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

Welcome back to Evercore ISI's Sixth Annual Payments and Fintech Innovators Forum. I'm David Togut. I lead the Payments, Processors and IT Services research team. Delighted to welcome the management and IR team of Western Union. Joining us from Western Union are Raj Agrawal, Chief Financial Officer; Brad Windbigler, Treasurer and Head of Investor Relations; and Tom Hadley, Investor Relations. Gentlemen, welcome. Thanks so much for being with us here today.

Thanks, David. Nice to be here with you.

There's recently been an important leadership change at Western Union with Devin McGranahan becoming CEO, taking over for former CEO, Hikmet Ersek. Raj, what do you see as some of the most important differences between Devin McGranahan's leadership of Western Union and Hikmet Ersek before him?

Yes, it's a good question, David. You know a lot about Hikmet, so I won't really speak about him. But I will tell you it is great to have Devin on the scene now, and he's been here for probably a little bit over 60 days. And I'll tell you, he's really become a student of the business. He's spending a lot of time internally, a lot of time meeting with employees, with the executive management team. We're having some really good debate on a number of different issues and opportunities for the company. And I think it's been great to see that. He really has had a perspective coming into the company that the assets of Western Union are really unrivaled in terms of what we are able to do from a payment standpoint all over the world. And he has some great thoughts on how we might leverage those things in the future. So it's great to work with him. We have a strategy development process that's underway, which will be over the next few months, where we've engaged a broad cross-section of leaders within the company to evaluate a number of different areas of opportunity and more to come on the output of that as we have our Investor Day later this year, but it's great. He's currently on the road, David. He's in Europe. I know he plans to go to the Middle East here soon. And this is really his first opportunity to learn and see the business firsthand. So I think it'll be very refreshing to hear his thoughts after he comes back.

On the fourth quarter call, Devin previewed a few initial areas of focus in his early days as CEO, primarily 3: first, opportunities to leverage The Western Union brand beyond cross-border remittance; second, accelerating the growth of your digital footprint and customer acquisition engine; and then third, improving your competitive position at the point of sale. Any updated thoughts on those 3 priorities? Any key milestones we should be watching for in the evolution of your strategy?

Yes, we're looking at all of those things as we go through the strategy development process that I spoke about. So a lot more to come on those specifics over the next several months. Again, I would just say that Devin really views the assets of the company as being unrivaled and something we can really build upon. We have seen through consumer surveys and interaction with our consumers that they are very open to doing more with Western Union. They have told us that. So they don't only want a transactional relationship with Western Union. They want to do more. They want to have more of their products and services that they have a need for from our company, right, things that we're good at doing. And so that's really the lens that we're using as we evaluate additional opportunities for the company. And the best example of that, David, is the digital banking platform that we've now launched in Europe for Germany and Romania, and we're going to do more of that this year with a multitransit payments wallet as well as a debit card offering. And that's really just the beginning, I would say, in terms of the core offerings. We're going to have more things that surround those core capabilities that consumers can use and more in our consumer ecosystem. So we want to be able to add to our portfolio of things. It could be a number of different things that we offer to consumers. The things that they may have historically gotten elsewhere, but why not Western Union if we have the right kind of capability anyway to do that. So a lot more to come in that regard. And more specifics as we do our Investor Day later.

Understood. We have 2 incoming investor questions regarding the situation in Russia and the Ukraine. So let me shift gears to those. Now first, we've seen other payment companies stop transactions with Russia. Is Western Union allowing payments to and from Russia at this time? And what percentage of Western Union's revenue comes from Russia?

