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The Western Union Company (NYSE:WU)

Q2 2009 Earnings Call

July 21, 2009 8:00 am ET

Executives

Gary Kohn – Vice President, Investor Relations

Christina Gold – President & CEO

Scott Scheirman – Executive Vice President & CFO

Analysts

Tien-Tsin Huang – JP Morgan

Julio Quinteros – Goldman Sachs

Jason Kupferberg – UBS

Greg Smith – Duncan Williams

James Kissane – Bank of America-Merrill Lynch

Bryan Keane – Credit Suisse

Glenn Greene – Oppenheimer

Kartik Mehta – Northcoast Research

Timothy Willi – Wells Fargo

Operator

(Operator Instructions) Welcome to the Second Quarter 2009 Western Union Company 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 Second Quarter 2009 Earnings Conference Call. Thank you for joining us today. Today’s call includes comments from Christina Gold our President and CEO, and Scott Scheirman our Executive Vice President and CFO. 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 want 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 2008 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 disclaims responsibility for any recording, replay or distribution of any transcription of this call.

With that it is my great pleasure to introduce Christina Gold.

Christina Gold

During the quarter we performed well against our business and financial objective and made important strides in broadening our market opportunity. Our revenue was $1.3 billion for the quarter and we earned $0.31 per share. Our cost reduction initiatives continue to contribute to profitability as indicated by our operating margins which were 27% during the quarter.

Through the first six months of 2009 we have generated over $600 million of cash flow from operations and at June 30th we had cash of $1.8 billion. This financial strength allows us the flexibility to invest in and enhance our competitive position particularly in a tough economic environment.

Our C2C transaction growth moderated for the period as did the average amount of money sent per transaction by our consumers. Revenue per transaction was consistent with the first quarter. The C2C business delivered transaction growth of 3% year over year and we handled just shy of 50 million transactions during the quarter. As our transaction growth indicates remittances are not necessarily discretionary. In fact, most of our customers have a pressing need to consistently send money home for essentials such as food and shelter.

Before I turn to the regions I want to update you several initiatives. WesternUnion.com continues to perform well particularly internationally with transactions growing more than 20%. With the addition of Spain during the quarter we now have 14 send countries including the top five European send markets activated with dot com service. We are pleased with the continued growth of our intra business where transactions are growing at approximately 20%.

In the account to cash base there are now nine banks offering this Western Union branded service worldwide which includes visibility with millions of account holder. Our account to cash offering is growing transactions at approximately 60%. Our focus remains on gaining market share in this challenging time. We believe we are well positioned given our world class brand, network scale, and financial strength.

Turning to our C2C regions, EMEASA consisting of Europe, Middle East, Africa and South Asia represented 45% of our total revenue for the quarter and experienced a revenue decrease of 5% on 11% transaction growth. On a constant currency basis revenue was up. Most of our largest Western European countries grew transactions consistently with first quarter growth rates. Within EMEASA, Spain and Russia remain challenged. In an effort to better target the consumer we have launched our Vigo branded service in Spain which allows us to capitalize on Vigo’s price value proposition.

Revenue and transaction growth rates in the Gulf States and India remain strong for the period but moderated compared to the first quarter. India experienced revenue growth of 11% on transaction growth of 27%. We added to our EMEASA agent network base with the recent agent signings of the Instituto Central Banco Popolare Italiana in Italy, Union Bank in Sri Lanka, Janata Bank in Bangladesh and CMS Limited as a sub-agent of Paul Merchants Limited in India, and we renewed Post Mara to a multi-year contract. In Turkey we added Garanti Bank which expands our accounting to cash capabilities.

In the second quarter the Americas region represented 32% of consolidated revenue and experienced a revenue decline of 11% year over year on a transaction decline of 5%. The domestic and Mexico businesses continue to be challenged. Our domestic business saw 12% revenue and 8% transaction declines. Revenue in Mexico which represents 6% of Western Union declined 20%. Transactions were lower by 15%.

In the second quarter our Mexico results trailed data published by the Banco de Mexico. Trends indicated that our independent agents both Western Union and Vigo are performing below levels of our regional and national agents. In addition, we discontinued Vigo service at nearly 600 non-exclusive locations this year due to credit issues caused by this challenging economy. It is worth noting that our large retail channel performed slightly better than the Banco de Mexico data.

Our efforts to improve Mexico include strengthening the independent agent base, supporting our key national accounts and driving our bank channel strategy and marketing programs. We expect Mexico will continue to be challenging throughout the remainder of 2009.

Transaction trends within our US outbound business, the largest revenue component of our Americas region, have remained stable over the past three quarters. We are executing on our banking strategy with the recent agent signing of Fifth Third Bank, the first time they are offering a third party money transfer service. In Canada, we extended our relationship with Scotia Bank through a multi-year agreement and we rolled out 2,800 US bank locations during the quarter.

