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The Western Union Company (NYSE:WU)

Q1 2010 Earnings Call

April 27, 2010 08:30 am ET

Executives

Mike Salop - VP, IR

Christina Gold - President, CEO and Director

Hikmet Ersek - COO

Scott Scheirman - EVP & CFO

Analysts

Tien-Tsin Huang - JP Morgan

Andrew Jeffrey - SunTrust

Jason Kupferberg - UBS

John Williams - Goldman Sachs

Ashwin Shirvaikar - Citi

Jim Kissane - Bank of America/Merrill Lynch

Bryan Keane - Credit Suisse

Jim Wiley - Wells Fargo

Operator

Good day ladies and gentlemen and welcome to the first quarter 2010 western union company earnings conference call. My name is Jerry and I will be your coordinator today. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Mr. Mike Salop, Senior Vice President for Investor Relations. Please proceed, sir.

Mike Salop

Thank you, Jerry and good morning everyone. On today’s call we will have comments from Christina Gold, Western Union’s President and Chief Executive Officer, Hikmet Ersek, our Chief Operating Officer, and Scott Scheirman, Executive Vice President and Chief Financial Officer. After the 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 can be found at westernunion.com under the Investor Relations tab and will remain available after the call. I would also like to point out that additional operational statistics were provided in a supplemental table with our press release.

As a reminder, today’s call is being recorded and our comments include forward-looking statements. Please refer to the cautionary language in the earnings release and in Western Union's filings with the Securities and Exchange Commission including the 2009 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 some items that do not conform to generally accepted accounting principles. We have reconciled those items to the most comparable GAAP measures on our website 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

Thank you, Mike and welcome to everyone on the call. I’m sure many of you have read this morning that I announced my intention to retire as President and Chief Executive Officer of Western Union on September 1. After leading the company for over eight years, I feel the timing is right. The Western Union brand and network are strong, our strategies are in place and we have a sound succession plan.

I have been very fortunate to have worked of exceptional employees, agents and business partners over the years and one those exceptions people is Hikmet Ersek. Hikmet has been with Western Union for over ten years, most recently as Chief Operating Officer after previously leading our Europe, Middle East, Africa and Asia-Pacific regions. Hikmet will assume the President and CEO role and I’m very confident he’s the right person to lead Western Union forward.

Now, our business is off to a good start in 2010 as we execute on our strategies of driving profitable growth in our core C2C money transfer developing electronic channels and expanding business payments.

Globally our core cash money transfer business is gaining momentum. Although we still face challenging employment levels in key send regions, we are experiencing improving trends in many markets and believe we are continuing to gain market share. Our total international business have been steady with transaction gains in US outbound offsetting the expected less favorable trends in the Gulf state.

Transactions in our C2C business grew at a health 8% rate which was 300 basis points higher than the fourth quarter of 2009 and our strongest increase in the last five quarters. The improvement was primarily driven by the Americas region while we continue to benefit from last year’s repositioning of the US domestic business. Our plan to pull US consumers to our brand remains on track and domestic transactions ramped up to 18% growth in the quarter.

In addition to US domestic, the Americas benefited from improved trends in both US outbound and Mexico. We also made advances on our strategic initiatives, we are signing new retail agents in activating locations in Europe as we move towards our target of an incremental 10,000 retail agent activations by year-end. We have been placing particular emphasis on signing smaller independent shops which are located in areas where large immigrant populations work and live.

One retail signing we just completed is the Martin McColl convenience store chain in the UK, which will provide an additional 700 agent locations. In the US, our banking strategy took another step forward as we completed the rollout of our Money Transfer service at more than 1300 Fifth Third bank locations. Banks now represent 13% of our total US and Canada network locations.

Within our electronic channels, westerunion.com had a record transaction month in March with the international portion posting over 60% growth in the quarter, we are moving forward with our country expansion plans for later in the year and adding new product offerings to the US site such as overnight home delivery and gift cards. We are also enhancing non-transaction services as we have seen a large number of visitors using westernunion.com for activities such as finding agent locations, evaluating projects or checking on the status of their transaction.

Our account to cash service experienced over 65% transaction growth in the quarter and we just initiated an online service with Banco do Brasil, the country’s largest financial institution.

We’re also implementing an innovative service with Absa one of the largest financial service groups in South Africa and a subsidiary of Barclays. Absa customers will soon to able to initiate money transfers both to and from their accounts utilizing the bank’s online site or its mobile banking platform.

In total, we now have 15 banks that have agreed to offer account to cash service with others in the pipeline. In prepaid at the end of the quarter, we had over 365,000 cards in force in the United States, most with the result of direct marketing efforts to Western Union’s current consumer base. At the end of March, we began retail distribution of our prepaid cards and we now have over 4500 retail locations carrying the cards.

