西聯匯款 (WU) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third quarter 2009 Western Union Company earnings conference call. My name is Lacy and I'll be your coordinator for today. At this time all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Mike Salop, Senior Vice President of Investor Relations.

Good morning. I am pleased to have recently joined the Company and I look forward to working with everyone in the future. Today's call will include comments from Christina Gold, President and Chief Executive Officer, and Scott Scheirman, Executive Vice-President and Chief Financial Officer. Christina will provide a brief overview of the third quarter. Scott will give a more detailed review of the financial results. And then Christina will update you on the Company's strategic initiatives. After the comments, we will have time for your questions. 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 investors 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. Please refer to the cautionary language in the earnings release and in Western Union's filings with 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 some items that do not conform to generally accepted accounting principles. We have reconciled those measures to the most comparable 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 any responsibility for any recording, replay or distribution of any transcription of this call.

I would now like to turn the call over to Christina Gold.

Thank you, Mike, and welcome to our third quarter call. The company delivered solid results in the quarter with reported revenue of $1.3 billion and earnings per share of $0.26 or $0.33, excluding a charge for an anticipated settlement involving the State of Arizona. As you are probably aware, the legal and regulatory environment in Arizona has been challenging for our company for a number of years. During the quarter we accrued $71 million related to an anticipated regulatory settlement. The anticipated settlement includes resolution of all outstanding legal issues and claims with the State of Arizona as well as a multi-state agreement to fund a not-for-profit organization which will promote safety and security along the entire US and Mexico border. We have always had common policy goals with Arizona but have differed on the best procedures to achieve these goals.

Our objective is to move forward without the uncertainty surrounding this issue, as well as to contribute to improving conditions along the border. The legal matters date back to 2003 and the compliance procedures involved are not an issue today. Over the years, we have made significant improvements to our compliance program which we believe are the best in the industry. The agreement is not yet finalized, but we anticipate completion before the end of the year. Scott will give details on the settlement accrual in his financial review.

Turning to the business, in the third quarter we were pleased with our operational performance as transaction and revenue trends were consistent with the second quarter. The geographic diversity of our business enables us to shift investments in response to changing economic conditions. C2C revenue declined 5% in the quarter or declined 3% constant currency adjusted on 3% transaction growth. Average revenue and principal amount per transaction were consistent with the levels experienced in the first half of the year. Our objective is to gain market share, and we believe we have continued to make progress on this goal in 2009.

On a regional basis, Europe, Middle East, Africa and South Asia posted a revenue decrease of 3% with 8% transaction growth. Western Europe experienced consistent transaction growth rates compared to the second quarter, while Spain and Russia continued to be challenging markets in the region. The Gulf States delivered strong transaction growth although growth moderated compared to the second quarter. In India, revenue grew 8% and transactions increased 16%. We completed several agent signings in the region including Quick Money SA in Morocco, which operates 1,500 locations, [Boolu] Exchange in the United Arab Emirates, and Sonali Bank which is the largest government sector bank in Bangladesh. The [Tartarstan] Post in Russia which has the potential to add 1,000 locations also joined the network.

The Americas Region experienced a 10% revenue decline and a 4% transaction decrease. These rates showed slight improvement from the second quarter. Mexico results were stable relative to the second quarter as revenue declined 18% and transactions declined 13% in the quarter. While Vigo and our independent class of trade underperformed market data, our larger regional and national agents performed in line. Our US outbound business, the largest revenue component of our Americas region continued to post stable transaction trends.

In the Americas, we are executing on our go-to-market strategy which includes growing the network through the banking class of trade, introducing new products with the expanded prepaid programs and repositioning of our domestic money transfer business through pricing, targeted marketing and customer segment expansion. The US domestic money transfer business declined 15% in revenue and 9% in transactions in the quarter and has exhibited negative trends for an extended period. In the fourth quarter, we are implementing a repositioning of our domestic money transfer business.

On October 1, we implemented new domestic pricing that established standardized national prices and brought more consistency relative to US outbound pricing. We launched a marketing blitz around the new pricing campaign and we will continue with significant promotional activity throughout the holidays. The repositioning is designed to drive accelerated customer usage and improvement in transaction growth in the US domestic market. The price actions are included in our 2% pricing reduction outlook for the year and we believe this is the right repositioning to turn around our domestic money transfer business.

Moving to Asia Pacific, revenue in the quarter increased 5% with a 15% increase in transactions. China's trends improved relative to the first half with transaction and revenue growth of 7%. Our strategies to drive growth in China are beginning to pay dividends. Our targeted marketing efforts reflect an enhanced understanding of the diverse groups within China and the distinct related send locations. We were pleased to renew our agreement with the Agricultural Bank of China with an additional 15,000 locations expected by 2011. Once activated, these additions will bring our total location count in China to approximately 40,000.

We are further developing other Asian countries with promising long-term growth characteristics. Indonesia is a prime example. The country represents a top 20 inbound remittance market. During the third quarter, we had strong transaction growth in Indonesia and we launched our ten thousandth agent location in the country. We strongly believe Asia is a great long-term opportunity for us as it represents 20% of the global remittance market but only 8% of Western Union's revenue. The Philippines remains an important market although transaction growth moderated from the second quarter, given the country's connection to the Gulf States. As you are aware, many parts of the Philippines have encountered devastating flooding brought by Tropical Storm Ketsana. The Western Union Foundation and our regional operating center in the Philippines have begun a number of initiatives to assist in relief and reconstruction efforts. The Western Union Foundation is also contributing to emergency response to the hardships inflicted by disasters in Indonesia, Samoa and India.

