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

Welcome to the Western Union Investor and Analyst Conference Call. Good day and welcome to the Western Union Investor and Analyst Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tom Hadley, Vice President of Investor Relations. Tom, please go ahead.

Thank you. On today's call, we will discuss our recently announced transaction with International Money Express and then we will take your questions. The slides that accompany this call and webcast can be found at westernunion.com under the Investor Relations tab and will remain available after the call. Today's call is being recorded and our comments include forward-looking statements. Please refer to the cautionary language in the press release, in Western Union's filings with the Securities and Exchange Commission, including the 2024 Form 10-K for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During the call, we may discuss some items that do not conform to generally accepted accounting principles. We have reconciled those items to the most comparable GAAP measures in our recent earnings release and attached to our Form 8-K as well as on our website, westernunion.com under the Investor Relations tab. I will now turn the call over to our Chief Executive Officer, Devin McGranahan.

Good morning. Thank you all for joining us this morning during what I know is likely a holiday period for many of you. I am sitting here today in Miami with Bob Lisy, the CEO of Intermex, as well as Matt Cagwin, our CFO. We are very excited to be here today to discuss our recently announced transaction to acquire International Money Express for $16 a share in an all-cash offer. It has been an absolute pleasure getting to know Bob and his team over the last year. We have long admired the success of Intermex and in recent months have had the opportunity to learn more about the company, the management team, their go-to-market strategy and the great relationships that they have built with their agents, customers, vendors and employees. After a period of diligence, it became obvious to us that combining these two great companies make strong strategic sense. With this acquisition, we expect to accelerate the transformation of our North American retail operations. Intermex's go-to-market strategy is very similar to our approach in Europe and in some instances, better tailored to the complexities of the U.S. market. Their U.S. retail operations have shown success, doubling both principal and revenue over the past 5 years. We are also excited by the prospect of gaining a proven management team and a strong operating platform. Their sales and support organization, 10,000-plus strategically located U.S. agents and a robust suite of consumer products that are extremely unique assets that have been built over the last couple of decades. We also plan to accelerate and scale Intermex's early success with bringing their brand and value proposition online. As the U.S., the LACA customer base continues to rapidly digitize, we see a significant opportunity to capitalize on the strength of the Intermex brand and its 6 million strong customer base using our next-generation digital platform and capabilities. Finally, we expect to generate substantial synergies by bringing these 2 companies together, both on the revenue and on the cost side. Let's now talk about future revenue potential. Despite recent market headwinds, we believe that the longer-term outlook is positive. We see room to grow in North America retail by strengthening our operating model and expanding our product set. Intermex currently offers products and services we do not. Products like check acceptance, payroll cards and digital agent onboarding. Bringing these products to our 11,000 U.S. independent agents is expected to drive incremental revenue as well as help us lower our cost of settlement while improving the agent experience. We also see opportunities to extend the Intermex value proposition and drive incremental revenue by enabling Western Union's global payout network for Intermex' agents. Today, Intermex has less than 3% of their transactions being sent outside of the LACA corridors. Much like in Europe, we have had a goal to drive a controlled expansion of our company-owned store network in the U.S. This has proven more difficult to execute in the U.S. than it has been in Europe. Intermex brings a robust own store network with over 100 locations in the U.S. This is a strategic asset of Intermex and closely resembles the controlled distribution strategy we have been building in Europe. The Intermex own store network could provide greater control -- would provide greater control at high-volume locations often providing favorable economics and an improved customer experience as well as the ability to sell additional consumer products and services. We really like the Intermex brand. It is a highly recognized brand in our category and has strong customer awareness and loyalty. Moreover, the Intermex team has begun making good traction with the launch of its own digital offering given the relative strength of its market position. However, the digital business is a scale business that is rapidly consolidating among the top players. By enabling the Intermex brand with our platforms, scale and capabilities, we believe there is substantial opportunity to grow their digital business. Finally, we anticipate that the combined company will have roughly 20 million North American retail customers. We believe this customer base as well as their own store footprint discussed previously, will give us a substantial opportunity to be the company of choice when these customers need additional financial services products and wish to make their migration to digital. With the recent changes in the U.S. market, such as the remittance tax and the ongoing immigration pressures, we expect to see continued acceleration of migration from retail to digital and this customer base has the potential to provide us with a cost-effective digital customer acquisition channel for years to come, lowering our digital customer acquisition costs and improving the returns on our marketing budget. Now shifting to the cost side. As we laid out in our press release, we believe this transaction should easily provide $30 million of cost synergies. Given the complementary nature of their business with ours, we see significant opportunities to streamline both their and our ongoing operations in North America. We see the opportunity to take a best-of-breed approach to streamline to a single set of platforms and capabilities across these 2 organizations. We expect $0.10 of earnings accretion in the first full year and additional accretion as we continue to gain the benefits of the integration. Given the high cash generation of this business, this transaction is not expected to have a material impact on our ability to continue to return capital to our shareholders via dividends and share repurchases. We believe opportunities like this do not come around every day. While the public markets are focused on near-term months or quarters, we are focused on long-term performance and building a great business even when short-term results are under pressure. Given the long run structural impediments to population growth in most developed countries, we continue to believe that migration will be important to maintain aggregate economic growth. We do not believe that the law we are seeing today will persist even over the intermediate term, which is what has allowed us to acquire a very good business at an attractive entry point while still paying Intermex's shareholders a substantial premium to the public market value for the company. We believe this time horizon arbitrage has created a unique opportunity for us and we are excited to welcome the entire Intermex team to the Western Union family. Thank you for joining the call today. We will now open it up for questions.

