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The Western Union Company (NYSE:WU)

Q3 2008 Earnings Call

October 21, 2008 8:30 am ET

Executives

Gary Kohn – Vice President, Investor Relations

Christina Gold – President & CEO

Scott Scheirman – CFO

Analysts

Adam Frisch – UBS

Bryan Keane – Credit Suisse

Greg Smith – Merrill Lynch

James Kissane – Banc of America

Bob Napoli – Piper Jaffray

Julio Quinteros – Goldman Sachs

Charlie Murphy – Morgan Stanley

Operator

(Operator Instructions) Welcome to the Third Quarter 2008 Western Union Earnings Conference Call. I would now like to turn the presentation over to your host for today’s call Mr. Gary Kohn, Vice President, Investor Relations.

Gary Kohn

Welcome to the Western Union Third Quarter 2008 Earnings Conference Call. Thank you for joining us today. As we indicated in our press release we have prepared slides to accompany this call and webcast. These slides are available at www.WesternUnion.com under the Investor Relations tab and will remain available after the call for your convenience.

Before turning the call over to Christina, I will take a moment to remind you that today’s call is being recorded and that our comments include forward looking statements. I ask that you refer to the cautionary language in our earnings release and in Western Union's filings with the SEC including the 2007 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 will discuss items that do not conform to generally accepted accounting principles.

We have reconciled those measures to GAAP measures on our website www.WesternUnion.com under the Investor Relations section. All statements made by Western Union officers on this call are the property of The Western Union Company and subject to copyright protection. Other than the replay, Western Union does not authorize and in fact disclaims responsibility for any recording, replay or distribution of any transcription of this call.

With that it is my great pleasure to introduce our President and CEO, Christina Gold.

Christina Gold

We were pleased with our third quarter results with growth of 10% or 8% Euro adjusted and earnings per share of $0.33 up 18% on a GAAP basis and up 10% excluding $3 million of restructuring expenses in the quarter and the $22 million accelerated stock compensation spend charged in 2007. Our continued execution of our strategy and our geographically diverse portfolio kept our business growing profitably in the quarter in what became a more challenging macro economic environment.

Transaction growth rates held strong and their revenue growth this quarter was solid. Although we did see principal per transaction grow more slowly than previous quarters. Our operating margin was solid at 27.2% or 27.5% excluding restructuring expenses. We earned $0.33 a share this quarter. EPS was impacted by a total of $0.015 from restructuring charges and an increase in the net other expense line from foreign currency hedge losses that resulted from unusual market volatility. Scott will provide more color on this.

Our cash flow from operations remained strong and we generated $925 million for the nine month period. Our ability to deliver significant cash flows in addition to our strong cash balance at quarter end are major competitive advantages. The financial results we delivered this quarter were the result of the team executing on our four key strategies. Our first priority is to grow the C2C business. We continue to promote and market our brands, grow the agent network, expand our offerings like our intra business and online money transfer and to price effectively to grow our C2C business.

At the beginning of the year we had planned to implement price decreases this year totaling around 3% of company revenue. We now expect to make price decreases totaling only 1% of revenue. At the end of the third quarter our agent network totaled more than 365,000 locations exceeding our 2008 goal of 360,000. We have agents in every corner of the world serving customers in the most rural to the most urban markets.

In the past quarter we welcomed new agents and extended relationships with existing agents. To highlight just a few, throughout Asia/Pacific we added the Vietnam post which has nearly 3,000 locations. This is a competitive take away. We plan to open 600 locations this year and an additional 700 next year.

In the Philippines we added our first direct bank agent Robinsons Savings Bank. In Malaysia one of the largest banks Public Bank we expect to add 250 locations and in Thailand we added Bangkok Bank, they have over 750 locations, 400 of which have already begun offering Western Union money transfers.

In our EMEASA region we have officially opened in South Africa with our agent ABSA. In fact, I just returned from a trip to launch this service and I am very excited about the opportunity. We now have agents in nearly 50 countries on the African continent many of whom came the launch in Johannesburg. I can tell you that there was overwhelming enthusiasm among the agents and the Western Union team. In the past South Africa was an important receipt country for Western Union. It has now evolved into a receipt and send market that serves as a hub for a larger Pan/African money transfer opportunity.

We renewed our relationship with the French Postal Savings Bank. La Bank Postal is an important agent with whom we have been working with for nearly a decade. In the UK we launched a pilot money transfer program with ASDA a member of the Wal-Mart family. We added National Bank of Greece which is one of the oldest and largest banks in the country with 580 branches and to better serve Qatar our existing agent the UE exchange expanded into the country.

In the Americas region we acquired 100% of our agent in Panama and assumed direct responsibility for the agent network. This will lower our distribution costs as well as facilitate easier expansion of bill payment offerings.

Our C2C business was strong and in particular the international C2C business which is 69% of total revenue remained robust with 15% revenue and 19% transaction growth. Importantly, the growth is profitable at international C2C margins continue to expand.

