The Western Union (WU) Hikmet Ersek on Q2 2016 Results - Earnings Call Transcript

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The Western Union Co. (NYSE:WU)

Q2 2016 Earnings Call

August 03, 2016 4:30 pm ET

Executives

Michael Alan Salop - Senior Vice President-Investor Relations

Hikmet Ersek - President, Chief Executive Officer & Director

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Analysts

Tien-Tsin Huang - JPMorgan Securities LLC

Sara Rebecca Gubins - Bank of America Merrill Lynch

Ashish Sabadra - Deutsche Bank Securities, Inc.

Darrin Peller - Barclays Capital, Inc.

Ryan Allen Cary - Jefferies LLC

Ashwin Shirvaikar - Citigroup Global Markets, Inc. (Broker)

Danyal Hussain - Morgan Stanley & Co. LLC

Oscar Turner - SunTrust Robinson Humphrey, Inc.

Rayna Kumar - Evercore Group LLC

John Davis - Stifel, Nicolaus & Co., Inc.

Operator

Good afternoon, and welcome to The Western Union Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Mike Salop, Senior Vice President of Investor Relations. Please go ahead, sir.

Michael Alan Salop - Senior Vice President-Investor Relations

Thank you, Laura. On today's call, Hikmet Ersek, Western Union's President and Chief Executive Officer, and Raj Agrawal, Executive Vice President and Chief Financial Officer, will discuss the company's 2016 second quarter results, and then we will take your questions.

The slides that accompany this call and webcast can be found at westernunion.com, under the Investor Relations tab and will remain available after the call. Additional operational statistics have been provided in supplemental tables with our press release.

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 2015 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've 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 noted in our press release, 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 Hikmet Ersek.

Hikmet Ersek - President, Chief Executive Officer & Director

Thank you, Mike, and good afternoon, everyone. I am pleased with our second quarter results and with the resilience of our business. Revenue increased 3% on a constant currency basis, consistent with the last several quarters, despite the challenging global market environment.

Our consumer money transfer business was once again led by strong performance from westernunion.com, which delivered 20% constant currency revenue growth. Regionally, the money transfer business was aided by continued strong results from the U.S.

The international picture was more mixed, with growth in some key European countries but continued challenges from many oil industry dependent markets. In addition to consumer money transfer, our business solutions and consumer bill payments businesses each delivered solid constant currency results.

Overall, we continued to invest heavily in our technology infrastructure and currency remains a negative, but despite these factors, we generated solid profitability in the quarter. We also returned over $150 million to shareholders through dividends and share repurchases, which means in total we returned $475 million in the first half of the year.

Before discussing our strategic progress, I want to spend a few minutes discussing the global geopolitical environment, including Brexit implications for Europe. As you know, the world has experienced significant geopolitical turbulence in recent months, in addition to what we have seen the last couple of years.

Terrorist attacks in many countries, the attempted coup in Turkey, elections focused on immigration, currency volatility and many other such events have created headlines just over the last few weeks. There's a long list of countries dealing with major issues across the Middle East, Europe, Africa, South America and elsewhere.

Despite the uncertainties surrounding these events, our business has remained stable, thanks to our global reach and diversified portfolio of countries, as well as resilience of our consumer base.

While these types of events will likely have more impact in the coming years, we will continue to adjust our resources appropriately and work through the challenges to provide our needed services around the world.

As for Brexit, U.K. is an important market for both business solutions and our consumer money transfer business and the country represented almost 7% of total company revenues last year.

In the short term, we saw reduced trading activities from our Business Solution customers in the U.K. in the weeks leading up to Brexit vote, but a heavy increase in the last week of the quarter following the decision.

Overall in the quarter, we saw good growth in the U.K. B2B business and the C2C business increased as well in constant currency terms. Longer term, the impact of Brexit is still uncertain as we like others must wait for the U.K. and the European Union to negotiate the exit agreements. However, in the near-term we do not expect Brexit to cause significant disruption to our businesses or operations in the U.K. or Europe.

Turning now to our strategic initiatives: we continue to make progress on several fronts. With westernunion.com, mobile continues to lead the way in the U.S. with nearly 60% of the countries westernunion.com transactions initiated on mobile in the quarter. Internationally, we introduced upgraded mobile transaction apps for westernunion.com in eight markets. Overall, we now have online transaction sites in 37 countries, with mobile apps in 11 of these. Additionally, similar to what we have done with Viber and WeChat in the U.S., we just added our money transfer services to the Yandex.Money mobile app in Russia. So Yandex consumers can now initiate the transfers on their phones to Western Union locations around the world.

As I have mentioned in the past, one of our key growth initiatives for the future is to capture some of the cross-border business being delivered into accounts around the world and we continue to build out our network. Currently, we have the capability to deliver funds into billions of accounts in over 50 countries.

