The Western Union Company F2Q08 (Qtr End 06/30/08) Earnings Call Transcript

Jul.22.08 | About: The Western (WU)

The Western Union Company (NYSE:WU)

Q2 2008 Earnings Call

July 22, 2008 8:30 am ET

Executives

Gary Kohn – VP IR

Christina Gold – President & CEO

Scott Scheirman – Executive VP & CFO

Analysts

Kartik Mehta – FTN Midwest Securities

Elizabeth Grausam – Goldman Sachs

James Kissane – Banc of America

Tien-Tsin Huang – J.P. Morgan

Bob Napoli – Piper Jaffray

Bryan Keane – Credit Suisse

Adam Frisch – UBS

Glenn Greene – Oppenheimer & Co.

Greg Smith – Merrill Lynch

Charles Murphy – Morgan Stanley

Operator

Good day ladies and gentlemen and welcome to the second quarter 2008 Western Union earnings 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

Good morning everybody and welcome to the Western Union second quarter 2008 earnings conference call; thank you for joining us today. As we have indicated in our press release announcing earnings, we have prepared slides to accompany this conference call and webcast. These slides are available at www.westernunion.com under the Investor Relations tab. The slides will remain available after the call for your convenience and reference.

Before turning the call over to Christina, I will 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 2007 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 www.westernunion.com again 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

Good morning everyone, the geographic diversity we have built in our business has once again proven to be a key advantage in delivering results from quarter to quarter that stand out in these challenging economic times. In this past quarter not only did the international business continue to perform well, but we also saw improving trends in the domestic, US outbound and Mexico businesses.

Revenue was $1.3 billion, up 12% or 9% excluding the $38 million benefit from euro translation. Consumer-to-consumer revenue was up 14% from transaction growth of 13%. Our international business which represents two-thirds of our total revenue posted a 19% increase in revenue and 18% in transactions. The fastest growing part of our business, the sub-set of international transactions that originate outside of the United States grew revenue and transactions 26%. This sub-set represented 55% of total revenue in the quarter.

Domestic revenue declined 7% in the quarter; the rate of decline has moderated by about 300 basis points from second quarter 2007. And the Mexico business achieved 3% revenue growth on 1% transaction growth reflecting the stable pricing environment. We also continued to outpace the market growth as reported by Banco de Mexico.

On the topic of Mexico I know many of your read about the recent court opinion in Arizona. We were disappointed with the opinion. With that said this is one step in a lengthy legal process and we will pursue all avenues available to us including the appeal we will file later this week.

Within the C2C business we are very pleased that pricing decreases are running favorable to our plan, in fact we expect C2C pricing reductions to be about 2% of total revenue this year versus our plan of 3%. Excluding the $23 million of restructuring expenses we earned $0.33 per share, a 27% increase over the same quarter last year. Reported EPS was $0.31 a share, an increase of 19%.

The business continues to perform in a predictable manner driving consistent first half results giving us confidence in our ability to achieve our 2008 goals. As important as the results so far this year, is our confidence in the long-term. As we shared with you during our Investor Conference on June 20, we believe Western Union is well positioned to continue to build shareholder value in the long-term.

Migration trends remain strong and remittances are growing. Our strengths have put us in a unique position to capitalize on the opportunity. We enjoy a leading position in the huge money transfer market. As the [IAT] research shows the cross-border money transfer remittance market is estimated to be $400 billion this year and continues to expand on average 8% annually. Our remittance principal has consistently grown over 20% annually and as a result our market share continues to grow.

We have developed an unmatched distribution network of 355,000 agent locations. We have built one of the most well known brands. Western Union translates to trust, speed and reliability to customers the world over. We have a globally diverse revenue stream with more then half of our revenue originating outside the US. We have all the advantages of scale and the ability to leverage our infrastructure.

We have a first class compliance program and enjoy strong relationships with regulators around the world. We are in a solid financial position. Our prudent policies have helped us maintain strong credit ratings and give us flexibility to invest in our future. And of course it is the energy and hard work of our employees and agents who possess great local knowledge that make the organization complete.

These attributes give us the confidence to reiterate our long-term objectives of 10% to 12% revenue growth and 15% to 18% EPS growth. We introduced our four growth priorities in January and provided more details a few weeks ago. The priorities were developed to best align our resources to the opportunities. They are sound and we’ll continue to execute on them.

Our first priority is to grow the C2C business. We continue to grow the core business through the expansion of our global footprint. In the quarter we added 10,000 agent locations to bring the network to more then 355,000. Our locations across 200 countries and territories cover the most urban to the most rural spots on the globe making Western Union one of the most convenient service providers in the world.

We continually sign new agents and extend existing relationships as agents look to partner with Western Union so they can be a part of our extensive network and benefit from our compliance expertise, as well as the customer base our world class brand brings. In the past quarter I travelled to many countries to welcome new agents and to celebrate extensions of existing relationships.

