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

I think we get started. My name is Tien-Tsin Huang. I cover the payments and IT services sector at JPMorgan, [ I was selling Devon ], I'm so excited to have Western Union. And I feel like we have Western Union at this event, right, Raj, for so many consecutive years, and we've got a new CEO at the seat. So Devin McGranahan is the CEO, Raj is also here with us. We're going to fireside chat. I collected a lot of questions and combined them with mine, we'll go through that, and then we'll take questions at the end, also with the Board over Devin. It's great to have you. Great to see you. Thanks for being here.

Really great to be here. Thanks for having us. And I've enjoyed your coverage back when I was at Fiserv. And so it's a privilege to be up here today to get a chance to talk to you.

No, no, I don't say that. I'm a dinosaur, that's just been around for a little bit of time, which is actually a good first question for you, if you don't mind. Coming from Fiserv, and also, I always respect the team you came over from McKinsey from way back, but I think you're on insurance, right?

Yes.

So you're joining a consumer platform in Western Union, why?

I learned a lot from both Jeff and Frank. They're great, great leadership teams, great institutions. And in the last chapter, while I was there leading the merchant business, you could see the evolution of the payments landscape. So you could see what people were doing, whether it was PayPal or whether it was Square, now Block, and how they started to link the consumer side to the merchant side and creating those interesting semi-open, semi-closed loops between the consumer value proposition and the merchant. I was spending a bunch of time with Frank around Clover and how would we start to do something similar. And you come to realize that the hardest thing to actually build is the consumer side. Being able to build that brand, being able to have consumers who place trust in your platform, in your brand, in your products and services, and there are very few truly global branded financial services providers. And so the opportunity to come to Western Union, which has that brand and has that customer base, you realize that's really something you could build upon. And so it wasn't that far leap from what we were trying to do with Clover to moving on the consumer side and now trying to build backwards the other way into more of a payments ecosystem and more of the rest of the pieces and parts outside of the consumer side.

No, I like that. So thinking about bringing the first circle, you mentioned Frank, right? When I first followed Western Union was part of First Data, I guess even before that, MoneyGram. And if I don't see it all come together, but now that you're sitting in the seat, you've been here, what 5, 6 months?

A couple of months. Yes.

What's surprised you? What do you think industry participants may not appreciate about what you need? So this is not an investor appreciation question, but more an industry view.

The strength of the platform and the globality of the platform in terms of our ability to operate from a regulatorily compliant and consistent fashion in over 200 places around the world. Like until you see it, until you're standing in Dubai and so you're standing in [ Bahrain ], until you're in the middle of Mexico City, can you -- conceptually, you know what 550,000 give or take, retail locations means. But until you're there and you actually see the totality of how that manifests itself in so many places of the world, I was just surprised by that, right? Like so intellectually understood it. But once you see it and you recognize the scale at which we operate, it causes you to think about, okay, well, what do we do with it now, right?

Yes. No, that was well said, well said. So one more question just while your path in the bridge into your current role. What do you think, how did Fiserv prepare you for this current job? And I ask that because there's a lot of Fiserv and Western Union alumni at a lot of different fintechs and payment companies. So how do you see that?

I'm going to go down 2 angles, and it's a difference, I think, just in the 2 chapters when I was at Fiserv. The first chapter really with Jeff, that part of Fiserv perfected the higher taken at-scale platform and through disciplined capital allocation and disciplined M&A, drive products and services into that at-scale platform, right? So Fiserv over time developed the ability to bring new products and services to its base of 5,000-plus financial institutions. And so learning how that kind of an operating model works, given I've just inherited a large global at-scale platform, I think, to be meaningful. And then the second, when we put Fiserv and First Data together, and I had a chance to work with Frank, it really was about how do you take $1.2 billion of cost out? How do you run an operating model? How do you do bring 2 large companies together in a culturally consistent fashion, but drive to an operating model that could really deliver results. So bringing again some of that as we kind of take this next chapter with Western Union, I think will also be helpful.

