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

Hey, everybody, thank you for joining us. I'm Jason Kupferberg, the payments processors and IT services analyst here at Bank of America, and we have Matt Cagwin here, CFO of Western Union, Matt first time at our conference. So thank you for being here because you haven't been in the role for that long. But I think the first time you kind of spoke to the investment community, it was at the Analyst Day last October in New York. You and Devin unveiled, the Evolve 2025 strategy, so here we are 8 months after that. Just take us through some of the key components, the highlights of the strategy, give us a bit of a progress update, and then we can go a little deeper from there.

Awesome. Jason, thank you very much for having me here.

Yes, our pleasure. Yes.

I'm very exciting. Much more enjoyable than doing an Investor Day or a 90-day anniversary. But -- so as you think about our Evolve strategy, which we launched last October, it's built on 4 pillars. And it was really using the waterfront assets that we have at Western Union.

I got that.

The first one was returning retail to -- stabilizing our retail business. It's been an asset that's been under pressure for a couple of years. Had not made the right investments in it. We've been working on that very carefully over the last year or 18 months working with our partners, a lot of blocking and tackling there on how do you get the right engagement in the field. We've been working on the technology side, getting the right technology in place. Our second pillar is returning our digital business to double-digit revenue growth. As we've talked about in the past, we launched a new program back in Q3 overhauling our go-to-market strategy. And that program has allowed us to go from negative transaction growth in Q2 to 7% transaction growth in Q1 this year. That's happened through accelerating our new customer acquisition. We pushed this out in the U.S. in August, and we -- ever since we've launched it in any territory we've put it in place. We've been getting double-digit new customer acquisition, averaging mid-single -- mid-double-digit in Q1 and Q4 last year. And then that's then led to the transaction we talked about. The third pillar is our ecosystem. And our goal there is to drive financial services, accessible financial services to our client base, giving us a chance to expand our TAM, but more importantly, to drive retention. And one of the things we highlighted at our Investor Day was every 1% improvement in our retention is worth $30 million in retail and about $10 million in our digital business. So our real focus around the ecosystem is giving our customers more opportunity to transact with us, interact with us and keep us top mind when they want to do their next activity. And then the last pillar is overall operational efficiency, freeing up some money for redeploying into building out new products and technologies, we think we have enough space within our $3 billion expense base to be able to fund all the innovation we have in mind.

Excellent. Okay. That's a good recap. Maybe we turn in on the digital piece a bit. I know you put out a couple of metrics there, talking about some of the reacceleration, the new customer adds, fueling the transaction growth. You had taken some pricing actions, right? And it seems like really did stimulate demand as a result. So where do we go from here on that? I mean how long do these kind of promotional pricing strategies remain intact? And then how should we be thinking about, let's say, over the next several quarters, transaction growth versus revenue growth?

Fantastic question. I would say the easy answer to the first part of that is we do not anticipate promotional pricing going away. We are -- many of our competitors already doing it, have been doing it for years. And we think it's important, looking at the lifetime value of our customers versus the individual transactions. So we think getting them into our -- into the Western Union family, trying our services. We'll -- to your question about how do you think about transaction and revenue. What we highlighted in our last earnings call is that we believe that Q2 will be the wide inflection point and then we'll start narrowing as you get into the latter part of the year. We highlight the fact that we anticipate having in the third quarter, positive revenue growth in North America, we launched the program in the third quarter last year. And then we anticipate having positive revenue growth in the fourth quarter for the world for digital.

Okay. So fourth quarter for -- on a global basis. Okay. Okay. Understood. Understood. So let's maybe zoom out for a second, talk about the macro. I mean, Western Union has always been a macro-sensitive business. And right now, you've got cross currents in the sense that inflation still elevated, but easing, good thing, right? Rates elevated, but hopefully, not too much more to go in that regard. Unemployment is low. How does that all add up for the Western Union? How would you evaluate like the overall health of the average C2C customer right now? And I'm sure it varies a little bit by region and corridor, maybe you can touch on that.

Yes, certainly. So we've seen a lot of stability over the last 2 years. We've obviously been working our way through from a principal per transaction basis, which is how we really look at the maturity of the customers that we have. It has been positive low single digit for the last 8 quarters. So that's a good sign for us that our customers have money to send to their families and have the ability to do it. And when we look at this overall remittance business, it largely follows GDP. This one could be varied from quarter-to-quarter sometimes, but it largely follows that. But we're -- I think this might be a different environment is if unemployment start to get to be high, a lot of the change in employment has been the more white collar type jobs where our customer base is more the blue-collar workers, the service personnel in this hotel and those you can't find them. So we're optimistic that we're not going to see any kind of problems as we go into recession, but we're watching and monitoring it very carefully.

