Western Union Q3 2007 Earnings Call Transcript

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 |  About: The Western Union Company (WU)
by: SA Transcripts

Operator

Good day, ladies and gentlemen, and welcome to the thirdquarter 2007 Western Union earnings conference call. (Operator Instructions) Iwould now like to turn the call over to Mr. Gary Kohn, Vice President ofInvestor Relations, Western Union. Please proceed, sir.

Gary Kohn

Thanks, Carol. Good morning, everybody. Welcome to WesternUnion’s third quarter 2007 conference call. Thanks for joining us today. Beforeturning the call over to Christina, I’ll take a moment to remind you thattoday’s call is being recorded and that our comments include forward-lookingstatements. I ask that you refer to the cautionary language in the earningsrelease and in Western Union's filings with the Securities and ExchangeCommission, including the 2006 Form 10-K for additional information concerningfactors that could cause actual results to differ materially fromforward-looking statements.

During the call, we will discuss items that do not conformto generally accepted accounting principles. We have reconciled those measuresto GAAP measures on our website, westernunion.com, under the investor relationssection. All statements made by Western Union officers on this call are theproperty of The Western Union Company and subject to copyright protection.Other than the replay, Western Union does not authorize and disclaimsresponsibility for any recording, replay or distribution of any transcriptionof this call.

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

Christina A. Gold

Thank you, Garyand welcome, everyone. Before we get into the numbers, I would like to justhighlight the headlines for the quarter. Our Mexico business outperformed themarket and is moving towards positive revenue growth. Our domestic business,while still facing challenges, is improving slightly. The international C-to-Cbusiness remains extremely healthy, C-to-B is performing well, we have madeprogress on the innovation front, we delivered strong operating margins, and wehave seen accelerating organic revenue growth.

As you have seen this morning, Western Union reported revenueof $1.3 billion, which is up 10% over the third quarter of 2006. Earnings pershare was $0.30, excluding the accelerated $0.02 non-cash charge, or $0.28 asreported.

Operating income margin in the quarter was 28% before the $22million non-cash charge, or 26.3% as reported. Cash flow from operations isvery healthy and on track to exceed $1 billion for the full year.

Scott will provide more color on these and other results ina moment.

In terms of operating highlights in the third quarter, ourinternational C-to-C business posted strong growth rates, with revenue up 16%and transactions up 20%. A subset of this business, those transactionsoriginating outside of the United States grew even faster with revenue at 23%on transactions of 29%. This is significant in that taken alone, this subset ofour business accounts for nearly half of Western Union’s total revenue.

Our Mexico business showed improvement, with transactiongrowth rates continuing to accelerate to 7%. Revenue was down 1%, an improvementover the 7% decline we saw in the second quarter. There were no significantpricing actions implemented in Mexico during the quarter and revenue andtransaction growth rates are converging.

Since the second quarter, all three of our C-to-C brands,Western Union, Vigo, and Orlandi Valuta showed strength, with each brandoutperforming the market. The domestic business showed sequential transactionimprovement, with transactions down 4% in the third quarter and revenue down10. Our long-term goal for this business is low single digit revenue growth.

The consumer-to-business, or C-to-B, segment posted revenuegrowth of 14% in the third quarter. We are very pleased with the progress weare making with Pago Facil. With nearly a full year after the acquisition, it’son track with our expectations.

The segment’s operating margin remains strong at 31%,excluding its share of the non-cash charge. Additionally in C-to-B, weannounced a partnership with Yodlee, a leading provider of online banking andbill payment solutions to financial institutions. This partnership will giveparticipating banks’ online customers the option to make bill payments whichpost immediately to their account. That enables customers to better managetheir resources and avoid late fees. It also gives Western Union, Yodlee, andour bank partners a revenue stream which has never existed before.

In sum, we are pleased with the results we reported thismorning and we remain on track to meet our 2007 expectations.

As you know, underlying our efforts to build long-term valuefor Western Union shareholders are our four key strategies; one, to expand anddiversify global distribution; two, to build our brand and enhance the consumerexperience; three, to develop consumer choice and convenience; and four, todevelop new technologies and service offerings.

In September and October, I circled the globe twice,visiting agents, employees, and customers in India, the Philippines, Australia,Singapore, and the Middle East. In the Philippines, I addressed 400 businessleaders and discussed global migration trends. While there, we also visited ournew regional operations center, where we welcome 80 new employees whocollectively speak 17 languages. I also spent time discussing the businessopportunities with our agents.