We continue to be encouraged by the consumer response to our fee-friendly cards and believe prepaid gives us an opportunity to provide additional financial solutions for our consumers, while participating in the large and growing markets. Enrollments continue to ramp up and we’re on target to have over 750,000 cards in force by the end of the year.

In mobile, we have over 19,000 agent locations in ten countries enable to provide Cash to Mobile service as we progress towards our goal of 75,000 by year end. We are currently focused on activating the most operational mobile corridors, so the majority of today’s connections target the Philippines and Kenya. The activation of mobile service capabilities is part of our program to upgrade to web based point-of-sale technology, which will speed up all transactions and simplify our business processes.

We’re also positioning ourselves to participate in other mobile models that are emerging. These models are based on mobile banking platforms rather than mobile [wallets] and are being driven by regulatory requirements in some countries. The agreement with Absa in South Africa is one example. Western Union’s brand and global distribution network are key compliments for banks that wish to offer this service to their mobile banking customers.

Electronic channels in total represents 2% of company revenue and we continue to expect strong growth from these channels as we further rollout services and increase our capabilities. At Custom House expansion activities are progressing nicely. In the quarter, we opened new sales offices in Atlanta and New Jersey and are in the process of obtaining licenses to provide additional services in certain European countries. The business results are on plan, the new customer acquisition strategies are being implemented and we’re well into the process of strengthening Custom House capacity for global expansion.

Western Union’s financial position remain strong. In the quarter, we deployed our cash to shareholders by repurchasing $200 million of stock and paying $41 million in quarterly dividends and we also extended the maturity of $300 million of our debt. Overall we are encouraged by the first three months of the year and the improvements we are seeing in the marketplace. We feel very comfortable with our full-year financial outlook as well as our ability to continue to gain market share.

At this time, I would like to welcome Hikmet and turn the call over to him for a further review of the quarter.

Hikmet Ersek

Thank you Christina and good morning everyone. Before I review the results I’d like to say that I’m very thankful to Christina and to our Board of Directors for their confidence and trust and I’m very much looking forward to taking on challenge of leading Western Union.

I believe the long-term opportunities for the company are terrific and we will work had to drive the strategies to achieve them. This morning though, let's return to the review of the first quarter performance. Given the environment entering the year we are pleased with our consumer-to-consumer business in the first quarter. C2C revenue increased 3% or about flat on a constant currency basis.

Our 8% transaction growth was aided by the double-digit increase in the US domestic money transfer business, but we also saw better trends in the US outbound and Mexico and continued strength in Europe and Asia.

Our Europe, Middle East, Africa and South Asia region delivered revenue growth of 5% on the transaction increase of 6% in the quarter. The transactions performance was slightly below the 8% level in the fourth quarter primarily due to relatively flat results in the Gulf states.

Most markets in Europe delivered stable or slightly improved transaction trends relative to the fourth quarter. Russia continued to show improvement delivering solid growth in the period.

EMEA reported growth of 7% on transactions, growth of 6% in the quarter was impacted by the moderation in remittances from the Gulf states. However we continue to make good progress in the market. The Reserve Bank of India recently released official remittance data for all of 2009, which indicated Western Union delivered significant out performance. Among the new signings in the quarter, in the EMEASA region, where the United Bank for Africa and Nigeria and Banco Africano de Investimentos in Angola.

We saw our most dramatic improvement in the quarter in the Americas region, transactions which were flat in the fourth quarter increased 8% in the first three months of 2010. Revenue in the region declined 3% compared to a 7% decrease in the fourth quarter of 2009. The US domestic repositioning continues to deliver strong results. We are driving new consumers to our brands and increasing usage resulting in the 18% transaction increase in the quarter for domestic money transfer.

The $50 for $5 transfers were very successful and our improvement was broad based. As we record the better transaction trends across all our domestic principle events. Domestic revenues declined 13% for the period and improvement from the 20% decrease, we experienced last quarter.

We continue to expect revenue growth to turn positive later this year. Domestic revenue transfers also remains a very profitable business for us with operating margins of over 30%. The new pricing and marketing is just one part of the integration in the US. We also acquired new customers through the banking channel and westernunion.com and provide a new product offering such as prepaid cards and GoCash and including money transfer solutions.

Our integrated US (inaudible) is in the early stages of implementation, but the initial results are very encouraging. The US outbound business also experienced improved transactions growth in the quarter as we saw favorable trends across all of our major corridors.

Mexico business trends improved nicely from the recent quarters. Transactions declined 3% while revenues were down 7%. Each month in the quarter performed better than the prior one and Mexico recorded a positive transaction growth in the month of March. In addition to the continued state of performance of our strategic and regional accounts also our small independent agents delivered much better results than the recent quarters.

