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

All right. So next up, I'm delighted to have Devin McGranahan here, CEO of Western Union. Devin has been here since 2021. Prior to that, you were Senior Group President at Fiserv, where you oversaw the company's global merchant acquiring and processing businesses, including a number of Clover and Carat launches. So Devin, long career, happy to have you here and I'm looking forward to the discussion.

It's great to be here. Thanks for having us. It's a great conference.

Yes. So Devin, to kick things off, there's been a number of initiatives that you announced back at your inaugural Investor Day, where you announced the Evolve 2025 targets. The team has been working diligently against those goals. Could you talk about kind of what you've accomplished so far and kind of what's left on the road map as you zero in on those targets?

Great question. Thanks. And so just to reframe for everybody, we basically put out a 3-pillar strategy. One was stabilizing the retail businesses. Those who had followed the story for a long time, the retail business had been perpetually declining, which when you have $3-plus billion of revenue shrinking mid-single digits, it's tough to grow the company. The second was to reinvigorate our digital business. When I joined the company, our digital business was growing revenue low single digits and shrinking transactions low single digits. It was again not a recipe for long-term success. And then we talked about building out an ecosystem, a set of products and services, which we now have called consumer services, to leverage the great customer acquisition engine that is Western Union and bring new products and services. So working from the value proposition to kind of operational execution to delivery, in the second quarter, we were pleased with our fourth consecutive kind of mid-single-digit transaction growth for the company. We had successfully lapped the increase in transaction growth in our digital business and actually increased another 100 basis points to 13% transaction growth in our digital business. And we have largely stabilized the transaction growth in our retail business, plus we did 14% revenue growth in consumer services. We are continuing to shrink the gap between the transaction growth and the revenue growth. We saw retail close another 200 basis points. There was some rockiness between the first quarter and the second quarter with revenue in digital. We went from 9 to 7. But we had talked in the first quarter that we fully expected that in the second quarter because of the leap year and the calendar close dates in the first quarter, Easter. We had 2 holidays in the first quarter that would normally one be in the first quarter, second quarter, Easter and Ramadan. And so it was entirely expected that, that was going to happen. So we're pleased with the progress we're making. Consumer services will be solid double-digit revenue for the year, as we've talked about. We'll continue double-digit transaction growth in digital. We'll continue to close the gap between revenue and our ongoing efforts, which we have said will both take longer and be less dramatic. In retail, we'll continue slowly making progress on stabilizing that business. So very pleased with the progress we've made in what's roughly now been 2 years. And we launched that in October of '25 -- '22.

So a great overview. Maybe we can talk about the end customer. I think most people think of remittances as a relatively defensive business, particularly relative to just traditional consumer payments. What are you seeing on the ground today? Has there been any change in the behavior against some of the anecdotal evidence we've heard in the market around struggling low-income consumers?

Our consumer has been exceptionally resilient. We had a lot of concern 18 months ago. We publicly talked about it. Inflation has an outsized effect on the low-end consumer. And so we were quite worried about the inflationary environment and the erosion of purchasing power, which would erode their ability to send money home. Wage gains at the lower end and continued strong employment for kind of the lower end of employment has held, and our average PPT has been mostly flat, a little bit up ex Iraq over the last 18, 24 months. And so we've seen transactions for customers grow. PPT remained relatively flat. Our consumer has been relatively resilient. We have started to see some rockiness in South America in LACA. We've had a couple of elections in the last couple, both in Mexico and Venezuela, Colombia. There's a new President in Costa Rica, who's kind of closed down the Darién Gap. So we're seeing some dislocation in that market. But globally, we continue to see continuing trends with relative resilience in our core customer group.

And just because you mentioned it, some of the LACA trends, have those gotten incrementally worse this quarter? Just wanted to kind of zero in on if that's kind of newer or...