In South America we signed an agreement with Nuestra Senora de la Sancion serving the Argentina, Paraguay corridor. The agent will offer Western Union money transfer service in place of their own brand.

Asia/Pacific revenue was flat on a 19% increase in transactions. We were encouraged to see China’s transaction growth turn positive and revenue decline moderate. China is the world’s second largest remittance receipt market and our goal is to replicate our success in India by implementing a localized focus. We are in the process of opening our second business office in Guan Jiao and as the market recovers we expect to leverage our expanding presence.

Our Philippines in bound remittance growth outpaced the growth reported by the Central Bank of the Philippines. As we have stated in the past we see significant potential in this market as migrant flows from the Philippines continue. Other progress includes a five year renewal with Vietin Bank in Vietnam under which the bank becomes a direct agent. We continue to see opportunity in the broader Asia/Pacific region as it accounts for about 20% of the global remittance market yet it is only 8% of our revenue.

Moving to our C2B segement which we now refer to as global payment, revenue was down 8% on transaction growth of 3%, trends which are comparable to the first quarter. Our bill payment business in Argentina, Hava Facil continues to grow. Scott and I recently visited Argentina and saw first hand how their strong consumer value proposition and ability to process a transaction in seconds has made them one of the leading walk in bill payment providers in South America.

We have leveraged our success in Argentina and have launched walk in bill payment services in Peru and Panama. In the near term we are focused on expanding into Brazil. In summary, the keys to growing our global payments business will be product and geographic expansion. Finally, we announced an agreement to acquire Custom House which expands our product offering to the business to business payment market.

Before turning the call over to Scott, I would characterize the second quarter as one where we executed against our 2009 business and financial objective and just as important we continue to invest in our strategic priorities.

Scott Scheirman

Second quarter revenue was $1.3 billion down 7% on a reported basis and down 2% constant currency adjusted. In the second quarter we delivered $0.31 earning per share on a GAAP and constant currency adjusted basis which was down 6% from last year when adjusted for restructuring charges in 2008. EPS as impacted by $0.01 in the quarter for a $12 million charge related to investment in the Reserve International Liquidity Fund.

Second quarter transaction fee revenue which makes up 80% of company revenue declined 8%. Foreign exchange revenue declined 7% year over year. Both were affected by translation of foreign denominated revenue into US dollars and slowing C2C transaction growth.

A World May report released last week on the remittance market forecast that migrants will send 7% to 10% less principal to developing countries in 2009. This revised the March 2009 report which estimated migrants would send 5% to 8% less principal in 2009. Encouragingly the World Bank anticipates return to growth in 2010 and notes that the remittance markets supported by base of migrants were remaining in their host countries.

Our trends suggest similar patterns. Year to date, our consumer to consumer total cross border handle declined 5% or grew 1% constant currency adjusted. During the quarter we handled $16 billion in C2C cross border remittances down 8% year over year or down 1% constant currency adjusted. Our consumers continue to send funds as evidenced by transaction growth this quarter. However, they are sending less principal on average with principal per transaction down 11% or 5% constant currency adjusted.

Even though principal is down our revenue is not impacted proportionately because of the components of C2C revenue. First, approximately 80% of revenue comes from the transaction fee which is charged for sending money transfers. This fee is less sensitive to the amount of principal sent as we primarily use banded pricing. The fee also depends on the send and receive locations. Second, foreign exchange revenue which is 20% of our C2C revenue does vary with the amount of principal sent.

By way of example, the largest contributor to the moderation in transaction growth this quarter was the Gulf States in which principal per transaction is high but revenue per transaction is not. Therefore the slowdown in the Gulf States had a more significant impact to both principal and transaction growth than revenue.

In the second quarter, trends in countries with higher revenue per transaction remained consistent to first quarter 2009 which allowed us to achieve our revenue objective. This highlights the benefits of our geographically diverse revenue stream.

Now turning to costs. To get a meaningful comparison to 2008 we excluded the $23 million of restructuring expenses incurred in last year’s second quarter. On an apples to apples basis in the second quarter cost of services declined about 200 basis points to 56% of revenue versus 58% in the second quarter 2008. This improvement included the benefit of taking Fexco direct, selective agent commission initiatives, cost reductions, and overall expense management.

SG&A was 17% of revenue in the quarter, representing an increase of about 150 basis points from the second quarter 2008 primarily due to costs related to the Fexco acquisition. We continue to invest in our brand with marketing spending totaling 5% of revenue.

Second quarter consolidated operating margin was 27% consistent with the second quarter 2008 excluding restructuring charges. With about two thirds of our costs being variable headcount reductions, call center relocations, agent commission initiatives and the consolidation of our C2C regions contributed to a strong margin at 27% despite revenue declining in the second quarter. When the market improves and revenue grows we expect to expand our margins.