In other key agent signing in the Americas region was the Giant Eagle supermarket chain in the US which was a competitive takeaway. In the Asia-Pacific region, revenue increased 14% in the quarter on a transaction growth of 15%. China continued its positive trends with 21% growth in the revenue and 8% in transactions.

We also recently added more banks to our network in China raising our total to eight banks. The Philippines once again delivered strong transaction growth in the quarter. And we are focused on supplementing our retail network in the country with additional banking distribution. Global business payment segment performed in line with expectations in the quarter with reported revenue growth of 4%. Excluding customers, revenue declined 10% due to challenges in the US bill pay.

However, international Pago Facil continued to perform well. We are working hard to improve the US bill payment business. Our goals are focused on diversifying our product offerings, aggressively pursue new customers and billers in the market place and increase its efficiencies in our cost structure.

In B2B payments customers reported revenue of $26 million in the quarter and increased from $23 million in the fourth quarter last year. The growth was driven by stronger business in Canada and the US. As we move through the year, we expect to see further benefits from our investment and new customer acquisition. We are on track with laying the groundwork to expand the B2B business over to several next years and remain excited about the opportunity.

Now, I’m going to turn the call over to Scott to review the financial results for the quarter. Scott.

Scott Scheirman

Thank you, Hikmet. Consolidated revenue increased 3% including 2 percentage points of favorable currency translations. Sequentially, constant currency revenue growth rates improved 200 basis points and margins improved 140 basis points relative to the fourth quarter. The 8% transaction growth in C2C drove 3% revenue growth in the segment or flat constant currency.

In global business payments, the strong Custom House business offset the expected decline US bill payment resulting in 4% on a growth. Total Western Union transaction fee represented 78% of company revenue and grew 1% in the quarter. Foreign exchange revenue represented 19% of total company revenue and increased 16% from the prior year benefiting from the acquisition of Custom House.

We are pleased with two consecutive quarters of accelerating transaction growth in C2C up from the recent lows of 3% in the second and third quarters of 2009. Revenue in the international C2C business grew 6% in the quarter or 3% constant currency on transaction growth of 8%. Performance was driven by continued strength in Europe and Asia-Pacific and improving trends in US outbound business partially offset by the relatively flat transaction growth in the Gulf states.

The company’s C2C crossborder principal volume increased 7% in the quarter or 4% constant currency. C2C principles per transaction was flat or decreased 3% in constant currency compared to the same period a year ago. The trend improved relative to the fourth quarter when constant currency C2C principal per transaction declined 6%. We view the moderation in the principal per transaction declines as one indicator of increased confidence by consumers in their economic outlook.

The spread between C2C transactions and revenue in the quarter was 5 percentage points and included a three point benefit from currency. The factors affecting the eight point currency adjustment spread include a strong growth in the low principal band, domestic money transfer, pricing and mix.

In the first quarter, domestic money transfer was responsible for three points of transaction to revenue spread. This represented a combination of both pricing and mix as we saw large transaction increases in the low principal bands. Excluding currency and the impact from domestic money transfer, the other factors impacting the transaction revenue spread were generally consistent with prior quarters.

In our full-year outlook, we expect pricing actions including domestic to total approximately 3% of consolidated revenue. We anticipate full-year average pricing actions will be lower than the first quarter 2010 partially as a result of lapping the domestic price changes later this year.

The current period also included some impact from zero fee or reduced fee transfers to Haiti and Chile that we implemented to support the people affected by the earthquakes. Consistent with our expectations, consolidated operating margin of 26% decreased relative to the same period last year, but improved sequentially from the fourth quarter.

As you may recall, we had a strong margin of 28% in the first quarter of 2009 in part due to delayed investment and expense spending given the uncertain 2009 economic environment. Compared to the first quarter 2009, margins were impacted by incremental investments related to technology, PSD, electronic channels and Custom House expansion initiatives.

During first quarter 2010, we made a number of key strategic investments. For example, we invested about $5 million in prepaid primarily to drive enrollments in our card programs. Prepaid is estimated to be a $100 billion market opportunity in the US and our investments are helping us establish a solid position in the space. We continue to invest in B2B payments, including opening new sales offices, hiring more sales and product personnel, improving technology and online capabilities and strengthening the compliance infrastructure.

We believe that B2B revenue market opportunity is at least as big as a crossborder C2C revenue markets and we are investing now to drive growth in future years. In addition to our investments also impacting first quarter margins with the assumptions of the retail money order portfolio, amortization of acquisition-related intangibles, a weaker US dollar and volume declines in the US bill payment business.

The impact of the retail money order portfolio assumption was 40 basis points and incremental intangible amortization was approximately 40 basis points.