Yes, we talked a little bit about it in the second quarter because we've seen, in my tenure, LACA had been the one region that was growing mid- to upper single digits, where most of the rest of the world was negative. And so it was always kind of a stalwart. It turns out, we're actually doing better in the rest of the world as kind of this geopolitical dislocation gets sorted out. A lot of volatility in the Mexican peso. We talked about that in the second quarter. We had some small losses for the pesos we hold because of the 1 and 2-day volatility a couple of days around the election. I'm sorry, I'm just -- I'm more messaging at the volatile region, and we're going to continue to watch it in terms of where it's going.

Makes sense. Okay. So on strategy, I think one of the questions we commonly get around is around the company's ability to deliver strong digital transaction and revenue growth trends, without diluting the value to the retail business. And you've kind of framed this concept of a retail-to-digital escalator over time. How do you think about kind of managing the 2 channels?

I think one of the things I've talked about, and we talked about this also when we were switched from kind of the metric we were using in omni-channel, the retail business really is more of a flow of customers, right? So we acquire 20 million-plus new retail customers every year. I've publicly talked about our mid-50% retention rate in retail. People come and go in the retail business. New migrants, almost to a T, unless you're a high-end software developer, when you show up in a new country, by definition, you don't have a bank account. You don't have access to payment products. You're conducting your life in the cash economy, and you're sending money home in the retail environment. So we see the retail channel as a way to get to know a customer, we do KYC, and we can make -- for those who are staying in the remittance product, they haven't gone home, they haven't stopped sending money home, the journey to digital much easier than for a new customer. And the economics are certainly a lot better than those that you would get when you acquire a customer on Google or Facebook or someplace, right? And so our digital customers who started out in our retail business are a factor better than our customers that we acquired purely in a digital sense. So it's a focus of the company. I worry less about kind of channel conflict or -- it's about being where the customer is, when the customer wants to transact. And for retail customers who decide they want to transact digitally, making it super easy for them to do that with Western Union.

Yes. So you touched on it a bit there, I'm jumping ahead a bit, but...

And just the last thing. We've also aligned the pricing between our channels a lot better. So before, we had oddities where it was actually cheaper to do a retail transaction in some quarters than a digital transaction, which -- then why would you transact? Why would you migrate, right? And so now we've got a much more logical construct between retail and digital pricing.

Yes, that makes sense. You hit on it a second ago. I just wanted to maybe jump ahead a bit. The specific follow-up on U.S. immigration trends. There's this perception that the remittance market would be a net loser if the U.S. were to take a harder line on immigration. Could you maybe just help investors understand the impact that immigration has, both documented and undocumented, and how you're thinking about policy risk associated with the election?

So just go back to the fundamentals of the business. 80% of our transactions in any given year come from customers who's already transacted with us. The predominance of my business are migrants that are already in the U.S. or in any country in which they're doing it. So in the short term, any change in policy in Europe, any change in policy in the United States, any change in policy in the Middle East -- remembering, we're also a very global business, so while U.S. politics is interesting and relevant, it's certainly not the end all and be all in my business. But changes in policy anywhere in the world, and immigration is a hot topic anywhere in the world, have very little near-term impact. And it's longer term as flows of customers across borders slow, right? So then your ability to acquire new customers goes down. So while we'll be interested in the election, what we're more interested in is regardless of who wins, can the U.S. Congress with whatever president we have -- and we got close to it in the spring, can they get to a rationalization of immigration policy that would establish clarity for immigrants, for businesses, for the border? And in such a world, we'll benefit regardless of whether it goes harder or softer than where we are now. It's the clarity that will really matter so that people can conduct their lives and their businesses accordingly. Longer term, there is no way in which migration across borders can go down if the people who live in G7 nations wish to maintain their standard of living. Birth rates have gone down. Working populations in all of the developed countries around the world are shrinking. And so if large developed countries with productive economies want to continue that, they have to have inbound migration from lower-productivity countries.

Yes. Makes sense. Maybe switching gears a bit to the competitive environment. I think around the time of earnings, a couple of comments stood out. You highlighted some of the changes around the competitive environment, specifically around some of the local corridor participants. And it was basically better pricing trends, less competition, people exiting the market. Can you talk about what you're seeing, expand on that a bit, in how you think the competitive environment evolves?