In Singapore, we met with our long-time agent, Hersing, withwhom we recently strengthened our equity relationship. That trip included avisit to our largest location, Lucky Plaza, a flagship location with 28dedicated Western Union counters handling more than 4,5000 transactions a week.

In Australia, I celebrated Founder’s Day, the firstanniversary of our New York Stock Exchange Listing, at the opening of our newOceania regional office in Sydney. This was a special opening ceremony that included a traditional aboriginal danceto bless the new premises. After the festivities, we met with several of ouragents in Australia and the Oceania region to discuss how we can strengthen ourrelationship even more.

We also made a stop in India to dedicate the country’slocation number 45,000. While there, I met with regulators, agents, andemployees. India is a very important market as 29 million Indians currentlylive abroad.

In Dubai, I attended a gala dinner with over 200 people,including Western Union agents from all over the Middle East. Also attendingwere members of media, select dignitaries, and customers from the Philippines,Nepal and Bangladesh.

During these trips, one can see first-hand the large globalmarket for money transfers to and from countries and intra-countries.

According to recent World Bank data, the number ofimmigrants is now close to 200 million, or roughly 3% of the global population.India has emerged as the number one remittance recipient country, while Chinais number three. The opportunity here is huge, as today these two countrieseach exceed $20 billion in remittances. Together, India and China combinedcontributed 5% of total Western Union revenue. By contrast, Mexico alone is 7%.

India grew transactions by 69% in the third quarter, whileChina, where we now have 25,000 agent locations, grew transactions by 28%. Ineach of these two countries, third quarter revenue growth exceeded 40%.

Within this global money transfer market are especiallypromising, high-volume geographies for Western Union. Take, for example, Dubaito Bangladesh. As you know, Dubai is experiencing tremendous growth, which issupported by a large migrant workforce. Reflecting this dynamic in Dubai,remittances from the United Arab Emirates to Bangladesh jumped by nearly 57% inthe fiscal year ended July 2007, according to the Central Bank of Bangladesh.Western Union has 1,400 locations in Bangladesh to serve these customers.

We also strengthened our agent presence in Europe. We signeda new agent, Caixa Central de Credito Agricola Mutuo, one of the top financialinstitutions in Portugal. We renewed our relationship with the Portuguese PostOffice, which has more than 650 locations. In Greece, we welcomed Millennium Bank,with more than 130 locations.

In Africa, we added Madagascar Post, and expect to be in 220locations over time.

Looking now at recent developments here in the UnitedStates, we renewed our agreement with Safeway. This strengthens our position inthe United States with eight of the country’s top 10 grocery store chains beingWestern Union agents.

We also renewed our important and longstanding relationshipwith K-Mart. K-Mart has been offering Western Unionmoney transfers, bill payments, and money orders for 10 years, and we arepleased to be expanding this relationship into select Sears locations.

To the north, we signed a new agreement with Wal-Mart inCanada. We plan to be in all 280 Wal-Mart stores in Canada. The pricing andcommission terms are generally consistent with our existing Canadian business.We are pleased to partner with Wal-Mart and believe that our strong brand,effective ethnic marketing capabilities in country, as well as our complianceefforts, made us the logical choice.

In the area of intra-country distribution, in Chile wesigned Tur-Bus. With this agreement, Western Union intra-country money transferservices will be offered in up to 500 additional locations in Chile.

All told, we added 8,000 agent locations this quarter,bringing our total to 320,000. This keeps us on track to reach 325,000 agentlocations by the end of the year.

Turning now to the area of brand and consumer experience, inSeptember, in conjunction with the Western Union Foundation, we launched a $50million, five-year initiative to provide education and economic opportunity tomigrant families around the world. The Western Union Our World, Our FamilyProgram will provide tools to help family improve their language skills, managetheir personal finances, and take better advantage of economic opportunities.

We have also focused our efforts to raise brand awarenessamong specific migrant groups through targeted, ethnic marketing. Some examplesof recent local marketing events include: a pan-gulf campaign to celebrate Ramadan;sponsorship of the FBA European Basketball Championship in Spain; and theback-to-school promotion in Africa, where receivers are given essential schoolsupplies with each transaction.

Our efforts to support the Western Union brand are going onquite literally all over the world. Take, for example, a rural area of India,north of the city of Bangladore, near [my store]. During our recent trip, on aSaturday, 760 India Post workers put on Western Union T-shirts and paradedthrough the streets, handing out pamphlets on making money transfers. When youwitness as I did 760 postal workers forming a sea of Western Union yellow inrural India, you understand the power of our brand.