Marketing expense was 4% of revenue in line with our full-year outlook. Earnings per share for the quarter were $0.30 compared to $0.32 in the first quarter of 2009. We expect our operating margins in the second half of the year to be stronger than the first half, as we retire volumes and start to see benefits from several of our growth investments.

We will also continue to mange costs carefully, work to improve efficiency and selectively reduce agent commissions. C2C segment operating margin was 27%, down a 120 basis points year-over-year and sequentially up a 170 basis points from the fourth quarter of 2009. Compared to first quarter 2009, C2C margins were impacted by incremental technology and other investments and a weak dollar compared to a year ago. For the full year, we continue to expect 2010 C2C margins to be higher than last year. Global business payments operating margin of 21% included the Custom House intangible amortization expense and investment spending for future growth.

Excluding Custom House segment margin of 26% was down from 29% last year, but consistent with the fourth quarter. Reduced volumes in the US bill payment business were responsible for the decline from last year’s first quarter. The Custom House base business is healthy, but overall it’s contributions to earnings is expected to be slightly dilutive due to the investment spend and intangible amortization. We do not anticipate dilution from Custom House beyond 2010.

Turing to the balance sheet and cash flow. our financial position remains strong enabling a significant return of capital to shareholders. As of March 31st, the company had total debt of $3 billion in cash of $1.5 billion, of which approximately $700 million is outside the US. During the quarter we repurchased 12.4 million shares at an average price of $16.17 for a total of $200 million and paid $41 million in quarterly dividends.

At quarter end, we had $800 million remaining on our share repurchase authorization and we plan to remain active during the year. Cash flow from operations were $74 million, which included the impact of the $250 million refundable cash deposit that we made with the IRS in the quarter. As we announced in the fourth quarter earnings release, the deposit relates to potential tax liabilities including those arising from the company’s 2003 international restructuring.

The deposit limits further accrue of interest on such potential tax liabilities, which have been previously reported in our financial statements. Capital expenditures totaled $15 million and we continue to expect them to range between 2% to 3% of revenues for the full year. In March, we completed a debt exchange retiring $304 million or 5.4% notes during 2011 and issuing $325 million or 5.25% notes due in 2020.

This leaves our nearest date of maturity at approximately $700 million during November of 2011. Turning to our outlook for the year, we are off to a good start in 2010, but it’s still early. We affirm our full-year GAAP revenue and EPS outlook provided in February, this includes GAAP revenue in a range of minus one to plus 2% and GAAP EPS in a range of $1.29 to $1.34. Based on current foreign exchange rates, we expect GAAP and constant currency revenue to be similar.

GAAP and constant currency EPS are also expected to be similar. We plan to continue our strong excess cash through reinvestment in the business, selective strategic acquisitions available and returning cash to shareholders in the form of stock buyback and quarterly dividends. Although, we utilized almost $500 million in the first quarter on share repurchases, dividends and the tax deposit. We still have over $1.5 billion of cash on our balance sheet and expect stronger cash flow generation in the second half of the year.

That concludes our prepared comments on the quarter. Jerry, we are now ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tien-Tsin Huang with JP Morgan.

Tien-Tsin Huang - JP Morgan

I want to first talk about the US outbound and Mexico I think that was the area that I was most obviously surprised by, can you talk about how much of that was maybe an improvement is some of the cyclical factors or if it really more just share gains. Maybe you can just speak in to that because Mexico piece look like they outperformed the speck of the Mexico data and the US outbound is not like they are getting better?

Christina Gold

I think what we’ve seen in the US business to begin with is just the whole repositioning of the domestic money transfer business, has that halo effect on the whole market and so it’s pushing all of the different sectors, not only domestic but US outbound and US to Mexico, but also in the Mexico portion of the business as you remember last year we were shutting down some the weaker locations because of credit issues. But the team worked very aggressively over the last few months to find new sources and new locations that didn't have these problems and so we’re kind of lapping that.

But we’re also seeing much more productivity coming out of those locations. So we feel very good about what we’re seeing in our Mexico business, as well on the US outbound again it is not as tied to what we've seen in terms of the issues in unemployment and construction in the United States. So again the US outbound across the globe, we’re seeing very nice growth across those segments.

Tien-Tsin Huang - JP Morgan

Any material or notable change in some of the cyclical factors domestically as we move month to month to the quarter?

Christina Gold

Obviously you have the issue of what we did in the fall, but I think what we saw month to month, we continue to gain strength and momentum in the domestic money transfer. So we’re very pleased and feel, we make the right move at the right time to drive that business.

Tien-Tsin Huang - JP Morgan

The prepaid piece, it looks like the (inaudible) of nicely. Can you give us some detail around loads and activity or revenue anything else that you can share there just to give us a sense of how active those users are?

