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The Western Union Company (NYSE:WU)

Citi Financial Technology Conference

November 7, 2012 10:40 AM ET

Executives

Hikmet Ersek - President & CEO

Scott Scheirman - CFO

Analysts

Unidentified Analyst

Good morning everyone and welcome to our next session which is with Western Union. And from Western union we have Hikmet Ersek, President and CEO and Scott Scheirman, CFO of the company, thank you gentlemen for being here and for doing this.

We’re just going to kind of kick off with, you guys obviously just had earnings but I wanted to kick off with the first question just talking about trends and trying to figure out what it is that you saw in your trends that caused you take the dramatic pricing actions? Was it trends, was it compliance? What was it? If you’ll start with talking about that.

Hikmet Ersek

Before answering your question, Ashwin let me make some comments about last week’s announcements because obviously the market reacted heavily of our announcement and I would like to make some talking about that and discussing with you. First of all, I would like to tell that our consumer to consumer transactions is our core business have grown 3% to the first three quarter. Despite all these economic challenges we have also the recent impact of our Mexico and our Latin America business, because of the regulatory compliance challenges we have here.

Our electronic challenge, our electronic challenges are progressing very well. And we continue with our capabilities. We are expend our locations and generate still very, very strong free cash flow. If I look from today point of view, Ashwin, we have a healthy business; we are not seeing major structural changing in the industry. the Western Union brand is a premium brand in money transfer and I expect that it will stay also in the future as a premium brand. Customers really value our speed, our global reach, our convenience, our trust; they trust our brand in 200 countries globally.

However, I would like to mention also that we do have some issues in some key corridors which is basically came up the last recently, especially given the compliance challenges in certain countries and we have huge price differences with some competitors in some corridors. It’s not a global issue. Its some corridors. We are up to 50 to 60% more expensive price differences in some countries and actions we are taking now is really responding to some market share losses in some specific countries. These countries, I think what's going to happen is that our pricing actions will react immediately in the certain corridors that we’re going to win back the customers.

From today’s point of view, currently I believe also that we are going to come back to our pricing actions to our traditional historical pricing investment, 1 to 3% in the future after 2013, beginning of 2014 from today point of view, I am pretty much confident, we’re going to come back to our model. So the mold is not broken. The mold is her, we have our fundamentals and I am very much confident that we in 2014 will return to revenue and profitability growth again and we are very confident that we are in the right business, the cash to cash part of the business, the growing market and we do have some issues with the existing cash to cash traditional money transfer competitors in certain markets. So we are responding to that.

The digital site is growing really fast and we are already a leader there as you know. And westernunion.com, numbers are we are going to talk about in a few minutes, going 40%, and that's excellent and our business to business, business is and transcription wise grow last quarter 10% and the stock value opportunities are there and we just recently again announced a new distribution network on the stock value.

And we also, the confidence of the business, the confidence of the board, confidence of the management this year, we recently announced another $550 million repurchase with Q3 earnings which gives us $750 million authorization together for the next few months and believe me, our stock is undervalued. I don't think it belongs here where it should be and Scott and I am going to be active on the market once the window opens. We just filed our 10-Q and once the window is open, we’re going to be very active on the market accelerating our stock buyback. So the confidence this year and once again, the mold has not changed. I believe on the model and the model is very affective and we’re going to continue. I am very confident for the future of this company and that are going to come back with operating growth and revenue growth in 2014.

Now, to your first question about the recent trends, there are several transfusion impact at our business. I mean economic conditions obviously globally has an impact on our business including the weakness of Southern Europe continues, other side of that is Germany is growing. I think there are some healthy places also in Europe still. There are some slowdown in the US and our core business has been impacted especially with our compliance issues, with upgrade of our compliance anti-money lender activities being industry stranded, especial.ly Mexico and Latin America corridors with our Vigo brand. But as we lose the advantage of the Vigo brand in this Latin America and Mexico corridor, we had to react immediately and we are going to do some pricing investments which I don't want to share very openly because of competitive reasons but obviously, it’s no secret that we’re going to do something here and we have to immediately react to the sudden changes in the market, because we are losing customers in certain corridors and we can’t take that.

