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

Thank you, everyone, for being here with us again for the afternoon sessions of the Wolfe FinTech Forum. Again, I'm Darrin Peller, covering payments and processors and IT services. Really happy to have Western Union with us. I was just saying to Devin, who's the CEO of the company, just I remember going back to 2008, covering the story. And in reality, there's been a lot of change, actually, at the company and probably most of it in the time you've been here. It's really been a company that's been, I think, reignited in the last couple of years, and you've done -- you've been a big part of that. So it's really great to have you with us.

It's great to be here. We've got Tom Hadley, our Head of Investor Relations; and Matt Cagwin, my CFO, here as well.

Thanks, guys. Thanks for being here. Look, I mean I think starting off higher level, 18 months removed from your Investor Day, and we just touched on more of a revamped go-to-market effort. What have you learned about the business in the last 1 year, 1.5 years?

So the strength of the brand around the world is a privilege. The strength of the foundation that we have, I had hoped was good. And whether it's our risk and compliance, our payment processing, our agent network, those are all building blocks that have enabled us to actually move faster, Darrin, than what I thought we were going to be able to do. So if you remember back in October of '22, we laid out the pillars. The first one was stabilize retail and I think we got a lot of skepticism that, that, in fact, after years of cyclical decline could actually happen and so I was very pleased in the third quarter of '23 when we got to flat transaction growth globally in retail. And then we sustained that because lots of people said that was a onetime event, we sustained that into the fourth quarter. And as you know, we're now in the process of shrinking the gap between transactions and revenue. And so the strength of the underlying franchise is evident and through process improvements, a little bit of hard work, some new talent, we're really making progress against the goals we laid out at our Investor Day in October '22.

So what played out so far in line with what you would have expected the last year or 2 really on your Evolve 2025 strategy? And what may be playing out differently than you expected?

We talked a lot about returning the digital business to double-digit transaction and revenue growth. And starting in the second quarter of -- or in the fourth quarter of '22, we laid out the formula, grow new customers double digits. That will lead to double-digit transaction growth, which will lead to double-digit revenue growth. We announced double-digit new customer growth fourth quarter of '22. We announced double-digit transaction growth second quarter of '23, and in the fourth quarter, we were revenue growth of 4% in the digital business and starting to close that gap, so that has almost gone formulaically like we had laid out and hoped. And so we expect to see progression quarter-over-quarter of the narrowing of that gap between transactions and revenue for our digital business. Changing the hearts and minds of 10,000 people to have a very customer-first mindset is still work in progress. We've got a lot of great talent in the business. We've got a lot of people who get up every single day and want to do the right thing for the customers. And that's resulted, frankly, in a lot better customer and agent service. And so I talked about this in the fourth quarter call, we've seen total calls on a higher transaction basis go down by almost 1/3. So we've taken almost 10 million phone calls out of the system by just providing a better service to our agents and to our customers, more self-service tools, better transparency about the timing and expectations around the movement of their money. And so I think that's real evidence of kind of bringing the organization along and executing every single day.

Can we just touch a little bit more on the blocking and tackling elements of your business that you and I were talking about as we sat down, I remember a meeting we had maybe a few months ago where we talked about how there were certain aspects, you were kind of surprised about when you came on that the company didn't really offer. I remember thinking about it wasn't always available to send money using a bank account, right, in some cases, in some corridors, or there were certain friction elements that you've improved on. You've seen retail now flat, which is a lot better than it was, right? So give us examples of what you're doing to improve the retail business and where that could go.

