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

Okay. Welcome. We're excited to have Western Union here. My name is Bryan Keane. I head up the U.S. fintech practice on the research side here at Citi. And we're excited to have Devin here to talk through Western Union's new outlook, and they just had an Analyst Day, which we were just talking about. So there's a lot to talk about. But first off, Devin, thanks for coming.

Hey, it's a pleasure. Really excited to be here. We're excited about the story and the opportunity to talk about it.

Yes. Yes. No doubt, no doubt. So thinking about the Analyst Day, coming off its Beyond Analyst Day, I think you guys coined that phrase for the Analyst Day a few weeks ago.

We went from Evolve to Beyond.

Yes. I saw that, very tricky.

Yes. I'm a marketing guy.

Just thinking about the financial goals that you set 3 years ago in Evolve, as you mentioned. Can you talk about what went well first with Evolve? And where did you maybe fall short?

Yes. So I think the headline is we're largely where we expected to be when we laid out Evolve in 2022. The path there was a little different than we anticipated, and the current run rate is a little lower than we anticipated. And so in between that, a whole lot of things happened. We had a large business grow in Iraq and then go away. We had a couple of elections in South America and then here in the great United States of America that changed perspectives on immigration and migration. But we also had a European business that became much more resilient and in fact, has turned into a positive growth contributor far ahead of what we laid out or expected. And we've seen the digital business perform pretty much as expected. So I would say the geopolitical movements, Iraq a plus, change in North American immigration policy a negative. But net-net, we're largely where we are. And in the third quarter, we were kind of flat on GAAP revenue, which is we originally said we would be 0 to plus 2. So that's a little bit on the low end of the 0 to plus 2. But for 3-year predictions in this business, given what I inherited, I feel like we do okay.

Yes. And how much of that being on the lower end maybe of the 0 to 2 is these kind of geopolitical economic factors that are a little bit outside your guys' control?

Almost entirely, right? And so we didn't expect to do as well what the retail turnaround as we're doing in Europe, but we certainly expect it to do better than we're doing in North America. And so you can just look at the bank to Mexico data, right? So the majority of my tenure as CEO, which is now approaching 4 years, Bank to Mexico principal month-over-month, quarter-over-quarter, high single digits, low double digits. We had a couple of quarters in the middle of the Biden administration that were mid- to high teens in terms of the amount of money going back to Mexico. Second quarter of this year was negative 12. So just the sheer magnitude of the reversal, it's just hard to overcome in any short period. No amount of improving the model, agent productivity improving our pricing position can offset the fact that there's just a lot less money flowing from the United States to Mexico, to Guatemala, Honduras, now -- for a while, it was Mexico, that was a problem. Now apparently, it's Venezuela. So we're blowing up boats and [indiscernible] from Venezuela. So that's -- we can. That is what it is, and we're working around it. We had a lot of success with consumer services. That's probably better than we had laid out. In 2022, we called it the ecosystem, which was send, spend and save. And so really, we are focusing on the how do we add cards, how do we add wallets, how do we add bill pay products. And that part of the business, which we now call Consumer Services, has performed better than we had laid out.

Yes. Yes, no doubt. One of the things at the Analyst Day you pointed out was that you were now 70% market competitive with price changes that you made in geographies and corridors. I guess as an analyst, we always want to know then what the 30%, what's left to go?

Yes. So we have largely concluded that the 30% is what the 30% is. And so in some cases, we have a competitive advantage. We have a unique payout market in some place in Africa or we have a value proposition in terms of the nature of our go-to-market strategy for either that corridor or that demographic or that geography that either supports the pricing or it's just not big enough for us to actually try to -- the expense of trying to -- the medicine is worse than the cure or the cure is worse than the medicine. I don't know which one it is, but it's just not worth fixing. So we're largely done other than the normal day-to-day market fluctuations that we talked a lot in the Investor Day about how we're moving to a much more strategic pricing model where we are now changing prices sometimes as much as 3x a day on the retail side and even more than that on the digital side. When we get an advantage for FX rates, we'll take that into the market with us in an afternoon, and we'll move volume in an afternoon because we have a better FX rate than people who bought all their FX the day before, which is many of the smaller competitors set their prices based on yesterday's FX rates because that's how they do it. At our scale and volume, we're in the market every day, all day for FX. And so if we get an advantage, we now have the ability since we're market competitive to turn that into the ability to drive volume. When you're 30% overpriced, a couple -- 10 basis points of FX doesn't make any difference. When you're at market prices, those 10 basis points of FX can make a difference.

