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

Good afternoon, everyone, and thank you for being a part of Citi's 11th Annual Fintech Conference. I'm Ashwin Shirvaikar, Citi's Global Head of FinTech Research. The company I'm hosting next is Western Union. And from Western Union, we have Raj Agrawal, who is EVP and CFO as well as Raj's team including that. Raj, welcome. Thank you for being hard for event again.

Yes. Thank you, Ashwin. It's nice to be here again and nice to be able to speak with you today.

Yes, absolutely. And maybe we can kick off with the news of the day with regards to Western Union's CEO transition announcement. So tell investors a little bit about the process with regards to when it started, why now, things like that, that would be really helpful.

Yes. I'm happy to do that. Ashwin, just as you know, we didn't plan it to be this way. We didn't say that conference is on Monday. So let's have the announcement Monday, but it just happened to us this way. But happy to be able to speak with you about it. It has been a good succession planning process. The Board, as part of its responsibility is always thinking about succession planning not just at the CEO level, but also throughout the entire executive team and what's underneath the executive team. So this is just part of a Hikmet has made or had made his desire to retire clear to the board some time ago. And once that indication was given on to the Board, the Board did engage a process of putting more emphasis behind the CEO succession planning process, and they certainly took into account all the different potential outcomes that internal and external and they culminated in the announcement today. The Board itself, as you may know, there's some new board members. There are some board members that have bench with the company for the time. So they have a lot of familiarity with the strategy of the company and what they believe the company needs for the next wave of growth or a leg of growth for the company. And so Devin McGranahan, who we're very excited to be welcoming by the end of this year, will become the new CEO and he comes with a lot of capabilities. He has significant experience with McKinsey. He has a significant amount of experience running a very large business at Fiserv and a lot of experience leading teams and engaging with teams and certainly in the payment space. So I believe that he's going to look at Western Union and like a lot of the things that he sees, but he may also have some of his own perspectives on certain opportunities for the company, and we're excited to engage with him in that process.

Absolutely. Absolutely. Now -- and coming strategy can change somewhat, it can evolve and that's part of an ongoing process regardless of management team, or regardless of who's at the helm. But as you mentioned, over the past few years, Western Union has incrementally transformed its corporate divestitures what looks to me like should be a sustainable change in the cost structure, your rapid growth in your digital product, all these things. Could you talk about what the changes kind of point to from a strategic perspective? In other words, what does new will look like, I mean, let's just say, a year from now?

Yes. I mean, we have evolved and you're very smart to pick up on that, Ashwin. We have -- obviously, we've got rid of the Speedpay business a couple of years ago. And now we're in the process of selling our B2B business. So we will be I would say, a more focused organization going forward. We have our -- now our single cross-border payments platform that we can leverage obviously, for consumer payment opportunities, but also other kinds of opportunities that we have engaged in the past. We have a lot of digital partnership opportunities, and they continue to present themselves every single day. We have pension payroll payments that we've done in the past, other areas that we've sort of played in as broader Western Union, which will continue to be opportunities for the company. And I would also say that we're doing new things like the WU Shop announcement a couple of weeks ago as well as WU plus, which is a digital financial services test as part of our broader consumer ecosystem. So the company is going to be a little bit more nimble. We know we're going to be more focused on the areas that we believe we can be really good at. And that's really what you're seeing evolve as we've sort of divested a couple of businesses that were not necessarily our primary focused area. And I do think it's going to allow management to spend more time or significant time on the other more important areas that we have going forward.

Yes. Yes, absolutely. Normally, I don't ask a capital allocation question sort of very early in the process. It's sort of after the whole thing, so what about your balance sheet kind of thing. But in this particular case, you already have a healthy balance sheet. It's got healthier in the sale of assets and so on. It should get even healthier with the sale of the Business Solutions segment. I feel like the dividend is safe. but it doesn't need to rise materially, and I don't want to put words in your mouth, but that's my view. Is there an opportunity here to perhaps do some M&A, maybe a strategic acquisition to accelerate your vision? And now with today's announcement, we said we have to wait for some time before firmly in a seat.