To highlight just a few, in Asia Pacific we added two outstanding agents. One was Bank Danamon, a leading Indonesian bank. This was a competitive take-away. And the other was the Agricultural Promotion Bank in Laos. In our EMEA South Asia region we renewed our relationship with the State Bank of India which has extensive rural coverage with more then 4,700 locations. We signed a multi year agreement at more advantageous commission rates with our long standing agent, The First Bank of Nigeria.

We added the Sri Lanka Post where we expect to begin service in more then 600 of their 4,000 locations this year. And we added Pubali-Bank in Bangladesh with more then 400 locations. Additionally after making an equity investment in Grace Kennedy in 2007 we worked with them to expand our footprint in the UK. And we are now better positioned to serve the large UK to Jamaica corridor.

In the Americas region we had many signings and exciting renewals. In the US we renewed our relationship with two of our largest check cashing groups; PLS Check Cashers and Multi State Financial Services. And in Brazil we renewed our agreement with Banco de Brazil for five more years adding to our 10 year successful relationship. The renewal structure will further increase our margin and allows us to sign other agents in Brazil.

Other highlights in the C2C segment this quarter included on the customer loyalty and relationship front, we continued to provide unique features for our customers and have launched an auto notification pilot that brings the value-added service of notifying the receiver that a transaction is ready to be picked up and notifies the sender that funds have been paid out. At quarter-end we had 10 million Gold Card members. For the full year we expect C2C pricing reductions to be around 2% of total revenue versus 3% as previously expected.

We had a successful Mother’s Day in Mexico which is very key for us and it is important to note that last year’s Mother’s Day was strong as well. We saw improving trends within our westernunion.com business. Dot com posted positive revenue and transaction growth for the first time in five quarters driven by improvements in the US and continued international strength. In our Vigo expansion effort we added 3,000 receive locations in Russia and the Ukraine.

Our second priority is to expand our C2B business to other countries through joint ventures, acquisitions, and Pago Facil expansion. We are driving hard to bring Pago Facil to additional countries and we have made significant progress and are on-plan to offer bill payment services in Peru later this year. We are also on track to begin offering Vigo branded bill payments in the United States on a test basis in the fourth quarter. Acquisitions remain a key component of our C2B growth plans and we have a good pipeline.

Our third priority is to drive innovation by developing new services and technologies. The mobile pilot we launched in the first quarter with Smart Communications and Globe Telecom continues for transactions between Hawaii and The Philippines. We believe mobile financial offerings provide an attractive opportunity in the coming three to five years. We are in discussions with major mobile operators around the globe and we will have several announcements in the near future.

Our micro lending pilot remains on track. We and our partner Prime Credit, a subsidiary of Standard Chartered Bank are encouraged by the results so far and we will be sharing more with you as this pilot moves forward. Another key priority is our focus on improving profitability. We are committed to delivering 2008 operating margin excluding restructuring expenses consistent with 2007 at around 27%. Additionally we are taking steps to ensure we deliver up to 50 basis points of margin improvement next year.

These steps have included relocating several functions to operating centers in Costa Rica. I together with members of the senior management team visited our new facilities in Costa Rica and I am very proud to report that everything is on track. The new Western Union team members are energized and up to the task. I want to thank them as well as the rest of the team involved in making these transitions seamless. And this has been no small undertaking.

In the second quarter we took another step to improve our cost structure through our decision to close our operating facility in San Francisco and relocate the functions to existing US facilities and to third party outsourcers. Regardless of the economic environment we strive to run this business as efficiently as possible while maintaining our commitment to providing our customers and agents the highest level of service.

Ours is a scalable business and we have as an objective to deliver long-term margin expansions as we not only pursue cost saving initiatives but also leverage our infrastructure in the markets the world over. As we shared on June 20, we have been able to expand margins after we have made the investments for growth over time like in A-Pac and the EMEA South Asia; we have expanded margins as transactions and revenues scale.

Our leadership position is a result of our global diversification, our global distribution, our world class brand, geographically balanced portfolio, scalable infrastructure, industry leading compliance capabilities, and our financial position. I have great confidence in our team and our ability to achieve the goals we have set for 2008 and beyond.

And now I will turn to Scott Scheirman, our CFO who will discuss our second quarter financial performance and 2008 outlook in greater detail.

Scott Scheirman

Thank you Christina, our leadership position in the global money transfer marketplace and our execution of our growth strategy allowed us to deliver yet another strong predictable quarter of financial results.

Revenue for the second quarter grew 12% to $1.35 billion excluding $38 million of benefit from the translation of the euro, revenue grew 9%. The profit benefit on the translation of the euro was $5 million. Earnings per share on a reported basis were $0.31 at 19% growth and earnings per share excluding $23 million of restructuring expenses was $0.33, a 27% growth.