The tax rate for the second quarter was 25.5%. We continue to benefit from the higher proportion of foreign derived profits which are taxed at a lower rate compared to US derived profits and the affect of tax efficient strategies implemented in 2008.

Now turning to our segments. Our C2C segment which was 85% of total revenue declined 7%. Constant currency adjusted revenue was down 2% on transaction growth of 3%. Transaction growth rates remained relatively consistent throughout each month of the second quarter. Our international C2C business saw revenue decline 5% or off 1% constant currency adjusted. Transactions grew 8% as growth moderated from the first quarter given the global economic challenges.

The portion of the international business representing transactions that originate outside of the US saw revenue decline 5% or growth of 3% constant currency adjusted while transactions grew 12%. Second quarter C2C operating margin was 28% compared to 27% in last year’s second quarter and benefited from our cost saving initiatives.

As slide 21 details the spread between C2C revenue and transaction growth rates was 10 percentage points. Currency translation was the largest contributor to the total C2C revenue and transaction growth rate difference totaling half of the spread.

Three additional factors impacting the spread were geographic mix where revenue per transaction differs depending upon originating geography and destination, product mix where inter-transfers carry lower revenue per transaction, and finally price decreases. The combined impact from geographic mix, product mix, and price decreases remain generally consistent with recent quarters.

We have changed the name of the C2B segment to Global Payments which will include the results from the pending Custom House acquisition. There are no other changes to the Global Payment segment. This segment which is 13% of Western Union revenue saw revenue decline 8% in the second quarter. Operating income for the segment was down 11% and second quarter operating margin of 27% was down about 100 basis points from the second quarter of 2008.

We have taken costs out of the business and continue to target reductions. We are also allocating capital behind new opportunities to expand our product offerings and geographic footprint.

Our cash position, cash flow generation, and our A-, A3 credit ratings allow us to invest in the future. Year to date, cash flow from operations was $606 million, our capital expenditures were $40 million, and our stock repurchase totaled $100 million. As a reminder, on October 1st, Western Union will receive cash from First Data which will be invested in a flow portfolio supporting our retail money order business.

These investments will appear as settlement assets on our balance sheet with related increase in settlement liabilities. While the balances will fluctuate the average amount is approximately $800 million. We will continue our prudent investment velocity by investing in highly rated, liquid debt securities just as we have done with our existing money transfer settlement assets.

At June 30th we had $1.8 billion cash on hand, about evenly split between US and International cash. We have debt of approximately $3 billion; our nearest debt maturity is November 2011. In addition, we have a $1.5 billion line of credit that expires in 2012 that is fully available. Our financial strength and strong balance sheet gives us a competitive advantage.

For 2009 we are reaffirming our outlook. We expect constant currency revenue to be down 2% to 5% and GAAP revenue to be down 5% to 8%. Reaffirming our revenue outlook is based on the following factors; price decreases estimated at 2% of revenue for the full year, a pricing model that maintains revenue per transaction despite modest changes in principal amounts, the diversity of our business including presence in 200 countries and 15,000 corridors which enable us to shift investments. As a result the underlying drivers of revenue may vary from quarter to quarter.

For example, we had anticipated additional transaction growth in our intra business given our roll out plans which have been delayed due to licensing. Similar to my previous comments around the Gulf States intra will have a much more significant impact to transaction growth than revenue.

In summary, we are comfortable with our revenue outlook for 2009. For EPS we are reaffirming our range which is $1.16 to $1.26 on a constant currency basis and $1.18 to $1.28 on a GAAP basis. We are expecting the full year margin to be around 27%.

As a reminder, our outlook does not include the pending Custom House acquisition which is anticipated to close in the third quarter. We expect about a $0.01 of dilution to 2009 earnings per share with the largest portion attributable to expensing of transaction related costs. The Custom House acquisition is expected to benefit revenue by less than 1% in 2009.

In addition to our revenue and EPS outlook, we reaffirm the following. Cash flow from operations in excess of $1.1 billion, capital expenditures of less than $150 million, $400 million of stock buy back for 2009 and finally we expect the full year tax rate of about 26%.

Christina Gold

We are pleased to be tracking to the business and financial expectations we laid out in February. More importantly we are encouraged by or strategic progress. As we stated earlier in the year, difficult times often present the best opportunities and we believe that the initiatives we are pursuing today will serve as the foundation for sustainable and diversified growth over the next decade.

We have a focused set of strategic initiatives and I will provide an update on five of these, including banking, payment services directive in Europe, business to business cross border payments, prepay, and mobile.

First our banking strategy. We are expanding our distribution and more importantly extending our brand to new customers through physical bank locations as well as online distribution. Account to cash presence in key send markets provides an attractive opportunity to reach a new demographic. This market likely has greater access to bank services and may be less reliant on relocation to employment opportunities. A standout among our bank relationship has been Scotia Bank which has witnessed strong growth and serves mostly new customers who send higher principal.

