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

Thank you, guys. We're all being here in the room. Honestly, really happy to have you both here with us. As you know, I mean, Devin, you and I know each other for many, many years, even before Western Union. But obviously, it's great to have you with us as well. Maybe you want to just start off with a quick intro of yourself, your background. And then we'll go from there.

Sure. Devin McGranahan, I am the CEO of Western Union. I have had the privilege of leading this 172-year-old company for the last 14 months. So I joined in the beginning of 2022. Over the course of 2022, we outlined a new strategy, which we call Evolve 2025, which we'll get a chance, hopefully, to talk a little bit about. Prior to that, I was at Fiserv, First Data. I ran the merchant business. Prior to that, I ran the bill payment businesses. Prior to that, I spent 25 years at McKinsey & Company. So it's great to be here. This is our CFO, Matt Cagwin.

Darrin. Pleasure to meet you in person finally.

Likewise.

My name is Matt Cagwin. I am the CFO of Western Union. I've joined Devin about 8 months ago, having spent the previous 8 years at Fiserv First Data. I came from the First Data side, we were in a arranged marriage. Some marriages work out, some [indiscernible] for better. And then part of that has been about a decade in the coke industry, Coca-Cola Enterprises.

Cool. Very nice.

So we can question judgment if he decided to come with me. Beyond that, he's a great CFO.

That's great to hear. Thanks, guys. Look, it's been, like you said, not too, too long. And so, Devin, I mean, maybe just starting off with what you've seen in the past year or so. And what's been the big hurdles? What are your -- maybe the positives and negatives you've seen?

So look, the last year has been a tough year, right? We had high inflation. We had global economic uncertainty. We exited Russia Belarus as many companies did, which was a disproportion of our business relative to some other companies. And so the dislocation in the geo-macro environment in 2022 was probably not on the brochure when I accepted the job. It didn't say, hey, is this going to be -- what's going to happen. But under that, the business was relatively resilient. We continued to continue to serve 120 million customers around the world and our retail and digital assets. And ultimately, it's the strength of the brand, right? And I've talked about this multiple times. The underpinning of Evolve 2025 really is going back to grounding the company in the brand, in the customer and in integrating our retail and our digital channels to create an omnichannel experience. And so we made a lot of progress on that in 2022, we made a lot of investments in our retail point-of-sale system and our digital assets, and we launched a digital wallet in Europe, which is now live in 4 countries with over 150,000 people onboarded. So the fundamental building blocks came together, and we're starting to see a little bit of the uplift in that as we disclosed at the end of the fourth quarter in terms of a change in trajectory in our digital business.

Before we go into too much on the strategy and your focus, just a quick update on recent trends. I mean, if you don't mind from the last quarter into the beginning of this year, I mean maybe you could remind us some of the data points, but obviously, retail was still kind of finding its ground, right? Digital seems to be very strong, and you're actually adding quite a bit of new users. Was it 30% plus growth on new users and there's been some promotions around that, that's been helpful. But maybe just give us a sense of what you're seeing in the market?

Yes, I'll go there. So as you talked about, we launched the new go-to-market strategy in the middle of Q2. We actually piloted early -- late in Q2 launched, I'm sorry, in middle of Q3 I'm to say. As we exited the year, our North America business had about 30% outbound digital new customer acquisition -- for the total company, we had around 14% new digital customers. that has now carried on into this year. We've actually seen low double-digit growth globally for new digital customer acquisition. We're starting to see a continued uplift in our transactions you saw in Q4. We were -- first time went been positive in multiple quarters. We were low single digit, including Russia or mid-single digit without Russia. Now we're seeing a continued improvement to the point now we're in the mid-single digits. -- with Russia still in the numbers -- so as we've told their business on the call...

It's a little bit of a [ lag ].

We expected customers come first. Transactions, we'll keep it in the uplift because you have a bigger concentration of new customers and then revenue will continue to follow as we continue to start lapsing some of the cohorts coming in.