Transaction fee revenue which makes up over 80% of company revenue grew 10% driven by ongoing healthy transaction growth and improving pricing trends. Foreign exchange revenue which is generated from the difference between the exchange rate we make available to our customers and the rate at which we or our agents are able to acquire foreign currencies grew 25%. Foreign exchange revenue is 17% of total company revenue and is driven by our international business.

Second quarter margin was 25.0% as reported or 26.7% excluding $23 million of restructuring expenses. This compares to a 2007 second quarter margin of 26.8%. C2C margin was 70 basis points higher year-over-year as a result of continuing to leverage our scale in the international business. C2B margin was down 380 basis points. The margin was impacted by the ongoing product mix shift from the US, cash bill payment services to electronic.

Excluding restructuring expenses we expect full year 2008 Western Union margins to be consistent with margins in 2007. Margins in the second half of the year are estimated to be stronger then in the first half of the year with the fourth quarter having the highest margin. Of the $23 million in second quarter restructuring expenses $20 million was included in cost of services and $3 million was included in SG&A.

Consistent with the first quarter restructuring expenses were not included in the operating segments. For full year 2008 we expect to have a total of approximately $80 million in restructuring expenses. As a result of these initiatives we estimate expense savings will be $10 million this year and $35 million annually in 2009 and beyond.

These initiatives and other initiatives will help us deliver margin expansion of up to 50 basis points in 2009. Cost of services grew 16% in the quarter and was 59% of revenue. Excluding $20 million of restructuring expenses cost of services grew 13% and was 58% of revenue which is consistent with first quarter 2008. The growth in cost of services which is primarily agent commissions is attributable to the faster growing international C2C business and the mix shift in the C2B segments.

SG&A in the quarter grew 10%. Excluding $3 million of restructuring expenses, SG&A grew 8%. The tax rate in the quarter was 25% compared to 31% in the second quarter of 2007. The tax rate was lower primarily as a result of increased foreign derived profits which are taxed at lower rates compared to US derived profits and within the foreign derived profits a higher proportion of those being earned in even lower tax countries.

Additionally this lower tax rate is due to the finalization and implementation of foreign tax strategies that will drive sustainable cash benefits this year and annually going forward. As a result of our strategies and with the international profits growing faster then the US profits, we now expect a full year tax rate of 26.5%, an improvement from our previous estimate of 29%.

The 26.5% tax rate is calculated on our expected full year GAAP pre-tax profit. In updating your models please keep in mind that when you exclude the restructuring expenses the effective tax rate is 27.5%. Lower tax rates are a real cash benefit to Western Union.

Our net income as reported was $232 million, a 13% increase. Excluding restructuring expenses net income was $244 million, a 19% increase. We continue to convert a high percentage of our net income into operating cash. For the six months of the year we have generated $560 million of cash flow from operations and are track to achieve our target of $1.2 billion of cash flow from operations this year.

At quarter-end our cash balances total $1.9 billion. In the second quarter capital expenditures were $57 million bringing the total for the first half of the year to $80 million. In the quarter capital expenditures included signing bonuses, which were part of the capital expenditures guidance for the year. We still anticipate total capital expenditures to be less then $200 million in 2008 or about 17% of cash flow from operations.

When considering our high cash balances, our ongoing cash flow generation and our relatively low capital needs, it is clear that we have the ability to invest back in the business while returning immediate value to our shareholders through stock buyback. In the quarter we bought back 17 million for $385 million at an average price of $23.32. Since being public we have repurchased $1.4 billion or 66 million shares of our stock at an average price of $21.65. Last month The Board authorized an additional $1 billion for stock buyback. At quarter-end we had $1.6 billion authorized for stock buyback through 2009.

On another note in October, 2009 we will take over the management of the settlement assets and liabilities generated by our retail money order business. These settlement assets and liabilities are currently being managed by Integrative Payment Systems, a subsidiary of First Data Corporation and on average total approximately $800 million. The settlement assets will be transferred to Western Union in cash in an amount equal to the settlement liabilities.

We want to remind you that the management of settlement assets is not a new skill for us and the addition of this portfolio to our existing money transfer settlement assets will not change our prudent investment philosophy and will not change our overall risk profile. Our investment philosophy is to preserve capital, ensure appropriate liquidity exists to meet daily settlement funding obligations, and invest in high credit quality securities that are well diversified.

Our C2C segment which is 85% of total revenue had revenue growth of 14% and transaction growth of 13%. Operating income increased 17% and operating margin was 27% which is 70 basis points improvement from last year’s second quarter. The international C2C business remains our fastest growing business and we have delivered yet another stellar quarter. Our total international consumer-to-consumer business grew revenue 19% and transactions 18% during the second quarter.

The subset of our international C2C business, those transactions that originate outside of the US and total 55% of Western Union’s revenue and 80% of total international C2C revenue grew revenue and transactions 26%. Also helping the international business is modestly improving US outbound trends. Although still showing low single-digit revenue declines, the rate of decline has slowed by 300 basis points since second quarter 2007.

