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The Western Union Company (NYSE:WU)

Q4 2009 Earnings Call

February 3, 2010 8:30 am ET

Executives

Mike Salop – Senior Vice President, Investor Relations

Christina Gold – President & CEO

Hikmet Ersek – Chief Operating Officer

Scott Scheirman – Executive Vice President & CFO

Analysts

Ashwin Shirvaikar – Citigroup

Bryan Keane – Credit Suisse

Adam Frisch – Morgan Stanley

Christopher Mammone – Deutsche Bank

Darrin Peller - Barclays Capital

Julio Quinteros – Goldman Sachs

Tien-Tsin Huang – JP Morgan

Jim Kissane – Bank of America

Robert Dodd – Morgan Keegan

Operator

(Operator Instructions) Welcome to the Fourth Quarter 2009 Western Union Company Earnings Conference Call. I would now like to turn the presentation over to your host for todays call Mr. Mike Salop, Senior Vice President, Investor Relations.

Mike Salop

Today’s call includes comments from Christina Gold, President and Chief Executive Officer, Hikmet Ersek, Chief Operating Officer, and Scott Scheirman, Executive Vice President and Chief Financial Officer. In addition to a review of 2009 fourth quarter and full year results, we will discuss our outlook for 2010 and key long term strategies and initiatives. After our comments we will have time for your questions.

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.

I would like to remind you that today’s call is being recorded and that our comments include forward looking statements. Please refer to the cautionary language in our earnings release and in Western Union's filings with the Securities and Exchange Commission 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 items to the most comparable 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 has not authorized and disclaims responsibility for any recording, replay or distribution of any transcription of this call.

I would now like to turn the call over to Christina Gold.

Christina Gold

Overall we were very pleased with our 2009 results. Although the global economic environment was challenging our business was stable and we were able to deliver on our financial outlook. We maintained strong margins and generated significant cash flow, demonstrating the strength of our business model. We also advanced key strategic initiatives that open up additional opportunities with new customer and market segments.

Importantly, we posted another year of market share gains in our C2C business, increasing our cross border remittance market share from 17% in 2008 to an estimated 18% in 2009. We have increased our share by over 300 basis points since 2006 with significant gains each year.

Our ‘Yes’ marketing campaign contributed to the share gains and drove uniformity of the Western Union brand image and marketing. The campaign was launched across 200 countries and territories in over 50 languages and drove strong brand awareness. We saw large jumps in key countries such as Germany which improved unaided awareness by eight percentage points and India where awareness increased to over 90%. The campaign also helped us gain efficiencies in our marketing spend.

The strategic progress we made in 2009 will drive future growth with both existing customers and new customer segments. This is exemplified by the two strategic acquisitions we made last year; Custom House and the money transfer business of FEXCO. Custom House has allowed the company to establish the position in the large international business to business payments market which is a great growth opportunity.

We added new banking distribution in the US and made solid end roads in electronic channels. We increased the number of bank agents internationally that offer our account to cash services. Internet transfer through www.WesternUnion.com was expanded to 18 countries and we implemented a learn from pilot programs in mobile and pre-paid. We also took steps to turn around the domestic money transfer business resulting in an increase in domestic transactions in the fourth quarter.

Our financial position remains strong and our business generated significant cash with $1.2 billion of cash flow from operations in 2009. We deployed this cash through reinvestment in the business, the two acquisitions, share repurchase, and the increased dividend.

Before we review the year in more detail, I would like to take a moment to say that Western Union is committed to providing support to the disaster relief efforts in Haiti. We have made donations and set up matching gift programs with great support from our agents and employees. We have also temporarily offered transfers to Haiti from the US, Canada, and France with no transaction fee. Our thoughts and hopes go out to everyone in Haiti.

Turning back to 2009, at the end of last year we implemented an organizational change to help optimize our strategies in 2010 and beyond. Hikmet Ersek, formerly managing director of Europe, Middle East, Africa, and Asia/Pacific region was promoted to a newly created position, Chief Operating Officer. Hikmet now has responsibility for our overall business units around the world as well as our operations and marketing functions. Hikmet has been a strong leader at Western Union for over a decade. His new organization is designed around further increasing leadership in core money transfer and advancing electronic channels and business to business payments.

At this time I would like to introduce Hikmet, who will give you a brief review of our fourth quarter business unit’s performance.

Hikmet Ersek

I’m very pleased to join you in this new role. In my time at Western Union I have seen it grow from a geographically limited business with 80,000 agent locations to a global market leader with over 410,000 locations. In addition to the core money transfer, I also believe we have great opportunities in electronic channels and in the B2B business. We have a strong leadership team in place around the world and I’m very excited about the future.

Let me now review the fourth quarter performance of our C2C business segment. In the fourth quarter C2C revenue increased 2% or declined 2% constant currency adjusted. Transactions grew 5% and increased from 3% growth seen in the prior two quarters. This improvement was primarily driven by US domestic money transfer business. Western Union cross border principal declined 3% for the year and was flat constant currency adjusted. For the industry overall the World Bank has forecasted a decline between 5% and 7% for cross border principally in 2009.

Our Europe, Middle East, Africa and South Asia regions delivered revenue growth of 6%. Transactions increased 8% which was the same rate as the third quarter. Improvement in the region in certain markets was offset by a significant decline in growth related to the Gulf States. Western Europe achievement for the company accelerated transaction growth in the quarter. The UK and Germany were especially strong. Spain’s trends, although still negative did improve significantly from the prior quarters.

We also saw improvement in Russia. The Gulf States experienced positive transaction growth in the fourth quarter, however, the rate of growth slowed significantly driven by employment declines in the region. Transaction growth in the quarter was only in the single digits following strong double digit rates in the first three quarters of the year. The slowdown in the Gulf States is expected to impact 2010 as well. The situation also affects some receive markets such as India which grew revenue at 6% on transaction growth of 8% in the quarter.