On the retail side, we recently signed several key agent agreements including a renewal with Rite Aid in the U.S. and the new agreement with Walmart de México. And in Western Union Business Solutions, we have activated over 6,000 business clients on our new integrated digital platform, WU EDGE, and we'll continue to roll out enhancements and build the importer and exporter network.

Finally, I would like to mention the recent announcement that we have successfully completed the primary recommendation for our Southwest border settlement agreement. Our teams have worked very hard over the last several years to reach this stage and the actions taken have contributed to an overall strengthening of our compliance programs. While compliance enhancements are a part of our business model and a long-term competitive advantage, we are pleased to be able to complete this important milestone for the company.

So to recap, we have continued to produce solid results and are on-track to deliver our business outlook for 2016. We are making good progress on our strategies and have made strong advances in our compliance programs.

Now, I would like to turn the call over to Raj to discuss the second quarter results in more detail.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Thank you, Hikmet. Second quarter reported revenues of $1.4 billion declined 1%, or increased 3% on a constant currency basis, compared to the prior year period. The impact of currency translation net of hedge benefits reduced second quarter revenue by approximately $49 million, compared to the prior year period.

In the Consumer to Consumer segment reported revenues declined 1% in the quarter or increased 2% constant currency, while transactions grew 3%. C2C constant currency revenue growth was again led by westernunion.com, with regional growth led by North America and Latin America.

Total C2C cross-border principal declined 1% compared to the prior year period and was flat on a constant currency basis. Principal per transaction declined 5%, or 4% in constant currency terms. The spread between the C2C transaction growth and the revenue decline in the quarter was approximately 4 percentage points, including a negative 3 percentage point impact from currency.

Mix had a negative impact of approximately 1 point in the quarter, while there was no net impact from pricing. While the previously implemented Argentina price reductions are still affecting the spread, these were largely offset by FX spread increases in other parts of the world. We continue to find the overall pricing environment to be stable and do not expect significant changes in the near future.

Turning to the regions, consistent with prior quarters, I will be referring to constant currency movement as I discuss individual country contributions to the regional results. In the second quarter, the North America business was strong. Revenue grew 6% or 7% on a constant currency basis, while transactions increased 7%. U.S. outbound growth was again driven by sends to Mexico and Latin America.

In Mexico, our business continued to grow faster than the market based on the latest Banco de México principal and transaction data for the second quarter. The U.S. domestic money transfer revenue also grew in the quarter, posting a 4% increase on transaction growth of 3%.

We have begun adjusting prices in some additional cities to the same levels we implemented in part of the country last year. Due to the very limited amount of revenue that is affected, we don't expect these changes to have a significant impact on our pricing investment this year.

In the Europe and CIS region, revenue declined 3% or 1% on a constant currency basis, while transactions increased 3%. Similar to prior quarters, Germany delivered good growth, but this was offset by continued declines in Russia.

In the Middle East and Africa region, revenue declined 4% or 3% constant currency, and transactions were down 5%. Low oil prices continue to affect the region's results, with Nigeria and Libya the main drivers of the revenue decline in the quarter. In the Asia-Pacific region, revenue was down 3% or 1% constant currency. Transactions decreased 3% as received markets in the region, including India continue to be negatively impacted by lower remittance system in oil-producing countries.

Revenue in the Latin America and Caribbean region was flat, but increased 6% constant currency on transaction growth of 12%. Revenue growth in the region was driven by strong inbound business from the U.S., while the spread between revenue and transaction growth was caused by the price reductions and currency depreciation in Argentina.

westernunion.com C2C revenue which is included in the regional numbers just discussed grew 19% in the quarter, or 20% constant currency and represented 8% of total C2C revenue. westernunion.com transactions increased 25% with U.S. originated online transactions growing 27%.

In the Consumer-to-Business segment revenue declined 2%, but increased 12% on a constant currency basis. The depreciation of the Argentine peso caused the decline in the reported revenues, constant currency revenue growth was driven by the Argentina walk-in and U.S. electronic businesses which were partially offset by declines in U.S. cash walk-in. Business Solutions reported revenues increased 3% or 6% on a constant currency basis aided by strong growth from Europe.

Turning to margins and profitability: we did incur a $15 million accrual in the quarter, or $10 million after-tax for a legal matter. This relates to a Federal Trade Commission matter regarding our consumer protection and anti-fraud programs, as noted in our 10-Qs. The matter is still pending and the final resolution is still uncertain, so we will not be able to provide additional details at this time.

Including this accrual, the consolidated operating profit margin was 18.9% in the quarter, compared to 18.1% in the second quarter of last year, or 20.7% excluding the impact of the Paymap settlement in the prior year period. The FTC accrual negatively impacted the current quarter's margin by 110 basis points. Other factors affecting the margin included incremental technology expense, and the negative impact of foreign exchange, which were partially offset by reductions in compensation related costs and other expenses.