Yes. Look, a very simple, but it really is about execution is when I got here, the average retail transaction took about 7 minutes. Now when you start breaking that down, 80% of our retail transactions come from existing customers. About 80% of those are repeat transactions. So I send money to my mom, every Friday, the same amount, right? And so last year, we implemented something we call Quick Resend which literally turned that repeat customer, repeat send into 3 clicks, right? And so that speeds up the experience for the customer. They don't have to revalidate. They don't have to stand in line, agent efficiency goes way up, and frankly, there's a lot less errors that then have to be refunded or reprocessed, right? So simple execution, process improvements are making a big difference in the retail business, right? Staffing our call center. So when agents call and they have a problem, you pick up the phone immediately and you solve the problem. You don't make the agent wait. You don't make the agent come back. You don't make the customer come back. This is hard to believe. But for our Vigo brand, which is one of our higher performing areas in the North American market. They focus on the LACA market in Mexico in particular. If you had a refund, you couldn't get a refund in a Vigo location, you had to go to a Western Union location to get the refund. So you couldn't go back to the place you sent the money, you had to go someplace else. By the way, the Western Union agent who were doing Vigo refunds weren't really excited about that prospect either. So you as a customer, weren't getting the great customer experience that we would desire for you regardless of channel brand market opportunity. So now today, you can get a refund in a Vigo. So those kinds of process improvements have made a big difference.

Okay. And so we are now, like I said, we're now flat, right, on a year-over-year basis in retail after having been negative for some time. The comps are a little bit tougher, though, I guess, right? And so help us understand your conviction around that sustaining at these flattish or better rates going forward?

Yes. And so we continue to work on these process improvements. I told you we're about 1 in 12 call center interactions per transaction. I'd like to get that to be 1 in 20, 1 in 25. So that's all continued upside. We continue to see strength in regions like LACA, which is a strong retail business for us. Surprisingly, we're seeing strength in Europe, right? This was one of the big drags on our retail business. We lost 2 big important agents there. The team has really been rebuilding our agent network. We've been aggressively implementing some of our new go-to-market strategies. And so that in a tough market like Europe with a tough macroeconomic drop is encouraging that this is, in fact, durable and sustainable.

Yes. When we think about the footprint, obviously, it's an important part for your brand in general and just generally getting to the business, it's somewhat of a flywheel, right? And so how are you trying to really maximize your footprint in terms of profitability, in terms of efficiency? Just talk about some of the steps you've taken.

Yes. So we've really shifted the mindset from agent count right? And so in the end...

Yes, used to be every quarter, we're at 500,000...

In the industry, there was a real emphasis on who has the most agent locations I think prior management have set a goal for 1 million locations. That wasn't really grounded in anything, I'll call it, math science. And so we spent a lot of time working and we actually talked about this at our Investor Day, kind of how do you determine a great location for an agent? How do you use demographic data, how do you use cell phone data, how do you use competitive intel on where our competitors are and how they're doing to make sure that you have the right network in the right place, serving the right customers. And then we've put a really big emphasis on productivity. So we are very pleased when we now report over 400,000 productive locations, not just total locations and then how do we grow productive locations in the right places has really been the emphasis. So much more emphasis on productivity, much more emphasis on agent prospecting in the right places, not just agent count for agent count.

Just remind the audience, from a retail standpoint, what your goal is in terms of, is this a growth business? Or is it just kind of holding its own so that digital can really do well?

Yes, so for many years, as you know, because you followed it, the digital business was growing strong double digits, sometimes even into the mid-20s, low 30s. And that was a $400 million, $500 million business. But the retail business was shrinking 1%, 2%, 3%. And so the math equation kept the company kind of flattish, right? Some years, plus 1; some years minus 1, because you -- the retail business is $3 billion of revenue and that shrinking a couple of percent is very hard.

Just remind, what's the mix again, retail today versus digital?

Retail about 75%, Digital is about 25%, right, on $4 billion, $4.1 billion of revenue. So I think $3 billion, retail, $1 billion-ish, a little less than $1 billion-ish on digital. So and we have consumer services, otherwise known as other, which we can come back to.

We'll come back to that.

And so that equation just was a very hard equation to propel the whole company. So our goal for Investor Day and I think we're now well down that path is to get the retail business to stable revenue. So if you can get the $3 billion to stable revenue, the double-digit revenue growth in what's now almost $1 billion changes the total revenue equation for the company. And now you can see yourself getting to mid-single-digit revenue growth in the total because you've stabilized the big chunk of it from shrinking anymore, right? Is there upside beyond that? I remain optimistic as we kind of continue to perfect agent location, agent productivity, market, different markets have different dynamics in them. And so -- but our goal right now is to get that business to revenue stability, continue to grow our digital business double digits, and that equation is a pretty good equation for the company.