Turning back to the business, globally we continue to focus on growing our core though a variety of channels including our intra-country transfers, westernunion.com and account-to-cash. Each of these channels represents less than 2% of existing company revenues, but they are growing rapidly and offer significant opportunity. Our intra-country money transfer business outside the US grew transactions at a double digit rate in the quarter. The dot-com service is available in 14 send countries, including the top five European send markets. The profitable and high growth channel posted double digit transaction growth in the third quarter, including over 40% transaction growth internationally. Our account-to-cash transactions have grown more than 60% year to date with 10 banks currently offering the service. Account-to-cash provides Western Union connectivity to millions of account holders, many of whom who are new to our brand. As we focus on expanding partnerships with banks, we expect our account-to-cash offering to become a more significant part of our business.

Turning to global business payments, revenue declined 3% while transactions increased 2%. Revenues were aided by $8 million from the Custom House acquisition which closed on September 1. Our consumer bill payment offering in the United States provides same-day bill payment through our relationships with more than 4,000 billers. We can leverage these relationships in our systems to offer convenience to mainstream bank consumers as well, and we are pleased that Western Union's expedited bill pay services is now being offered to Wells Fargo online banking customers. Overall, we were pleased with the company's operational performance in the third quarter as revenue and transaction trends stabilized.

Now I would like to turn the call over to Scott for a more detailed financial review.

Thank you, Christina. Revenue for the third quarter was $1.3 billion, down 5% on a reported basis and down 2% constant currency adjusted. Custom House added $8 million to revenue and had a $5 million operating loss, primarily due to acquisition related expenses, including amortization and integration costs. We reported GAAP earnings per share of $0.26 or EPS of $0.33, excluding the settlement accrual. On a constant currency basis, EPS excluding accrual was $0.01 lower. Earnings-per-share in the third quarter of 2008 was $0.33.

During the quarter, the company recorded a pre-tax accrual of $71 million related to the anticipated resolution of issues with the State of Arizona in a multi-state agreement to fund a not-for-profit organization. A significant portion of the accrual relates to funding this organization which will promote safety and security along the entire US and Mexico border. In addition, as part of the agreement, the company anticipates committing to make further investments to its compliance programs in the US and Mexico border area over the next two to three years. The incremental EPS impact from these investments is estimated to be less than $0.01per year over that period.

We do not expect the terms of anticipated settlement agreement and the related compliance investments to have a material adverse impact on the company's future performance. We'll work closely with our agents, customers and other key stakeholders to reinforce confidence in our compliance programs.

Turning back to the business performance, third quarter transaction fee revenue which made up 79% of company revenue declined 5%. Foreign exchange revenue represented 18% of total company revenue and it was flat year-over-year. Both transaction fee and foreign exchange revenue were negatively affected by foreign exchange translation.

Key trends in the business were consistent with the prior quarter. We experienced year-over-year C2C transaction growth of 3% while the average principal per transaction was down 4% constant currency adjusted. Revenue and principal amounts per transaction were comparable to the first half of 2009. Most importantly, we find that our customers continue to send money and we believe we gained share in the cross border [remittance] markets. In the third quarter, the amount of consumer-to-consumer cross border principal transfer through our network declined 5%. Or was down 1% constant currency adjusted. Through the first nine months, the amount declined 5% or was flat constant currency adjusted.

The World Bank estimates the full year 2009 market for remittances to developing countries will decline 7% to 10%, while (inaudible) forecasts a 7% decline for cross border remittances. These organizations are forecasting slight market growth in 2010.

Cost of services represented 56.5% of revenue and improved 50 basis points compared to the third quarter of 2008. Operational improvements enabled the company to maintain strong gross margins despite lower revenue, and included the benefits of taking FEXCO direct, cost reductions, selective agent commission initiatives, and overall expense management.

SG&A was 22% of revenue in the quarter as reported, including an impact of 5 percentage points related to the $71 million settlement accrual. Excluding the accrual, SG&A as a percentage of revenue was consistent with the second quarter. Costs related to the FEXCO and Custom House acquisition also impacted SG&A trends. Marketing totaled approximately 4.5% of revenue for the quarter. Investing in marketing remains a priority for Western Union to build awareness and drive transaction growth, and we plan to spend 5% of revenue on marketing for the full year.

Consolidated operating margin was 21% in the quarter, or 27% excluding the settlement accrual. This compares to 27% in the third quarter of 2008. Our cost structure is about two-thirds variable. This fact, combined with headcount reductions, call center relocations, selective agent commission initiatives and the consolidation of C2C regions contributed to strong margin performance on an operational basis. When the market improves and revenue grows, we believe our business model will support margin expansion. The tax rate for the third quarter was 27% compared with 28% in the third quarter of 2008. In 2009, we had benefited from a higher proportion of foreign-derived profits which were taxed at a lower rate compared to US-derived profits, and the effects of tax efficient strategies implemented in 2008.

Now, turning to our segments. C2C which was 85% of total revenue declined 5%. Constant currency adjusted revenue was down 3%. Transaction growth was up 3% in the third quarter in line with the second quarter of 2009. Our international C2C business saw revenue decline 3% or flat constant currency adjusted, while transactions grew 6%. The portion of the international business representing transactions that originate outside of the US saw revenue decline 2% or growth of 1% constant currency adjusted on transaction growth of 9%.