During the quarter we signed several new agencies in the region including Bank Central Popular in Morocco and Capital Financial Holdings in Cameroon. We also renewed with CN Posta Romana and Bank Post, both in Romania, the Industrial Bank of Gabon and Echo Bank in Ghana. For the full year 2009 we made operating profit by 28% an increase 50 basis points from 2008.

Revenue in the Americas region declined 7% in the quarter while transactions were flat year over year. Both trends improved significantly from the previous two quarters. The improvement in transaction trends was largely driven by domestic money transfer. Stewart Stockdale and his team did a terrific job in creating a new revenue proposition. The effective marketing and promotional programs successfully drove traffic to our agent locations and deplete the dollar for five dollar promotion helped position us in a new principal bank, therefore it’s led to domestic transaction growth of 5% in the quarter with sequential improvement as the quarter progressed.

As expected, domestic revenue was down 20% as the lower pricing and holiday promotions impacted revenue per transaction. The repositioning program was intended to drive transaction growth quickly as the result in revenue growth in late 2010. We are on track for the turnaround.

The US business also saw higher transaction growth relative to the third quarter driven by the strength in the Latin America, Caribbean and Asian corridors. In Mexico, revenue declined 10% as transactions declined 12%. While still negative, this represents improvement from the prior two quarters. In the fourth quarter we signed a new agent agreement with Banco Bradesco in Brazil and we renewed a multi-year agreement with Wood Forest Bank in the US.

The Americas regions operating margin for the full year was 26% down from 27% in 2008 due to revenue declines in the region and the impact of implementing the US domestic strategy. We expect the Americas margin to rebound in 2010.

In the Asia/Pacific region revenue in the quarter increased 14% on transaction growth of 13%. In China our strategies to promote our brand and increase distribution are working. China trends continue to accelerate with 22% revenue growth and 8% transaction growth in the fourth quarter. Christina and I were recently in China where we finalized an extended agreement with the Postal Savings Bank of China an agent with extensive reach for both urban and rural parts of the country. We also recently completed an agreement in China with the Bank of [Jilin], [Fugan Hashi] Bank and Bank of Harbin.

In the nation we have entered into convenience store chain with 1,500 locations. The 2009 operating margin for Asia/Pacific was 27% up from 25% in 2008 as revenue growth and the regional consolidation allowed us to further leverage our cost structure. Asia/Pacific is a great opportunity for us relative to our global share we are under presented in this region. I have personally spent a lot of time in Asia and I’m committed to seeing our business realize its full potential in this large market.

Now moving to our global business segment. Ranjana Clark and her team are focused on obtaining new customers for both the consumer to business and B2B. Global business payments revenue increased 4% in the quarter while transactions decline 4%. Excluding Custom House, segment revenue declined 9%.

Our consumer bill payment business primarily based in the United States and heavily linked to the critically sensitive areas of the economy that continued to be challenging. We are focused on acquiring new customers and aiding new billers to stabilize our US walk in and electronic bill payment business.

Internationally our Pago Facil bill payment business continues to perform well posting transaction growth in the quarter and throughout the year. Our business in Argentina is growing and we continue to expand our biller base and distribution capability in Panama and Peru. Custom House growth was affected in 2009 by declines in global trade flows as we saw lower principal from existing customers. However, custom loyalty and transactions remain strong and the Custom House team continues to have success with new customer acquisition.

Now I would like to turn the call over to Scott to review the financial results for the quarter and our 2010 outlook.

Scott Scheirman

Revenue for the fourth quarter increased 2% on a reported basis or decreased 1% constant currency adjusted. Custom House added $23 million to revenue and $5 million of operating loss, primarily due to acquisition related expenses. Earnings per share in the quarter was $0.32 on both a reported and constant currency adjusted basis. This compares to $0.34 or $0.37 excluding restructuring expenses in the fourth quarter 2008.

For the full year we reported revenue of $5.1 billion down 4% from 2008. In constant currency terms revenue was down 1% which we believe demonstrates the resiliency of our business in a difficult environment. Custom House added $31 million to revenue and $12 million of operating loss for the year.

GAAP EPS was $1.21 or $1.29 excluding the Arizona and multi-state settlement accrual recorded in the third quarter. Constant currency EPS was a penny lower. In 2008 GAAP EPS was $1.24 or $1.31 excluding restructuring expenses. In my discussion this morning, all margin and cost comparisons will exclude the 2009 settlement accrual and the 2008 restructuring expenses. Please see the earnings release and slides for the GAAP measures and comparisons.

Consolidated operating margin for the full year was 26.6% excluding the settlement accrual. Margins declined 60 basis points from 2008 as cost of services decreased 80 basis points and SG&A increased 140 basis points. The cost of services improvement was primarily driven by profit improvement actions including agent commission initiatives and savings from the 2008 restructuring. SG&A was negatively impacted by Custom House and FEXCO costs and other expenses.

Operating margin was 24.2% in the fourth quarter and declined from both 2008 and the first nine months of 2009. As we indicated on our third quarter call, margins for the quarter were expected to be lower relative to the first three quarters of 2009 due to Custom House costs, the US re-pricing, timing of marketing spending, the assumption of the retail money order portfolio, and foreign exchange. Other than currency, the same factors along with FEXCO costs and increased technology investments drove the 420 basis point decline from the prior year.

Marketing expenses totaled 4.7% of revenue for the year and 5.2% for the fourth quarter. The tax rate was 21.3% in the fourth quarter and 25.0% for the year. Both rates were below prior year levels driven primarily by an increase in foreign derived income and continued benefits from our tax efficient strategies implemented in 2008.

In our C2C business consumers continue to transfer funds as transactions increased 5% during the fourth quarter. Constant currency average principal per transaction decreased 6% in the quarter. The international C2C business experienced sequential improvements in both transaction and revenue growth rates in the fourth quarter. Trends in Europe and US outbound improved compared to the third quarter offset by significantly softer growth in the Gulf States. International constant currency principal per transaction decreased 5% in the quarter consistent with the third quarter.