And that's, I think, still not totally priced into the stock, right? I mean I think there's a lot of investors that want to see that play out more than 1 or 2 quarters.

Correct. I mean you don't given what our current multiple is that's not priced in there yet. There's still skepticism on the sustainability of a flat retail business.

Well, I think for -- as you mentioned, I've covered it for a long time, and we've seen some fits and starts, right? And so now if we can see sustainability but it sounds like you've made a lot of progress and you have pretty good conviction in it.

And then we -- and then on the last call, we introduced this idea of consumer services, right? And this was the third part of our Evolve 2025 strategy, where we are adding products and services, that's our digital wallet, that's our bill pay, that's our retail money order, that's our foreign exchange services. That's our issuing debit cards out of the wallet, so we have some interchange. Those products and services, which expand the TAM, which expand the value proposition to the 120 million people around the world that we have a privilege to serve, we got on the call last time and said we feel really good about the investments we've made, how they're starting to come to fruition. And we see that as a double-digit revenue grower now into the medium term.

Right. So that certainly helps the overall profile.

So that's $300 million to $400 million of revenue. We're saying is now going to grow double digits. So you add that to the equation with the $900 million, give or take, digital business growing double digits and a flat retail business, you start to get to a growth equation that's a lot more compelling than maybe what you've been used to, on your -- I guess 2008 would be 16 years you've been following.

When I started covering the stock, yes. Let's shift to digital before we go back to the consumer services or the ecosystem. And just -- I mean, again, it's an area that I think that's, in my opinion, what you've probably made one of the biggest dents on since you've been there, is really showing like a more pure, clear strategy around branded digital, right? I was saying this to you last night even, right? There was some confusion over white label sometimes in the past. So you're pretty focused, right, on the branded offering, you've accelerated it again in terms of both transactions, but there's been some pricing to some degree to help, right? And so where are we on that journey first? Because I think it grew last -- was it 13% or 14% in fourth quarter, if I remember correctly, right?

Transactions were 13%, revenue was 4%. So there was a 9-point delta that we're closing, right? And we believe we can get to in a reasonable period of time, at least certainly within the Evolve '25 strategy time frame. Revenue and transactions to a 200 to 300 basis point spread. So revenue will keep coming up. We've been able to sustain new customer growth. We've continued to see strong transaction growth. So we feel good about that strategy. We're very indexed on that branded business. That is where the competitive market is, it allows us the most control over the customer experience. It enables us to also manage what we talk about kind of the retail to digital escalator. So we, on the fourth quarter, talked about now 5% of new digital customers were originated in our retail business, so creating those omnichannel experiences. That is a very low-cost CAC, we see 20 million plus new customers, recent migrants, showing up in our retail business around the world every year, capturing those as they go on their journey from retail to digital.

To your point, you're keeping retail flat as you're feeding the digital side.

So that's why we like the branded. It's a lot easier to go from Western Union to Western Union than from Western Union to something else.

Sure. So once again, I mean, if we look at the setup for '24, I mean, you had slightly tougher comps now after what was a good year for transactions in 2023 for digital. Do you still feel good about that trend in this year?

Look, we exited last year with strong trends, that was less true in '22. So as you know, there was a little kind of hiccup in the first part of '23 as people looked at the exit trends, whether that be margin, whether that be transactions. We exited '23 with strong trends on every direction to set ourselves up for a great '24. So I feel good about where we are, I feel great about the guidance that we've provided and the underlying work that you've been talking about, improving the processes, improving kind of operational execution is what powers a large global transaction business.

And just remind us the time line of -- you implemented some strategic pricing initiatives on the digital side also. And that's partly explaining the spread between the 13% transaction growth and the 4% revenue growth. When do we start anniversarying those again?