C2C operating margin was 28%, consistent with the comparable period last year. The settlement accrual is not included in segment results. The difference between revenue and transaction growth rates for the C2C segment was approximately 8 percentage points. The difference was primarily due to currency translation, geographic mix, product mix between intra- and cross-border transfers and pricing. Currency translation totaled about one-quarter of the difference. The combined impact from the other factors has remained generally consistent with recent quarters. The company continues to expect pricing decreases for the full year to be approximately 2% of revenue.

Our global business payment segment which includes results from the recently completed Custom House acquisition was 13% of Western Union revenue in the quarter. Segment revenue declined 3% or declined 7% excluding Custom House. The operating margin was 24%, although excluding the Custom House acquisition, it would have been consistent with last year's margin of 26%. In the near future, segment margins will continue to be impacted by Custom House related costs, including investments to grow the business.

The company's financial position as demonstrated by our cash balance, cash flow generation and our A minus A 3 credit ratings remain strong. In the third quarter, we repurchased 6.9 million shares at an average price of $18.19, for a total of $125 million. Year to date, cash flow from operations was $958 million, capital expenditures were $67 million, and stock repurchases totaled $225 million. We now expect our full-year capital expenditures to be closer to $100 million than $150 million. We continue to target full-year share repurchases of $400 million.

As expected, on October 1, Western Union received cash from First Data which was invested in a portfolio supporting our retail money order business. Beginning in the fourth quarter of 2009, these investments which should average approximately $800 million will appear as settlement assets on our balance sheet with a related increase in settlement liabilities. We maintain our prudent investment philosophy by investing in highly rated liquid debt securities.

At quarter end, we had $1.6 billion of cash on hand, with slightly more than half in the United States and $3 billion of debts. Our nearest debt maturity is November 2011, and we also have a fully available $1.5 billion line of credit that expires in 2012. The company has narrowed its revenue and EPS outlook to the higher end of its previous expectations, excluding the impact of the settlement accrual.

The company now expects the following full-year 2009 financial results, including Custom House. Constant currency revenue to decline 1% to 2%, GAAP revenue to decline 4% to 5%, GAAP operating income margin of approximately 25% or approximately 27% excluding the settlement accrual. GAAP EPS of $1.15 to $1.20, or $1.23 to $1.28 excluding the settlement accrual. Constant currency EPS $0.01 lower. Cash flow from operations to exceed $1.1 billion and a tax rate of 25% to 26%.

Our previous outlook was for constant currency EPS of $1.16 to $1.26. And GAAP EPS of $1.18 to $1.28 which did not include the diluted impacts of $0.08 from the settlement accrual or $0.01 from the Custom House acquisition. In the current outlook, Custom House positively impacted revenues by less than 1%. Through nine months of 2009, operating income margin excluding the settlement accrual was 27.5%, while our full year outlook was approximately 27%. Key operating reasons for the fourth quarter margin change include the timing of marketing and investment spending.

For example, marking spending is more heavily weighted to the fourth quarter to support the holidays, including the additional investment behind the domestic business. A full quarter of Custom House amortization and integration costs and investments for growth, and the retail money order conversion which will negatively impact operating margin by approximately 50 basis points in the fourth quarter due to investing the flow in tax exempt securities. Although the conversion negatively impacts operating margin, the overall EPS impact will be minimal as there are offsets in interest income expense and the tax rate. In addition, foreign exchange rates may also swing against operating margin percentages relative to the first nine months. Although a weakened dollar benefits top-line revenue, our foreign denominated profits are largely hedged so the margin percentage may be negatively impacted. Our outlook does not include any impact from our patent infringement lawsuit against MoneyGram. As you may be aware, a jury recently awarded Western Union $16.5 million in damages from MoneyGram for infringing on our patented money transfer by phone service. Since the verdict is still being contested by MoneyGram, we have not included the $16.5 million dollar award in our outlook.

I will now turn the call back over to Christina for an update on our growth initiatives.

Thank you, Scott. Our priority growth initiatives stem from one central strategy, growing a profitable portfolio of complementary businesses which extends our leadership position in moving money around the world quickly and in a compliant manner. These five key initiatives include banking, the payment services directive in Europe, business-to-business cross border payments, prepaid and mobile. Our banking strategy is gaining momentum.

The large bank relationships that are currently in operation are performing well, and early experiences indicate they are bringing new customers to Western Union. In fact, in the first year of these relationships, over half of the transactions involve customers who had not used Western Union during the prior 12 months. Banks which were nearly non-existent in our US and Canadian network a year ago now represent over 10% of our location distribution in those countries. And the pipeline is encouraging. USBank is operational. We are preparing to launch Fifth Third locations, and Fidelity National Information Services has begun signing relationships with small and medium sized financial institutions.

In the European Union, the payment services directive is effective on November the first and we received approval for our license from the UK regulatory authorities. We have integrated the sales force and operational infrastructure acquired through Fexco, and we are utilizing this platform to grow in Europe. Through PSD we expect to attract additional customers while expanding the classes of trade that offer money transfer services in countries that previously limited our agents to banks and post offices. We recently signed three letters of agreement with Ortel, PayUp and Lagardere, providing the potential for 15,000 additional retail locations throughout Europe. In the global business payment segment, we completed our Custom House acquisition on September 1. Custom House offers small and medium-sized businesses exceptional customer service, reliability and competitive pricing when making cross border business payments. We estimate this market for SME's generates global revenue comparable to or larger than the consumer-to-consumer money transfer market. With a proven track record of success, we are glad to have the Custom House team on board as we focus on integrating and expanding this scalable opportunity.