Revenue from the portion of the international business representing transactions that do not originate in the United States grew 8% or 3% constant currency adjusted on transaction growth of 9%. The full year C2C operating margin was 27%. Margin was unchanged from 2008 despite the revenue challenges, reinforcing the resiliency of our model. Fourth quarter C2C operating margin was 26% and was down from prior year in recent quarters. The decrease was the result of the lower domestic pricing and increased marketing, technology investments, FEXCO costs and other expenses.

Slide 19 shows the components of the three percentage point difference between the revenue and transaction growth rates for the C2C segment in the fourth quarter. A weaker dollar benefited this spread in the quarter by four percentage points but this was offset by domestic and other price reductions and geographic and product mix. Excluding the fourth quarter domestic price reduction, the combined impact of non-currency related items has remained generally consistent in recent quarters.

For the full year, price reductions were in line with expectations at approximately 2% of consolidated revenue. In global business payments, full year operating margin was 25% or 27% excluding the Custom House acquisition, which compares to 28% operating margin in 2008. C2B margins were negatively impacted by declining volumes.

Fourth quarter operating margin for global business payments was 20%. Excluding the impact of the custom House acquisitions the segment margin was 26% during the quarter, down 140 basis points from the prior year, driven by the same factors that affected the full year. In 2010 segment margins for global business payments will continue to be impacted by negative US bill payment trends and Custom House related costs and investments.

Cash flow from operations in 2009 was $1.2 billion. Capital expenditures were $99 million and we utilized approximately $500 million of international cash for the Custom House and FEXCO acquisitions.

During 2009 we repurchased 24.8 million shares at an average price of $16.10 for a total of $400 million and paid $41 million in dividends. At year end, we had $1.7 billion of cash on the balance sheet with slightly more than half outside the United States and $3 billion of debt. The debt is rated A-A3 with the nearest maturity in November 2011. We also have a fully available $1.5 billion line of credit which does not expire until September 2012.

Turning to our 2010 outlook, we are expecting a modest recovery in the global remittance market. The economic environment remains challenging and unemployment remains high in major send markets. The November 2009 World Bank report estimated a 1% increase in cross boarder remittance principal in 2010. This estimate was made prior to the end of the year slowing in the Gulf States. We believe many markets have stabilized and some are beginning to show sings of improvement.

In our C2C business we are targeting continued global market share gains with improvement in transaction and revenue trends relative to 2009. EMEASA and Asia/Pacific are expected to continue with positive transaction growth and improved revenue trends. However, we believe the Gulf States will contribute significantly lower growth in 2010.

In the Americas, Mexico will still be challenging but we expect the rates of decline to moderate. The US domestic strategy should help the regions transaction trends. Overall for the Americas regions we project revenue will decline but at a lesser rate than 2009. We expect improvement in transaction rates in the region in 2010.

In global business payments we project the Custom House B2B business will deliver double digit revenue growth driven by increased penetration in existing markets and expansion to new countries. We believe the US bill payment business will remain soft with continued negative revenue and margin trends as we experienced in 2009. Overall, we expect Western Union reported revenue in a range of down 1% to up 2%. Constant currency revenue is anticipated to be one percentage point lower than reported.

We remain committed to investing in high return growth opportunities in both C2C and global business payments. In total we expect to invest over $50 million of operating expenses in 2010 to support PSD, electronic channels, and Custom House expansion. In 2009 the company invested $25 million of operating expenses in these initiatives.

The electronic channel, investments include WesternUnion.com, account to cash, mobile, and pre-paid cards. Despite incremental investments in electronic channels and PSD, C2C margins are expected to expand in 2010. Global business payment margins however are expected to decline. Additional Custom House expansion and acquisition related costs combined with the softness in US bill payments will result in lower margins.

Intangible amortization from the Custom House acquisition will be approximately $13 million in 2010 an increase from the $4 million recorded in the final four months of 2009. Due to the increased amortization and investment spending, Custom house is expected to be slightly dilutive to EPS this year. We do not expect Custom House to be dilutive beyond 2010.

The company’s consolidated 2010 margin will also be affected by a full year of managing the retail money order portfolio. This should impact margins by approximately 40 basis points for the full year, although there is no impact to EPS. As a percentage of revenues we expect the combination of marketing and price reductions to be in a similar range as recent years. Marketing is expected to decrease slightly to approximately 4% of revenues.

We are gaining efficiencies and marketing through our global branding campaigns and our standardized pricing programs in the domestic business. Pricing is expected to increase to approximately 3% of revenue, primarily as a result of the full year impact of the US domestic re-pricing. Marketing and other investment spend which was weighted toward the back half of the year in 2009 is expected to have a more normal seasonal pattern in 2010.

We project the combination of increased margins in the C2C business and declines in global business payments to result in a consolidated margin of approximately 26%. The decline from 2009 levels can be attributable to the incremental investment costs, Custom House intangible amortization, and the full year impact of the assumption of the retail money order portfolio. We also anticipate second half 2010 margins will be stronger than first half.

We believe our business model is supportive of margin expansion when revenue growth accelerates and market improves. We anticipate a tax rate in 2010 of 24% to 25% and net other expense of approximately $160 million. In light of these factors, our outlook for GAAP EPS for 2010 is $1.29 to $1.34. We currently do not expect any impact from currency on EPS.

As we move through the year, foreign exchange could impact our reported revenue, margins, and earnings. For each 5% change in the European currencies, the annual impact on revenue would be approximately $60 million. Due to our hedging programs the impact to profit would be considerably less at approximately $6 million.

Turning to 2010 cash flows, capital expenditures are expected to be in our recent range of 2% to 3% of revenue. Two other items are projected to impact cash flows this year. Both items have been previously expensed and recorded as liabilities but will likely impact cash flow in 2010. First, we expect to pay the $71 million related to the Arizona and multi-state settlement this year.