Yes. No, that's well said. Never thought about it that way. Yes, between Jeff and Frank, you cover a lot of ground from an operation standpoint. Okay. Good. So let's dig into the business. I wrote down a quote, I think, from the call, I think you mentioned that in the retail business, you said you're struggling to grow revenue at the same pace as growing principal. Why is that the case? And can you -- can we see revenue growing in line with principal? It feels like a merchant question with volume and revenue and transactions, et cetera. What's your response to that?

Yes. It's an interesting pull out, so let's pull on it a little bit. I don't know that our aspiration should be to grow revenue in principle in line, right? Obviously, our goal is to grow revenue. And so here, we've been growing principal without necessarily growing revenue. And so trying to understand the dynamics of that, which is a bit of mix shift in between the retail business and the digital business. And it's a bit of how we think about where we're driving growth and under either their digital label or on the retail side. So disaggregating what are the drivers of our ability to grow principal and not grow revenue enough, you quickly come to realize that part of the growing revenue formula is, we have to at least stabilize, if not grow the retail business. And so for the last couple of years, we've been very indexed on growing our digital business, which we've done very successfully, now having $1 billion digital business in the remittance space, but maybe at the expense a little bit of the retail side. And so we've got to really focus on where in the world can we grow that retail business? Where are we underpenetrated, either from a geography or a corridor or a population standpoint? Because growing that is going to help us grow the overall revenue line even if we grow principal greater than we're growing revenue.

Got it. Got it. So part of the revenue formula, of course, is pricing. And I always remember that reason the World Bank paper and UN making comments about trying to drive pricing on remittances to below 3%, I think, by 2030. I think Western Union above that as it's been coming in. But how does that objective that the UN has set, how does that inform your thinking around pricing strategy?

Look, our pricing strategy is driven by the market, potentially not by the UN, right? And so part of what we're trying to do is make sure that we value for our customers. And if you look at our 200 million plus rapidly growing account-to-account business, we're in the 1% to 1.5% yield ratio, right? And so for that part of our market, we are growing that quite aggressively, and that is by the UN standard aggressively priced. Overall, we're somewhere around 4%, and that's been pretty consistent. And that reflects our high cash to cash business in many parts of the world. As you know, there's a lot of costs associated on both the send and the receipt side when you're doing cash to cash. So by definition, as the business becomes more digital, and we go more account to account, I think that's naturally going to occur. And we're well below the World Bank average at 6% already today. So I think as the mix continues to shift, you'll see that reflected in overall results.

Yes. No, in the end, I kind of don't agree. It's all dictated by the market and remittances are hard. Compliance, KYC, AML, you've got distribution agents and partners, and so it's difficult. It's not just easy to aim for a price.

And competitors, don't forget, we have a few aggressive competitors that we compete with every day, too. So it's a market set pricing, it's not top-down pricing.

Right. And which leads to my next question, which is, it feels like -- and again, maybe I'm covering it too long, but over the last couple of decades, it's moved more to a localized or regional service in the sense that mobile phones can make you attack a certain corridor or region a lot more surgically. So my other question for you, Devin, I've been thinking about this a lot, is it important for Western Union to be global? I think you sort of hinted at this, but I'll ask it explicitly. Is it important to be in every country and territory against the Western Union brand.

So the benefit comes from the scale of the brain, right? And so because people know that we're in every territory, we're in 20,000-some corridors, you know you can use Western Union to send money anywhere you want. That allows us to attract a lot of clients and allows us to own -- or allows us to own a mantra around our brand about what we can do and what we can do well across the world. I think your observation, and it's one of the things I've learned in the 5 months I've been in the Chair is that, competition happens in the corridor by corridor, market-by-market level, right? And you heard on my last call, we started talking about what are the right street corners to be on? What are the right partners to have? What are the right incentives for those right partners on those right street corners in order to win that quarter by corridor, a knife fight that happens in so many different parts in the world. so I think the real question you're probably asking me is, can we do that at scale in enough places around the world. And that's one of the beauties of inheriting a business that is $4.5 billion of revenue and has been built up over 50 or 60 years as we've got local market knowledge, we've got teams in place. We have the ability to activate that. And I think part of what happened with COVID is as the world moved away from retail temporarily and our digital business grew a lot. I think we grew 40-plus percent in the first quarter last year. We need to go back and reactivate some of that local market muscle that built the franchise into what it is.

