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

All right. Good morning to the morning session here with Western Union, always excited to have the Western Union team with us. Devin McGranahan, CEO is kind enough to give us some time. My name is Tien-Tsin Huang. I'll be interviewing him with the fireside chat and taking questions from the audience as well as from the from the portal. So with that, I'll get right into it, Devin. Good morning.

Good morning, Tien-Tsin, it's great to be here. Thanks for having us.

It was great to see you. It's crazy it's been years gone by. And here we are again on the same stage. Starting out with just the obligatory question, if that's okay. I know the consumer is really resilient on your side, but we're asking for what you're seeing on the ground with respect to consumer health. Any observations calling out, especially as you go across the globe here given your global presence?

Yes. We've been surprisingly pleased with the resiliency of the consumer. When we went into this macro environment, we were modeling a much greater impact on our customer. Our customer is largely at the lower end of the socio and economic totem pole. And as a result, inflation impacts the cost of their daily existence at a far greater rate than it does someone like us, right? So basic staples, transportation, food, housing, makes up a much greater portion of their budget. So we've been surprisingly pleased with the resiliency we've seen. Our PPT has remained consistent over the last 2 years, ex Iraq, and our TPC has also remained exceptionally resistant -- resilient. And so we know that our customer is pretty unique, right? Our customer is cross borders. They are in search of opportunity and have strong obligations, familiar obligations, community obligations that they feel compelled to send money home. And so despite the effects of inflation, they've remained very committed to that purpose. And we've seen it in the numbers now for 6, 8 quarters.

Yes. No, resiliency has definitely been the theme across the consumer base. How about on the regulatory side, I know there's always a pendulum that will swing. I'm sure we'll talk about Iraq here or later up to you. But any broader regulatory themes to call out that's good or bad for you, whether it's a short wave or a long wave?

Yes. So we operate in, I don't know, something like 180-plus countries around the world. And so it's tough to say "the regulatory environment." There are places that are easier to do business and places that are tougher to do business. But at the macro level, it's been very stable. There have been relatively little focus on some of the issues in terms of payments, in terms of banking, in terms of financial services as the world has grappled with other geopolitical issues. I would say there was a period of time, maybe 4 or 5 years ago, where in many countries around the world, there was a pouring force of people getting what I'll call payments licenses. So kind of in between a normal remittance or transactions license and a full banking license. So these digital payment licenses were kind of in vogue around the world and lots of them were issued. You see regulators pulling back on those now as many of those companies have not fulfilled the mission or the obligation that they set forth when they applied for the license. And so that is probably the only regulatory contraction I see as regulators have gotten a lot more skeptical about a business plan for a digital wallet or a payments company, having now seen many of those not flourish in many parts of the world.

Yes. Well, I don't think that's good for you given the asset that you have around compliance. But before we get to that, just with the election year, I get a lot of questions around potential immigration reform. Is that you're -- something that you're watching? Is that something in the past that has impacted demand in the U.S.?

We went -- we've gone back and looked at it, there's lots of conversation about this election, obviously, and whether you go back 5 years, 10 years, 15 years, despite the administration, there's a relatively consistent flow of migrants into the U.S., and that's actually true pretty much around the world. If you look at the global macros for the next 30 years, most of the developed world in order to sustain their standard of living is going to have to have an inflow of population. So again, there'll be ups and downs, and there will be political skirmishes but net migration into the mature developed countries around the world is a must in order to sustain global GDP growth. So the macros are all in the favor of it. The second thing to keep in mind is in any given country, take the U.S., right? The preponderance of my customers are here already. They've been here already. And so in any given year, the net new migrants are a small part of our business relative to the base of migrants. If you look at a country like the Dominican Republic, the base of Dominicans in the U.S. is now like 40% of the whole country of what's still in the Dominican Republic, right? And so those are the people who send money home. Those are the people who built lives here. Those are the people who have jobs. And so net new migration in any given administration doesn't change our business that much.

Okay. Good. And then just lastly on this one, just on Iraq, anything new and maybe a quick update on what happened? And I know you've attacked it with some operational changes as well.

Yes. So I think Iraq -- so let's just step back for a second because Iraq is a unique event for us. So there were some changes there last year, a little kind of in the March-ish time frame around the nature of the banking regulations and how the country was managing inflows and outflows, which we benefited from enormously because of our inherent competitive advantages in places like Iraq, right? We had distribution partners. We had relationships with the Central Bank. We had the compliance and risk skills in order to manage the outbound to particularly certain countries like Turkey and other places where, again, we had a big incumbent distribution base. We had regulation, we had risk and compliance capabilities, and we had relationships with the central banks. And so we benefited from that in a way that many others didn't. But it was a little bit of a roller coaster. So the last quarter -- the second quarter of last year was quite significant as that change rolled in. And now it's moderated to a place where we gave guidance back last month where we said it will be between $10 million and $30 million. I feel very good about that range. We've solved a lot of the operational problems with settlement and our settlement partners. And so it's now become a much more consistent part of our business in a much more predictable range.