We are investing now in order to more deeply penetrate existing markets, adding sales offices and staff in the United States, Canada, the UK and Australia. We are also enhancing our website capabilities and preparing to open offices in new markets. Custom House offers exciting opportunities across a wide range of geographies and we are well on our way to establishing the platform for growth.

In prepaid, our testing over the course of the past few months has provided valuable information for us to expand our offerings. We currently have two reloadable prepaid programs in the market. First, our MoneyWise Visa prepaid card provides a strong value proposition to consumers, particularly the under-banked. This card enables consumers to add money conveniently, including the ability to load a Western Union money transfer directly onto the card. Our new prepaid Visa Gold card has all of the same great benefits of the MoneyWise program and it integrates our industry-leading Gold Card rewards. We continue to pilot both programs and are expanding them through a variety of marketing efforts, including direct mail, on-line, e-mail and in retail operations.

Cash-to-cash money transfer remains a dominant preference among the consumers moving money today. However, mobile is emerging as a complimentary channel for money transfer, and there is a long-term opportunity in transforming mobile phones into virtual Western Union locations. The potential of mobile money was recently described in an economist's article which highlighted the success of Safaricom M-PESA. This rapidly growing offering provides inter-country mobile money transfer within Kenya. This is a somewhat unique situation where there is a leading network operator and mobile wallets have been widely adopted. We are actively participating in the Kenya opportunity through cross border mobile money transfer.

We have expanded our service with Vodafone and sister company Safaricom. We now have more than 40 Western Union locations in the UK, where consumers can send money directly to the phones of more than six million Safaricom subscribers with M-Pesa wallets. We are targeting all the major Kenya send locations in the UK, and by year-end we expect to have 80% or 2,000 of these key locations enabled for mobile transfer.

The Philippines is another one of the few countries currently equipped with mobile wallets. Through partnerships with Smart and Globe, we have active pilots for mobile transfers to that country from the US, UAE, Hong Kong and Singapore. We also plan to expand connectivity in these markets in the fourth quarter.

In addition, we recently announced an alliance with Maxis, a major mobile operator in Malaysia. We are working together to launch a service in 2010 that will allow the 11 million Maxis subscribers to send money cross border remittances directly from their mobile phones. Recipients will have the ability to pick up the funds in cash at any Western Union location in over 200 countries. This represents the first Western Union offering of cross border remittances from a mobile phone for worldwide cash payout.

Western Union is well-positioned in mobile money transfer. Our current trials already provide access to more than 14 million subscribers who have phones enabled for money transfer in Kenya and the Philippines. Western Union provides flexibility and convenience in the transfer process. Whether it is an agent location, a computer terminal, a mobile phone or a prepaid card, our infrastructure connects it all. While mobile is a longer term opportunity, we are building the foundation today to capitalize as the market evolves.

In summary, we are pleased with our financial performance and strategic advances. We have delivered solid results in a challenging environment and key operational trends have stabilized. We remain focused on gaining market share, and we believe we are with a world class brand, 400,000 agent locations, strong balance sheet and cash flow, encouraging progress on key growth initiatives, including our banking strategy, retail expansion in Europe, business-to-business payments and great strides on our channel strategy, including mobile, account to cash, westernunion.com and intra-country money transfer, and we have great confidence in the future.

Thank you very much for listening to us today, and Operator, we will take our first question.

(Operator Instructions). Our first question will come from Greg Smith with Duncan Williams.

Yes, hi. Can you hear me?

Hi Greg.

Good morning, Christina, you talked about prepaid. I was hoping you could just expand on that a little bit and what you think the market opportunity is, and how the revenue model will play out for Western Union?

As you look at the market for the prepaid, it's in the billions of dollars. It's a very large category and what we're trying to determine exactly is what space are we playing in. And we really are trying to look at our customers and see a couple of things. Firstly, we're looking at prepaid as an alternative in terms of using it for home delivery and direct to consumers. And that's one of the tests that we're doing with the MoneyWise card and we're seeing good uptick on that and good performance there. And then the other piece of it is, how do we expand our goal program where we have about eight million consumers in the US on the Gold card and can we move them over to the prepaid? And we're seeing uptick on that as well. I would say that as we come into 2010 we'll be in a better position to clarify exactly the size we're looking at, because we are testing a lot of alternatives. But preliminary, we're very pleased with what we see. We also see good metrics in terms of profitability and in terms of return for the company, so we're not -- we're not giving ourselves a difficulty in terms of margin, so I think all of the things are lining up extremely well, and as we bring our plans to you for 2010, we can give you a little more detail on that.

Okay. Great. And then just a few more comments about the payment services directive. You've obviously had some nice announcements and new agents. Have things kind of met your expectations on that front and progressing as you expected, or have there been any stumbling or road blocks in any way?

It's gone really well, Greg, because there's a couple of things. Firstly, the acquisition of FEXCO has been an important part of this and our integration has been excellent. Then with the 15,000 announcement and the letters of agreement, that was something we're very pleased with. But certainly we see there's a lot more runway to grow here, so our team is working actively to sign up more locations. So look for more news from us over the next couple of months.

Okay, great. Thank you.

Thanks.

Thanks, Greg.

Our next question will come from the line of Kartik Mehta with Northcoast Research.

Scott, you mentioned as far as margins and why they would be down in the fourth quarter, and I think you mentioned three things. I was trying to understand on the marketing side, is it this fourth quarter, will you be marketing more this fourth quarter than you have previously, or is this normal for seasonal? And then on the money order, the negative impact you're going to have in the fourth quarter, would that also play out for the remaining three quarters as well, or can you talk about how that might work?