Okay. And so if we think about some of the digital banking initiatives, digital wallet initiatives, I think initially, you would start with some pilots over in Europe. So maybe just refresh everyone on kind of the genesis of that, how it's expanded, what sort of traction have you seen with it? I mean it's essentially moving towards being kind of a neobank for a lack of a better word?

Yes. So it's our third pillar. So our -- we call it our ecosystem. One of the parts of our strategy for the ecosystem is a digital wallet, which we launched the first 2 digital wallets last year in the second quarter in Romania and Germany. One of those countries is a big send market, which is Germany. One of them is a very big receive market, Romania. Then later in the year in Q4, we launched in 2 additional markets. We launched it in Poland and in Italy, again, one big large receive market, one big send market. And our objective of putting them in send and receive markets as they build a test and see behaviors as a reminder that you know this, but historically, we made no money in a receive market. The money we get sent in. It actually was a cost to us because we had to pay agents to do payout. We're now with the wallet, we're able to have people keep the money on the wallet. We're adding ancillary products such as you can get a prepaid card, you can get a debit card, you can hold currency, earn interest in certain geographies, you can hold things in up to 13 different foreign currencies. So there's a myriad of other services that we've attached to the wallet that allows us now, both in a send market to provide additional services as well now having services in the receive market, which we never had before. What we're starting to see from a transaction, its very early days, still, we've only been in these markets for a few -- a little less than a year for some or most -- we're seeing transactions generally 3 to 4x higher than what we were seeing with the traditional remittance clients. The good news there is that means they're more active with us that we hope and expect it will drive better retention because they're more active with us. But what we've also noticed is that there's 3 types of customers we're getting. We're getting customers that fit your -- where you open the question with the neobank type customer that aren't core remittance clients. And then we're also getting people who are migrating from our retail business or our digital business into the wallet. And then we're getting the third grouping is people who were clients of ours more than 12 months ago, have gone dormant for a period of time and are coming back because now we have new services. And when you break it up, the first group, not going to be great economics. It's no different than all the neobanks you probably monitor that lose money left and right. So we are -- we rebalance how we're going to market, focusing our marketing and our attracting clients away from that group and into the 2-second buckets because the economics in the 2-second buckets are similar on the second group around our remittances plus the incremental products we have. The third one had no revenue, but they needed our service they had our service at one time, but moved away for whatever reason and have now come back because of additional product set.

And how do you go about kind of reactivating those former users? Is that just kind of direct e-mail marketing or the...

So we're doing web marketing through Facebook, other things, we are doing some direct marketing, we're allowed by geography. So not all of them are finding us because we have their e-mail or phone number. A lot of them are finding us through the other way we're attracting clients.

Okay. So maybe just circling back on digital because that's where I think there's always a lot of attention paid, huge growth during the pandemic, obviously, then some normalization, some deceleration. But revitalized strategy, you're stimulating the transaction growth. Underneath all of that, what is the competitive landscape look like in digital money transfer. And as you have reaccelerated the transaction growth recently, any sense of who you've captured share from?

Yes. So let's keep competitors, as you know very well. So obviously, you've got why, so we would not really consider a key competitor for us. They're targeting a different customer, typically account to account. Then you've got Remitly, which we find as a very formidable competitor, but they're able to do it with a very high marketing budget and very low rates and no profit. And then beyond that, a few other competitors have some small competitive set. Where we're getting it. I don't exactly know. We don't ask that question. We're getting new people signing up. You look at what our competitors are doing for their growth rates and not seeing a bunch of visibility or deviations in it. So I don't know how to answer that question per se, but we are seeing some really strong traction, obviously.

Any sense, I guess, so these newer users that are coming on, are they possibly new to digital remittances? Or is there any way for you to know that? Or...

We know that they are not coming from our retail business. We're not cannibalizing our business. We're not seeing a massive movement from -- we're able to track customers between both sides. We're not seeing a massive shift or any meaningful shift between the 2. They are net new to us as digital versus the last 12 months retail. We're not looking back forever, but they're coming -- they are not moving from an active retail to a now active digital.

Yes. Yes. Okay. And -- sorry, go ahead.

The only thing to point out to is, when we first launched this program, we were cautious, would you get people seeking the free and you would basically have these people who would come in for the one transaction then leave and what would that do. The one that we're proud and happy about is that we're seeing equal to or slightly better in a lot of geographies, retention rates than what we had prior. So it's telling us we're getting similar type customers. Therefore, you're going to continue because it is what we've always talked about where you're going to have your customers come first then you're going to see your transactions and then revenue as you continue to build the pipeline. And that's right now panning out and working out a little better than we thought.

