The Western Union Company ($WU)

Thank you again for joining us. Again, I'm Darrin Peller, covering payments and IT services at Wolfe Research. We're really happy to have you guys with us. And we're really happy to have Western Union with us I'd love to just start off with hearing about the most recent year, I mean, it's been an exciting time for the company, and we have Matt the CFO with us to walk us through it. Look, you guys, the anticipated Intermex acquisition and numerous growth drivers emerging in the Consumer Services business. Just what are you most excited about in terms of the accomplishments ahead of you and the goals for '26.

Darrin, thank you very much for having me here today. I'm going to take a step back and answer that question. But -- you had a chance -- maybe better. You had a chance to sit at our Investor Day back in November. And as we sat there, we talked about our digital-first strategy built on a very strong retail platform, which I'll get to your question here in a second, led by strong growth in digital and then expanding and doubling our consumer service business. So to your question of what's exciting for me. We announced last year, middle of the year, an acquisition of Intermex. It's a $500 million to $600 million retail business that we were able to do. It was not on our radar screen. It was an acquisition where the market pressures have lowered their multiples, have them provided us an opportunity to buy them for roughly 4 to 5x EBITDA. And we've now spent the last seven months with the team getting to know them, get to know the way they go to market, get to know their processes. And it's a tremendous asset that we're able to bring into the company in middle of this year. So I'm super excited about that. I'm also excited about the continuing work we're doing on consumer services, continuing to grow out our travel money business and then continuing to build our stablecoin strategy, digital assets.

Cool. Look, let's take a step back and go through some of the trends you're seeing in the market. There's a lot of noise and a lot of tailwinds and headwinds, but somewhat more headwinds, I'd say, than tailwinds these days around remittance. And so start off with what you're seeing in the market, if you don't mind, first, in terms of just trends lately. And we'll go into specifics around how you're being impacted by some of the geopolitical noise and some of the migration topics, but just high level for a moment.

Yes. So certainly. So we've seen a meaningful headwind in the Americas over the last going on five quarters, started in North America Q2 last year, really coming around, to your point there a second ago, the immigration policy, whether it be the ICE rate, whether it be the lower immigration, we've seen immigration to the U.S. has really dropped by about 2/3 from pre-Trump to where we are now. That is actually -- that part not having a massive impact on our business today. It's more the concern about being out in the market and our customers going out and doing transactions in retail locations has been more pressure because of fear getting picked up. But over time, we're going to see an impact on the U.S. economy for not having enough blue-collar workers to do the jobs we need to get done and then ultimately, potentially an impact on our business.

Where are we on that front in terms of the impact on -- from migration trends in the U.S. lately? Are you at a steady rate now in terms of what you'd see it in terms of impact to retail transaction growth rates? Or -- and just remind us some of the numbers, if you don't mind, in terms of some of your transaction growth rates in retail in particular?

Yes, certainly. So we've been now down in the Americas, low double digit now going on three quarters to Q2 through Q4. So it's been relatively stable, bounced around between, call it, 11% and 14%. So we do see that where we get retail. Retail. So if we get into Q2 this year, we'll start to lap that.

Right. And guys, to put it in perspective, that's retail, digital is still growing.

Yes. Digital, worldwide last year grew about 6%, transaction is 13%.

Right. And so if we put it all together, your transaction growth has been pretty moderate. I mean...

Last year was down a little bit. The previous two years were positive. So the retail pressure caused it to flip negative. But again, we think we'll lap that this year.

And that's what I was going to say. So we're going to lap that this year. But again, it seems like the impact of migration trends or patterns in the U.S. due to a lot of geopolitical stuff is actually in the run right now anniversarying and you're not seeing it worsen.

Correct. Agree.

Okay. How about the potential impacts of remittance tax and the digital shift? I mean I know that's something maybe you want to explain that for everyone and what's going on there and how that impacts the business?