Yes. Let me answer it more broadly than just Russia. Clearly, the environment right now is very volatile, and it's changing every single day. Every day I get up, I hear about new sanctions and new restrictions on how the business can be done. So we are certainly following all of those regulations. We're in direct contact as well with the governmental agencies that are putting those restrictions in place because we want to make sure we're doing things the right way. Ultimately, David, our goal is to allow consumers that have a need to move money to their loved ones, and there's an even greater need today than there might have been a couple weeks ago, as you would imagine, to allow them to move money in the right way. If you take Russia, Ukraine and Belarus, the 3 key markets from our perspective, they make up anywhere from 4% to 5% of our total company revenues. I would say that today, we're largely operational in those markets under the current constraints and sanctions that have been put in place, but the environment is very volatile. There may be new sanctions that come up. There may be new things that arise in new restrictions. And the things that are going on there are just changing every day is my main point. And so it's really hard to say what the impact to the company will be this year. We don't really plan for war in a normal situation, so this is not a scenario that we've ever planned for. Our main goal and main objective, as I said earlier, is to do as much as we can to allow consumers to move money to their loved ones, to get them the financial aid and the assistance that they need more than ever before. The other thing I'd just add, David, is that we are seeing different kinds of dynamics in the Eastern European markets right now because of what's happening. So even though we may have pressure on our outbound business from some of these markets, we're seeing a slight uptick on inbound business to the surrounding countries because you now have a lot of refugees that are moving to other markets, and they now have a need to receive money. It's not going to offset the downside here potentially, but we're doing what we can to manage as best as possible.

Just to be clear, are there any restrictions on Western Union's ability to send transfers into Russia, Ukraine or Belarus? Or is that allowed under U.S. sanctions?

There are certain restrictions, and we're following those. It could be through certain agents that are restricted. It may be through certain settlement mechanisms that are restricted. So our team here has done a good job to try to work within those constraints. Ultimately, it's about getting money to the people who need it the most. But -- and that's why I'd say, David, that things could change tomorrow, again. It keeps evolving. But we wanted to be very clear that it's about 4% to 5% of our revenues that are going to be impacted in one way, shape or another.

So in other words, are you able to affect transfers into Russia, Ukraine and Belarus through banks that are not subject of sanctions? So you basically are just shifting flows to other conduits -- legally available conduits that are not subject to sanctions?

Yes, in close coordination with the governmental agencies here that are allowing that.

Understood. A related question, really on foreign currency. What's the potential impact to Western Union? Question is sort of making the comparison to Argentina. How should we think about currency devaluation of the Russian ruble versus the USD and how this might impact Western Union's revenue and profit?

Yes, look, the ruble has depreciated quite significantly in recent days. So that will have an impact on the dollar value of the revenues that the company ultimately has, but the flows are going in both directions. So we have money not only leaving the Russian market but also going into Russia or in the surrounding countries. So it really is going to ultimately depend on what are the ultimate flows that are happening to and from those various markets. It's not just what's happening to the ruble and what impact does that have? It also is an impact with other flows that are going into the Eastern European markets. Anything else you want to add, Brad?

Yes -- no, I mean the -- we recognize revenue, as you know, David, on a send basis. So as Raj was alluding to, send flows are shifting. Some parts of the region that used to be historically more outbound become more inbound, so all of that is also changing.

Understood. Just shifting gears. You've guided for 2022 revenue growth to slow, continuing the trends you saw from 2021. Given an uneven economic recovery with adjusted low single-digit revenue growth, excluding Business Solutions, which you're selling, can you walk through some of the key drivers of your 2022 revenue growth outlook, especially your expectations for the Europe and CIS region, which were down 7% in constant currency in the fourth quarter of last year?

Yes. First of all, I want to put aside the discussion around what's happening in Russia, Ukraine and Belarus because we can't predict exactly how that's going to come out this year. That was not envisioned in our original outlook that we gave. So just keep that in mind. The outlook that we gave before was predicated on the World Bank outlook for cross-border remittances, which they have projected to be around 3% growth in principal this year. And that would naturally mean that revenue growth would be less than that given the mix of where the business is coming from. So we had given an outlook of flat to low single-digit constant currency revenue growth ex-inflation from Argentina. So that's really the construct of it. In addition to that, we had seen a relatively soft performance in the third and fourth quarter of last year ex the B2B business. And so in the short term, we had indicated that the first half of this year will be lighter than the second half of this year from a revenue growth standpoint just because of the momentum that we were coming into the year with from last year. And -- but as we have more of the initiatives, the agent signings that we've done, the digital initiatives, digital partnerships, these things will help to drive more revenue growth as we go through the course of the year. But it will be lighter in the first half. Digital, for example, had a 45% or a mid-40% type growth in the first quarter of last year. So Digital is going to be softer in the first quarter of this year for that reason alone as we go over a tougher comparison. So hopefully, that gives you a little bit of context of how we constructed the overall outlook.