And this investment will bring is typically what we did in the past like the US domestic money transfer business as we did in 2009 the investment. Also here, brings immediately the customer’s back, you see immediate transaction growth and long term 12 to 18 months, you see also revenue coming back and we do that constantly. We did that several corridors, we did that several corridors, we did tend to go outbound corridors and we did that to US money transfer, US domestic money transfer part and I believe on the success of that.

And one of the things also I will like to mention that we think we are losing market share in the certain corridors to the traditional money transfer companies. It’s not like we are losing market share to digital. The reason why I am saying that is westernunion.com is growing very healthy. 80% of the customer are new to westernunion.com or digital world, to account based electronic banking world.

So the customers really trust us and they come to us because they've never been in the bank by the way and they've never been with Western Union in the past on the tradition but they are new via electronics, so we are tracking here also new customers.

And our B2B business, the global trade is down, you know that. But the transactions are here. We give double digit 10% last quarter. As a reminder, I would like to remind also that in Q3, 2011, we had a very, very strong growth. So there is some growth over there also, but we grew 10%. Our revenue principal per transaction is down because the global trade is not that positive. However we have only 2% market share. So what you do have, if you have 2% market share in that special market, you grow, so it’s going to be about $400 million business. I think it’s about $400 million dollar business and we have 2% market share. So it’s something that we are going to grow also.

Unidentified Analyst

What would happen and no one is really denying or doubting that pricing actions do lead to transaction increase, you’ve shown that in the past, it’s pretty clear, but the magnitude of, let`s call it 5% decline in pricing instead of a traditional 1 to 3%, would suggest given that you don't really have another corridor other than US to US, where my understanding is pricing is kind of fine and then US to Mexico, which is 5% corridor, I mean even if you are doing a 50% price correction in US to Mexico, it doesn't get you to 5%. So, my question really is, if you could walk us through, maybe give us some flavor of top 10 corridors, where pricing actions might be taken, I'm not asking for details, on what the pricing actions are clearly but it’s going to be apparent in the market anyway.

Hikmet Ersek

Let me put it in perspective, what the mid-single digit means, pricing investment means for 2013, now and 2013 and Scott jump in, if you find something here. And coming back to the Mexico and Latin America corridors, the Vigo impact had a huge impact to our business. As we reset Vigo for compliance reasons, as a reminder, I would like for the audience also tell that we signed an agreement, attorney general in 2010 and we have a monitor and we are getting directions also by the monitor to implement agreement.

So we started to implement this actions and we lost in Mexico and Latin America corridor, south (inaudible), 7,000 Vigo locations.

Unidentified Analyst

They were all Vigo?

Hikmet Ersek

They were all Vigo. They couldn’t apply our compliance standards which I believe in the future will be also industry standard runs that has been implemented, couldn’t do that to the Western Union standard. So with that, we lost a lower price brand and that we had to react immediately and that's about the 2% pricing investment for Latin America and for Mexico. If you take that our guidance was 1 to 3% at the 2% there, it’s about 5%, we are coming there. It’s no secret that we were always talking about our Russia issue and we have competitive pressure there, that's no secret. We have to react there and there has been some, we always do pricing investment between 1 to 3% traditionally, historically and several corridor.

So for competitive reason, I am not going to disclose which corridor I am going to do pricing investment, but you can imagine that the Mexican Latin America corridors, we have to react, its almost no secret any more, immediately and we have to react also in some other corridors but it’s our tradition between 1 and 3% price investment. That does not change. I believe also in the future from today's point of view, I believe we cannot come back to 1 to 3%.

Scott Scheirman

The other thing I wanted to ask is, pricing is just one of the levers we look at to grow the business, so we’ll continue to add locations where we’ll promote the brand, we’ll continue to enhance the offering, but we do know with pricing to your point, from historical experience, we get more customers, we get more transactions, it will be a little bit painful on the revenue in the profits in 2013, but we expect to return to revenue growth and profit growth in 2014. But the goal is to get more transactions, more customers into the franchise and we know how to do it and we’ve got a proven model behind now.

Unidentified Analyst

I guess related to the pricing investment change that you’re making, how should we think about the margins of the company going forward? I mean in the past you’ve talked about the ability to increase margins on the business but as we get back to a more normal 1 to 3% pricing increase beyond next year, you’ve raised margins in the past couple years in the C2C business, but how should we think about the margins directly going forward if we get back to a more normal pricing investment.

