西聯匯款 (WU) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter, 2009 Western Union Company earnings conference call. My name is Becky and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (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.

Thank you, Becky. Good morning, everyone. Welcome to Western Union first quarter 2009 earnings conference call. Thank you for joining us today. As we indicated in our press release, we have prepared slides to accompany this call and web cast. These slides are available at westernunion.com under the investor relations tab and will remain available after the call.

Before turning the call over to Christina, I want to remind you that today's call is being recorded and that our comments include forward-looking statements. I ask you to refer to the cautionary language in the earnings release and in the Western Union filings at the Securities and Exchange Commission, including the 2008 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 has not authorized and disclaims responsibility for any recording, replay or distribution of any transcription of this call. With that, it's my great pleasure to introduce our President and CEO, Christina Gold.

Thank you, Gary and welcome to our first quarter call. We enter 2009 with a strong focus on gaining market share, driving profitability and generating cash flow and we were pleased with our performance in the first quarter. Our revenue was in line with our expectations at 1.2 billion for the quarter, down 5% or flat constant currency adjusted compared to a year ago. We earned $0.32 s per share, up 10% from last year, excluding the 2008 restructuring expense. And underlying these numbers was the fact that we handled $15 billion in cross border remittances during the quarter, an increase of 4% over last year's first quarter when adjusted for currency.

During 2008 and 2009, we made great progress on cost saving initiatives, including reductions in head count, the relocation of numerous positions to lower cost geographies, selectively lowering agent commissions and the consolidation of our C2C regions. These efforts, as well as, the timing of marketing expenditures and other investments led to a first quarter operating margin that rivaled our largest pierce in the payment industry at 28%. This was a 210 basis point improvement from a year ago, excluding the 2008 restructuring expense. We generated 357 million of cash flow from operations for the quarter with CapEx of just $16 million. Cash flow and liquidity continue to be a focus in 2009. We are in a strong financial position and believe this will be a key contributor to creating long-term value for shareholders. Within the C2C business, we experienced transaction growth of 7% year-over-year. In fact, we handled 46 million transactions this quarter, compared to 43 million in the prior year. As expected, transaction growth moderated from the fourth quarter and the average amount of money sent per transaction declined. These factors impacted C2C revenue growth for the period. We maintain our stance that 2009 is a year of opportunity for the Company and that mind set is exemplified by our acquisition of FEXCO's money transfer business in Europe along with our new agreements with US Bank and Fidelity National Information Service.

In our view, these key actions provide tangible evidence that we are able to leverage our strengths and either acquire or partner to drive incremental market share opportunities through new channels around the world.

Now, let me take you through our three C2C regions. Europe, Middle East, Africa and south Asia represented 43% of our total revenue for the quarter and experienced a revenue decrease of 4% on 15% transaction growth. However, on constant currency basis revenue was up. As expected in Europe, we experienced a moderate slowdown in transaction growth from the fourth quarter into the first quarter. We were pleased to see certain countries hold relatively stable to fourth quarter growth rates but clearly, there were others that remain under pressure, including Spain and Russia. Offsetting mixed results in Europe were the gulf states and India, two areas that remain among our fastest growers. The gulf states performance was strong, slowing only slightly from the fourth quarter of 2008.

India's performance contributed to the region's results with revenue growth of 19% and transaction growth of 42% in the quarter. Across EMEASA, we are directing investments at market share opportunities. In Europe, we are particularly focused on opportunities presented by the November 2009 implementation of the Payment Services Directive. This regulatory change will allow us in many countries to expand the classes of trade that can offer money transfer services. This is an exciting development and for that reason, we have established a dedicated sales force to sign new agents.

Additionally, we took an important strategic step by acquiring our agent FEXCO money transfer business, which allows us to operate across Europe more profitably with broader growth opportunities.

In the first quarter, the Americas regions represented one third of consolidated revenue and experienced a revenue decline of 7% year-over-year on a transaction decline of 3%. In the region, our domestic business saw 10% revenue and 7% transaction declines for the quarter. Mexico saw revenue decline 10% and transactions decline 9%. We believe that these businesses will continue to be challenged throughout 2009. Transaction growth within our US outbound business was stable compared to the fourth quarter.

In the Americas, we implemented a new go-to-market strategy that has enhanced efficiency and effectiveness. Specifically we have combined our US and Latin America organizations, including the Western Union, Vigo and Orlandi Valuta sales forces. We are looking to open new distribution points and are making progress in the US Banking channels as the US Bank and Fidelity National agreements would suggest. Asia Pacific grew revenue 3% on the 25% increase in transactions. Revenue growth slowed in part due to head winds in China where revenue decreased 13% on a 1% transaction decline.

For our China business, sequential revenue and transaction trends continued from the fourth quarter into the first, as transactions conducted by small business users, usually exceeding $1,000, had been adversely affected by economic conditions. Our team has increased their focus on China and is taking steps aimed at maximizing growth and profitability in this important market.

Specifically, we have brought together a cross functional team to create a new strategy, which includes a deeper sub-regional structure and marketing strategy, development of closer affiliations with key inbound corridors and an updated marketing approach with more localized grass-roots activities. Our Philippines inbound remittance growth outpaced the growth reported by the Central Bank of the Philippines. We continue to see significant potential in this market as migrant flows remain robust. According to the Philippines Department of Labor and employment, in January, 165,000 Philippinos migrated overseas, a 25% increase year-over-year. This increase comes on the heel of the record 1.4 million Philippino workers who immigrated during 2008. As the Asia Pacific region accounts for just 8% of our revenue, but represents nearly one fifth of the global remittance market, the region is one of our largest core opportunities.

