西聯匯款 (WU) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to second quarter 2010 Western Union earnings conference call. My name is Carissa and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question session. (Operator Instructions) I would now like to turn the conference over to your host for today's call, Mr. Mike Salop, Senior VP of Investor Relations. Please proceed.

Thank you. Good morning, everyone. On today's call, we will have comments from Christina Gold, Western Union's President and Chief Executive Officer, Hikmet Ersek, our Chief Operating Officer and CEO-elect and Scott Shierman, Executive Vice President and Chief Financial Officer. After the comments we will have time for your questions. As we indicated in our press release, we have prepared slides to accompany this slide on webcast. These slides can be found at WesternUnion.com under the Investor Relations tab and will remain available after the call. Consistent with the first quarter, additional operational statistics have been provided in a supplemental table with our press release. As a reminder, today's call is being recorded and our comments include forward-looking statements. Please prefer to the cautionary language in the earnings release and in Western Union's filings with the Securities and Exchange Commission including the 2009 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 also discuss some items that do not conform to Generally Accepted Accounting Principles. We have reconciled those times to the most comparable GAAP measures on our website, WesternUnion.com under the Investor Relationssection . 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. Before I turn the call over to Christina, I'd like to mention that Western Union will be hosting an Investor Day in New York on the morning of September 30. You can now register for the event on the Investor Relations section of our website, and the meeting will also be webcast. Now I would like to turn the call over to Christina

Thank you Mike, and welcome to everyone on the call. We are pleased with the quarter's results as the positive momentum we experienced in our C2C business at the beginning of the year has continued in the second quarter. Thanks to the diversified nature of our portfolio, global transaction growth increased to 9% led by improvement in the Americas region. Our operating margin, excluding restructuring expenses, was 27%, 150 basis point improvement from the first quarters and earnings per share, excluding restructuring, increased 16% from the second quarter of last year. We grew our agent locations to almost 430,000 in the quarter, and we purchased $217 million of stock and paid $40 million of dividends. So on many fronts, it was a good quarter and our business is on track as we enter the second half of the year. Longer term, we continue to have global opportunities to increase our market share in money transfer through network growth, focused marketing and consumer segment expansion. We can enhance our growth by offering new products like prepaid to existing consumers and building our position in new consumer segments such as small-and-medium enterprise business to business payments. As most of you are aware, I will be retiring on September 1, so this is my last earnings call with you. Although there have been challenges, I believe the foundation is strong and the Company is well positioned for future growth. Today, Western Union has a strong global brand and unmatched network, the right strategies, a solid financial position, and an energized management team under Hikmet Ersek's leadership ready to move forward. At this time, I would like to turn the rest of the call over to Hikmet and Scott, who will give you more perspective on the quarter as well as take your questions. Hikmet?

Thank you, Christina. Good morning, everyone. I would like to take a moment to once again thank Christina for her leadership and contributions to Western Union over the years and wish her the best. I agree with her that the foundation of the Company is strong and the opportunities are big, and my team is excited about leading Western Union into its next stage. This morning, I would like to give you some more color on the second quarter results. Many markets contributed to the performance. The Americas delivered further improvement with double digit transaction gain and the first revenue increase since the second quarter of 2008. Our international markets also have solid growth even with economic challenges in some parts of the world. Although our US bill payment declined as expected in the quarter, on the other side customers delivered good results with $28 million in revenues up from $26 million in the first quarter.

We continue to make advances in electronic [accounts] money transfer and various mobile as we leverage our network, brand and compliance [capabilities]. Westernunion.com transaction in the international market increased over 60% in the quarter. Account based money transfer transaction which includes both account-to-cash and cash-to-account with banks grew more than 70%. In mobile, we have now enabled over 60,000 agent locations in 17 countries to provide cash-to-mobile services and we have begun a pilot program in Malaysia offering mobile-to-cash. We are moving forward with our prepaid strategy as we now have over 500,000 prepaid cards-in-force and over 8,000 retail locations offering the cards.

Let's now take a more detailed look at our results. Our Europe, Middle East, Africa and south Asia region transactions grew 5%, revenue declined 1% as currency translation of the Euro negatively impacted results, but revenue increased on a constant currency basis. The transaction by increased slightly below the first quarter's 6% increase as we saw some further slow down in the Gulf. In Europe, as we are all well aware, there were some other challenges in some countries brought on by the sovereign debt crisis. Our diversified portfolio, however, delivered overall transaction growth in the European Union, a large market such as UK and Germany performed well.