Brand awareness among Indians living in the U.K. was just41% in 2002, and in 2007 jumped to 98%. Brand awareness of Indonesians livingat Hong Kong was just 1% in 2004, and has leaped to 87% in 2007. The power ofthe Western Union brand and strong, localized, ethnic marketing will continueto drive growth for Western Union.

Our ethnic marketing efforts also paid off recently inFrance, where our Western Union gold card was recognized with the country’sleading professional communications award called the GoldTop Com. Our successful gold card program now has over 9 million cards inthe hands of our customers in 65 countries.

We were also recognized by the Direct Marketing Associationduring its recent meeting in Chicago with a Silver Apple award for our serviceexcellence program in Europe.

On the convenience front, we are utilizing our Western Unionclick cash offering as a new away for Google to make payments. Google needed asolution to pay commissions to publishers participating in their AdSenseadvertising program in countries where sending and cashing a check is time-consuming,unreliable, and expensive for recipients. Western Union's technology andextensive physical distribution was the answer.

Today, Google uses Western Union click cash to make paymentsto publishers in Argentina, Chile, China, Colombia, Malaysia, Pakistan, Peru,Philippines, and Romania. The cash is available to the recipient within minutesof the payment being processed by Google and can be picked up at any WesternUnion location in the publisher’s country.

Turning now to new technologies and services, last week weannounced that Western Union joined forces with the GSMA, the global tradeassociation with 700 mobile phone operators, including Smart and Globe in thePhilippines, and [Varti] in India. The mobile operators in GSMA’s membership serve2.6 billion customers, which is 82% of the world’s mobile phone users.

Western Union and the GSMA are developing a commercial andtechnical framework that mobile operators can use to deploy services thatenable customers to send and receive money transfers using their mobile phones.These transactions will be low denominations, high frequency money transfers.

Western Union is in a unique position to build this market.We already have all the necessary components, extensive compliance capabilitiesand regulatory knowledge, the ability to handle cross-border and intra-countrytransactions, an expansive physical agent footprint worldwide for putting cashin and taking money out, and the trust that customers have in the Western Unionbrand to get the money their safely.

The mobile money transfer target consumer represents a new,adjacent market for Western Union; a consumer who has the need for morefrequent, lower principal transactions. The mobile money transfer marketpresents an exciting long-term opportunity in the coming three to five years.

On the micro-lending front, we continue to explore theviability of this new offering. Initially, the loans would like be small dollaramounts. The consumers for loans of this size often have no formal credithistory and are thus overlooked by most financial institutions. That’s whereWestern Union is different.

These unbanked, or under-served customers are regular usesof our remittance services. We are taking a look at the logistics, includingdetermining the reliability of our scoring methods and talking to a number ofpotential partners. It is our intention that these partners would underwritethe loans and thus carry the risk on their balance sheet.

Before turning the call over to Scott, I would like toreflect for a moment on Western Union's first full year as a public company. Itwas a year and three weeks ago that we began trading on the New York StockExchange as WU. We have accomplished a lot since then. We have establishedourselves as an independent, public company; complemented our leadership withnew senior talents; acquired and integrated Pago Facil, opened the Asiaregional operating center, launched three new Westernunion.com countries,implemented a strategy that will successfully restore consumer confidence insending money to Mexico, turned Vigo profitable and launched Vigo service inItaly, passed the 320,000 agent location mark, on our way to 325,000, launchedWestern Union Our World, Our Family as a tangible way to give back to the peoplewe serve.

There are a lot of people involved in this effort and Iwould like to acknowledge Western Union's 6,000 employees and our worldwideagents for all of their hard work during our first year as a public company.

Our first year has had its challenges, to be sure, but weare pushing hard on our core business and some of our initiatives, our newinitiatives, are really gaining traction. Revenue growth is accelerating,margins are strong, cash flow is robust. We are 100% focused on driving the nextphase of growth and building shareholder value.

With that said, I will now turn the call over to Scott, whowill review third quarter financial performance and 2007 outlook in greaterdetail. Scott.

Scott Scheirman

Thank you, Christina. Revenue for the third quarter was $1.3billion, up 10%. Of this figure, $18 million was contributed by Pago Facil and$16 million came from the Euro. The revenue growth this quarter was driven byimproving consumer-to-consumer segment results. C-to-C revenue growth was 10%on transaction growth of 15%. International consumer-to-consumer revenueincreased 16%, while transactions were up 20%. As Christina mentioned, our pureinternational C-to-C business, that piece excluding U.S. originatingtransactions, posted revenue and transaction growth of 23% and 29%respectively.

Full year price reductions look like they will be about 3.3%of total Western Union revenue.