In our opinion this bodes well for our recent bank signings including US Bank and Fifth Third. We plan to continue to sign banks throughout the United States.

In Europe we are also investing our time and resources in advance of the upcoming payment services directive implementation in November 2009. The acquisition of Fexco provided us a platform including a sales force and operating infrastructure on which to build throughout Europe. Through PSD we will attract additional customers while expanding the classes of trade that can offer money transfer services and our sales force is already pursuing many opportunities.

As you have seen, Western Union is also focused on areas beyond the $400 billion C2C remittance market. We see the cross border business to business payment space as offering a similar market revenue opportunity as our C2C business.

Our pending acquisition of Custom House positions us well in this area and we believe it is a game changer, with operations in seven countries today and annualized revenue run rate of $100 million and strong margins our objective is to accelerate international expansion by leveraging our brand, global footprint and financial strength. Custom House offers small and medium sized businesses exceptional customer service, reliability and competitive pricing.

Another growth opportunity is pre-pay. We now have eight million Western Union Gold Cards issued in the United States. We recently began offering reloadable Visa Debt Cards to a group of these loyalty card holders. Our physical locations and detailed understanding of customer behavior is a key asset in addressing the market opportunities. Our Americas team also broadened the home delivery test of the Western Union MoneyWise Prepay reloadable Visa Cards to two additional markets.

Mobile money transfer is an emerging initiative that allows customers to send or receive remittances using their mobile phones. Our brand, network and compliance infrastructure are assets that we will leverage as this three to five year opportunity takes form. In the second quarter we formed a strategic alliance with Zane, a leading mobile operator in the Middle East and Africa. We will pilot cross border mobile money transfer services between Western Union and Zane Zap mobile platform in select markets once we have obtained regulatory approval.

We are also pleased to announce an extension of our service with Vodafone and sister company Safaricom. Beginning next week, consumers can visit select Western Union agent locations in the UK to send money directly to the mobile wallets of Safaricom subscribers in Kenya. This effectively extends our reach in Kenya to more than $6 million consumers whose mobile phones will act as virtual Western Union Locations.

Our ongoing mobile money transfer pilots are providing valuable information as we expand with operators in new countries and test various marketing strategies with current operator agents. One example of our learning and modified go to market strategy focuses on giving the receiver of a Western Union money transfer in the Philippines the option to load the remittance onto their mobile wallet or to pick the cash up at an agent location.

This initiative provides choice and convenience to receiver customers and another reason to recommend Western Union to the sender for future remittances. The mobile channel complements our core business and we are playing a leading role in this evolving opportunity.

In closing, I would like to stress the overall strategic progress we have made in 2009. We are the market leader in consumer money transfer and expanding into the broader payments market. We have a world class brand an unmatched physical network enabling people and businesses to move money around the world in a fast convenient manner. We have a scalable infrastructure, industry leading compliance capabilities and we have the financial strength to invest in market expansion when others may not have that opportunity.

The ability to commit capital and resources to opportunities that leverage our core strength is laying the foundation for a global market share gain, positioning Western Union for earnings leverage when the global economy rebounds.

Thank you for listening to us today and with that we would like to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tien-Tsin Huang – JP Morgan

Tien-Tsin Huang – JP Morgan

I wanted to first ask about Mexico. Basically all of the metrics for all the other regions in growth, etc. are all in line, I guess Mexico is really the only difference from our expectations. You highlighted some of the reasons, I was just curious can you quantify for us the impact of closing some of those Vigo stores and maybe give us a little bit more detail on what’s going on competitively there on the ground.

Christina Gold

I think in Mexico there were a couple of factors. Obviously we saw on the revenue side we did do a little bit of pricing on the Mother’s Day campaign so you saw that a little bit in the distance between revenue and transactions. Really a big issue for us has been the credit lines that we can extend to some of our agents. Not only did we discontinue 600 we suspended over 1,000 over a period of time so that does impact our business.

The thing you have to remember on this is that these particular locations are not exclusive so they can be offering four or five different brands at one time so that if we are not at the table the operator may still continue to operate but we’re not willing to deal with that agent anymore because of the credit risk. That transaction could go to a competitor but we will not take the risk on the credit.

Tien-Tsin Huang – JP Morgan

Obviously that’s having an impact on the trends. Timing wise when did that happen in the quarter and should we expect the second half to look a little bit weaker than the first half given some of those actions you are taking?

Christina Gold

I think we’re going to see challenge in Mexico for the year but I think that there’s a lot of things going on that will really help to firm up the Mexico business. Obviously the Americas team is very focused on the independent agents looking for more credit worthy agents that they can put on. Also the banking strategy is moving pretty quickly and we’re very delighted with the US Bank, the 2,800 locations that we rolled out in May are already producing pretty effectively. Now with Fifth Third I think that’s really going to help us a lot.