We continue to expect our network in Europe, we recently announced the addition of Yapi Kredi Bank, a competitive takeaway and one of the largest banks in Turkey with more than 800 locations. We have a strong agent network in Europe today, primarily through banks and postal business and we are continuing to diversify our agent with the addition of retail accounts. We are making very good progress signing new retailers, all of the activation of services taken slightly lower than expected. We previously anticipated having 10,000 new retail agent locations activated by year-end and we now project we will reach this level mid-2011. We now expect a new retail account in Europe at closer to 1% of revenue for Western Union in 2011.

Two recent additions to retail distribution signings are the OMV oil and gas group and telecom. The OMV agreement will allow us to provide money transfer services in over 1800 gas station across eight European Union countries, and the contribution of the large Spanish retail group, El Corte Ingles. These are two more examples of how we are expanding our European Union distribution to new classes of trade and reaching new consumers. The (inaudible) retail opportunity in the Europe is large and we are laying a solid foundation for future success.

Continuing on with our review on the regions' quarterly results. Russia, again, performed well. We have also increased our strategic operations in the country including launching electronic account based money transfer with Moscow (inaudible) Bank, our second partner bank in Russia to offer this service. Transactions in the Gulf states were down moderately in the quarter compared to a year ago as challenges in the UAE and Saudi Arabia offset growth in some other Gulf countries. Our outlook for the year, we are projecting continuing softness for Gulf in the second half. We believe, however, the long term projects are healthy as infrastructure projects in Gulf are expected to resume. We also continue to invent our new corridors and develop partners for alternative channels such as mobile and account based money transfer to help to drive our business in the Gulf states.

India reported growth of 4% on transaction growth of 3% in the quarter. We recently added a new agent in India, Bandhan Financial Services, a major microfinance services company with over 800 locations across the country. We also made an important advance in our electronic channels and expansion as we signed an agreement with our agent State Bank of India that will allow now for cash to account transactions. Beginning in 2011, Indians working and living overseas will be able to send international cash transfers from Western Union directly into their State Bank of India online banking linked accounts. The State Bank of India agreement represents another step for Western Union to provide additional online services to consumers and follow the cash to account service implemented at Garanti Bank in Turkey last year.

Turning now to America's region, the improvement continues with 12% transaction growth and a 1% revenue increase in the quarter. US domestic money transfer was a major contributor to the transaction increase and results were stronger than expected across the region. Americas represented 32% of total Company revenues in the quarter. The Mexico business turned positive with transaction growth of 5% and revenue increase of 4%. Although US employment has not improved dramatically, stabilized economic trend are helping Mexico [residents]. We also had a strong response to our Mother's Day promotions and we believe our Mexico business benefited from the success of our US domestic group positioning. Also the US outbound business continued its positive performance, with most corridors delivering strong transaction growth and improving revenue trends.

In US domestic money transfer, our reposition strategy is working. The new pricing and promotions helped drive an increase in domestic money transfer transactions of 28%, up from 18% in the first quarter, while revenue declined 10%. For the second quarter in a row we saw transaction increase across all of our domestic principle banks with the $50 [and under] bank delivering the highest growth. We are on track to deliver domestic revenue growth later in the year and we continue to see operating margins over 30% from this business.

Finally in the US the rollout of the prepaid cost continues. We began retail distribution at the end of the first quarter and now we have over 8,000 locations carrying our cards. Through our direct mailing and retail network, we have more than 500,000 cards in force as we approach our target of over 750,000 cards by year-end. Moving forward, we are focused on increasing distribution, driving usage and [elevated] possibilities for prepaid and select international markets. It is still early but we believe in long term opportunities for the prepaid business. In the US, we will also be rolling out the Western Union Gold cash service in the second half of the year. Gold cash is [inland] prepaid money transfer service that allows us to enter new classes of trade such as convenience stores, that do not have guest service counters. We just completed an agreement with Family Dollar to distribute Gold cash at over 6,500 stores across 44 states and it will be more than 1,000 more gas stations and convenience stores over the next several months.