How hard is it to do that? So between digital and retail, it's the technology, the platform, the people, the support? Can you localize all of that? Is it hard to do? Are you set up that way?

So one of the things I've started to talk a lot about is bringing our retail and our digital businesses closer together. One of the things that we did internally just 2 weeks ago, as we integrated our digital go-to-market teams into our geographic teams, so bringing our digital and our retail from a leadership standpoint together. And now we're starting to bridge some of the gap people have heard me talk about our next-generation transactional retail -- or transactional digital platform and investing in our retail point of sale, both of those will be on the same front-end technology. So we'll be able to manage a customer relationship seamlessly, whether they be in the retail environment or the digital environment. I think one of our natural competitive advantages is the fact that we have this $120 million plus retail customers, and many of them will become at least semi-digital, if not entirely digital, over the next couple of years. And so how do we ensure that when that happens, they stay within the Western Union family and don't go to somebody else's digital platform somewhere around the world and make sure that we create those experiences that cause that to happen seamlessly and it's easy for the person to do.

So this is really about omni and doing it, one front end, doesn't matter if it's retail or mobile or in-store phone, that the idea is to sort of own that customer in an omni way.

Kind of what I was talking about the team even last week, which is having a SLA, that's just an assisted digital transaction, right? It's just a human that sits in front of our digital platform, and whether that's an assisted digital transaction or it's a fully digital transaction directly to the customer, our technology needs to be seamless so that, that experience, the data, the customer recognition, our loyalty programs, all the things that would then make for that omni experience are easy to deploy at scale around the world, because the more those are different then the more you've got to go market by market, deal with the vagarities of any given thing that has built up over time.

Right. Got it. No, it's interesting. It's that thing why I was excited to ask you about it. So you've been busy putting this plan together, not to get smooth in terms of plans, things happen. So of course, Ukraine, unfortunate conflict that's happening over there. That's the top -- we've identified, I think the World Bank adviser is the top 5 locations. So what happens next? I know you've suspended some operations there. What happens from here?

So as we announced on our call, we have suspended operations in Russia and Belarus. That was one of our very profitable and growing markets, particularly with our digital white labor partnership with SpareBank. And so we revised our guidance in accordance with the fact that we don't anticipate going back into those markets any time soon. We will keep the option open should the conflict resolve itself, but I don't think we're optimistic that, that will be any time in the near future. So we're, frankly, indexed on focusing in the rest of the markets and the rest of the world. We're indexed and focusing the several million refugees that have emerged out of the conflicts that are now populating Western Europe, Eastern Europe, some of the CIS countries. And how do we serve those folks in the highest quality manner possible?

Yes. Not I commend you often doing the fee-free on the Ukraine side, that's absolutely the right thing to do. Okay. So it's out of the plans, but available if things change to reopen. So -- I didn't want to interrupt there.

No, go ahead.

So perfect, Devin. So thinking about the bridging, you revised guidance on Russia, of course, FX as well. You talked about some migration into those countries. How healthy is the consumer? I know everyone wants to hear that, I save it to the middle of the conversation. What are you paying attention to? How healthy is demand on the ground?

This is a great conversation, and the team is working really hard. There's 2 sides to this for us, right? And so our customer base has seen more wage inflation in the last 6 months than probably they saw in the last 6 years, right? So anybody who's walked into McDonald's and seeing the signs that says $20, $22, $23 an hour, knows that, that lower echelon of the workforce is seeing the effects of both employment demand and inflation, right? And so that ultimately leads to people having more dollars in their pocket, which could lead to more cross-border remittances. On the other hand, I was in California at a different conference on Friday and a gallon of gas is $6, right? So my customer base also feels the impact on commodity prices and on the rising inflation levels that we're seeing around the world. And we can't yet tell which of those forces is going to weigh out. I'm optimistic for the fact that the wage gains will be hard to take back and the inflation will get tamed and the combination of those wage gains over time will create opportunities for more people, not only to have a better standard of living, but to be able to send money home.