The thing that’s very encouraging is our large chains and retailers are doing well. We will also be focused on them so we’ll try to shore it up balancing all of the different things that are going on in Mexico as we move forward.

Tien-Tsin Huang – JP Morgan

You mentioned that there are still bank deals to be had here in the US. Just to confirm will there be any signing bonuses that we should think about that could be unusual as these deals come through? Also, just the commission structure and the margin structure how different is it from your typical agent?

Christina Gold

These are really in line with any of the agreements that we would have with agents in the United States and I think as Scott alluded to we’re not expecting CapEx to be over $150 million for the year so there’s nothing unusual in the plans. We are definitely looking to sign more banks this year.

Tien-Tsin Huang – JP Morgan

The SG&A was up sequentially a bit, is this a good run rate to assume going forward or were there some one time expenses in there?

Scott Scheirman

I would think about it is that we’re targeting 27% margins on a full year. A couple things that caused the up tick from first quarter to second quarter we did spend a little bit more on marketing, we’re closer to 5% of revenue compared to 4% in the first quarter. Then we picked up for a full quarter the Fexco operating expenses. Back in the first quarter it was probably about four or five weeks. As you factor it in think about the 27% margins on a full year basis.

Operator

Your next question comes from Julio Quinteros – Goldman Sachs

Julio Quinteros – Goldman Sachs

I want to come back to a comment that you made about the expense management and then the leverage. Obviously as we start looking to 2010 how do we think about the factors that could add to leverage in 2010 and what type of margin expansion are you guys willing to commit to at this point into 2010 beyond 2009.

Scott Scheirman

It’s probably a little early to talk about 2010 in specifics but let me tell you how we’re thinking about our business over the next few years a bit. We do believe as the market rebounds, as revenue accelerates we have margin expansion opportunities in our business as we move forward. Other areas that we’ll be focused on are continuing to manage our costs appropriately balanced with making the right investments in the business.

We made very solid investments with buying Fexco this year. Custom House, that’s a huge opportunity for us in the B2B space. We’ll continue to balance the cost savings with investing in the business. As I mentioned we believe our business model as revenue grows, as the market improves, we can drive margin expansion.

Julio Quinteros – Goldman Sachs

Related to Fexco and Custom House have you guys disclosed what the incremental amortization would be for those acquisitions?

Scott Scheirman

We have not. What we have talked about is that Fexco would be about $0.02 dilutive to 2009. Then Custom House we have not included that in our outlook but we have talked about that being about $0.01 dilutive primarily due to deal costs that now need to be expensed under the accounting rules.

Julio Quinteros – Goldman Sachs

You margin commentary for leverage and expansion would already factor those in as well?

Scott Scheirman

Yes, we take that into consideration as we think about the long term.

Julio Quinteros – Goldman Sachs

On transactions the overall transaction growth did come in a little bit lower versus where you were in the first quarter. Are we at the point now where we can see the transactions have bottomed or is it still a bit early to sort of call bottom in transactions. How do we think about where you guys are? I think one of your comments was that there had been relative stability at least kind of on a month to month basis through the quarter, just wondering if we’re at a point where we’ve seen a bottom there.

Christina Gold

It’s been really consistent throughout the quarter. I think that as we saw the transaction come down to about that 3% a lot of that is really the transactions coming from the high growth areas of the Middle East moderating, still growing but not at the pace it was before. We feel very comfortable with the guidance that we’ve given in revenue and I think the only thing that we’re very pleased to see is our revenue per transaction is consistent and it’s holding. The transactions that we have sort of seen come down are lower revenue per transaction so it’s much more efficient for us in terms of our revenue number.

Operator

Your next question comes from Jason Kupferberg – UBS

Jason Kupferberg – UBS

I wanted to start with a question on the margins to follow up on an earlier question there. It looks like you are above your full year target with the year half over and wanted to get a sense of whether this is just because of timing of how some of the marketing and other investments are laying out on a quarter by quarter basis versus your original expectations or have there actually been some additional cost cutting actions perhaps in the area of agent commissions, etc. that might actually be able to drive up side to this margin target especially if transaction trends don’t decelerate much more during the balance of the year.

Scott Scheirman

A couple things that we’re thinking about, we are targeting a 27% margin for the full year. As you may recall, we entered the year a little bit cautious in our investment spending because of the challenging global economy and so that drove some strength in the first quarter margin that we spoke about, about 90 days ago. Some of it is clearly timing of our investment spending.

Also, we are going to invest in certain areas such as PSD and mobile as we move through the year. We’re very excited about those opportunities both short term and long term. The last factor that’ll drive margins somewhat will be the revenue performance as we pull through the third and fourth quarter of 2009.