So why doesn't price continue to drop? It sounds like you feel like pricing is now stable. But why -- in a digital world, I think the fear is with remittances that prices will continue to drop.

Yes. I don't actually know what drives that fear. You pay for everything. So if you walk out there on Park Avenue and you take $100 out of the ATM, they're going to charge your $3. I charge you $3 to send money to Mexico, right? Think about that, right? Like that requires no AML, that requires no sanction screening, that requires no KYC, okay? We have an amazing value proposition where you can move $200 to Mexico, Guatemala, let's pick some fun places. You want to send money to Afghanistan. You want to send money to Yemen or Syria? I'm your guy, right? For $4, you can send money some place, some place fun. So yes, I think somebody is still going to pay me to do that. I don't know anybody who's going to do that for free.

Yes, no doubt. There's nothing [ free ] for that.

Okay.

Well, essentially the KML stuff and all the legal ramifications of sending money.

This will be a stunning thing just to wrap your mind around. I have 3,000 people in compliance. 3,000 people in compliance to make sure because every KYC requirements are different by countries. Every country has their own set of sanctions, requirements and sanctions list. While anti-money laundering is pretty consistent, there are variants of around the world. And when a bank does these things for you, right, they do it for you for an account. So they now have KYC, you put your $10,000 in the account, they've created your profile. And then all they do is monitor whether you show up in a branch with $10,000 of cash. And then they're like, okay, well, that seems suspicious. We should go look at that. We do it on every transaction. Every transaction goes through that whole process for us. So I think somebody will pay something for that.

Yes, no doubt. On digital, can you just explain WU's digital strategy going forward in the underpenetrated corridors, country expansion, high-growth customer segments?

Yes. So let's break it into 3 real components, right? So we have our base business growing 12%. And we've laid out in Investor Day that we're going to accelerate that. You can do the math, but it's a couple of hundred basis points of acceleration. And then it's a closing of the gap between our revenue and our transactions, some of which will stop because of the abating of the price reduction that we've been doing. And so Matt laid out, we see that long-term kind of 300, 400 basis points difference between transactions and revenue, get transactions up into the mid-teens, 300, 400 basis points you get revenue up in the low double digits. So that's the theory of the case that we laid out. The drivers of that are continuing to optimize our very low customer cost of acquisition and leveraging our retail footprint. So we laid out at Investor Day that our goal is an under $20 CAC, which we think is industry-leading relative to what others do in the space. And so we'll go acquire a bunch of customers. Part of the reason we bought Intermex is that gives us 6 million customers who we get to talk to every day, who currently when they migrate and go digital, they are doing that with somebody else, sometimes us, sometimes somebody else. None of them are going digital with Intermex because they don't -- they have a $10 million digital business, it's tiny. They don't have very good products, they don't have very good capabilities. So we're going to continue to feed that machine with our natural incumbency, which is our high-quality brand, our low CAC, our organic search results and feeding the retail to digital escalator. The second thing we're going to focus on is we're adding a bunch of geographies. I was just talking to some folks here in the beginning, we're getting our outbound license in the Philippines. We're launching our outbound business in Indonesia. This year, we rolled out our next-generation platform in Argentina, Chile, Peru and Panama. We're going to put that also into Brazil. So the majority of our business, which I don't think people is really in the U.S. and Europe. We have a very interesting and high-growth digital business now emerging in the Middle East, and we're expanding our digital business aggressively into Asia and into South America. And so that's all additive growth that we don't have today. And then the last thing, by dint of who we are and over time, there are some really important corridors that we are very insignificant in relative to our global size and scale. So if we take India, the largest inbound remittance market in the world by a factor of 2, globally, we have a 5% market share. It's gone completely digital. It's gone completely payout to account. Our historic focus on retail. One point in time, we had 100,000 retail payout locations in India. Think about that, 100,000 locations in one country. But that went very quickly with the change in monetary policy to everybody who has a bank account. Now we're something like 92% payout to account. But we didn't change our go-to-market. So big corridor growing rapidly, very low market share. We're going to go target things like that.