Sure. Let me start with money order and I'll come back to marketing here in a minute. Money order in simple terms, yes, will play out for the next three quarters in 2010 because we've invested those funds in tax free type investments, so there will be some geographic issues on the income statements as far as operating income. But we believe the net income will directionally be the same as we've been earning historically.

On marketing, as you -- what you might recall is we entered the year cautious because of the economic landscape and what 2009 may shape up to be. Actually in the first quarter of the year, we were closer to 4% of our marketing spend. So as we move through the year, as we've seen the economy and the markets develop, we're going to invest more in the fourth quarter compared to earlier in the year and probably a tad bit more compared to prior year. Really in a goal to continue to gain market share which we believe we've done, but also to support our domestic business. But our goal is to invest for growth and continue to gain shares as we move forward.

Christina, can you talk a little bit about what you're seeing in terms of immigration trends, if you're seeing them overall improve or remain the same?

It's varied around the globe, but I think what we see as we look at the United States, in terms of -- particularly for the US-Mexico business, we're not seeing new immigration coming into the country. We're not seeing people leave, but there's not a new level of migration in. Around the globe, I think the one area where we're seeing some exit is from the Middle East. We have seen some reduction in migration, but I think that's very much connected to the price of oil, so we may see some uptick and come back as the price of oil goes back. We're not seeing big changes in trend. I think a little bit we're seeing it in Russia, there's some issues. And obviously Spain continues to be challenged, and that's very much driven by unemployment. But as we look at our numbers and we look at the World Bank, there's a call for a return to modest growth in 2010.

One last question, you talked a little bit about repositioning the domestic business. Do you think -- is repositioning the result of just what's happened in the economy, or it's because competition has changed, or there's some other factors forcing you or wanting you to reposition this business?

No. I think we've looked at the domestic business having a lot of challenges over the last period of time, and clearly a lot of that has come from the economy and also the high percentage of Hispanic consumers within the domestic business. As we looked at it and as we looked at our pricing, let's say from US to China versus New York to Chicago, there just seems to be some inconsistency. So Stewart's team did an excellent job of doing a lot of research and a lot of work to test different price points and also different points in terms of marketing. We now have a standard pricing and that's really critical for us. Because as we go to market and whether we advertise in one city or another, we don't have to change anything now. It's a common price point across the country. Excellent value. Still premium priced, but I think the marketing that they put in place, and we are [heading up], we are putting a little bit more than we normally would in the fourth quarter on domestic, because we feel it's an opportunity now to go back in and push hard to get people back into the business to gain market share and be ready for 2010.

Thank you very much.

Thanks.

And our next question will come from the line of Brian Keane with Credit Suisse. Please proceed.

Yes, hi, good morning. Christina, can you talk a little bit about compliance? I know with the settlement with Arizona, higher compliance procedures are in the costs there. Can you talk about what the competition has to do for compliance as well and how that will evolve?

As we look at compliance, we really feel we have the state of the art and really best in class in terms of compliance, and over the years we've invested and really improved our systems more and more. But this is an ongoing process. As you go into new technologies and new products like prepaid, like mobile, it requires even more investment, so that's one thing that we've continued to do over the years.

From a competitive point of view, being the preeminent player in the marketplace, you're always the one that people look at to set the standards. And as we look at the issues that we had in Arizona, I think that we all agree in terms of wanting to do the right thing and have a safe and secure border. But maybe not in terms of some of the operational procedures. So we really feel this is something that goes back to 2003, and we're really pleased that we can have a multi-state agreement and put this issue behind us.

Then on China, I saw that bounce back nicely to 7% both in revenue and transactions. Can you just give us a little color on what happened there?

I think it's a couple of things. Obviously, the economy there is starting to bounce back so you see that, which has been a help to us. But also the team is really focused on the grass roots marketing. We've opened offices in other cities. Really looking at China very much like we looked at how we expanded India. Delighted that we have 15,000 more locations are going to be coming from the Agricultural Bank, so we're going to expand our footprint in China, working on our grass roots. I'm really pleased to see that 7% revenue and transaction growth in the quarter.

Overall, I know you guys took up the guidance to the high end of the range, but just some general comments. Do you believe the worst is behind us and you think the global economy or the remittance market is starting to recover?

We feel good about the stabilization. I think obviously from second quarter to third quarter it was stable, and in some markets picked up a little bit. So we feel very good about that. Clearly there's still some challenges in the Middle East, which was high growth. It's still growing but not at the same pace. I think different parts of the world are going to have different impacts. There's still the big question in the US on the level of unemployment, because that does come to our [Mexico] quarter, and also the unemployment as it relates to Spain. We see stability. Also, if we look at the World Bank are projecting modest growth for next year, versus a minus 7% to minus 10% this year. That augers well for us as we look to the future.

Thanks a lot.

Our next question will come from the line of Tien-Tsin Huang with JPMorgan.

Just to expand on Bryan's question. Were there any major surprises in the quarter in terms of country or regional performance?

I would say no. I think it's pretty consistent with all of the other quarters. There were no -- if we look at different countries, there was no major deterioration or things that kind of did not perform consistently, so I think we felt pretty comfortable that things had stabilized for us in our business.

This is Scott, what I would add is US outbound trends were consistent with the last few quarters. Western Europe were consistent, and those are major send areas for us. Gulf, although the transaction growth rates are stronger, there was some moderation, but C2C transactions, both Q2, Q3 were 3%. And then the average principal per transaction on a constant currency basis was down 4%, which was a slight moderation from the second quarter, so the average ticket price is hanging in there, too.