Christina Gold

I think we're starting to see some nice uptick in terms of activations of cards, but I think it's a little early days yet, because a lot of the cards came on late in last year. If you remember we finished last year at 150,000, now we’re at 365,000. So that’s one of the things that Stewart and his team is really working on now to find out what are the different methods to drive activation, the size of the loads and then the new thing that we've done as of March is really put it on the retail sort of counter.

So that's a really going after different customers, we’ll have more information as we see progress here. But we’re very, very happy with what we’re seeing and as you saw from Scott’s remark we are investing to grow this business, because we think it's a huge opportunity for the company.

Tien-Tsin Huang - JP Morgan

You said $200 million on buyback, is that representative of what we might see for the rest of the year in terms of buyback?

Scott Scheirman

We haven't provided any specific outlook on that. We think $200 million is a good start, we will carefully manage our cash and our cash flows to investing the business, acquire companies and return cash to shareholders. And with that, we will be active as we move through the year with the stock buyback, but no specific outlook there in particular.

Operator

And your next question comes from the line of Andrew Jeffrey with SunTrust.

Andrew Jeffrey - SunTrust

Just for starters is a follow up on the prepaid business which is obviously getting a lot of attention here in the US as an industry at a standalone basis, you mentioned you spent about $5 million in the first quarter investing in that business, how does that compare to the investments you made last year and is that a pretty good quarterly runrate as far as what we should expect as 2010 continues to unfold here?

Scott Scheirman

If I go back to some remarks made about 90 days ago in our fourth quarter earnings call that we will spend about $50 million on strategic investments and that’s up about $25 million from 2009. That $50 million will be if you will ratably spend for the most parts throughout 2010, maybe a little bit more heavily weighted in the first half of the year. Those investments will clearly be around our strategic priorities, prepaid as we're talking about right now, but also in the B2B, Custom House area, but also in our electronic channels as it relates to westernunion.com, mobile and account to cash. So we will continue to invest and we see both in the B2B space and prepaid just some very nice large market opportunities there and balanced with that opportunities to continue to grow our C2C business and gain share in that area too.

Andrew Jeffrey - SunTrust

It sounds like you are starting to highlight some of these new growth drivers, the account to cash and some of the international electronic transaction part of the business. I know one of the challenges in westernunion.com in the US historically has been regulatory, can you just comment on the regulatory environment and whether you feel like you have kind of solved that equation as you sound like you are reemphasizing some of these electronic money transfer channels? Is it kind of consistent, do you feel like you maybe made some progress internally as far as regulatory compliance is concerned that gives you more confidence or how shall we think about the challenges, potentially the growth versus the opportunities which seems big?

Christina Gold

We really see it as a huge opportunity for us and it really was not so much in the United States, the regulatory issue as opposed to an issue of fraud. And so what happened to us a couple of years ago with some of the credit card problems that they had, they was a large high level of fraud in the business. So we had to do a lot of things to really control how much we would allow people’s credit cards to be accepted through the online transaction and that made it a very clunky unpleasant transaction for customers.

So we have invested now heavily this year and we will complete all of the work I think by June this year so that when customers go online in US, it will be a very seamless transaction. So we feel very confident that we can continue to grow this business very aggressively and we will see tremendous growth there, so it really wasn’t a regulatory issue, it was more protecting the company from fraud.

Andrew Jeffrey - SunTrust

It sounds like you have solved some of those challenges?

Christina Gold

Yes.

Operator

And your next question comes from the line of Jason Kupferberg with UBS.

Jason Kupferberg - UBS

First of all, on the transaction side with India and China specifically, I guess India slowed a little bit and you guys talked about some of the contagions from the Gulf states and China I think was flat versus last quarter. How do you guys think about the normalized transaction growth for those two countries over the medium to long term, assuming a more normal global macroenvironment?

Hikmet Ersek

I think we are progressing in both countries. In China we had a revenue growth of 21% and a transaction growth of 8%. Also in India we are having positive transaction growth. Recently the Reserve Bank of India released their numbers, remittance numbers for 2009, it shows really that we outperformed that Reserve Banks numbers. So we are doing pretty well here.

It’s gets a little bit from the Gulf states, Gulf outbound to South Asia to India, we had some a slowdown here, but even India, we are going globally (inaudible) everywhere and our presence being globally everywhere helps to drive the transactions. Also in China, our strategies are working in China. We had for years two big banks and they are still very valuable agents, like the Post bank and Agricultural Bank of China. But now we had also regional banks and we are having eight banks. So we’re really everywhere also in China. We are expanding our strategies and doing pretty well. So I think the Asia strategy is working pretty well.

Jason Kupferberg - UBS

So net-net that transaction growth you expect will accelerate over the next year or so in these two countries based on everything you described?