Moving to our consumer-to-business or payment segment, we generate nearly 90% of the segment's revenue in the United States and much of this stems from home mortgage, credit card and auto loan payments. Much like the fourth quarter, we are continuing to feel the impact of the recession. The American consumer is obviously under pressure and those likely to use our services are conducting fewer payment transactions.

In an effort to diversify, we continue to evaluate acquisitions and are pushing hard on international expansion. We have introduced bill payments in Peru and Panama and are also working on obtaining a license in Brazil. These expansion efforts build on the continued success of our Pago Facil business model. On the product front, we recently announced that through our relationship with Yodlee, Fidelity National will offer its customers integrated online expedited bill payments. We look to attract more partners and sign more deals that leverage our ability to offer same-day bill payment in the United States. This is an important step to expanding this segment's reach into new customers and channels.

So to sum up the first quarter, Western Union is performing well in a tough environment and we credit our strong brand and our diversity and scale with operations in 200 countries and 15,000 corridors. We delivered transaction growth, strong margins and generated significant cash flow, the hallmark of our model. Now, I'd like to turn the call over to Scott.

Thank you, Christina. First quarter revenue was $1.2 billion, down 5% on a reported basis and flat constant currency adjusted. In the first quarter, we delivered $0.32 earnings per share. Transaction fee revenue for the first quarter, which makes up 80% of company revenue, declined 6% due to the impact of currency translation and slowing transaction growth within C2C. Year-over-year C2C principle per transaction declined 10% in the first quarter or down 3% on a constant currency basis. Foreign exchange revenue 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. In the first quarter, foreign exchange revenue was down 2% year-over-year.

Breaking first quarter revenue down further, reported revenue in C2C segment, which was 84% of total revenue, declined 5%. On a constant currency basis, revenue was up 1%. Revenue in this segment was driven by transaction growth of 7%. An increasing number of corridors experienced the impact of the global economic slowdown, which we expected. Our international C2C business saw revenue decline of 3% or on a constant currency basis up 3%. Transactions grew 11%. The portion of the international business, those transactions that originate outside of the US, saw a revenue decline of 3% or growth of 5% constant currency adjusted, while transactions grew 16%. As slide 17 details, the spread between C2C revenue and transaction growth rates widened in the first quarter, compared with fourth quarter 2008. The largest factor in the reported revenue number, accounting for half of the 12 percentage point difference, was currency. Also impacting the spread was first geographic mix. Transactions carry a different revenue per transaction based on originating geography and destination.

Second was product mix, interest transfers have a lower revenue per transaction than cross border transactions and third was price decreases. The combined impact from geographic mix, product mix and price decreases was consistent with fourth quarter 2008. As we stated on the fourth quarter call, the spread may continue to widen in 2009 from currency translation and our global initiatives to drive our intracountry money transfer business. First quarter C2C operating margin was 29%, compared to 26% in last year's first quarter.

Contributing to the overall C2C margin improvement were the relocation of call centers, work force reductions, combining of C2C regions and management of expenses. The C2B segment, which was 14% of our revenue, saw revenue decline of 8% in the first quarter. Operating income for the segment was down 10% and first quarter operating margin of 29% with 60 basis points compared to the first quarter of 2008. We have taken costs out of the business and will continue to evaluate additional cost savings initiatives. That said, we do not foresee improvement in the US C2B business in 2009. This makes our international expansion and product diversification, including acquisitions, all the more important.

Moving down the P&L, let's go to cost of services and SG&A. To get a meaningful comparison to 2008, we excluded the $24 million of restructuring expenses incurred in 2008's first quarter. On an apples-to-apples basis in the first quarter, cost of services declined 250 basis points to 55.7% of revenue versus 58.2% in the first quarter of 2008. We drove this improvement from the call center relocations we undertook and selective agent commission reductions we achieved in 2008. In terms of SG&A in the quarter, it was 15.9% of revenue generally consistent with first quarter of 2008. Going forward we expect SG&A to increase as a percent of revenue due to the costs related to the FEXCO acquisition and timing of certain investments.

First quarter consolidated operating margin was 28.4%. This is a 210 basis point improvement from 26.3%, excluding restructuring in the first quarter 2008. During the quarter, we benefited from $40 million in annual cost savings we achieved from the steps we took last year. Also helping the margin in the first quarter was the timing of certain investments and lower, more effective marketing expenditures at 4% of revenue. We expect the marketing spend to increase throughout the year to about 5% of 2009 revenue. As a reminder, about 65% of our costs are variable so they move with revenue and we are confident that our business model allows us to drive margin expansion as the market improves and revenue grows.

The tax rate for the quarter was 26.6%, compared to 29.2% in the first quarter a year ago. The decrease was primarily the result of a higher proportion of foreign derived profits, which are taxed at a lower rate compared to US derived profits and the effect of tax strategies implemented in 2008. We expect these items to drive sustainable cash benefits on a go forward basis.

For the quarter, our already strong liquidity improved. Cash flow from operations was $357 million, capital expenditures were $16 million. We finished the quarter with $1.5 billion of cash on hand with about $900 million in US cash and $600 million internationally. In February, we refinanced a $500 million 364 day bank loan by issuing 5-year bonds at a 6.5% interest rate. We have debt of approximately $3 billion with maturities of $1 billion in 2011, $500 million in 2014, $1 billion in 2016 and the last $500 million in 2036. Additionally, we have a commercial paper program that is fully backed by a $1.5 billion undrawn revolving credit facility that expires in 2012. At quarter end, we had no commercial paper outstanding.