That's very helpful. Just shifting to Digital. You'd mentioned in 2021, digital money transfer transactions up 32%. Revenue exceeded $1 billion for the year. What's the growth outlook for Digital for 2022 as a whole, recognizing Q1 is a difficult compare?

Yes. We had guided to a double-digit type of growth number for the Digital business this year. Where that comes out exactly, I can't tell you. I'm not going to be that specific, but that's what we had expected when we gave our outlook, and it would likely be lower than that in the first quarter, given everything I've seen. We continue to see long-term really good growth opportunities for our Digital business because that's where the market growth will come from. That's where we are very well-positioned to drive additional growth and expansion. And with our Digital banking platform that we've now launched in Europe, that's going to put some more growth momentum behind the overall Digital growth in our company. So we feel very good about where Digital is going. And we're just sort of going to work through this year in terms of the grow-over impacts from the higher growth that we had the last 15 months or so.

Understood. Incoming investor question on the Digital business. Can you speak to long-term value to CAC, customer acquisition cost, for the Digital business and customer retention rates that you've seen over time?

Yes, let me try to do the best I can there. We haven't given specific numbers on those components. But I would say that the customer acquisition costs were at a low point during the pandemic because people were looking for ways of sending money online, and we happened to be there. We were front and center. And so we had a tremendous amount of customer acquisition. I would say that the costs have reverted back to where they were historically from a customer acquisition cost standpoint. But I think we still have a lot of runway there. It's still very valuable to us to acquire the customer at the current level of acquisition costs because, over the course of their lifetime with Western Union, they provide significant value back to the company, and so we continue to put more and more marketing dollars into acquiring our Digital customers because we know that it's going to translate into good long-term growth for this business. So that's really the way we're looking at it. And I don't know if you guys want to add anything else to it, but...

Yes -- no, I mean it's the lens we take, right, on the marketing investment, but we haven't offered that disclosure. And then as we talked about this Digital banking wallet, that's also affecting, we expect it to affect LTV over time. So it's the lens we take to the business as we're evaluating investments and opportunities.

And then the second half of the question relates to client retention in the Digital business. Do you have any stats there?

Look, the retention levels -- I'll answer it more broadly, retention levels have continued to increase over the last several years, and that trajectory has continued. We -- one of the key reasons to do the digital banking initiative in the platform is to drive higher retention levels with our customer base. We don't want it to be just a transactional relationship with consumers. We want them to acquire other products and services from Western Union. So that in the 30, 60, 90 days that pass between the first transaction they've done with us, we want them to really do other things with us. So that's why we're going to provide them this multicurrency payments wallet, the bank account, the debit card so they can maybe shop in our ecosystem and acquire other products and services. So that alone should drive higher retention levels of our Digital customer base, and that's one of the key objectives that we have.

We have a few more investor questions on Russian exposure. Are you still able to operate your white-label digital partnership with Sberbank in Russia? What percentage of digital white label revenue comes from the Sberbank digital partnership?

Yes. On the second part of the question, I think I quantified the overall revenue for the 3 markets, Russia, Ukraine and Belarus as being 4% to 5% of our total company revenues. With respect to Sber, I don't want to get into specifics there, but that relationship is currently operating, but it may not operate much longer, given the changing sanctions that we see. We see the sanctions evolving during the course of the month of March. That may not allow us to operate that any further. So that's certainly something that we're working through, and that's really part of the backbone that I was trying to give before that the sanctions continue to evolve.

Is that partnership a material part of your Russian revenue?

It's very important to us, yes. It's very important to us. But as I mentioned before, the majority of our -- we're still operating in the majority of our business within those markets, but that's going to keep changing during the course of this year.

Understood. And then if 4% to 5% of revenue is from Russia, Ukraine, Belarus, what is the proportion of revenue that is sent to Russia since you recognize revenue on a send basis?

Yes. That's -- and I should have clarified that 4% to 5% is both directions of revenue. So that's both the inbound and the outbound business from those 3 markets, okay? So it's all inclusive of both directions of revenue flow.