Also, we play to make a refundable cash deposit with the IRS. This deposit relates to potential federal tax liabilities arising from our 2003 international restructuring, making the deposit limits further accrual of interest and the deposit is refundable if we prevail in our position. We are planning to deposit $250 million with the IRS in 2010. As of December 31, 2009, the total liabilities on our balance sheet for known tax exposures were approximately $500 million which includes potential tax liabilities related to the 2003 international restructuring and other items.

On a GAAP basis including these items cash flow from operations is expected to be $800 to $900 million. Our business model has consistently generated cash flow in excess of earnings and we expect that to continue in the future. We plan to utilize these cash flows to invest in the business, make strategic acquisitions, and return capital to shareholders through both stock buyback and dividends.

We increased our dividend significantly at the end of last year to $0.06 a quarter. In addition, we plan to continue to be active with stock buyback again in 2010 providing a balanced payback for our shareholders.

Now I will turn the call back over to Christina for some final comments on our long term strategies.

Christina Gold

Although the environment is still challenging in 2010 we see strength in our core. Trends in the C2C business are improving and we believe our brand, network compliance and expertise and financial strength position us well for long term profitable growth. In 2009 we have evolved our strategies, our organization and our go to market initiatives. Our growth strategies can be characterized in three primary areas; the core C2C money transfer, electronic channels and business payments.

In our core C2C we are aggressively pursuing opportunities in Europe with the new retail agent distribution available under the payment services directive. We are aiming to grow in these markets through strategic expansion of our network and targeted marketing. As a result of the PSD in Europe we expect to have an additional 10,000 retail agent locations operational by the end of 2010 and believe we will be able to significantly expand locations and revenues over the next several years. By 2011 we anticipate the added distribution in Europe will add one to two percentage points of revenue growth to our overall business.

In Asia, where revenue and profitability are ramping up, we are also rapidly expanding our distribution network. Worldwide we expect to have over 450,000 agent locations by the end of the year. In the Americas we are targeting revenue growth in the domestic business by late 2010. We also plan to add more banks to our distribution network bringing new customers and the potential to provide account to cash offerings.

Additionally, we see opportunity to increase our distribution into new classes of trade through the go cash in lain money transfer service which we will pilot later this year. Outside the US we are targeting our intra business in certain countries through focused marketing efforts. Excluding US domestic, intra is approximately 2% of our overall revenue and there are opportunities for us to grow this business in markets such as the UK and Indonesia.

The second growth strategy focuses on development of electronic channels including WU.com, account to cash, pre-paid cards and mobile. Our strategy is to invest and expand our efforts now to be at the forefront of these channels as they evolve. We believe these efforts will give us access to new customer segments and provide more choice for existing consumers extending our life cycle with them.

We continue to grow Western Union.com led by the international markets where transaction growth exceeded 50% in the fourth quarter. We are focused on adding new countries, increasing awareness, expanding customer payment options and improving the customer experience. WesternUnion.com is currently available in 18 countries and by the end of this year it will be present in markets covering over 60% of our global outbound principal volume.

Our US WesternUnion.com consumer data indicates that over half of our online customers are either completely new to Western Union or have not used our core retail service in the last 12 months. These customers have higher incomes and are more fully banked then our traditional cash consumers, which expands our market opportunity.

Transactions from our account to cash service with banks increased over 60% in the quarter although off a small base. We currently have 12 banks globally that offer our account to cash service and we are working with both existing and new bank agents to more than double this number in 2010.

Our pre-paid programs are targeted at providing new services to our existing under banked consumers. We tested pre-paid cards in 2009 with Western Union Gold and Moneywise Visa and MasterCard programs and are very pleased with the results. We are moving forward with a larger roll out of these cards as well as additional offerings and we plan to have over 750,000 enrolled cards in the US by the end of 2010. We will need to drive usage of these cards once enrolled but we are already seeing solid response rates.

The US pre-paid market is large and growing, with industry projections estimating open loop principal volume at over $100 billion. Our cards offer a great value proposition to our consumers and good economics to us through reload and interchange revenue so we are very excited about the opportunity.

Our mobile strategy is evolving. In 2009 our pilots targeted cross border transfers to mobile phones in Kenya and the Philippines. In the fourth quarter of last year we enabled 10,000 Western Union agent locations with the technology to provide cash to mobile service. In 2010 we are focused on continuing to enable our agent network with the point of sale capability for mobile as well as targeting new relationships and markets.

By the end of this year we plan to have 75,000 locations enabled representing our key global send locations. We are also targeting being connected to over 150 million mobile phones by the end of this year. Although there will not be an immediate financial impact from these connections, as mobile wallets become more prevalent we will be well established. Mobile revenue is still a long term proposition and is currently limited by consumer preference, regulatory restrictions, and technology challenges.

Although there are nearly five billion mobile phones in the world today the number of mobile wallets is only in the 10s of millions. Mobile wallet adoption is expected to increase rapidly with industry forecasts projecting around one billion accounts in the next five years. As the market evolves we will continue to leverage our telecom relationships to reach a significant portion of active mobile wallets.

In total, our C2C electronic channels, including WesternUnion.com, account to cash, pre-paid, and mobile account for about 2% of overall Western Union revenue today. We believe that these channels will become more important over time and our strategies and investments today will position us well as the leader in these areas as they evolve.

Our third key growth area is business payments. The acquisition of Custom House has given us a strong platform for growth in a large market segment. We estimate the small to medium enterprise cross border payments global revenue opportunity is at least as great as C2C money transfer. Custom House has proven itself adept at serving the cross border foreign exchange payment needs of businesses of all types, in particular small and medium sized enterprises.

We have begun increasing penetration in our existing seven countries with additional sales and product personnel and offices and plan to expand into new markets in 2010. Custom House has a strong track record of customer loyalty so investing up front to acquire new clients and expand to new territories will pay off with long term revenue streams.