Foreign exchange hedge gains in the quarter were $11 million, compared to $20 million of gains in the second quarter of 2015. In total, currency negatively impacted operating profit by approximately $23 million in the quarter, compared to prior year.

Compliance expense was approximately 3.5% of revenue, down from 3.7% in the prior year period. EBITDA margin of 23.7% in the quarter, compared to 22.7% in the prior year period, or 25.2% excluding the Paymap settlement.

Our tax rate was 7.6% in the quarter, compared to 8.5% in the second quarter of last year, or 11.8% excluding the settlement charge. The tax rate in the current quarter benefited from changes in tax contingency reserves and other discrete items, including the impact of the FTC accrual which lowered the rate by approximately 180 basis points. Including all of these items, and some additional benefits expected in the second half of the year, we now anticipate a full year tax rate of approximately 12%.

Earnings per share of $0.42 in the quarter, compared to $0.36 in the prior year, or $0.41 excluding the Paymap charge. The FTC accrual negatively affected the current quarter's earnings by $0.02 per share. The C2C segment operating margin was 21.5%, compared to 23.3% in the prior year, and was affected by 130 basis points by the accrual.

Similar to the company overall, other factors affecting the C2C margin included higher technology expense and the negative impact of foreign exchange, partially offset by reductions in compensation related costs and other expenses. The Consumer-to-Business operating margin was 11.5% in the quarter, compared to 18.3% excluding the Paymap settlement charge in the prior year period.

The margin decline compared to the adjusted margin a year ago was primarily due to increased technology expense and customer mix. Business Solutions improved operating profit to $5 million, or a 5% margin from breakeven in the prior year period. Business Solutions EBITDA margin increased to 18.1% from 12.1%.

The operating profit improvement was driven by increased revenues and reductions in compensation related expenses. Depreciation and amortization for Business Solutions was approximately $13 million in the quarter, compared to $12 million in the prior year.

Turning to our cash flow and balance sheet: cash flow from operating activities was $486 million year-to-date through June. Capital expenditures were $61 million for the quarter. At the end of the quarter, the company had $3.2 billion of debt and cash of $1.2 billion.

Approximately 30% of the cash was held by United States entities. During the second quarter, we paid $78 million in dividends and repurchased approximately 4 million shares for total of $78 million. Our remaining authorization, which expires in December 2017, was $394 million at quarter end and the outstanding share count at end of June was 488 million shares.

Based on the first half results and recent business trends, we are affirming our full year financial outlooks for constant currency revenue growth, operating profit margin, and operating cash flow. The GAAP revenue outlook has been decreased slightly to reflect changes in several key foreign currencies including the Euro and the British pound against the U.S. dollar and we now expect the GAAP revenue change to be about 400 basis points lower than the constant currency increase.

The impact on operating profit from the currency adjustments is largely expected to be offset by hedge benefits with hedge gains currently projected at approximately $45 million, compared to approximately $40 million in the prior outlook.

Also as mentioned earlier, we now expect a full year effective tax rate of approximately 12%, which is down from the mid-teens expectation in the prior outlook as we are benefiting from several favorable outcomes relative to our reserves and discrete items.

We have also included the impact of the $15 million FTC accrual in our outlook although we still expect operating margins of approximately 20%. As a result of all these factors, the earnings per share outlook has been narrowed to a range of $1.60 to $1.70, up from the prior range of $1.58 to $1.70.

So, to summarize, we are pleased with the second quarter results, which came in largely as expected and our full year earnings outlook has been narrowed, primarily to reflect the lower tax rate and the legal matter accrual.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. And our first question comes from Tien-Tsin Huang of JPMorgan.

Hikmet Ersek - President, Chief Executive Officer & Director

Hi, Tien-Tsin.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Hello, Tien-Tsin.

Tien-Tsin Huang - JPMorgan Securities LLC

Hello. Good afternoon. Thanks for all the slides and the details. Just a couple questions. The digital piece, it looks like, accelerated a little bit here despite the macro. I think MoneyGram saw some decel there. What's driving that acceleration within the digital piece? Is it more distribution or are you seeing more effectiveness with your marketing?

Hikmet Ersek - President, Chief Executive Officer & Director

It's both, but mainly our strong growth comes from the U.S. and 60% of the transactions done in the U.S., westernunion.com are mobile transactions, U.S. outbound and U.S. intra was very good. But also the global expansion, Europe, we see also very strong growth on mobile and on the westernunion.com.

Currently, we do have about 11 countries grew mobile apps and as you recall, Tien-Tsin, we opened also an office in Singapore to expand our success, which Khalid and the team did in Singapore, sorry, in San Francisco, the same success, we want to do that also in Singapore, expanding globally and that has been paying off. So the growth has been very strong.