It's a very good question, Ashwin, and it's very relevant. Our capital deployment strategy has not changed for some time, whether it is related to ongoing operating cash flow at the company or proceeds that we may get from the B2B sale. Obviously, we would like to take into account whatever Devin McGranahan will on this point of view. But we want -- we know that there continue to be investment needs in the business. So that's going to be our first priority. And whether it's the sale proceeds or our ongoing cash flow, the dividend, as you say, is safe. We pay almost $400 million a year annually this year in the form of dividends. And I believe that we will continue to move that in line with business performance. Third, we would like to do the right kind of M&A transaction, and let me come back to that in just a second. And then the last piece is really using excess cash for stock buyback. And I really put it last, it's important, but it's not the most important use of our cash flow. We want to buy that stock, but only if we've exhausted the other opportunities for the company. And from an M&A standpoint, again, we'll certainly want to take into account the new CEO's view, but we would like to do the right kind of M&A transaction that can advance the ball for us a couple of years. It could be a technology, it could be a capability of some sort. It could be something that enhances our time to market with our consumer ecosystem opportunity. You've seen some announcements from us there. It doesn't necessarily have to be a revenue-generating opportunity, but it could be just depends on the price and value point that we get from an acquisition like that. But we're very open to really setting up the company for the next wave of growth, and that's where we would prefer to put the dollars rather than stock buyback, but we'll just have to see what opportunities present themselves, but we're going to be very flexible. And as you say, we have a strong balance sheet already. And frankly, the rating agencies will give you a lot of flexibility if you do the right kind of strategic acquisition to be able to get back to your ratios over some period of time. So we don't feel constrained in that regard in terms of being able to do the right kind of acquisition, Ashwin.

Yes. Yes. Are there capabilities that you lack in terms of achieving your current strategic objectives?

Well, look, the consumer ecosystem is just starting off, and the WU plus initiative is just starting off. So the WU plus is really doing everything we do today plus the digital banking offering, we have the ability to do it throughout Europe with our European banking license, which is in Austria. But when we look at other parts of the world, we don't necessarily have that direct capability today or we don't have the licensing. So we might be interested in doing the right kind of acquisition or partnership that can give us that opportunity to expand WU Plus in the U.S. or other key markets, right? So those are the kinds of things we think about. Certainly, mobile capabilities or account payout to Visa just ongoing things that we would love to just supplement with the right kind of acquisition if you can find it -- If not, we'll do it organically.

Okay. Okay. Understood. Understood. I should have said at the beginning, from a logistical perspective, there are investors who want to send in questions, they can just e-mail it in a box that you see on the side, and I'll get them. But let's talk maybe about -- you mentioned it a couple of times, WU Plus WU Shop. Maybe give investors sort of walk back a little bit and give investors an idea of what these initiatives are? And then we'll take it from there.

Sure. Sure. We're very excited. We've been speaking about our financial services test fourth quarter. We finally unveiled the brand a couple of weeks ago when we did our earnings call. We're calling it WU Plus because it is giving to consumers everything we do today in Money Transfer plus a digital banking offering. So customers in Germany and Romania where we're doing the initial test. We'll have the opportunity to get a digital -- to get a multicurrency bank account to get a debit card for Visa and then also to have a seamless money transfer experience on a brand new app, westernunion.com app. So we're very excited about that because customers have told us that they trust Western Union with their money. We move it around the world for them today and they would like to be able to do other services that they need at Western Union, sort of a one-stop shop for financial services. So that's what we want to provide to them. And that's -- we think we're uniquely positioned to serve our migrant customer that uses our core capabilities for moving money around the world, but then they have other needs, right? And then WU Shop sort of fits into this package by giving these same customers an additional retention point or an additional opportunity to engage with Western Union. So WU shop itself is an opportunity to shop at over 12,000 online retailers in over 60 countries and over 12 different languages, and it's now live in 6 countries from which you can initiate a shopping transaction in 160 markets. So U.S. is one of them. Germany, Austria are a couple of others. So it's an engagement tool more than anything else, Ashwin, it's going to help us create higher retention levels of our customers. And beyond the great things that we're doing in wu.com with features and functionality and more customer acquisition through our marketing channels and then distribution expansion, these are additional add-ons that take us outside of the remittance space, really engages to an additional market opportunity.

Yes. So you said simply, you used to be just send and now you send sales and spend?

Absolutely. And the one thing I forgot to mention is the reason we've chosen Germany and Romania is Germany is a key sending market in our business and Romania as a key receiving market. We wanted to make sure we created the dynamics or understood dynamics between the sending and receiving customer because that's where the power of this ecosystem will really present itself is letting them engage with each other and also, as you say, save and spend in other areas within this ecosystem.

Got it. Got it. Okay. And the related thing, obviously, selling the Business Solutions business there, but the bank license is not being divested? Is that right?

Correct. Yes. Yes, we have a bank and it's called the Western Union International Bank internally is how we refer to it. It's based in Austria and it does give us European licensing throughout the European Union. And it is strategic to us in that it will allow us to continue to expand these financial services types of offerings throughout the European Union. And so it gives us some advantages and a great testing ground to test these things out.