And Darrin, I think it's -- for those who have tracked the story for some time, Western Union was a significant beneficiary of the first part of COVID, right, because of the recognition of the brand, the rapid migration of retail to digital. We saw significant increases in the, I'll call it, the spring to summer of 2020 as the world shut down and people still needed to send remittances. As that progressed into 2021, what you saw in the numbers was an erosion of the value proposition as other digital players began to catch up, and by mid-'21, our new customer acquisition rates had turned negative on a growth basis. So from the middle of until we got to the fourth quarter of '22, we were not growing fast enough to grow our customer base given what had transpired with COVID, right, and the influx that we had seen. And so if you'll recall, in the second quarter of '22, we had negative transaction growth in the digital business for the first time in our history. And so we feel pretty good about what we've been able to do with new offers, marketing funnel effectiveness, onboarding and returning customer journeys as well as ongoing CRM marketing to be able to transition from that negative to positive by the fourth quarter. And now, as Matt said, continuing into that mid-single digits with Russia, right? So I think we see a strong trajectory there.

You talked about a lot of the dynamics being sort of post COVID to some degree. There's also a narrative out there that competition is harder, right? And so Devin, I mean, when you talk about what you're seeing in the marketplace around it, not even thinking about new technologies, but just the newer -- the other digital money transfer companies that have either come public or not, has anything changed from your perspective on that front? Or is it -- is it more of the same? And you guys just have to do, be effective at that go-to-market.

Look, I have a high degree of respect for our competitors. A couple of them had very strong fourth quarters, which shows the strength in their acquisition model. And more importantly, if you get under it, the strength in their retention, right? So they have significantly higher retention than we do. And that is a combination of customer experience, each of the journeys within returning customers and repeat customers, in particular, higher-value repeat customers. They've innovated and managed their processes and the risk and compliance in a way that creates compelling experiences. And then the second is, there -- Wise, Remitly and Western Union are all now about 2.8 million monthly active users. So they have scaled now, right, where before we had a significant scale advantage. You've got 3 players roughly. Now they're different. Wise is much more account-to-account higher principal where we and Remitly are much more migrant, in many cases, account to cash. So they're different market segments, but they now have equal scale, which makes them formidable as well.

You mentioned retention, and it's interesting because you've obviously shifted to a degree from prioritizing revenue per transaction to more lifetime value, and I think customer retention goes in with that, obviously. And so just touch on that transition and strategic focus on how you operate.

Yes. So it's been a big transition for the company, which then translates into how do we go to market. How do we manage the customer? And then how do we, over time, realize value for the shareholders, right? And so the prior philosophy really was around managing each transaction independently and, in most cases, trying to maximize the revenue in that particular transaction. What we're doing is abstracting from the transaction and really thinking about customers, customer acquisition and then customer lifetime management. So Evolve 2025 at its core is about expanding customer relationship, increasing retention and expanding customer relationship. In order to do that, you actually have to have customers who come back, right? And so having a good value proposition, having compelling experiences relies less on bringing new customers to the franchise and churning them and maximizing each transaction that they do from a revenue and a profit standpoint, to retaining customers and then expanding that relationship over time. So that's really what we've shifted. We've started to talk about CAC and LTV, which were not in the vernacular before. and we've started to model within the company, how do we build the technology, the processes and the platforms, which are all really around the customer and not the transaction.

So thinking about that a little bit further. I mean, when you think of the go-to-market now, what's different about what you want as an acceptable customer today that maybe you wouldn't have taken a couple of years ago?

Well, I think it's less about -- we would have taken anybody. It's more who would take us. So we, before, had a structure and a philosophy that said, sure, if you want to pay $26 to send $300 to Jamaica, we're your guys, right? And there's a segment of people who for the brand and for the access and for our payout network that made sense, and we captured those transactions. If you and said, we'd like to capture a lot of customers and therefore, we'll then have a price which says, try us. So we put in new customer segment offers 50% off your first transaction, first transaction free. And now how do we turn those people into repeat customers, how do we get them to come back for a second transaction, a third transaction? How do we put a debit card or a prepaid card in their hand? How do we get them to pay a bill. That mindset acquire a customer, build a customer relationship versus let's maximize the value of each transaction to Jamaica.

So at the end of the day, you're seeing some success. The go-to-market strategy now with a 50% promotion or the first transaction promotional pricing is obviously showing the uptick in new users coming in. And it sounds like you're seeing retention improve based on the transaction growth rates.

Yes. We talked about this at year-end that our retention for the September cohort was the best we had seen in 6 years. So we continue to monitor that and adjust our plans as we go.

Even after pricing has normalized.

After pricing sort of continuing to get to market-based pricing. Yes.