The consumer-to-business segment increased revenue 14% ontransaction growth of 71%. Operating margin in the segment remained strong at31%, excluding the non-cash charge, or 29% reported.

In the third quarter, we recorded the previously discussed$22 million expense related to the required quick vest of stock options andawards as a result of the KKR First Data deal.

Let me provide you with some color on where the $22 millionexpense is recorded. The split is one-third in cost of services and two-thirdsin SG&A. When looking at the segments, the split is 85% in theconsumer-to-consumer segment, 13% to the consumer-to-business segment, and 2%in corporate and other.

Third quarter operating income on a GAAP basis was $330million, a decline of 2% compared to third quarter 2006. On an apples-to-applesbasis, operating income grew 6% when excluding $18 million and $14 million ofincremental public company expenses in third quarter 2007 and 2006respectively, and the $22 million non-cash charge.

When comparing third quarter 2007 to last year’s thirdquarter, remember that in addition to the non-cash charge, third quarter 2007included an incremental $4 million of public company expenses and $46 millionof incremental interest expense.

This quarter will be the last time it will be necessary tobreak out public company expenses since we now have four quarters as a publiccompany for the purposes of prior period comparisons.

On the margin front, operating income margin was veryhealthy at 28.0%, excluding the $22 million non-cash charge, or 26.3% on areported basis. We continue to leverage our scale and improve our coststructure. Going forward, our goal is to achieve strong profitability whilemaintaining the appropriate level of investment in the business for futuregrowth.

Also on margin, it is important to note that ourinternational operating income margin has improved as we continue to gainscale. In fact, for 2007, we expect the international C-to-C operating marginto be in the mid-20s.

Our tax rate was 30% in the third quarter, compared to 32%in the third quarter of 2006. We are estimating a full-year tax rate ofapproximately 30%. Increased foreign derived profits compared to U.S. derivedprofits have helped lower our overall effective tax rate.

Year-to-date cash flow from operations are strong at $883million and we remain on track to deliver full-year cash flow of more than $1billion.

Capital expenditures in the third quarter were $54 millionand are $122 million year-to-date. We still expect total 2007 capitalexpenditures to be less than $200 million.

During the quarter, Western Union repurchased $300 millionof the company’s shares at an average price of $19.59 per share, and we havenow purchased $601 million of the company’s shares. We continue to believe ourstock represents a real value at these levels and we intend to be an active purchaserin the open market from time to time.

Let me clarify the potential dilutive impact from the changeof control of First Data. First, all of the outstanding options that were inthe money have been factored in our fully diluted shares outstanding since wewent public in September 2006, whether they were vested or not.

Second, the quick vest that resulted when the deal closedhas in itself caused dilution of less than one-fourth of a cent. Any futuredilution from this quick vesting will be the result of the rate at which optionholders exercise options net of the number of shares we buy back with theproceeds from the exercise. We will monitor this closely.

Today, our cash priorities remain to invest to grow thebusiness, make acquisitions, and return capital to shareholders, primarilythrough stock buy back. As you know, we have $400 million left under thecurrent board authorized buy-back and anticipate going to the board in thefuture for additional authorizations.

Our 2007 earnings per share guidance assumes diluted sharesoutstanding of approximately 772 million shares.

With the credit crunch in the news recently, we wanted touse this quarter’s conference call to discuss any exposure Western Union has tothe credit markets. The short answer is very little. Western Union participatesin the money order business by offering Western Union branded money orders.However, we do not carry the full balances on our balance sheet.

You will, however, see on our balance sheet settlementassets related to our business. There is very little exposure in these assetsdue to the recent credit market issues.

As of September 30th, our total settlement asset balance was$1.4 billion, of which $378 million is cash, $879 million is agent receivables,and $154 million is highly rated municipal bonds.

We are pleased with the results of this past quarter and thetrends within the business. We now expect full year revenue growth of 10%. Wealso anticipate GAAP earnings per share in the range of $1.09 to $1.11. Thisrange now includes the $0.02 impact from the non-cash charge and assumes afull-year tax rate of approximately 30%.

Please note when we originally issued our earnings per shareguidance, it did not include the $0.02 impact from the non-cash charge.

In summary, we are pleased to have delivered financial andoperating results in line with our expectations. Western Union has strong cashflows and we are well-positioned to invest in the future and return value toour shareholders.

Carol, with that, we are ready for the first question.

Question-and-AnswerSession

Operator

(Operator Instructions) Your first question comes from theline of Craig Maurer with Calyon. Please proceed, sir.