We introduced a new regional view this year to better highlight our geographic diversity. The Americas region saw revenue flat year over year while transactions grew 1%. This region is 33% of total revenue. Within this region as expected pricing in Mexico remained stable and we once again performed better than the statistics reported by the Banco de Mexico. Mexico’s revenue and transactions declined 1% and 4% respectively. Our domestic business continued to improve with revenue down 3% which is the lowest rate of decline we have experienced in the last nine quarters. Transactions were down 1%.

Our Europe, Middle East, Africa and South Asia region is 45% of total revenue and posted revenue growth of 20% with 27% transaction growth. This region includes a variety of geographic corridors with each having its own growth characteristics. Some Western European markets saw revenue growth slow sequentially from the second quarter. For example, some of our customers in Spain have felt the impact from the slumping housing industry and the rise in unemployment. As a result, we have seen transaction growth slow.

Other markets have stronger revenue growth which is partially offsetting the slower growth in some countries. India for example is a market where our investments in the brand and the network continue to yield growth. In the quarter India revenue grew 51% and transactions increased 68%. We also remain very pleased with our performance in the Middle East markets.

The Asia/Pacific region makes up only 7% of our total revenue but includes large remittance markets like China and the Philippines. Asia/Pacific grew revenue 23% and transactions 30%. Revenue growth slowed from the second quarter mostly due to China which reported 6% revenue growth from a 4% increase in transactions. Indications are that China’s results were affected by economic issues that impacted small enterprises that typically send money to China.

Similar to the EMEASA region strong growth in other Asia/Pacific countries helped somewhat offset slower growth in China. For example we have grown our inbound business to the Philippines faster than the 17% market growth as reported by the Central Bank of the Philippines for the first eight months of the year. The Philippines is an important market. Currently it accounts for more of our revenue than either China or India.

We generate revenue in 200 countries with no single country outside the US contributing more than 7%. We serve 15,000 corridors and have the ability to shift investments across the portfolio of markets we serve to maximize growth.

In addition to expanding our distribution we have other initiatives in place to drive the C2C business. We are focusing on growing our intra business outside the US and Canada where the opportunity is significant. There are 300 million intra-country migrants within countries as compared to the worlds 200 million cross border migrants.

Our non-US intra revenue which is mostly within Russia, the Philippines and Chile has grown on an average 30% a year since 2005 and will exceed $100 million this year. We have the network and brand awareness in place to expand and drive growth in this intra business globally.

We are expanding distribution and attracting new customers to WesternUnion.com and by offering online money transfers through several banks. WesternUnion.com is available in 13 countries now and transactions outside the US grew in excess of 30%. In Asia we launched internet money transfers with our agent CIMB Bank, similar to our offering with Scotiabank in Canada and Deutsche Postbank in Germany, customers in Malaysia can send cash in minutes using their internet banking relationship to any of Western Union’s 365,000 agent locations worldwide.

We have engaged Publicis Hong Kong to aid in aligning and optimizing our iconic brand worldwide. We will be introducing our new global brand campaign next year. As a reminder the new activities are not incremental spends to the marketing budget. We continue to invest around 6% of revenue on marketing. We recently launched a new campaign in the United States, Cash the perfect gift. The campaign features multiple elements all of which address various holidays and reinforce the trend that cash is the perfect gift.

Our second priority is to expand our C2B business. Clearly our bill payment business is feeling the impact from the worsening US economic circumstances. Fewer US consumers are able to make bill payments or get new loans so it is as important as ever to execute on our growth plans for C2B including entering other countries and diversifying product offering through joint ventures, acquisitions and PAGO Facil expansion. We have signed billers and have existing agents offering PAGO Facil services in Peru. We plan to launch PAGO Facil in Panama early next year.

Our third priority is to drive innovation by developing services and technologies. On the Mobile Money Transfer front we announced yesterday our alliance with Orascom Telecom one of the largest mobile operators in the Middle East, Africa and Asia. We plan to work together to introduce mobile remittance services in select markets where Orascom operates including Algeria, Pakistan, Egypt, Tunisia, Bangladesh, and Zimbabwe. Orascom has a total of 77 million subscribers.

In the quarter we expanded our Mobile Money Transfer pilot. Consumers can now visit select Western Union agent locations in the United Arab Emeritus, Singapore, Hong Kong and Hawaii and send money directly into accounts on Mobile phones of Smart communications and Globe Telecom subscribers in the Philippines.

We offer money transfer services in most every region where mobile opportunities exist. We are seeing interest in mobile transfers but the speed of rollout is limited by the introduction of mobile wallets by carriers. Mobile wallets are essential to conducting mobile money transfers. Our many capabilities like physical agent locations, brand recognition, technologies and compliance know how are helping us make progress and ensure we are positioned to succeed over the next three to five years as consumer acceptance evolves.

Our micro lending offering is moving slowly as banks are facing such significant issues and we do not want to take the credit risk on these loans. Another key priority is our focus on improving profitability. For 2008 we remain committed to delivering operating margin excluding restructuring expenses consistent with 2007 at around 27%. We have also set us an objective to deliver up to 50 basis points of margin expansion in 2009.