And the nature of the promotional pricing is basically first transaction free?

It's generally first-time free in some places have half off, and we're going to continue to experiment with it and try to figure out what's the right point to get the right level of growth. I mean if you can do half off, but still got 20% growth, we're going to do that all day long, but if that falls to 2%. I'm not sure I gave away one transaction to get 20% growth in new customers.

Right. Okay. So after the first free transaction, you're paying...

Market-based pricing.

Okay. Okay. Got it. And I did actually want to ask more broadly on pricing. I mean I've covered the company for a long time, and there was a time when it felt like C2C pricing just in general, it was kind of before digital was really a thing could just be like headed down a real slippery slope. And for years now, C2C pricing in aggregate has actually been stable, maybe even up a little bit, some quarters here and there. And so maybe you can just touch on how Western Union has kind of moved pricing strategy, using analytics, whatever it might be because it's almost counterintuitive, I think to a lot of people at the C2C pricing in aggregate has stayed pretty solid and steady.

Yes. It's a great point. I mean so we average about 4% yield across the board. You're typically a little bit higher for a retail transaction than you are pure digital, but that will vary whether it's a cash payout for digital. Our sophistication here is great. One of the things that we thankfully inherited is a technology allows you to price in a retail market, a myriad of ways. You can do it by a day a week, you can do it by street corner, you can do it by DMA, which would be like an area. So the sophistication we have to do is pretty sophisticated or very good. On the digital side, we have the ability to scrape what our competitive pricing is. It's like I think do ours probably. And you can see to a quarter level, what are you pricing for an account to account or account to cash payout. You have the ability to see what the key competitors are doing in the marketplace. Our strategy and our approach for it, though, is we used to have a strategy of maximize revenue per transaction. We've pivoted that as we've moved away from being a very transaction focused company to being more customer focused, and we now have the ability to look at customers between both retail and digital and make them a person rather than a transaction. And we are now moving to a lifetime -- we've moved to lifetime value. So when we price now, we're not going to be the highest price in the market at all times. We're going to try to figure out where is that right point where Jason wants to be a client of Western Union for as long as possible. So we're moving to a -- we look at a basket of market prices, and we're going to be in that basket and trying to find that place where you're happy with us.

Yes. Yes. Okay. No, it definitely makes sense. Why don't we move over to the retail channel? Because you talked about that as one of the pillars too and a question you just talked for a while about there being some element of just structural decline, but still a massive business for you, right? And throwing off some good yields and cash flow and all that. So let's just go a layer deeper into some of the initiatives that you guys are employing to try and stabilize that business?

Yes. I earlier mentioned technology, but I didn't go into the detail on this. There's 2 early advancements we've put on technology recently. One is quick resend. This is a technology where the system will build to pull up your last transactions. And if you want to send to your family member in Guatemala that you've already seen to before, no longer do you need to input all the information and you can automatically pull that up, you can change the amount or put the exact same amount, the time is very fast is in that transaction. The other one we have is remember me. And with remember me, you walk in and before you'd have to give us your e-mail address, your phone number, your driver's license or whatever identification you're using and all that information have to be put in and then gets in your transaction. Now when we get one of those elements, it will pull up the rest of them and pre-populate. Our goal of doing this is it makes it faster for the customer but also makes it faster, most importantly for our agents who the biggest -- most expensive commodity is usually people. And how do you get the queue moving and how do you use them effectively. So those are 2 things we put in place. We launched both on a pilot 4 months ago in D.C., had great results out of it. And we've now started launching it more broadly here in the U.S. It's been launched in a fair bit of the country, and we're seeing good penetration for that and we're going to continue rolling it out from there.

Is that essentially some of the -- remember you guys talking about like point of sale enhancements back at the Analyst Day? So is this essentially the initiatives or is it actually a change in the technology like literally within point of sale?

Yes. And these are an offshoot of what we talk about at Investor Day. so Investor Day, we talked about rolling out a whole new POS, project name was Phoenix. And we're still working on that. It's in pilot phase. These were 2 of the early support points we saw, and we're like we could wait and roll it out around the world. It's the new POS that we're making it the best it could be, or we can carve this off and push into our legacy systems, you get the benefit today. So as we're rolling out Phoenix, as we see things that we can push into the old technology, we're going to do that. And got the ball rolling, we're building in a modular fashion where you can plug and play, which allows us to get the speed of rollout.