So it turns out cross-border remittance is a capital-intensive business. And when capital is free, people behave irrationally. As interest rates have gone up, kind of -- also, it's a scale business. So it's a scale business that's capital-intensive. So as interest rates have gone up, we've seen more of the marginal players no longer being able to compete. And on the call, it hadn't yet been publicly declared, but we saw Small World exit that went into insolvency sometime in early July. They were a pretty big player in Europe. They were growing presence here in the U.S. So it was just an example of a PE-backed player, who was a relatively reasonable size, who in an elevated interest rate environment couldn't pay the bills anymore and closed their doors. And so we see more rationality. We saw that in the World Bank data in 2023. It's one of the first times remittance pricing had gone up. The World Bank noted that. And so we believe that in this environment, we'll continue to see that. And lots of people were raising questions when we became more competitive. Would that spark a downward spiral in the market? And we've actually seen almost the opposite, which in many places where we've become more competitive, people have reacted by moving the other way versus trying to go one below us and one below us, right? So...

Great. Western Union has always had such a sticky business over time as a function of the ability to basically reach any corner of the globe in a very short amount of time. As digital adoption accelerates, how has your strategy around the agent network evolved?

So the agent network is very important to us. As I've talked about many times, on the send side, we view it as the gateway to Western Union. It's the customer acquisition vehicle that's exceptionally low cost. People walk in, they see the Western Union sign, and they send money. On the payout side, those relationships are very important to us. A large percentage of our digitally originated transactions are still paid out to account or paid out to cash. And so those payout networks around the world are important, and we maintain a competitive advantage in that. And then we have been building an equivalent payout network to account. I think we have over 3 billion endpoints in our payout network to account, which allows again someone who wants to send to account anywhere in the world to be able to do so seamlessly many times in real time. So the value proposition continues regardless of whether the recipient wants cash or they want it deposited in their digital wallet or they want it deposited in their bank account. A great example is in the Philippines, which was historically a very large payout to cash business. We've seen the growth in payout to account in the Philippines. One in 5 Filipinos has a GCash account, right? And so we recognize that trend and are building out the network to kind of manage the transition. Payout to account has significantly better economics on a unit basis margin percentage than payout to cash. And so that's where -- other than a transition period, it's actually good for our business.

Yes. Driving repeat transactions and customer retention was a major focus in the original investor day00. Is there anything you could share about sort of recent cohort behavior and the progress that you've made on retention?

So we talked about it at the end of the year. We've seen -- and we talk about it once a year. We saw retention improvements across the majority of our business in 2023. In particular, we've seen decent retention improvements across the cohort of new digital customers that we acquired once we changed our go-to-market strategy. So if you'll recall back to 2022 and early 2023, we put back into the offer new customer acquisition offers, first transaction free, half off your first transaction. And there was a great deal of concern that we would be acquiring price shoppers with lower durability and retention in our historical business, and it's been exactly the opposite. Those customers that we've acquired since 2022 are showing higher retention, higher transactions per customer, and higher principal per customer across the board. And so we're acquiring a higher-quality customer, which is translating into increased retention, which is part of in lots of conversation about whether the durability of the transaction growth would be sustainable. In the second quarter, we grew over 12% transaction growth in 2023 and accelerated by 100 basis points to 13%. And that -- part of that durability is the increased retention that we're seeing from the newly acquired customers.

Great. So you've also announced several new products and features, including a new retail POS system and your next-generation digital app and wallet. What's been the early feedback that you're hearing from agents and customers on some of these improvements?