We understand that one key to building shareholder value is to grow profitably. We will accomplish this by leverage in our global scale, reducing operating expenses. We completed initiatives this year that are expected to save $35 million annually beginning in 2009, reducing distribution costs by lowering agent commissions and optimizing our global investments. These are unique and unprecedented times. Many economies are stressed making some consumers feel uncertain about employment and their own ability to earn.

As a result of the economic uncertainty and the negative impact that weakening Euro is likely to have on revenue growth we are taking a more conservative approach and believe it is prudent at this time to withdraw our long term growth objective for revenue and earnings per share. With that said our business has grown well during 2008 and we are pleased with the third quarter results. Our business is strategically and operationally sound and we are well positioned over the long run.

We are the global leader in the cross border remittance market. We have all the advantages of scale and the ability to leverage our infrastructure. We have developed a global and in our opinion unmatched distribution network. We continue to invest in our brand that for more 150 years has been one of the most recognized in our industry standing for trust, speed and reliability.

We have a diverse revenue stream with more than half of our revenue originating outside the US. We have a robust compliance program and enjoy strong relationships with regulators around the world. We are in a solid financial position and most importantly we have employees and agents around the world who are committed to growing our business.

Now I will turn the call over to Scott Scheirman our CFO who will discuss our third quarter financial performance and 2008 outlook in greater detail.

Scott Scheirman

Revenue for the third quarter grew 10% to $1.38 billion excluding $24 million of benefit from the translation of the Euro revenue grew 8%. The related benefit to profit was $3 million. Earnings per share was $0.33 and included $3 million or about half a penny of restructuring expenses. EPS also included net other expenses that were $11 million higher than expected and $19 million higher than third quarter 2007. The higher net other expenses were primarily driven from lots upon foreign currency contracts related to our hedging program. This had a $0.01 impact to EPS.

Historically we have been able to predict within a narrow range the portion of the gain or loss that must be recognized in current period income. However, due to the significant market volatility in late September the foreign currency loss this quarter was four times greater than we had anticipated. The financial impact of the portion of each foreign currency forward contract that will eventually be recognized into income is known as the time we enter into the contract.

The recent volatility will not change the ultimate gain or loss however, during the contract period we make adjustments to reflect values at quarter end. For the full year we now expect net other expenses to total $120 million up from our previous estimate of $110 million.

Transaction fee revenue which makes up 80% of company revenue grew 8%. This was driven by ongoing healthy transaction growth rates and fewer pricing decreases. Foreign exchange revenue is 17% of company revenue and is generated from the difference between the exchange rate we make available to our customers and the rate at which we or our agents are able to acquire foreign currencies. This revenue stream is driven by our international C2C business.

The 17% growth in foreign exchange revenue this quarter slowed from last quarter as a result of the average C2C principle being sent by our customers growing slower than in previous quarters. As a percent of principle remitted foreign exchange revenue is relatively unchanged from previous quarters. A strengthening dollar does not impede our ability to grow this component of revenue.

Third quarter operating margin was 27.2% as reported and excluding the restructuring expenses it was 27.5%. This is a sequential improvement from 26.7% in second quarter and 26.3% in the first quarter. We continue to expect our full year 2008 operating margin excluding restructuring expenses to be consistent with 2007 at around 27% with the fourth quarter being the highest of the year.

Consistent with the previous quarters restructuring expenses were not included in the operating segments. Of the $3 million in third quarter restructuring expenses $1 million was included in cost of services and $2 million was included in SG&A. For full year 2008 we expect to have a total of approximately $70 million in restructuring expenses a reduction from our original estimate of $80 million. We have not changed our estimate for related expense savings of $10 million this year and $35 million annually in 2009 and beyond.

For more meaningful comparisons the following discussion on cost of services and SG&A exclude the stock compensation expense from last years results and restructuring expenses from this years results. As a reminder in the third quarter 2007 the stock compensation charge of $22 million was allocated to cost of services and SG&A. Cost of services included $8 million while SG&A included $14 million. Cost of services grew 10% and was 57% of revenue. The 57% of revenue is consistent with third quarter 2007 and is lower than the 58% of revenue reported in the first and second quarters of this year.

SG&A in the quarter grew 13% and was 16% of revenue. SG&A was up as a result of higher employee compensation including headcount additions in several international markets as well as planned increases in marketing spend over the third quarter last year. The tax rate this quarter was 27.7% compared to 29.5% in the third quarter of 2007.

We continue to expect full year tax rate of 26.5% as calculated on our reported full year GAAP pre-tax profit. Remember that when you exclude the restructuring expenses the effective non-GAAP tax rate for this year is expected to be 27.5%. Our tax rate continues to benefit from increased foreign derived profits which are taxed at lower rates compared to US derived profit as well as the finalization and implementation of foreign tax planning strategies that will drive sustainable cash benefits this year and on a go forward basis.