So how do we think about the ramping of the retail base on to digital?

So think about 2 things, right? One is most of my customers always begin their journey in sending money home in a retail environment. So when you first get to a country, you find a job, you put shelter over your head, food on the table, clothes on your back, transportation to work. Once you've established those basics of life, you accumulate enough money to start sending money home. At that point of your migration journey, you generally don't have a bank account. And so almost always, you start in the retail environment, and then as you progress in that journey, you become more established, you get a prepaid card, you get a bank account, you get a digital wallet, and you move into a digital sending experience. And we see it in our progression of our own customers. Our digital customers are younger. They're more affluent. But many of them did do their first remittance transaction in retail. And so we're going to capture that. So we're going to -- we're working on knowing when someone shows up for the first time, we've never seen them before. Is this person someone that's likely to rapidly progress to digital, and we're going to help them make that journey. The second is there is a natural progression where people's happening in the U.S. a bit right now, where people wake up and say, I want something that's more convenient, I want something that's easier. In many cases, it's no longer cheaper, but in some cases, maybe cheaper. And how do we convince them to come with us instead of go with somebody else, right? And so the #1 obstacle we've gone and done consumer research amongst our retail customers who are going digital is they don't know we have a digital option. Oh, I didn't know Western Union had a digital option. That's number one. Number two is pricing. So our pricing is now competitive. But we historically were worried about channel conflict. We were historically worried about marketing to our own customers. So our competitors would market to our retail customers all day long and spend lots of money with the digital margin companies, the Facebooks, the Xs to target our retail customers because we were afraid to do it. We're going to change that. We're actually going to go after our own retail customers and help them migrate to digital with Western Union instead of with somebody else.

So how do we think about longer-term digital volume as a percentage of total principal?

Well, we laid out a chart at the Investor Day that said by 2028, 50% of the revenue of the company, which will probably be then 60%, 65% of the principal of the company, I'd have to do that math, will come from digital and consumer services. So our goal in the next 3 years -- and when I started 3 years ago, 70% of the revenue of the company was in the retail. And that 50% also includes our recent action of Intermex, which is an entirely a retail company. So we're going to add $500 million to $600 million of revenue in that number that is purely retail. So you can see what's going on in the, what I'll call the organic base, the growth of consumer services at 20-plus percent, the growth of digital with a low single-digit shrinking base in retail is rapidly transforming the revenue mix of the company.

Yes, I was going to ask about retail. Maybe you can size that for us today, how big retail is. And then we saw obviously, some amazing changes in Europe. And I think you guys highlighted growing 13% in Europe as of recent. Can you talk a little bit how big is the retail business? Can you keep it at low single-digit positive? And what happened in Europe that maybe you can emulate over in the U.S.?

Yes. So today, the retail business is about $2.5 billion. We laid out Investor Day ranges of kind of $2.2 billion to $2.3 billion or $2.1 billion, $2.4 billion. Tom will be able to tell you the exact range. But implying the aggregate retail business over the next 3 years will shrink low single digits. And so -- and that's truly a reflection of what we're seeing here in North America. We do not anticipate a significant change in the immigration policy stance. And therefore, we're just being realistic. To your point, there's only so much we can do about the fact that the flow of money into Mexico is now negative. And so that's the reality of that. The European business is growing on the remittance side, mid-single digits. On the consumer services side, double digits. So all of European retail is growing low double digits, right? And so that's the evidence of the model, i.e., you have the right distribution, you have the right pricing and then you have the right go-to-market strategy. Retail can in a stable immigration policy environment, be a low single-digit grower given our scale, size and market share. And there are all the forces at work in Europe in terms of digitization. Europe is way more digital than the U.S. or Latin America or about the only place that as digital as Europe is probably Asia. And so all of the forces we talk about are at work today in Europe, and we're growing at mid-single digits.

Is there any learnings from Europe that can be crossed over to the U.S. for the retail business?