I see. So is it -- so is there a way to quantify what proportion of revenue is sent to Russia?

Yes. Russia had historically been sort of a 50/50 inbound/outbound type of market. I think it's probably shifted to be a little bit more outbound, given the digital partnership relationship we have there. But there's a healthy amount of business that has still been -- that's still going to Russia.

And just a final incoming investor question for now on Russia, Ukraine, Belarus. If 4% to 5% of revenue comes from these 3 countries, is that at the company average margin? Or is it significantly above or below?

I don't really have a perspective to give you on that. I would just say that it's -- because the transactions are priced differently in some of those markets versus the rest of the globe that we have. And so the yields may be a little bit different there. I don't really have a perspective for you on that in terms of overall profitability. Certainly, if there's a revenue impact from these 3 markets, it will also have somewhat of a profit impact to us. It's just the way the business works because we have our variable cost structure. That's about 60% of our revenue, so 40% fixed, 60% variable. And that's generally true for most of the markets that we operate in.

Understood. Operating leverage was a big theme of your fourth quarter 2021 results with C2C operating margin up almost 400 basis points to 24.4%. You've guided this year to adjusted operating margin of 21% to 22%, significantly below the fourth quarter. What are the primary tailwinds and headwinds to 2022 operating margin?

Yes, David, I would just say that the operating margin outlook that we gave is really -- the 21% to 22% is really in the range of what we originally expected last year when we first came out. And the things that have changed last year to drive higher margins were that the B2B business had a very strong revenue performance last year, which will no longer be with us. As you may have seen this morning, we've now closed the first part of the transaction on the B2B sale. So that has a relatively higher profit margin on incremental revenue. That's what helped margins a bit. We also had a positive impact from FX, from foreign exchange, last year, which this year will be slightly negative, right? And these are all putting aside any specific impact from the other 3 markets that we talked about. And so those 2 things and then just overall lower revenue growth sort of gets you into the 21% to 22% range that we gave an outlook on.

Understood. Another incoming question on Russia. We've seen Russia implement capital controls. Is Russia allowing customers to send payments outside of Russia via Western Union?

It's not -- it's less about Russia. We're able to -- again, I'd just say that we're able to operate within the sanctions that have been put in place through nonsanctioned entities to allow consumers to send money to and from Russia. Again, very much within the guidelines and with discussions with the U.S. agencies here. So that's certainly the case, but it may not always be the case. We'll just have to see how things continue to play out.

Earlier, you referenced the launch of your multicurrency digital wallet and digital banking initiatives. Can you quantify the potential revenue and earnings contributions from these 2 initiatives this year? And how do you plan to differentiate these 2 offerings versus the competition?

Yes. I would say, David, that we have not assumed any material revenue from the digital banking initiatives. It's too early in the stage to actually count on revenue there. It's just Germany and Romania at this point. You will see more markets launching later this year in Europe. We're just not ready to announce those yet. And we think this is a great long-term opportunity for us, less about 2022 but much more about the next few years. And we think it's going to drive higher retention levels as we discussed earlier. We think it's going to translate into incremental revenue opportunities for the company, and it's going to be a core part of our business going forward.

For this year, what are you budgeting for growth and compliance expenses, given greater regulatory oversight of a number of industries under the current administration?

Yes, compliance really has been -- has continued to be a bright spot for us in terms of how we deploy the compliance resources that we have and regulatory capabilities. Our compliance costs have been relatively stable the last few years, and that's why we've really gotten away from quantifying them specifically because there really hasn't been a big change, right? If anything, we're finding optimization opportunities within the compliance function and the compliance requirements that we have as we've also moved some front line capabilities into the front line organization. So if it's interactions with agents, we may sometimes put those into the field, where maybe a person can handle multiple responsibilities in addition to their compliance responsibilities, maybe they can do other things with agents that we may need to have done. So we've been able to find some efficiencies there, I would say, David, but overall, compliance spend in the company has been relatively stable for the last few years.

Can you address cryptocurrency and blockchain and how you're using those in your current business models? There are some competitive offerings out there around cryptocurrency-oriented money transfer. So how are you introducing those into your current operations?

