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

Thank you for joining us on day 3 of the Wolfe Fintech Forum. Look, as you guys know, I mean, we've had a lot of really great content over the past couple of days and today is no exception. We have another full day, including -- really, really proud to have the executives from Western Union with us. Having Devin for, I think, his first formal conference as CEO of Western Union is -- we're privileged to have him here. And obviously, love having Raj with us, and thanks for your support over the years at all of our -- probably all of our conferences the last, last many. But Devin, again, really, thank you for coming out.

Darrin, it's great to be here, and I'm looking forward to the conversation and the opportunity to share a little bit of what I've learned in the last 72 days as CEO of Western Union. All right.

[Operator Instructions] But with that, look, I think maybe just a great place to start off would be exactly that. I mean, how has it been in the last 72 days? What are some of the things you've uncovered that maybe either surprise you or otherwise since you've been here?

Darrin, I got to say, right under the brochure where it said, move to Denver, that said deal with the Russia-Ukraine crisis.

Yes. Right. Right.

So as a new CEO, that was an unanticipated surprise. And as you saw this morning, merely an hour ago, we announced that we will be ceasing operations and that, weighing all of the factors in terms of our customers, in terms of our partners, in terms of our employees, it was just the right decision. And so being with the world on this one made more sense than sometimes -- we have a history, as a company, of being the last resort for many of our customers in many war-torn regions. And so this was a hard decision for us, but I think it's the right one.

Can you just, before we go too further into the real strategies of the business, maybe just touch on the exposure for a minute. Just remind us on...

Yes, happy to do that. If you look at Russia, Ukraine and Belarus, first of all, we've shut down operations or we will be shutting down operations in Russia and Belarus because they're somewhat connected, obviously, both inbound and outbound businesses. But if you look at Russia, Ukraine and Belarus as it grew, it's 4% to 5% of our total revenues. It doesn't mean that all of that goes away necessarily. We don't know exactly how it's going to play out because we have seen refugees leave the country of Ukraine to surrounding countries. We've seen some inbound business there, but it certainly has been more challenging in the last few days of operating there, whether it's sanctions or other things that are going on. So we'll see how it plays out. We want to continue to provide our essential services in other countries and where the need is there, but it is about 4% to 5% of our revenues that's potentially at risk.

Okay. Maybe just to take it 1 step further, there's a combination of sort of secondary factors, including higher gas prices and discretionary spending, potential implications or inflation or even recession, potential risks in Europe or the like. I mean, is that -- I know it's early. We haven't seen any evidence of that yet in your business though, have you?

No. I mean, over the long term, inflation shouldn't really have an impact because people ultimately have a need to receive money and to send money and they will. In the short term, it's hard to really say on where things will net out because there could also be inflationary pressures in people's wages.

Right.

Right? So depending on how that nets out, it's hard to say that there will be any specific impact. But certainly, it's another factor to think about.

And it's kind of early now, anyway. Devin, maybe we'll just go back to the transition now then. So I mean, coming over from where you were before. I mean you must take some experiences before that you want to apply. And I'd love to hear a little more details of what you discovered since you've been here in terms of the business that are -- areas you want to focus on.

Yes. Great. So I think there are 3 avenues, both based on my time at Fiserv, and then the strengths in the Western Union business we should talk about, right? First, and I just came back, as you and I were talking about, spent the last couple of weeks traveling around the world, meeting with our teams, meeting with our partners, both big agents, small agents and spending time, actually, with our customers, right? And regardless of where I was in the world, I was universally pleased and, in some cases, even surprised at the strength of our brand at the street level, right? And so you would walk into an independent agent and they will have wrapped their whole store in Western Union logos, even though they have Western Union, they have Transfast, they have RIA. But the Western Union brand is the one that they choose to put on their shop front because it draws customers, right? The customers from the receiving countries recognize Western Union and know that's where they go to send money. So the strength of that brand and the strength of our physical presence, and something I'll talk about, I think really helps us in the digital world, right? And so I think a little bit of the shift you'll hear from me is our retail and our digital businesses are intertwined. And part of the differentiator for us via a truly digital player, as I already have 100 million consumers who know who my brand is and interact with me, and at some point, they're all going to become digital, right? You guys write and other people write, at some point, cash does go away, and at some point, retail becomes less relevant. But using that escalator of retail to digital, as a strength for us, I come away from the markets recognizing that's a real opportunity that we've probably undercapitalized on in the past versus where I'm going to take us. The second place to talk about, one of the stops I made was in Vienna, where, in Austria, our bank is -- our European bank, we also have a bank in Brazil, but our European bank is licensed, which enables us to bank across 32 European countries. Super impressed with the quality of the tech stack that we put in place, the quality of the team that's there from a risk and compliance standpoint, and therefore, the opportunity to scale that probably faster than I thought, right?