On March 31, we had about $100 million remaining due to us from the reserve international liquidity fund. We expect to receive the full amount from the fund. Our cash position, cash flow generation and our A minus A3 credit ratings allow us to invest in the future to expand our market share. To put this into context, our business model will continue to generate significant cash flows. Liquidity is a distinct advantage for Western Union.

For 2009, we are reaffirming our outlook as provided during the fourth quarter 2008 earnings release. We expect constant currency revenue to be down 2% to 5%, GAAP revenue to be down 5% to 8%. Going into the year, we had planned for pricing decreases to total 1% of full year revenue. As our leaders review their new areas of responsibility, they are identifying marketplace opportunities and shifting investments. As a result, we may see pricing decreases total around 2% of revenue for the full year. For EPS, our constant currency range remains $1.16 to $1.26 and GAAP range remains $1.18 to $1.28. We are expecting the full-year margin to be around 27%.

In addition to our revenue and EPS outlook, we reiterate the following. We expect to generate cash flow from operations in excess of $1.1 billion and to make capital expenditures of less than $150 million. Finally, we repurchased $100 million of Western Union stock during the first quarter and that puts us on track with the $400 million stock buy back target. Christina.

Thank you, Scott. We continue to see 2009 as an opportunity, a time when the strongest brands have a true competitive advantage. In Western Union's case, the economic slowdown, although certainly an issue for us, hasn't slowed our momentum as it relates to organizing our business and investing for tomorrow. We made our regional structure more efficient and effective by expanding [Hickman] (Inaudible) responsibility to include Asia Pacific and placing Stewart Stockdale in charge of the consolidated Americas region. Additionally, [Vajanna] Clark joined Western Union to lead the C2B or payment segment, as well as, oversee our global strategy. She brings to Western Union a wealth of strategic and payments knowledge. In her more than 20 years with Wachovia, she gained deep expertise especially in marketing, innovation, brand development, customer loyalty and strategic planning.

This sets the stage for strategic process aimed at moving our core money transfer business forward, while pursuing other initiatives that will target the broader payment space. We are as focused as ever on growing our core agent based cash-to-cash money transfer business. Over 90% of our C2C transactions fall in this category. We are building on our success here by investing more heavily in channels that not only move the ball forward in money transfer, but allow us to make progress with new, incremental consumers. In addition to other initiatives, there are three offerings we are focused on, westernunion.com, intracountry money transfers and account to cash. Each of these channels is less than 2% of total revenue today and is growing transactions at double-digit rates. We believe they provide significant opportunity.

We have been working hard on international expansion of our online network westernunion.com and making the overall user experience easier and faster. Based on the site improvements, we are experiencing positive transaction and revenue growth in the United States. We are also seeing 20% plus transaction growth on international westernunion.com sites. And we have improved margins in this important channel. We are leveraging our network and high brand awareness to develop if even more intracountry corridors. Outside the United States, we have $100 million plus intra business with transaction growth exceeding 20%. We are making progress on growing this into a more meaningful business. We made great strides in our banking strategy in the United States with the signing of US Bank and Fidelity National.

Our strategy is designed to expand our distribution and more importantly, extend our brand to new customers through banks physical as well as online distribution. We have made solid progress in attracting new customers with our online relationships with many banks, including Sims in Malaysia, Deutsche Post bank in Germany, Scotia in Canada and other similar bank relationships that allow for account to cash money transfers, in addition to the retail walk-in service at these banks.

In fact, just months into the relationship, Scotia accounts were around 2% of all of our business in Canada, serves mostly new customers with higher principal and on a pace to double their transactions this year. We are excited to capture more opportunity with our banking strategy and our new relationships.

In Europe, we are prepared for the upcoming payment services direction implementation. We have a dedicated sales force which is already prospecting potential agents. The FEXCO acquisition also positions us well to offer money transfer through new types of agents and taking on FEXCO's money transfer operations gives us a center from which to operate and grow throughout Europe, while becoming more profitable. I was recently in Europe to meet with the sales and the integration teams and I am pleased with their progress and confident in our ability to capture the opportunity.

On the mobile front, we continue to sign key operators globally and expect to make more announcements in the near future. Our mobile team is working hard in implementing new tests and understanding our current pilots, which are focused on key intra and cross border opportunities. Our Americas team is broadening its test of the Western Union money wise, pre-paid, reloadable Visa card, including a new innovative feature, overnight home delivery. Preliminary results on our test locations have been good and we are planning to begin tests in Kansas City and St. Louis. We are also investing in technology and process improvement initiatives that better position Western Union in the marketplace.

The revised report issued by the World Bank in March forecasts remittances to developing countries to return to modest growth in 2010 as the mobile work force continues to seek employment throughout the globe. The report states that remittance flows remain resilient as many migrants are likely to stay in their adopted countries. In addition to the migrants who will stay, there still exists a migrant flow to destination countries, albeit at a slower pace than historical levels. Importantly, this population needs to transfer cash home. Based on these long-term trends and associated investments, we are making Western Union much more of a consumer centric organization with the emphasis on developing new products based on demand and marketing capabilities to sell them to our global base.

In an effort to strengthen our understanding of our consumers, we have moved our consumer database, which now spends 200 countries in-house. We have a dedicated team who is leveraging this consumer data to provide stronger analytics supporting many key areas including more effective price modeling, better market-demand forecasting, so we can add agents in the most impactful locations and increased cost efficiencies through better targeting of marketing investments for customer acquisition and retention, including maximizing the benefit of our more than 11 million Gold cards. Utilizing this data more effectively will certainly allow us to grow even more profitably.