Yes, certainly. So I'll give the headline, and I'll back it up a couple of steps. The headline is not material to us what we've seen in the first couple of months of the year. But what is the remittance tax? So the government put in place a 1% tax on any cash payout transaction. So if you go and initiate a transaction with cash, that will be taxed at 1% here on a U.S. outbound transaction. That -- I'll back up a couple of steps here. That started out as a 5% tax when they proposed it Q2 of last year. We spent a lot of time with lobbying efforts to get that reduced from 5% to 1%, also got to eliminate at one point that they were going to require our agents to go and decide to someone a citizen. So the original rule was very challenging. Ultimately, what came out has an impact on our customers. But for us, we've not seen an impact on transactions changing the trends we saw before. And how we got there is you know we've been working on a debit card strategy for going on 2 years. We had modest penetration before the tax. But we -- as a company, we were about 5% in Q4. Now we're in about mid-teens. But even readers in our agent locations was moderate before the tax came out. We used the second half of last year to go mobilize and get as many point-of-sale solutions out in the marketplace, and now we're about 90% penetration in all of our agent locations.

So the combination of you getting out there and the need for the consumers to want to use it is really driving debit to really be...

And that allows them to save the tax. We've also seen from the tax, we've seen an uplift in -- as you know, we launched about two years ago, a prepaid solution. And we've seen that prepaid uptake go up by about 4x versus what we saw in Q4 and what we've seen so far this year in Q1. It's still early days. We're looking at what the reload rates will be and what the lifetime value of these customers will be, but we're seeing more penetration with that.

How about the conflict in the Middle East, Matt? I mean, obviously, there's key corridors between whether it's Saudi or UAE sending money back to India, Pakistan and other markets. We've seen in the past political turmoil has caused an increase in transactions. Are you seeing that?

It's early days. It's been a couple of weeks now. We are seeing a modest uptick in the outbound. Typically, when there is a conflict, we will see people wanting to get their money out of the conflict zone. This is something we're watching very carefully, though, because where the bombs are going is touching other parts of our business. What that will do, we're not seeing an impact today. But if it were to continue beyond weeks and months, what happens with tourism into Europe into Turkey? What happens to our travel money business, consumer services. So we're monitoring this very carefully. Hopeful that we'll get to a point where the conflict gets resolved. The most important part, the good news is we do have a big team in the Middle East, and thankfully, they're all safe, and we've been helping them get out and take care of their families.

Okay. That's good to hear. When we think about the new partners you're adding, [ PartnerOS ]. I mean, you're having some really good traction. I mean you added Kroger and Deutsche Post, Canada Post. What is the offering that's allowing you to really win those types of businesses?

Yes. So it's more than just the point-of-sale solution. I got to take a step back on this. So for us, we really walked away before Devin got to the company about 4 or 5 years ago, we had walked away from retail. So we had not added -- you probably -- you've been covering us for a long time. We had not added strategic account probably in a decade. What we've done over the last 4 years is we've modernized our point-of-sale solution. Retail iOS actually allows you to embed many different solutions into it so that you can have a one-stop shop making the agent's job as easy as possible. We started visiting our competitors' agents well before they put out an RFP because typically, when an RFP comes out, if you don't already have a relationship, you're probably not going to win. You might actually make the other party pay more, but you're probably not going to win. So we've been spending the last 2 years building relationships. Canadian Post one has been an 18-year journey. Deutsche Post, we didn't -- they were -- as you know, they were a partner of ours that we lost 4 years ago, 3 years ago. And we never stopped talking to them, and they saw the improvements we've made and the ability for them to go be more effective and they want to get back in. So this is a continued journey we're working on both from the product sales side, from the technology side and helping them understand how we're going to help their customers have a better, better interaction experience, and that's given us a really strong pipeline.

Can we touch on digital? What's the latest trends there? I mean -- and maybe help us understand what you're doing to enhance or just continue driving success in that area as well as potentially the gap between revenue and transaction growth.

Certainly.

Just remind everyone that you have metrics.

