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Western Union Co. (NYSE:WU)

Q4 2007 Earnings Call

January 31, 2008 8.30 a.m. ET

Executives

Gary Kohn – Vice President of Investor Relations

Christina Gold - President and Chief Executive Officer

Scott Scheirman – Executive Vice President and Chief Financial Officer 

Analysts

Elizabeth Grausam – Goldman Sachs & Co 

Glenn Fodor – UBS

Gregory Smith – Merrill Lynch

Drew Tannenbaum – Morgan Stanley

James Kissane – Bear, Stearns & Co. 

Joshua Elving – Piper Jaffray

Glenn Greene – Oppenheimer & Co. 

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Western Union Company earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Gary Kohn, Vice President of Investor Relations. Please proceed, sir.

Gary Kohn

Thanks, (Shikwana). Good morning, everybody and welcome to the Western Union fourth quarter 2007 conference call. Thank you for joining us. Before turning the call over to Christina, I would like to 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 the 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 Gold

Thank you, Gary and welcome, everyone. As you have seen this morning, Western Union reported a solid fourth quarter in line with our expectations. This is our first full calendar year as a public company and I am proud of our accomplishments. In particular, revenue growth accelerated during the year, up 12% in the fourth quarter and 10% for the full year. Driving these results were the combined strong growth of our international C-to-C business which contributes nearly two thirds of our revenue and a 13% revenue growth of our C-to-B segment. Supporting this growth was Pago Facil's overachievement of its first year business plan.

We achieved full year GAAP EPS of $1.11 or $1.13 excluding the third quarter non-cash stock compensation charge. We continue to drive on the innovation front to ensure that we are positioned to take advantage of long-term opportunities. We've built on our strong financial position and we generated $1.1 billion of cash flows from operations during the year. We achieved a healthy 27% full year operating margin and we maintained a solid balance sheet with excellent financial flexibility. Once again, our results demonstrate that Western Union is a diverse global company benefiting from strong migration trends and remittance needs.

In the fourth quarter, the international transactions that originate outside of the United States accounted for 54% of our total revenue compared to 48% in the fourth quarter last year. This subset is the fastest growing component of our business, growing revenue 23% and transactions 29% in 2007.

Our domestic business experienced a challenging year, and we do not expect major improvement in this business over the next 12 months given the current US economic conditions impacting our customers. However, we do plan to invest prudently in brand awareness, customer acquisitions, loyalty and retention programs like the Gold Card, and to improve westernunion.com.

In Mexico, which now ranks as the third largest remittance market in the world, our transaction growth rates continue to outpace the growth reported by Banco de Mexico. Also, the difference between the revenue and transaction growth rate narrowed in the quarter, further reinforcing that our pricing is at the right levels. We have made no significant price decreases in the Mexico business since early 2007. Our strategy to promote our three brands, Western Union, Vigo, and Orlandi Valuta and to expand distribution is helping us in Mexico.

Accordingly, we expect to have modest growth as we continue to gain market share in 2008. In the fourth quarter, and throughout the year, we furthered our strong position in many of the world's leading remittance markets. We have been in the United Kingdom for nearly two decades. In 2007, we nearly doubled our presence to 7,000 locations through our existing FEXCO relationship and with two additional equity agents, Costa and Finint. The focus on expanding our distribution in this market and investing in brand awareness is paying off. Transactions grew by 30% in 2007. We will reopen in South Africa after a six year absence. We have received all the regulatory approvals and will be announcing our rollout plans shortly.

In India, the world's largest receive country; with $27 billion in annual remittances we recently celebrated the opening of our 50,000th agent location with the State Bank of India. In the quarter, revenue was up 45% and transactions were up 68%.

In China, which passed Mexico to become the world's second largest remittance country with $26 billion in annual remittances, we posted solid growth with revenue up 37% and transactions up 24% in the fourth quarter. And we are delighted to have welcomed China Everbright Bank as an agent with their 300 branch locations across 30 cities in China.

Combined, India and China now represent 5% of Western Union's annual revenue. That's up from 4% in 2006 and 3% in 2005. There is a lot of opportunity in these two countries and we are very well positioned for continued growth.

The Philippines is the fourth largest received country in the world with an estimated $17 billion in annual remittances representing 13% of the country's GDP. We have over 7,000 agent locations in the Philippines and in 2007 our inbound remittance principal grew over 40%, well ahead of the healthy market growth of 11%.

In addition to our outstanding inbound business, by leveraging our existing network, we have built a successful intraservice in this market and in the near future we will further complement our network with mobile offerings.

Underlying our efforts to build value for Western Union shareholders are 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 the fourth quarter we made progress in each of these areas. We exceeded our expectation by finishing the year with more than 335,000 agent locations, a milestone we are very proud of.

We added Penn Traffic, a supermarket operator in the Eastern United States with over 100 locations. They previously offered services through a competitor. We formed a new relationship with the Bangladesh Post, adding nearly 450 locations to offer even more convenience to our customers in this important country.