Jason Kupferberg – UBS

Are you essentially saying if the revenue picture plays out as you expect during the back half then folks should not really expect up side potential to the 27% margin target?

Scott Scheirman

I would point you to that our top line outlook of revenue being down 2% to 5% then within that we’re targeting a margin right around the 27% threshold.

Jason Kupferberg – UBS

Can we drill a little bit more into what’s going on with the agent commission structures. In this environment I think you’ve talked in the past about renegotiating some deals there and maybe if you can help us quantify some of the benefits you’ve realized. Clearly that’s an important moving part in the cost of services line and the sustainability of that as well would be helpful.

Christina Gold

I can just give you a little color then Scott can talk to it as well. I think its something that we’re focused on every year, this is an ongoing challenge in terms of we’re focused, it’s not sort of a one year and over and out. It’s interesting that by taking on Fexco obviously that improves our margins for the business. As well, we just signed Vietin Bank in Vietnam which is now becoming a direct agent to us. Again, our margins improve with those types of deals.

We’ve focused on new agent signings in terms of really making sure that the economics are better for the company and then as renegotiate particularly on the receive side we do work with our teams to make those numbers better for us as well.

Scott Scheirman

I think Christina summarized it very well. It’s very targeted, it’s very strategic. Every year we have an annual goal. We had one for ’08, ’09; we’ll have one for 2010. It’s also balanced with signing new agents at lower commission rates. We believe all those things will be helpful to our business model as we move forward.

Jason Kupferberg – UBS

I know you had talked in the past about moving some call centers to low cost regions. Are there still opportunities to migrate any other parts of your cost structure to lower cost areas around the world?

Christina Gold

I think when we moved the call centers last year we also moved some of our back office, our settlement and some other functions were sent there. We also moved Australia cost center into the Philippines so we’re constantly looking at that. We’re also looking as we build out with our new Fexco acquisition just what we want to do in Europe with some of our call facilities as well. That’s something that we constantly monitor looking for the best cost per transaction and per call.

Operator

Your next question comes from Greg Smith – Duncan Williams

Greg Smith – Duncan Williams

The $12 million charge is that in the other income?

Scott Scheirman

Yes, that’s in the other income.

Greg Smith – Duncan Williams

You guys didn’t repurchase any stock in the quarter is that correct?

Scott Scheirman

That’s correct. In any given quarter there’s a variety of factors we take into consideration as we look to buy back stock. We’re very committed to buying back $400 million of stock in 2009.

Greg Smith – Duncan Williams

How is the branding working with Fifth Third? Is the Western Union brand still prominently displayed?

Christina Gold

Yes, it will be like any other agent in terms of having the Western Union brand at the Fifth Third locations.

Greg Smith – Duncan Williams

It may be early but I guess US Bank is up and running and they previously were offering money transfers. Just wondering what the transaction volume looks like out of a bank branch versus a typical non-bank agent location?

Christina Gold

It’s early but I think all parties are extremely happy with the preliminary results.

Operator

Your next question comes from James Kissane – Bank of America-Merrill Lynch

James Kissane – Bank of America-Merrill Lynch

Can you give us the margin trends across the different C2C segments, maybe APAC, Americas and EMEASA?

Christina Gold

I think that we usually give those once a year but I think that we know as we look across the regions they’re all coming pretty close to support the corporate margins now. They’re all pretty well in sync.

James Kissane – Bank of America-Merrill Lynch

Given that Mexico was pretty soft in the quarter would Americas have reversed a little bit?

Christina Gold

We don’t really give that. I guess you can judge it from there. I think also we have a lot of strength in Europe and the other parts of the world that are driving our margins as well.

James Kissane – Bank of America-Merrill Lynch

I know you touched a lot on Mexico but you didn’t mention Swine Flu, do you think it had an impact?

Christina Gold

It’s really hard to tell because we know Mexico City was shut down for a couple of weeks. There were a lot of concerns but it’s difficult to say it’s this or it’s that. We do know there were a lot of credit issues with our independent agents.

James Kissane – Bank of America-Merrill Lynch

You touched on Mexico but maybe market share trends in the various regions?

Christina Gold

We’re very pleased to see, we will gain market share in 2009, and we’re seeing that. I think that we saw a little bit of a trailing on the Mexico numbers but I know Stewart and the team are really focused to make sure that that is where we needed to be by the end of the year. I feel very comfortable in our position and market share and our growth.

Operator

Your next question comes from Bryan Keane – Credit Suisse

Bryan Keane – Credit Suisse

On the P&D initiative I know you guys will open up new channels of trade. Will that happen right on the change of regulation I think November ’09 or does that take a few months before you can actually roll out new locations?

Christina Gold

It’s going to be like anything, it takes a little bit of time to roll them out. We are in a lot of negotiations and discussions with major retailers right now in many of the countries. That’s already the team is at their targeting that and then signing or looking at contracts to get some of them up and signed. It’s also a new business for many of the retailers in Europe, its something that they’re not used to, so it’s a lot of education and working with them as well.