And we -- people indexed a lot on the first transaction offers, right? But remember, the new go-to-market program had other components to it. We refined the onboarding experience. we refined the repeat customer transaction journeys. We increased our ongoing CRM and communications to the customers, right? So all of those elements of the program are what's driving ongoing retention, not -- once you get the first transaction for 50% off, there's some other reason to come back because we've made it easier, because we've talked to you, because we've brought you back into the system and so the second, third and fourth transaction retention rates are higher for this cohort than previous cohorts because of the rest of the program, not because we offered the first transaction free.

A lot of what you're seeing is, obviously, the digital side. And that's now, I think, 43% of your transaction mix as a fourth quarter.

It's lower than that. It's closer to 30%. You're including white label in that number.

Including white label, digital...

Branded digital that we're mainly talking about here.

So branded digital, 30%. But either way, it's gone up quite a bit. I remember when it was under 10% not too long -- couple of years ago.

And [ of our ] revenue is about 25%.

So where does that go to? Where does the digital or branded digital specifically go to as a percentage of the mix?

So we talked about Investor Day, our goal was to get the ecosystem and branded digital to be half our business, over the future. We didn't time bound that because we have a lot of plans and strategy like execute on and make that possible. That's our aspiration.

Okay. And...

And by the way, that aspiration is not to shrink the digital business or the retail business to make the digital business half.

Well that was what I was going to add.

It's to grow the digital business to be...

Well, I guess that's sort of the question, right? I mean retail is still a very profitable piece of business for you guys. And if anything, you have 600,000 locations around the world that help support both, really. But retail is a big part of that. And so when we think about where that is going to go and when that's going to inflect, it's been negative, right? So where do you see that inflecting?

So we're seeing a couple of interesting things, right? And we talked about this at the end of the fourth quarter. Our block of business is growing double digits, right? And so that's predominantly retail business. It's predominantly a business where we have...

Just to be clear -- at Latin America.

Latin America. Everything south of the United States of America. That business has a strong distribution network. It is a combination of owned locations, Western Union branded exclusive locations and a bit of independence. And we have a robust product set there where we have bill pay, we have foreign exchange, and we have some digital money movement services. That is a laboratory of what our retail business can look like everywhere in the world. And so we are in the process of rightsizing networks, aligning our right agent incentives. We've talked a lot about that point-of-sale experience to create stickiness with the customer to come back, ease of use, and so we believe, based on what we see in LACA and what we're now seeing in Europe given some of the changes we've made, this is a business that can be stable to slightly growing given the dynamics. And if we can get to that, we can get to his 50% because digital will keep accelerating.

So from your perspective, I mean, again, maybe I'm pushing too hard, but timing-wise, retail inflection, I mean, is that something we can hopefully see in the next couple of years? Or...

Just a reminder of our long-term guidance we put out at Investor Day. I mean...

Medium.

Medium term. Thank you. We don't give long-term guidance.

We're expecting this year to be down 2 to 4, we reiterate that. And then get in to [ 0, 2 ] and then positive after that. So you get to that [ 0, 2 ], you're flattish on a retail, but flattish doesn't mean you're positive or 0 as Devin just talked about, because you can get there at your digital to double digit, we talked about at Investor Day our goal.

But we've laid out a -- the Evolve 2025 is a 3-year journey that brings the company to sustainable positive transaction and revenue growth, right? And as you highlighted, Darrin, right, the -- it will be a much healthier revenue growth because these will be emphasizing customer, customer relationship, customer relationship expansion and retention, right? And so that's a model that you can compound, and this is what you see in our digital competitors because they have much higher retention, have a more compounding effect for their new customer acquisitions that we do, right? And we've got to get there both on the retail and the digital side.

One of the areas that you've also been investing is more owned locations. The full -- fully run -- maybe just touch on what that can do to the ecosystem for you guys and what kind of success you're having?

Yes. So we should level set just -- so everybody is on the same page, owned locations today are 1%, 1.5% of the total like 600.

Correct.

650, something like that.

In other words, out of the 600,000 agents, you have [ 600, 700 ] [indiscernible].