Looking now at renewals, we are very excited to have extended our relationships with several important post offices including Kenya Post Office Savings Bank, Correo Argentino, the Argentinean post office, and Deutsche Postbank. We signed a ten-year renewal with Grupo Vimenca with over 200 locations in the Dominican Republic. And additionally, we have made an equity investment in Grace Kennedy, our agent with a strong presence in Jamaica and other Caribbean islands.

To celebrate our new agreements with Grace Kennedy and Grupo Vimenca, Scott and I recently visited Jamaica and the Dominican Republic to meet with the CEOs, tour the markets and review our long-term plans. And on a personal note, I can say that it is gratifying to have these kinds of long lasting business relationships.

In the United States, we extended our relationship with TCF Bank which covers 360 locations across seven states. Also, recently in the US we extended two significant supermarket relationships. In November, we renewed our 22 year history with Kroger, insuring that Western Union continues to be conveniently offered to our customers at the counter in more than 2,400 Kroger locations. Eight weeks later, we extended our agreement with Delhaize America, covering more than 1,100 locations. Kroger and Delhaize are especially significant renewals for Western Union. With these signings we maintain our position of having long-term agreements with eight of the ten largest supermarkets in the United States.

We remain committed to promoting the brand around the world and developing an even more precise customer centered approach. We launched several new US outbound holiday promotions to key markets in response to consumer feedback for more frequent and immediate reward and recognition programs. The focus marketing and grass root events introduced our Africa Cash, Caribbean Cash and Philippines Home for the Holidays promotions.

In the fourth quarter, to connect more directly with our customers, we communicated with Gold Card customers via text messages and direct mail in 15 different languages, based on individual customer preference. At year-end we have 9.5 million active Gold Cards up from 8 million cards in 2006. This program is becoming even more global with cards issued across more than 60 international countries.

We have been offering continuity of income insurance as a retention tool in Hong Kong, Malaysia and Austria. Based on the success we have seen with this program, we continue to expand into other major countries. We have been recognized in the United States as a top 100 brand. I am pleased to say that we were honored with a similar recognition in the Ukraine, the Choice Brand of the Year Award.

Western Union continues to invest to promote its brand in high growth markets. In China and India, Western Union continues to enjoy high brand awareness which contributes in part to our strong growth in both China and India. In addition to the ongoing investments we make in our brand, we are focused on supplementing our core money transfer business with additional choices and more convenient ways to use Western Union services.

In Canada, we launched a new service with Scotiabank, connecting customers to our 335,000 physical locations. Customers needing to send money can initiate a transaction in bank branches or via Scotiabank’s on-line service for payout in any Western Union location worldwide.

In 2007, we grew our non-domestic, intra-country money transfer business to over $80 million in revenue on transaction growth exceeding 30%. Together with H&R Block, we recently launched a pilot to offer Western Union money transfer service using the popular H&R Block Emerald Prepaid MasterCard. To make it simple and convenient for customers to send money over the internet, we continue to expand westernunion.com. Westernunion.com contributes about 2% of total revenue and is available in 12 countries. 20% of westernunion.com's revenue originates outside of the United States and this revenue stream grew 45% in Q4.

We pushed hard on the innovation front this year. Last week, as part of our GSMA initiative, we joined forces with two different mobile telecom operators in the Philippines, Smart Communications and Globe Telecom. We will go live with these two pilots in the second quarter and are excited about having offerings that address an adjacent market. For those consumers with the need to conduct more frequent, lower principal transactions, the mobile money transfer market presents an exciting opportunity in the coming three to five years.

Smart, an offering designed to serve customers with bank accounts, ended 2007 with more than 30 million subscribers and already has a mobile financial service platform linking bank accounts to mobile handsets. The Globe offering will target cash based customers. Globe already offers its more than 19 million subscribers an established mobile wallet offering called G-Cash.

Also, under the GSMA relationship, we formed an agreement with the largest Indian telecom company Bharti Airtel to jointly develop and pilot a mobile money transfer service for India. Bharti Airtel has more than 50 million mobile phone customers.

We are excited about the potential of these agreements and the quick progress we are making with our newly formed relationship with the GSMA, and the interest from other mobile operators remains very high. We are working in Hong Kong with PrimeCredit, a subsidiary of Standard Chartered Bank, to begin offering micro loans on a test basis. It is worth noting that we will not be responsible for the credit risk on the loans.

I am pleased with 2007 and I am even more excited about the possibilities that lie ahead. We are confident that market growth exists. We have promising opportunities ahead of us and the tools to succeed. The number of global migrants as estimated by the World Bank is around 200 million or 3% of the world's population. The amount of principal remitted around the globe is projected to continue to grow to 8%.  We will remain focused on investing where the opportunities exist. 

Similarly on the consumer-to-business side there are billions of bills paid by consumers and businesses around the globe.  Right now Western Union for bill paying is primarily in only two countries, the United States and Argentina.  So we see a global market opportunity to expand our bill payment business.   