Our team is doing a great job and we will see the benefit. Some will come right on in November and others will roll over into 2010 and beyond.

Bryan Keane – Credit Suisse

You don’t have any of the major retailers signed up today and you plan to at least add a few of them by the time year end.

Christina Gold

We’re working on it.

Bryan Keane – Credit Suisse

Hoping to get some color on the prepaid opportunity. How do you guys get paid there and how meaningful do you think it will be to the top line in years to come?

Christina Gold

This is a very profitable, very good business for us. I think that we look at that as a huge opportunity as you look at the prepaid market in the United States and around the world. Just on the MoneyWise Visa reloadable it’s extremely profitable because not only are we doing the money transfer we’re also doing the home delivery and we participate in all parts of that. The economics are very good.

Bryan Keane – Credit Suisse

Is it by transaction that you get paid?

Christina Gold

Yes. When we do a money transfer you load up and you do the transfer and then also you pay the transaction and you pay for the home delivery.

Bryan Keane – Credit Suisse

Turning over to the C2C business, Europe you talked about being relatively stable. Can you talk about that besides I guess Spain and Russia were still weak? Is it just tied to unemployment there?

Christina Gold

Spain we know that we saw that happen quite early on in the economic crisis because they really were also in one of these construction housing bubbles so we saw that. We see the France, Germany, UK, Italy are pretty consistent in terms of their performance. I think Russia’s a little bit different. I think Russia has others issues as it relates to oil and obviously Russia was an inbound and outbound market and now a little bit of stress in that business on all of our business in Russia. I think the bulk of Western Europe we’re pleased with what we’re seeing.

Operator

Your next question comes from Glenn Greene – Oppenheimer

Glenn Greene – Oppenheimer

I was also going to ask about what you’re seeing in Europe specifically Spain and Russia. Is there any way you could quantify the order of magnitude of the decline, is it similar to what you’re seeing in Mexico? I guess I’m not exactly clear on what order of magnitude it represents of your business. Mexico we know was 6%, a little unclear how big Spain and Russia is.

Christina Gold

No country is larger than Mexico except for the United States. You can put that into perspective. I think that probably our most challenged market has been the United States with the Mexican market so you can kind of put that into perspective because we haven’t really given numbers on Spain. The real issue if you look at Spain, unemployment is 15% to 16% and that continues to be a big problem in terms of looking at how, we don’t see further declines but its down and its staying at the same level at this point in time. It’s not rebounding in Spain.

Glenn Greene – Oppenheimer

A little bit more color on the strategic rationale for the Custom House acquisition. It’s clearly a different type of money transfer business where you’re not really a money transfer business but just trying to understand how you think about it from a strategic perspective it was actually sort of synergies with your core C2C money transfer business at all.

Christina Gold

As we look at Custom House we look at our business obviously we do the remittance business but we also see we are really experts in terms of moving money around the globe. Custom House really moves money for small to medium sized businesses so there is a correlation in terms of types of licenses that are needed, the compliance knowledge that you need to have and we have that in 200 countries. That really opens up the door for Custom House to be able to piggy back on a lot of our licenses.

At the same time, we have a great brand and name and people trust us to get money to many countries very quickly. With Custom House they are giving excellent service. They actually make money on the spreads, this is not a fee based businesses, and this is a spread based business. We understand currencies; we understand how to do that so that again comes back into our business.

The other thing is we have 385,000 locations. We have super agents around the world and they have a lot of business relationships in terms of the need to pay for goods, the need to move money, not the $300 or $400 transactions but the $30,000 and $40,000 transactions. By really utilizing that part of our organization we can expand Custom House from seven countries into 40 countries and that’s really our objective.

They have a unique proposition and I think our brand, our network and our financial strength, putting those two together with their team and their know how I really see a huge opportunity. This is a market that really can give us the same types of revenue stream as our C2C business. We see this as a big win for us.

Glenn Greene – Oppenheimer

Does it sound like you’re going to be re-branding this under the Western Union brand or are you going to keep the Custom House name?

Christina Gold

We’re debating; we’re looking at different parts of the world that could be Custom House powered by Western Union. Our marketing teams are working on that. We haven’t finally closed the deal; we’re hoping to do that in the next 30 days. That is one of the things that we’re working on is how we position it and how does it look around the globe.

Operator

Your next question comes from Kartik Mehta – Northcoast Research

Kartik Mehta – Northcoast Research

I wanted to understand a little bit better about your banking clients, especially maybe the US Bank one because that’s been going on longer. What do you see as the difference between the customers you get there versus the customers you get at your regular agents or the non-bank agents? Is there a difference?