Right. On the Mexico front, just the Vigo branded under-performance. How much of that is tied to the proactive store closings that you referred to last quarter versus the other factors? Can you just give us an update there?

We're seeing that the small retailers and the Vigo, that's really where we're seeing the under-performance, so obviously it is tied to Vigo performance and the small independents. But if we look at our major chains, they're performing up to the market level. We're not seeing the same number of closures or the same issues that we had in the first half, but obviously it rolls into the second half because those locations are no longer there. But Stewart and his team is looking aggressively to try to increase the number of independents in the network.

The solution is to expand the network from here, and the other changes that might be on the horizon?

For the Mexico business, I think we're looking at it in terms of -- the real issue for that will be a lot related to the US economy and the level of unemployment. We do feel that that's a key indicator that is impacting that business.

Last one from me, Scott, maybe just a housekeeping question. How big was the integration and acquisition expense of Custom House in the third quarter?

The loss for Custom House was about $5 million in the quarter on $8 million of revenue and I would say the majority of the $5 million loss was related to both integration cost, but also deal cost as you pay attorneys and accountants and so forth to close the deal.

So that should ease or improve as we exit the year correct?

Yes. It should ease. One of the opportunities we see with Custom House in the B2B space, and we used the word "game changer" before. Last quarter when we announced it, but we believe there's opportunities to invest behind that business to grow it. And to put it in context, we think the B2B space, the size of that revenue market is equal to or greater than the size of the C2C (inaudible) revenue market, and we've grown that to over a $4 billion business, 17% share. So we think Custom House is a good investment opportunity for us to drive investment behind as we moved forward.

Thank you.

Our next question will come from the line of James Kissane with Banc of America-Merrill Lynch.

Thanks. You mentioned a $100 million of CapEx this year, is that the number we should be thinking out longer-term? Is that the normalized level?

Yes, we've historically run in the neighborhood of $150 million the last couple of years. This year we're closer to a $100 million than $150 million. So what I've got in my mind is somewhere between 2% to 3% of our top line which would be a $100 million to $150 million type number.

And the trends in signing bonuses, it seems like your commissions are coming down but it also seems like the signing bonuses have come down somewhat as well.

Yes, we've been very successful in signing new agents. We crossed the 400,000 agent mark this quarter. We're very pleased with that. We have renewed key agent relationships, have had no major agent losses. We feel like we're in a very good spot with our agents, and able to renew those, and at times get economic terms that are a little bit more favorable to us.

Great. Christina, the 15,000 retail locations in Europe, those are not in the 400,000 agent count, right?

No. The ones that we announce are -- we only announce the numbers when they're actually active, so they won't even be started to roll them out until after November. So they're not in there at all.

How quickly do you think these agents can ramp, and what's your sense of their productivity versus the post offices and bank channels in Europe?

It will depend -- in terms of exactly where there're located. Obviously there are some agent locations that are in ethnic communities, so that does a quicker ramp-up. It's also dependent upon the retail company whether they're willing to ramp out in the middle of their Christmas time, so we have to balance their needs with our needs. We would be going through that as quickly as we could, but it could take a year or so to put them all into place. A year or two. Depending on the 15,000 maybe you get five, ten thousand, it just depends on the network. On the ramp-ups, normally we see one to three years in terms of productivity, but because these are on the send side and they offer a unique service because they will have better hours for our customers, I think they should do very well.

Just one last question. Outside of domestic, can you give us a sense of the pricing trends? Sounds like domestic is coming in but you're sticking to the 2% compression for the year.

Yes and really, the domestic price change was in that 2%.

So it sounds like international might be a little bit better than what you were thinking about in the beginning of the year?

Well it varies, because it's a mixture of all different quarters and timing, but we feel we did do some pricing in international to gain market share, but we feel good about our price position and where we are.

All right, thanks, Christina.

Thank you, Jim.

Our next question will come from the line of Jason Kupferberg with UBS.

I have a question to follow-up on the payment services directive. As you look out to 2010 since that will really be the first full year of implementation, can you help us frame the potential incremental revenue opportunity here? Obviously you've already signed up a good number of new locations and sounds like more to come. So any frame of reference for the incremental revenue opportunity would be great.

I think we look at the location count as something that will give us incremental revenue, but in terms of 2010 we will be talking to early in the year in terms of our projections, and we may be able to give you a little more color in terms what have we expect the PSD to deliver as part of our outlook for 2010.

What I would add is where we believe PSD will be helpful in Europe, too, is that it allows us to get retail presence. Such as in places as France and Germany where we traditionally had banks or post banks. Those have been good agents. But what retail will help us is the hours of operation and often they speak the language of our customers. So we believe on a long-term basis getting into the retail establishments, particularly countries like France and Germany, will be helpful to our business model.

Okay. That's helpful. What percent of your agent contracts are up for rebid over the next 12 months and how would that compare with kind of a typical year and does it create any additional opportunities to push on the commission levels a bit? I guess sometimes you do renegotiations, but can you talk about that a little bit?

It's really a rolling schedule in four and five-year increments, so there's really not one year with a spiker. There's a couple of contracts that come up a few years back that are quite high, but we don't have anything major. It's the normal type of renewals that are coming through, and we have a waterfall in terms of as the contracts come through, we try to target in terms of commissions and working through that commission rate to bring it to a more effective rate for us.

Lastly on the balance sheet and capital deployment, particularly interested to get your thoughts on the dividend. I know it's pretty small, but I guess that means there's room for increase potentially. But if you can talk about that in the context of other cash deployment options, assuming you're going to continue to buy back a decent amount of stock and keep your eyes open on the M&A front?