So – also I would say also the customer's staying loyal there. Once they are – they are still new customers, still we don't see cannibalization, 80% of the transactions looks like are new and the pricing has been – we did some pricing action but some pricing has been stable also. And I think we have the right strategy, Tien-Tsin.

Tien-Tsin Huang - JPMorgan Securities LLC

Right. No, that's great. It sounds like it. Let me ask as my follow-up to both of you just on the revenue guidance. You're keeping it constant. It looks like you're running 2% to 3% FX-neutral revenue growth first half of the year. You're still guiding low to mid-single digits. Given what you called out in terms of the macro and the tax, what-not, is it more likely we'll see it at the lower end of that, or is there still potential for it to accelerate into the mid-single digits given what you see?

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Yes Tien-Tsin, this is Raj. I would just say that we've given a range of possible outcomes. There's still potential for it to change. There are some components of our business that are accelerating. You saw digital accelerate in the second quarter. We have high growth expectations there. We have some other areas that are accelerating as well. But we're also cautious with some of the challenges that we see in other parts of the world.

So we'll see what happens in some of the oil-related markets like Saudi Arabia or Nigeria and Libya, and we're watching those very closely. So those will certainly have an impact and that will have an impact on the overall outcome in the end.

Hikmet Ersek - President, Chief Executive Officer & Director

We're overall confident with our outlook.

Tien-Tsin Huang - JPMorgan Securities LLC

Understood. Appreciate that. Thanks.

Operator

The next question will come from Sara Gubins of Bank of America Merrill Lynch.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Hi, thanks. Good afternoon. Could you give us an update on how your conversations on WU Connect are going, conversations with prospective social media companies, and the potential for new signings in the near term?

Hikmet Ersek - President, Chief Executive Officer & Director

Yeah, good question, Sara. Hi. Viber and WeChat is still on. We have the U.S. agreements there. We just signed Yandex in Russia, which is also same like a mobile operator and a social media company, consumer do use Yandex and they can send also money from their mobile phones worldwide to 200 countries.

The other ones are – obviously we are not making a comment for the ongoing negotiations, but we are still in a testing phase. It's not material yet, right, Sara, but we are still learning. We started recently a few weeks ago with some of the marketing activities with Viber and WeChat. I think we can give you more color about how their customers are reacting in end of Q3, maybe end of Q4. It takes time, but we are still very excited and we are still also in contact with other social media companies.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Great. Thanks. And then just a quick cost question – could you talk about the incremental tech spending, how that's been trending, if we're at a full $50 million (22:50) annualized run rate exiting the quarter? And do you get any benefit from having now successfully completed the recommendations made by the monitor?

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Yes. Sara, this is Raj. The technology spend, I would say, continues to ramp and this year we'll be spending well over $50 million incremental to last year. In any given quarter it's going to be dependent on which activities we actually have going on in the technology area. But I would say we're seeing a good level of technology spend in the second quarter and we're continuing to ramp there.

From a Southwest border standpoint, we've been – our spending there has been coming down for the last couple of years as we've been putting some of these programs in place, and that's related to the primary recommendations, but we've also got secondary recommendations that we're putting in place where some spending will continue. And then obviously we have a global compliance program where we're spending in various parts of the world for various kinds of activities, so Southwest border was only a small piece of that.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Great. Thank you very much.

Hikmet Ersek - President, Chief Executive Officer & Director

Sure.

Operator

And next we have a question from Bryan Keane of Deutsche Bank.

Ashish Sabadra - Deutsche Bank Securities, Inc.

Hi.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Hi, Bryan.

Ashish Sabadra - Deutsche Bank Securities, Inc.

This is Ashish Sabadra calling on behalf of Bryan. A question on the third quarter. When I look at the comps, the comps get easier in Europe and APAC. And you also talked about increased B2B transaction post the Brexit. So, as we think about the third quarter -- and I understand you don't give quarterly guidance – but should we just think about the comps being slightly easier, which helps you on the transaction side?

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Yes. Ashish, as you said, we don't give a quarterly outlook, but the U.K. activity and Brexit, we saw strong activity in the last week, but eventually things will level out there. So it remains to be seen on how much heightened activity will continue, but we're watching that closely, obviously.

You have a lot of things that are going on around the world, a lot of different activities. We've continued to see good growth in our U.S. business. The European business, we've gotten good growth from Germany in the quarter, but that's been offset by challenges in other parts of the European business like Russia, given the situation there. So there are continued challenges in various parts of the world as well as in Europe that we're continuing to monitor.

Ashish Sabadra - Deutsche Bank Securities, Inc.