Scott Scheirman

Yes, Jason. What I would add to that if you think about just Asia, it’s about 20% of the market opportunity, but it’s only about 8% to 9% of our revenue. So we continue to have a lot of opportunities to gain share there.

Jason Kupferberg - UBS

Let me switch gears for a second to pricing, and I know you guys talked about an overall 3% pricing investment for this year and then you had a nice chart in your deck showing the walk from transaction growth down to revenue growth and there's a couple of pieces there that are price related. One of them looks to be a mix of domestic price reduction in mix and then you've got the other bucket of other price reductions, so in aggregate those two buckets look like they're bigger than 3%, so does that mean that the net impact of price reductions on revenue is going to diminish as we go through the balance of the year?

In other words it seemed like more than 3% pricing investment in Q1 so does that moderate later in the year to get you to 3% for the full year?

Scott Scheirman

Yes, Jason it does moderate, it is higher in the first quarter. If you may recall we’d launched the domestic pricing initiative, most of that was October 1, we did some things in the second or third quarter last year, but we’ll begin to lap that as we get to the latter part of 2010. We’ve been pleased with the domestic initiatives and I think what's important there, that business is profitable. It’s got 30% margins, transactions were up 18%. So we very much like what we see there, but on a full-year basis our pricing will be about 3% of our consolidated revenues.

Jason Kupferberg - UBS

Okay. So the really improvement will be in Q4 revenue when you anniversary the domestic?

Scott Scheirman

Yes, little bit in the second and third quarter, but lot of it in Q4.

Jason Kupferberg - UBS

On the US bill pay business I know you said that's still kind of weak, how much of a turnaround there is embedded in your guidance for 2010?

Christina Gold

I think if we look at Hikmet can talk to you some of the initiatives, that he's putting in place, but I think it's still going to be a challenge, business on the bill pay in the US side but the B2B is our real opportunity.

Hikmet Ersek

But don't forget that our payment service, bill payment is still a very strategic initiative for us, especially walk in our agents like that customers walk in and to do transactions there, so and it’s still a very profitable business [for us]. Now what we are doing is definitely we’re looking and have a very hard look on the bill payment business, we’re looking at the processes, we’re looking at the cost structure to improve the business there, but strategically it’s important business and it's still heavily linked to the greater sensitive areas of the US economy which still remain challenged. So I think when that picks up, then it will be back.

Operator

And your next question comes from the line of Julio Quinteros with Goldman Sachs.

John Williams - Goldman Sachs

We were curious to see just what we could expect from Hikmet in terms of changes and what his operating priorities might be for the next few years?

Hikmet Ersek

I’m very fortunate that I have a business, which I have a tailwind, let me phrase like that. We are present in 200 countries, we have a fantastic business, it’s a global business. And I’ve been fortunate also being with that business for last 10 years. I remember in the early stages I was celebrating 75,000 locations with some of my colleagues and we were dreaming above 100,000 locations. Now we are over 450,000 locations. So it is a very great business and I’m going to use that tailwind and I am also fortunate that I have a long relationship with Christina, which she supported with me for many years. Also additional on that, definitely we are looking on expanding our customer segment, we are looking on the electronic channels. The beauty of our business is being present in 450,000 locations globally everywhere in 200 countries and if you link the electronic channels with our locations, (inaudible) that gives the opportunity also the future opportunity for this company. So, I’m very optimistic about that and we will definitely drive this under my leadership also.

John Williams - Goldman Sachs

Hikmet, I think you touched on something interesting which is the idea that you have to sort of manage the emerging channels versus the agent network, how do you go or how do you think about that in the next few years? Do you feel that the agent network maybe has some levels of critical mass at this point where you can focus more on new channels or is there still the need to grow that pretty aggressively as you go forward over the next five years?

Hikmet Ersek

I think our core business is doing pretty well. I have been in market for many years especially in emerging countries, if you say that that cash has some value, I think that will definitely continue to grow and still customers are carrying cash to the location and pay off in cash. In Africa or Asia you could see that our locations are kind of manpowered ATMs for the customer.

However, on the sending side, me being a immigrant and using westernunion.com at midnight afterhours sending money from my ATM to a location, both at anytime, I think that’s the connection what I’m talking about. If you look at westernunion.com or account-based money transfer electronic, its growing 60% especially international part and we are now in more than 15 counties and we are expanding that one and our agents especially our bank agents are very welcoming on the send side to support so many things that their accounts are linked electronically to our 450,000 locations globally.

John Williams - Goldman Sachs

What do you expect of C2B margin, how should we think about that as we go forward in the next year or two?

Scott Scheirman

One of our key priorities in C2B in global business payments, especially with the US bill payment businesses we need to stabilize that topline revenue and so tied to the sub-prime in the US. We need to continue to focus on doing that.