Sure. Jason, we'll generate our objective is to generate $1.1 billion of cash flow this year which is strong, especially in the environment we're operating in. Our priorities for cash continue to be invest in the business and we spoke about our CapEx being closer to $100 million, which is modest for a company our size. Another priority for cash is investing in the business, acquiring companies, if you will, such as we've done with FEXCO and Custom House. And finally, returning value to our shareholders is important, both through stock buyback. We targeted $400 million for that. And then on the dividend front, we continue to receive input from investors and others and we have ongoing dialogue with our board on that. So we'll continue to evaluate that, the best way is to return cash to our shareholders.

Would we assume on your next call since it's year-end, that's when we might have an update on the dividend situation?

We continue to have dialogue with the senior management team and with our board, and when we have news on that, we'll be sure to share it with you.

Okay. Thanks.

Thanks.

And our next question will come from the line of Julio Quinteros with Goldman Sachs.

To maybe push a little bit on the 2010 situation and picking up on the comments that as things begin to improve here you would expect to see some margin expansion. Any way to sort of frame or bracket what type of margin expansion we should be thinking about in this model as you get back to growth into 2010?

It's probably a little early to talk real specifically about 2010 in specific terms, but let me give you some of our thinking and how we're thinking about the business. That we want to balance strong margins with investing in the business, which is very important for us and our shareholders. If you look at 2009, we're projecting 27% margins in a year when revenues will be down 1% or 2% on a constant currency basis. We've also made investments in the business with Custom House and FEXCO which have clearly impacted our margins but still able to deliver 27%. As we look at the future, we believe when the market improves, as revenue grows, our business model, to your point, will support margin expansion. But our objective is deliver strong margins but investing in the business for future growth is important. As I mentioned earlier, Custom House or the B2B space is one of those areas. But we have an objective as a management team to have strong margins for sure.

Just for perspective, is there any way to break out the sort of the incremental amortization from, say 2009 versus 2008, just to get a sense on what the additional amortization has been to the overall operating profit line from both FEXCO and Custom House?

Julio, I don't have that number at my fingertips. I know in the financial schedules we've disclosed what our amortization is year-over-year. Let us think about providing that additional detail on a go forward basis.

Thanks, guys. Good luck.

Our next question will come from the line of Ashwin Shirvaikar with CitiGroup.

The changes that you made in US domestic, when do you expect to see that business improve? Is it possible to lay out what specific expectations you have over the next few quarters?

I think, obviously, we will have impact on our revenue line, but what we expect to see is marked improvement in our transaction rate in terms of gaining back share, and we anticipate going back to a positive transaction growth rate in 2010. We are pleased with what we're seeing already in the month of October, so we're confident we can move this business forward.

And I do have sort of a longer term question relative to mobile. Do you see that as a fragment and market from a technological prospective? In other words, do you have to build out a unique set of capabilities for each geography or is there more standardized approach where you can use your existing infrastructure that benefits margins also?

I think for us, we're in a unique position because we can connect to any carrier. So that for us in terms of technology, for us it is not as complex as it is for the mobile carrier who has to have the right M wallet in their phone. We're uniquely positioned to take advantage of this channel, particularly cross border, which we've done in Kenya now and we're ramping up that to learn more about that. We've also connected as well into the Philippines and we're adding the connectivity on our send side. The challenge for us which is not complex, but it's really to make sure we train the people at the point of sale in terms of how to do a mobile transaction. So as we scale this, and we drive more locations, it will just become like another type of transaction do you want to send it mobile, do you want to send it overnight, do you want to send in on a prepaid card or next day. So it's another one of our offerings, so I think we're very uniquely positioned to take advantage of this opportunity. It's really a challenge in the countries, and I think that Safaricom and M-PESA, by having the carrier and the phone enabled are in a unique position to take advantage of us sending money across, but it's taking time for countries and mobile carriers to get there.

Thanks. That's very useful. I do have one last housekeeping question. In terms of the new EPS range that you have, that does include the diluted impact of Custom House, right?

Correct.

That's about still roughly a $0.01?

$0.01. You're correct.

Okay. Great. Thank you.

Thank you.

Our next question will come from the line of Christopher Mammone with Deutsche Bank.

Just focusing on 2010 and realizing that your constant currency revenue growth this year is reasonably out-performing what the World Bank is forecasting for the market as a whole, and just looking at the World Bank's forecast for slight growth in 2010. I guess as a baseline, how you're thinking about your own top line next year and maybe how that can relate to what the World Bank has been saying?

We're working our way through it in terms what the World Bank has been saying, but the other thing to remember, every time they put out a projection, they keep drawing down. So as we look at 2009, we're pleased to see we're out-performing in terms of the World Bank numbers. Obviously, they're looking at a zero to 3 or 4, so that's where they are. And we're just working through our numbers in terms of where we feel we'll be in 2010 and so it's a little bit early for us to give that type of information. But we normally outperform the World Bank.

Okay, thanks. Just housekeeping, was the Custom House revenue contribution around $8 million to $9 million, is that what you said?

$8 million, you're correct.

That's just a month impact, so I'm just wondering is that a good number to use for a monthly revenue run rate, or is there any lumpiness there?

I think that that is a fair 30-day period, the $8 million.

Thanks, that's all I had.

Our next question will come from the line of Bob Napoli with Piper Jaffray.

Good morning. Question on Custom House. I was hoping you would give a little more color in your growth strategies there and some of the thoughts around the investment dollars that you're planning on putting against that business next year?

