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The Western Union Company (NYSE:WU)

Q3 2007 Earnings Call

October 23, 2007 8:30 am ET

Executives

Gary Kohn - Vice President, Investor Relations

Christina A. Gold - President, Chief Executive Officer, Director

Scott Scheirman - Chief Financial Officer, Executive Vice President

Analysts

Craig J. Maurer - Calyon Securities

Elizabeth W. Grausam - Goldman Sachs

James F. Kissane - Bear Stearns

Patrick M. Burton - Citigroup

Kartik Mehta - FTN Midwest Securities

Christopher Mammone - Deutsche Bank

Charles A. Murphy - Morgan Stanley

Tien-Tsin Huang - J.P. Morgan

Paul Salmika - Willis N. Management

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Western Union earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Gary Kohn, Vice President of Investor Relations, Western Union. Please proceed, sir.

Gary Kohn

Thanks, Carol. Good morning, everybody. Welcome to Western Union’s third quarter 2007 conference call. Thanks for joining us today. Before turning the call over to Christina, I’ll take a moment to remind you that today’s call is being recorded and that our comments include forward-looking statements. I ask that you refer to the cautionary language in the earnings release and in Western Union's filings with the Securities and Exchange Commission, including the 2006 Form 10-K for additional information concerning factors that could cause actual results to differ materially from forward-looking statements.

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

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

Christina A. Gold

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

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

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

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

In terms of operating highlights in the third quarter, our international C-to-C business posted strong growth rates, with revenue up 16% and transactions up 20%. A subset of this business, those transactions originating 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 of our business accounts for nearly half of Western Union’s total revenue.

Our Mexico business showed improvement, with transaction growth rates continuing to accelerate to 7%. Revenue was down 1%, an improvement over the 7% decline we saw in the second quarter. There were no significant pricing actions implemented in Mexico during the quarter and revenue and transaction 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 brand outperforming the market. The domestic business showed sequential transaction improvement, with transactions down 4% in the third quarter and revenue down 10. Our long-term goal for this business is low single digit revenue growth.

The consumer-to-business, or C-to-B, segment posted revenue growth of 14% in the third quarter. We are very pleased with the progress we are making with Pago Facil. With nearly a full year after the acquisition, it’s on 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, we announced a partnership with Yodlee, a leading provider of online banking and bill payment solutions to financial institutions. This partnership will give participating banks’ online customers the option to make bill payments which post immediately to their account. That enables customers to better manage their resources and avoid late fees. It also gives Western Union, Yodlee, and our bank partners a revenue stream which has never existed before.

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

As you know, underlying our efforts to build long-term value for Western Union shareholders are our four key strategies; one, to expand and diversify global distribution; two, to build our brand and enhance the consumer experience; three, to develop consumer choice and convenience; and four, to develop 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 business leaders and discussed global migration trends. While there, we also visited our new regional operations center, where we welcome 80 new employees who collectively speak 17 languages. I also spent time discussing the business opportunities with our agents.

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

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

We also made a stop in India to dedicate the country’s location number 45,000. While there, I met with regulators, agents, and employees. India is a very important market as 29 million Indians currently live abroad.

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

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

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

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

Within this global money transfer market are especially promising, high-volume geographies for Western Union. Take, for example, Dubai to Bangladesh. As you know, Dubai is experiencing tremendous growth, which is supported by a large migrant workforce. Reflecting this dynamic in Dubai, remittances from the United Arab Emirates to Bangladesh jumped by nearly 57% in the 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 signed a new agent, Caixa Central de Credito Agricola Mutuo, one of the top financial institutions in Portugal. We renewed our relationship with the Portuguese Post Office, 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 220 locations over time.

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

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

To the north, we signed a new agreement with Wal-Mart in Canada. We plan to be in all 280 Wal-Mart stores in Canada. The pricing and commission 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 compliance efforts, made us the logical choice.

In the area of intra-country distribution, in Chile we signed Tur-Bus. With this agreement, Western Union intra-country money transfer services 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 agent locations by the end of the year.

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

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

Our efforts to support the Western Union brand are going on quite 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 a Saturday, 760 India Post workers put on Western Union T-shirts and paraded through the streets, handing out pamphlets on making money transfers. When you witness as I did 760 postal workers forming a sea of Western Union yellow in rural India, you understand the power of our brand.