So it's universally positive. We have significantly reduced transaction times, and we are continuing on that journey. I have a team right now in Spain, who is piloting the next iteration of our accelerated transaction time. And I was telling some folks, I've got a little video of them doing a transaction in a little over 1 minute, which is down significantly from the 7.5 minutes when I first joined. We used to treat every customer regardless -- remember, 80% of transactions comes from people we've done transactions with, like we've never seen you. So name, phone number, documents, contact information, who are you sending to, what's your occupation, what's your reason for sending, every single time, right? And so this idea of Quick Resend and remember me, we've replumbed our point-of-sale systems to work on a customer basis instead of a transaction basis. So now you walk up and say, hi, I'm David, and we say, okay, your phone number, please. Can I verify your ID? Now they're looking at a screen of the ID we've already captured. Yes, it's you, done. And then if you want to redo a repeat transaction, system retains your last 10 transactions. You say, oh, I want to send to my mom again. Same $200? Yes, 2 clicks and you're done, right? And so that rethinking how Western Union goes to market, instead of being a transaction processor to being a customer relationship-oriented person, is both improving the customer experience, it's reducing time for the agents, and it's reducing friction. When I got here, we're taking 32 million phone calls a year. This year, we'll take less than 17 million. So we've cut that need to have an agent or a human interacting with you to complete [ a traction ] by half.

Yes, that's great. Another slight tweak to the Evolve 2025 strategy was the addition of a new target to grow what is now called consumer services revenue double digits. You mentioned this earlier. It's historically been the kind of bill pay and retail money order products. What do you expect to be the biggest driver of the double-digit growth in consumer services going forward?

I actually think it might have been you. Sometime, it was the first quarter or the second quarter of 2023, you asked me if we were going to become a company of other because we were growing other double digits, while the rest of the business was shrinking. And so that was the insight to maybe not call it other but to rename it consumer services. So thank you very much. Look, we're very excited about it. As you know, the base of the business is our traditional transaction products of retail money order and bill pay, but we've added in there our prepaid product. We've added in their foreign exchange services in multiple countries around the world. We've added in there, we talked about it for the first time last quarter, this advertising network that we've built here in the U.S. And so it is the addition of incremental products and the expansion of those products across geographies, which gives us real confidence that this is a double-digit grower for the foreseeable future. And again, we had a 14% in the second quarter and reiterated that we see double-digit growth for the year even though it was only 8% in the first quarter.

Yes. Makes sense. All right. The company has deployed a number of new marketing initiatives to attract customer usage, which included first transaction free and then some more market-specific pricing techniques. Where are you at now in the rollout of the pricing initiatives? Do you see stronger transaction growth across both retail and digital as sustainable? As you lap these, you'd maybe just hit on that latter part on the digital side?

Look, we've talked a lot about the pricing. We'll be lapping the last of the digital -- significant digital pricing, recognizing we're doing pricing every single day. We have 20,000 corridors. It's the structural pricing in digital in the third quarter, which we finished, we rolled that out in the Australia region in the third quarter of '23. And we'll lap the retail ones by the end of this year. But while there's a lot of focus on the pricing, there was a lot that also went with on the retail side. We're talking about increased transactions. We rolled out a new loyalty program. On the digital side, we've significantly improved funnel effectiveness rates. We're improving retention with the new cohorts. And so there's a lot more to the durability of the transaction growth performance than just the pricing. The pricing, remember, when I launch a program, I say, first, you got to acquire new customers. Those customers will translate into transactions, which will translate into revenue. The new customer offers put us back in the market as relevant for new customers. It's all the rest of the work that keeps the funnel driving the transactions and the revenue.

Great. So maybe pivoting to Iraq. I doubt when you joined the company, you thought we'd spend this much time talking about it. There was an interesting article in the journal earlier this week that maybe help those of us on the outside to understand some of the back story about what's been happening there a little bit better. But curious if there's any update that you can share on kind of where we stand now and your thoughts on the revenue contributed for this year and sort of how that market may evolve.

So the article was fantastic because it really did lay out what we've been talking about in terms of the change in policy, banks exiting the cross-border market across all facets. We were a net beneficiary, particularly for consumers and small businesses who could no longer do any kind of [ branch ] transaction. As you know, that was $120 million of revenue in the second quarter of 2023. In the second quarter of 2024, that was $34 million of revenue. So the big run-up that came with that change has largely started coming out of the system. We believe the business that we have there is now a better business than it was before all this started because as you can imagine, management paid very little attention to a small business in a difficult country relative to the other 80 countries that we're in. But when it started to have that kind of growth and acceleration, we obviously paid a lot more attention to it. So we now have a digital offer in the country. We've got the retail agents in the country. But it is a fluid situation, and it will continue to evolve. My anticipation, we gave guidance at the beginning of the year, 10 to 30. Obviously, the first quarter was not within that guidance. We were significantly above. The second quarter was pretty close to that guidance at 34. My anticipation is we will be at the low end of that guidance this quarter and in the fourth quarter, given the continuing changes and the stance of the U.S. government as articulated in that about the Central Bank policies in Iraq. So I would be thinking of it much more on the low end of our guidance in both quarters for the rest of the year than either at the middle or the high end as it was in the first quarter.