Yes. Yes.

The underlying infrastructure, the underlying team are in place. So you'll see us starting to roll out much quicker in markets, particularly in Europe at a pace that's different than maybe what we were doing before. As I think, and Raj and I were talking about this, this morning, right, tying our send and our receive a little bit closer together. And again, I think this will be part of our advantage digitally is for every send customer that we get into our digital bank, there is going to be some percentage of them that entice the receiving party to also enroll.

Yes. Makes sense.

Because -- so for every customer you acquire, you get some fraction of another customer that comes along with it because it's more convenient and the platform will be better and less expensive for both parties to be within the Western Union ecosystem.

So rolling out what a little more? A little more quickly, you were saying? You were saying really -- maybe at a faster pace than what where we used to in Europe, you said?

In Europe, to start with, right? And then we're going to come here to the Americas. But it's rolling out the multicurrency wallet that's tied to the ability -- so the wallet right now has 13 currencies that are interchangeable, wallet-to-wallet transactions are seamless, whether they're within country or cross-border which also gives us a domestic money transfer opportunity. As you know, our traditional domestic money transfer business has been on the decline for many years. This actually puts us back in the game of domestic money movement in many of these countries. And then it's tied to a traditional deposit account, so you can hold bounces. We're actually seeing, in the new pilot, we're seeing people holding a couple of hundred euros as a deposit balance. And then it's got one of these, right? So we're issuing multicurrency debit cards, right? And so this thing gets used at the point of sale. This gets used for transactions beyond money transmission.

Right. So effectively, the real neobank model, right, in terms of try to really digitize consumers, especially on that migrant population.

On the migrant population and...

And the underserved.

In communities, in countries that they're not of origin for, right? So we're, right now, in Romania and in Germany. And what we're seeing is we're getting good take-up with Romanians in Germany, right? So we have a natural community of people who, through word-of-mouth and through association, whether it's domestic money movement, so I'm sending you money because you and I are both Romanians and it's causing organic customer acquisition which, again, I think will be compelling for us in a digital ecosystem, right? Because our customers have a natural affinity with each other.

Yes.

Unlike a typical neobank who's acquiring clients outside of an affinity model, they're just acquiring clients. And as you know, I grew up in payments. Capital One and MBNA mastered the affinity model for acquiring card clients, right? So think about our neobank potentially as an affinity model in neobanking, where our customers have reasons to share the word and to want to be affiliated...

It makes a lot of sense.

Because they're, naturally, a community that we're connecting, right?

I mean, I have to think that this population is probably generally underserved by the financials -- the traditional financials.

So again, this is early, early days, right? But one of the things we found is -- so we solved -- I did not know this until shortly, but Romanian documentation, is notoriously suspect because Romanian passports and Romanian IDs are relatively easy to fake, right? And so we had to adapt our digital KYC model to be interview-based. So when you enroll now in Germany and you're Romanian, you actually get a video interview in which we then KYC you and your documents. That's proven to be quite effective. That's very different than if you try to open a bank account with a traditional bank in Germany and you're a Romanian, right? You're, by definition, on the suspect list because you're Romanian, you show up with these documents. And we've kind of mastered that, right? And so that gives us an advantage with that community in that country that's different than the traditional players who are in that market.

Yes. The KYC elements really are different, I guess. So that's interesting.