[Operator Instructions] Our first question comes to us from Tien-Tsin Huang from JPMorgan.

Fun to analyze for sure. Just -- thanks for going through all the detail. I'm just thinking about some things in my head here about the brands, how both sides will get exposed. I appreciate what Devin, you said about the operating model looking like Europe for Intermex within the U.S. So what's the decision timeline here to -- first on the brand and how that's going to get exposed on both sides across the different platforms and how we decide on the surviving platforms and the operating models and things like that? It sounds like there's a lot of opportunity to learn from each other. When will those decisions be made? And how much risk is there to execute then?

So we're very excited about the brand, Tien-Tsin. And we're excited about the operating model and the strength of what Bob and his team have built here in North America. We'll go through a process, as I said in the public comments, we are truly taking this as a best-of-breed approach. So we are not going to impose Western Union on Intermex. We are going to look at the platforms, the products, the team members and create a truly great North American business. We expect regulatory processes to take 9 to 12 months. Within the frame of the restrictions on those, we will begin our integration planning. And I look forward to sharing with you as time goes on, how we're going to bring these 2 great businesses together. Today, I think we feel very confident that they are complementary, the styles of the management teams and the ability to bring 1 plus 1 equals 3 together, very strong.

And Bob, since you're on the call, I presume you'll stay for a period here. It sounds like from Devin that it's important to have the management team be involved here. And then just really quickly, the $30 million, how much of that is assumed in the $0.10 of accretion in the onset of the deal? That's all [indiscernible]

Yes. I guess I'll first answer. Look, I think this is a really great day for Intermex. It's bittersweet for us as an organization. There's been a lot of great people that, including myself, that have built Intermex into a prominent brand out of North America, primarily to Latin America. But this brings us a huge amount of opportunity to expand that base at retail, something that I believe has got still great opportunities but also brings us the opportunity to build that digital component with the Western Union behind us, the Western Union brand behind us. So we look really forward to that. And I look forward to being part of that for a long time. Devin and I have built a strong relationship so far through this process and I look forward to be an integral part of that building. So it's not a transitional thing for me as much as it's -- this time, I see this as a longer-term thing and I think it's a valuable opportunity for myself and our team going forward.

Tien-Tsin, thanks for joining us at short notice this morning. As far as your question on the $30 million, there is some synergies built in that first year but the synergies will ramp throughout the 2-year time horizon and we'll continue to make the accretion stronger as time passes.

Our next question comes to us from Vasu Govil from KBW.

Maybe I'll ask them both upfront. I guess, first, just, Devin, on the rationale. I know Intermex is a great brand but how did you think about sort of doubling down on the retail business, given that you yourself said that over time, that's potentially strategic -- structurally a declining business but more going towards digital. And then if you could give us a little bit of how you see the pro forma company growth rate before any potential for revenue synergies, that would be great.

Vasu, thanks for the question. On the last earnings call, you heard me talk about the need for us to continue to take our operating model of controlled distribution with tactical execution at the local agent level from Europe into the U.S. That is a process that we have embarked upon. And this acquisition -- and Bob's team will help us accelerate that. So we already have a very large U.S. business that, as you know, has underperformed recently and in particular, the market. And so we see this as a way to accelerate that transformation. As you know, we also enjoy a very competitive customer acquisition cost for our digital business and that is largely driven off of the strength of our retail presence in over 400,000 locations around the world as well as the strength of the Western Union brand. So we rely less on digital marketing expense and the organic search capabilities. We believe that Intermex brand has similar characteristics, particularly around the very attractive Latino population here in the United States of America. So we actually see the Intermex brand as a further down payment in building our retail to digital customer acquisition engine and believe that it will become additive to our digital business as well. So we do not see it as doubling down on retail. We see it as strengthening a large retail business we already own and increasing our ability to grow new customer acquisition in a digital space with the great brand and the customer recognition and loyalty that Intermex has.