And if I can chime in, right, I think I may have asked somebody on an earnings call, but if the gold stays for old reasons, with higher fuel prices, gas but oil prices, they could also see micros coming in, which also could drive activities if you think that the microns are pretty resilient, right? So there's so many moving pieces.

I mean that's a great example, right. The UAE is a country of 9 million people, 7.5 million of them are migrants, right? And so sustained high oil pricing results in strong economic development in the lease, which is a big constituent of our customers, and we can best it for that. But I think the key word though is it's got to be sustained for a while. So the Middle Eastern countries have to believe that there's enough durability to that to then start big capital projects, which causes construction and all that stuff.

Sure. Yes. Let's see. There's a lot of uncertainty out there. So given that, Devin, just the importance of margin expansion, I know as you're budgeting, you're sitting [ Raj ] the Board and the team, you're thinking about your plans. I think the prior plan is forcing you to raise or expand margins. How important is it in your mind to configure that?

So we're going to come back in October to the group with both my -- outlined for the strategy that along with that, the midterm guidance, which will provide clarity on kind of our outlook for margins. If we step back that for a second and not talk numerically, part of what I'm trying to drive is a rethink about the potential of the platform. And in that prior guidance, I think there were some assumptions about the ability to grow the business. And in particular, if we're talking about the ability either to grow retail or to expand into other products and services. And so part of what we'll talk about in October is what is our confidence in being able to grow that business? Where are the opportunities in the world? And therefore, what does that imply about what we want to do with the business? And ultimately, what that means, both for growth and margins?

About you -- heard you say that you have a $4 billion expense base, and so there's potential to streamline and potentially optimize and bringing back to Frank conversation, you led with, I assume that will be a topic of conversation as well in terms of what's needed today to support the business?

And so a lot of the work that's going on since I got there is to understand where we spend the money? Why we spend the money? And what outcome is that driving, right? And so when you inherited a large cost base now, remember, it is 55% to 60% variable cost. But there are opportunities even in our variable cost base as we think about shifting as I was talking about, about which channels and which channels out, which markets to really optimizing how we spend our money and what it is that we get for what we're spending and how do we use that to drive growth.

So a lot of your digital peers, and we'll have some of them here, don't have a profit burden, like we're talking about margin expansion, but some of the digital peers don't have any profit. So -- and they're growing very fast. They're very selective in certain countries, I know. Do you see an expensive changing from a digital perspective?

Way back at the beginning you asked me what surprised me. One of the things that surprised me is, with my industry-leading margins and a number of competitors who are held to a burden far less why I keep getting questions about margin expansion, but we'll set that aside for ticks and giggles later. Look, I think the market is changing. As you know, the growth at any cost mantra that existed even 12 months ago. I mean when I can remember when I was in the merchant business, and we were looking at toast, and we're looking at other things where the valuations and the reward was for top line customer account growth, not even necessarily revenue growth, but customer count growth. I think some of that is changing, right? And I think the perception about how you're creating shareholder value? What is the role of disciplined customer acquisition, disciplined relationship value expansion. I'm hoping that our model for doing that will be recognized.

Good. good. Agreed. Yes. I think it will all sort itself out in terms of the balance or fairness of margins. So a big theme, Devin, I think you and I may have talked about this in a separate occasion, but just everyone wants to bank their users is a phrase. You mentioned Cash App, Venmo, they got their success through domestic B2P, and they're now surrounding that with different bank-like services. Zoom was acquired by PayPal for the same purpose to get inflows and to cross-sell other things. How might Western Union be positioned to do that? Great brand. You have a 9 million digital users. You mentioned $100-plus million on the retail side. Is there opportunity? Is that important for you if you're thinking about TAM or revenue expansion?