So we've now been going on three years of double-digit transaction growth, two years of mid- to high single-digit revenue growth. As you just highlighted there, there's a gap of, call it, 500 to 700 basis points. The driver of that initially was we launched a new go-to-market program where we're doing first-time customer-free transactions. And then we got to a point of stability this year, the '25, the reason for the spread is we've won two large partners in Saudi Arabia, which we talked about in Q2 last year that are more account-to-account payouts. So this is someone who would do a transaction initiated on the account side and then paying out to someone else's account. Those come at much lower take rates. And as a result, that growth rate is driving a wider spread between transactions and revenue. We'll start to anniversary that as the year progresses.

But are you seeing stable or good trends on digital lately?

We are continuing to see solid trends. As we talked about in February, the strength is really coming out of the Middle East. The war is helping that a little bit, and we're still in seeing flattish stability around the world where we're working on improving new customer growth.

All right. Great. Great. Just from a competitive standpoint, I mean, you've gone through different pricing strategies over the years. I've seen very dramatic moves over the last 10 years covering the stock or more than that. But more recently, I mean, you've really tried to establish competitive pricing and dynamic pricing, right? What's the latest where dynamic pricing is enabled in the U.S. and abroad? I think you stated somewhere around over 50% enabled in the EU, I think, if I remember correctly. But just what's the update?

Yes. So let me talk about pricing. There's two parts of pricing. One is we talked about at our Investor Day that we now believe that we're competitively priced in about 70% of all the corridors around the world. That then to be able to do dynamic pricing, and let me describe what dynamic pricing is, dynamic pricing is where we actually go and get our competitor data during the day, and we will update up to three times a day the FX rate to be as competitive as possible. You can't do that if you're not a market. So getting that 70% is the first parlay to be able to go and then actually go do dynamic pricing. To your point a second ago, right now, we're about 75%, 80% of all transactions out of Europe on the strategic pricing and dynamic pricing. U.S. is closer to 40% to 50%.

Okay. All right. Maybe just shifting to principal per transaction. I think it was up 5%, right? And so -- and I think if I remember correctly, you guys thought at least short term, this is the new norm. That's pretty decent trends from a same-store sales, if you think about it that way. What's driving that?

Principal on your question earlier on immigration. So we're seeing people going, doing less transactions but larger principal amounts. That's actually not a good thing for us in the long run. Right. You want to see more. You want to see more transactions. So for those who don't know our business, we charge a fee to do a transaction, and then we'll charge a spread on top of the FX rate. So more transactions, you'll make more money. So it's not necessarily a good thing, but it does show there's still stability and people are still sending money back home. They need to support their families. It continues to support our understanding.

So effectively, migrants are just trying to mitigate how many times they have to make a transaction and get out there, but they're doing more when they do.

Correct.

Where they're sending with other people and grouping transactions together.

Correct.

How about Intermex? I mean it's in your guidance for '26. What's the latest on what needs to be approved for the transaction timing?

Yes. So we are down to four states in one country, all of which we have line of sight on that they'll hopefully get completed here in Q2, which is what gave us confidence to include in our guide for the year. We also included our guide for the year because we are going to integrate the teams very quickly and the businesses very quickly. And the ability to do a, "Hey, Intermex is this, core business is that." Will be very hard to do after a couple of quarters. So we felt it's more important to give full year including it.

Okay. When we think about the business itself, you've compared it to the -- the way European business or retail operates. Just help us understand that. What is it you're really benchmarking off of? What's the similarity there that you're looking at?

Let me talk about how our retail business works as a whole. So imagine a pyramid. The bottom of our pyramid is our strategic partners, which we've now won a couple of new ones we talked about a few months ago, which we believe will generate $100 million of more revenue as they fully ramp as we get to the middle of next year. Then you have what we call our independent channel. This is where it's us and one of our competitors sitting in an independent agent location, you can walk in, you can price shop. So it's very price sensitive. Intermex is very strong with that. They have about 10,000 agent locations. We got about 10,000. So now we're doubling that here in the U.S. Europe is much heavier independent. So it's more similar to that. And we've been working on the strategic side with taking the U.K. Post exclusive last year, went into Deutsche Post, and we're working on the bottom of the pyramid. And then the very top of the pyramid is company-owned stores or what we call concept stores, which are exclusive locations that look and feel like a Western Union. So what Intermex is helping us do is they're helping us at the top, because they have about 150 stores here in the U.S., which we have very few. And then they're helping us double the middle, which we didn't have enough penetration in the independent channel.