Vasu, thanks for joining the call today. As you think about us why we're buying this acquisition, Devin's talked in the prepared remarks about the many soft benefits. I want to spend a few seconds talking about the hard benefits. This is a unique opportunity to acquire this great company, something that Bob has been able to build over the almost last 2 decades for around 5x EBITDA. So we think it's a great return for us and our shareholders. To your question around the growth rates, we believe that with what Bob's built and combining the best-of-breed, both what we have plus what he has in North America will help us be able to stabilize and grow our North America retail business over time, as well as accelerate our digital business with his 6 million customers. Look forward to sharing more about our outlook in the Investor Day.

Our next question comes to us from Darrin Peller from Wolfe Research.

Congrats on the deal. Devin, maybe you could just go back for a minute to the ability for you to actually convince users to transition to the digital platform. You've done a good job with it on your own brand. It's both the convincing and it's obviously being there for those that want it naturally. But I'm curious what the actual action plan you have in place as to follow suit on the Intermex customer base? Because I do think you're going to want to push them on digital as fast and as much as you can, given the sustainability of that. And then as a follow-on, is there a pricing difference between that you could take advantage of? In other words, does this help rationalize the pricing in the market at all? I mean, has there been any irrational actions either by Intermex or other companies? And when I say irrational, just competitive that you can now see level off a little more? Does this help the competitive landscape in that way?

On the digital side, one of the great opportunities here is, Bob and his team, as you know from their public commentary, have seen some accelerated trajectories in their digital business growing 40%, 50-plus percent quarter -- year-over-year. So the brand is very strong and the opportunity is significant. Bringing our platforms -- we spend significantly greater amounts of money on our digital marketing. As you know, we've launched our new next-generation platform in 15, 16 countries around the world. We're going to use that next-generation platform to relaunch the Intermex digital experience here in the U.S. So we think the combination of our scale and product and technology plus the marketing investments that we already make and the relationships we have in the digital space will enable us to accelerate the great work and foundation that Bob and his team have been able to do as a independent public company. And so we're really seeing this opportunity enabling what is a strong foundation with a lot more resources, scale and technology to accelerate what is clearly market demand for their brand, their product and service as those customers go digital. And so we believe some of the purely digital players have been acquiring customers out of both our and Bob's retail network. And we're working hard and we'll work with Bob to kind of put an end to that activity. With regard to pricing, we have not considered any price-related changes as a result of this deal. The remittance industry is highly competitive and we will continue to compete aggressively to win businesses across all our channels.

Okay. All right. And then, Matt, just my quick follow-up is just on the financial leverage side. I mean I assume this put you at a higher level than you typically want to be but only probably briefly, I'm curious your leverage ratios that you want to hold on to pro forma for this and just in terms of the -- it sounds like you have no reason to believe the dividend should change or anything on buybacks. Is that right?

Yes, Darrin, thanks for the question. No. So our goal still is to maintain investment credit rating. This will put us slightly above the 3x. The deal likely doesn't close for another 9 to 12 months. We're working with the rating agencies on time to get back below that threshold but I'm working on a 24-year -- 24-month horizon to get there. So that's why we felt comfortable in the prepared remarks talking about not a material change because Bob's business generates EBITDA every year of 20% of the purchase price. So over a 2-year horizon, you're going to get cash flows and EBITDA of a level that gets you pretty close to paying back down below 3x.

Our next question comes to us from Gus Gala from Monness, Crespi, Hardt & Co.

So I just want to understand what lessons from the prior Vigo acquisition back when it was the first [indiscernible] put into Intermex, I think that was like nearly 4,000 locations. And can we talk about potential for cannibalization within the independent channel? Just thinking -- I mean going back to the question on pricing incentives for agent expansion, just different approaches there, anything we should be considering as that integrates? And one clarification, any concerns on regulator around your U.S. to Mexico share? I think this will probably put you as the biggest player, at least in the plurality of it in terms of the share.

Thanks for the question. The interesting turn of events in history is Bob sold Vigo to Western Union 2 decades ago. So it's a repeat. As you probably know from Western Union's public disclosures, Vigo has been one of the better bright spots in our retail footprint and in our retail results over the last 5 or 6 years. And so as the market has shifted towards a more independent and in some cases, an independent, non-exclusive footprint, our Vigo brand has helped us in that segment of the market. . But clearly, we have a much smaller part of that segment of the market, given that our Western Union brand, which is the predominance of our retail business is mostly exclusive and has a large proponent of the strategic partners, the large grocery store chains like the Krogers and the Albertsons and the Publixes. And so this is an opportunity to bring together a stronger part of our independent agent -- our 11,000 of our roughly 40,000 U.S. locations are in that independent channel. So bringing Bob's 10,000 to it actually starts to balance out the strength of that channel relative to our more exclusive and Western Union branded channel. So I see it as additive and we believe the market is big enough that we won't see a lot of cannibalization.