Craig J. Maurer -Calyon Securities

Good morning. I was hoping you could discuss two items; one,how you view the continued extreme weakness in the housing market as it relatesto your business; and two, in relation to the addition of Western Union inCanada, what other geographies around the world that Western Union participatesdo you feel might be basically primed for your participation? Thanks.

Christina A. Gold

Thank you very much, Craig. Just in terms of the housingmarket, clearly we have -- we look at our business in terms of the 200countries and really assess all of the risks around the world. And as we lookat the issue in the United States, it has had some impact but we have felt thisimpact for a period of time, so we feel very comfortable in our projections andwhere we are going for the remainder of 2007 and confidence with the guidancethat we’ve given. I think we have a portfolio that is large enough to balanceoff the risks.

In terms of the Wal-Mart relationship, we do have anotherrelationship with Wal-Mart in Argentina and we are always interested in talkingto people about becoming a member of the Western Union family, but we wouldonly let you know at some point when that happens and it actually occurs.

Craig J. Maurer -Calyon Securities

Thank you.

Operator

Your next question comes from the line of Elizabeth Grausamwith Goldman Sachs. Please proceed.

Elizabeth W. Grausam- Goldman Sachs

Thank you. You guys had some pretty significant agentrenewals and wins this quarter, including Safeway, K-Mart, and Wal-Mart, yetyour margin outperformed certainly my expectations and your count backs reallydidn’t perk up at all in the quarter, relative to where we thought.

Can you just make some comments on how you feel about thepricing dynamics and your agent renewals, and whether or not they have actuallybeen a little bit better than your expectations? Because it certainly feelslike it, relative to our estimates.

Christina A. Gold

No, I think we feel very confident in terms of our agentrelationships and the power of the Western Union brand and really what we bringto an agent. So we have not seen a real issue there in terms of renewals and weare delighted to have the Safeway contract signed and also the K-Mart and thenmoving into Sears. So for us, and also as you saw, even with our relationshipin Singapore, it actually will give us a better level of profitability in ourbusiness. So we feel very good about where we stand and our CapEx is rightwhere we expected it to be, because all of these contracts were factored intoour numbers.

Scott, maybe you’d like to add a little color to that.

Scott Scheirman

We’re clearly signing all the agents we wanted to resign andsigning new business, and we project our capital expenditures will be less than$200 million, but we’re tracking exactly where we expected.

Christina A. Gold

And you know, oneother thing I just want to add; one of the things that we’ve always said isthat we have discipline in our resigning, and even as we bring on new agents,like Wal-Mart, we do have a very disciplined approach to the financial returnfor the company.

Elizabeth W. Grausam- Goldman Sachs

Great, and then, just on the strategic side, Christina, itcertainly feels like there’s a much firmer focus on the innovation at WesternUnion now, with your GSMA announcement, obviously Google as well, in this pressrelease. Can you talk about management’s focus now that you’ve moved throughsome of the real cyclical downturn in the U.S. market? Do you feel that thereis a better focus internally on looking forward and driving new growthopportunities in the business? And do you feel that you have the rightmanagement team now in place to really execute against that going into 2008.

Christina A. Gold

I feel really confident about our future and where we’regoing. I think that clearly we had some challenges in ’07, but we’ve worked ourway through them and it really shows the power of our team in being able toreally look at what we need to do in the marketplace to achieve our results,but also, our focus on innovation and looking at ways to really add more valueto the shareholders in terms of new products and new services for ourcustomers, that’s really a driving force for us in ’08, as we saw with the GSMAand the Yodlee announcement.

And also, with Gail coming on board and we have a fullcomplement of management, I think I’ve got the team, we’ve got thecapabilities, and we are really ready to roar into 2008.

Elizabeth W. Grausam- Goldman Sachs

Can these initiatives actually accelerate growth in 2008, oris it longer term?

Christina A. Gold

I think some of them are longer term. I think some of thethings in the C-to-B business will see traction in ’08, but I think if you lookat the GSMA, that’s much longer term and a lot of that is dependent also on themobile operators being able to put sort of M-wallets in the mobile phones, andthat’s going to take some time to really get traction.

Elizabeth W. Grausam- Goldman Sachs

Thank you.

Operator

Your next question comes from the line of James Kissane withBear Stearns. Please proceed.

James F. Kissane -Bear Stearns

Thanks, and good job, guys. Scott, could you provide alittle more insight in terms of the margin trends in the internationalbusiness? I think you said they were mid-20s, but where were they and where doyou think they can go?