And we've actually started already in the fourth quarter in terms of what we want to do with Custom House. I think there's a couple of things we're focused on right now, is really enhancing and expanding some of their offices in key markets like the UK, Australia, the US, where we see that there's opportunities to do further penetration. One of the keys there is the sales force, and so they're training people to go out and sort of feet on the street, to drive that traffic, which will give us more growth in 2010. Also on the eCommerce side, we've invested more in terms of the technology for our internet site, connecting them to the Western Union site. We do have plans in terms of market rollouts, which from a competitive point of view, we don't want to say where we're going next, but we have a clear path in terms of what countries and then what level of performance we want to see. And then kind of a waterfall of different countries over the next 12 to 18 months. As we move forward, we will be investing to do that. It will require opening of offices and hiring of sales personnel. That's the biggest expense we do have. The other thing is we want to make sure they're well-trained and continue to perform at the highly professional level that Custom House delivers to its consumers.

As far as dollars of investment, you want to give any color on that?

Not at this time. We clearly want to invest, we want to gain market share. Just as we I'll use the word "globalize" the C2C Western Union international business, we see the same opportunity to globalize the Custom House business over the next two to three, to four years. As we get to the 2010 timeframe, Bob, and our February earnings call, we'll give you some more color on how we're thinking about Custom House and maybe some of the investments we're considering there.

As far as mobile goes, given further developments in Kenya, are you getting any better feel for what the economic model for the mobile business is going to look like?

What we're seeing now is a little bit higher average send. It's at about $74. When we talked to you a few months back it was in the $50s, so we're seeing that. In terms of margins, it is margin-supportive. I think we are learning a lot about mobile. We don't have the definitive answer because there are very few markets where we can send to.

The other thing is really one of the things we're seeing, particularly as we look at our UAE, Singapore and some of the other markets to the Philippines, is how do you get customers acceptance of using that method of distribution or that channel to send money because there's still a very strong preference to the cash. So I think that these are things we're learning, but it's margin-supportive. But over the long-term, I think we feel very good about the metrics, but it's still early days yet as we learn about this industry.

And last question, just on the prepaid business, are you anticipating rolling like a cash reloadable card out into the retail market and compete with other brands out there like a Green Dot or Net Spend? A Black Hawk?

Well, we're looking at all kinds of alternatives in terms of prepaid, and I think one of the things right now is we're trying to maximize on the 8 million Gold card consumers that are in our network to see what the advantages of us being able to move them on to a prepaid and get the positive in terms of the positive margin dynamics in that group. But we will look at all different opportunities as we expand our prepaid offerings.

Thank you.

Operator, it's almost the bottom of the hour so we'll take one more question.

Thank you. Our final question will come from the line of Darrin Peller with Barclays Capital.

Can you give us some idea for transaction trends within some of your key corridors throughout the quarter, maybe focus on September versus the rest of the quarter?

Our trends have been pretty stable up to the quarter. I think the one thing that's unique in this particular quarter is Ramadan, and it is shifted. So when you shift Ramadan you shift the trends. But everything came in basically as we expected, so we're feeling very comfortable in terms of our transaction trends.

And then maybe was there any idea and to so far it's October, you mentioned briefly you were pretty comfortable with the domestic side. Are you seeing any pickup there, or in any of the other key corridors?

We are happy with the domestic side, and I think we've given guidance for the rest of the year and we feel confident in the guidance we put forward.

With regard to revenue growth versus transaction growth, it improved in international to a 9 point spread from 13 last quarter, and then in domestic it seemed to have gone sort of the other way, it was about 6 points versus 3 last quarter. Maybe Scott, if you can help explain that?

Sure. Let me start just [macrolly] with the overall C2C business, that -- where we saw some narrowing of the spread would primarily be currency from that standpoint, so on the international business it would have been currency. The other factors that relate to, say, geographic mix with intra-pricing, all those type of things, those differences have been relatively consistent the last couple of quarters.

On the domestic business, there was a little bit of widening of the spread. We did do some selective price reductions in the Q3 -- excuse me, in the Q1 and Q2 time frame that took more of a full impact as we went into the third quarter. Then clearly on October 1, we just did a repositioning of the domestic business, but there was some smaller earlier pricing reductions that we did in domestic that had some of that difference. But again, our goal with domestic is to continue to drive growth there and position that business to continue to gain share.

All right thank you. Real quick lastly, how have the banks kind of been performing with regard to -- I know you touched on it earlier, but USB, Fifth, has the transaction volume been comparable to other agents? Have the sizes been comparable? And lastly, is there any chance for another large kind of bank sign-up in the near term?

What we've seen so far we're very pleased what we're seeing from the banks. Obviously, we talked quite a bit over time about Scotia Bank becoming 2% of Canadian revenue, now doubling itself in the second year. We're very pleased with the ramp up of USBank. Right now they're at retail and we're hoping to be able to go account to cash when USBank is ready to do that. Fifth Third is just being rolled out as we speak, so again, another opportunity. We're seeing really good numbers. We're seeing -- on the first year of operation about 50% of the customers are new to our business and new to the franchise, so that's really incrementality which is very good. So we have a lot of high hopes and a lot of positive opportunities with the expansion in the banking channel. It's now 10% of Canadian US locations and we expect to expand that over time.

Thanks, guys.

Thank you very much for being on the call today. We really appreciate your time. We were delighted with the quarter. It was a challenging environment, but we delivered solid financial results and also really pushed forward in terms of our strategic agenda. So I want to thank our employees and our agents for the continued commitment to our customers. Again, thank you for your time.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.