Our strategy is to leverage Western Union strength to deliver valued financial services to our consumers that will drive long term, top line and bottom line growth.  We have an extensive physical distribution network of more than 335,000 agent locations in 200 countries.  We operate four great brands, Western Union, Vigo, Orlandi Valuta and Pago Facil. We have nine and a half million gold card customers, we have great agent partners around the globe, and very strong operational capabilities and compliance programs, and we have 6,000 employees dedicated to our success.  

Looking to 2008 we have four key priorities, the first priority is to grow the C-to-C business especially the international business. We will continue to expand our distribution adding about 25,000 locations annually included expanding our Vigo brand in Europe. We will build and promote our brands, including investing in customer relationship managing programs, to retain customers and drive additional transactions.   

Our second priority is to expand our C-to-B business to other countries through joint ventures, acquisitions and by introducing Pago Facil to other Latin American countries.  In addition we will increase the number and variety of bill paying options as we have done recently with Yodlee, Google and others. 

Our third priority is to drive innovation by developing new services and technology. In 2008 we have plans to push hard for new products.  We plan to test mobile money transfers, micro-lending and other services. In addition we will continue to expand our presence on the internet through westernunion.com.   

And our fourth priority is a continued focus on the bottom line.  We are committed to growing profitably. We will make wise investments all the while remaining focused on improving the cost structure, implementing operating efficiencies and delivering strong margins.  I am very confident we have the right strategy and have set the right priorities to continue to gain share within this huge and growing market. We are setting guidance for 2008 to grow revenue 9-11% and to achieve earnings per share in the range of $1.24 to $1.28 or 10% to 13% growth. 

 

I will now turn the call over to Scott Scheirman, our CFO who will provide more detail on the fourth quarter and full year 2007 financial performance as well as our 2008 guidance.  Scott.

Scott Scheirman

Thank you Christina.  Revenue for the fourth quarter was $1.3 billion, up 12% or 10% excluding the December 2006 Pago Facil acquisition. Revenue also included $28 million from the translation of the Euro. 

For the full year revenue was $4.9 billion, an increase of 10% or 8% excluding Pago Facil. Full year revenue included $79 million from the Euro. During 2007, organic revenue growth, revenue excluding Pago Facil and the Euro translation, accelerated in the second half of the year. Additionally fourth quarter organic revenue growth was stronger than the third quarter. This acceleration was driven by the C-to-C business especially the international business.

   

In the fourth quarter, C-to-C was 84% of total revenue. Revenue growth for the segment was 12% and profit growth was 11%. Operating income margin was 27.5% compared to 27.6% in last year’s fourth quarter. Impacting both the margin and the profit growth were the mix-shift related to the faster growing international business and incremental public company expenses. These impacts were offset in part by expense leverage.   

Within the C-to-C segments our Mexico C-to-C business, which represents 7% of our total revenue, achieved sequential revenue growth rate improvement since the second quarter of 2007. Fourth quarter revenue was flat on transaction growth of 3%.  For the full year revenue declined 4% and transactions were up 4%. 

Our domestic C-to-C business which represents 11% of total WESTERN UNION revenue showed declines of 9% and 3% in revenue and transactions respectively during the quarter and for the full year, as it saw declines of 10% in revenue and 4% in transactions.   

In addition to the market conditions in the US, the domestic C-to-C businesses also impacted by the security issues related to the card-not-present transactions, which include WesternUnion.com and telephone money transfer transactions. Excluding the card-not-present transaction the domestic C-to-C transactions would have been flat this past quarter.   

We continue to work hard on the card-not-present issues, specifically we continue to work with banks to address their broad concerns and we have seen the banks return to accepting transactions.  On the consumer side we are exploring opportunities to improve the customer experience by making the service more convenient.   

Our international consumer-to-consumer business had another strong year, growing revenue and transactions 15% and 20% respectively, with operating income margin in the mid 20s. The transactions that originate outside of the US grew revenue at 25% and transactions at 28% in the fourth quarter. 

Full year consumer-to-consumer price decreases and foreign exchange actions totaled 3.2% of total company revenue which was less than our expectations for the year.  For 2008 we expect C-to-C price decreases to be approximately 3% of total Western Union revenue.   

The consumer-to-business segment grew revenue 13% or 4% excluding Pago Facil during the fourth quarter.  The operating profit decline of 3% and the operating margin of 30% in the quarter were impacted by the faster growth in the electronic bill payment products compared to the higher margin cash-based products, the lower margin Pago Facil business, as well as incremental independent company expenses. Full year C-to-B revenue increased 13% or 4% excluding Pago Facil.    

We earn $0.32 per share for the fourth quarter, an increase of 14%. Earnings per share was $1.11 for the full year on a GAAP basis or $1.13 per share when adding back the $22 million non-cash stock compensation charge from the third quarter of 2007. 

On the margin front, consolidated operating income margin was strong at 27% for the full year. For year-over-year comparison, fourth quarter 2007 was impacted by the mix-shift discussed previously and $17 million of incremental independent public company expenses, compared to $9 million in last year’s fourth quarter. For the full year 2007, these expenses were $59 million which is right in line with our expectations, compared to $25 million in 2006. Also impacting the full year operating margin was the $22 million non-cash stock compensation expense.  In 2008 our objective is to deliver strong operating margin, consistent with 2007, while maintaining the appropriate level of investment in the business for growth.  This investment includes marketing investment in 2008 at around 6% of revenue.   