Okay. When we're staying on the topic of Intermex, I think they have about 6% of their transactions that are digital. I mean how does that compare to Western Union overall right now?

About 40%.

Right. So you're obviously way underpenetrated in terms of Intermex. Is that -- what kind of an opportunity is that for you guys? And is that going to help you drive digital growth even more over the next several years?

So it's one of the reasons why we bought them. It's not part of our thesis for the purchase price, but it was one of the things we talked about on our announcement call is they've got 6 million customers. We think that they have a very antiquated digital platform, and they've gotten to that 6%. We're going to go bring them into our tech stack, continue to brand it as Intermex. And we believe that through our better technology, their brand recognition and their 6 million customers that we can drive an accelerated growth in digital.

Okay. That's good to hear. Putting it all together, the synergies and the guidance, does it embed any cost or revenue synergies in '26? Or is this more of a '27 story? I realize the bulk of the $0.10 accretion you spoke about in the first full year post close.

It's still original -- when first announced, we're talking about $0.10 you just said. There is negligible benefit this year from a cost synergy standpoint. While we're maybe closing 4 to 6 weeks earlier than we originally anticipated, a lot of the benefits are going to come through payout commission savings, send commission savings, headcount and support functions and to get the headcount, you got to go work on the technology, which is going to take us from the time you close 9 to 12 months go, get the technology embedded. From the payout partner side, you got to go negotiate and you got to have the contract up. So we think it's going to take most of the rest of this year to work our way through that and start getting the benefit as we get into 2027.

All right. That's helpful. We all think about Western Union, we think about money transfer. But consumer services has become a pretty big growth driver for you guys lately. It's actually very strong, in particular, in the last, let's call it, 18 months. And so maybe you could just reframe what are the subpieces of -- what is the company doing in consumer services, maybe relative size of each of those pieces and their growth rates?

Certainly. So I think the simplest thing I think about consumer services, we have 100 million customers. We have about 40 million customers on the send side, about 60 million customers on the receive side. Our goal is how do we serve them with additional products. So consumer services just expand that TAM for our customers. And when you get inside that, we now have principally three large products. Our largest one is our bill pay business. It's about $100 million, $150 million business. It's growing in the mid-single-digit range, largely based here in the U.S. and Argentina, but we've now got in a couple of different markets around the world, we're trying to expand it. So it's a combination of growth from same-store sales is growing, but then we're also getting expansion opportunities. Our second bucket is retail money order. This is a very low growth, no growth business, but we can take share. And it's principally a U.S. business that we believe with expanding our agent locations with the Intermex acquisition, we have the opportunity to get further penetration in this market. But as an industry, it's not a growth market. It's more of a take share market. And then the next largest one for us is travel money. This is a business where we had a few tens of millions of dollars that go back two years. We'll probably exit this year about $150 million. Last year was about $100 million. It is principally located in Europe right now. We've got a little bit in Asia, a little bit in Latin America, but the heaviest concentration is in Europe. As you mentioned before, we did the EuroChange acquisition last year, which added a little over 1% revenue growth to last year's results. That business, it depends on what part of the world you're in, but overall, it's growing low single digit. If you're in the APAC markets, it's mid-single digit to high single digit. So it really depends on what part of the world you're in. And what excites me about all of it is the white space. We're only in a couple of handfuls of countries for all of our products. So we have the ability to expand, whereas on the consumer -- on the remittance side, we're already in every country. We're in 200 countries around the world. We have digital in 50 countries around the world. Our opportunity there is really taking share. Here, our opportunity to take share and go fill in some white spaces.