Yes. And so we don't anticipate that ever being more than 2% or 3% of the total, right? So this is not a massive -- we've gotten this question. This is not a massive shift in our model. Our model is largely an agent driven, largely a light capital, light touch model where we can reach lots and lots of people, very cost effectively with a high variable cost component in the agent commissions. The benefit to the owned locations, though is in high concentration geographies. So in Brazil, out of the 1,600 locations or 50% of the revenue of the country. So in high concentration areas, we can control the experience, we can deliver additional products and services and, most importantly, we can begin to integrate our digital and our retail and moving retail customers to digital seamlessly because there's no agent in the middle, right? And so those locations give us the laboratory to say, okay, this catchment that we have, these 20-plus million new to retail customers every year, how do we begin to build relationships with them directly with Western Union.

I mean we -- this came up during your Investor Day, but you haven't seen much pushback from your regular agents, your non-owned agents.

In fact, I was with a very large strategic partner yesterday and we started down the same path. Look, they're a big retailer in the United States. They're also dealing with retail to digital. They want to integrate us into their loyalty program. We want to integrate into their digital ad. This is good for all of us. This is good for our partners. It's good for them. It's good for us. You just have to design the right economic model that says, how do we both benefit from a customer that's stickier, from a customer that does more with both of us. And every customer in the world at some level is going omnichannel. So if we don't figure out how to integrate our models with our partners, we're going to lose out.

Darrin, if I can just build on Devin's point? So the other thing that we could have with our agents, so we can go down is our concept store concept. So you have your company owned, but you also -- if you have, to your point, if some agent were pushing back, there's economics that makes sense for both parties, and you can do an exclusive location, which is a concept store in a right location where they own it, and we got dozens of them in Europe, we're launching right now where we partner with agents to do that.

Where it's -- [indiscernible]....

Yes. It's their agent location, but it's exclusive, it's well branded, it's Western Union. It feels like a [indiscernible].

Only-branded Western Union.

Only branded Western Union. So that's the alternative you have if you start getting to a pinch where certain agents are feeling like we're touching on their market.

And how about the wallet? I mean, really the -- the idea of the Western unit ecosystem in offering that digital wallet was something that I think we've thought made sense for years, frankly, just because you have the captive audience, especially on the -- on both sides. But even on the receive side, it would make sense, let alone the send side. So thinking about what that can do for someone. Can you touch on how that's been progressing in the consumer reception?

Yes. So you know we launched that second quarter of last year in Germany and in Romania. We subsequently added Italy and Poland. And so what we're playing with that ecosystem is 2-sided network, to your point, send and receive, right? We've rolled it out with a debit card. We've rolled it out with 4x currency services, so you can hold 13 different currencies in your digital wallet. And then we've linked it to a series of other partners or ecosystem players that early waged access and a few other things, right? We've onboarded about 150,000 is what we announced in the fourth quarter earnings call. We are progressing kind of the pace in which people are transacting and the nature of the transactions they're doing quite well. We will bring that concept to the United States in the second half of this year. We will also launch in Brazil in the second half of this year. We will add 1 or 2 more European countries, again, trying to get the network effect on the 2-sided, send and receive. And we're starting to create offers for senders to induce their receivers to download the wallet to receive money into Western Union digital wallet. So look, we launched it less than a year ago. We're pleased with the progress it's making. Strategically, it's really important over time because it's the underpinning for increased retention and relationship expansion. But in the short term, we're focused on the digital business and the retail business, getting them back to reasonable rates of growth in our traditional cross-border money. So think about the wallet as the long-term destination. The short term is getting our digital business and our retail business functioning.

But at the end of the day, I mean, going back money would go into, whether it's a digital call and wallet, then it would have to go right into either cash out or into a bank account, right? And so now you're actually giving your users both sides, an opportunity to actually keep the funds in the wallet, right, and you can monetize it in different ways? I mean it's very logical, and I think it would be probably targeting a customer base that's relatively under banked.

Correct. I give this story. In Germany, we discovered, there are multiple versions of your worker permit ID because it's a good European country. And so different levels of the ID entitle you to different social welfare benefits, right? Most traditional banks only accept the 2 highest levels. So think about a green card and a green card junior. There are 3 others for seasonal workers and for other things. Because of our risk and compliance system, we can accept [ offer ], right? And so we onboard a bunch of people in those 1, 2 and 3 worker permit visas because we were able to do it, and we like those customers where traditional banks don't like low balance, higher transacting customers.