Okay. Okay. Got it. And in terms of just that digital bank pilot, are there other sort of defining characteristics of what that would look like that you have targeted that this is what it should be? Or are you still working through it?

Well, we have objectives. We want to see the customer uptake. We want to see how many customers are signing up for this. We believe that it will keep -- create a lot more stickiness with our customer base. And that's going to take a few months for it to play out. But the beauty of having a banking license in New York and Union is that we can go very fast and very heavy at the rest of the European Union to the extent that received the successor, which we expect it will be, but we need to see that proof point, and then we'll go quickly at some of the other key markets. Certainly in the European Union and then think about other ways of expansion as well. Because Ashwin, we really believe that this could be the next wave of additional digital growth for Western Union. And I think it's quite exciting that we're sort of non-women's oriented opportunity for the company. But it's leveraging our core customer base.

Yes, yes. Absolutely. Absolutely. Now when I look at digital bank competition, most digital banks today are kind of single country institutions, maybe a small handful of market country regional type. So how do you see as true competition because you have the potential to be genuinely like multi-region possibly global over time for your particular client base. So who's competition?

Yes. Well, I mean, generally, the entire payment space is competition, but we're trying to go after a unique customer that the others are not going after. As I mentioned before, we really want to serve our migrant customer needs better and more efficiently than others might be able to do and with more targeted types of offerings for our migrant customer that has a need to move money cross-border, cross-currency. That's really the uniqueness of our business. The other digital banks that are single region in nature, they're not necessarily thinking that way around the digital banking opportunity. It might be the more affluent customer in that particular market, but not necessarily the customer who has a need to do money around the world. And that's really who we're going after, and that's what sets us apart from the other players that are in the market.

Got it. Okay. Okay. And this might seem like an odd ball question, but when I think of a bank and I kind of think people could help with bank tellers, people that can help with transactions, people that can help with loans, things like that. Is that -- I mean, are you thinking like that? Or are you basically thinking a prepaid card, ATM card, possibly a digital mode of that card. How are you thinking? What are the regulatory implications of each path that you might choose?

Yes. It's a very interesting question. This is really meant to be a digitally-oriented drive initiatives. So having a customer get a Visa debit card or multicurrency bank account, it's digital in nature. If you think about -- your question is interesting, I'd say, because if you think about our network today, we have 70% of our network outside the U.S. are banks and post banks and financial institutions. So there -- these customers are already likely walking into a physical location at one of these agent partners, but they're doing a money transfer probably in person, right? So maybe there's some kind of opportunity in the future that connects our digital bank offering to what this customer's needs might be. But we also want to be mindful of the customer that the bank already might have that we are partnered with, right? So there are some considerations there, but -- that's certainly a potentially additional opportunity. But right now, it really is meant to be a digital offering for some of our customers decided for outside of what they might be normally doing at other banks.

Got it. Okay. Okay. And one part of this whole spectrum of offerings in prepaid relationship, which I think in the U.S., it's with NetSpend. I don't know if you actually have a similar type prepaid relationship across the globe. Is there an expansion opportunity there? How do you think of that?

Yes. We don't really have a prepaid relationship that I'm aware of in any big way. It is an opportunity for the future. Again, if we can add more products and services, we're giving a debit card, VISA debit card to the digital customer here that's going to sign up for the digital bank account. But if there are other kind of product opportunities that we can introduce for these customers, we're very open to it. And we're -- again, it's really about creating better retention levels of our current customer base. If they have a need for more products and services that are financially oriented, we absolutely want to be considering those and we will. And we're sort of starting off simply here with a multicurrency bank account and a debit card, but there is a lot more opportunity for us to provide many more products and services over the next couple of years.

Okay. Can we maybe shift gears to sort of the digital part of the business. And I was going to start with wu.com, but I do have a question we heard about partnerships being a greater mix of the digital business. So let me start with that and then we can move to wu.com. The question is, could you -- how are you thinking about margins as partnerships becomes a greater mix of the digital business? Can you share unit economics for digital versus partnerships, understanding that there could be lower revenue per transaction, no KYC, no customer acquisition cost given partner might be taking the risk. But can you quantify?