Canada, where Custom House is based, is our largest market with approximately $30 million of revenue. Given the size of Custom House Canadian business we believe increasing penetration in the US by itself is a huge opportunity in addition to expansion in other markets across the world. We expect growth to ramp up as we execute on our roll out plan. We believe we can grow business to business payments to a billion dollar business over time with solid margins once we complete integration and major expansion spending.

As we focus on long term growth in our core C2C, electronic channels, and B2B businesses, we believe we are well positioned to take advantage of the opportunities. Western Union is a trusted and preferred brand among consumers. Our industry leading compliance systems and expertise are critical in cross border money transfer. Our unparalleled brick and mortar network is a significant competitive advantage when cash is necessary on either end of a transaction.

We know from our tracking studies that a large majority of our customers still prefer cash transactions in the immediate future. As we look at the market, we believe the long term secular transfer global remittance growth clearly remains in tact. The income gap between emerging and developed countries will still be substantial for the foreseeable future.

Developed markets are projected to continue to have needs for foreign workers to supplement aging populations and support economic growth. Emerging markets will project large needs for surpluses of workers. Globalization will continue to drive long term migration and as economies and employment rebound, remittance flows will follow.

Overall 2009 was a resilient year for Western Union given the headwinds. We delivered on our outlook and improved our market position thanks to the tremendous efforts of our employees and agents around the world. There are still challenges in 2010 but we have confidence in our business model and our strategies and believe we are well positioned to continue to gain share and grow our business.

Thank you for joining us today and operator we are ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ashwin Shirvaikar – Citigroup

Ashwin Shirvaikar – Citigroup

With regards to the idea of continued market share gains, if I look at the World Bank data and I look at your own 2010 growth projections it does not look like you can sustain another year of market share gains at least in the near term. Maybe beyond 2010 but certainly for 2010 it looks like it may not happen. Is that an accurate characterization? Why are we in this spot?

Christina Gold

We feel very confident that we will continue to gain share in 2010. As we look at the projections from the World Bank obviously one of the issues has been a slowdown in the Middle East and the Gulf States. That actually occurred after Ramadan in December. Despite that we saw that we gained shares in that region as well. We feel very confident that our plans this year will allow us to continue to gain market share.

Ashwin Shirvaikar – Citigroup

You’re actually saying that the World Bank information would be adjusted down and so you can continue to gain share?

Christina Gold

I think we look at it that way. Also we look at that, we look at the growth we’re seeing in other markets and we’re looking at the principal that we’re moving around the world so we feel very confident that we will gain share again this year.

Ashwin Shirvaikar – Citigroup

The initial evidence on whether the US domestic pricing promotions that you had in the fourth quarter, have they helped volumes and by how much?

Christina Gold

We really saw an integrated plan as the team looked at repositioning the US. There was pricing, there was marketing, there was really a whole halo effect on this business. Recognizing that the pricing was only a band below $200 and that actually there was some price increases in bands over $200. As we came through the quarter you saw that our transactions came at 5% but we actually grew transactions to higher and higher rates of growth to a double digit position as we came out of the quarter.

It’s also important to note that it wasn’t just let’s say the $50 band or the $200 or the next day product, we saw a halo effect so that all of the different price categories even over $200 where we were not pricing we saw growth and improvement in the transaction rates. We’re very confident that we’re going to see revenue growth in the back half of 2010. It’s very important for us because this is a big business and it’s also a very profitable business to the company.

Operator

Your next question comes from Bryan Keane – Credit Suisse

Bryan Keane – Credit Suisse

I wanted to talk a little bit about the C2C business. It looks like constant currency revenue was -2% for the quarter and for the year and transaction growth was about 4.5% or close to 5%. When we go into 2010 do we immediately see improvement off those numbers in the first quarter or do we have to take a step function down due to the Gulf States?

Scott Scheirman

As we think about 2010 overall on the C2C business those trends will be stronger than 2009 both in transaction and revenue growth. Asia/Pacific there’s still big opportunities there where we have 8% of our revenue but its 20% of the market opportunity. PSD as an example we’re going to add 10,000 locations, the ramp up of that will be from a revenue standpoint the latter part of 2010. For example, with PSD we believe that’s going to add 1% to 2% consolidated revenue growth in 2011.

We do believe 2010 will be a building year. Margins will be stronger in the second half of the year than the first half of the year. Within the C2C business we expect to gain share and we expect to expand the margins in the C2C business in 2010.

Bryan Keane – Credit Suisse

When you look at all the quarters is it almost all corridors increasing or accelerating except the Gulf States? What percentage of revenue does the Gulf States come out to be?

Christina Gold

I think what we’re seeing in the business is an overall improvement across the world except the challenge of the Gulf and the Gulf really had the biggest difficulty right at the end of the year so we built that into our plans. We see an improving world out there. We do not give the percentage of the Gulf but maybe Hikmet can talk a little bit about how important Saudi Arabia is and some of those countries.

Hikmet Ersek

I think we see the challenging economic environment but we are very well positioned in the countries. We have really great brand awareness; we have great dedicated locations in Saudi Arabia and UAE and Qatar, Oman and Kuwait. I think the transactions will grow in quarter four. An employment decline did impact our transactions in Q4. We are well positioned if the economy comes back. If you look at our business we are in 200 countries and territories, we have thousands of corridors. The Gulf States is one of our regions from many regions.

Bryan Keane – Credit Suisse

The global business payments margins are going to be down looks like pretty significantly this year. Can you talk about, does that rebound in 2011? I might have missed this but tax rate guidance for 2010.

Scott Scheirman

Let me start with tax rate guidance, 24% to 25% on the tax rate for 2010. On global business payments broadly two things are impacting that business. First is the US bill payment business, we’ve got challenges with the credit environment in the US. Much of our bill payment in the US skewed towards mortgages, auto loans, and credit cards, those have been very challenging because of the macro environment in the US. That will put pressure on the margins.