So we started that process in basically the third quarter of '23. So we launched our new go-to-market strategy, which for people to remember, included new promotional offers. So it's a multipart program. But on the pricing side, it included first-time promotional offers and it included new customer segment pricing, which we call market-based pricing. So that is basically being competitive in the marketplace in an attempt to increase retention beyond the first promotional pricing. There was a lot of worry that we would put promotional pricing in the marketplace. People would take advantage of it and never come back. We've been very clear that we've actually seen stronger second and third transactions from those promotional pricing than we did before we had promotional pricing. So we're also starting to see it a little bit in retention. That happened. We launched that in North America in the third quarter of '22. We then started rolling it around the world. So we were in Europe kind of in the fourth quarter of '22, the first quarter of '23 we then kind of worked our way into the Middle East. And then the last place we implemented it was in Australia, which would be kind of back half of Q2, beginning of Q3 of '23. So we're now lapping that, which is part of how you saw revenue growth go 3%, 4%. As we continue to lap it, that's why you can have confidence that, that decline or that from the 9 points of delta between transactions and revenue will shrink because we're just going to keep lapping what we did back half of '22 through middle of '23.

So that sounds like a good setup. When we think about the competitive landscape for everything we're talking about on the consumer side for a moment, just help us understand what's changed, if anything, in the industry from your perspective. We've had obviously a number of panelists. Some of them touch on this, some of them don't. But what are your thoughts lately?

So I think one of the good things is lots of people last year at this time were quite worried about the macroeconomic effect around the world, whether that be Europe because of geopolitics, whether that be the Middle East, whether that be potentially not a soft landing in the United States. And so there was a lot of worry -- and our customers, remember, are at the lower end of the socio and economic strata around the world. And what's actually transpired is labor shortages and the continued demand for those occupations, whether it be in agriculture, whether it be in hospitality, whether it be in construction, have remained strong and so we've continued to see very consistent principal per transaction. We've continued to see strength in transaction growth. So the competitive environment has benefited, competitors get aggressive when the world is shrinking, as they try to keep their fair share. In a world in which is growing a bit, it makes the competitive environment a little bit easier. And so that macro backdrop has been very, very helpful. And then obviously, you see strong competitors on the digital side continuing to invest in their business and grow their business. But I think we're a player again. So we are back in the hunt on both the retail and digital side and people are paying attention.

Can we touch on the opportunities on the ecosystem, which, I mean, for the longest time, I thought there's a natural cross-sell to these relatively underbanked, in many cases, consumers and who better than you guys who is trusted with financials, we know, to do it. So tell us a little more on the journey of how that's been going for you guys and what products are really resonating with your users?

Yes. So we're seeing real strength in what we consider to be our transactional financial services. And so that would be bill pay, both in the United States, Argentina that would be retail money orders. So this was a product that was kind of left for dead when I arrived. But there's actually real demand for it. And real demand is an alternative to check cashing for nonbank customers. So we actually made some improvements and some investments in our retail point of sale and our retail money order refund process and a few things that have actually seen that business, which is a reasonably sized business for us. It's a big chunk of that kind of consumer services grow high single digits, right? And so we've also started to get some traction with our digital wallets. So we're now in 4 countries in Europe, we are live in Argentina and on April 11, we'll be live in Brazil. And so all of those come with a debit card, they come with a savings account, they come with a multicurrency account. So we're starting to see kind of traction in that area. And then my favorite is we've gone back into the market. In fact, you probably remember when we were issuing prepaid cards in the U.S. many years ago. We've gone back into the market in the U.S. with a prepaid card. And so we're live now in about 400 retail locations, really good reviews from our agents, our customers, we got the value proposition right this time. And this time, you can actually do payouts, so you can get money and I have it on a card. So you don't have to do payouts in cash. So the agents like that, it takes costs out of the system, it takes cash out of the system. So we've designed the product to be more integrated into our cross-border remittance than maybe in the past where it was just a kind of independent product that hung on a J-hook someplace.

What type of time frame can we expect this to be meaningful in terms of contributions to financials?

This is one of the reasons in December, we kind of got out in front of this and said, "Hey, we're going to rebrand this whole segment, it's tough to talk about other with a straight face, we're going to rebrand this whole segment, consumer services" and went out there with a double-digit revenue growth, right? So these things are contributing. They are starting to be material. And you can take that chunk of revenue and build it into the model at double digits, right?

So money order, bill payment, digital wallet, I mean, there's quite a few initiatives, right? I mean...