To ensure that our brand matches up globally with this strategy, we've launched the Western Union yes campaign. This campaign is our first truly global marketing effort and we are leveraging many techniques across 200 countries and territories. We have made great traction using social media, including a microsite called the Western Union yes effect, Utube and Facebook. The yes campaign was launched in New York, London, Paris and Toronto to great reviews by customers and employees. We showcased the new commercials for more than 400 agents during our recent meeting in Capetown. The excitement was overwhelming. We will be running our commercials in 21 languages in the coming months to complement the other grass-roots efforts. Western Union's physical presence truly makes it the world's payment network and for that reason, we believe, we have a significant market opportunity and a strategy to get there. At the core of the plan, we are allocating capital and other resources to an increasing set of opportunities that leverage our network, brand and customer relationships. Operator, we are now ready for our first question.

(Operator Instructions) And your first question comes from the line of Bryan Keane. Please proceed.

Good morning. The operating margins were significantly better than I expected at 28.4%, but you are kind of maintaining a guidance level of 27% operating margin. Just trying to see if there are additional expenses in there that would cause the margins to fall sequentially because usually first quarter is seasonally the weakest.

You know, I think we're delighted to see the margins that we achieved in the first quarter. I think one of the things when we look at our guidance and where we see revenue is going to be for the year, we have to temper that into it as well. So there is investments in marketing, but it will still be around the 5% level, so it's really a timing of some of the investments going after Mother's Day, Christmas, Ramada and some of the key holidays. They come at different times of the year. Obviously, we're very focused on margins, but there is a little bit more on the technology side, but not a large amount. So it's really a question of some timing and also just where the revenues land as we go through the year.

Okay. And then I think you said pricing is now expected to be down 2% versus 1% previously.

Yes.

I didn't quite get the reason why that was.

We are really planned right now at about 1, 1.4, that's about where we are, but as Hickman and Stewart have gone into their new role, we see in some of the corridors some opportunities to gain some share. So as we did in the Middle East, we priced not so much from a competitive positioning, but really to gain shares. So we see that there is an opportunity there, so that may bump up to about 2% for the year, as we go through the year.

Okay. And then just two other questions, maybe for Scott. The guidance for the year last quarter had single-digit principal remittance growth and it looks like remittance growth was down 3%. So was that a little less than you expected?

No, it was directly about what we expected. One thing to keep in mind, Bryan, is that on a reported basis, it is minus 3%, on a constant currency basis, it is plus 4% and our objective is to continue to gain market share and use our 1.1 billion plus of cash flows to do that. Also, I think as you move throughout the year, you know, as things look now, the Euro may move more in parody than where it was a year ago today. For example, a year ago the Euro was about 1.50, and it's about 1.30 today in rough numbers, Bryan, and in the fourth quarter about 130. As we move throughout the year, as we look at the cross border principal that is correct will begin to normalize, but our objective is to gain market share as we move forward.

The other one would be principal per transaction, it looked like it was down 10, I think it was down 4 last quarter. I know that the guidance was for it to be down, I don't know if that was in line with expectations, the minus 10?

It was directionally where we expected. On a reported basis, it was down minus 10. On a constant currency, it would be down about minus three. What we're continuing to see is our customers are coming to the storefronts, sending transactions. C2C transactions grew 7%. Cross border principal on a constant currency basis was up in the low single digits at 4%.

So the strength of our brand, our 379,000 locations, we're continuing to see customers remit money back to their loved ones and it's one of those things where it's not a discretionary spend for them, they want to get money back to their loved ones. So we will anticipate continue to work to gain market share as we move through the year.

Okay. Congratulations on the strong quarter.

Thank you.

Thanks.

And your next question comes from the line of Kartik Mehta FTN Equity Capital Markets. Please proceed.

Thank you. I wanted to ask you a little bit Christina about your intracountry opportunities. You talked about that a lot. Is there any way you could talk about maybe what some of the near term opportunities or maybe more of some of the longer term opportunities and what the potential is for Western Union?

I think if we look right now where we see a strong growth in the intra, we have it in the Philippines, we have it in Chile, we have it in Russia, so those are very strong markets. We're looking at various parts of eastern Europe, we're looking at some countries there, which are not as big as some of the big, long-term opportunities like the Chinas and Indias of the world where we see tremendous opportunity. We feel that mobile could be the entry into either China or India. That's one of the reasons we're pushing very hard on that. There's about 300 million intracountry migrants that we could take advantage of in that. We're looking to grow that not only intra but a pan European strategy. We can now create a more cohesive pan European one as well as we opened up South Africa as well, a few months back we will have a pan African strategy as well. Some of them are more cross border, but they're really more like intras.

I'm wondering, is this acquisitions of existing agents or is this acquisitions of other products or companies that might help you grow or if you had -- what would be one over the other?

Sure. It would really -- could be a combination of both of those. As we look at acquisitions, we believe there's a number of opportunities out there. A key for us to make sure we've got the right strategic fit as we look at the acquisitions and then second is the right cash on cash economic returns. But clearly, we acquired the money transfer business of FEXCO. We made some agent equity investments.

So we're always evaluating opportunities there and then also looking at the opportunities that may allow us to expand our geographic footprint or extend some of our product expansion in some of our key product areas.

And, Christina, kind of last question. I wanted to figure out if there's been a change in consumer behavior other than people just sending less money? Have you seen any other changes as in the distribution method they're using or anything else that you've been surprised by from consumers that are using your service?

I think what we're seeing is our core consumer's behavior is very consistent except they're very stressed, so they don't have as much money. What we are seeing though is we're getting incremental consumers by doing the account to cash business. Just take Scotia bank, it's 2% of Canada's business in less than a year and it's going to double. We're able to bring new customers into the system. Also, as we've improved our ability on dot com, again bringing more to the business. So we're broadening our franchise to other consumers who use our services.