Okay. Good. And I know there was some confusion post the call with growth ex Iraq. I was just going to ask you straight up, Devin, just thinking about FX-neutral revenue growth excluding Iraq, it seemed like it was fairly stable. Can you just clarify where everything shook out?

Yes, I loved -- you're right. I loved your term, there was some confusion. So look, I was very excited about our digital business in the first quarter. To be clear, our digital business has no Iraq in it, right? And so we had roughly 13% transaction growth, 9% revenue growth. We closed that gap between transactions and revenue by almost 500 basis points in the first quarter, right? And that was ahead of what we had been talking about and it was, I think, a demonstration of the strength that we're seeing in our digital go-to-market program. And that has absolutely nothing to do with Iraq. In the quarter because of us managing now this cap on settlement flows, we raised prices a little bit. So we did see a little bit more revenue from Iraq in the quarter than we originally anticipated. But transactions in the retail business ex Iraq, where I'll call it, flattish for the third quarter in a row, which hasn't happened in a long time. And retail revenue ex Iraq was like negative 5%. So again, that's a sequential improvement quarter-over-quarter roughly in the neighborhood of 200 basis points. So this train that we're on is going as we talked about with Iraq, ex Iraq to bring the retail business back to stability. So think about that as low single-digit transaction growth with stable revenue, put our digital business into double-digit territory, both in transactions and revenue growth. And we predicted we would have achieved that by 2025, and we're well on the way here in 2024. So I feel very good about it. With Iraq, ex Iraq -- by the way, Iraq is good to generate some revenue and some cash and some EPS that we get to use to continue to grow our business.

Yes. No, it's great. Hats off to you. I know there's a lot of moving pieces, but it does feel like the plan you put in place is working. And you said like with patience you'll get there in 2025, it feels like we're on our way. With -- and I get the question a lot, Devin. Just thinking about money transfer transaction growth, it's been solid, right, plus 6%, 3 straight quarters is what I wrote down. It's faster than the World Bank figures that some of us use as a benchmark. Decompose that for us in terms of the growth algorithm or the components of the growth. How do you think you've gotten there? And what do you think really can move the needle from here to either sustain or accelerate?

Yes, it's a great question. And so for us, there are 3 kinds of markets, right? There are markets that have strong tailwinds. And that is from either a corridor's perspective, a geography perspective or a channel perspective, right? So digital in general has a tailwind, customers are moving digital. So making sure we compete and win our fair share of digital posted transaction growth up. And there are regions of the world. So the Middle East, given all of the investment that's happening in Saudi Arabia, given the dynamics with price of oil is a strong region, right? The U.S. is a strong region right now, particularly U.S. to what I'll call the northern parts of LACA, the Mexico, Guatemala, Honduras, Nicaragua. And so making sure that we're well positioned either in those channels, those corridors are those geographic macros to benefit from outsized growth is really important. The second is making sure that the overall landscape of the company, so getting our retail business to productive everywhere in the world and making sure that we continue to serve retail customers. And I know there's some belief that, that business is dieing, but most migrants, when they leave their home country and end up in a new country and they send money home, that first transaction is a retail transaction. They don't have a banking account. They don't have many times established enough consistency in the country. And so it's a cash transaction and it's a cash transaction at a retail. So that port of entry for new migrants is our retail business. So making sure we capture our fair share with the right agent relationships, the right incentives to those agents and then a great experience for both the agents and the customers is really important. And then finally, the digital business is slowly consolidating around a couple of now billion-ish players, and I think that's to our benefit. And so continuing to grow and compete in the digital business with now 3 or 4 of us that are really at scale creates a different market than when you're competing against a bunch of subscale players who are clogging for growth and maybe don't have the same profit objectives that large public companies do.

Yes. So you mentioned retail. I think you've also said it's the gateway, right, for growth. And I think that is an advantage. I'm curious just for the benefit of everyone, why does the consumer choose Western Union on the digital side over some of the other digital players that are out there?