Okay. What about wallet and card services? I mean that's an area that I know is, in my view, one of -- probably one of the biggest opportunities for a company with such a huge network of end users on the other side. So help us understand what that is.

Yes. So other things in consumer services, we've got our wallets, we are prepaid. We got our new digital assets. On the wallet front, we're now in about 9, 10 countries around the world. The purpose of it is your customers on an inbound market can divert the funds and I can save commission expense. On the outgoing market, a lot of our customers can't get banked. They can't walk into the traditional BofA or whatever bank you're banking with. They don't have all the credentials. They don't have the credit history. So using a wallet solution allows them to get into the digital market. So we're seeing strong uptake. I think Devin talked about in the last earnings call. In the U.S., we launched a soft launch of our Vigo Money wallet, are seeing tens of thousands of customers enrolled with no marketing or near no marketing, while we've been working on getting the platform right and testing the customers and functionality. So it's -- we're excited about what it can do for us, but I'm really excited on the receive side. And on the receive side, we just got approval in the last week or so for our acquisition in Mexico. You probably remember announcing that two years ago. It's probably one of the longest regulatory reviews in my life. I would not have put that in my guidance as long as that took. But that license is going to hear close in a couple of weeks from now, and then we got to get approval for our new tech stack, but we look to be in market there coming later this year or early next year.

Yes. I mean, I don't know if you've ever quantified how many users you have on received markets, but we've heard about 9 million.

60 million received customers.

Yes. I mean, that compares to 9 million digital users roughly in the U.S., right? And so there's a multiple -- 5, 6x multiple of the number -- if you can get them banked effectively with a digital wallet, it could be a really big opportunity that's really not at all in any of your numbers.

Largely not. I mean it pays for itself by saving the commission expense and then it grows revenue if you can go monetize other consumer services to them.

Yes. How about stablecoin? I mean, more broadly, it's been a topic, obviously, of concern for investors on cross-border companies in particular. But for you guys, I mean, are you seeing any evidence of it shaping up as a risk or for -- either for you or the industry?

We see it more as an opportunity. We don't see it as a risk for the industry. Let me describe the risk part, and I'll come to the opportunity part. The risk part, our customers are sending [ $350 ] each. To go and set up a wallet, send money to someone else who has set up a wallet and then you have to figure out a way to get the cryptocurrency or stablecoin on your send side. They got to then go convert to fee on their side. Those things are hard to do for $350, sending the average customer sends 6 or 10 times a year. So we're not seeing that in our customer base. If I were sending $100,000, I'd probably go consider that a lot. But what we're doing about it and why I think we're actually turning this into an advantage for us is we've launched a digital asset strategy. Our digital asset strategy has really three elements to it. First off, we're trying to work on our treasury management. We send about $120 billion around the world every day or every year. It's $500 million a day. We have created over 20 years ago, we created a real-time network already by doing prefunding, by getting partnerships with agents where you pay them a commission rate to give real-time funding. We think we can go and pull a lot of the capital out of the marketplace through using a digital asset. We've already started -- we've [ minted ] our first coin. We've already tested with a partner. Just yesterday morning, I'm on the call with one of our large partners in one of our top 5 markets in the world about how to use them to go do this to move to a digital asset, and they were very intrigued by it. So we're working through that, and we think that will help us from a working capital standpoint. The second area is we're launching stable cards. We will be a market with over a dozen markets middle of the year. This is -- think about this as largely our customers who are in high inflationary markets. You're in Venezuela, you're in Argentina, your family is sitting here in the U.S. or somewhere else in the world and they're sending you home money, you can then divert the money to a stable card. That stable card allows it to stay in USD and now you're protected against the inflation in that market. And then for us, we get to, a, save the commission expense because you didn't have to go through an agent to pay it out. And then you can pull the money out through my third thing I'll talk about in a second, the DAN network or you just go swipe like any other credit card and we'll make some interchange off of it. So we get to monetize it a second time. And then the third element of our digital asset strategy is what we call the DAN network, Digital Asset Network. We're using our agent network to help people who want to load funds into a Digital Asset Wallet, either on the send side or the receive side, we'll be in market middle of this year with four partners, and we've got a long pipeline of others we're working on. And the goal here is how do you help people get on and off of the digital asset ramps.