Scott Scheirman

Yes how I would frame that is, as we think about margins or profitability, one of the most important things you’d probably imagine Phil, is revenue growth if you will. To have revenue growth is very helpful to driving profitability market share and all those things. So the goal in 2014 is too really to get a point where revenues are growing again. We think they will be slightly down in 2013 but get revenues growing in 2014. Also get the profits growing in 2014. So we’re going to focus on the revenue growth. We also are taking advantage of opportunities if you will to optimize the cost structure. Just as we kind of take about $30 million charge in the fourth quarter, we anticipate to take some additional charges in 2013 and those charges will likely be greater than the savings, so we’ll be upside down on those. So we do believe those will have net benefits in 2014. So the combination of continuing to focus on revenue growth, doing some things to help our cost structure and the other thing that we are trying to balance is compliance.

We now spend over $100 million a year on compliance and just given how the compliance requirements are generally tightening around the globe, that's one spend we’ll probably continue to increase as we move forward. But as we do turn the calendar to ’14, we are very focused on growing the revenues and growing the profits as we move forward.

Hikmet Ersek

Just don't know, maybe feel Scott, two things, compliance is important. We are going to continue to invest there and it’s going to be industry standard. Our business is complex and it’s also investing the compliance, getting that as an industry standard is important, it’s also competitive advantage. Cross border money transfer is complex.

Coming back to margin discussion or revenue is important. The other side of the coin is also that on the 35% of our costs are fixed, 65 are variable cost. And we are going to expand our network but we are going to be also very, very focused on the agent commissions and I believe that our business is more expanding to different geography, different places, class of trade. We will have a better cost structure on the variable cost also and once the revenue comes back with all our actions we have proved that they bring it back on the long term basis. I think the revenue will grow and will help our business.

Unidentified Analyst

When you did the five for 50 as well as the other promotions in the US to US market, how long did it take for transactions to come back and then sort of the crossover line between where revenues used to be and new revenues.

Hikmet Ersek

You can give numbers. Maybe you have it in your mind. One thing is clear. It comes back and it drives immediately transactions customers back to the retailer. One thing I have to say also, the agents were very happy, because the traffic was immediate in the back and they also could sell their products and they had to traffic back. But we know from experience that it takes about 12 to 18 months, and especially maybe you can give some numbers Scott.

Scott Scheirman

Yes actually it will vary by corridor if you will. What we focus on in the short term basis is getting transactions, so you see really rapid acceleration and transactions like we saw with DMT. The revenues declined for that 12 month period and once you get in that 12 to 18 month period, you do see revenues beginning to grow a nice clip generally depending upon the corridor and then also depending upon the corridor, you’ve got to compare this to, if you don't do nothing, what with the revenue and growth profile look like without doing anything compared to doing something and we feel like with these pricing actions doing something is the better result on a long term basis, because we’re always trying to optimize revenue and profits on a long-term basis.

Unidentified Analyst

Just going to the B2B segment scenario where you guys made a couple of acquisitions in the last several years. seems like the revenues have come in a little late, although you’ve been impacted by currency in global economic trade. Just wondering if you guys could provide an update on how you were thinking about the prospects of that business, whether that's changed since you made the acquisitions, what you’ve learned from those deals, whether there has to be additional acquisitions in that area, any thoughts on that would be great.

Hikmet Ersek

First of all I am very satisfied with the integration process. Putting two companies as you recalled, as a reminder, we acquired customers and we acquired travelers and we put it in one company called Western Union Business Solutions, synergies and acquisition and integrations working very well.

VTS, indeed we did have some impact from global trade that impacted our revenue, as you know the global trade is slow because of economic challenges, but our transactions are here. The other two point I would like to mention also, we were in 16 countries as we started with Western Union Business Solutions after the integration process, now we are in 29 countries. Recently announced one of the top countries, India, opened in India, our Western Union Business Solution activities.

I think I see long term still lower double digit revenue growth for this part of the business. I know that agents, we are using our existing agents, and there are agents who do consumer money transfer, they have taken already Western Union Business Solutions on their portfolio. So there are synergies here also. And we don t have to get new agents here. Our existing agents really like this product.