And KYC is our business, right? Like we have to do it on every transaction with every person, so it's core to who we are, where in a traditional bank, KYC is something that only happens at account opening. It's not in their blood the same way that it's in our blood.

I mean I have to ask because this is an area that I think if it inflects and it's successful, could be a pretty big needle mover for your stock, right? When you think about what people are worried about in terms of competitive dynamics versus incremental diversification of your model. So it's taking -- I mean, this has been a theme or a discussion for some time. Yes, we haven't seen traction for a while, yet now you're saying we can expect an accelerated pace. Why? Why now can we expect -- is it just further investments that are going to go into it? Or more focus?

So I think there's 2 things, right? One, it's becoming more of the thing instead of one of several things, right? So really Raj and I are doing some reallocating away from other -- what might have been priorities in the past to say, "Okay, let's reallocate resources to really driving the rollout of this," right? And so when I arrived, the rollout of this was into '23 before we got to North America. I think we'll be in North America this year, right? So that's what I talk about in terms of accelerating and in terms of reallocating. And then the second is, I'm putting a much bigger focus by dint of -- to your first question of where I come from and what I do, and I saw this with Clover, on wanting to own the primary relationships, right? So when I was at Clover, we launched Clover Business Solutions, which was the direct-to-merchant model, where we started ramping up kind of our own sales force, our own -- because the traditional first data model had all been worked through banks and -- right? And so what I started to do was take us direct, and that's a little bit of the same mindset here, which is using that brand and really thinking about owning those relationships and part of what you'll hear from me is we're going to talk more about the acquisition of customers. We're going to talk more about the value of those relationships and expanding those relationships much more like traditional payments or fintech, like you would hear from a PayPal or you would hear from a Square, than where I think we were in the past, which was about transactions in principle and movement through the pipes versus acquisition of human relationships that we can call durable and expandable.

I want to get into the core business also, but this is so interesting. I mean before we do -- just to be clear, like, from an investment dollars to do this and an ability to maintain margins while also investing in the business to accomplish what you need. I mean, is that...

Well, we're going to have to do a combination of reallocating dollars within the business and maybe some incremental dollars as well. You're going to see more markets launched, just like we launched in Germany and Romania. We'll have more country payers in Europe this year that will be launched. We're not ready to announce them yet, but they're in process or coming, right? So we're shifting spending as we speak.

Let's shift gears now and just touch on the trends in the business for a minute because C2C clearly has moved from being what, 90% retail and 10% digital-or-so to more of a 20-80 split, right.

Almost 25%...

A 25-75 split, and the growth rate looked, on the digital side, pretty sustainable on a tough comp last quarter. I think it was up 13% against a tough compare. Can you touch on that for a minute in terms of what's truly resonating? And if that -- in your mind, is that new way still relatively sustainable? You just talked about a lot of these being new customers to the business.

Yes, you want to do this?

Yes. Let me start, and then Raj, obviously has, the history better than I do on this.

He has an easy job. He can default to me whenever he doesn't want to answer something.

Look, we see our future as a digital future. And you just heard me talk about a digital ecosystem that's broader than just remittance, right? And so the more we acquire digital customers and can put them into that digital ecosystem, that allows us to control the relationship, and that allows us to expand the relationship. So there's nothing about our business that doesn't have digital-first and foremost in it. What you also heard from me early on, though is, I think unlike what you just said, which is most of those customers are new to franchise, we're going to continue that, but we're going to more aggressively take existing customers and move them into the digital ecosystem. So we're going to put an emphasis on talking to our 100 million existing retail customers and moving them, proactively moving them into our digital future versus letting them either find that themselves and/or potentially go to competitors, right? And so I think that is how you sustain the growth in building the digital ecosystem is continued acquisition of new to franchise and a better migration of existing to franchise, which will have some impacts, but we're also seeing that some of those who migrate don't migrate completely. They still use the retail not as frequently as they did in the past, but they still use the retail and they become better customers overall, total transactions per person go up, principal values go up because now they're interacting across the brand multiple ways, right? And so capturing that value of the omnichannel, and this is again what will differentiate us from purely digital players, will allow us to expand those relationships and the trust that's there, eventually expand the product set.