Yes. Look, the revenue impacts you said clearly. What I would just say from a margin standpoint is that the digital white label business and wu.com for that matter, have been very margin supported over the last couple of years because we've had such significant growth in 2019. The digital business was only $600 million in revenue size. And we're talking about it exceeding $1 billion this year. And at the same time, we've been able to drive better margin outcomes for the company. So there's certainly very margin supported. Yes, the digital white label business comes with a different revenue profile because we play a very different role there. But if we can delight and get more and more digital white label business, it doesn't matter that it's coming at a lower revenue per transaction, it's about getting a bigger share of the overall pie. And we're really targeting that 50% of the remittance market that's more controlled by the bank. So it's more account oriented. That's really the opportunity set for us to go get. And so we -- the goal there is to sign as many partners as we can in as many countries as possible. And we will not likely get the same revenue production as we do in our -- some of our partners like STC or Spare but we don't necessarily need that. We just need a partner to in every single country that can utilize our services, and we think we'll get a good share of that account to account space. It's already a $200 million business for us on a run rate basis and growing at a very fast pace. So we're very excited about what that can be longer term.

Right. Right. Okay. It's a basic definition question also has kind of come up here. What's considered digital? Is it how to be end-to-end digital? Or just can it be only digital initiated? Or how you?

Yes. We really try to define it very clearly, and that's not so true for some of the other players in the market. Digital for us is anything that's only digitally initiated. Now we're agnostic to how it gets paid out because we want to give customers a choice. And that's frankly how the business is being used. People are not just thinking about what's my account to account on rate. It really is about account to account, account to retail, account to wallet, account to mobile, whatever the mechanism is, but it has to be digitally initiated for it to be counted as digital revenues for us. So either from an account or a debit card, credit card without the interaction with an individual, you have to sort of be able to initiate the transaction on your own. That's really what we mean by digitally initiated.

Right. Okay. And could you -- given the growth of the last couple of years, we help frame business in terms of what a reasonable growth and margin expectations at this stage of its evolution?

Yes. Look, the growth, when we exited 2019, we indicated that we believe that the digital business could grow at roughly 20% a year, for the next 3 to 4 years. We achieved double that growth rate last year. So we grew about 40%. And then this year, we're probably running closer to 20% growth overall for the digital business. So we've actually had 1 extra year of growth in a period of 2 years. And so the business, as you can see, has been moderating a little bit now, just given the high growth rates from last year. But look, without getting into specifics, I believe that the digital business can have a really good growth profile over the next few years, Ashwin, because of all the things we talked about. And there are 2 different dynamics here. It's the wu.com branded offering, where we are very focused on improving the technology and the features and functionality of the platform to drive better retention. Secondly, we're spending and investing a lot of marketing dollars to acquire customers, which really will be the long-term lifeblood of this business. And then third, there's a heavy focus on distribution. And then lastly, we're also expanding the ecosystem, all the things we talked about. And then there's a digital white label digital partnership side where we have a good pipeline. We signed many accounts. Some of these are not visible yet to the market, and we'll be bringing more of those to the market in the next few months. And now we'll gain some more visibility, too. So all of this gives us confidence that over the next few years, the digital business can be a very nice growing business for us and a great platform for further growth. It's going to be over $1 billion this year. So -- it gives us a big head start on our own growth for the company.

Great. Great. And you mentioned that the wu.com customer is different than your retail customer. But I'm not sure, have you gone into sort of any of the details of what the demographic attributes are or any kind of cohort analysis with regards to how these grow over time, things like that?

We haven't given data like that. Generally, this is going to be a -- if you compare our retail to our wu.com business, wu.com will have a more technologically savvy customer. They're going to be likely a more affluent customer. They are going to have the ability to move good amounts of principal around the world. So that's the kind of customer we're getting in there. Likely, they're coming from the banking space. So they've used their bank historically or they may have used other digital providers. A little bit of it is coming from other retail providers in our own retail business, but that's not the majority of the customer base. As we've said before, about 80% of new customers on wu.com are new to the company. They have not used us before. So it's still largely a new customer. And then in terms of specific consumer metrics, we haven't really gotten into that. But that's as we -- as you've seen over the last year, we've provided a lot more disclosure around our wu.com business with respect to average customer growth, a number of customers, the mobile app downloads. And so I think we're going to continue to disclose more information that's more relevant, especially given the fact that other digital players have gone public, and it gives us a good platform on being able to highlight the competitive advantages of our business vis-a-vis those businesses.

Yes. Would that be -- not many of these other entities necessarily have omnichannel offering in terms of just being?

Absolutely. Yes. Omnichannel is such a great advantage because most of these other players are not trying to compete in the space that we're in, which is retail payout, even if it's a digitally initiated transaction. And then the account to account business is also new for us, but we think we're going to provide a better, faster, more efficient service than others can provide given our network and our capabilities around the world. So we're very excited about what the digital-only part of our business can become. And it's -- we think we're going to be a significant player in that space over the next few years.