We convert a high percentage of our net income into operating cash. Through nine months of the year we have generated $925 million of cash flow from operations and are on track to achieve our target of $1.2 billion this year. In 2008 we will return over 100% of our net income to shareholders through buybacks and dividends.

Capital expenditures were $45 million this quarter and totaled $125 million through nine months. We now anticipate total capital expenditures to be less than $175 million this year down from our original projection of $200 million. We implemented a working capital strategy that allowed us to better utilize cash generated from US and international operations. We use this strategy to repurchase shares in the quarter without increasing borrowings. In fact, we paid down $300 million of debt during the quarter.

In the quarter we bought back 20 million shares for $523 million at an average price of $26.13. Since going public we have repurchased about 86 million shares of our stock or 11% of the original shares outstanding at time of spin for $2 billion at an average price of $22.69. At quarter end we had about $1 billion remaining under our current authorization for stock buyback through 2009.

I want to make a few comments regarding the significant turmoil and financial markets. First, we have historically adhered to prudent financial policies and more specifically we seek to diversify our financial position and to spread out our counter party risk. With that said we, like many others, did have an issue arise this quarter stemming from our investment with the Reserve International Liquidity Fund which was a Triple A rated money market fund. During the quarter we had $300 million of surplus international cash which is not used for daily operations invested with the Reserve International Liquidity Fund.

Immediately upon hearing the news of Lehman Brothers bankruptcy and knowing that the fund had exposure to Lehman we requested a full redemption. We were told in writing by the Fund that the redemption would be honored at $1.00 net asset value per share but we have not yet been paid. We are working to resolve this matter and we believe that we’ll be a satisfactory resolve. As a result of the actions taken by the Reserve Fund we have reclassified the amount from cash to receivables on our balance sheet.

Even with this reclassification our cash position at quarter end was strong at $1.1 billion in addition to our strong cash position we have in place a Commercial Paper program that is fully backed by $1.5 billion revolving credit facility that expires in 2012. Against this credit facility we have less than $100 million of Commercial Paper outstanding on September 30th.

Our strong balance sheet, ability to generate high levels of cash flow and prudent financial policies have us in a solid position of being able to meet our financial obligations, invest in our growth, make strategic acquisitions and return capital to shareholders through stock buyback.

Our C2C segment which is 85% of total revenue posted 12% revenue growth while transactions grew 13%. Reported C2C revenue growth slowed 220 basis points from last quarter. When adjusting for the Euro C2C revenue growth slowed 70 basis points from last quarter. Revenue growth was impacted by slower growth in principle per transaction and to a lesser extent slowing transaction growth in certain markets.

C2C operating margin was 27.8%, was strong and consistent with last years third quarter excluding the 2007 stock compensation charge. Our international transactions that originate outside of the US total 57% of Western Union’s revenue and grew 28% driving revenue growth of 21%.

The Consumer-to-Business segment which represents 13% of our total revenue had revenue decline 2% on transaction growth of 2%. Excluding last years stock compensation expense operating income was down 15% and this quarters operating margin of 26.4% is down 420 basis points compared to the third quarter 2007.

Simply put, we are handling a lot fewer bill payments than we had originally anticipated at the beginning of 2008 as many more American consumers who would use our service are having difficulty paying their bills and are unable to obtain credit in any form. This is causing the year over year revenue, margin and operating income to decline in C2B.

Before concluding I’m going to provide color on our foreign currency hedging strategy and how our reported revenue growth for the fourth quarter and 2009 will be affected by the strengthening dollar. Our long term foreign currency hedging goal is to increase the predictability of forecasted profits and cash flows denominated in major currencies other than the US dollar. To accomplish this we estimate net revenue and cash flows from specific foreign countries and then utilize foreign currency forward contracts to lock in exchange rates for the next 12 to 36 months.

The Euro translation at the exchange rates we’ve experienced so far this year has added $95 million to revenue in the first nine months. At current exchange rates as the dollar has strengthened we’re expecting no revenue benefit in the fourth quarter or for 2009. In fact, at current exchange rates the translation of the Euro will be a drag on revenue growth in the fourth quarter and in 2009. We will continue to provide both revenue growth on a reported basis and revenue growth excluding the translation of the Euro so you can make a more meaningful comparison of the growth trends.

On the profit side for the fourth quarter and next year in keeping with our hedging strategy we have foreign currency forward contracts in place that will help improve the predictability of our profits and cash flows denominated in major foreign currencies. In other words, our profits and cash flows will be impacted less by fluctuation in foreign currencies compared to the impact on revenue.

In the third quarter we saw slower growth in C2C principal per transaction in previous quarters, a moderation in transaction growth rates in certain countries and we expect no Euro benefit to fourth quarter revenue growth. As a result of these factors we have tightened our previous guidance for 2008 revenue growth and earnings per share. We expect revenue growth of 9% to 10% and we are pleased given the economic circumstances that our current outlook is within our original January guidance.