On June 20 we presented a view of our business made up of three regions that shows how geographically diversified our business is. The regions are the Americas, Europe, The Middle East, Africa, South Asia, and Asia Pacific. Revenue growth for the Americas was 1% marking the first quarterly positive revenue growth in seven quarters, transactions grew 4%. Within the region our domestic money transfer business benefited from moderating declines in the US westernunion.com business.

In the second quarter domestic dot com revenues and transactions declined slightly year-over-year but less so then in previous quarters. Also driving the Americas result was the ongoing strength in South America. Our Europe, Middle East, Africa and South Asia region posted revenue growth of 23% with 24% transaction growth. This region is driven by a wide variety of geographic corridors, includes India; the world’s largest remittance receive market.

As a result of our extensive network totaling more then 50,000 agent locations in India and the strong [inaudible] network across the globe we achieved 54% revenue growth in this huge market. Transactions increased 65%. The Asia Pacific regions represents a huge opportunity for us and as to date only comprises a small percentage of our total revenue but includes large remittance markets like China and The Philippines. Asia Pacific grew revenue 30% and transactions 25%. China reported 27% revenue growth and 18% transaction growth.

The consumer-to-business segment which represents 13% of our total revenue grew revenue 3% and transactions 2%. Operating income was down 10% and this quarter’s operating margin of 28% compares to last year’s second quarter margin of 32%. Impacting the year-over-year operating income decline and margin is the declining traditional US cash bill payment business as compared to the faster growing US electronic bill payment and Pago Facil businesses which have lower margins.

For 2008 our revenue, cash flow from operations, and capital expenditures guidance is unchanged from what we shared on June 20. We expect to deliver revenue growth at the higher end of our 9% to 11% range, cash flow from operations of $1.2 billion, our capital expenditures to be less then $200 million and we estimate the net other expense line to be approximately $110 million for the full year.

We are raising our 2008 earnings per share guidance as a result of the improved full year tax rate expectation which is a real cash flow benefit. Our new guidance for earnings per share excluding restructuring expenses is $1.29 to $1.33 and we expect to likely be at the higher end of this range. We have added $0.04 to our prior guidance of $1.25 to $1.29 to reflect the change in tax rates.

Remember as I stated earlier the tax rate on these non-GAAP earnings per share guidance is 27.5%. We now expect GAAP earnings per share of $1.22 to $1.26. This reflects the lower tax rate of 26.5%. In the second quarter we again saw the benefit of our international business in driving revenue and earnings. Through the first half of this year we have delivered consistent predictable results and remain on track to deliver on our financial objectives.

We are committed to expanding margins. We expect higher second half margins this year especially in the fourth quarter and we are expecting up to 50 basis points of margin expansion in 2009. We are also pleased to have recently raised our long-term earnings per share growth objective to 15% to 18%. We generate strong cash flows which gives us the flexibility to invest to grow the business, execute on our strategy and to return capital to our shareholders.

In summary all this will drive long-term shareholder value. Thank you. And now Christine and I will open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kartik Mehta – FTN Midwest Securities

Kartik Mehta – FTN Midwest Securities

I wanted to ask about the renewals you had for your agents, have you been able to reduce any of the commission payment with these renewals or have you been able to keep them stable?

Christina Gold

Net, net I think we’re seeing a positive in terms of the commissions with our agents particularly on the international side, that’s where we’ve been focused. As you saw with the Banco de Brazil we had better financials for us and we are continuing to look at a lot of the receive markets as well as when we sign up new agents, we also have more favorable economics for us. So we feel very good about where that’s going.

Kartik Mehta – FTN Midwest Securities

I think you talked about signing an agent that was a competitive win and I was wondering is there more or less competition in your ability to try to sign new agents?

Christina Gold

I think there’s always a lot of competition but really with the size of our network now at 355,000 locations and the power of our brand, people want to come to us because they value the traffic that we bring and the volumes that we bring so yes its competitive, but we really are the preeminent leader in this space and recognized as such.

Kartik Mehta – FTN Midwest Securities

On the settlement assets, would that be a net benefit in 2009 or would you anticipate it to be neutral as you transfer those assets to Western Union?

Scott Scheirman

It will be neutral for us. We will get at today’s estimate about $800 million in the form of cash but it will be neutral to us.

Kartik Mehta – FTN Midwest Securities

As you look at your worldwide transactions are you seeing any kind of an economic slowdown impacting any of those transactions in any of your other regions outside of the US?

Christina Gold

As we look at our portfolio of countries in all of our corridors we’re really delighted to see our international rates up 26%, improvements of the domestic in the US and Mexico numbers so we’re very happy with what we see. And also because we are in so many countries, the US is our biggest market but no country is more then 7% so we really balance our investments to make sure that we deliver the results as we move forward.

