been impacted, I would say, a little bit by the COVID environment that we're in. We're still very positive on what this can become. But it's really -- again, as I said, it's a great example of how we can leverage our platform and really push the platform strategy, this -- or Saudi Telecom or Sberbank are just a great example, or Safaricom that we have in Kenya. These are just great examples of how we can leverage our platform for the benefit of others. And I always say internally that it would be nice to have more Saudi Telecoms, but we don't need a Saudi Telecom in every single market. We just need a partnership in every single country, and we'll be in great shape if they're even half as successful. So that's -- it really is just a way for us to look at how we can use our retail network and capabilities in different ways. And -- but I would say that Amazon today is not a material contributor to the overall results, but it certainly is a great example of how we can leverage our capabilities.

Terrific. Well, unfortunately, we have to leave it there. Really appreciate all the thoughts and commentary, Raj, and thanks to everyone for joining us, and have a good night. Stay safe.

All right. Thanks so much, Jason.

Okay. Take care. Bye-bye.

Bye-bye.