No. That's helpful. Thanks. And then maybe a question on Brexit. Just as we think about the longer term – and I understand it still all needs to be formalized – but what are the different areas we should think about in terms of the impact? Could there be any impact from a regulatory perspective, technology upgrades and the investment that's required, or any impact to the volumes as you think about it, like just longer-term impact from Brexit.

Hikmet Ersek - President, Chief Executive Officer & Director

It's hard to tell what the negotiations between European Union and the U.K. will be. I think I'm in the same boat with other CEOs, which are active in this area. However, I would say that as it is today it's really European Union and U.K. agrees on a separation agreement, it affects like licenses, passports, which you can use in different countries, European Union passports. Also immigration policies, it may have an impact on that.

So, we don't know. It's really early to say. We don't see any near-term impact on our business. We are pleased with our European – U.K. business. Just to put in perspective also including Western Union Business Solutions and the C2C business, consumer business, our revenue – it's about 7% of our company total revenue.

So the beauty of Western Union is how diverse we are, how big portfolio we have, and we can always organize our portfolio. But it's hard to tell. It's too early and I would say that it's not – we can't tell it from today. We have to wait and see.

Ashish Sabadra - Deutsche Bank Securities, Inc.

Thanks for the color. Thank you.

Operator

And the next question comes from Darrin Peller of Barclays.

Darrin Peller - Barclays Capital, Inc.

Hi, guys.

Michael Alan Salop - Senior Vice President-Investor Relations

Hey, Darrin.

Darrin Peller - Barclays Capital, Inc.

Hey. It's good to see the results show no pricing impact on your revenue this quarter. I just want to get a quick update on your outlook around pricing, what you're really seeing from a competitive landscape, given it seems a little more stable than it's been in years past. And then the mix issue you called out that had the pressure, the 1 point or so of pressure versus transaction growth, was that just the online or the mobile mix or something? Can you give us a little more color? Thanks.

Hikmet Ersek - President, Chief Executive Officer & Director

Let me give general market overview, maybe Raj, can give more detail to Darrin about that. Darrin, if you look at the environment, I think the pricing environment's quite stable. That doesn't mean that we are not doing pricing actions.

As you know, we are operating 16,000 corridors and we have different areas so we do pricing actions, but overall I would say that pricing is very stable. In some quarters, we even increase prices, in some quarters we decrease. We really react to our business intelligence and market environment, and we adopt the prices generally. I would say that I don't see any big pricing pressure near-term and we are confident with our programs, marketing programs and market environment.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Yeah, and just on the second quarter specifically, Darrin, the pricing investment was flat for the quarter. We've had continued impact from the Argentina reductions, price reductions we took earlier in the year. That's continuing to show up in the second quarter. But we also grew over the DMT pricing that we did in April of last year. So we're getting some benefit from that. And then we did have some spread increases in certain parts of our business overall. And then on your mix question, that's just related to mix changes in our business around the world as certain parts of the business grow faster than others. So that has a mix impact on the overall growth.

Darrin Peller - Barclays Capital, Inc.

Okay. All right. That's helpful. Thanks. And then just a quick follow-up on the margin side. The C2B margin was down a little more than we expected. I think you had mentioned technology investments and mix there, as well. Can you give us some sense or any more color on what we should expect there, what actually happened there and what we should expect going forward?

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Yeah, on the B2B margins, the primary impact as I mentioned, was from technology, we're making technology investments throughout the company, as well as in the electronic business part of the C2B business, so that's what's impacting it. We also had some customer mix where we did have some success in signing new accounts, but they came at a slightly lower margin. But again, the biggest impact was from the technology.

We don't want the margins to be down at this level. We expect the margins to be better overtime, but it is going to take us some time to get through some of the spending that we're doing here, on the technology side. Ultimately the goal is to drive a better platform and have better opportunities on growth in this business. So we're pleased with the overall growth, but we want to drive more growth in this business.

Darrin Peller - Barclays Capital, Inc.

Is that of decline – that's embedded in your outlook for margins anyway, though, right?

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

It is embedded in our outlook for the year, yes, in our outlook.

Darrin Peller - Barclays Capital, Inc.

Sounds good. Thanks, guys.

Hikmet Ersek - President, Chief Executive Officer & Director

Thanks, Darrin.

Operator

And our next question comes from Jason Kupferberg of Jefferies.

Ryan Allen Cary - Jefferies LLC

Hi, guys, this is Ryan Cary for Jason. I know you called out weakness in the petro-linked economies. And I think you said that Saudi Arabia, which had managed to avoid much of the slowdown, has also been starting to slow. Any update you can provide on your expectations for these regions would be appreciated. And then maybe remind us what percent of C2C revs comes from the primary corridors impacted by lower oil prices?