Makes sense. It's very helpful. Okay. So sticking with the overall topic on the retail side, stabilizing retail revenue growth is a key part of the Evolve 2025 strategy. You mentioned kind of closing the gap on the -- between retail revenue growth and the transaction growth for the remainder of this year. How are you thinking about the cadence over time? And then where do you think that sort of stabilizes longer term?

So I'm very clear, in the long run, we're going to get to 300, 400 basis points difference. Well, in the long, long run, we'll get to like 200 basis points. In the medium term, we'll get to 300, 400 basis points. But my real goal is to continue to drive the growth of the business. And we've said this publicly, our goal is not to accelerate the closure of that gap. I can do that. My goal is to build a structurally strong business to continue to grow, particularly in the digital, in the mid double -- mid-teens to high teens, and we're going to continue driving for that. And over time, we will see the gap close. But the objective function is to grow the business and grow revenue, not necessarily accelerate the closure of the gap. And so we're very indexed on growing the business. We manage the gap. The gap is a function of the pricing, which we will grow over by the end of this third quarter. And then the structural components to what we're doing, which is accelerating the payout to account, we've talked about that part of the business growing 30-plus percent. And the fact that we're indexing on higher-growth corridors, including Mexico, India, Philippines, all of which generally have lower RPTs than sending money to Afghanistan or Yemen or Syria or some other place where we're uniquely positioned, but there isn't a lot of growth in those markets.

Yes. That makes sense. And I guess just to emphasize that last point, the pivot towards the payout to account, obviously, lower RPT, but I'm sure the gross margin profile is better on that. So...

Correct. And we're working hard in all the important corridors of the world to strengthen our payout network, have more direct connections, which increases real-time connectivity and lowers costs. So you have less -- I talked about this on the last call, we'll have much less intermediaries. The system, many of ours and many of our competitors, was built with gateways and access providers into many of these markets. So the more direct connections you have, the lower the cost, the better performance. And we're accelerating the build-out of that part of our network everywhere around the world.

Yes. Maybe shifting to the big picture. It's frequently lost on investors, just the sheer size of this market. I know the World Bank puts out some estimates on the trajectory of the remittance market. Those get revised. Interested to see here how you think about just the outlook in the remittance space more broadly.

Look, the formal market, depending on who you want to talk to, is $900 billion, $1 trillion of principal. The banks still have a large share of it, which I can't understand, because it's expensive and slow. And companies like TransferWise are doing a good job of eroding that at the higher end. It is a GDP-esque grower, and we think about it that globally. But that doesn't mean in any given circumstance, it's GDP grows, right? That's spread over the whole world. And so at any given time, just like we saw with Iraq or we'll see with corridor migration acceleration. Right now, we see a lot of growth in the Middle East. So as Saudi Arabia and the UAE are doing massive infrastructure investments, they're importing labor. Many people are sending money home. So you see those pockets where you get accelerations way beyond GDP growth. So we like the market. We believe there's opportunity for consolidation. There's further erosion of bank share, and there's a long-term positive trajectory at GDP or slightly above GDP at the aggregate trillion-dollar market level. There's another thing that we don't talk about as much but other people talk about, which is the informal markets. So there's lots of money that moves across borders in vans and suitcases and backpacks. And the more the product becomes easier to access and a reasonably priced value proposition, that alternate market or informal market becomes part of the formal market and also helps drive the growth.

Makes sense. So maybe taking a big step back, Western Union is an amazingly geographically diverse business. When you look around the world, where are you most excited about in terms of the opportunities for the market for Western Union to grow? You just talked a little bit about the Middle East.