Very helpful. I guess when we think about AI and data, and I'm going to ask just maybe one or two more and then turn it to the audience guys. But when we think about how much data you have, you probably have among the most in the industry, specifically remittance industry given your scale and size. How do you see this as a competitive advantage? Or does AI actually enhance this opportunity, some of these opportunities for you?

I think AI is huge in a couple of places. For us, we're already using our customer service centers to actually assess our call agents and quality of the service they provide. We're already using it within our technology group to do programming. We're starting to use it in our fraud detection department to minimize fraud. And to your point, the level of data we have, we can look across the 100 million customers. We can look at the frequency of -- typically, you don't have a regular sender or a regular receiver where fraud is happening. It's usually someone who's new, so you can go and look at that. So I think it's a game changer over time. The questions come up in every meeting we've had so far here today. They all want to know are we the next block and we're going to go lay off 40% of our people. I don't think that's going to come from us in the next week, but I do think as an industry, at least for Western Union, I think you'll continue to see how technology can help you, in particular, AI can help you to continue to streamline your work.

Right. And then just lastly, what are capital allocation priorities for the year between dividends, buybacks, M&A? And I mean, do you have capacity for incremental M&A when you digest Intermex or you digest Intermex?

So nothing's changed. Our strategy since I've been here has been we're very committed to our dividend. We have bought back about 1/3 of our stock during my four years, which has brought down the check for our dividend by about 1/3. So we're down about $300 million of our free cash flow on the dividends. We're very interested in M&A. It was not a focus of our company prior to the last three years. We've done a handful plus small tuck-in deals, one large one in Intermex. Where we can find something that provides new financial service that we can provide to our 100 million-plus customers. We're going to go look at those things that make the right sense for the product, service, customer price, all that. And -- but whenever there is nothing there, we're going to continue to return it to buyback as we've done the last couple of years.

So Matt, we're sitting at the end of '26, beginning of '27. What do you want to see to call the year of success? And are there areas of -- if we were to see upside versus guidance, let's say, what would it have been coming from in your opinion?

Yes. So for us, success for me, hit our commitments. That's been my goal for my last four years, lay a very strong foundation on the digital asset side. I think that's something that can really help us accelerate growth as we go into future years, getting the DAN network fully enabled and getting good penetration there, making good headway on pulling capital out of the system. All that will lay a good foundation for the future. What could be a surprise this year? I could see a world where stable card or the digital asset network hit the ground running out of the gate and generate a bunch of revenue. I don't have much baked into my outlook for that. I do have an expectation of it in my 2028 guide, but I don't have an expectation of getting a lot this year early.

All right, guys. Any questions from the audience? I think there's one in the middle. I just get a mic real quick.

Specific to the retail business, there seems to be a bit of a mix shift as you are retaining these customers who are looking to avoid the remittance tax. And so that means more debit payments at the point of sale, more prepay payments at the point of sale. Can you talk a bit about how that maybe flows through in terms of unit economics? And is there any meaningful change to.

Yes. So from a prepaid card standpoint, if it's our prepaid card, we're actually making more because we get to make the interchange. On the debit card side, there is the normal interchange fees you'll have with that. It does allow us to save on banking fees. So typically, today, we already incur costs related to making deposits and having accounts open and all that. It will negligibly increase our expenses related to those transactions, but we do think it's going to make customers stickier. So over time, it will improve lifetime value.

Other questions? All right. Why don't we wrap it up there? Guys, we have a break for about 20 minutes. So please get some coffee, get some refreshments, lunch and then be back at 12:25 for an amazing panel on venture capital and private equity.