Right. Great. This is more of a valuation-type question, but one common investor comment, I get, particularly amongst someone who might be, say, bullish on one will is to say that it will spin out the wu.com business because it would comp against some quite valuable prior to recently public digital remittance properties. I get that from a valuation perspective, but is that practical?

Look, Ashwin, I would say that we can accomplish anything we want to. So if we felt that, that was going to create significant shareholder value, we would certainly need to consider it. But as you say, it would not be a simple exercise because we look at wu.com today as another channel in our overall business. It's reliant on the transaction processing capabilities that we have, the compliance, the regulatory capabilities, the ability to settle in 130 currencies in a matter of minutes all around the world, a settlement that we have with our partners all around the world. So all of these things are things that you would have to build in to any kind of a separated organization or separate company, and it's not simple in nature. It's a very -- it's a channel for a reason, and it's relent and everything else we have. So those are complexities that would really need to be thought through if we were to consider something like that. But look, we're always open to doing the right thing. We -- We want to consider things like that, if it's going to make sense overall for the -- for our shareholders. And we certainly have thought about those kinds of things in the past, and we'll certainly think about those in the future as well.

Great. Great. This may sound odd, but is your wu.com business as economically dependent as your retail business? Or it's just the demographic so different that it's not.

Economically dependent, meaning for the consumer, the -- Is there any like needs around the world. Yes.

Yes. I'm kind of saying more from the perspective of looking at your 3Q results, for example, there was...

Oh, I see what you said yes. sorry, I didn't catch your questions or now I understand the -- look, it's not -- I think the economic indicators were more impactful to our retail consumer than they were to our digital consumer just because they're going to likely have a more affluent customer that's using the digital business. It can have somewhat of an impact because ultimately, our business is driven by GDP growth, employment levels, consumer spending, all these things have an impact. But the first set of customers are probably going to impact to be the retail consumer because of composition of those consumers and the kind of jobs that they take on, things that they're doing. So yes, certainly, that's the first place we see it not as much in the digital part of our business.

Right. right. Okay, okay. And what happened in 3Q with the retail business? Was that -- I mean, are there just fewer migrants in the market today? Or is it more of a -- if the jobs come back, then the sand will come back too?

Yes. Yes, it's -- certainly, it is the case that some customers have left the retail part of the market, not just for Western Union, but generally in the market, and you saw a big shift in the market last year, where -- you had -- the people who couldn't afford it or didn't have jobs they were sort of leaving the sending money aspect of their lives because they didn't have they had to support themselves. And we saw more customers coming into the digital side. That is still the case. So those customers have left. And unless we get very strong economic data or a good trajectory upward like we were expecting that is going to create some softness in the short term. We need to good GDP growth, good consumer spending levels, good labor force participation. That seems to be a key factor as well. And so these things compounded have a negative impact on the retail part of the business. And so yes, certainly, that is the case, Ashwin. And we think it's temporary in nature, but -- when we get to a normal environment, we can all debate on when that will be. We think the retail business could be a stable business for us again, but we're not quite there yet.

Got it. And with regards to retail, I have an incoming question from an investor, which is, should we consider that you're now at a full run rate as it relates to Walmart?

No. We're not at a full run rate as it relates to Walmart. I would say that we continue to ramp. So we introduced the business in the second quarter of this year. And we now have it in all 4,700 Walmart locations in our services, but we're still ramping. Each month, we've had more business in the previous month, and we're not quite at the full run rate. It will be sometime next year. But we've been very focused, Ashwin, on educating the frontline associate at Walmart, telling them about our services, making sure the consumers know we're doing promotional marketing and pricing activity because we are the third entrant into the Walmart location. So we need to create more awareness of our offering and that takes time, but we're going in the right direction, I would say.

Okay. Okay. Got it. Got it. As we sort of wind up on time, I know we have a few questions left that I was hoping to ask, but since we're running out of time. Any key takeaways or message that you would like to share with investors?

Well, look, we're excited about the news today. We have a new CEO coming in at the beginning of the year, and we look forward to getting him up to speed. It's going to be an exciting future for Western Union. A lot of the good things that we have, I believe, will continue. We may also have some tweaks through the kinds of things that we're focused on. And I think it only means good things for Western Union over the next few years.

Okay. On that note, thank you very much. We really appreciate your insights.

Yes. Thank you so much. Thanks, Ashwin. Bye-bye.

Thank you.