Kartik Mehta – FTN Midwest Securities

So would it be fair to say you’re not seeing really any kind of a slowdown from a transaction standpoint what you had anticipated?

Christina Gold

If we look at where we came out of the quarter at 26% revenue and transactions for the international that’s right on the button in terms of where we expected to be.

Operator

Your next question comes from the line of Elizabeth Grausam – Goldman Sachs

Elizabeth Grausam – Goldman Sachs

In terms of your pricing, you sound a little bit more optimistic on the pricing environment certainly for this year relative to last year and if you could give us a sense of what’s really driving the 2% pricing this year relative to 3% last year, if there’s geographic aspects to that you could share and how much of it is tied to your ability to consolidate some market share away from your competitors at this point in the cycle?

Christina Gold

It’s a combination of things; obviously as we look at the US particularly the Mexico in the domestic we did pricing in early 2007 so we’ve lapped that. But I think also really as we look at our portfolio and our business what we’re really trying to do is add value so that pricing is really the last lever that we pull. We really look at how can we add value through our loyalty programs, sharing in terms of rewards with our agents, looking at other ways to compete.

And also as we look at some of the developing markets in the world, as we started to grow those markets we started in a very different competitive position and so we see that 2% being a realistic number for 2008 and we’re delighted to see that and obviously the profitability of our business and the [property] of competitors you can see that there is an important element of profitability for all of us to make this work.

Elizabeth Grausam – Goldman Sachs

Is there any effect of having your Gold Card base on the pricing stability that you see in markets as you get users into more of a loyalty business, one where they perhaps have rewards or loyalty points tied to the agent bases in those markets where you can stabilize your own pricing?

Christina Gold

Gail and the team are working in terms of how do we really even more maximize those Gold Cards because we do see that stability. We also in terms of the rewards they don’t necessarily get paid through Western Union but rather to the agents. So that gives us leverage there as well. So it’s really a win-win situation for us.

Elizabeth Grausam – Goldman Sachs

This is the second quarter in a row that you specifically have flagged a fairly large competitive agent take-away can you give us a sense of what the pipeline looks like going forward, are we even going to see some consistent announcements from you of international competitive wins and is this unusual or has it picked up in the last few quarters or is this consistent with where you’ve been historically?

Christina Gold

I think it’s consistent. I think we’ve always been targeted in terms of looking at what are the networks available out there and clearly with the results that we bring and the locations that we have, the competitors are looking in terms of the agents coming to us because they see not only the brand but the locations, the networks and also the compliance capabilities. So I think that we bring a lot to competitors who come to us but it has been relatively consistent and maybe a little bit more in the last 12 months.

Operator

Your next question comes from the line of James Kissane – Banc of America

James Kissane – Banc of America

What do you think the tax rate will settle out given the mix shift towards international say over the next couple of years?

Scott Scheirman

On a long-term basis we do believe the tax rate will continue to move down and that that is a real cash flow benefit to Western Union. I would tell you that the jumping off point and its too early to give 2009 guidance but I would probably focus you on the non-GAAP tax rate of 27.5% as a starting point and then we believe that tax rate can continue to move down over the next three to five years as the international business will likely grow faster then the US business.

James Kissane – Banc of America

Can you give us a sense of the difference in the tax rates on a blended basis?

Scott Scheirman

I don’t want to—the US statutory rate is clearly 37.5%. The international rate is substantially lower then that and it all factors into our long-term objective where we’re growing earnings per share at 15% to 18%, but a lower tax rate will be helpful and one of the elements in addition to expanding margins as we move forward to drive strong growth of 15% to 18% earnings per share.

James Kissane – Banc of America

And can you just review the plans for the money order business; are you now issuing the money order business instead of outsourcing to First Data?

Scott Scheirman

First Data is still doing the technical issuing of the money orders, we run the sales and marketing of that business. It’s a business that we’re very familiar with and then beginning the latter part of 2009 into 2010 we will begin issuing the money orders and investing the assets and the liabilities and its something we’re very familiar with and our team has run the sales and marketing arm of that since the spin-off.

James Kissane – Banc of America

The margin pressure in C2B, I guess the primary factor is the shift away from cash payments but when do you expect some stability in C2B margins?

Christina Gold

I think we feel that we’ll be in the high 20s in the C2B margins and I think the key for us is really obviously when we Pago Facil that its really going to be in terms of acquisitions and that’s really what we’re working diligently on right now. Hopefully by the end of the year we’ll see something there.

Operator

Your next question comes from the line of Tien-Tsin Huang – J.P. Morgan

Tien-Tsin Huang – J.P. Morgan

The better pricing commentary, I just wanted to clarify does that factor in better commission economics or is that a separate discussion?