Thank you very much.

Thank you.

And your next question comes from the line of Glenn Greene of Oppenheimer. Please proceed.

Thank you. Good morning. Just a quick question as it relates to the EMEA region and the differential between the revenue growth and the transaction growth, sort of the 19.4 Delta. I was wondering if you could give us more color on breaking down the piece that drove the differential, between currency, product mix, pricing. Just a little more color on the differential?

Sure, sure. Glenn, this is Scott. What -- primarily the difference in EMEAs in the fourth quarter compared to the first quarter is currency. On a consolidated basis, currency impacted us by about 5%, GAAP number was down 5, constant currency was flat, revenue growth. So really if you apply that to EMEA, which is a large part of our international business, it really had a much more magnified impact on EMEA. If you exclude the currency impact, revenues were clearly up in the EMEA region.

Any way to be a little bit more specific how much the currency impact was in EMEA?

What I would probably do is refer you to slide 17 in the deck which would really give you an overview of the C2C and EMEA is a part of that and clearly, what we've seen if you compare Q1 to Q4, the difference from product mix, geographic mix, pricing is consistent with Q4, really what's driving the difference on an overall basis which would be true in EMEA is currency, too.

And then similar to Bryan Keane's question on the operating margins, but if I look at it just from a gross margin perspective, is there any reason to think these gross margins aren't sustainable going forward and how much of the benefit was currency on the gross margin side?

Let me give you a little bit of color on that as well. I think the other thing, obviously, we planned our investments for 2009. We did, though, as we came into Q1, we were very careful in our management expenses waiting to see see what was going to happen in the marketplace.

We're trying to balance 200 countries, a lot of corridors and making sure that we can deliver in terms of our guidance and also deliver in terms of what we were expecting for the business in terms of growth of transactions. I think you see that on the agent commission side and that line we really have made tremendous progress with the reallocation of some of those contracts that we've done with agents and the new signings, but also when you look at moving the call centers out of the country, that really has improved that line. So some of that will stay.

It's more on the expense line we're going to see -- you know, Mother's Day is coming. That's a key event for us. So there will be, you know, more investments coming, plus there is still the question as you look at our guidance, we recognize that there's still challenges in the marketplace as it relates to revenue. And, Scott, maybe you can add a bit on that as well.

Yes. Clearly, the cost of services line, we're pleased with that and as Christina mentioned, many of the expense actions we took in 2008 and some of them in 2009 have helped out with call center relocations, head count reductions and selectively reducing agent commissions and signing new agents at lower commission rates.

As we move forward, we are targeting a 27% margin to make sure we have the right balance of profitability, but investing to drive the growth and on an overall basis, our investments are relatively the same. I'd give you an example, in marketing, we're targeting about 5% of revenues on a full year basis. We are a little bit less than that in the first quarter, probably be a little bit higher as we move through the quarter. That 5% is consistent with where we were in 2008.

Then just quickly, the trends towards the end of the quarter, did you see any change, any stabilization or was that sort of a consistent pattern month to month to month?

You know, I think when we look at -- we saw a slight step down from Q1 from fourth quarter and it was really pretty consistent throughout the quarter. So there wasn't sort of a ramp down, it's kind of just pretty well spread across the quarter.

Great. Thank you very much.

Thanks.

Thanks.

And your next question comes from the line of Julio Quinteros of Goldman Sachs. Please proceed.

Great. Christina, can you just go into a little bit of detail on some of the new initiatives that you guys have announced over the last couple of days, specifically some of the bank relationships in terms of the pace of adoption and how quickly you would expect to see some of those banks begin to contribute to the growth?

Obviously, we're very delighted about US Bank and they will actually be going live in the month of May and we'll be hooking them up. So they will become a retail location for Western Union offering our services starting in May. As we move through and develop our relationship with them, we look to see account to cash and other opportunities for us that will develop with them, but that will be a little bit longer term. Obviously you saw with Scotia Bank it has been very, very strong and obviously, we have it with with the Deutsche Post Bank, we have it with the Swiss Post. So we have a number of things that are doing extremely well as it relates to that banking strategy.

Again, with Fidelity National, we have two different relationships there. One is that they will be offering money transfer services to their 8500 members. So the smaller banks, you know, for us to reach out to 8500 banks is more complicated, but we now have, you know, some dedicated banking people who are really going out to sell our services to these banks for money transfer, but on the other side as well with Yodlee, we are offering bill payment which is real time bill payment online. So again, another opportunity for us to expand our payment segment.

So both of these initiatives are doing well and we're very focused on our banking strategy in terms of making banks, particularly in the United States, a part of our network. In Europe and other parts of international, we have banks, it's about 75% of our locations, our banks and post offices, but now this really broadens the portfolio for us.

Okay. Great. And then just any general view in terms of what the pricing relationships or the commission structures look like with the banks?

Very much the same. It's -- you know, we basically -- we have no favorites. We love them all. But it's the same type of deal.

Okay. Great. Thank you.

And your next question comes from the line of James Kissane of Banc of America, Merrill Lynch. Please proceed.

Thanks and good job, guys. Christina, could you provide a little more color on China and how you can rejuvenate your business there? I mean it's not growing much and I know the economy is weak, but it's such a huge opportunity.

I think with China, you know, we have a great team over there in China, but what we've done now is we've basically carved China into regions as opposed to looking at it from one big country. When you think of the size of China, so from an operating point of view, Hikmet's team has really carved it out into different regions who have different types of consumers and needs. Then they've connected it with the right kind of send and receive. Part of Chinas send and receive, some of it is coming from the Middle East, some of it is coming from the west, really looking at the corridors and identifying what the needs are that they have. I am doing a lot of grass roots work.