So let's just stay with the retail channel for a minute. Talk about the agent network. How long are average contracts these days? And what percent of the retail business is under exclusive contracts? And what are you seeing in terms of when you go through a renewal cycle, what type of impact do you have to commission rates typically?

Yes. So just a reminder, we have about 400,000 active locations. For those who have followed us for a while, you might have heard us talk about a 600,000 location number. We used to brag a lot about the flags planted irrespective what they actually had. And the activity has been around 400,000 for a number of years on an active basis. To your question around how long the contracts, they're typically 3 to 7 years with an average around 5. And to your question around exclusivity where generally when we think about it, we are exclusive like here in the U.S. Most of the big-box stores, were exclusive other than Walmart and Kroger. In Europe, we've got a lot of the Post Offices there. And in around the world the Post Office they're generally pretty exclusive, throughout Latin America. We've got a lot of master agents that are exclusive in a number of the countries. There are some geographies where you can't have exclusivity, law prohibits it. And where that happens, we will typically go to market with 2 prices and 2 commission rates. One is if the agent choose to be exclusive, they'll get x. And if they want to be nonexclusive, they're going to get a much lower rate. And the goal is to be financially incent them to be exclusive, but you contractually cannot force them to be exclusive or by law if it's a choice.

Okay.

And to your last question, I think, was around rates. On renewals. As a backup, we also announced at Investor Day that we're moving away from having large signing bonuses. If you look back at the history of the company, we typically would pay between 2% and 3% of our revenue every year inside of bonuses. Our goal there is you're paying someone just for the right assigning. We're pivoting that won't necessarily change the net take home to an agent. We're pivoting that to more performance-based incentives that when we grow together, were both rewarded together versus writing a big check for signing. So you will see our cash flow change on that. We had one last one that was a lingering one from early last year, we paid out in Q1. It doesn't mean you won't see any. But the days of $90 million, $100 million signing bonuses for a partner, I would expect to be over. And then as far as the average rates, they're largely consistent, when you include the incentive bonus relative to signing bonus. And you know all that how it's relatively similar.

Yes. Okay. Okay. Got it. Latin America has been a pretty bright spot for you guys. I think there's been some significant acceleration there in the revenue growth, the past couple of quarters. Talk about the trends underpinning that, sustainability.

Yes. So it has been one of the biggest bright spots for us. We've got a great management team down there. As I mentioned a minute ago, it has got a fair bit of exclusivity in the marketplace. It has the largest concentration of company stores in the world. They represent about 90%, 95% of our company-owned stores. They were an early mover on the digital market. So the level of competition we're seeing on the digital side has been more nascent. And we've been intentionally driving as fast as we can there to make sure that we have a front-runner position. And then we also have some other ancillary products down there. So we have a very big bill pay business down there, which we leverage our company stores for which then gets you -- which strengthens your retail digital escalator because we're able to control that experience.

So do you see the strength as being kind of sustainable as we go through the balance of '23, I mean, at least directionally? Or...

I would anticipate them to continue to have strong results. The comps get a lot harder at the back half of this year because you remember last year, they were mid-double-digit growth last year and comps will get harder. But they -- if you look over time, they've always been a very strong market for us, and we'd anticipate it to continue to be a strong growing market.

Right. Right, right. What areas of your business can you potentially apply generative AI to? Are you guys experimenting there at all?

Yes. So it's -- these questions all the time. To me, we're a technology company. We've been using robotics, AI and myriad of things here, automation, you can't call out everything and there's different definitions of it. But to the definition now of generative AI, we're looking at lots of different things. One of the things that we're piloting right now is in our call centers, we've got 1,500 and 2,000 call center agents spread around the world. And today, we will actually have testing listening of those calls. And as Jason is doing a good job, is his tone going well. Is his customer receptive? Are you using the right words? And all that is done by human listening, grading, putting on a report card, sending in a way -- historically happen -- very labor intensive, you have to sample it. We've got some technology that we're testing right now that allows us to do it for all calls, and it can do it across the 30, 40 languages that we take and then can score them and can help us understand the agent A needs to have more training and support versus agent Bs, your front runner. And we're excited about this because it's not only a -- maybe you can drive out cost because you don't have to people listening anymore. But more importantly, I mean, the more you can have satisfied customers calling in, get their issues resolved first time will then drive retention. So it's one of the things we're piloting from that angle.

Okay. I wanted to touch on margins as well for 2023 specifically. I think you hinted at the fact that first half margins may be below full year, right? And then second half improves, just walk us through some of the puts and takes kind of driving some of that dichotomy between the 2 halves.