We expect earnings per share of $1.29 to $1.31 excluding $0.06 per share in restructuring expenses. The corresponding GAAP earnings per share rate is now $1.23 to $1.25. We expect the current environment will not have a sizeable impact on our ability to generate significant cash flow so we’re on track with our original cash flow from operations guidance of $1.2 billion. We now expect capital expenditures for the year to be less than $175 million an improvement from the original plan of less than $200 million.

Factoring what Christina said earlier we believe our business model and strategy are sound. Our business continues to growth profitably. Our results this quarter are due to the execution of our four strategies and our geographically diversified portfolio. Our business is solid and we continue to invest to grow our global share of the remittance market.

Thank you, now Christina and I will open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Adam Frisch – UBS.

Adam Frisch – UBS

Wondering about the disparity between transaction and revenue growth in international and EMEASA and because that had been closing in prior quarters that obviously was a big reason for more positive sentiment on the stock. What happened in the September quarter and how do you expect that to trend going forward?

Christina Gold

As we look at the international there are two elements really that are working here. One clearly is the impact of the Euro which is about half of it in terms of where the Euro has landed at this point in time. The other part is we talked to was we saw revenue in terms of the principle per transaction being less which generates a certain amount of revenue from our F/X rates. Those two elements really caused that spread. I think as we move forward looking at the positioning of the Euro and the US dollar that will continue over a period of time.

Adam Frisch – UBS

That should continue into ’09 I guess as well?

Christina Gold

In ’09 we’ll give you guidance in January. I think the Euro, we definitely know the Euro is going to be a drag on us in ’09 the way its sitting right now.

Adam Frisch – UBS

What did you see in October versus the August, September trends that made you get more, let me ask a question, what did you see in October and how did it compare to September and August?

Christina Gold

October is going forward and so it’s really what we saw going into the third quarter. It’s really as we came through the third quarter we saw that the drop in terms of the amount of principle being set in certain markets and we also saw the big change in the Euro and the strengthening of the US dollar.

Adam Frisch – UBS

One of the highlights of this story has always been the strength and durability of the model you guys have laid out your plan very, very well and comprehensively in all your recent calls. You just withdrew the long term guidance that you gave four months ago due to some near term volatility. I’m not sure how to interpret or reconcile all those things because there seems to be a few conflicting messages there. Why the long term guidance?

Christina Gold

We feel really good about our business model and where we are. I think as we look to the long term I think this over ’09 and going forward that will be a question that people will continue to ask. What our concern was, with the volatility of the marketplace right now and also the US dollar and the Euro what’s going on we felt it prudent to take it off at this time.

Operator

Your next question comes from Bryan Keane – Credit Suisse.

Bryan Keane – Credit Suisse

Just looking at the Euro we’re not surprised to see revenue growth lag going forward. I want to make sure I understand the impact to the bottom line. Shouldn’t the hedges prevent any losses or due to the contracts and the way they were done there is still a possibility of losses going forward on the bottom line?

Scott Scheirman

It might be helpful to recap what we’ve seen in ’08 and then talk a little bit about 2009. On a year to date basis the Euro has benefited revenue by about $95 million but on the bottom line the benefit has been about $12 million so significantly less. As the dollar strengthens and the Euro weakens it will have a much more dramatic impact on the top line but because of our hedging program and how we’ve layered out hedges over the next 12 to 36 months the impact to the bottom line will not be nearly as significant.

Bryan Keane – Credit Suisse

Is there a possibility to still see losses going forward or will it net it out to zero?

Scott Scheirman

We’ll give guidance in January of ’09. The one metric you can think about that for every call it .10 if the Euro moves from say 1.45 to 1.35 it would be about $60 million of revenue impact in 2009. The profit impact would be substantially less on that because of the hedging program.

Bryan Keane – Credit Suisse

I wanted to clarify the weakening principle amounts did that weaken throughout the quarter and I guess it got deteriorated in September or was it soft all quarter long?

Christina Gold

It’s been something that we’ve been monitoring but its pretty well been across the quarter and it’s across the globe. It’s still continuing to grow so that’s an important point that we are growing principle. It’s not growing at a high volume but it was growing and it’s growing a little bit less now so that has an impact in terms of our revenue. Also I think if you look at principle China which had a high level of principle we saw that deterioration in the growth in China so that has an impact as well.

Bryan Keane – Credit Suisse

The outlook in C2B going forward?

Christina Gold

On C2B obviously we know that we’ve got our work cut out for us in that category. Clearly we’re working aggressively on PAGO Facil. The US marketplace is an issue for us and we know that. We’re aggressively pursuing expansion and also looking at acquisitions so it’s something that’s really on our radar screen and we would anticipate improvements in that category as we go into 2009.

Bryan Keane – Credit Suisse

The improvements would come from, for me I would guess that would be fewer bill payments would continue as the consumer continues to drop off.

Christina Gold

I think it’s really looking at acquisitions and looking at global expansion, those are the keys really for us. With the marketplace in the US is what it is and we‘ll have to manage it as best we can but it’s really driving on the growth strategy.

Operator

Your next question comes from Greg Smith – Merrill Lynch.