And to be clear, I know we've talked about this a lot of times in the past, but the thought of moving from one to the other, the economic implications of that have always been questioned, right? Is it whether or not the yield is the same, the margins. You said the margins are similar, right? Maybe better, but...

Two things, if you're talking about a branded Western Union digital offering, the revenue per transaction might be a little bit lower than it is in retail, but the contribution margin is quite high. It's very margin supportive as it has been, because we've grown our business from $600 million back in 2019 to over $1 billion last year, and margins have been quite stable and improved a little bit over that time period. So I think it's going to be just fine from a margin standpoint.

So it's not a headwind to a profit growth?

No.

In other words, 1 for 1 switch?

I mean, we might want to allocate more investment back into this area of the business because it's so powerful for us long term. So those are the kinds of things that we have to...

It's because they're more stickier, they are more -- they engage more.

And Darrin, one of the things that I have kind of spent time on in the last couple of months, and it has reinforced me on this trip over the last couple of weeks. We are also going to kind of go back to what I'll call the brass-knuckling in the retail environment, right? So as we migrated more and more to digital and the growth in digital, I think we backed off of a traditional Western Union strength, which was in-market management at the corridor and at the local market level to bring customers into retail, right? And so it's something Western Union's very good at. I mean, we perfected the model of how do you do this in 20,000 corridors around the world. And we're going to go back to that a little bit, which again, will feed that escalator to keep the retail from falling off the cliff as you get digital -- retail to digital migration, right?

That makes sense, yes. I mean, what kind of percentage do you think it can get to? There's always going to be a need for cash transactions. But I mean, should we envision -- do you envision a 50-50 split over time or?

Look, I think that's something we'll come back to you with when we get to the Investor Day in September or October. I do think cash will still be very important. And as you know, one of the strengths of our digital platform is a high percentage of those digital-ins are still cash outs in a lot of countries around the world, India being an exception. But if you're in the Philippines or you're in Malaysia, you're in a high-receive countries, a high portion of those are still in cash, right?

When we think about the cash out that you're just talking about right now on that 550,000-plus locations from an agent standpoint, it's obviously the biggest network out there from a remittance standpoint by far. And so -- and I'll even take it a step further. I mean, on the digital side, we see, I think, about 30% of all downloads are Western Union, so still by far the #1 also. So the brand is clearly the leader in terms of recognition. Taking advantage of that brand in terms of the digital side makes sense. But just to be clear, your opportunity to expand and continue to grow with agents and in new markets, I'm just -- can you touch on that for a minute in terms of the cash and the agent network?

So there's 2 or 3 focuses that I'm starting to index on, right? So the first is we had a very, what I would call, key account and master agent model and we rule. In the U.S., you pick them, right? You want Walgreens, you want Walmart, you want, Kroger, you want -- we own the key accounts around the world, whether it be post offices, whether it be big merchants, we're the dominant player in the key accounts. Where we probably have been less present is in that smaller independent agent model, and this is obviously where RIA and others have been, and so we're going to go hunting there. We're going to expand our network. We're going to add more smaller local agents in areas around the world where we can grow share by having that presence or having that capability in that desk and compete head-to-head with other providers in that. The second is there's a bunch of corridors where we've got to be better than we are, and there's opportunity, like I just came back from the UAE, right? We don't -- the second most important corridor in the world is UAE to India.

Right.

Right? We don't have a big share of that model, right? That's largely a local agent to bank model. And we've got to say, okay, what do we need to do and what's our strategy to capture more of that corridor, right? U.S. to Guatemala, big corridor, a couple -- $15 billion in principal, we don't have a lot of share, right? And how do we then make sure that we've got the right model in these places? Now we have a lot of share in a lot of really important corridors, but there are places where we don't that give us the opportunity to take the brand, to take the model and go acquire more retail business.

I mean I think there's still a pretty big underappreciation that even by far the largest provider like yourselves or what, 15%, 20% of the market? And then it becomes very fragmented.

Very fragmented.

Absolutely.

5%, 6%, even the bank's probably, what, 50...

Banks traditionally have been about half of the remittance market. The other half is digital and retail type of players.