Yes, foreign exchange, both retail and digital, we actually are seeing real momentum in that, particularly in Europe, where part of our controlled distribution strategy, in order to make the economics of that work, you have to have more products than just cross-border remittance. So one of the core products in that as we open our own locations and our concept stores and hubs is ForEx.

If you had to -- just to wrap it up on this on the Consumer Services side. I mean, if you had to kind of rank order the contributions that give you confidence and I think you guided double-digit growth for the segment. And maybe we should just touch on whether that's including -- that's organic with or without inflation from Argentina. But that's -- it's coming from what areas would you say?

So the bulk of that today is our bill pay business and our retail money order business. It is -- we also, in the fourth quarter, kind of changed how we talk and basically have taken Argentinian inflation out of it because it is very confusing when the Argentinian inflation was in. So both our guidance and the numbers we talk about are kind of all removed from Argentinian inflation. So that double-digit is non-Argentinian inflation influenced. But where we really see the growth coming from is the ForEx, is the prepaid, is the digital wallet. It's the things we've been building that are going to drive that base to the double digits.

That's great. How about capital allocation? Maybe we'll just touch on in terms of internal investments, I think you discussed reallocating and shifting some expense base, what was it, $700 million, $800 million, if I remember correctly, right?

It will be the noncommission expense base.

In order just to modernize the business, POS hardware, you talked about customer service. Is that still the case? Is there more wood to chop in terms of reallocating expenses?

Look, we -- this is, as you know, in any big company, probably one of the hardest things to do because people have budgets and they want to spend those budgets and they think their budgets are necessary. So trying to take from Peter to give to Paul is a really, really hard exercise in a big, large company. And so I think we've been exceptionally aggressive and done a very, very nice job. We got $50 million in '22, we got $50 million in '23. I feel pretty good about another $50 million in '24. Our goal was $150 million over the Evolve '25, by the end of this year, we'll be $100 million towards that. I can easily think we'll get that 5-year goal done in 3 or 4 years, all of which we're using to really invest in the new point of sale, invest in the ecosystem, put the right investments behind our digital experience to be able to compete more aggressively with digital natives and we've done that all while maintaining the '19 to '21 margin. So this hasn't been a story for investors, let us go spend a bunch of money and you guys hope that it pays off. We made the commitment, maintain the dividend, maintain the margin, and we'll go find the money to invest, to innovate, to modernize, to help make this thing happen. And I think 18 months in, we're doing it, as we said we would do.

What about M&A? I mean, is there any optionality beyond some of these internal investments and obviously mean -- while maintaining the commitment to the dividend as well?

Look, our stated capital allocation strategy is maintain and protect the dividend, which given our investment-grade credit rating and the performance we have, I feel very good about. We -- second in the hierarchy is looking for places to accelerate our strategy particularly around that ecosystem, new products and services, tuck-ins by geography, by capability around the world, and we've spent time last year looking at that. I think things are still a little frothy, but we're looking for value-oriented acquisitions that we can accelerate the strategy with and when that doesn't happen is like you saw in the fourth quarter of last year, we'll return it to shareholders and drive buybacks, which we did pretty strongly in the fourth quarter last year.

Partnership versus M&A, I guess, is another important question. You've had a fair amount of very good partnerships over the past couple of years. Can you just give us a couple of examples and any others you see?

Look, by definition, we are a partner business, right? All of my agents, all -- like we are a partner business. We're great with partners. We rely on our partners everywhere around the world. So we like partners. We work well with partners. We know how to do partners. Some great examples as it relates to the strategy, the #1 unmet need for our customers is access to credit, right? I'm not that jazzed about using the balance sheet to lend to consumers. But other people are, surprisingly, and so we've been able to find partners. We have one in Australia. We have one in Argentina. We now have one in Brazil, particularly where we have controlled distribution. So when we own our own locations, where we can help someone fill out a loan application, where we can facilitate loan collection, right, like that is proving to be very strong for us. And so now we're looking at it in other places in the world where we can enhance that offering through partnerships.

A couple of minutes for questions at the end, I'm going to leave. But I mean, Devin, if we looked at the business in a couple of years, mix, what would this -- what is this going to look like? Digital is, I think on a transaction basis in the high 20% of your total mix right now, what is that going to be? What do you expect that to be? And then more broadly, what is the mix going to look like?