The investments that are needed in these initiatives, broadly speaking, are all within -- they're all captured in your plan, obviously.

Absolutely. Absolutely.

And so when we think about the margin structure of this business now going forward a little longer, Matt. What do you think? I mean, is this something that we can really have the best of both, you can invest properly in the digital wallet and grow? Meet the growth targets you talked about at the Investor Day?

Yes. We fully are committed to our medium-term guidance of the 19% to 21%. We feel like with our $3 billion expense base, we have the ability to redeploy costs within that and build to make these investments. I think we've talked to you before about how we redeployed last year, $40 million to $50 million into these initiatives by moving it around some different programs and costs. We've continued that into this year. And what we're trying to do with that is it's not really a cost-cutting initiative. It's really a redeployment, making sure we've put money to the right things. And our focus is anything across from real estate to right people in right jobs, getting the commissions right and getting our CAC in the right place.

And so we -- at our Investor Day in October, Matt laid out, in essence, our investment program, which is about $150 million, and we committed to reallocating within our current expense base to fund that $150 million.

Okay. That's helpful. Maybe just touch on capital allocation for a moment. I mean, you guys have been a very good cash generator for a long time. You've also bought back quite a bit of stock and have a very high dividend yield. So maybe just give us a sense of what your thoughts are going forward.

Yes, higher stock price will lower the dividend.

So look, we remain committed to the philosophy that we laid out, which is we believe we have the balance sheet and income strength to support our dividend at its current levels and remain committed to that as a ability to return capital to our shareholders. Second, we are looking to accelerate growth. And if there are inorganic opportunities, particularly in building out the ecosystem or building our capabilities into adjacencies for cross-border money movement, we will deploy capital inorganically. Anything that's left after that, as you saw in the fourth quarter, where we returned almost $175 million, we will continue to buy back stock. We want to remain and be perceived very much as investor friendly.

Okay. Guys, any questions? I'm going to open it up to the audience, see if there's any questions. I guess for me, while we're seeing if there's anything in the audience. I mean, when we think about what this business, Devin, you want it to look like in 2 to 3 years, you told me the mix already. But obviously, the competitive landscape, I mean does it make sense for consolidation to occur in this industry?

Generally, yes. Specifically, no. So this is a highly globalized business, right? And so when you think about -- the Middle East is very different than what's happening in APAC, right? And so when you think about the Philippines, which is a super important inbound country, if you're in the remittance business, 70 million of the 120 million people in the Philippines have a GCash wallet, right? That changes the nature of the business precipitously for [indiscernible] if you had a big retail payout network, which we did in the Philippines and all of a sudden, everybody has gone digital. How does that influence the business and who are the players and how do those players aggregate up or down. So in any given market corridor geography, there are opportunities to consolidate, bring players with capabilities that are complementary together, particularly as the model evolves. Macro, look, there is no MoneyGram, Western Union, MoneyGram, Ria like the regulators just aren't going to let that happen.

Okay. I guess one -- go ahead, I think there's a question in the back.

Just quantify the revenue back to 1% [indiscernible].

We have -- we've disclosed it before. It's $30 million for retail and about $10 million for digital.

Last question for you guys. I mean, look, your stock has been under some pressure over the last few weeks. Honestly, all I get his call is asking why nobody really has a good explanation. It seems like competitive dynamics comes up sometimes, people worry about whether others are doing something that you guys aren't. From what the sound of it is, you guys are doing well and the transaction growth trends are coming in, in line or even better maybe than you would have expected when you gave your outlook. So what do you think folks just don't get about the story that it seems like it's being played out of the stock?

If I knew the answer I would have had a lot less frustrating 2 weeks.

But what do you think is underappreciated?

So what I think is underappreciated is the power of the existing customer base and of the integration of the franchise, right? So you can go look at what my digital competitors spend for customer acquisition. It is not sustainable to build a $5 billion revenue business doing what they're doing. They've actually made public commitments about how they have to get to profitability, how they have to grow up, right? So the power of what we've built over 50, 70 years, super hard to replicate. You can't get into 200 countries. You can't run the risk and compliance that we do. You can't process 350 million transactions at scale, right? That is a durable franchise that if we're successful, it's hard to replicate by anybody.

Makes sense. Alright guys why don't we leave it there. Thank you very much for joining us today. Appreciate it.