I guess it just shows, I mean, in my opinion, banks are typically low hanging fruit when you're -- if you're a good fit type of company, right? All right. Can we just talk about customer reaction in response to those early panels? I mean, the digital banks that we talked about already, I think, in terms of [ loss ] and the WU shop initiative, just remind us the thought process there?

I think it's an example of the potential of the platform, right? I wouldn't think about it as a big economic driver, but it's an -- part of what the opportunity for us is, is retention in the franchise and ongoing loyalty, right? People migrate out of the remittance market as they move up the economic ladder. Sometimes people are emergency send or one or two-time users. And we have a lot of that in our business, right? Because of our brand, when people have a need, they come to us. How do we catch those and then bring them into the franchise maybe outside of that onetime remittance need, right? And so I think WU Shop is just an example of the flexibility of the platform to create opportunities for engagement and ongoing loyalty.

That's helpful. Raj, maybe we could talk about the Business Solutions sale.

Sure.

Clearly, the business was actually doing pretty well over the last couple of quarters. But when we think about the proceeds coming in, just remind us of the timing of the proceeds. It's net, I think maybe $800,000 million.

Yes, yes. In terms of the performance of the business, first of all, it was growing over a lower 2020. And if you really look at it on a 2-year basis, it's slightly north of flat, the B2B business. We did close in the first part of the transaction, so we do have all of the proceeds from the deal. Gross proceeds were $910 million, and we have -- after taxes, it will be roughly $800 million.

That's great.

Now we're just managing the remaining European part of the business, which will close a few months from now for the benefit of the buyer. So any profit or loss goes to the account of the buyer. And we're just sort of a sales engine for them on that side. So we have the money. We were sitting on the cash and we want to deploy it strategically wherever we can. So we're in an evaluation process right now.

Makes sense. And just a reminder, the contribution of profits last year from that?

It was about -- well, the EBITDA was around $120 million last year, $100 million-or-so of profit, $0.22 of EPS. This year, we've included about $0.03 of EPS in our...

It's already in the books right now.

Yes, yes, exactly.

Just managing the business now exclusively focused on the C2C business. Generally, should allow you just not only more investment priorities but time, right? I mean, just -- could you touch on that for a minute? I don't know how this business really derailed the attention.

Why don't you start from your perspective?

For me, this was sold before I got here. So it's not been a part of the share of mind in my time. And to your point, that's really allowed me to focus on what do we want to do with the brand, what do we want to do with the franchise, how do we want to leverage the assets in a C2C, B2C world, not in a B2B world. And as you know, I come from the payments, B2B is very, very different than C2C, B2C or C2B, right? So I think, going forward, we're going to have a C in what we do, right, whether that's C2B because we've issued wallet debit cards; whether it's B2C, we're enabling our rails to be used by companies to make payments to employees or other people; or C2C, whether that be cross-border or intraborder, right? And so that focus of always having the consumer using the brand, I think, is just helpful for the organization. As you said, where -- how do you accelerate this? Well, you accelerate this by reprioritizing and focusing with the consumer as always part of the equation.

Okay. Just to wrap it up with some questions on capital allocation, especially in the context of now having the $800 million net proceeds. I think you had a $1 billion buyback authorization for I think it was 3 years?

Yes. Three years, yes. Yes.

Just -- can you touch on the balance between buybacks and M&A or other? I mean I think you're very committed to the dividends though, right?

Yes, let me just start and then Devin, please feel free. We are pleased that we were not -- that we announced the $1 billion buyback, [ pardon me ]. It's good for 3 years, as you said, and sort of an indicator of our commitment to continuing to buy back our stock. We think it's a good value, and we want to continue to put money there. Dividends, we reiterated the quarterly dividend for this quarter, and that will be a significant use of cash flow this year. Beyond that, I would say that the proceeds from the B2B sale, we really want to hold for strategic opportunities. So as we go through the strategy development process the next few months, with Devin's heavy involvement there, that's going to spit out some answers on where do we think we have the holes, where can we fit in some additional capabilities. It may not be a big transformative acquisition, but maybe it'll be capabilities, other things that we think can push our strategy forward, the one that we talked about with our digital banking platform and consumer ecosystem. So that's really how we think about it. And Devin, I'll turn it over to you to add.