Hikmet Ersek - President, Chief Executive Officer & Director

So good question. Generally the main impact on our business maybe on the weakness of the oil related countries were Libya and Nigeria. Saudi Arabia had a little bit slower, but it was not the major impact. The major impact was Libya and Nigeria and that's because of their oil-producing and oil-related economies. In general, OPEC countries, if you take the OPEC countries, it's about 10% to 15% of our revenues. So that puts also in perspective.

Some of the – we still see good growth in UAE. We still see good growth in some parts of the businesses. But some parts of the business I have to be cautious also because like Saudi Arabia, where some investments have been slowed down, some construction, some hotels, some big airports have been slowed down and that impacted definitely the workforce there respective to the remittance market. And that slowed down. We could see it. And once the oil prices are getting more stable I'm sure that that's going to go back again. But currently we do see a little bit impact from that area.

Ryan Allen Cary - Jefferies LLC

Okay, great. And how should we be thinking about compliance trends going forward? It seems like this has remained relatively consistent at the lower end of the 3.5% to 4% range. Is that the right way to be thinking about it? And then anything you see on the horizon that could cause results to trend either above or below that range?

Hikmet Ersek - President, Chief Executive Officer & Director

Generally, I would say that we see compliance as a part of our business, right, business as usual. And we see it also long-term competitive advantage. One example is the Southwest border primary agreement that we completed and we definitely upgraded our compliance programs and in many countries we also see that Western Union is a preferred partner because of the compliance programs we put in place.

I think the investment will continue. I don't see bigger changes. We operate in 200 countries and regulatory environment constantly changing and the team is doing a great job investing in the technology, but also in the people to extend our licenses.

But also you know, it's remainder in the country being active and being a competitive advantage and protect our consumers. That's our main goal. And since the last few years we increasingly invested in the compliance environment, $200 plus million every year and that probably is really also protecting our consumers.

Ryan Allen Cary - Jefferies LLC

Great. Thanks for taking my questions.

Michael Alan Salop - Senior Vice President-Investor Relations

Sure.

Operator

And the next question will come from Ashwin Shirvaikar of Citi.

Ashwin Shirvaikar - Citigroup Global Markets, Inc. (Broker)

Hey, guys. So I guess Raj, you've given some of this information in the course of the call, but I just want to clarify. As I look at the next 12 months, we should continue from a cost perspective to see the impact of hedge rolloffs with minor uptick in the second half. Tech costs continue to go up. And looking at 1010 (34:05), compensation, restructuring continued to be the offset so that you can guide up on margins.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

I mean, our outlook for margins this year, Ashwin, is 20% and that's really based on everything that we know at this stage.

Clearly, we'll have some more hedge gains in the second part of this year and some of the hedge gains will continue into next year as well. But there are a number of other factors that are going to drive margins and profitability.

Hedges are just one component. You have cost savings as well. But commissions and compliance costs have been relatively stable. That should be – that's stable for this year and we've been able to stabilize those in the last couple of years, so that's positive. But we don't really have an outlook for next year if that's what you're getting at, Ashwin, but we feel good about the outlook for this year.

Hikmet Ersek - President, Chief Executive Officer & Director

However, we are very much focused, Ashwin, on revenue growth and profit growth, profitable growth and revenue growth, that's our focus.

Ashwin Shirvaikar - Citigroup Global Markets, Inc. (Broker)

Yes, obviously revenue growth also helps the cause. My next question for you, with regards to digital mobile becoming such a big part of how people access the network and the system, is there any change in how you think of your agent network with regards to the kind of deals you can structure with them with regards to their compensation, and so on and so forth? Any update there would help?

Hikmet Ersek - President, Chief Executive Officer & Director

Yeah, Ashwin, currently not. I think that our agent commissions has been favorable for Western Union over the years as you know, and definitely the new agreements we sign has not been signing at the – the rates we've signed years ago. Obviously, that helped also.

However, I would like to keep and grow my agent network because one of the biggest things we see is that the new customers, which we signed with mobile, want to drop money on a retail money transfer – retail locations worldwide, right. We do have, for instance, in India more than 100,000 locations. And you can send money immediately from Denver, from your mobile phone immediately to 100,000 locations in India, plus the thousands of millions of accounts in India in a moment (36:42); nobody else can do that, that big, as we can do it. That's a big competitive advantage.

Saying that also, we are always looking for optimization for our sales costs, for our retail costs, and I think the team is working very hard on that, and I think long-term definitely some room there to be more efficient.

Ashwin Shirvaikar - Citigroup Global Markets, Inc. (Broker)

That's very good color. Thank you. Appreciate it.

Hikmet Ersek - President, Chief Executive Officer & Director

Thanks, Ashwin.

Operator

The next question comes from Danyal Hussain of Morgan Stanley.

Danyal Hussain - Morgan Stanley & Co. LLC

Hi. Thanks for taking my question.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Hi, Daniel.