Brand awareness among Indians living in the U.K. was just 41% in 2002, and in 2007 jumped to 98%. Brand awareness of Indonesians living at Hong Kong was just 1% in 2004, and has leaped to 87% in 2007. The power of the Western Union brand and strong, localized, ethnic marketing will continue to drive growth for Western Union.

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

We were also recognized by the Direct Marketing Association during its recent meeting in Chicago with a Silver Apple award for our service excellence program in Europe.

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

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

Turning now to new technologies and services, last week we announced that Western Union joined forces with the GSMA, the global trade association with 700 mobile phone operators, including Smart and Globe in the Philippines, and [Varti] in India. The mobile operators in GSMA’s membership serve 2.6 billion customers, which is 82% of the world’s mobile phone users.

Western Union and the GSMA are developing a commercial and technical framework that mobile operators can use to deploy services that enable 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 capabilities and regulatory knowledge, the ability to handle cross-border and intra-country transactions, an expansive physical agent footprint worldwide for putting cash in and taking money out, and the trust that customers have in the Western Union brand 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 more frequent, lower principal transactions. The mobile money transfer market presents an exciting long-term opportunity in the coming three to five years.

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

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

Before turning the call over to Scott, I would like to reflect for a moment on Western Union's first full year as a public company. It was a year and three weeks ago that we began trading on the New York Stock Exchange as WU. We have accomplished a lot since then. We have established ourselves as an independent, public company; complemented our leadership with new senior talents; acquired and integrated Pago Facil, opened the Asia regional operating center, launched three new Westernunion.com countries, implemented a strategy that will successfully restore consumer confidence in sending money to Mexico, turned Vigo profitable and launched Vigo service in Italy, passed the 320,000 agent location mark, on our way to 325,000, launched Western Union Our World, Our Family as a tangible way to give back to the people we serve.

There are a lot of people involved in this effort and I would like to acknowledge Western Union's 6,000 employees and our worldwide agents 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 we are pushing hard on our core business and some of our initiatives, our new initiatives, are really gaining traction. Revenue growth is accelerating, margins are strong, cash flow is robust. We are 100% focused on driving the next phase of growth and building shareholder value.

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

Scott Scheirman

Thank you, Christina. Revenue for the third quarter was $1.3 billion, 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 by improving consumer-to-consumer segment results. C-to-C revenue growth was 10% on transaction growth of 15%. International consumer-to-consumer revenue increased 16%, while transactions were up 20%. As Christina mentioned, our pure international C-to-C business, that piece excluding U.S. originating transactions, 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% on transaction growth of 71%. Operating margin in the segment remained strong at 31%, 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 and awards as a result of the KKR First Data deal.

Let me provide you with some color on where the $22 million expense is recorded. The split is one-third in cost of services and two-thirds in SG&A. When looking at the segments, the split is 85% in the consumer-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 $330 million, a decline of 2% compared to third quarter 2006. On an apples-to-apples basis, operating income grew 6% when excluding $18 million and $14 million of incremental public company expenses in third quarter 2007 and 2006 respectively, and the $22 million non-cash charge.

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

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

On the margin front, operating income margin was very healthy at 28.0%, excluding the $22 million non-cash charge, or 26.3% on a reported basis. We continue to leverage our scale and improve our cost structure. Going forward, our goal is to achieve strong profitability while maintaining the appropriate level of investment in the business for future growth.

Also on margin, it is important to note that our international operating income margin has improved as we continue to gain scale. In fact, for 2007, we expect the international C-to-C operating margin to 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 of approximately 30%. Increased foreign derived profits compared to U.S. derived profits have helped lower our overall effective tax rate.

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

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

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

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

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

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

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

With the credit crunch in the news recently, we wanted to use this quarter’s conference call to discuss any exposure Western Union has to the credit markets. The short answer is very little. Western Union participates in 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 settlement assets related to our business. There is very little exposure in these assets due 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 the trends within the business. We now expect full year revenue growth of 10%. We also anticipate GAAP earnings per share in the range of $1.09 to $1.11. This range now includes the $0.02 impact from the non-cash charge and assumes a full-year tax rate of approximately 30%.