I think, also, we have seen tremendous growth in India and the knowledge of the team from India is really going to be transported to assist the team in China and really rethink some of our strategy because in India we have over 50,000 locations. In China, we have 25,000. Although that's good, when you think of the population, we need a much greater reach, so the team is focused on doing that as well.

So I think, yes, we have to deal with the small business and find the right solution there and some of that is going to be driven by the recession, but as we look at really the remittance business, we are looking at sort of a new go-to-market strategy for that business.

And in the release you mentioned that the US outbound business was stabilizing. Do you think it's bottomed out at this point?

It seems to be doing okay. I think we're pretty pleased with it. I think -- you know, I think one of the things we saw in the US is the Hispanic consumer is the consumer we're seeing has had the most pressure and as you look at unemployment and a lot of factors, that consumer for us has been really challenged. So the US outbound is much more broad based and I think we feel, you know, that that's -- that one is holding pretty well.

And just the last question, the opportunity associated with commissions, you talked about pricing, you know, being down minus two instead of minus one. Can you give us -- you know, maybe quantify in commissions maybe what the margin opportunity is longer term? Yes.

I think on the commissions you saw, I think we came in at 55.7 for the quarter. So we felt very good about that when you see where we were last year. In terms of the pricing, we haven't finalized everything on the pricing because we're at 1 point -- 1.5. It could be 2, it could be 1.7. It depends on as you look at corridors, we have countries like Indonesia and Malaysia where we really don't have large share, but have a huge opportunity. So if we put the pricing right, we can really go in there and really lift a lot of business out.

And, Jim, this is Gary, just for a clarification, which I think you got, the 55% isn't the commission level, that was the percent of cost of services.

Yes, the total line.

Yes.

Got you. I'm just curious longer term. Is there a one-point opportunity here, two-point opportunity or is there a push back, you know, from the agents?

Yes, I mean it's a balancing act. I think what we've tried to do on all of the new ones, especially on the receive side, set up a better rate of commission because they obviously know the size of the business they're going to get and the volume and the value of the brand. So we've been working on it consistently. You'll see it, you know, coming through in our numbers, but these contracts are five-year durations. So sometimes it takes a while before it flows through into the system. So it's a point of focus. We have a target every year and the team is actively going after it.

Great, thank you.

Thanks.

And your next question comes from the line of Franco Turrinelli of William Blair and Company.

Good morning.

Good morning.

Scott, thanks very much for the disclosure on the impact on, you know, slide 17. One thing that I'm curious about is you talked about lower principal. Is that captured in the mix component of the difference between transaction and revenue growth?

Yes. That would be part of the overall mix as we think about the change from transaction growth to revenue growth.

So in mix, we've got geography, we've got intra versus inter and we've got lower principal all kind of embedded within that?

All embedded within that, yes. And that's been running relatively consistent, that mix difference compared to the fourth quarter of 2008.

And are those three factors, you know, broadly equal? I mean not precisely, but broadly?

We haven't provided that level of detail, but just to say that suffice, you know, the three of those are making up the mix difference. I also think on the -- I believe on the principal per transaction, I think a number of individuals may think that has a huge, huge impact on the revenue per transaction.

It has some impact on the revenue per transaction, but you've got to remember that we price in bands, so a lot of our bands run in bands of 100 or $200, so it may take a while for a transaction to cross a fee band.

Great. That's helpful. Christina, it's really interesting to see how many different, you know, initiatives you have in terms of new channels in particular. Is your experience thus far that those channels are really, you know, kind of additive to our existing business? To what extent are you seeing, you know, cannibalization or a kind of shift from traditional channels to some of these new channels?

Well, I think that we saw right from the very beginning on dot com about 50 to 60% of the business was incremental. So we know that. I think when we look at the account to cash in the banking system, that's pretty well all incremental because some of those transactions, banks were doing them to some degree with difficulty and now with us it's a much faster transaction.

So a lot of it is incremental, it's no cannibalizing the business. So even on the mobile front, it's a much smaller transaction, it's a different consumer. So I think what we're just doing is broadening our base and giving ourselves a bigger customer footprint to work with.

I think that's really both interesting and important because obviously, you know, these technology-based alternatives or challenge-based alternatives have for a long time been seen as a real, you know, risk for a company and I think what you're really telling us is that, you know, these are primarily, in fact, additive rather than --

Right.

Is that fair?

That's fair and I think it just broadens our opportunities and really puts us, you know, toe to toe with any of the competitive offerings out there.

Sure. Going back to Jim's question on agent commission and you talked about new contracts with agents, is this something where in the future you can structure these contracts as such that as volume ramps up with a new agent, you know, the commission rate would sort of automatically come down as opposed to having to renegotiate as volume goes up?

We have different types of arrangements and some of them actually goes in reverse. As they drive to certain level of productivity, they get a higher level commission. So we do have performance based contracts as well. So it varies across the globe based on the volumes, based on the type of location, so we can manage that.

One final question if I may for Scott. Scott, obviously, tremendous operating cash flow performance. Even being aggressive with our CapEx, buy backs and acquisition assumptions, I mean you're still left with a lot of excess cash. Any thoughts on where your preference would be there? Would it be debt pay down, would it be more buy backs, anything you can say there?