To support our profitability objectives we have taken steps aimed at improving our operating efficiency. For example we consolidated and relocated several operating functions in 2007, and last week we announced a work force re-alignment in certain operating areas where approximately 120 jobs will either be relocated to our operating center in Costa Rica or eliminated. 

As a result of this action we will incur an additional operating expense, which are part of our guidance for approximately $5 million in the first quarter.  In 2008 we expect the operating income margin to be lower than the annual average in the first half of the year and higher in the second half of the year. 

Our tax rate was 27.4% in the fourth quarter compared to 29.1% in the fourth quarter 2006. Full year tax rate was 29.9% compared to 31.5% in 2006. Increased foreign derived profits compared to US derived profits helped lower our overall effective tax rate during 2007. We also had favorable resolution of certain tax matters in the fourth quarter.   

With the credit crunch remaining in the news, I want to reiterate my comments from the last earnings call regarding credit exposure.  Western Union participates in the money order business by offering Western Union branded money orders, but we do not carry the related float investments on our balance sheet.  However you will see on our balance sheet, settlement assets related to our money transfer and bill payment businesses. There’s little exposure in these assets to the recent credit market issues and we have not taken any write-offs. At year end our total settlement asset balance was $1.3 billion of which $203 million is cash, $922 million is agent receivables, and $194 million is invested primarily in highly rated municipal bonds. We regularly monitor credit risk and mitigate credit exposure by making high quality investments.   

As expected our full year cash flow from operations was strong at $1.1 billion and capital expenditures were $192 million. In the fourth quarter we bought back 6.4 million shares for $146 million at an average price of $22.73. For the full year we spent $727 million to repurchase 34.7 million Western Union shares at an average cost of $20.94 per share. 

In December 2007 the board authorized an additional $1 billion for stock by-back.  We now have $1,253 million available for repurchases. We continue to believe our stock represents a real value at these levels. 

I would further point out that while cash used to buy back shares can potentially come from increased borrowings, we plan to maintain our A-minus credit rating. We are pleased with our fourth quarter financial performance and with the revenue acceleration we achieved in the latter half of 2007. Our 2008 financial plan anticipates the international C-to-C business to remain strong, the Mexico business to have modest growth, and the US domestic and US outbound businesses to be challenged in light of the current economic circumstances in the United States.   

Our guidance for full year revenue growth is 9% to 11% and we’re estimating earnings per share of $1.24 to $1.28, or growth of 10% to 13%. And our long-term objective remains to deliver 10% to 12% revenue growth and 12% to 14% earnings per share growth. 

For 2008 we also expect strong operating income margins consistent with 2007, cash flow from operations of approximately $1.2 billion, capital expenditures of less than $200 million, a tax rate of approximately 29% in 2008 compared to 30% in 2007, however, net other expense will be slightly higher in 2008 compared to 2007.

In 2008 our cash priorities for cash remain unchanged.  Our cash priorities are to grow the business, make acquisitions, return capital to share holders primarily through stock buy back.  In addition to cash-flow from operations, we have over $1 billion of cash on our balance sheet available for acquisitions and investments. 

In summary, I have spent considerable time with our teams to review our 2008 priorities and initiatives including both the opportunities and challenges in the market today and in the future. I am confident that we have set appropriate goals for 2008.  I believe our success will be a result of our focus on the priorities Christina articulated and the market opportunities that exist globally.   

Operator, we’re now ready for the questions. 

Question-and-Answer Session

Operator 

Thank you.  (Operator Instructions) Your first question comes from the line of Liz Grausam with Goldman Sachs, please proceed. 

Elizabeth Grausam – Goldman Sachs & Co 

Thank you.  I wanted to chat about your international C-to-C business where obviously we’re seeing a tightening between transaction growth and revenue growth and also a healthy clip of agent renewals.  If you could talk a little bit about the pricing dynamics you’re seeing at the consumer level internationally and if you’re seeing some improvements there. And also the commission rates that you’re negotiating on your renewals, if they’re stable or if you’re getting any benefit now that you’ve been in these markets for several years. 

Christina Gold  

Thanks, Liz, and in terms of pricing, we see pricing - as we’ve said – about the 3% range for 2008 and we actually saw in the fourth quarter a nice lift in the revenue at 25% in that international sub-segment. So, we see it as pretty steady - the normal pressures - but there’s really not a great push for a compression of margins and driving pricing to a deeper level.  I think the other very good news is we’ve done a number of re-signing of key agents around the world, and as we’ve negotiated the contracts, and they now have scale and size in terms of their business, we are negotiating those contracts to our advantage as it relates to commission. 

Elizabeth Grausam – Goldman Sachs & Co 

Great. And then just overall market pricing trends, you obviously have a very large competitor that is having some internal problems and liquidity problems. Are you seeing any early signs of stabilization globally in pricing and on agent renewals that would work to your advantage in the market given perhaps some lower leverage than your competitor has? 