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

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

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line 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 relates to your business; and two, in relation to the addition of Western Union in Canada, what other geographies around the world that Western Union participates do you feel might be basically primed for your participation? Thanks.

Christina A. Gold

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

In terms of the Wal-Mart relationship, we do have another relationship with Wal-Mart in Argentina and we are always interested in talking to people about becoming a member of the Western Union family, but we would only 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 Grausam with Goldman Sachs. Please proceed.

Elizabeth W. Grausam - Goldman Sachs

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

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

Christina A. Gold

No, I think we feel very confident in terms of our agent relationships and the power of the Western Union brand and really what we bring to an agent. So we have not seen a real issue there in terms of renewals and we are delighted to have the Safeway contract signed and also the K-Mart and then moving into Sears. So for us, and also as you saw, even with our relationship in Singapore, it actually will give us a better level of profitability in our business. So we feel very good about where we stand and our CapEx is right where we expected it to be, because all of these contracts were factored into our 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 and signing 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, one other thing I just want to add; one of the things that we’ve always said is that 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 return for the company.

Elizabeth W. Grausam - Goldman Sachs

Great, and then, just on the strategic side, Christina, it certainly feels like there’s a much firmer focus on the innovation at Western Union now, with your GSMA announcement, obviously Google as well, in this press release. Can you talk about management’s focus now that you’ve moved through some of the real cyclical downturn in the U.S. market? Do you feel that there is a better focus internally on looking forward and driving new growth opportunities in the business? And do you feel that you have the right management 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’re going. I think that clearly we had some challenges in ’07, but we’ve worked our way through them and it really shows the power of our team in being able to really 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 value to the shareholders in terms of new products and new services for our customers, that’s really a driving force for us in ’08, as we saw with the GSMA and the Yodlee announcement.

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

Elizabeth W. Grausam - Goldman Sachs

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

Christina A. Gold

I think some of them are longer term. I think some of the things in the C-to-B business will see traction in ’08, but I think if you look at the GSMA, that’s much longer term and a lot of that is dependent also on the mobile operators being able to put sort of M-wallets in the mobile phones, and that’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 with Bear Stearns. Please proceed.

James F. Kissane - Bear Stearns

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

Scott Scheirman

We are very pleased with our margins, both at the Western Union level and at the international level. Historically, as we’ve built our scale in Europe and in Asia, each year we’ve seen our margins continue to improve. On a go-forward basis, our goal is to have strong margins. We want to balance 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 to continue to increase that.

But I also know margins represent a proxy in our business for cash flow and shareholder value, so our goal is to balance both of those and 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 years ago?

Scott Scheirman

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

James F. Kissane - Bear Stearns

So with international growth somewhat faster as it is, you still 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 year you said it will be less than $20 million. Last year was somewhat higher. Do you think you get back to closer to $100 million?

Scott Scheirman

Right now, our view for 2008 is less than $200 million, and again, 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 $200 million.

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 business each month during the quarter, a very solid growth and we are very pleased with it.

James F. Kissane - Bear Stearns

Thank you.

Operator

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

Patrick M. Burton - Citigroup

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

Christina A. Gold

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

Also, we’ve done some testing in terms of marketing mix in the U.S. and we’re seeing some things we feel can give us traction, so I think we’ll continue to drive forward in terms of our marketing investments, looking at that, and also remember that we did some pricing on the next day product early in ’07 and so we’ll be lapping that in ’08, so that’s had a fairly dramatic 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 with FTN Midwest. Please proceed.

Kartik Mehta - FTN Midwest Securities

Thank you. Scott, I know at the beginning of your presentation, you indicated what you wanted to use free cash flow -- investments, acquisitions, and share buy-back. As you look at the pipeline and your opportunities, are there sufficient -- are there a lot of opportunities for acquisitions, or do you think that based on the amount of free cash flow you 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 in 200 countries, so we are very focused internationally on acquisitions and we see opportunities out there to buy companies. Also, you’ve got to take into consideration I’ve got over $1 billion of cash in my balance sheet I can use for international acquisitions. So as we go forward, it’s going to be really a combination of investing in the business, acquiring companies, and then returning value back to our shareholders through stock buy-back, but there are opportunities out there and we want to take advantage of those at the right time, at the right price.