Yes. It's a very good question. I would say, one of the things that is really evolving is with Devin's arrival, we're taking another fresh look at how Western Union can add value in the space. So if you think about what we have today, we have a great cross-border payments business that's present in 200 countries and territories around the world. We have the ability to settle in 130 currencies. We move money in minutes, and we have the technology to do that. And we do it in a regulatory and compliant manner. So we are trying to evaluate how can we take those capabilities and those assets which we believe are highly sought after in the crypto space, how can we take those and overlay them on the crypto payments ecosystem to add value for our consumers, for Western Union, for shareholders. So that's part of the strategy work that's happening right now that we will have much more feedback for everyone over the coming months.

With some of your competitors aggressively growing agent locations, how does Western Union intend to maintain market share over the next 12 to 24 months and to retain exclusive agreements with its large agents, which come up for renewal every 5 years or so on average?

Yes. The good thing is that we have -- the majority of our business is still exclusive in nature. We have not seen major shifts when you look at our business on a global basis. The Gulf states happen to be nonexclusive in nature. And as I might have mentioned earlier, we were a later entrant into the Gulf states. It was already a nonexclusive market. And then some of the Eastern European countries are also nonexclusive in nature. We have seen some partners here in the U.S. like a Kroger, that's offering multiple brands now at their point of sale. We were an incumbent there and continue to be there, but we were a newer entrant to Walmart. And Walmart already had a couple of players there. You have to really have strong, unique capabilities to be able to offer multibrands at your point of sale, the right technology, the right compliance programs, regulatory capabilities. So not every partner can actually achieve that kind of an outcome. And for Western Union, I would say, David, that there's no single agent or partner that's more than 5% of our revenues. And most are much smaller than that. So we're very diversified in terms of our go-to-market capabilities. So we -- ultimately, our goal is to find the right kind of partner at the right economics for the right overall value generation for shareholders, and that's how we evaluate any single contract that we may go into.

Last year, Western Union returned approximately 75% of its $1 billion plus in operating cash flow through over $380 million of dividends and $400 million of share repurchase. This year, you'll receive $910 million of cash from the sale of your Business Solutions segment, the first part of which you closed today. How are you prioritizing capital return this year compared with organic investment in the business and potential acquisitions?

Yes, we're going to do a little bit of all of those. We were pleased to announce our $1 billion buyback program, which is good for 3 years. And so we continue to be in the market to buy back stock. We also reaffirmed our dividend for this quarter. So that's going to be another significant use of cash this year. And as you mentioned, we are -- we've just gotten a bunch of cash in the door for the sale of our B2B business. We do want to invest in the business organically to drive continued growth and expansion. Digital would be a key area of opportunity. We pay a very healthy dividend that was almost $400 million of cash last year. We'll continue to buy back stock. But we also want to use the majority of the proceeds from the B2B sale for strategic opportunities. So part of the strategy work that's happening right now will spit out some answers on where do we think we have the gaps? Where do we think we need to fill the holes a little bit with capabilities or other smaller acquisitions that might help accelerate the things that we want to do. Maybe it's something related to a consumer ecosystem, right? So these are the kinds of things we're looking at. It may not necessarily be a direct revenue-generating acquisition. It could be, but it may not be. It may be capabilities that we're looking for, right? So with the strong assets that we have, David, we think there is a lot of opportunity for us to maybe supplement our core capabilities with additional things that we don't do today. Maybe it's in the crypto space, who knows, right? So we'll just see what kinds of assets we can add.

Understood. Can you update us on the status of your Walmart relationship, how material that is to Western Union's revenue?

Yes. Look, it ramped up last year. We think it'll be a more meaningful contributor this year. But if you just go back to my statement before, which is there's no single agent that's more than 5% of our revenues and most are much smaller than that, including Walmart and Kroger and others. They're going to be much smaller than that 5% threshold. It's a very diversified business. That's really the way to think about Walmart as well.

Understood. I'll just pause for a minute to see if there are any additional incoming investor questions. Great. Well, Raj, Brad, Tom, thanks so much for being with us here today. We appreciate your participation in our conference, your time, your insights, and look forward to speaking with you again soon.

Okay. Thanks so much, David. Thanks for having us.