Scott Scheirman

We are very pleased with our margins, both at the WesternUnion level and at the international level. Historically, as we’ve built ourscale in Europe and in Asia, each year we’ve seen our margins continue toimprove. On a go-forward basis, our goal is to have strong margins. We want tobalance investing in the business, the innovation things that we want to do.Knowing that we’re in 200 countries, we have a 17% market share, we want tocontinue to increase that.

But I also know margins represent a proxy in our businessfor cash flow and shareholder value, so our goal is to balance both of thoseand have strong margins on a go-forward basis.

James F. Kissane -Bear Stearns

Okay, but they are mid-20s today, right?

Scott Scheirman

Yes, mid-20s in 2007.

James F. Kissane -Bear Stearns

Can you just give us a sense where they were say three yearsago?

Scott Scheirman

Lower. But we continue to gain scale and gain leverage andwe’ll continue to work our margins and drive our business for growth andinvestment.

James F. Kissane -Bear Stearns

So with international growth somewhat faster as it is, youstill think you can maintain say a 27% or so margin?

Scott Scheirman

Yes, we want to have strong margins.

James F. Kissane -Bear Stearns

Okay, great, and just normalized CapEx, I mean, this yearyou said it will be less than $20 million. Last year was somewhat higher. Doyou think you get back to closer to $100 million?

Scott Scheirman

Right now, our view for 2008 is less than $200 million, andagain, we’re trying to balance signing new agents, investing in the business,and resigning agents. But we believe for 2008, we’ll be clearly less than $200million.

James F. Kissane -Bear Stearns

Okay, and just one last one; intra-quarter trends for U.S.to Mexico and domestic transactions?

Scott Scheirman

We’re very pleased with the Mexico business. It was up 7%for the quarter. We outperformed the market. As we look at the C-to-C businesseach month during the quarter, a very solid growth and we are very pleased withit.

James F. Kissane -Bear Stearns

Thank you.

Operator

Your next question comes from the line of Patrick Burtonwith Citigroup. Please proceed.

Patrick M. Burton -Citigroup

Good morning and congratulations as well. Christina, couldyou outline the steps you are going to take in the U.S. domestic business toget back from the negative 10 revenue this quarter to let’s say low singledigits sometime next year? Thanks.

Christina A. Gold

I think there’s a couple of things. One of the key issues wesee in the domestic business is our card not present transactions, and that’sabout, in terms of our transaction impact, it’s about 200 basis points. So weare working very aggressively with our team in terms of with the banks in termsof accepting those transactions, because that will be important for us to seethat improvement.

Also, we’ve done some testing in terms of marketing mix inthe U.S. and we’re seeing some things we feel can give us traction, so I thinkwe’ll continue to drive forward in terms of our marketing investments, lookingat that, and also remember that we did some pricing on the next day productearly in ’07 and so we’ll be lapping that in ’08, so that’s had a fairlydramatic impact on it this year, so we’ll see movement forward as we go into’08.

Patrick M. Burton -Citigroup

Thank you.

Operator

Your next question comes from the line of Kartik Mehta withFTN Midwest. Please proceed.

Kartik Mehta - FTNMidwest Securities

Thank you. Scott, I know at the beginning of yourpresentation, you indicated what you wanted to use free cash flow --investments, acquisitions, and share buy-back. As you look at the pipeline andyour opportunities, are there sufficient -- are there a lot of opportunitiesfor acquisitions, or do you think that based on the amount of free cash flowyou are generating, you’ll always be very active in buying back your shares,assuming the price is right?

Scott Scheirman

As we look at our acquisition pipeline, we do business in200 countries, so we are very focused internationally on acquisitions and wesee opportunities out there to buy companies. Also, you’ve got to take intoconsideration I’ve got over $1 billion of cash in my balance sheet I can usefor international acquisitions. So as we go forward, it’s going to be really acombination of investing in the business, acquiring companies, and thenreturning value back to our shareholders through stock buy-back, but there areopportunities out there and we want to take advantage of those at the righttime, at the right price.

Kartik Mehta - FTNMidwest Securities

It sounds like with that $1 billion plus, all the free cashflow you’re generating, you will -- it sounds like you will always be buyingback shares, or at least returning the money to shareholders in some way, someform.

Scott Scheirman

Yes, our goal is to return value to our shareholderssomeway, somehow, absolutely.

Kartik Mehta - FTNMidwest Securities

Christina, you talked a little bit about the domesticbusiness and maybe a portion of why it’s slow. How fast do you think the marketis growing? Do you think the market has also declined significantly -- specificWestern Union issue that’s hurting you right now?