Danyal Hussain - Morgan Stanley & Co. LLC

Hi, Raj. I wanted to clarify the $0.01 guidance change. It seems like if before we were assuming tax to be 15% and we lower that to 12% for the year, that's $0.06, when you factor in the $0.02 from the accrual. So, I'm looking for the other $0.03. Some of that looks like it may have been FX headwinds, but I'm wondering what else is in there.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Yeah. Hi, Daniel, this is Raj. Our outlook for the full year, it does take into account the tax benefit. I would say the $0.06 that you're calculating is a little bit high. Our new outlook for the tax rate is around 12% and we had given a mid-teens level. So depending on what you assume for the actual tax rate, you'll have to walk down from that.

But I would say your estimate's a little bit high, and then we have a $0.02 offset to that from the legal accrual. So that's why we moved up the low end of the range by the net $0.02 effectively. And so that's how we look at it. Nothing really has changed from our operating outlook. We still have the same revenue growth outlook, low to mid-single digits constant currency, profit margins at around 20%.

And then our reported revenue is going to be a little bit lower than we thought in the last quarter, but most of that revenue change is going to be – the profit impact of that is going to be offset with the increased hedge gains. So we now expect about $45 million in hedge gains this year versus $40 million that we said in the last quarter. So all that is netting out to have no real operating impact. And so we've reflected the two key items, the taxes and the legal accrual.

Danyal Hussain - Morgan Stanley & Co. LLC

Got it. That makes sense. And I just wanted to clarify, so this quarter you were able to offset the Argentina pricing impact with FX spreads. I just want to understand better how sustainable that is and how those spreads – do they benefit, for example, when you have higher FX volatility, would we expect those to normalize or is this a more sustainable spread?

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

There are three things that are in the second quarter from a pricing investment standpoint. We are still seeing the Argentina impact as I mentioned. Secondly, we did grow over the domestic money transfer pricing that we did last year in April, so we're getting a benefit from that.

And then third, we did raise some spreads in certain parts of the world. I would say on the spread changes, we have 16,000 quarters that we're monitoring pricing activity in and pricing levels and we try to optimize those on an ongoing basis. So I wouldn't characterize these as things that stay forever. We may increase spreads. We may reduce spreads. It really depends on what those particular markets require. So that's really the way I would look at the spread changes.

Danyal Hussain - Morgan Stanley & Co. LLC

Got it. Thank you.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Yes.

Operator

The next question comes from Oscar Turner of SunTrust.

Oscar Turner - SunTrust Robinson Humphrey, Inc.

Good afternoon.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Hi.

Oscar Turner - SunTrust Robinson Humphrey, Inc.

Thanks for taking my question. You talked a bit about your competitive advantage in mobile coming from allowing send to either retail locations or accounts. Can you provide any color into transaction or volume growth by payout method – so, looking at either transfers to retail accounts versus just to accounts, and how that has trended?

Hikmet Ersek - President, Chief Executive Officer & Director

Yeah, I think one of the biggest competitive advantage is the retail and stays retail. Most of the transactions are paid out in money in minutes in retail in cash and that continues, especially international outbound ones are happening, but we do see very strong certain countries like in South Asian countries that the people do prefer also accounts and our promotions on the westernunion.com has been very successful there, that we can grow – we grew our account payouts also in some countries.

In some countries we are just building it. We have now billions of accounts worldwide in 50 countries. That reminds me a little bit, right, how we built the retail money transfer business. Build it, they will come. And we are really building it, now the account network worldwide. Now billions of accounts and now it's all about communicating and building the corridor, making marketing and promotions. But still the most of the payouts are on the retail payouts but very strong growth in certain countries, certain corridors, and also on the account payout.

Oscar Turner - SunTrust Robinson Humphrey, Inc.

Okay. Thank you. And then just looking at your account-to-account initiative, could you provide any color on account-to-account volume growth in the quarter? Also, at what point will this start influencing your revenue growth?

Hikmet Ersek - President, Chief Executive Officer & Director

When it becomes material definitely we will give you more color on that. It's in the beginning but it's a very strong growth. The big advantage here is that funding method is done by accounts. You have immediately the funds in mobile. You collect the money immediately from funds.

We do have it in the U.S. but also very strong in Europe where we have a direct ACH transact, direct debit they call it in Europe and we collect the money immediately from an account then drop in an account worldwide on a billions, which country, more than 50 countries.

And the other thing is that we see more banks calling us actually on that. Could you do this transaction for us because you have the technology, they tell us. You have the compliance programs which they have to build it globally. We do have it in 200 countries. So it started to be getting kind of advantage, kind of a focus, but again, we just build it billions of accounts and now we are really designing a product against this account-to-account transactions.

Oscar Turner - SunTrust Robinson Humphrey, Inc.

Okay. Thank you.

Hikmet Ersek - President, Chief Executive Officer & Director

Thank you.