100%. And one of the reasons we had my 2 Italian colleagues on stage 2 weeks ago is we've actually imported one of them, max, who is Head of our European business to come and help us lead the North American business while we await the final regulatory approval for Intermex. The other reason we bought Intermex is the model that Intermex follows is very similar to the model that we're following in Europe in terms of the nature of the distribution triangle. We had a big gap on the independent nonexclusive in the U.S. because historically, the Western Union brand didn't compete in that part of the distribution. We compete in that part with a brand we have called Vigo, which is much smaller. So when we add, which has about 6,000 independent agents. So when we add Intermex, we'll now have about 16,000 independent nonexclusive agents. So we fill that out. We're also adding at the top of the triangle, much like we've done in Europe with company-owned stores. So after the acquisition, we'll have about 200, 250 company-owned stores. And then we're going to keep the Western Union base with our big strategics, and we're making real progress there. I announced at Investor Day that Kroger has made the decision to go exclusive with Western Union. So they'll go from nonexclusive to an exclusive based on a lot of the investments that we've made in innovating on the retail platform, particularly with those large grocery category of retailers. So we think a lot of what's done in Europe can happen here, and we're working hard to replicate that model. Intermex really lets us accelerate that model at a much faster pace than we could do organically.

Yes, I want to touch on Intermex. I think you guys talked about $500 million to $600 million in revenue. I think it did maybe $658 million. So maybe some impact from overall immigration and what's going on in Mexico. But the business really -- the synergies could be huge just on the digital side. Maybe just talk about a little bit about the revenue profile, where it's going and why this is such a good asset for you guys to buy.

Yes. So you're good with math. I'll let that do it. You caught that little math there. So look, they just filed their queue. Anybody who looked at it, they shrank about 9% in the third quarter. So I would say we're being realistically conservative based on current outlooks and trends on what we saw at our Investor Day. So if I set that aside, we think there's a couple of really exciting things. So the majority of that $600 million of revenue is in 5 corridors, right, Mexico, Guatemala, the Dominican Republic, Honduras. They have no payout to the rest of the world. They don't do any business to Jamaica. They don't do any business in Philippines. They don't do any business to Africa. And there are neighborhoods, and they have 10,000 locations. So in every location, they sit side by side with other agents who are sending money to other parts of the world that they aren't using Intermex for. So after we close, we're going to turn on Western Union's payout network in the rest of the world to those Intermex agents. And so if you go into some of the neighborhoods here in New York, you'll see very multicultural agents that have Intermex. The Intermex is only catering to the Mexican community or to the Dominican Republic community, and we're now going to allow that brand to cater to the world. So we think there's upside there. And again, that independent nonexclusive channel is a knife fight -- and the Intermex value proposition, which is high-quality agent service, high-quality customer service, that applies equally well to somebody who wants to send money to Jamaica as it does to Mexico. So we think the value proposition works. They just didn't have the payout network. The second, as you mentioned, is the digital. One of the reasons the Board decided to sell the company is they couldn't see how they were going to invest hundreds of millions of dollars as a mid-cap, small sized public company to compete in the digital world. Digital has got -- there's only 2 or 3 now truly at-scale digital players, spending hundreds of millions of dollars of marketing, spending hundreds of millions of dollars on product. If you -- like in all digital businesses eventually, it becomes a scale game, and that is happening, and they just said, we don't think we can do that. The difference is we're already at scale. So we can take those 6 million customers. We can take that great Intermex brand, and we can just leverage our platforms. We can leverage everything that we're doing with very little incremental cost to allow them to have a high-quality, great Intermex digital to the world experience. So we see those 2 as real upside in that $600 million, which might be the conservative number based on current trends.

Yes. Yes. Can you talk a little bit about the Beyond strategy with the nonremittance revenues, I think revenue is -- [ lose ] nonremittance revenue share to 25%, I think, by 2028 from 15% today. I think that was from the Analyst Day. With the consumer segment reaching $1 billion in 2028. Can you talk through that business, the drivers there? I think it's always hard for everybody to memorize kind of what's in that business. It's bill payment, travel money, digital wallet, some of the prepaid side. Why has that business been successful, more -- maybe more than you and I thought it was going to be and what are the drivers for growth from here to get to those kind of penetration rates you talked about at the Analyst Day?