You know, we're pleased with our cash flow, the $357 million in the first quarter and we're on track to at least $1.1 billion in 2009. As we think about our capital structure, we're going to continue to target a capital structure that's consistent with A minus A3, so that would leave us right around that $3 billion of debt and then just operating, the global operating environment we're in now, we feel like it's very prudent from a liquidity standpoint to be very solid there. We have been solid, we continue to want to be solid.

We'll continue to look at opportunities in the marketplace. We periodically review our capital structure internally and with our board and we will a open continue to, you know, make sure we have strong liquidity, we'll invest in the business, we've got an eye to some acquisitions and then we're targeting $400 million of stock buy back and we're right on target. We're $100 million into that through the first quarter.

Any thought -- any discussions at the board level on dividend levels?

We periodically have those discussions with our board and we'll continue to have those discussions and clearly investing in the business is very important to us, but also providing a very solid return to our shareholders is important. So we'll continue to have those discussions and weigh the priorities in our capital structure and use of cash.

Okay, great. Thanks for taking my questions.

Thanks.

And your next question comes from the line of Chris Mammone of Deutsche Bank. Please proceed.

Thank you. The FEXCO acquisition closed in February; is that right?

Correct. The FEXCO acquisition closed in February.

Okay. So just wondering there, can you just remind us about the accounting? Was there any impact to revenues from the timing of that deal closing?

No. There wasn't. Today and even before the acquisition, those revenues were really already recorded on our books and what -- with the FEXCO acquisition, we acquired the money transfer business. So we did not acquire any nonmoney transfer assets as part of that acquisition and the impact overall on first quarter was pretty nominal since we owned them. About five or six weeks in the first quarter.

Okay. All right. And then on the margins, I guess how should we think about the distribution going forward? I know that the prior expectation was for back half to be higher than the first half. Clearly we've got, you know, pretty good number in the first quarter.

Should we expect second quarter to be lower due to Mother's Day and then maybe a lift in the third quarter and then fourth quarter be down because of the holiday marketing spending? I guess how does the timing of the other technology investments flow into the margin distribution as well?

Sure. Sure. The margins will vary by quarter, Chris. You know, in the first quarter we're at 28% and we're targeting a full-year margin right around 27%. So quarter by quarter, the margins will be different and by default, you know, some of the quarters will probably be a little bit below that 28% mark as we manage to a 27% margin on a full-year basis.

Also what it will vary with to some extent is the revenue performance through the year, but we continue to make investments around Mother's Day, that there's a number of key holidays in December and then Ramada, so we'll continue to invest in that. Full year basis I encourage you to think about we're targeting a margin around 27%, but again it will be balanced with investments and the revenue performance as we move through the quarters.

Okay. That's helpful. Thank you, guys.

Okay. Thanks, Chris.

Thanks. And your next question comes from the line of Tien-Tsin Huang of JP Morgan. Please proceed.

Good morning. Sorry, I got disconnected. I want to ask about EMEA, south Asia, it was nice to see it held up so well despite the negative press in the gulf states. How big is the Middle East or the gulf coast actually? Can you give us that and what kind of trends are we seeing in recent weeks?

We don't disclose the size of the Middle East, but EMEASA itself is 43% of our business. We continue to see strong growth coming out of the Middle East. It has moderated somewhat from Q4. You know what, but I think to put it into perspective, Saudi Arabia is the second largest market in the world. US is number one and then it's Saudi Arabia. So you can see how large and important it is. Tends to be a lower principal and lower revenue per transaction, but a very high volume business.

Okay. So it sounds like maybe a little bit of slowdown, but not much material change there?

No, but I think as we look through the year, we're balancing all of the EMEASA, we're looking at MEPA, looking at all of our big growth engines and monitoring those because we want to make sure we really have a good feel for what's happening in the marketplace.

Okay. Good. And then I guess US Bank corps, just a couple of questions there. What ultimately drove the deal I guess in your direction? I believe the partnership was previously at your biggest competitor.

What created the opportunity? Was it a competitive special situation, a bidding process? Just trying to better understand how that came about and secondly, if you can talk about the pipeline for other direct partnerships with banks especially in the US.

I think one of the things that Stewart and his team has been very focused on a banking strategy for the US, it's something that we've looked at for some period of time, but he really mobilized the team and himself to really go make that happen. I think we offered a tremendous brand, 379,000 locations, great compliance, which is very important.

I think all the attributes of our business were important to them in making that decision and the ability to also drive traffic, to really give them customers and business and then also the technological capabilities that we can offer as we move along in this relationship with account to cash and other alternatives.

And then the pipeline for banks, Christina?

I think it's -- you know, obviously it's -- everything is in our line of sight. Obviously Fidelity, that relationship is going after a certain group of smaller banks, but we have a number of others in the line of sight. So look to more announcements over the next period of time.

Okay. I guess last question for you, Christina, just the revenue guidance, 2 to 5% declines, you know, starting out at a good pace here in the first quarter, any change in our confidence level to hit the 2 to 5% decline in revenues for '09?

I feel good about the guidance. I feel confident in where we are.

I think we had a great first quarter looking at where we came out in Q1, but I do recognize that there's a lot of unknowns out there in the marketplace and we're trying to balance all of that with, you know, some corridors -- or countries like Spain and Russia are more difficult, but then we have the strength of Middle East and also some European countries are also strengthening. So we're balancing all of our different businesses.

Good. Nice to have that buffer. Thanks a lot.

Thanks.

Thanks.

And your next question comes from the line of Dan Perlin of RBC Capital Markets. Please proceed.

Thanks. I just had a question about the foreign exchange revenue. Scott, is there anything that's either making it more difficult for you guys to earn a spread or creating an opportunity for you guys to earn maybe an outside spread given some of the volatility in the currency?