Christina Gold

I think we really have to look at who the competitors are around the world.  I think one of the biggest corridors that we all compete in is Mexico and that’s been stable for some time. So, I don’t think we see that impact in there and internationally we have numerous competitors so it’s not just that particular one but there are banks and other institutions. The one thing I will say that is the strength of Western Union is that it is so important, as we sign up agents who are banks and post offices and large government entities, that we have a good credit rating. So that is very much to our advantage and helps as we look to 2008 in the future.  

Elizabeth Grausam – Goldman Sachs & Co. 

Just one last question. On the earnings guidance, do you incorporate any view on your share repurchase activity for 2008? And what would you expect that to be?

Christina Gold

Ill give that to Scott.

Scott Scheirman

Good morning Liz. On our share repurchase, it’s hard to tell from the walk through our cash priorities, and our cash flow from operations. We’re expecting $1.2 billion of cash flow from operations, and then our cash needs from there are to invest back into the business, to grow the business. We anticipate capital expenditures to be less than $200 million for 2008. Part of that cash flow would also be looked at for acquisitions or M&A. And then the next priority is stock buy back. There will be ample cash flow for stock buy back in 2008. 

Elizabeth Grausam – Goldman Sachs & Co. 

Does the 124 to 128 range, though, would include… 

Scott Scheirman 

We are seeing some stock buy back in that range. Yes. 

Elizabeth Grausam – Goldman Sachs & Co. 

Thank you.

Operator

Your next question comes from the line of Adam Frisch, with UBS. Please proceed.

Glenn Fodor – UBS

 

Hi it’s Glenn Fodor. Thanks for taking my question. On the economic front, how much margin for error is built into your forecast? For example, when you say modest domestic and outbound growth, how much would GDP or unemployment or the other economic metrics have to move for that to be at risk?

Christina Gold

 

I think one of the beauties of our business is that we operate in 200 countries, but we also monitor about 16,000 corridors. So, as we built the plan for 2008, we did it by region. Scott worked closely with the finance team. We looked at the risks, not only here but around the globe, and we really tempered it to make sure we accounted for any risk that we saw on the horizon. We looked at risks and opportunities. I feel very comfortable with what we built into the 9 to 11% guidance for 2008.  

Glenn Fodor – UBS  

Okay. I know you’ve given some good color on ’08 margin potential, but this is a question we get a lot from investors when they’re looking at the stock. I was wondering, past ’08, I was wondering if you could talk about where you think margins could go or where the leverage to expansion would come from?  

Scott Scheirman 

Glenn, this is Scott. Good morning. On a long-term basis we want to continue to balance having strong margins. We feel there is such an opportunity to grow our business globally. If you look at just India and China combined, it’s about 5% of our revenues, and those are the two largest receiver remittance markets in the world. So there is ample opportunity there to grow. So we’ll balance with that for growth. But we do want to have strong margins. We equally understand that’s a proxy for cash flow and profitability and shareholder value. But I will say my international business where our margins in the mid 20’s have been very strong and even throughout 2007 that margin moved up slightly throughout the year. So I’m very pleased with our margin. But again, it’ll be a balancing act of investing for growth and delivering profitability for our shareholders.  

Glenn Fodor – UBS  

Okay thank you. 

Scott Scheirman 

Thank you Glenn.

Operator

 

Your next question comes from the line of Greg Smith with Merrill Lynch. Please proceed.

Gregory Smith – Merrill Lynch

 

Hi. Good morning. Just looking at China and India, the fact that both of those markets are now bigger than Mexico, but yet Mexico is still bigger on a revenue standpoint for Western Union. Is your market share just lower in India and China? Or is there more money maybe going through informal channels? I'm just trying to figure out that dynamic.

Christina Gold

 

I think you’ve got a little bit of both. But I think really, when you think back to Mexico, we’ve been there for over 100 years in money transfer. And when we look at India and China, we’re looking at, really, the last decade, and actually the last five years we’ve really been pushing that growth. And those economies have really shifted in the last five years, if you just look at what’s happened there. So for me, and for our company, this is a huge opportunity for us because, no, we don’t have a huge share of market and we have a great opportunity, and you look at India, it continues to grow 45% revenue, China 37% revenue, and all we see is green lights in terms of growth, opportunity and building that business to even greater extent. 

Gregory Smith – Merrill Lynch 

Okay. And then, in the next US to Mexico quarter specifically, one of your smaller competitors has recently talked about shutting down some branch locations. Are you seeing any of the stresses in the market have negative ramifications on some of the smaller players, which begs the question, will this eventually all accrue to your advantage potentially?

Christina Gold

 

I think we have tremendous agents on this end side all around the globe, particularly in the United States. We talked about eight of the top ten grocery supermarket chains are part of our network going in, and obviously a lot is going in to Mexico. And then as we look at Mexico with our two great partners, Electra and Banamex, they have extensive distribution and are very strong in terms of their compliance and all the things that we do with them, and also Telecom and other agents in Mexico. So I feel very confident that we have the right locations, the right network, and we will continue to grow it as we grow the business. And there may be some that come across because they’ve left another private company, but really we have a very strong powerful network for Mexico. 