Christina Gold

That’s really separate; the only thing is that when we do impact pricing it impacts the commission as well for the agents so we all share in terms of a pricing decision. But as we look at the marketplace right now we feel 2% is what we’re going to need for 2008.

Tien-Tsin Huang – J.P. Morgan

So commission economics would be incremental to the 2% if we want to think about that longer term?

Christina Gold

Well not necessarily, it’ll be the same percentage that it would always be because there’s a sharing percentage that’s always existed with the agents so it’s not as though they’re going to have more or less because when you take pricing down, then their revenue goes down as well.

Tien-Tsin Huang – J.P. Morgan

I think in the past you’ve mentioned that 3% was your pricing investment longer term should we consider 2% is a better proxy now?

Christina Gold

I would say 2% is great for 2008 but you know I think that we’re always looking at opportunities and as new quarters come up and new opportunities exist we may push back to the 3% so somewhere between the 2% and the 3% and as we go into guidance for 2009 we’ll give you a better flavor of it because we’ll have a better sense of what we think we need to do for next year.

Tien-Tsin Huang – J.P. Morgan

On gross margins that was actually up sequentially I think for the first time in awhile, can you help stack that up for us, how much of that was pricing and currency and then you mentioned margins improving in the second half of 2008 is that primarily going to come in G&A or should we project even better gross margins as well?

Christina Gold

Well I think the margins on the C2C were up 70 basis points in the quarter and so of that is scale as well.

Scott Scheirman

We are pleased with the margins we delivered in the second quarter and exactly to Christina’s point, we’ve been able to leverage our international scale, the C2C business, those margins were up 70 basis points and as we look at the second half of the year, we expect the margins to be stronger in the second half of the year then the first half of the year, and the strongest in the fourth quarter. And what’s driving the fourth quarter to some extent is the seasonality where our customers are sending more money to their loved ones around the globe because of the various holidays and we have a fixed cost structure that we can very affectively leverage in the fourth quarter.

But we see 2008 margins consistent with 2007 right around 27%.

Tien-Tsin Huang – J.P. Morgan

The commission and other revenue was down a little bit after a period of modest growth, anything to read into there?

Scott Scheirman

Just a small item there in that that’s tied to interest rates. There’s some flow based income in there and with interest rates being down a little bit over the last 12 months its down slightly for that.

Tien-Tsin Huang – J.P. Morgan

In domestic C2B what is the mix now between traditional, I guess you call it the cash based bill payments versus electronic bill payments?

Scott Scheirman

We haven’t precisely disclosed that. Each portion is a good part of that business. Clearly the electronic piece is growing faster then the cash based portion and we’ve been very pleased with Pago Facil, it is a cash based business but that one continues to over achieve its business plan and it’s going to allow us to expand to other geographies around the globe.

Tien-Tsin Huang – J.P. Morgan

Towards the end, in terms of mix shifting towards the electronic domestically or is there still some time to go there?

Scott Scheirman

Its hard to say for certain, where we’re focused with C2B is that we think it’s a lot of opportunities to grow this business globally both through organic growth and through acquisition expansion. And even in the US we think there’s opportunities to extend our product offerings [inaudible] is a product that we’re very excited about so its hard to say for certain, long-term C2B we want it to have margins right with our corporate averages so that’s our long-term objective.

Operator

Your next question comes from the line of Bob Napoli – Piper Jaffray

Bob Napoli – Piper Jaffray

Assuming we do feel like the global economy is clearly starting to slowdown a little bit more, I know your numbers were very strong in the second quarter and you said you haven’t seen any change in trends, but what would you expect assuming the global GDP were to decline by a few hundred basis points in 2009 from the trends that we see, how would you manage that and what affect to you think that would have on the overall growth and profitability of your international business?

Christina Gold

It’s difficult to define and we will give a clearer line of sight when we give guidance for 2009 but I think the important thing to remember who are customer is. Our customer is a cash based individual who goes to countries to search out work, to send money home. This is not a credit card person, doesn’t have a house, really is kind of strapped and they are challenged. So it’s a very mobile person so what we would see—sometimes we can see is perhaps the principal being a little less but as we looked at some of the challenges we face around the globe, and you see it, you can see changes in principal but we can manage that through moving prices to drive transactions or investments in other parts of the world where we see—like in The Middle East we see a lot of people going into The Middle East so we’re driving that business very hard. A couple of years ago it was really a [inaudible] business and we really didn’t understand it now we have a team there that does a phenomenal job and we drive a very big chunk of business out of there.

So and the other thing, I was just in Poland, it was very interesting a couple of weeks ago when we signed the Bank Pekao. Poland has been a receive market for many, many years. But as that economy is now picking up they’re starting to build infrastructure in different parts of Eastern Europe so all of a sudden now we have corridors from Poland to Vietnam, Poland to China; they’re bringing in migrants because they lack the labor force to do the work. So it’s very important for us to identify new trends, new opportunities and continue to market and build those corridors and so its really a balancing act but I feel confident that we have the people on the ground and the intelligence on the ground to maneuver our investments to make sure we continue to see that growth.