Christina A. Gold

I think when we look at the domestic, it’s not a fast growerat all. I think we see it’s a flat to up a couple of points, so I think it’sreally a question of looking at that market and then positioning ourselves interms of mid-single digits. I think that will be very comfortable for us andfor our customers.

What we really want to do there is look at innovation aswell and see if there are other products and services, and that’s one of themandates that Gail is looking at, is how do we add more into that consumer toreally grow that business and that’s really where we have to go.

Kartik Mehta - FTNMidwest Securities

One last question on the Mexico market, obviously if youlook, compared to the second quarter, you are making strong progress. It soundslike pricing is going up, obviously. Are we at a point where you think pricehas stabilized and it will be difficult from here over the next six to eightmonths for prices to go up higher on that market? Or do you think there is anopportunity for that corridor to maybe see some increased pricing because ofthe stabilization?

Christina A. Gold

I think it’s very stable, as we look at it right now, andthe pricing has been stable really for most of the year, so as we look to that,I don’t see really prices going up or down. I just see really a status quo, butas we see the power of our brand and the work we’ve done in market, we seecontinued growth and moving towards positive revenue for Western Union, whichwe are very pleased to see. And, you know, we did beat the market.

Kartik Mehta - FTNMidwest Securities

Thank you very much.

Operator

Your next question comes from the line of ChristopherMammone with Deutsche Bank. Please proceed.

Christopher Mammone -Deutsche Bank

Thanks. Do you have for the quarter the revenue growth inagents over which Western Union had an ownership stake? And also the attachedcommission growth on that?

Christina A. Gold

You’re talking about the equity investments?

Christopher Mammone -Deutsche Bank

Yes.

Christina A. Gold

We don’t actually pull those out but they are all -- when Ilook at it, just from top of mind, they’re doing extremely well, the equityinvestments that we have. We’re pleased with that.

Christopher Mammone -Deutsche Bank

Okay, and also, Christina, could you maybe give us an updateon Westernunion.com?

Christina A. Gold

Westernunion.com continues to grow exceedingly well ininternational. Because of the fraud issue that we’ve had in the United States,we’ve been having some challenges but we are working very closely with thebanks and with our IT and technical people, and we hope to see that correctitself within the next couple of months.

Christopher Mammone -Deutsche Bank

Thanks.

Operator

Your next question comes from the line of Charles Murphywith Morgan Stanley. Please proceed.

Charles A. Murphy -Morgan Stanley

Thank you. Looking back over the past couple of years, itlooks like the third quarter is for some reason or other the most profitablequarter for the C-to-C business. Could you review if that’s true and why that’strue? Looking forward, should investors expect this type of margin from theC-to-C business over the next few quarters?

Christina A. Gold

I think if you look at the quarters, I think actually thefourth quarter is probably one that’s more profitable but it really dependsjust on mix of businesses as we go through a year. But obviously, as Scott saidearlier, our objective is to be 27 and plus in terms of margin, so we feel verygood about what’s been accomplished in the third quarter.

Again, with the up-tick in revenue, that all comes to drivethe profitability. Scott, I don’t know if you want to add something there.

Scott Scheirman

What I would add, Charlie, is as we move into the thirdquarter and especially move into the fourth quarter, you do see a little bit ofseasonality in the business. During the fourth quarter, there’s a lot ofsending around the holidays to loved ones, so we usually see a nice up-tick inthe revenue in the fourth quarter, and a little bit in the third quarter. Butour goal is to have strong margins as we move forward.

Charles A. Murphy -Morgan Stanley

And quickly, Scott, could you just review again what thetotal public company costs were in the third quarter of ’07?

Scott Scheirman

The third quarter of ’07, they’re about $18 million. Rightnow, we are on a run-rate. We think that will be a little bit less than $60million on a full-year basis.

Charles A. Murphy -Morgan Stanley

Okay. Thanks so much.

Operator

Your next question comes from the line of Tien-Tsin Huangwith J.P. Morgan. Please proceed.

Tien-Tsin Huang -J.P. Morgan

Thanks. Just as a follow-up to that, to the last question;the incremental public company costs, $4 million, does that compare to theincremental of 60 for the full year? Because I think you had $10 million in theprior year, correct?

Scott Scheirman

In the prior year, we had about $14 million. In the secondquarter, we had $10 million and we had about $18 million in the third quarter,so you kind of go through some peaks and valleys, depending upon how we spendmoney. But on a full year basis, we’ll be a little bit less than $60 million.

Tien-Tsin Huang -J.P. Morgan

Okay, got it. And then the -- I guess just -- I went back toyour original spin presentation. Is your long-term EPS growth still 12% to 14%and operating income growth of 10% to 12%?