I mean, Darrin, as you know, 5 years at Fiserv, disciplined capital allocation is in my blood. And so using the benchmark of returning capital to the shareholders, whether that be via the dividend or whether that be share buyback is always front and center in any decision we're going to make. I do think there is opportunity, particularly given the scale of our business, to find what I'll call tuck-in acquisitions, whether they be capabilities, whether they be teams with new technologies to accelerate our ability to roll this out at a different pace around the world than maybe we've been operating in. The second thing, right? I mean, it's a privilege to have a business that generates cash like we do, right? So in a good year, we can pay the dividend and still have a fair amount of capital left to purchase shares, to make small acquisitions to do things that are accretive to the value of the company and to the shareholders.

Makes sense, good. Let me just take a few questions, if you don't mind. There's a couple in my inbox right now. One of them is really around pricing. TransferWise has been a little bit more aggressive on pricing, and we've seen some initiatives around blockchain and P2P initiatives on cross-border. Can you touch on the competitive and pricing environment?

So one of the strengths of our brand enables us to be the market leader many times for pricing, right? And so part of what we talk about is what is the structure and the conduct of any market, where are the competitors, and then how do we manage. The good news is we have, basically, because of our position, clear market knowledge and data on every major corridor in the world and where do we want to be and how do we want to compete is a decision we get to make every single day. And so we manage it as a portfolio, and then we optimize across that portfolio in the way that produces the best competitive return as well as the best shareholder return, if that makes sense. So pricing and dynamic pricing is core to what we do, and I think we do it pretty well.

I have one -- another one in my inbox, but here's one that popped up here, which is what type of investments in these new consumer-facing products were factored into the '22 margin guidance? Are there cost offsets to exit Russia and Belarus?

Well, let me just say that we don't yet know the full conclusion of what's going to happen with Russia, Belarus, Ukraine, that the dynamics change every single day. We have stepped away from Russia and Belarus as we announced morning. And certainly, we'll have to relook at some of the outlook components that we gave early in the year, but we're not ready to do that yet. We'll do that at the next quarter announcement. Obviously, we'll try to find some cost offsets wherever we can, but that's not necessarily going to be a net zero game with that. So we -- putting aside Russia and Belarus in that situation, we, I think, generally assumed a relatively stable cost base year-to-year because we have relatively low growth that we came out with this year. And so it didn't assume significant changes in the expense base. We are reallocating spending as we talked about earlier, the shift.

Right, for the shift.

Yes, we've shifted spending into these other things that we're working on. So that's certainly the case. But so we'll see where it all nets out.

And look, I had been fortunate enough to have a few weeks on the ground to reorient the 2022 plan. So when I talk about the acceleration you're going to see, as Raj talked about, incrementally more markets in Europe and a leap across the Atlantic. That's all built into our '22 plan.

Okay. There's one other question I saw before in my inbox that I'll just quickly -- and then we'll wrap it up is valuations have come in specifically on the growthier part of the public ecosystem with a lot of these names that are either in remittance or elsewhere, I mean, come down quite a bit from IPOs or specs. And even on the private side, there's been a bit of a narrowing on the bid-asks. So would you consider doing M&A that is in the space itself for scale purposes versus going into just more tuck-ins on capabilities?

It's a great question. It's one that we've started as part of the strategic review process. I've launched a debate, to debate. And I think it's a -- right now, it's an open issue. I don't have a definitive point of view. There are benefits, in some cases, to the scale. Historically, the valuations were such that it was tough to get enough benefit from that scale to justify the price. As you noted, those prices are coming down, so the justifications become easier to start to potentially consider.

All right. Guys, for those on the next session, starts at 10:25. There's 2 sessions at once, 1 with Envestnet, and one with Payoneer's CEO and CFO. But Devin and Raj, thank you guys both for joining us. Honestly, it's really been great to have you back, and fantastic to have you in person.

Thank you so much.

Thank you.

Thanks.

All right, guys. Thanks.