Yes. So let's break the business into 2 categories of products and services. There is what I would call the now at scale platforms, which would include our bill pay business, our retail money order business, which is largely a U.S. business, and our now travel money business. Those are $100 million-plus businesses, all growing strongly. We like those businesses. We've invested a lot in the platform. In travel money, we invested inorganically to get some of the platform like with the Eurochange acquisition. And we see market demand from our customers leveraging the channels that we already have. So the beauty of Consumer Services, and this is the thing I didn't anticipate enough is we already have the customers. We already have access to the customers. There's market demand from our customers for these products and services because many of the people who serve my customers either have overpriced those products or don't have good products. And so we've seen customers excited about the fact that you can go to a Western Union and get travel money. We've been doing great business with our -- one of the reasons we're doing well with the strategic is our retail money platform reinvention. We reinvented the entire value proposition. We lowered all the fees. You can get a refund now by just scanning a QR code on the back of the money order, and they're walking into Western Union and getting any cash. When we started this 3 years ago, if you wanted to refund, and I kid you not, you had to fill out a carbon copy form and send it to us via mail, we would process it. And 6 weeks later, we'd send you a check. Think about that. These people bought a retail money order because they don't have a bank account, and we would send them a check, right? Like that's not the greatest consumer value proposition. And so we've redone the technology, the front end. We've done the value proposition. And so we're seeing market gains. You put a good product out there that people want at a reasonable value. The second category of products are things like our media network, our digital wallets, our card-issuing strategy. All the stuff we just talked about in our digital asset strategy, the digital asset network, the stable card. Those are more nascent. We've seen strong growth in them. We're still investing in those platforms. But that's where -- these businesses are going to continue to grow well. But the incremental growth is all coming from the next set of stuff that we're rolling out that we think is the same idea, which is a high-quality product with a good value proposition, serving our customers through our channels, which makes it then very cost effective to acquire those customers is what we laid out and why we think there's $0.5 billion of incremental revenue in that category of products and services. And to your point, it's a long list over the next 3 years.

Well, let's talk about the digital asset network, which I think is probably an underappreciated asset that you guys have. Stablecoin comes out or any new technology comes out and people will always point to the competitive threats what that means. Stablecoin, obviously, international people think about remittances. Well, they think about the risk there. But for you guys, you decided that you're going to launch your own stablecoin and you think it actually can be a positive. Can you just talk about competitively what stablecoin means and why can it actually be a positive for Western Union?