Greg Smith – Merrill Lynch

Can you guys just talk about anywhere in the business where you’re actually changing the strategy in light of the economic conditions so relative to maybe four months ago now you’re looking at possibly spending less on marketing or less investing and some of the new initiatives, any of that going on in light of the economic environment?

Christina Gold

I’ll just talk a little bit and then I can ask Scott to add some flavor in terms of profitability. I think that one of the things that we are ensuring is that we focus and invest in our key strategies for growth because we don’t want to pull back there because we think that our model is sound, our strategies are good. We continue to look at investing in our brand.

Also in some of the markets we have added people because we need to round out the teams in different parts of the world. We’re investing in our mobile because we feel that’s really part of our future. Those investments will continue. We always look at ways that we can look at our total business model, where can we reduce expenses and become more profitable.

Scott Scheirman

To echo what Christina said we’ll continue to invest where the growth opportunities exist so target our pricing, marketing and our resources to where the best growth opportunities exist around the globe. There are markets like the Middle East that are growing very strong. We’ll continue to invest there. In addition on the profitability side one of our key strategies has been to drive profitability to increase our margins and to recap that it’s really optimizing our investments, its leveraging our scale and we’ve seen this where the international margins continue to move up.

We are taking actions to continue to reduce our cost structure; we’ll save $35 million from our restructuring activities. The final thing I’d add like probably many companies now we’ll just be prudent with our expense spending as we move into 2009. We want to continue to invest where the growth opportunities exist.

Greg Smith – Merrill Lynch

On the competitive landscape are you seeing anything unusual out of your traditional competitors in the money transfer channel and then what about some emerging competition are you seeing any impact from card based or mobile from outside the traditional channel?

Christina Gold

I think the competitive landscape continues to be very competitive but I would say its stable in the sense there’s nothing unusual out there. We continue to see different players looking at opportunities to go into the mobile space but I think with our recent announcement for Orascom that will be terrific for us. I think that we’re monitoring all competitors we’re looking at the card based competitors as well, not seeing a lot of traction in that area. They’re there, they’re competitive, they’re smart but I think we have the team and the brand and the strategies to compete effectively.

Greg Smith – Merrill Lynch

Is there a way to quantify what you anticipate the Euro drag in 2009 if everything holds where it is now should we assume a two to three point drag something like that?

Scott Scheirman

Probably the best color I could give you right now is probably like many people I can’t predict what the Euro rates will be six or nine months from now. As I was talking earlier if we look at the metric if the Euro moves about .10 let me just say from 1.45 to 1.35 each .10 is about $60 million of revenue impact to our business. I would probably use that metric and then make your best guess of what you think the Euro is going to do in 2009.

Operator

Your next question comes from James Kissane – Banc of America.

James Kissane – Banc of America

Following up on Adam’s question in terms of the rationale for backing off the long term growth objectives, I think most people appreciate what’s going on in the current macro environment but say looking beyond 2009, 2010 why can’t you sustain 10% plus revenue growth and mid teens earnings growth?

Christina Gold

It’s not a question that we can’t or we won’t I think it’s a question of it’s always a question that’s asked and it seems almost a bit redundant now. When we look at the marketplace that we’re in, we look at where the Euro is we really want to focus in terms of what we can deliver. Plus as we look at acquisitions what that can bring to the table I think we can look at a growth as well. It’s not like we’re saying more or less we’re just saying it’s not a question that we can answer at this point in time.

James Kissane – Banc of America

Are there any fundamental changes in the business going back to Greg’s question in terms of competition, anything emerging there?

Christina Gold

Really not, I think we feel very confident in our business model as you saw with the international the 28% transaction growth it really shows the power of our brand and also of our network. As you look at this difficult economy cash is an important component of what people are hanging on to. Our customers are people that need to send money, this is not a discretionary spend it’s an important thing for families. Clearly we will continue to see the growth and we have confidence in our business model.

James Kissane – Banc of America

A little more color on China, it slowed dramatically in the quarter. I think you sighted a small enterprises. It doesn’t seem to reflect weakness in domestic China it’s more the Chinese migrant workers outside of China.

Christina Gold

No, I think one of the things that we have in our China business model, we do have a certain percentage of our business is small entrepreneurs that go to China, buy merchandise and use Western Union as the mechanism to pay for it. We’ve known about that for some time and we track that. What happened is we came through that third quarter during the time of the Olympics it was more difficult for people to get visas to go into China.

It seems as though that whole business model in terms of the small entrepreneurs going into China, buying merchandise, that slowed part of it being also the strength of the RMB it just seems that there are issues in China. This is not a remittance sender this is a small entrepreneur.

James Kissane – Banc of America

Any sense in terms of what portion of your business is related to construction workers, migrant construction workers around the globe?

Christina Gold

No, it’s hard to say because it varies by country because I think if you look at the Middle East and the tremendous growth there, there are an awful lot of people working there on the construction sights but then you also have a very high percentage of people that are working in hotels and in the various industries that are service industries. It varies very much by corridor, by country but I would say there is a percentage worldwide whether its 20% or so it could be at that level. There truly is very specific to corridors.