Bob Napoli – Piper Jaffray

And what has been through the prior—you go back to 2001, 2002 where we did have a global recession, how did Western Union manage through that and is there a difference today?

Scott Scheirman

What I’d say is that our business is much more diversified today then it was five or six years ago. We’re in 200 countries, 355,000 agent locations and one thing I’d keep in mind is we’re in a $400 billion remittance market that’s growing 8% a year and we’ve consistently grown greater then 20%. If you look back over the last five years, 2002 through 2007 our revenue has grown at a 12% compounded annual growth rate and cash flows have grown at a 13% compounded annual growth rate. So the good news today is we’re even much more diversified today then we were five and six years ago.

Operator

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

Bryan Keane – Credit Suisse

Do you expect a new court decision in Arizona to impact the Mexico business at all?

Christina Gold

I think that we took the brunt of that issue in mid 2006 and early 2007, I think that it’s disappointing what happened with the decision and we will take all actions necessary but it impacts about 20 locations in Northern Mexico so I really don’t see us having the kind of a relapse of the issues that we had a year or so ago and plus the strategies that we put in place at that time are still in existence so I feel pretty confident about that.

Bryan Keane – Credit Suisse

When you talked about C2B operating margins to remain in the high 20s so that would translate into a less of a drag year-over-year, what’s the reason for that? Because I assume the business mix is still going to hurt you, why would margins stabilize that?

Christina Gold

I think we’re lapping a little bit of the change that we’ve seen if you go back to 2007 so we had both in the first quarter and in the second quarter about a 300 to 400 basis points decline, but I think it’s landing in about the territory where we think it’s going to land. And at the same time we’re pushing very hard in terms of our expansion strategy and also looking at as Scott said the [Odily] deals, Google deals and also Pago Facil and acquisitions.

Bryan Keane – Credit Suisse

What’s the average principal per transaction and how does that look like year-over-year?

Christina Gold

The average principal now is at about $400 which is more then—it’s increased over time and it’s about four or five percentage points higher.

Operator

Your next question comes from the line of Adam Frisch – UBS

Adam Frisch – UBS

I just wanted to ask again a little bit about pricing, if transaction trends continue to slow a little bit and I’m not sure if 2Q is just an anomaly, its hard to make a trend out of one data point, but if we continue to see that on the heels of a slowing global economy, would a favorable pricing trend potentially reverse or are those prices locked in for multi year?

Christina Gold

Pricing is very fluent, its something we monitor day to day on 15,000 corridors. But we look at what’s going on in the marketplace and what we need to do so it’s not locked and loaded. As we do our plans for 2009 we look at what we think we’re going to need but we feel very confident in that. And also a 26% for our international outside of the US growth rate is tremendous and also seeing very strong growth rates in our subset as well. So we feel good about where the transactions are growing and going and don’t see the need to push that much more on the pricing button.

Adam Frisch – UBS

On the question about tax rate and that sustainability but continuing with the theme of sustainability on margin expansion, obviously 2009 50 basis points higher, can we expect further margin expansion going forward or are the changes you’re making now enable you to leverage your fixed cost base more going forward or do we need to see more things like, just throwing things offshore, doing other things on the cost side to continue that trend of margin expansion over time?

Christina Gold

I think we’re working on both fronts, one is in terms of efficiency in our cost structure and that’s why we did quite a bit this year with the $80 million in charges. But the other thing is we showed to investors at the meeting in June, as the Asia and the EMEA have scaled they’ve gone into the 20s and mid 20s so we’ve seen that scale as we built the awareness, built the network, we really do see margin expansion in our markets. So we have more opportunity in those markets to grow margin through scalability.

Scott Scheirman

What I’d add to it, it’ll be both—we have opportunities to leverage our global scale. I believe in certain areas we’re reaching an inflection point where we continue to drive margin expansion and then there will be some opportunities to improve our cost structure. The actions we took this year, difficult actions, but $80 million of expense but annually we’ll save $35 million beginning in 2009. So we’ll have opportunities and we have a plan in place and we’ve reaching an inflection point in certain markets.

Operator

Your next question comes from the line of Glenn Greene – Oppenheimer & Co.

Glenn Greene – Oppenheimer & Co.

If you look at your quarter-over-quarter transaction revenue and year-over-year they all look stellar and I’m just wondering if there was anything you could glean from the monthly trends you’re seeing either across domestic Mexico or the international that gives you any sort of indication where we’re headed going forward either positive or negative?

Christina Gold

I think we’re delighted with the quarter. We’re reaffirming our guidance for 2008 and our long-term guidance as well so we feel confident in our strategies and where our business is going.

Glenn Greene – Oppenheimer & Co.