Gregory Smith – Merrill Lynch 

Okay. Thank you.

Christina Gold

 

Thanks.

Operator

 

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

Drew Tannenbaum – Morgan Stanley

 

Hi. This is actually Drew Tannenbaum for Charlie. In the third quarter 10-Q you commented that you’ve been experiencing a convergence between international EBIT margins and profit margins of US originated business. Does that mean that international operating margins are going up, or that US originated operating margins are coming down, or some combination of the two?

Christina Gold

 

I think what we’re saying, and I’ll let Scott add to it, but international margins are going up as we gain scale. Once you build the network you invest in brand awareness, you invest in marketing to get consumers knowledgeable about your product and your company, then you start to get scale and then you are leveraging the bottom line, as you can see with the growth in India and China. But Scott, maybe you want to add some comments. 

Scott Scheirman 

I agree Christina. The international margins that are running mid 20’s, if our corporate margin is, call it 27%, the international margin is very close to the corporate average. Even throughout ’07 we have seen that margin continue to increase as we gained scale and we were able to leverage the cost structure that we put out in Europe and Asia and so forth. But those margins are very strong, and they have been growing throughout 2007.

Drew Tannenbaum – Morgan Stanley

 

Do you expect them to continue to grow into 2008? 

Scott Scheirman 

Well, what we’ve guided for 2008 is that we’re going to have strong operating margins consistent with 2007. So it’ll be a combination of the international business and the US-based businesses, and those combined will deliver a very strong margin for 2008.

Christina Gold

 

One of the other components I might mention also is that our Vigo business right now is profitable, so that’s also helping us from the US side, because that was a bit of an issue for us.

Drew Tannenbaum – Morgan Stanley

 

Okay great, thank you very much.

Christina Gold

 

You’re welcome. 

Scott Scheirman 

Thanks Drew.

Operator

 

Your next question comes from the line of James Kissane, with Bear, Stearns. Please proceed. 

James Kissane – Bear, Stearns & Co. 

Thank you. Good job guys. Could you give us a little bit more color on CapEx in ’08, meaning priorities in ’08? And maybe, what’s the base maintenance CapEx? 

Scott Scheirman 

Good morning Jim. How are you doing? 

James Kissane – Bear, Stearns & Co. 

Good. 

Scott Scheirman 

Our CapEx in 2008 will be less than $200 million. It’s really a balance between signing new agents, re-upping agents where we have contracts that are renewing, and then also investing back in our business for growth. When we were part of First Data, a lot of that CapEx was outlaid by First Data, whether it was gear or equipment. Now, as being a separate stand-alone company, we’ve got to put that CapEx out. But it will be a combination to sign new agents, renew agents, and invest in our infrastructure. We’ve been very comfortable with our renewals in ’07 and we renewed every agent we wanted to and we've got real good visibility for ’08 of how we want to spend our money and invest for growth. 

James Kissane – Bear, Stearns & Co. 

Do you think maintenance CapEx is less than $100 million?  

Scott Scheirman 

I don’t want to get into too fine detail of our capital expenditures, but we’re looking at less than $200 million. Every time we put capital out there, I look at a strong cash-on-cash return to make sure we’re delivering economic value to the company and our shareholders. 

James Kissane – Bear, Stearns & Co. 

Christina, just given all the concerns around international given the slowdown in the US, are you seeing any pockets of weakness in your international corridors? You talked about, say; the UAE to Bangladesh was growing at 60%.

Christina Gold

 

I think our international is really strong, like I told you, if you just look at the UK, where we’ve been for such a long time, growing transactions of 30%. So it’s not just the new markets but our established markets as well. I feel very strong about it. And also, we have the flexibility to invest more in some of the faster growing markets so we can balance our portfolio at any given time. 

James Kissane – Bear, Stearns & Co. 

Okay. Two last questions. How fast can you ramp South Africa? Because I think going way back, that was about 1.5 to 2% of revenue. And the last one, westernunion.com in the US, Scott, when do you think you can get that fixed? 

Scott Scheirman 

Let me first speak to westernunion.com, Jim. 2007, I would really call the year of getting the security and the fraud things fixed and right. And we worked hard on those. Our banks are accepting the credit cards. We’ve implemented some technology things. The goal for ’08 is to really focus on the customer experience. It’s a little bit cumbersome to do a transaction on westernunion.com, so a combination of technology, high leveraging our Gold Card and some other things, we want to improve the customer experience in 2008 on westernunion.com.

And we do think there’s continued opportunities to grow that business. Today it’s only 2% of revenues. It can be much bigger than that. And we still have global expansion opportunities. The international business grew 45% this past quarter, so it’s been very strong there. On South Africa, we have the regulatory approval to move forward there. We want to be as quick in that market as we can be, and we expect to make progress there in 2008.

Christina Gold

 

Just on South Africa too, I was talking with the team last week. We do have agents in sight and everything is lined up. I think what we want to do is make sure that we enter the market with as much push, as fast as we can, but that we get a global hit. Because obviously there’s pockets all over the world, and also South Africa itself is a send country because it is an important market within Africa itself. 