Yes. So we think it's an opportunity, not a threat. And we think there's 3 opportunities, right? So the first and the easiest is we're heavily reliant on the non-SWIFT -- SWIFT banking system. So we settle around the world in T+2, T+3 and in some cases, T+5 [ into places ]. So in order to have my value proposition, which is you can walk out of here and send money to Mexico and your loved one can pick it up 5 minutes later, we maintain a fair amount of capital in the system in prefunding and correspondent banking accounts to make that happen. The actual money that you sent won't go to Mexico for 2 more days, but your mom can take the money today. And so by moving to blockchain-enabled Summit platforms, we move money 24/7. No more weekend problems, no more holiday problems, and we think we can move those prefunding balances down significantly because of the rapidity of which we can move money around the world. So that's an easy opportunity. It's unique to people like us who have lots of negative float in the system to move money around. And so we think that's a home run. The second, which you highlighted, which is the digital asset network, we spent a lot of the time in the Investor Day talking about our payments network they're building. Originally, our payments network was a cash out only network, and it was really built buy us for us. And so as we've modernized that and truly created an omnichannel payout network, so we have 3 billion-plus endpoints on accounts and wallets. We have 400,000 retail locations. We've opened up that architecture, so other people can plug into it. And we've been surprised at the demand that we've had from what I'll call, digital -- crypto digital wallet infrastructure players and others. That last mile problem is a real problem. So if you own bitcoin or you own USDC and you're in Bolivia and you want to buy a gallon of milk, you've got to go from USDC to Bolivars and you got to get those Bolivars so that you can go buy the gallon of milk. And so we solve that problem every day and how our system works. We can put that money in your bank account, we can give you that money cash. We run treasury operations in all these places where if somebody sends money, we collect the Bolivar. If somebody pays money, we hand them back to Bolivar. And so there's been a lot of demand to let other people who are in the digital asset world access to that funds out network, that off-ramp. And so that's the digital asset network. We'll also do in-ramps. There's been less demand for on-ramps than there has been for off-ramp. But we think eventually there'll be demand on both on-ramps and off-ramps. And then the third is our own coin, USDPT. I try to say that fast 3x. The U.S. dollar payment token, and we purposely chose not to call it the Western Union payment token because we actually think it's going to play an important role in moving money, particularly for consumers around the world in the stablecoin digital asset. We also think it's a unique value proposition for our consumers. So today, the way the system works is if you send money in Mexico, you walk into an agent or you go online, we tell you what the exchange rate is, you agree. And then your loved one on the other side has no choice but to accept Mexican pesos at the exchange rate that the tender agreed to. It's how it works for everybody, not just Western Union. By putting that into a digital asset, you'll send your money to your loved one. And then your loved one basically now holds that money. They hold that store of value, they hold it in the great U.S. dollar, which in many cases around the world, is a far more stable currency than the local currency. And then they have control, the receiver has control about when and how they convert that to local currency. And so we're going to shift that decision right from the sender to the receiver. In the process, we think that receivers may not decide that they want to convert every dollar instantaneously local currency, given the stability and the security of the American dollar that they'll hold it, and we will turn a negative float business into a positive float business. So anything that sits in that USDPT, we get their treasury rates on until it's redeemed. Also, as we announced at Investor Day, we're going to link that to a stable coin card. So we're going to issue in partnership with Visa and Rain. We're going to issue cards against those stablecoin balances. So you can then actually hold your stablecoin balance, and you can get a card and then you can actually go shopping, just like I told you, you want to buy that gallon of milk in Bolivia, you just swipe your card, and it comes out of your stablecoin balance, you don't have to worry about the conversion, you don't have to do anything. So we then basically allow it to be a digitized bank account for people who don't have bank accounts with card access. And so where we've tested that idea, consumers find it very compelling. We haven't -- we don't have any market yet. We'll get it into market early next year, but we think there'll be market demand for it.

I know we only have a couple of minutes, but the revenue model will be the float, the balances that -- or people using card transactions...

Interchange.

Yes, the interchange, then on and off-ramps as well. Anything else to think about when we think about the digital asset network for stablecoins?

Yes. So for the digital asset network, well, the first is eliminating float for Western Union Treasury taking dollars off the balance sheet. Second, being the off-ramp, people will pay us very attractive rates to provide that local market liquidity as an off-ramp. And then for the consumer value proposition of USDPT, it's float on balances that don't immediately convert. We do earn when they convert, we'll earn the FX that we would normally, so there's an FX revenue stream on that. And then if they choose to use a card, we will have fees on the card and interchange on the card as well.

Okay. And then finally, I just want to end with the outlook. I think Western Union is assuming global remittance market grows in line to 3% to 4% kind of your expectations what are the key upside and downside scenarios for you guys to achieve that revenue guidance of $4.8 billion to $5.3 billion by 2028 and $2.30 in EPS. What are some of the -- what gets you to the upside of the range and what could be some of the risks?

Yes. So one of the things I've come to learn that this is a very volatile business. Somebody decides to invade a country that disrupts my business in some way and somebody gets elected that disrupts my business in some way. Somebody does lots of geopolitical effects. Now the good news is we're very global. So if you have a war in one part of the world, sometimes the rest of the world is doing pretty much okay. And so our global diversity helps with the geopolitical and the macro gives and takes, which is why we think on -- and if you go back for a long period of time, in aggregate remittances, are basically a global GDP plus 100 to 200 basis points, right? So the migration of people around the world is part of what powers GDP. And so most high productivity countries bring people from low productivity countries in to sustain their economic growth. So as long as you think global GDP will stay in that 2% to 3%, global remittances will be in that 3% to 4%. The upside for us comes in great execution on things like the digital asset network. It comes from a change potentially in economic policy or immigration policy in North America. It comes from an acceleration in our digital business because there's more take-up in that geographic expansion that we're doing or in the corridors we're focusing on. That's where the upside comes.

All right. With that, we'll keep it there. Thank you very much, Devin.

All right. Bryan, it's pleasure. Thank you very much.