Operator

Our next question will come from Rayna Kumar of Evercore ISI.

Rayna Kumar - Evercore Group LLC

Good evening.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Hi.

Hikmet Ersek - President, Chief Executive Officer & Director

Hi, Rayna.

Rayna Kumar - Evercore Group LLC

Hi. Now that PayPal has owned Xoom for roughly a year, have you experienced any impact to your online business?

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Well, I think the results really speak for themselves. You can see the great growth that we're getting in our wu.com business, 25% transaction growth, and 20% revenue growth in constant currency.

And we have a business that's much broader than just the U.S., right. We have a business that's in 37 countries and we continue to expand those capabilities on an ongoing basis. We already deliver around the world in 200 countries and territories around the world and then our account payout capabilities are getting even stronger.

And the unique thing about the account payout is that it's direct delivery into these accounts. It's not going through the correspondent banking system. And so even the newer players, they're playing only in the online space, online to counter account-to-account. They're not playing in the retail space, which is where we have our brand.

So that's not the place they're coming after. And as you know, our digital business pays out mostly in a retail location today, right. But the growth opportunity for us is also paying – doing account-to-account or online-to-account and we think we're going to create a better and stronger business there than anybody else will be able to create.

Rayna Kumar - Evercore Group LLC

What progress have you made in offering instant ACH?

Hikmet Ersek - President, Chief Executive Officer & Director

Most of the transactions in the U.S. instant ACH is a very U.S. focused question I guess, and most of the transactions in the U.S. are still done by credit cards and the people prefer credit cards. We have it, but we see most of the people want to use their credit cards to fund the transaction. We do see also strong growth on the ACH on the – in Europe. They don't call it ACH there. There's direct debit. There are companies like SOFORT, they help us to do that, pull out money from the banks, from consumer accounts. And that's growing also very well. But most of the transactions on the send side is just still done by credit cards.

Rayna Kumar - Evercore Group LLC

That's very helpful. Thank you.

Hikmet Ersek - President, Chief Executive Officer & Director

Thank you.

Operator

And next we have a question from John Davis of Stifel.

John Davis - Stifel, Nicolaus & Co., Inc.

Hey, good afternoon, guys.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Hi, John.

John Davis - Stifel, Nicolaus & Co., Inc.

Hikmet, I wondered if you could maybe comment on any potential impact of the EU's new AML directive that just came out recently. Any impact there or thoughts would be helpful.

Hikmet Ersek - President, Chief Executive Officer & Director

I don't think that has any impact on our business currently. We probably follow the European Union rules obviously, and we don't see any big impact to our business because we've been doing this already, the regulations, and we adopted them already. One of the biggest things also is that, don't forget that we forget sometimes to mention it we do have a bank license in European Union, which is licensed in 27 European Union countries. And that helps us also. That also is a competitive advantage here. And then we did invest a lot on our anti-money laundering activities in European Union and we work closely with regulators there. I don't see big impact here.

John Davis - Stifel, Nicolaus & Co., Inc.

Okay. That's helpful. And then, Raj, maybe a housekeeping item. I think, assuming that the tax rate is going to benefit from one-time items this year, is it safe to assume that it will likely trend back to the mid-teens next year?

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Yeah, yeah, I would even say for this year, if we didn't have the various discrete items that we talked about, we would be in the mid-teens range as we had originally thought. And we're not giving specific guidance for next year, but given what we know today and tax legislation's evolving all around the world, we would be probably in the mid-teens range for the next couple of years. But we need to see how things play out around the world. As you know, those things are evolving all the time.

John Davis - Stifel, Nicolaus & Co., Inc.

Okay. And then, finally, I think, Raj, you mentioned on the call that 30% of the cash is in the U.S., so I think that puts it around $360 million. And then assume you're going to generate another $100 million-plus in free cash flow in the back half of this year. That gets you to a $475 million-ish cash number in the U.S. That's roughly what you paid out in the first half of the year. So, maybe just talk a little bit about the internal cash management policies and procedures you guys use and help give us comfort that there's plenty of cash in the U.S. to pay dividends and repurchases as we go into 2017.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Yeah. Absolutely. Our dividends are easily payable, and that's something we have a heavy focus on obviously. We do have intercompany working capital programs that allow us to free up more cash here in the U.S. And I would also say that overtime we also will have more capacity from a debt standpoint. So there's plenty of availability of capital and the way we manage our cash overall. So I have no concerns there.

John Davis - Stifel, Nicolaus & Co., Inc.

Okay. Thanks, guys.

Hikmet Ersek - President, Chief Executive Officer & Director

Thank you.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

Thank you.

Rajesh K. Agrawal - Chief Financial Officer & Executive Vice President

I understand we don't have any more questions in the queue, so we'll end the call. Thanks everyone for joining us and have a good afternoon.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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