So it didn't take me very long to get very excited about the work that the team was doing in Europe around our bank, right? And so we are now fully commercialized in Germany and Romania. We've launched friends and family in Italy and Poland. Our banking license allows us to operate in 32 European countries. Now we spun up another effort looking at our other banking licenses around the world and what does that allow us to do. I think this idea -- and it may even be less about "banking". And it's more about shifting from a transactional relationship to a customer-centric relationship and whether that's a wallet, whether that's a bank account, whether that is a store of value on a prepaid card, but keeping economic flows, whether they're inflows or outflows within the Western Union ecosystem. And again, you don't have to go all the way to being a [ neo ] bank if we allowed more customers to receive their payouts in a digital prepaid that then keeps it in the ecosystem. There's some opportunity for interchange on the cash out on that part, that would be a step change in our model. And again, it's moving more towards this idea of customer, customer relationship management, customer lifetime value versus principal and transaction counts, right, because what's flowing through the system.

All right. We have 10 minutes left. Moving really quickly. Do we have questions from the audience? So we'll have a mic that's being passed around. I also have a couple of questions on the portal but it can wait. Anyone? So just on the -- just back to that topic, so how well does that scale, Devin, based on what you described country by country, region by region, the scalability of it? Can you -- is this local versus regional versus global question again, I suppose?

Yes. It's a great question. And I think if you were starting from scratch, so if you're a de novo digital bank, the scaling of it is quite hard. Every country has a unique regulatory framework for how you act as a quasi bank or as a store of value. Every customer set -- has a different set of local competitors, whether they be local banks or other fintechs. And so I think at a space value, it's very tough to scale. As you were highlighting for me I already have 9 million customers who come to me every day. I already have a regulatory framework that allows them to act as a financial institution and a money movement institution in 200-plus places in the world. So for me, it is more about how do I manage the customer relationship so that they recognize that I could be a provider of those products and service for them and that we can do that at a relatively low cost for the customers I already have, right? And we can figure out how to scale that. This should be something that could provide some real growth for the company.

Okay. Good. Anyone else? Otherwise, I'll start rapid firing some other ones that I gathered. Should we do that? Let's do crypto. I had have to ask you a crypto question, even though it might be a bad word in some places nowadays. But the on-off board opportunity for Western Union makes a lot of sense, given how many touch points you have. What does this fit in your priority ladder?

So let's divide crypto into 2 boxes. From a consumer buy sell hold as a store of value, super interesting, right, whether independently on our own, through some wallet or mechanism or in -- with partnership with other people who are looking for some of our capabilities in local markets, regulatory compliance for cash and cash is a big deal. And so that's a very interesting thing that clearly we're exploring, and we'll come back at our Investor Day with lesson plans and some ideas around that. Crypto as a wholesale replacement for global money movement. I'm going to add more skeptical given again that highly fragmented regulatory environment in each of the send in receive countries and varying local regulations and laws, it will be a while. But even in that world, I see an opportunity, let's go to a world where you've got CBDCs, right? Let's say we end up with 5 to 10 generally accepted central bank digital currencies. Do you still have to have someone who's playing the interoperability role when you go from a euro central bank digital currency to do central bank digital currency? You still have to have people who provide ins and outs to those for Fiat currencies. And you still have to have stores -- places where people can securely store their digital currencies, right? And so all of those things we do today in the Fiat currency world, we should be able to do in a digital currency world as well.

So you have a great -- the reason why you can see this because you have a great compliance engine, you have a ton of distribution. So my other back-off question is what about white labeling the service? How important is it Western Union branded and what you do because the SpareBank was obviously doing very, very well. It was driving a lot of growth. I think SEK, [indiscernible] telecom is the other one. Why not do more of those?

And I think we will -- we're -- we worked on it for a long time, we have 2. Where there are the natural market conditions, as there are -- as it was in Russia, as there are in Saudi Arabia, where we can have a partner that has critical mass of customers and is structurally well positioned to provide our products and services to their customers, we'll do those deals all they want. And we're happy to be digital white label behind them. They're just few and far between. But I think we're going to move away from is dissipating our efforts with small deals that don't really aggregate too much in terms of volume, but require a fair amount of technological line -- technological integration and an ongoing compliance management because every bank has their own view of how to manage compliance and regulatory requirements. And so you start aggregating a lot of these small banks and small deals, the burden of administration goes way up.