So you didn’t see anything unusual in the quarter, June didn’t slow; June didn’t get better across any of the major territories?

Christina Gold

We feel good about our business.

Scott Scheirman

We don’t want to get into month over month, but second quarter was a strong quarter, first quarter was a strong quarter. We reaffirmed our guidance that will be likely at the upper end of the 9% to 11% revenue growth and at the upper end of the $1.29 to $1.33 earnings per share so with 355,000 locations in a $400 billion remittance market there’s a lot of opportunity to grow.

Glenn Greene – Oppenheimer & Co.

With respect to the agent commission renewals and actually more favorable commission rates that you’re trying to glean here, does that benefit you on a near-term basis meaning how much of that is implicit in your up to 50 basis point guidance for margins for 2009 or is there a longer tail to that where it has more of a benefit in 2010, 2011?

Christina Gold

No that has a bit of a longer tail in the sense it depends when actually the new contract goes into play because we do negotiate these things about a year out. So it takes a little while for some of that to roll through and I think the other thing is on the 50 basis points we wanted to at the time we took the restructuring charge was to clarify also that we would take the charge but that we would give back to investors the 50 basis points. So we’re still targeting to do more if we can, but we’re not committed yet to 2009 except for the 50 basis points which we’ve already given.

Glenn Greene – Oppenheimer & Co.

But is the 50 basis points—is there a meaningful contribution from the agent commission rates or--?

Christina Gold

In that no I would say no, not there no. You add that separate.

Operator

Your next question comes from the line of Greg Smith – Merrill Lynch

Greg Smith – Merrill Lynch

With regards to Western Union taking over the management of the settlement assets on the money orders, what’s the reasoning behind that? I don’t think we’ve heard why you’re actually doing that?

Scott Scheirman

When we first spun off from for First Data, they did the processing of that and as we went public time just didn’t permit necessarily to do that. We’re getting the licenses we need and other things we need to do that. And then money order is an important business to us. We sell that in over 50,000 locations. Two-thirds of our money transfer agents in the US offer that so it’s strategically important. And since spin-off we run the sales and marketing arm of that and now starting in October through 2010 we’ll have full management of that business and that product.

Greg Smith – Merrill Lynch

So will you potentially get more aggressive in growing that business, hopefully not more aggressive in how you manage the money, but in actually growing it?

Scott Scheirman

No we will be aggressive in managing the money by no means. We’ll get cash of $800 million and we will invest that wisely just as we have with the money transfer business. Without being too helpful to my competitors out there, money order is important and we’ll continue to drive growth behind that.

Greg Smith – Merrill Lynch

With some of your office closures and moving call centers and whatnot, it sounds like you are increasingly using third party outsourcers just want to get an update on how that’s going and are you getting service levels and whatnot that you hoped for?

Christina Gold

We are really quite pleased with the progress we’ve made. Obviously it was a difficult decision but its one where we were very well planned and we have a large operation in Costa Rica. We actually have over 1,000 employees there now so the bulk of the work, a large chunk of it is being done by our employees in Costa Rica and other parts of The Philippines and other parts of the world. The outsources that we’ve used we had been using them over a period of time and we have very strict in terms of SLAs and what we expect so the service there is very good. As we’ve gone through this transition we really have not skipped a beat as it relates to service and our expectations are high and the performance of our centers and the outsources have been very good.

Operator

Your final question comes from the line of Charles Murphy – Morgan Stanley

Charles Murphy – Morgan Stanley

I just wanted to return again to agent commissions, can you give us any sense for in situations where you are adjusting agent commissions how much you’re adjusting them? For example if I was an international agent and I was making 25% of the transaction what will I be making in 2009?

Christina Gold

We really don’t disclose the finite details of it but I think the differences are—it depends on the size of the market and the business and kind of whether you’re a receive and the cost structure that the agent has. And we’re cognizant of their profitability and our profitability because we work on both fronts so I think that as we create these advantageous contracts for ourselves we also ensure that we’re going to drive volume through their business so that they also maintain their profitability. So it’s a win-win and we also look at other ways in terms of marketing investment and other things to do that we can do to drive the business with them.

Charles Murphy – Morgan Stanley

I noticed that you appointed a new manager in the US Canada business, is it possible to get any early impressions from him or what he will be asked to do?

Christina Gold

Obviously we’re delighted that Stewart has joined the company. We were in search for a period of time and I think he brings a lot of marketing expertise to the corporation and we look forward to what he can do for the business and work with the team to drive it forward. So probably over time you will have an opportunity to meet with him and see how his plans are going. But its early days yet, he’s only been with us for about 30 days.

Thank you very much, appreciate everybody on the call today. Again to all the employees and agents of Western Union thank you for a terrific quarter. We feel confident in our year, we’re confident in our business and we’re just delighted to be able to share the results with you and look forward to next quarter. So thank you very much for joining us today and have a great summer. Thank you.

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