The other thing, again, I am remind everyone is that we do have only 2% market share, though I believe that we have the biggest non-bank money B2B provider globally and our goal is to expanding here rapidly and I know that Raj Agrawal and his team are very active as we speak, selling more and more to more countries.

Unidentified Analyst

I wanted to sort of go back to the compliance question. Obviously compliance is supposed to be an advantage for Western Union, because you spent so much and presumably your competitors cannot spend as much. Why then is it that it’s such a multi-year process to sort of fix what the monitor said, what the agreement was. Why was Vigo sort of seemingly left out? How far away are you from fixing what you need to fix and last point which you brought up a couple of times is, you said it’s going to be an advantage because everyone else will have follow which kind of leads to the simple question of, are the rules same for everybody?

Hikmet Ersek

As I took over, it was definitely, I didn’t know about many things, it was a surprise. One of them for me personally one of the part and I have to implement many, we took the agreement, what we signed and the monitor is since over a year and how ‘s and we start to implement some action plans and with our general counsel John Dye and his team, we are very actively putting the south west border issue and focusing on that. Now south west border issue is a unique to Western Union. It’s an agreement which has been signed in 2010 and we are implementing the actions and I am very confident that the team is doing the right thing. I am very confident that it’s a long process but we are doing that and it’s no secret that doing business in that corridor currently is not that easy as doing business with the competitors. You have to be very open on that and once we implemented all these actions which is quite high standard which is good for the customer, good for the consumer, good for the company. I believe as an industry leader that we’ll be one day and my hope is there, that industry standard, that others have to follow and we have to do that.

Now we are spending about $100 million in compliance, we have a lot of money and we are spending in the right place and we have to do that and don't forget also that this standards we are upgrading our compliance. It’s a global standard also then. And if you want to enter into global cost for the money transfer services, there are some standards you have to feel that comply with the regulatory environment and see that as a competitive advantage. Not many companies can enter in that market that easily without having that. And that's why we are investing. It’s a good investment. We believe it will be competitive advantage and also applying with regulatory environment, definitely we have some work to catch up and we are doing it and but as an industry leader, in this sector, obviously we set the standards hopefully.

Unidentified Analyst

But I guess the question really is, with regards to, does MoneyGram have the same standards, does a particular corridor specialist say from, Russia to Ukraine, have the same standards

Hikmet Ersek

Well it’s a recorder as you know Ashwin, and every country has their own specifics and that's the beauty of that business that we apply to every corridor to any regulatory environment and we do apply with that and that's beauty also of Western Union being in 200 countries. It has its costs, but also its advantages obviously. Once again, the south west border issue, it’s a unique issue which we are working very hard on that and our team is working very hard but Russia issue is different. Ghana issue is different and we are being in200 countries, it has its price and that's about $100 million currently.

Unidentified Analyst

Wondering if you could just provide a little more color on what's happening in the specific corridors where you’re having the competitive issues because Hikmet you mentioned that it’s not a digital that is taking share, its traditional competitors. So what are the vents that led up to the need to do this pricing action? What's changed? Is it more competitors than in the past and if so, why are there more competitors? Or is it that you have raised prices over time or is it that the comps have lowered prices or if something else?

Hikmet Ersek

Two different area, the recent dramatic changes happened in Q3. As you recall, we lost principal amount. We are minus 7% in principal in Q3. Q2 was minus 2%, Q1 was about plus 2, Q2 minus 2% principal amount and minus 7% in Q3. That dramatic sudden change has to do with our Vigo reset, our compliance issues and the Latin America corridor and we had to react to that immediately because we are losing, I'll give you another example. One of our competitors publicly give some numbers and they are growing in this corridor 19%. We envy them. and we are losing in this corridor, minus 20%. So there is a gap of 40% losing customers. And we had to react here immediately. That's the part of that.

The other part is really 1 to 3% and generally investments so far pricing. We've been conservative in 2011 and 2012, we only invested about 1% in pricing. And there’s several reasons. But we always say that between 1 and 3% is what we do invest in this traditionally, historically in this market. So Russia is there.