James Kissane – Bear, Stearns & Co. 

Great. Thanks very much.

Christina Gold

Okay.

Operator

 

Your next question comes from the line of Josh Elving with Piper Jaffray. Please proceed.

Joshua Elving – Piper Jaffray

 

Hey, good morning. I have a couple of higher-level questions, and I guess the first one I have is there’s been a lot of various projections of the world-wide remittance market being about 300 billion, and if you kind of look at your share with some of your competitors, it appears that there is close to 75% of remittances world-wide that are done through informal channels. What level of that remaining 200, or a little bit more, billion is actually addressable and could be picked up through formal transfer?

Christina Gold

I think that when you look at the numbers a lot of the numbers that are issued are formal channels, and the informal is not necessarily accounted for in that number. So, there's actually more than that 300, so you can talk about 400. So, it’s a huge market. So when we look at our share, we continue to grow share every year so for us, that's what we think is the huge opportunity. If we just look at the amount of principal that's moving around the world, last year the principal globally was running at about 8%. We're running in around 20-24% so we're growing three times faster in terms of principal. We see huge opportunities for growth.

Also, the other thing that’s happening is the phenomena as we’ve become more global world, the informal channels, governments are pushing to drive the funds into more formal channels because of a lot of concerns about many issues in terms of money laundering and terrorism, and so that also helps us because we have such a compliant, robust system to move money.

Joshua Elving – Piper Jaffray

 

Thanks. And then just on mobile transfer, there seems to be some conflicting thoughts with regards to what that opportunity really is, longer term. I think you suggested it in your opening remarks, just about how you’re very active in the Philippines, and I believe the Philippines was kind of a test market for a lot of the mobile transfers, and it seems to have picked up pretty aggressively there. Can you give us any kind of an update on the Philippines and what you think is the bigger picture?

Christina Gold

 

Well as I said earlier, the Philippines market is the number four largest remittance receive market in the world. Money moving into the Philippines last year grew 11%; we grew 40%. So we feel very comfortable in terms of our growth. In the mobile, the

Smart and Globe are both carriers that have m-wallets, because you can’t do mobile transfers without m-wallets. So the fact that they have that capability now allows us to hook into, with our money transfer system, to create a methodology in terms of transferring funds to the Philippines.

This is actually our first test outside of the United States. We will be doing that in second quarter. But we have been doing some testing in the United States, and what we have seen with mobile is low-ticket send. Our average is about $53, just to put it into perspective, and our average remittance is much larger. So, this consumer is not the same consumer. This is someone that wants to send a small amount of money very quickly more frequently. We see this as an add-on. It’s all a test, it’s all learning, but huge opportunity for us in a market where we have inbound, we have intra, and now we have mobile. And also, as I said, we’re working with India, the largest remittance market in the world, to develop a methodology to do it with Bharti Airtel into India as well.

Joshua Elving – Piper Jaffray

 

Thank you very much.

Christina Gold

 

You’re welcome.

Operator

 

Your next question comes from the line of Glenn Greene with Oppenheimer. Please proceed. 

Glenn Greene – Oppenheimer & Co. 

Thank you. Good morning. Not to be the dead horse here, but I wanted to talk more about the international C-to-C margins. I wanted to get a sense for – you talked about mid 20’s for the year, but the progression during the year, where we exited the year, and I think it would be very helpful to get a sense for how it’s ramped year-over-year, ’07 versus ’06.

Christina Gold

 

I’ll say a little bit, and then I’ll give it to Scott. I think the thing to look at is, you really have to think, if we go back to say, Asia, when we started, our investment was almost 12% of revenue just to get the marketing up, to get everything up. So the margins were much lower. As we’ve come through now, that’s starting to support our total international margins. As Scott said, it’s in the mid 20’s and it continues to accelerate as we move forward. Not rapidly but it's moving up, not down. So, Scott, if you want to add a little more color to that.

Scott Scheirman 

Yeah, well what I want to add is we’ve built the global footprint, whether it be in Europe or Asia Pacific or around the globe. We’ve had a certain amount of fixed cost that we’ve had to put out there to build that scale and now we’ve got the ability to leverage that around the globe. You know each quarter in '07, we saw improvements in the margin and on a go for it basis our challenge will be to really balance the strong profitability but also investing for growth. As we talked about a little bit earlier, India and China are only 5% of our revenues. We think there is continued opportunity to grow that market. Mini markets around the globe whether it’s Western Europe or Eastern Europe in Russia, South America, we continue to see a lot of opportunities to increase our market share so we’ll invest  but we also want to deliver strong margins to our shareholders.  

Glenn Greene – Oppenheimer & Co. 

It sounds like you’re kind of at the point where you built the scale on the infrastructure and it’s kind of a balancing act of how much leverage you want to show to the bottom line versus investing for growth. 

Scott Scheirman 

Yeah, we’ve really built up the global footprint, you know we have 335,000 locations, we want to add another 25,000 locations to that every year but the global footprint has been built out from an operating stand point. 