Our next question comes to us from Jamie Friedman from Susquehanna.

Congratulations on this transaction. I'm curious, in instances where there is overlap of the presence between the 2 companies, how are you going to manage for that? And I'll just ask my two upfront. And Bob, your company has been -- both your companies, your company has been well known for very tactical data-driven marketing. So I'm just curious as to how that operational expertise you think can transfer over to Western Union.

So today, we already operate here in the U.S., 3 brands with Western Union, OV and Vigo. Bob can comment but he operates 2 brands with La Nacional and Intermex. We actually see the brand and the brand portfolio is offering different value propositions, both to the agent and in some cases, also to the customer. So we will maintain a multi-brand portfolio wherein by defining the agent value proposition and the consumer value proposition by brand. And so we believe that will give us the ability to target customers and agents that those brands represent the right fit for that agent and that customer. That multi-brand strategy, we believe, will also give us an advantage relative to single brand competitors in the highly competitive and fragmented U.S. retail marketplace.

Yes. And could you repeat that part of the question for me again?

Sorry.

Yes. I mean your -- over the years, your company has been well known for very data-driven, like you study the ZIP code, you find the merchant in the ZIP code, the Bodega [ in the ] ZIP Code, all that data. I'm just curious how sort of hyper micro marketing strategies can be applied in potentially the bigger canvas of Western Union.

Yes. I think the interesting point is where you ended your point is that the bigger canvas, this is a ZIP code by ZIP code business. And having the opportunity to work on a canvas with a combined array of products and the combined array of brands will only make that a much better offering for our consumers at retail. It gives us the opportunity to use that micro data down to the ZIP code and then apply the proper solution to that relative to products, relative to brand. So we see it as a huge opportunity and that same metrical approach, those same tactical approach that's then served us well and helped us grow tremendously, I think we'll dovetail well with the Western Union brands that are currently in-house there and with the approach that Western Union has taken over the years. So I think that it will apply quite well and I think it will make us both stronger in the end.

And it is one of the things that we are very excited about. As I have talked about, we have followed a similar approach in Europe with that very tactical micro-market approach down at the agent and the street corner level. And so the model that Bob has built the team and the data that they have assembled to be able to take that across the broader Vigo, OV and Western Union footprint, we think, is a real opportunity for the combined organizations and look forward to having Bob and his team lead that for us.

We have time for one final question. And that final question will come to us from Chris Kennedy from William Blair.

I mean Intermex has given some interesting unit economic statistics for both its retail and digital business. When you think of those, is there any way to look at those, compare them to kind of where Western Union is and just talk about the opportunities there.

Chris, thanks for joining the call. Western -- Intermex has provided a fair bit of information. We provided a fair bit of information that are different. We've gone through and we see immense benefit of bringing these 2 businesses together. They've been able to get a very accelerated branded digital business growth. Their productivity within their customer locations, their agent locations actually a bit more productive than ours. Bob, over time, has done a great job of sharing the cost of signing up a new agent location. He's a bit more efficient than we are at that. And we're excited about making our team more efficient with his data-driven approach. So there's many benefits we've seen on how he operates that business, as Devin talked about in his prepared remarks, similar to what we've been able to accomplish in Europe. There are some benefits on our side, we're going to bring to his. So we look forward to sharing more of that as time passes but there are some unique differences.

And obviously, for regulatory reasons but also just pure competitive reasons, these are 2 public companies coming together, so the level of detailed sharing at unit economic levels and things like that has been more limited. I will come back to the point I made at the beginning, which is, we see this as bringing a best-of-breed. So where Bob and his team are doing something that is clearly superior to the Western Union approach, we will rapidly adopt that and push it across the footprint. And I believe Bob feels the same that the opposite is true, where we have benefits or an approach that would help the Intermex brand and team, they will adopt that as well. So we see bringing 2 great businesses with disparate strengths together to create one great business that builds on the strengths of both organizations. So I'd like to end the call by thanking all of the people from both teams for the great work that has brought these 2 companies together. As you can imagine, this is not easily done and requires a lot of time and energy from both sides. We've got 2 wonderful teams here in North America that are already starting to work well together. And I really look forward to what we'll be able to do as a combined company. So thank you to all the Western Union employees, to the Intermex employees, to our respective Board of Directors to enable us to bring these 2 companies together. Thank you all.

Thank you for joining today's conference call. We hope you have a great day.