One issue as you’ve already talked about that already for I think two, three quarters Scott. And then there are 16,000 corridors which we are doing pricing constantly and it’s nothing new. I mean I've been doing pricing since 14 years, pricing actions corridor by corridor, so its corridor pricing and most of time has been successful, I will real and most of the time and we did pricing, one of the biggest pricing we did in 2010 was also (inaudible) South Asia and still growing in a very fast growing market. so I would take the 2% pricing investment specifically related to Mexico and Latin America corridors and throughout the rest is between 1 and 3%.

But generally I will like to also mention that we are premium priced, we are a premium brand and we are going to continue with that and we are not going to change, we don't see from today’s point view, I'll not say that there is no reason that we should change that.

Unidentified Analyst

How much of a pricing premium did you have to get before you saw this dramatic drop off?

Hikmet Ersek

This dramatic drop off, coming again corridors specific is, we lost the Vigo brand and Vigo brand was non-exclusive competing brand. I don't know what the price.

Scott Scheirman

Yes, if you just look at something like a US to Mexico, many of the competitive landscape including (inaudible) Vigo were probably with that $8 or $9, $10 range. Our flagship brand Western Union has probably $15 to send $300 to $500, that's probably a 50% premium that's just too much in the marketplace. I would say our view is, we still can command a premium. We think the value of our brand, the distribution network, customers trust us but just in certain corridors the gap if you, just got too great. But we still think we can be in a premium position to move forward.

Hikmet Ersek

It reminds me the same discussion we had in 2009 and 2010 on US domestic money transfer, Ashwin. Remember, the premium was so high and we adjusted and it came back and still huge success.

Unidentified Analyst

And still a premium.

Hikmet Ersek

Yes, still a premium.

Unidentified Analyst

At what point does higher compliance costs begin to work to your advantage? When does it push some of these lower price competitors out?

Hikmet Ersek

If you look at our business, it really depends, and certainly depends on the corridor, depends on the country. It does already I think, I've been hearing since took over that electronic money transfer or other competitors, mobile companies will come in and take the market share away. It’s hard to build that business without the compliance settlement and cross border business. I think it is already investing in the compliance, investing in the regulatory environment does protect that. We had to do in some corridors, we have do our homework like we have to do our Arizona homework agreement on homework but in some corridors, it’s already a huge competitive advantage. I don't know many companies will invest so much to protect and to grow their business. And protect the cost money and the figure is really about protecting your brand, protecting your customer.

Unidentified Analyst

In terms of just how the stocks performed the last three year, four years, you’ve got to be disappointed. But at what point does the board sort of step in and say, we need to do something radical other than increasing the dividend? Would you consider maybe a different corporate structure, going private? I know it comes up with investor conversations? Why now? I mean you’re obviously not getting any respect in the market?

Hikmet Ersek

Well obviously board and Scott and I are constantly talking to the board and we are very much aligned on that. Shows confidence about that, of how much we believe in the business is that, don't forget we paid till today $600 million back to our shareholders year-to-date through buy back and dividends. Plus, we have a $750 million authorization for the next 13 months and stock is underperformed, Ashwin definitely and undervalued, this company has future, I believe on that and we’re going to accelerate our self-buyback. Ashwin, we have the authorization, we’re going to accelerate because $12 or $13 worth of stock prices, I don't know is far undervalued, it should be there. And I think we have the right strategy, our strategy is correct, our business plan is correct to invest in this company and we are constantly talking to the board about our capital structure and once we have our next board meeting, I am sure that's going to be on the agenda again and we’re going to talk again some.

Unidentified Analyst

Is it just a waste of time to have to deal with people like us when your business is going through such a transition? Would you be focused in orderly (ph)?

Hikmet Ersek

I think it’s not this transition, I think I am coming back to my point. We have a certain issue in the Mexico corridor, right. And we are fixing these issues. I think we have a plan to come back with our revenue growth and profit growth by 2014 and that's the plan we’re executing currently and I am very confident that we’re going to execute that plan and we did it in past and we’ll do it today also.

Unidentified Analyst

We’re out of time, so [Multiple Speakers] thank you Hikmet and thank you Scott.

Hikmet Ersek

Thanks Ashwin.

Scott Scheirman

Thank you guys.

Question-and-Answer Session

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