Christina Gold

There is. When I look at it I look at Scotia Bank which we’ve been working with them for about a year. You can see that they have both the retail and then they have the online capability which will be coming to US Bank a little bit later this year. What we see in many cases is second generation people, migrants who really have been in the country for lets say 10, 20, 30 years looking to send money back or to send money to family.

We see a larger principal, we see a bank consumer and yet it’s a consumer who looks at Western Union as the fastest way to get money from let’s say the US to India or the US to any other part of the world. It’s a larger principal and it’s a fast transaction because we can pull it right out of the bank account.

Kartik Mehta – Northcoast Research

Do you think recently the GA came out with a statement that they wanted to reduce significantly the money transfer cost? Do you see this having an impact on the business in any way or would this be more of a non-event?

Christina Gold

We’ve heard that from time to time but I think the industry is extremely competitive when you look at the numbers of companies that are involved in money transfer not just Western Union but also looking at the banks, looking at the postal institutions around the world that are run by Governments. We see that a lot and I think the competition will push pricing where it needs to be.

Obviously if you look at places like the Middle East its highly competitive as it sits right now and that’s where we see much lower RPGs in those markets. I think its something that we monitor, we keep our eye on, but we are very proud of our price positioning and we feel that we’re very competitive and we offer good values.

Kartik Mehta – Northcoast Research

It seems like recently the State of Oklahoma came out with a surcharge on money transfers. I’m wondering if that’s had any impact on the business or if it’s too early to tell. More importantly are you seeing that anywhere else or do you anticipate that happening anywhere else in the country?

Christina Gold

It really hasn’t had an impact on our business. We are not seeing that anywhere else. We are monitoring it. Our team works very closely with state and federal regulators across the country so this is kind of a one off situation that we’ve seen.

Operator

Your next question comes from Timothy Willi – Wells Fargo

Timothy Willi – Wells Fargo

On the mobile payment opportunity, as you look out I think you talked about a five year opportunity to embrace. In your discussion about margins overall for the company to what degree does the evolution of mobile payments is a triber of margin expansion or a headwind that you’ll have to fight based upon how the product is sort of evolving right now and how you think it may evolve in terms of pricing and margin structure.

Christina Gold

As we see it right now we see it as margin supported. Obviously in terms of how it evolves over time it’s more difficult to say. I think the other thing that we do see right now is most of the mobile transactions you see tend to be much lower principal, a $50 transaction so it’s a volume driven business. Obviously the importance there will be the efficiencies and everything else in the systems and that’s one of the reasons why we’ve certified some of the suppliers and really making sure we get the right people that can help in terms of putting that together.

I think that over time it will grow not only from a money transfer perspective but also from a bill payment opportunity. I think we’re really well positioned to take advantage of the opportunity and I think this will obviously support our margins and we’ll work closely in terms of what we need to do to make sure that our cost structure supports the margins that we need.

Timothy Willi – Wells Fargo

In terms of compliance and security and fraud safeguards in terms of the mobile versus the more traditional money transfer, are the systems and infrastructure you have in place adequate to support that or are there nuances about mobile that you see that might require additional CapEx or build outs of those infrastructure if that market grows.

Christina Gold

We have invested not a large amount; we have invested some in our systems and our technology as we’ve been rolling out the mobile in different parts of the world. It’s not excessive. Also with our vendor certification we really pinpointed certain vendors who really have the right type of equipment, M-Wallets or with Cybased, Utiba and some of the other suppliers that really offer the security that you need to be able to do it.

Then the compliance that’s been one of our strengths always so we bring that to the table. We feel comfortable that we can handle that. It’s something that we monitor. I think the reason why many of the mobile carriers are now coming to Western Union because they recognize we know how to move money and how to protect that money as it moves around the world and to protect their reputation.

Timothy Willi – Wells Fargo

On China, in terms of refining how you approach the market there do you have any thoughts about the productivity curve and sort of any kind of expectation you have for getting that market jump started again.

Christina Gold

I think the team is working very hard there. I know that Hikmet was in Beijing last week. I think that we’ve seen a stabilization. Transactions have come up a little bit, plus one, I think that it will still be a challenge as we go through 2009 but I would anticipate using the model from India, using those types of marketing techniques that we should start to get more traction in 2010.

Gary Kohn

I’d like to turn it back to Christina for closing comments.

Christina Gold

I want to come on the quarter and say we’re very pleased with the quarter. We felt that we met our targets for the quarter; we’re very pleased with that. We invested in our strategy; we see a lot of growth, a lot of opportunity. Our markets are really relatively stable. Our revenue per transaction is very good. We see market share gains, we see a lot of strategic progress and we just also want to say to all of our employees around the globe; thank you very much for a terrific quarter. We look forward to talking to you next quarter. Thank you very much.

Operator

Thank you for your participation.

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Source: The Western Union Company Q2 2009 Earnings Call Transcript
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