Scott Scheirman

Yes, our long-term objectives are 10% to 12% revenue andprofit and 12% to 14% earnings per share, as our long-term objectives.

Tien-Tsin Huang -J.P. Morgan

Got it, because I was happy to see the bigger sharerepurchase. I’m just trying to, at least in terms of next year, sort of betterappreciate what’s going to drive the acceleration in operating income growthfrom the 6% reported in the third quarter.

Christina A. Gold

I think one of the key things is going to be the organicgrowth in revenue in the business, and just if you look at the strength of ourinternational business, at 20% transactions and 16% revenue, and the subset ofthat at 29 and 23, that’s one of the powerhouses. And as we see now Mexicocoming in, we’re getting stabilization and improvement in domestic, really allof our businesses are moving in the right direction and C-to-B is very strong,so I think that’s going to be a key component of that.

Tien-Tsin Huang -J.P. Morgan

Okay, and then thanks for sharing the international C-to-Cmargins. I guess just to also clarify, the margins in I remember Asia-Pac weresomewhat depressed due to some build-out costs. Is there still some room toimprove the margins there in the short-run?

Christina A. Gold

I think there’s -- what you see is as you get scale and asyou build the cycle of business, you see the margins improve. So we’re in themid-20s for the total of the international business and clearly in some of ourmarkets in Asia, we’re at a much more, a nascent stage.

If you look at India and China, it is only 5% of ourrevenue, so as they continue to build, we’ll see much more leverage on thebottom line.

Tien-Tsin Huang -J.P. Morgan

Okay, got it. Last quick question; the profitability on Vigo,any update there?

Christina A. Gold

Things are looking good. Scott’s been doing a great jobthere.

Scott Scheirman

Vigo, the profitability continues to improve. Q3 was betterthan Q2 and I think we reported last call, Q2 was better than Q1, so we continue to make theimprovements we need there and it’s not quite where we want it but we are on afast track of where we need to be, so we are very pleased with that.

Christina A. Gold

The other thing is that next year and as we go through theremainder of this year, we’ll be pushing harder into international rollout,which will also leverage some of our expenses as well.

Tien-Tsin Huang -J.P. Morgan

Terrific, thank you.

Gary Kohn

We have time for one more question, please.

Operator

Your final question comes from the line of Paul [Salmika] with [Willis N.] Management.Please proceed.

Paul Salmika - WillisN. Management

Good morning; two questions, one is if you could break outagain the allocation of the charge between cost of goods, SG&A? If it’s inthe press release, just direct me to that. I couldn’t spot it.

Second question, back in the first quarter you mentionedthat debt reduction was a priority and you said future growth was second andthird was returning capital to shareholders. And then you look for a $3 billiontarget by the end of the year. And then second quarter, you mentioned that thetarget was slightly higher than $3 billion. And now I don’t hear any mention ofdebt reduction at all. Have you changed these targets then? It looks like youhave changed the priorities, and can you tell me why?

Christina A. Gold

I’m going to pass it on to Scott, but just in terms of ourdata, I think we feel pretty comfortable in terms of what our level of debt is,because we wanted to maintain our ratings, so we’re very comfortable with that.But Scott can give you more color on that.

Scott Scheirman

On the debt, you’ll see on the balance sheet, we’re about$3.3 billion and that’s exactly where we want to be, so you won’t see, as apriority anymore for cash, any reduction of debt. We’ll keep that right around$3.3 billion and it has the credit ratings right where we want them.

On the allocation of the non-cash charge, about a third ofthat went to cost of services and about two-thirds of that went to SG&A.

Paul Salmika - WillisN. Management

And as far as why you stopped at 3.3 instead of going downto the 3?

Scott Scheirman

The $3.3 billion gives us the credit rating that we arelooking for, and so we are just trying to find the optimal leverage in ourbusiness on our balance sheet to move forward.

Paul Salmika - WillisN. Management

So what would the target be for leverage and how do youmeasure that?

Scott Scheirman

We’ve got good relationships with our rating agencies andwe’ve got targets in mind, but our goal is to be at that A-minus credit ratingand that’s where we’ll maintain it as we move forward.

Paul Salmika - WillisN. Management

Thank you.

Christina A. Gold

I just want to thank everybody for being on the call andagain, I want to thank all of our employees for a great quarter. We are poised,we’re ready and we’re really looking forward to the future and again, thank youfor being on the call and we look forward to talking to you early next year.Thank you.

Operator

Thank you for joining in today’s conference. You may nowdisconnect and have a wonderful day.

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