Operator

Your next question comes from Bob Napoli – Piper Jaffray.

Bob Napoli – Piper Jaffray

You bought back more stock than what we expected; the credit markets have become substantially more difficult although they seem to be getting a little bit better over the last week and a half or so. Are you expecting to continue to buy back stock in this environment and what payments do you have, what debt payments do you have to roll over, over the next 12 months and what is your confidence in being able to do that at reasonable levels.

Scott Scheirman

Let me give you a macro view and I’ll try and address your specific questions. It’s probably helpful first to start with what are our cash priorities, how do we use our cash. We’ve had three priorities and those priorities are consistent today. First is to invest and grow the business, number two is to acquire companies and then number three is to return cash to shareholders.

As we look through each of those priorities we want to make sure and take care of those in the order that we talked about. In the next 30 days we do have about $500 million of floating rate notes that expire. There are really two ways that we will finance those, one would be I’ve got cash on the balance sheet I could pay those off or if the debt markets are, if the window is open and the rates are somewhat reasonable we can go in and do a refinancing on those.

As far as liquidity, I feel like we do have good liquidity in that we’ve got over $1 billion cash on the balance sheet. We’ll generate $1.2 billion of cash flow and then I’ve also got an open revolver that expires in 2012. It’s $1.5 billion, I do issue CP against that but at quarter end I had $80 or $82 million of CP outstanding against that line.

With all that being said, we will focus on our cash priorities and we still have $1 billion authorized on our stock buy back that we would like to use as we move through 2009.

Bob Napoli – Piper Jaffray

Even this quarter now as we speak or going forward the balance of the year you intend to continue to repurchase shares?

Scott Scheirman

I want to be cautious given that we have some debt that’s expiring. The markets are choppy right now. When I look over the next 12 to 15 months we’ve got strong cash flow, $1.2 billion and so I would like to go back in the market and buy back stock I’m just not going to tell you the exact timing I’m going to do that. That is one of our objectives.

Bob Napoli – Piper Jaffray

The $1.2 billion of cash, how much of that do you need for operations and how much of that is free cash?

Scott Scheirman

I’ll use it in terms of capital expenditures that our capital expenditure estimate is less than $175 million so call it $1.2 billion knock off a couple hundred million for CapEx and you’re talking about $1 billion.

Bob Napoli – Piper Jaffray

The Banco de Mexico was really dire in the month of August or the data for the month of September and your numbers are not nearly as bad. Is there something wrong with the Banco de Mexico data do you think or what’s going on there?

Christina Gold

I think our strategy has really worked well for us. I think that we’ve been very focused. One of the things also we now really looked at our US markets into Mexico as holistically. One of the things we did do in third quarter we invested a little more in marketing, we tried to smooth it out over the year rather than have everything up front a little more in third and little more in fourth and so we were on air quite a bit as well in the quarter. I think all of that benefited our business and we saw certainly we were gaining market share at that period of time.

Bob Napoli – Piper Jaffray

If you look at the remittance industry globally if you go back over the last 30 or 40 years and its grown every year but two and those were not even recession years. Do you think we’re going to have, as part of your pulling your long term growth guidance you’re not as confident in the long term growth of the industry. Do you see the industry turning down, remittances declining globally over the next year?

Christina Gold

I really don’t. I think we may see a little bit of the principle come down and we did see that a little the last two years. The principle on a macro basis is growing at about 10% and now it’s at about 8% but we’ve been growing almost three times faster than that in terms of principle so I feel very confident in that. It’s really a question of when we look at that long term guidance it’s a question of how realistic is it to keep sayings its there when every year we give you the guidance exactly in terms of what we can accomplish.

Recognizing as we not only grow the remittance business but look at our bill payment opportunities and look at our, in terms of technology and innovation I think that we have a lot of opportunities to grow that business and grow very strongly.

Bob Napoli – Piper Jaffray

Last question, I know you’re beating up on this long term growth rate. There are a lot of companies that have long term growth rates. In an unusual environment like this they’re not backing off their long term growth goals, while it’s understood to clearly, you’re going to have a more difficult time given probably fall short of those goals and maybe meaningfully.

As we go through this environment but to pull those, the long term growth rate just raises a lot of confusion to what you’re seeing is different then what is obvious in a global economy. Your numbers today and your outlook and what you’re saying is not, I don’t think really different from what one, a rational investor would think but pulling the guidance that you just raised in May is the thing that says well what am I missing.

Christina Gold

For us really one of the big issues some is the turmoil in the market and the other issue is where are the currencies and the Euro going in the next period of time.

Bob Napoli – Piper Jaffray

Right, but that’s a year at a time versus a long term growth rate. Who cares, currency is currency, we can figure out what that is but once you stabilize the currency the Euro isn’t going to go down forever. Do you still believe in the growth rates that you put out assuming a stable currency?