Yes. First and foremost, it is brand and brand familiarity. So we have hands down the best brand recognition in significant payout markets everywhere in the world. And that is the history of our years and years and years of being in the retail business in those markets, having strong agent partners and in many cases, having large inbound market shares. And so when someone leaves their home country and they end up in a new country and they want to send money, whether that's digitally or in the retail business as we talked about, but digitally, the first brand that they think of is Western Union. If you look at our unaided organic search results, we're factors above everybody else. So Western Union is synonymous with sending money right? Now the challenge for us and the opportunity that we've been capturing over the last 2 years is having a value proposition when they end up on your digital properties in terms of cost, speed and experience that causes them not only to do that first transaction, but to stay and to say, "Hey, this was great. It worked really well. It's a great value. It was a great experience. And I'm going to stay at Western Union. I'm not going to try somebody else." And so translating that brand recognition into great digital experiences with a strong value proposition is what we've been doing for the last 18, 24 months and that's what's translating into the double-digit transaction growth now.

Yes. And then price elasticity on the digital side. I know loyalty is a big part of what you're talking about. And I ask this in the spirit because I believe PayPal with their Xoom asset in remittance, they're talking about resetting that business and getting pricing to be more competitive. So what's the philosophy around pricing on digital?

Yes. So having recently spent 2 years doing that. I wish them good luck. It's very hard. Look, digital is exceptionally transparent. And you can go online and basically get a market effective price to any quarter in the world in less than 5 minutes. And so that efficiency means there is no -- and I think the company for -- my company for decades enjoyed a premium on its ability to price due to the strength of its brand, the strength of its risk and compliance and the strength of its payout network. I think in a digital world, the brand still remains exceptionally important because how customers get acquired can be very expensive digitally. And so the ability to leverage your brand cost effectively to acquire customers is a differentiator. But the other 2, they're game, they are stakes because if you're out of the price window, you're not going to get the first look. If you're out of the price window when somebody comes back, you're not going to get the first look. So we spent, as you know, much of the back half of '22 and '23 normalizing our digital prices to market pricing, right? And so we spent a lot of time making sure that we are competitive in those places that it's exceptionally important from what we call a market price. What are the basket of prices that are in the marketplace for that corridor at that period of time, and we want to be in that hunt. We don't ever want to be the lowest, we probably don't want to be the highest, but we want to be in the hunt for market pricing, and that's made a big difference. And so it's a little different in the retail business where there's more to do with agent incentives, there's more to do with geographic proximity and location in terms of how you think about pricing. But in the digital world, there's a band, you need to be in that band if you want to compete and win.

Got it. Very clear. I know you're moving some of your transaction processes -- okay, yes?

And by the way, I think as evidenced by now that we've -- because as you know, most of last year, we were running transactions in the teens and revenue was barely hovering in the positive. As we have grown over now, the pricing that we put in the marketplace to get back to market competitive, you're seeing that gap close, right? And so I get asked this question all the time it says, "Well, why is it sustainable?" So unless the market decides to reprice, we just stay in the market pricing band, and that revenue closes to something that looks more like the impact of channel mix and corridors and other things, which causes a slight difference in RPT and then the difference between transactions and revenue, but it becomes, I think, we think 200 to 300 basis points, not 600 basis points.

Right. Right. And I think that's implied in your outlook, right, with some of the spread. That was my question, is that you'll see a little bit of volatility short term, but it feels like you have a good line of sight into getting to that level.

Yes, we feel good about getting to that level.

Okay. You've mentioned and I've been wanting to ask you because since we're at a tech conference, shifting to the cloud and having the transaction processing engine, to the cloud. What are the implications of that, Devin, does that give you more freedom on the tech and product side? Or is there a cost benefit only?

Look, so anybody who's had the privilege of working in a legacy tech company, they understand the history of large, hard-coded mainframe applications. And frankly, while they're exceptionally resilient, i.e., you can process hundreds of millions of transactions very consistently. They're also exceptionally difficult to change. And so it creates an ongoing struggle to be able to react quickly. It creates an ongoing source of cost to maintain and to update the historical legacy mainframe transaction processing systems that the big older payments companies had. Our move to the cloud enables us to break that paradigm. So we can be a lot more flexible now. We did a bunch of refactoring in our code base to allow a lot more configuration-based changes. And that allows us to be able to go to market quicker, to update features, functionalities, pricing in a much more real-time basis and much more like a company that started in 2015 or 2018 that's much more of a digital native than one that started in 1851.

Right. So it sounds like product velocity as well as freedom around pricing as well, that's...

Product velocity, go-to-market, but really, it's about pace. It's about the ability to do things much quicker than in the -- than in our old approach.

Okay. So is the margin impact going to be something that we will see once that's completed, Devin? Or is it going to get redeployed into some of the other initiatives we talked about?