The second is Custom House in the business to business space. We see that as an enormous opportunity. In fact, historically we view it a game changer. We think that really could be. We’re going to continue to invest in that business in 2010, which will impact the margins. We think longer term that’s got the legs to be a billion dollar business. We know that the revenue market opportunity as big as the C2C revenue market opportunity. We’ll continue to invest and grow. It’s probably a little too early to talk about 2011 in specifics but with Custom House it’ll be slightly dilutive in 2010 but we don’t expect dilution beyond 2010 with Custom House.

Operator

Your next question comes from Adam Frisch – Morgan Stanley

Adam Frisch – Morgan Stanley

Ironic that we’re finally starting to see some encouraging signs in C2C growth but now it appears that B2B and C2B is struggling at this point. The operating margin guidance is also the thing that I think is really throwing people this morning and frustrating them, at least the shareholders. Maybe if we could take a step back and reposition or clarify some things.

Can you delineate the challenges there between transition costs and ongoing operating headwinds and talk about the factors that are putting pressure on margins in 2010? I think most people out there were not expecting a 26 handle on margins. Talk about what’s going on in margins and why we should at all believe that they could go up in 2011 and 2012.

Scott Scheirman

Let me first broadly start with the consolidated margin of 26% and what is putting some pressure on that. First I’d say the C2C business which is 85% of our revenues we expect those margins to expand in 2010 and we believe that business model clearly is set to grow margins as revenue reaccelerates and the market improves. C2C margins will expand in 2010.

On a consolidated basis what’s putting pressure on the margins I’d really put it in three buckets. First it’s the retail money order portfolio. We took that over from First Data on October 1st. In the fourth quarter that impacted our margins by about 50 basis points. We’ll have that for three quarters in 2010 so that’ll be approximately a 40 basis point impact on margins.

Second I would point Custom House, we’ve got $13 million of intangible amortization related to the acquisition. The third area is investments we’re making in the business. We invested about $25 million in 2009; we’ll invest about $50 million. We think it’s really important that we make those investments. We see really good opportunities in the B2B space, we see good opportunities in electronic. Electronic channel today is only 2% of our revenues and it has the opportunity to be much bigger than that. We’d like to make those investments; we think that’s prudent to do.

We do believe, as the market improves, as revenue reaccelerates, we’ve got a business model that can drive margin expansion on a go forward basis.

Adam Frisch – Morgan Stanley

This is a little bit different than I think the way the press release reads and the way the stock is reacting pre-market because the margin pressure in 2010 the initial view of 26% looks really bad and will draw a lot of pressure on this management team in terms what are you guys doing in terms of executing. If you’re telling me that the pressure is coming from a portfolio that’s coming in from the outside, the Custom House intangibles and investments which are another 50 basis points, overall the business looks more stable in 2010 than it did before, with the potential for revenue growth to be better given the current trends we’re seeing in the fourth quarter.

Christina Gold

You’re right. The C2C we expect margin expansion in 2010 in the core business.

Adam Frisch – Morgan Stanley

The business itself looks a lot more stable than the press release is suggesting. I just want you to know the perception in terms of what’s going on out there and the explanation you just gave are two very different things.

On the increased investment in payments initiatives, we think it’s necessary; we’d love to see that the increases happening there. Why only $50 million? The up tick is $25 million, where is that money being spent and why isn’t it a bigger number?

Christina Gold

We look at it in terms of what we think is a realistic target and where we really want to focus. If we look at our dot com expansion we’re really going after new markets and opening that up. I think we feel we have adequate funds to do what we need. We also look at some of the funds that we already have within our marketing and investment budgets and we reallocated it as well. We feel very good about what we’re investing.

As you look at PSD because we were looking to see really strong revenue coming out of that later in the year and into 2011. I think we are in good shape there. The pre-paid is also going to accelerate as we go through the year. We will look at is as well dependent upon what happens in the marketplace if we see initiatives that we really start to ramp up very quickly we would reconsider putting more funds behind it if we see the return coming fast enough.

Operator

Your next question comes from Christopher Mammone – Deutsche Bank

Christopher Mammone – Deutsche Bank

In past calls we heard a lot about your various successes in renegotiating agent commissions lower and the benefits of that had on the margin. Could you quantify what the benefits of those initiatives were in 2009 and maybe where you are in the progress? It wasn’t a part of your prepared remarks so I wonder how much more do you have to do there, can you do there, and how will that help stem the tide of some of these other margin pressures in 2010?

Christina Gold

I think the important thing is this is an ongoing process; it’s not a one year type of program. As we renegotiate contracts we really work at getting a better financial result in terms of how we renegotiate those contracts. Also a lot of new contracts that come to us we start at a different point in terms of commissions.

Hikmet Ersek

We sign agreements with better conditions with lower commission rates, long term agreements which benefit, also using new customers using that agent benefits our cost structure. Also with PSD, we are now PSD licensed in Europe. With the PSD license we are kind of the super agent ourselves and we have direct access to the locations with better commission rates, that’s helps also to drive our cost structure.

Christopher Mammone – Deutsche Bank

On Custom House, you mentioned what the intended amortization was in 2009 was it $4 million.

Scott Scheirman

$4 million, you’re right.

Christopher Mammone – Deutsche Bank

You had that, what would you characterize as other acquisition related costs? If you exclude all that was Custom House actually profitable after the time that you brought it on board?

Scott Scheirman

Within Custom House we had clearly deal costs to pay bankers and attorneys. We’re embarking on integration costs as we move forward. As we think about 2010 it will be slightly dilutive but as we leave 2010 we don’t expect it to have any impact or not be dilutive to our earnings in 2011.

Operator

Your next question comes from Darrin Peller - Barclays Capital

Darrin Peller - Barclays Capital

On the pricing pressure associated with the US marketing changes you made, can you quantify how much of that you expect to play into; I think you said three points of pressure from pricing during 2010?

Scott Scheirman

On the pricing for 2010 we’re running at that 3% within that historical 1% to 3%. The DMT pricing probably moved us from a 2% range to a 3% range in 2010 because of the repositioning but well within our historical average and what we think makes a good investment in the business.