And the world has made -- have a minor change versus when I shared that. Our margins came in pretty solid in Q1 at 20.4% or 20.5%. Our guidance for the year is 19% to 21%. Q1 margins were very solid from 2 major aspects. One is we had some upside in our revenue from Iraq due to the monetary policy change. And then the second major driver is, as we talked about at Investor Day, we've got a program to drive continuous improvement. And our goal is to redeploy those funds into our strategic initiatives, our evolve strategies. We were able to save more in Q1 than I drive that project, then Devin was able to spend and he drives all the initiative side. So I was able to outpace them on our redeployment initiatives.

Okay. Okay. And then maybe just touching on the Iraq piece because depending how closely people may have followed the print, they may or may not be aware. What was the change in monetary policy? Do you expect some of that lift which was pretty material to revenue and margin to persist beyond Q1?

Yes. So the change was basically the Central Bank of Iraq made it more challenging for banks to do KYC or Know Your Customer rules. And the banks were not prepared to do that, which basically turned -- you wanted to send a remittance outside of the country through a bank go from being days to over 30 days. Which made it really challenging for you to want to wait 30 days. Now we already had really strong compliance programs in place, so you were able to come to Western Union and continue to get your money in minutes or depending with corridor within the normal time frames. So we were able to fill that void that was left by the change of monetary policy. We do anticipate, as we talked about in our Q1 earnings call, banks are going to figure out what made this work. It's not a permanent change. How long it will last? Only time can tell.

What have you assumed in your guidance?

So the guidance we published in Q1 assumed that it ended at the end of April.

At the end of April. Okay. Okay. All right. Anything you can share since then?

We will share that in July.

Okay. All right. Fair enough. Fair enough. Let's kind of bring it back full circle to that Analyst Day. Again, you provided some longer-term financial targets to, I think, give the Street a sense of how you saw the strategic pillar is translating into the numbers. You talked about revenue growth improving in '23 versus '22 and '24 versus '23 and then aiming for 2% growth, I believe, in 2025. Share with us a little bit about how you sort of buildup that plan, kind of the confidence intervals particularly looking out at the 2025 piece and how you're feeling about it?

So I'm very confident about where we are right now in the path. We're a little bit ahead of where we thought we'd be at this point in time. We think we have a lot of levers to pull between now and then that give us flexibility to get there. As we talked about at our Investor Day, we exited last year down 6%. We expect a 2% sequential improvement each year between now and then. So you can -- our guide this year was down 2% to 4%. Have very confident we can get there. And then you keep getting better by 2% each year. The large driver of that early on is going to be on the digital space, we talked about last October, and we're already starting to see that on the transaction side, and we know the revenues are coming later this year. And then the retail is the one that we got to get these things in place we're starting to get. We talked about in Q1 that we've seen a couple of hundred basis points in almost every geography around the world on a transaction basis in retail. So we're starting to see some traction there, which is a little bit faster than we had anticipated. So we're very bullish about where we are, but it's 3 years, a lot can happen between now and then, but where we are today, I'm pretty happy.

Okay. I know that's fair enough. And what about -- I mean, you have a strong balance sheet, you don't owe much debt. You throw off pretty good free cash flow. So just take us through your latest thoughts on capital allocation and deployment.

Yes. So we are committed to our very high dividend yield of a current dollar amount, not the yield, I hope our stock will go back to where it belongs. Our second focus is strategic M&A. We've not been a massive acquisitive company over the last decade. Since my time is not because we're not looking for things, but we want to make sure we buy things that make logical sense. And our focus is really -- as we talked about Investor Day, we're looking to continue to get digital to be half of our company's revenue. So we're looking at things that can be helping us on the digital side or help us on adding to our surrounds for our ecosystem. So if there's any of the ancillary products or things of all that nature that the areas we're looking at. And then ultimately, when we look at all those things, if there's no good logical place to put the money that will be a great return for our shareholders, we'll return it through share buyback. Very similar to what we did in Q4 when we bought back $175 million.

Right, right. And on the M&A point, I mean, what are you seeing in the pipeline? Like -- have the valuations normalized? Is -- have seller expectations become more realistic?

People are -- they're more realistic, but that's -- we're now slicing since the gray. There's still a belief I did around a year or 2 ago, and I got x, but we believe or the market we believe is way less than x. And there's some place between the 2, but they're still not down to where the reality is with interest rates and growth rates and access to capital.

Okay. But there's some interesting properties out there is just a matter of being patient.

Patient.

Right. Okay. And with that, we are hitting 0 on the clock. Thank you very much, Matt.

Thank you.

Really appreciate it. Great conversation.