We have to carefully manage our costs and get efficiencies there, but also it will be important in that segment is that we continue to expand our product offering through B2B and also through geographic expansion of bill payments to selective countries. So we’ll continue to work through that, but our priority is really getting the topline to go north as we think about this on a long-term basis.

Operator

(Operator instructions). Your next question comes from the line of Ashwin Shirvaikar with Citi.

Ashwin Shirvaikar - Citi

You have provided the South Asia part of it, but if you can provide a breakout of how things are going in Europe, particularly with regards to PSD?

Scott Scheirman

Sure, let me talk about Europe and South Asia little bit, Europe most markets in Europe we saw stable to improving performance, so we like what we are seeing in Europe. There are markets such as Spain where there continues to be some challenges, slight negative growth there but we continue to see that abate as we move forward.

The other area we’ve got our eye on is the gulf area, the transactions will come flat for the first quarter, so we’ll continue to monitor that but from a PSD stand point we continue to make progress there. We think that is very nice opportunity for us. We continue to sign, retailers and in particular we’re focused on Germany and France and I can let Hikmet comment on what the teams have been focused on in particular but we see that as a nice long-term opportunity.

Hikmet Ersek

As I mentioned in the previous calls for Germany and France, it’s an important opportunity. Also in other countries like Benelux countries. As you know in these countries we had banking channels as our agents, which limited opening hours. Now with the PSD license we can have also retail chains and we are targeting 10,000 locations, additional 10,000 locations by year end in Europe and I think we are on the good progress to reach that.

We already have a little below 1000 locations activated especially in these countries where we are heavily bank channels. So we see good progress activating these locations and we see already the transfers, transactions coming from these locations, so I think it’s a good strategy.

Scott Scheirman

One thing I would add is not related to PSD, but also in Europe we are going little bit further east, so nice transactions growth in Russia too. Russia is doing well.

Ashwin Shirvaikar - Citi

Okay further update on Gulf, which I believe did play a part in your overall revenue guidance three months ago. Some of our checks show that although Dubai itself is still quite slow with construction project cancellations and hold ups in other parts of the Gulf, construction activity is coming back, is that similar to what you are seeing and would that over the course of the year have a tendency to provide upside?

Hikmet Ersek

Growth is individual for country by country mix. Some countries like Qatar, Kuwait are doing pretty well, but some countries like UAE are still challenging. It’s not only Dubai, some of other countries are still challenging, but we believe you know we will return to growth late 2010 and when the constructions picks up and it will have an effect to our transactions.

Ashwin Shirvaikar - Citi

On bank relationships, should we expect more along the lines of some of the ones that you signed last year and if you could also provide some idea of progress on those relationships?

Christina Gold

The projects did very well in the US, the US bank results have been excellent. Fifth Third is ramped up and active and now they are 13% of our distribution in the US. We are looking at a couple of other banks that are close to signing, so hopefully we will have some news for you in the next few weeks in terms of finalizing notes, agreements as well but we’re very confident in our footprint and our banking strategy in the US.

Operator

And your next question comes from line of Jim Kissane with Bank of America/Merrill Lynch.

Jim Kissane - Bank of America/Merrill Lynch

Can you provide little more color on customers, I know you touched on it in the slides, but maybe the year-over-year growth and the margin trends and also maybe what the incremental cost to build out the operations are?

Christina Gold

I can talk a little bit about sort of the growth and then Scott can talk a little bit too the cost. I think that as you saw in the fourth quarter we had $23 million worth of the revenue and this quarter we have $26 million. Also they were not part of our business last and first quarter, but they did grow over their own numbers from last year. The focus what we have done is really focus on US and Canada right now because Canada was underrepresented in their numbers and the US numbers were about you know well over 20%, 30%, 40% in that range.

So they were getting tremendous new customer acquisition there. So we feel really good about what they are executing and the investments are reasonable. We’re taking it step-by-step, making sure that we are going to get the return on our investments, but we feel very confident in what they are doing.

Scott Scheirman

Investments are very reasonable, the base business before the investments are amortization and intangibles, it is profitable for sure, it is growing. And then really just speaking, if you look at the margin profile we said it will slightly dilutive in 2010 and I mean slightly dilutive and we don’t expect dilution beyond 2010.

So, we think given the market opportunity and the ability to leverage our brand, our core competencies, it’s really a good investment for us to make at this stage of the game.

Jim Kissane - Bank of America/Merrill Lynch

Answering Ashwin’s question, you kind of touched on PSD, but maybe can you kind of pinpoint FEXCO and how that’s driving the PSD initiative?