Darrin Peller - Barclays Capital

To deconstruct the guidance you have for revenue, you’re calling for a range that I think is a little below some of the expectations. Just wondering how much conservatism is built into that. If we think about $75 million is probably the year over year comp that you’re going to have from Custom House maybe that’s a percent and a half of growth.

Excluding that, you have pricing pressure, you pointed to about three points. Given where transaction trends are, seems to be somewhat favorable in most of your corridors this quarter versus the prior quarter. Can you talk about what’s going to drive the, what are the other components of the guidance for revenue besides those two?

Christina Gold

As we look around the world what we do as we develop that guidance we do a bottoms up from all of our countries and our 15,000 corridors so we do a deep dive to have a good understanding of where the puts and takes are on the forecast. I think we also see some softness coming from the US to Mexico business that is not rebounding. As we talked about today we do see improvements in Europe and other parts of the world. There are two areas where we’re focused, one is the Gulf States and the other is the Mexico piece. Those are our two biggest challenges.

Obviously as we develop with the PSD and some of our electronic channels we’ll see some pick up in revenue and we’ll also see that pick up later in the year on the domestic side. We try to be as, I would not say conservative, but as balanced as possible because if we remember last year when we talked about revenue we always cautioned that the Gulf was always something that we were concerned about. It didn’t materialize until later in the year but it did happen. I think we feel that we’ve been very realistic in terms of how we put this together and a lot will depend, particularly let’s say in our US business in terms of the unemployment rates and how that goes over the next six to 12 months.

Operator

Your next question comes from Julio Quinteros – Goldman Sachs

Julio Quinteros – Goldman Sachs

To follow up on the assumptions for growth, the three percentage points of pressure from pricing looks like, based on the numbers we have, we have about 1.5% of benefit from acquisitions. Can you fill the gap then in terms of what the underlying transaction volume assumption is I might have missed that?

Scott Scheirman

For the C2C business both from a transaction standpoint and a revenue standpoint using 2009 as a benchmark we believe the C2C transactions in revenue will be north of that number for 2010. As you think about your guidance or your outlook as you’re pulling your model together. We’re seeing improvements in the US outbound business, we saw some strength in the fourth quarter, and we saw Western Europe pull through, Russia, the UK, and Germany.

Areas where we’re probably going to see some headwinds in 2010 would be the domestic money transfer repositioning, it’s the right investment to make but we won’t see positive revenue growth until the fourth quarter there as we exit the year. The other area is probably just some headwinds in the US C2B business that’ll provide some headwinds. Overall for C2C we expect to expand the margins and grow transactions and revenue north of where we grew them in 2009.

Julio Quinteros – Goldman Sachs

Backing up a little bit, having gone through this cycle and obviously never having seen one quite like this for you guys. Is the sense now that as you look at 2010 is this model just going to end up being more of a lagging model, a lag recovery relative to what we’re seeing on the broader macro trends? Can you address that because it feels to me at least what seems to be changing on the margin for me is a sense that this is not a leading recovery story but more of a lagging recovery? Is there some way to think about that or help us think about how that dynamic plays out in your model in 2010.

Christina Gold

It’s very much focused also in terms of what regions of the world are having a difficulty. If we look at Europe we see the rebound and its come pretty quickly. We look at Russia, its coming back, even Spain is returning. We are leading there. Where we see the lag is more in the US and also in the Gulf, which was the question we had before. In the US we went in earlier and we seem to be having a longer timeframe to come out, particularly to Mexico. That’s really coming back to the whole issue to unemployment. We see the same issue in the Gulf.

In other parts of the world we see very nice rebounds, we feel confident in our ability to drive our business there its just balancing the portfolio this year in terms of as different markets are in different stages of recovery and that’s been a bit of a challenge in why we have the guidance that we have in terms of our revenue numbers.

Julio Quinteros – Goldman Sachs

To put some perspective on that, the mix of agents or the corridors, if you take US, Middle East and Mexico, what percentage of your agent base is that versus the other parts of the world and relative to revenue as well?

Christina Gold

We don’t really give that number. As you know, Mexico is about 5% to 6% of our revenue so that you can take it that’s a big chunk of that there. No other market is quite that large. Outside of the US that’s one of our biggest markets.

Julio Quinteros – Goldman Sachs

When you look at the new channels obviously you guys are doing a lot in the mobile and the bank channels and everything that’s out there. Give us a sense on what you’re seeing there in terms of principals per transaction because it seems like that’s another area where the volume, at least the principal leverage that you’re seeing is probably lower than expected. Do you have any sense on how the new channels are comparing to what would be your traditional business in terms of the overall principal per transaction?

Christina Gold

It depends on the customers because some of our newer customers we see large principals but certain channels you would see less principal only because there’s more controls as it relates to managing compliance and also fraud when you’re dealing on the electronics side. On the mobile side we definitely see a smaller level of principal that’s just been what we’ve seen in the traditional of it so far. We see a lot of opportunity in the account to cash, as we develop that with the different banks because they know their customer that we can start expending the principal bands in that particular category.

Operator

Your next question comes from Tien-Tsin Huang – JP Morgan

Tien-Tsin Huang – JP Morgan

Did you provide a target for principal growth expected in 2010 or even principal per transaction?

Scott Scheirman

We did not. Our overall thinking just broadly as we think that that could abate somewhat from what we’ve seen in 2009 but didn’t give any specifics on that.

Tien-Tsin Huang – JP Morgan

Still a premium to whatever the World Bank ends up coming out with?

Scott Scheirman

We believe we’re going to gain market share in 2010.

Tien-Tsin Huang – JP Morgan

The investment spending, glad to hear you’re picking that up. You gave us some targets foreseen on some of the metrics there; I tried to write some of that down. How should we measure the success in terms of revenue? It sounds like electronic channel is about 2% now, where should we expect that for 2010 and similarly for Custom House, what should we expect there? What should we be watching for in 2010?