Yes. Okay. I had to ask, and Raj you can tell me if you want, I have to ask a question on capital allocation. So business solutions sales in flight halfway done, I guess, we can say that. You come from a company that does deal and is quite good at it. So your appetite for M&A, especially at this point in the cycle?

So we have purposely and been very public about retaining the proceeds of the sale of Western Union Business Solutions as we go through the strategic evaluation. As you also note, the confluence of the public markets is now starting to play into the favor of someone like us as a strategic acquirer a year ago, it would have been quite hard to say I could deploy capital with a strong lens towards long-term shareholder value creation given my platform, my investor base, my valuation. That's becoming more of a reality. And so I think that's creating opportunities that we're certainly willing to look at as part of our overall capital allocation strategy. But I will come back to that. We're going to do it in a disciplined fashion. We're not a 40x revenue buyer. And so it's going to have to be a good deal at the right price that can drive value for our shareholder base.

Okay. I trust that to be the case. So a question here, can you describe how much exposure Western Union has to FX moves given recent big move in the U.S. dollar? So I know FX volatility is in general can influence demand. Any considerations here given the recent move into the dollar, I guess, is the question?

So there's 2 dimensions. The first is a strong dollar allows customers many times to increase the value of their remittances. And so we do see for U.S. to some places, that helps, right? And so we could see them. But on the opposite side, what's happening in Colombia, like our Chile or Colombia Corridor or most of our corridors to Colombia are down because of, again, the currency fluctuations that's happening there. And so in any given environment, there are pluses and minuses for changes in currency, what the purchasing power is for our customer bases and how they take advantage of it. And one of the things I've become aware of is the corridors to India are highly FX sensitive. So the India [indiscernible] literally, I think, pays attention to FX rate every day. And when there's a blip, you see more volume go; and when it goes in the other way, you see the volume fall off. So we pay a lot of attention to what's happening and where and then I think coming way back to something you started is we're now going to start pushing that into those local marketing efforts. So when we see a strong dollar that helps with the peso exchange, that helps Mexico, how do we, though, emphasize that in our marketing and help drive volume with a phenomenon that we know is already happening.

Yes. Yes. So it seems like people have gotten smart around that being opportunistic with FX, and you can do the same on the price side as well, which I think is fair question.

And coming back to another of your -- this bank that we launched in Europe earlier this year, it's solve the interesting problem and that allows you to hold one of -- any of 13 currencies in the same account. So unlike traditional banking, whereas if you wanted a dollar account, that's 1 account, if you want a euro account, that's another account, if you wanted a paso account, that's a third account. In your account, you can hold up to 13 currencies, and you can then buy and sell currencies within the account based on relative valuation. So it allows someone to disaggregate the managing of the fluctuation of exchange rates from when they want to send money. So if they see the dollar strengthening, they can load up and then hold on that as a store value in whatever currency they want and then exchange when they want.

I see. So to make sure I understand that, so you have 13 sub accounts, you can basically choose the currencies that you want to load or unload into that.

Correct, correct. And you can then move value around as currency rates -- exchange rates are favorable for which currencies you want to manage to in your send-out portfolio.

I mean that is definitely something we want to learn more of. So hopefully get more of a chance to do some direct research on that. Any last question. We have 20 seconds left. Just do a quick one. Thank you.

Thank you.

10 second and going. No question -- no pressure.

There's just the 13 different currencies that you're able to offer, can you just talk about liquidity solutions? And how are you sourcing liquidity from what areas, what pools of liquidity? Just curious on that part.

So we are leveraging our traditional liquidity management, the treasury team that we have in Western Union, which is a world-class team that manages our liquidity for the entire business around the entire world. So we are -- one of the great things about the infrastructure we already have as we manage billions of dollars of flows across quarters and countries. And so adding the multicurrency well, it just rides on the rails of Western Union's treasury operations as it exists today.

Terrific. Devin, it was great to have you. Hopefully, we'll get a chance to see you again very soon.

Thank you so much. Really appreciate it.

Thanks, Devin.