Yes. So Middle East is a strong business. It's tough to see in our numbers because it gets swamped by Iraq. APAC is a super interesting business for us. We've made material investments since I became the CEO, recognizing 40% of the population of the world lives there. It's not only growing as an inbound market. But in many cases, I was just in Indonesia 2 weeks ago, there's 53 million middle-class people in Indonesia, right? It is a middle class that's as large as us here in the United States. One of the -- it's a great place. Most people know it for Bali. But one of the biggest populations in Indonesia is the Muslim community, and one of the things that people seek once they begin to have some wealth is a trip to Mecca, right? And so that involves foreign exchange. That involves paying for your hotels. That involves sending money ahead of your trip, maybe even sending money home. And so that kind of business for us is growing in Asia. Students exiting -- middle-class students exiting these countries to get educations in Australia or to get educations in Europe or the United States, that all then has a trail of remittance that comes with it when you're sending money for books, when you're sending money for living expenses. And so we see Asia as a super interesting, not just as a receive market, which was historically Western Union's perspective, but it's an increasingly dynamic send market.

Exciting. Maybe switching gears to maybe a less exciting topic, but nonetheless, the dismal science of managing margins and expenses. I think it's been very notable since you took over, a very clear messaging around the commitment to the operating target range that you set out. I think this year, you're managing to a slightly different cadence for operating margins than the last couple of years, but nonetheless within the range. So how are you thinking about the pace of investments and the long-term trajectory of margins beyond the Evolve '25 investment period?

Look, the -- we've been pretty transparent since I became the CEO that we would significantly invest in the products, platforms and go-to-market of this company, which we've been doing. But we would do it in a shareholder-responsible way, maintaining not just the margin targets but the return to shareholders, both with a strong commitment to our dividend and then capital returns, when we have an excess of that through share buyback, right? And I think we've been pretty good about that for the last 2.5 years and also managed to invest significantly in improving our market competitiveness, building out new platforms on the retail side. One of the things I talked about was our Australia business in the second quarter and showed the combination of our new digital product and platform with our new go-to-market. That business is growing 30-plus percent on a transaction basis and 20-plus percent on a revenue basis. And so in the fourth quarter of last year, we had some opportunity given Iraq. We accelerated the rollout of that new digital product. I think we're now in 11 or 12 countries around the world. And so when we get opportunities, we accelerate our ability to invest and drive the future of the business. But we're going to be responsible and continue to maintain our commitments, including our commitment to the dividend.

And just on that note, capital allocation has always been kind of a hallmark of the Western Union story, a very healthy dividend, strong cash flow generation. What would kind of change your mind in terms of managing through a different strategy? How do you think about M&A as a lever to kind of accelerate investments? And what could that look like over time?

Yes. Look, we're always open to opportunities that can create value. Given my current valuation, that largely precludes overvalued high-growth companies. But there are other opportunities for us to pursue, in particular, expanding the product set and capability to grow consumer services and then some opportunities that present themselves to continue to do roll-ups or market consolidation on the core remittance side. That said, we're very disciplined about what the alternative is, which is giving the capital back to the shareholders. And at our current valuation, that's a very compelling case given our belief in the future of this business. So...

Makes sense. I think with that, we're about out of time. Devin, any final thoughts that you'd leave the audience with today?

Well, I appreciate being here, so thank you very much.

Of course.

I'm excited about where we are 2 years from our last investor day00. We're tracking, as I said, in the second quarter against almost all of the metrics as we hoped. We achieved company-wide positive revenue growth, ex Iraq. Someday, I will be able to say, without the ex anything, had ex Russia and then I had ex WUBS and now I have ex Iraq. My goal in life is not to say ex to anything. But ex Iraq, we've really stabilized the business in less than 2 years, which is a quarter or 2 quarters ahead of what we had hoped for when we went on our investor stage. And I see the momentum continuing to build, so very positive about where we are.

Great. Well, with that, we're out of time. Devin, thanks for joining us today. Really appreciate it.

Thanks so much. Thanks, everybody.