Glenn Greene – Oppenheimer & Co. 

In a different direction, the domestic business which has continued to struggle for five or six quarters here seems to be lagging the Mexico turn around and I don’t know if they should be correlated but I would think they would be. I’m wondering why the domestic is taking longer to turn around then Mexico is? 

Christina Gold 

I think in the domestic market we see a lot more impact on the housing, what’s going on in construction and in employment and we’ve also seen more impact on the immigration front because it’s across a lot of different dynamics, so that’s really what we’ve seen. In the Mexico business as well we’ve seen shifts in terms of customers, where they are, some have gone to Canada, some have gone to Europe, but I think that’s why we feel we’re being very tempered in terms of our prognosis for domestic in 2008. 

Glenn Greene – Oppenheimer & Co. 

Finally Scott, just quickly, you wanted to recap your comments on the margin expectations in the first half verses the second half, I just want to make sure I heard that right. 

Scott Scheirman

Sure, in the first half of 2008, our margins will be slightly lower compared to the second half of 2008, so the second half of 2008 will have stronger margins. The one other comment I would add, the domestic discussion we had a few minutes ago is that if you think about the fourth quarter, our retail business really had flat transactions, the card not present really dragged that down by a couple of hundred basis points. So the walk in business, we did see flat growth in the fourth quarter on the domestic business. 

Glenn Greene – Oppenheimer & Co. 

What’s the reason for the margins being lower in the first half than the second half? Was there any reason for that? 

Scott Scheirman 

You know we normally have some seasonality in the business, so you’ll see the seasonality where in the third quarter, especially in the fourth quarter, is our biggest sending time of the year where people send money to loved ones so the revenue really jumps up in the fourth quarter which is really good for our business. We have a fixed cost structure that we can effectively leverage and also in the first quarter of this year we will have about 5 million of operating expenses. It’s in our guidance; the 5 million of operating expenses related to the 120 jobs that we're relocating to Costa Rico. 

Glenn Greene – Oppenheimer & Co. 

Got it, great. Thank you very much. 

Scott Scheirman 

Thank You. 

Operator 

(Operator Instructions) The next question comes from the line of Chris Mammone with Deutsche Bank, please proceed. 

Unidentified Analyst – Deutsche Bank

Hi this is (Vasu) filling in for Chris, if you could just touch on how big you think is the market opportunity for micro lending and mobile remittances and if any meaningful contribution from that is peeked into 2008 numbers? 

Christina Gold 

I think as we look at both of those initiatives we’re really at the beginning stages, I think we know it’s a huge market on both. On the mobile, we'll have to see how that goes because the question there is customer acceptance and we see that as a three to five year horizon before it really becomes meaningful if all the tests go well. On the micro lending we are just at the beginning stage working with PrimeCredit, a part of Standard Chartered Bank in Hong Kong, to understand the dynamics of how we could do that, how profitable is it to us, and what is acceptable of this product with our customer. And so I think it’s early days yet to give any kind of number, but I do not see it as being a meaningful number in terms of 2008 revenue or profitability numbers. 

Operator 

Your next question comes from the line of Robert Dodd of Morgan Keegan, please proceed. 

Unidentified Analyst - Morgan, Keegan & Company, Inc.  

Hi Guys, it's actually Michael stepping in for Robert. Just one quick housekeeping question, and forgive me if you guys have already provided this information but what is your expected tax rate for 2008? 

Scott Scheirman 

Our expected tax rate for 2008 is 29%. 

Unidentified Analyst - Morgan, Keegan & Company, Inc.  

All right that’s all I have, appreciate it. 

Operator 

Your next question comes form the line of Adam Frisch with UBS, please proceed. 

Glenn Fodor – UBS  

Hi it’s Glen Fodor again, thanks for the follow up. Just your top line growth guidance of 9 to 11%, can you decompose that into organic or same store growth plus new business less attrition, and then plus or minus pricing? 

Christina Gold 

I think in terms of that, all I would say is that we’ve given our guidance in terms of pricing. We’ve expected it to be about 3%. In terms of acquisitions there is no acquisitions in there and there’s no major revenue from any of the new initiatives in terms of mobile or lending and that would be all we could give you today. 

Glen Fodor – UBS

But the portion of growth that comes from just growth at your existing same store locations verses adding new agents, do you have a conceptual view on that? 

Christina Gold 

Not really because were adding every year on a same basis of 25,000 locations and it takes a period of time for them to ramp up before they really become active in the network. 

Scott Scheirman 

The growth combination of same store sales and adding new locations to the network, it will be a combination of both of those. We have not dissected that in great detail for anyone. 

Glen Fodor - UBS

Thank You. 

Scott Scheirman 

Thank you, thanks for your comments. We're going to turn it back to Christina for closing comments. 

Christina Gold 

I just want to say thank you again for being on the call today. Again I would reiterate after our first full year as a public company were very proud of our performance, and in particular I wanted to thank all of the employees across the globe who helped to make it happen. So, thank you very much and we look forward to talking to you throughout 2008.

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Source: Western Union Co. Q4 2007 Earnings Call Transcript
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