No, not at all. You know, as we talk about pricing and so forth, whether it's fee or FX spreads, that's all considered in our overall pricing equation. But, you know, we manage that very carefully and closely every day with our agents and continue to earn spreads that we believe are competitive and allow us to drive -- for example in the first quarter, C2C transaction growth of 7% and, you know, internationally outside of the US grew transactions at 16%. So really no impediments in driving the business with FX.

I don't mean so much from the volume standpoint, but your ability to actually control that spread.

No. We -- it's part of the pricing equation, if you will, and we have the ability to set those spreads every day and don't have any challenges in doing that. It's a very competitive marketplace and we're competitive out there, but we have the ability to set the spreads where we like to.

Got it. And then a quick question for Christina. Is -- when you guys look at kind of the correlation with global unemployment and then your business, have you seen a massive lag effect to that or is it a quarter or two? I'm just wondering you're starting to see global unemployment really kind of start to hit higher and I'm wondering if you've really actually seen the real slowdown potentially in volumes yet?

I think our business is very mixed in terms what have drives what. Recognizing that our customers need to send money. So that what we do see is lower principal, we see fewer transaction, but there's not one criteria that says this correlates directly to Western Union transactions or revenue growth. There are certain countries, let's say Spain where we know unemployment right now is running at 15.5% and it was a highly construction focused economy. That we saw that hit about a year ago.

But in other countries, it's really very mixed, so it's not unemployment, it's just our customers, what they end up doing is going to other jobs or fewer hours, but they really need to send money. This is food and lodging and, you know, helping their families survive. So I think that, you know, you cannot just say -- it impacts our customers, but it is not one factor that drives our business results.

Okay.

Okay.

And then lastly, for Scott, if I -- if I kind of adjust for the potential marketing spending that you could have done at 5% this quarter, it looks like it was only about a penny in earnings anyway, does that sound about right to you?

Yes. 1% of revenue is probably in the neighborhood of $12 million.

Right. So even if you had spent that level, you still would have posted a pretty strong number?

There's some other investment timing in there, but we're trying to keep our investments relatively consistent to drive that 27% margin, but there is some timing within the year.

I would also add with our yes campaign, the team has done a terrific job in using, you know, common materials, doing 20 commercials in one shot, really maximizing how we do it and how we go to market. So that's going to give us tremendous savings going forward. So we're getting more bang for the buck, that's really important in terms of what the marketing team has been able to do.

Lastly, previously you said FEXCO would be $0.02 dilutive. Is it now expected to be kind of flat to accretive for you guys or still slightly diluted.

That's still our view on FEXCO.

Okay. Thank you. Thanks.

Becky, we are coming to the bottom of the hour. I think we have time for one last quick one.

Our final question comes from the line of Bob Napoli of Piper Jaffray. Please proceed.

Thank you and good morning. Question, the FEXCO acquisition, the Payment Services Directive, what kind of competitive moves are you seeing? I mean it does open up and certainly you guys are aggressively moving after that market, but are you seeing -- what are you seeing on a competitive side? This should open up some opportunities for others.

You know, I think right now we're not seeing too much activity because recognizing that that goes into effect in November of 2009, for us, we're really geared up and ready to roll because we already have the network, we have the compliance capability and we have the brand. So, you know, it's not something that you can just walk in and turn on a switch.

Europe is highly regulated and there's an awful lot to do, so I think that there's a lot to be done before a lot of the competitors will come in. I think, also, what we have now is a dedicated sales force who has experienced and knows what to do, who are out there right now targeting opportunities for us so when this comes through, we're really to roll.

Do you have a feel for how many locations you will be able to add?

I would not -- I would tell you it's quite substantial. Over the next couple of years, it's quite substantial and I think the pay back on the FEXCO acquisition and what we can accomplish with this is going to be very good.

The US Bank market, that's always -- banks have always been viewed as potential competitors and you're making more of them partners. Is -- what -- you said 75% of your locations outside the US are at banking locations. What percentage of that within the US and what kind of -- can you quantify in some regards --

In the US, it's very, very small. It's not material. It's not anywhere near that. It's always been a challenge for us and the banks want to white label our brand and we won't do it. They want us to offer them the service but call it whatever they want to call it.

But I think as -- an interesting case is Scotia bank who did a lot of research because they wanted to attract the ethnic consumer into the bank and as they looked like how do this, they finally realized you need the network and the know how on both sides of the transaction in terms of marketing and they called up and said, hey, this is the only way we're going to get it done.

So I think a lot of banks are rethinking their strategy and really coming to us as, you know, the experts in the field to really help them get this done.

And FIS was not working with anybody else prior to your relationship or were they?

No, not that I'm aware of, no.

And last question, now that you're more into mobile, can you -- do you have updated thoughts on the economics of mobile and the opportunity around mobile?

You know, I think still mobile is a long-term opportunity. Mobile tends to be a principal that's below $50. So you've got a very small amount of principal that's moving. Right now we have it in selected markets, like in the Philippines we're doing it, we're working in the Middle East, so we have it -- and we're working with Vodaphone in Africa. So we're learning. This is a learning mode as opposed to knowing exactly every element of each thing.

You're basically looking at a lower principal, but you still have profit on that transaction and business here requires volume. You've got to drive a lot of transactions. But I think longer term as well as we talked earlier, this is an opportunity for us to get into intra and China and India and that will be very important to us in the future.

Thank you.

Okay. I just wanted to thank everybody for being on the call today. We're delighted with the quarter and as always, I want to thank all of the employees of Western Union for all that they do every day and our agents and just appreciate your time on the call and look forward to talking to you next quarter. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.