Yes. So if we go all the way back to our Investor Day, we gave a North Star. It was actually kind of put in there, it got more commentary than almost anything else, and it was a pie chart, and it said, this is where we are today, and it basically, at that time, showed digital about 21%, everything else at about 79%. And so we said someday, we didn't say when, we said someday, half of this pie will be digital, and half of the pie will be non-digital. We've updated that to say that's still the North Star, although we now have digital, we have consumer services, and then we have what we'll call traditional retail, and so we are well on our path to growing those 2 slices of the pie to get to that 50%, but that's still the North Star. It's to grow our business, particularly digital, particularly value-added products and services while maintaining our traditional retail businesses flat.

Makes a lot of sense. All right, guys, why don't we take a couple of questions before we wrap up. We have about 3 minutes if anyone has.

Got one over there.

Devin, I'd love if you can give an update on your focus on productive locations versus overall agent locations. Maybe if you could walk us through which regions are seeing the most impact from that change? Or where are you targeting the most change there?

It's a great question. Thank you. We have focused on agent and location productivity as the benchmark by which to judge our performance. So it's quite hard to manage a network where you have 20%, 30% of it that's dormant. That's also, by the way, not a great customer experience when a customer walks into an agent that's not prepared, doesn't have cash, hasn't done a transaction recently. So we're really trying to get to having a consistent experience everywhere around the world. If there's a Western Union sign upfront, you're going to get a great Western Union experience. We've been very focused in places like Europe, like in Africa, certain parts of Asia, where we had large parts of the network that weren't as productive as we would like. That has been less true in North America or in Latin America, which had a more -- because of the cost of real estate and because of some other kind of historical things, our network was generally more productive in those locations. Our goal is to get to 100%. We're now probably in the 90s percent in terms of agent productivity. And so every quarter, we work through another slug of agents that either are going to work with us to improve their productivity or they leave the network. And by the way, we now have standards for new agents. So for our sales teams, in order to get compensated, new agents have to meet productivity thresholds at 3 months, 6 months and 1 year. And if they don't meet those, the salesperson doesn't get paid.

Just quickly on the retail business. You've done a good job stabilizing the business so far. But where are you in terms of the overall progress and moving towards those strategic goals? Do you have a lot more work? Are there a lot more things that you're going to be able to do in order to give investors confidence that, that business is going to be stable going forward?

So as I said, I'm pleasantly surprised with the progress that we've made as fast as we've made. A large retail business is actually harder to influence and move. We made some pretty bold moves last year in terms of realigning and getting to more market competitiveness in some important geographies and some important corridors, that will pay dividends for some period of time. And there were a lot of questions in the fourth quarter about the gap between retail transactions, which has accelerated significantly and retail revenue, which had not, right? And so that is a result of some of our investments and our actions to put ourselves in a better stead going forward. You'll start to see that delta between transactions and revenue now start to narrow just like we've started to see in digital, which I think should give investors some confidence. We still have work to do. As I said, we're at like 1 in 12 agent or customer service support per transaction. I'd like to get to 1 in 25. That would mean we've got better processes, better agents, better technology. We continue to invest in our point of sale. I've got 2 or 3 more significant improvements that we're looking to make that will allow us to, again, increase productivity, increase ease of use for our customers. And then we're investing a lot in what we call omnichannel services. So being able to communicate with our retail customers, SMS, WhatsApp, in the app, in a much more seamless and holistic way, which will hopefully drive retention and again, allow us to drive promotions. Today, we have a very hard time driving customer-centric promotions, whether that's for loyalty rewards, whether that's for pricing discounts, whether that's for anything, because we don't have an easy way to communicate directly with our retail customers like we do our digital customers. So building these omnichannel interfaces that allow our retail customer to track a transfer that allows a retail customer to register the receivers to speed up a transaction. Those also allow us to start to build a one-to-one relationship which will drive that retail business in a very different way.

Any other questions, guys? All right. Devin, thank you very much.

Thank you so much.

I appreciate you having here.