Hikmet Ersek

Sure, we have a really great platform. I think that was a very strategic good investment. We have our sales people on the FEXCO, on the field getting more retail agents to on our network and the beauty of that is that we are a direct agent. We are the agents here and we have a direct access to the small retailer and that helps us also on our commission and on our cost structure also that having that direct access and also direct promotions, placing the ethnic marketing there, having the sales people direct connection with that, that helps a lot, I think the FEXCO acquisition was a very good and appropriate acquisition.

Christina Gold

The other thing I would just add Jim is that also with that we acquired the platform called [Fexlink] which we are now putting into all of our send locations, which really is a web-based technology which allows us not only to do our regular money transfer, but to add other products like mobile, like prepaid into the transactions.

So, that is really good as well and our U.K. business where FEXCO is really based was our top performer of our plan last year. So, really it is paying off and it is doing a lot for our business.

Jim Kissane - Bank of America/Merrill Lynch

Doesn’t it make sense at some point to start breaking out westernunion.com? It seems it is becoming a bigger piece and it is driving some growth?

Christina Gold

I think as we drive our electronic channels and it becomes a bigger part of our business like we said, it’s 2% of our business as we gained scale on that we would open that up, but not right now.

Operator

Your next question comes from the line of Bryan Keane with Credit Suisse.

Bryan Keane - Credit Suisse

I just wanted to talk about the World Bank report. Over the weekend, the World Bank raised its forecast for 2010 and 2011 for remittance flows, is Western Union seeing that same type of momentum?

Christina Gold

I think we are really pleased to see the results from the World Bank because obviously it’s an affirmation that the business and the resiliency of our customers and the importance of remittance is in the global economy.

They are projecting 6% for this year and 7% for next year, interesting to note that our first quarter, our total principle that we moved was 7%. So, we are off to a very good start. I think the other thing that we are seeing is particularly in the month of March, we saw really an uptick there. That’s where when Mexico went positive.

That was our record for westernunion.com. So, it’s early days for us in terms of looking at 2010, but I think all of the signs are looking very good for our business.

Bryan Keane - Credit Suisse

And typically you guys have beaten the World Bank estimates as you take share?

Christina Gold

Yes, we have. If you look at last year they were down minus 6 and we were down minus 3, so if you take the total principle we were twice, we beat them and we always do.

Bryan Keane - Credit Suisse

I just wanted to ask about the PSD. I’ve gotten few questions about just a competitive landscape and how that might change, so now that you are a few months in, I’d interested in Hikmet giving your assessment on that?

Hikmet Ersek

I think Bryan we has the license, which was a big effort. It’s not easy to get the license, right because the regulators are really looking and we had a big effort here. We got the license and I have to say that our sales people are on the field and really getting this retail chain here. It takes some time to having a big retailer, it take some time to activate them because you have to have a house-to- house connection. You have to go to their point of sales system, but you know I think we are very well underway to make a big opportunity out of this.

Operator

Your last question comes from line of Jim Wiley with Wells Fargo.

Jim Wiley - Wells Fargo

Thanks, I have one question and one follow up first is in the US market where that spread has widened sequentially from 4Q, which is probably just due to a full quarter effect of the pricing strategy building, but could you talk about monthly, a way to think about how that spread between revenue and transactions, what was it pretty stable as you progress through the quarter or where there any changes?

Christina Gold

If we look at the momentum of that business, as we came out of the fourth quarter, we were running transactions at 5%, and now we’re running transactions at 18%, but you need to think that this thing is building momentum, not slowing down so what we’re seeing is month-after-month a strengthening of that business.

Scott Scheirman

It’s clearly building momentum, I think what’s important to keep in mind Tim is that one, domestic money transfer has got a 30% margin business. It’s a very profitable business for us and then two, we expect positive revenue growth as we get into the later part of 2010.

Jim Wiley - Wells Fargo

Did transaction growth in the US accelerate as the quarter went on, because if I remember I think you said in tees of last year it was like 10% for the month so this quarter's performance would say that you continued to accelerate throughout the quarter?

Scott Scheirman

Yes.

Jim Wiley - Wells Fargo

My follow-up question was just around the electronic channels, as you move forward now over the last couple of years with the variety of different electronic channels whether it’s mobile or account to cash, internet, et cetera . Are you seeing anything within the pricing or the profit metrics around transactions or profit per principle, anything that would you think overtime be sort of a secular negative for the margin structure of Western Union as these channels emerge or do you think you sell price appropriately for the value of the brand?

Christina Gold

We see that these electronic channels are margin supportive, I think that overtime we will continue to gain share in the electronic channels and build, so I think even then as we drive more transactions that we will leverage even more of our cost structures. So we feel very comfortable that they will support the overall margin of the business.

Thank you very much for being on the call today. We look forward to talking to you again and Hikmet congratulations to you. Thanks everybody

Operator

Thank you for participating in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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Source: The Western Union Company Q1 2010 Earnings Call Transcript

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