Christina Gold

If you look at the electronic channels most of them are growing at double digit rates in the electronic channels, Custom House we said we’re looking at double digit growth. We’re looking at very strong growth rates and they become more meaningful to our business. We will report on those numbers that I talked about today, we’ll report on them every quarter so you can track.

Also later this year, we want to have an investor conference with all of you so we can also give you more information in terms of how some of these numbers all connect. We’ll talk a little bit about different metrics as we look at electronic and where we really want to take the business over time so that we expand our portfolio and our customer base.

Tien-Tsin Huang – JP Morgan

The Gulf Coast, it did sounds like it’s slowed commensurate with some of the Dubai news. Just to be clear, are you looking for transactions to still be positive in 2010? How did they look in November, December and even January if you could share that just to give us an idea?

Christina Gold

Overall for the Gulf we’re in really good shape in terms of our locations and our agents. We anticipate growth in 2010 but not at the double digit rate that we were seeing in 2009. Where we did see the slowdown it was really at the very end of the quarter after Ramadan we didn’t see the up tick come back and that’s really been the challenge. We factored that into our forecast for the year.

Tien-Tsin Huang – JP Morgan

Still positive. First Data money order portfolio you gave the margin dilution that’s consistent with what you said in the past. What’s the positive impact on the tax rate in the fourth quarter and maybe for 2010? Can we tie those two together, lower margins but also lower tax rate?

Scott Scheirman

There is definitely some impact because of the interest income on the munis as tax exempt so it factors both into the 24% to 25% range that we have for a tax rate outlook for 2010. Then also it was one of the factors why the tax rate came down in 2009. Although for 2009 it was also the tax planning strategy we put in place in 2008 and then more of our profits are being generated internationally which are taxed at a lower rate. It’s a combination of all those things that helped drive the tax rate down.

Operator

Your next question comes from Jim Kissane – Bank of America

Jim Kissane – Bank of America

Trying to drill down on Custom House, it seems like its coming up a little bit short relative to your expectations. I thought it was supposed to be accretive and generate around 20% margins. Maybe you can drill down a bit.

Christina Gold

What we’re really looking at is we see the opportunity for us as being similar to the C2C business. We have the capabilities and we have the team to expand it so as we speak I think they’re hiring an awful lot of people on the East coast and the West coast just in the United States. The US is certainly under penetrated and if you look at Canada being $30 million it’s usually 10:1 so you can imagine how big the US should be for us in that business. We’re rapidly going after that right now. We are on our business case but actually putting more investment in early on because we want to make sure that we grow to that billion dollar revenue stream.

Jim Kissane – Bank of America

Can you give us a sense on what your target for revenue in 2010 is?

Christina Gold

It’ll be double digit growth and a lot is going to be dependant also on new customer acquisition because it’s really the expansion that we have to see and their ability. We saw in fourth quarter we did see their average principal on some of their customers had slowed a bit but their customer acquisition rate is well up in the 30% rate so that’s wonderful and they have a real skill set at doing that.

Jim Kissane – Bank of America

Given the impact on transactions in the US will you consider more aggressive pricing actions outside the US?

Christina Gold

No we would not. I think we would just consider, the US has been an issue for a long period of time. That domestic business is a very big business and it was really the problem of having every city had a different price; we couldn’t get a uniform marketing position. It’s still a very profitable business. The profit of that business is above the Western Union average so it’s important to us.

As you look at other parts of the world, when we go into the intra business its only 2% of our revenue or less than 2%. The impact on our overall company to move intra to different price points you just wouldn’t see that, we wouldn’t be doing that. We don’t have the same issue. This is a long established business that really needed a re-look and a re-think and we’re very delighted to see all the levels of our business in the US starting to move in the domestic side.

Operator

Your next question comes from Robert Dodd – Morgan Keegan

Robert Dodd – Morgan Keegan

If I can go back to the guidance again and look at your revenue growth guidance, the margin was in line for me. The mid-point of that range looks to essentially be flat. If we take out double digit growth in the B2B that implies for the C2C business you’re looking down a couple a percent at the mid-point. Is that correct? If it is, with 300 basis points of pricing compression, again it comes down to the issue that it looks like your implicit volume growth numbers are up about 1% and don’t include market share gains against the World Bank.

Christina Gold

I think that we see growth and growth potential. I think the other thing, as you look at the revenue growth; one thing you have to remember is the domestic pricing is having an impact on our growth rate. It’s probably at about 100 basis points on the year so that’s there too. It doesn’t really show but that’s what’s happening to us, we don’t see the growth from that business until the back end of the year.

Robert Dodd – Morgan Keegan

That’s included in the 300 basis points price compression.

Christina Gold

It’s also included in your revenue growth rate. You’re working on both ends.

Robert Dodd – Morgan Keegan

On the currency issue that you gave us some color in terms of the 5% Euro move and some revenue. That, given we’ve got a little bit of a tailwind so far at least would tend to say that’s a driver for margin compression in 2010 as well. Is that correct? If so, how much of your margin compression is a result of the current status of the FX rates?

Scott Scheirman

You’re right. That does pose a headwind on the margin. In our outlook we believe constant currency revenue growth will be 1% lower so on a GAAP basis we’re picking up about roughly $50 million, 1% on a $5 billion business so about $50 million of revenue. Our EPS outlook had no impact from currency. In simple terms, we’re picking up $50 million of revenue, no bottom line impact so that really does put some negative pressure on the margin because of that. Probably if you do the math its probably 20 or 30 basis points.

Mike Salop

We’ve run a little long but we want to thank everyone for joining the call. (Instructions)

Christina Gold

Thank you very much for being on the call. Again, we look forward to talking to you next quarter.

Operator

That concludes today’s presentation. Thank you for your participation. You may now disconnect.

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Source: The Western Union Company Q4 2009 Earnings Call Transcript
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