Christina Gold

We feel very strongly about our business model. We’re very pleased with the third quarter and we’ve given guidance to the end of the year and we feel confident in our ability to deliver that.

Operator

Your next question comes from Julio Quinteros – Goldman Sachs.

Julio Quinteros – Goldman Sachs

To come back to expectations if you look at the international margin ramp up on both margins and revenue, can you talk a little bit about the puts and takes on the international side specifically. Obviously there are some channels that are doing better than others but in aggregate if you think about the international part of the model it seems like that’s going to be the key both near term and longer term.

Can you talk about where the biggest variances would really be as we think about six months and then 12 months out on the international revenue side and then also thinking about the margin opportunity that we should yield from the international business?

Christina Gold

I think on the revenue side also that we’re starting to see improvements in our US business. I think not dramatic shift but I think over the long term I think also the US has an opportunity to support our revenue as we move forward.

Scott Scheirman

What I would add is that macro at our C2C margins this quarter they were 27.8% consistent with Q3 last year once you back out the stock compensation expense from last year. International is clearly a big piece of the C2C business. Our opportunities for margin there is to continue to leverage the global sale and on a macro basis you saw that our cost of services was 57% of our revenue that was down from 58% the first two quarters.

Our strategies of leveraging the global scale, reducing some of the agent commissions or signing new agents at lower commission rates are working. Some of the restructuring we’ve done in the US and around the globe is helpful. We have seen in our international business each quarter this year the margins have continued to move up slightly. With the international business 57% of the revenues don’t even touch the US so we continue to believe in the 200 countries around the globe a lot of opportunities to grow on a long term basis.

Clearly too, a long term driver will be low cost labor and countries that need that low cost labor for their economies to continue. I think a lot of the long term things that have been in play will continue to be in play as we go around the globe.

Julio Quinteros – Goldman Sachs

Just as a bit of a look back in history do you guys have on hand any of the historical data on how the model would have held up through any of the last downturns or recessions if you could go back in history and give us a sense for what type of deceleration was sort of implied and the results that you saw in the last one or two recessions that we’ve had in the past recently.

Christina Gold

One of the challenges we have as we look at going backwards is that when we go back to let’s say post 9-11 and some of those timeframes we were basically a US centric business. We were not as global as we are today operating in 200 countries. We have a much bigger universe that we work with so we really don’t have models that we can go back to because the company and the existence of what we are today is not what we were going back 10 years ago.

Julio Quinteros – Goldman Sachs

So a lot more international today.

Christina Gold

Yes, and being in 200 countries, I think one of the things that we see now, which is one of the strengths that we have is that yes you can have some challenges in certain markets but then other markets are growing very rapidly like we see in the Philippines which we’re growing way past in terms of what the Central bank numbers are. We see very big strength in the Middle East. We have a portfolio that we can balance; we can balance our investments to drive growth.

Julio Quinteros – Goldman Sachs

If you could remind us coming out of the fourth quarter it looks like your revenue run rate should be about $1.37 billion or so relative to the revised guidance here. Can you remind us of seasonality into calendar year 2009 if we’re growing off of that revenue base should we expect to see any down ticks on a sequential basis along the year because of any seasonal impact or is that a number that we can take and annualize and start thinking about the calendar year ’09 number?

Scott Scheirman

I would probably point you to looking at both 2007 and 2008 and our strongest quarter of the year from a revenue standpoint is our fourth quarter. I see no reason right now in 2009 why the fourth quarter would not be our strongest quarter of the year from a revenue standpoint.

Operator

Your last question comes from Charlie Murphy – Morgan Stanley.

Charlie Murphy – Morgan Stanley

Looking at the international business transaction growth actually held up very nicely in the third quarter. Is there any way to give us an indication of what it was in September or what type of levels are sustainable over the next few months?

Christina Gold

As we gave the guidance we feel confident in our ability to continue to grow the business particularly in international as you’ve seen in the third quarter. That’s really built into our 9% to 10% on the revenue side. The demand is there, what we have seen in a few quarters in a few countries like in Spain where the housing industry has been impacted we’ve seen growth but not at the rate that we were seeing before and we obviously have the issue of less principle but that does not impact the transaction. There is still the need to send cash and send money out.

Charlie Murphy – Morgan Stanley

Can you explain in a bit greater detail why the domestic business is getting a bit better and why that is sustainable?

Christina Gold

There are two issues here, the marketing investment that we made in the third quarter on the US and having on air time has helped grow that business. The other thing unfortunately when there are hurricanes and other disasters in different parts of the country it creates jobs and work so we see as well with some of the weather related issues it has also driven our business in the domestic money transfer.

Thank you very much for joining us today and I know that we recognize the challenges of the current economic environment but with that said our geographic balance of our business, our leadership position in the money transfer industry allows us to generate significant revenue, earnings and cash flow which we will invest in our strategic priorities. Our business is strategically and operationally sound and we remain confident in our ability to grow. Thank you very much for joining us today.

Operator

Thank you for your participation in today’s conference. This does conclude your presentation you may now disconnect and have a great day.

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