Kartik Mehta - FTN Midwest Securities

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

Scott Scheirman

Yes, our goal is to return value to our shareholders someway, somehow, absolutely.

Kartik Mehta - FTN Midwest Securities

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

Christina A. Gold

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

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

Kartik Mehta - FTN Midwest Securities

One last question on the Mexico market, obviously if you look, compared to the second quarter, you are making strong progress. It sounds like pricing is going up, obviously. Are we at a point where you think price has stabilized and it will be difficult from here over the next six to eight months for prices to go up higher on that market? Or do you think there is an opportunity for that corridor to maybe see some increased pricing because of the stabilization?

Christina A. Gold

I think it’s very stable, as we look at it right now, and the 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, but as we see the power of our brand and the work we’ve done in market, we see continued growth and moving towards positive revenue for Western Union, which we are very pleased to see. And, you know, we did beat the market.

Kartik Mehta - FTN Midwest Securities

Thank you very much.

Operator

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

Christopher Mammone - Deutsche Bank

Thanks. Do you have for the quarter the revenue growth in agents over which Western Union had an ownership stake? And also the attached commission 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 I look at it, just from top of mind, they’re doing extremely well, the equity investments that we have. We’re pleased with that.

Christopher Mammone - Deutsche Bank

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

Christina A. Gold

Westernunion.com continues to grow exceedingly well in international. 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 the banks and with our IT and technical people, and we hope to see that correct itself within the next couple of months.

Christopher Mammone - Deutsche Bank

Thanks.

Operator

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

Charles A. Murphy - Morgan Stanley

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

Christina A. Gold

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

Again, with the up-tick in revenue, that all comes to drive the 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 third quarter and especially move into the fourth quarter, you do see a little bit of seasonality in the business. During the fourth quarter, there’s a lot of sending around the holidays to loved ones, so we usually see a nice up-tick in the revenue in the fourth quarter, and a little bit in the third quarter. But our goal is to have strong margins as we move forward.

Charles A. Murphy - Morgan Stanley

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

Scott Scheirman

The third quarter of ’07, they’re about $18 million. Right now, we are on a run-rate. We think that will be a little bit less than $60 million 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 Huang with 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 the incremental of 60 for the full year? Because I think you had $10 million in the prior year, correct?

Scott Scheirman

In the prior year, we had about $14 million. In the second quarter, 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 spend money. 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 to your 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 and profit 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 share repurchase. I’m just trying to, at least in terms of next year, sort of better appreciate what’s going to drive the acceleration in operating income growth from the 6% reported in the third quarter.

Christina A. Gold

I think one of the key things is going to be the organic growth in revenue in the business, and just if you look at the strength of our international business, at 20% transactions and 16% revenue, and the subset of that at 29 and 23, that’s one of the powerhouses. And as we see now Mexico coming in, we’re getting stabilization and improvement in domestic, really all of 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-C margins. I guess just to also clarify, the margins in I remember Asia-Pac were somewhat depressed due to some build-out costs. Is there still some room to improve the margins there in the short-run?

Christina A. Gold

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

If you look at India and China, it is only 5% of our revenue, so as they continue to build, we’ll see much more leverage on the bottom 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 job there.

Scott Scheirman

Vigo, the profitability continues to improve. Q3 was better than Q2 and I think we reported last call, Q2 was better than Q1, so we continue to make the improvements we need there and it’s not quite where we want it but we are on a fast 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 the remainder 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 - Willis N. Management

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

Second question, back in the first quarter you mentioned that debt reduction was a priority and you said future growth was second and third was returning capital to shareholders. And then you look for a $3 billion target by the end of the year. And then second quarter, you mentioned that the target was slightly higher than $3 billion. And now I don’t hear any mention of debt reduction at all. Have you changed these targets then? It looks like you have 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 our data, 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 a priority 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 of that went to cost of services and about two-thirds of that went to SG&A.

Paul Salmika - Willis N. Management

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

Scott Scheirman

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

Paul Salmika - Willis N. Management

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

Scott Scheirman

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

Paul Salmika - Willis N. Management

Thank you.

Christina A. Gold

I just want to thank everybody for being on the call and again, 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 you for 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 now disconnect and have a wonderful day.

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