Now turning to Asia Pacific. The region once again delivered strong growth in the quarter with increases of 11% in revenue and 14% in transactions. The Philippines continues to perform well as we celebrate our 20th year in the country. We are further building our network strength with the recent addition of Philippine National Bank, which has the largest offshore bank network in the country. We plan to offer our money transfer services at over 300 of its branches in the Philippines beginning in the third quarter and over the time, almost 90 overseas offices in 12 other countries. Our intra [services] in the Philippines is growing fast as well and now represents almost 25% of our total counted transactions. Intra also aids our cross border business by increasing brand eminence and agent engagement.

In China, transactions grew 6% and revenues increased 11% in the quarter. We are activating recently signed regional bank locations which are important as they provide hold unit positions locally and provide specialization on specific corridors. We also continue to drive business to China by placing [inaudible] resources in key set markets to promote our business. In Asia, we made further progress with electronic account based money transfer to our launch with the Industrial Bank of Korea. Bank customers can now send money transfer directly from the online banking account which is important because Korea is a highly banked country and seller payments are often paid directly into bank accounts. Finally in the region, we are very pleased to be building our business in Japan, one of the Top 20 global set markets. We are received authorization to provide international money transfer service under the country's Act considering supplemental funds. The new vote allows non-banks to [combat] money transfer service in the country. We have large hour service in Japan this month with our agent Travelex, where customers will be able to transact seven days a week with hours beyond the traditional business day and we have other potential agent agreements in the pipeline. It will take some time for us to develop our business in Japan but we are excited about the opportunity to actively building our network in this large market.

Now turning to the global business payments segment, revenue increase 9% or declined 8% excluding customers, consistent with our expectations. Pago Facil in South America recorded another good quarter but the US continues to be challenged. As part of our recent organizational changes, we have moved the bill payment business under the direction of Stewart Stockdale in the Americas region. Stewart and his team are currently working on that integration plan seeking both revenue and cost efficiency opportunities. By moving bill pay to the Americas, our sales people are now able to better focus on selling multiple products on the same retailers including money transfer, prepaid services, bill payments and money orders. We have also continued to expect our approximate 4,000 strong dealer base into new categories.

Customers revenue increased to $28 million up from $26 million the first quarter primarily driven by Canada and Australia. We are on track for double digit revenue growth this year and we continue to invest for the future creating a capable platform and standardized system and processes. In the US, we have now opened two new cell offices and the third one plan to be -- the second half the year. We are actively recruiting people across regions obtaining licenses, and building a pipeline of potential partnerships to drive growth of this business across the globe.

And finally, I would like to have -- take a few minutes to discuss the organizational changes we announced on May 27. When I became Chief Operating Officer at the beginning of the year, I assembled a team to examine our structure. My goals were to seek ways improve our execution and speed which will help drive growth as well as find cost efficiencies in the business. The new structure we are putting in place is designed to accomplish those objectives creating an excellent position to lead our alternative channels inside with only one example. This position will help us to drive our electronic channels strategy and we are recently -- as recently hired David Yates to fill this role. David has extensive international IT, banking and payment system experience and he will be officially joining the Company next week. And other changes, moving consumer bulk and pay into Americas region under Stewart Stockdale's leadership. The business is local with similar consumers and distribution to money transfer so there are many benefits to this integrated operator. Our realignments were also designed to reduce layers in our organization which will contribute to speed to market and move decision making closer to the consumers and agents. Finally, leverage of our existing global sensors of excellence and establishing a new sensor lead will help us gain efficiencies in our cost structure, and spend (inaudible) and improve services. Our management team spoke of this to execute on our priorities of growing retail money transfer, expanding electronic channels, bill update business payment and other new services and improving processes and productivity. The organizational changes we are undertaking will better position the Company to deliver against these objectives. Although the global economy remains uncertain in many countries and regions, we are very fortunate that Western Union is in a position of strength with a solid financial position and improving business trends. However, we must insure that we stay ahead of the market and in position to take advantage of the many opportunities in front of us. Improvements is a continuous process and we will consistently challenge ourselves to find new and better ways to drive our business. We will be discussing our business strategy more in detail in the months to come but now I am going to turn the call over to Scott to review the financial results for the quarter.

Thank you, Hikmet . Consolidated GAAP revenue increased 2%, or 3% excluding the impact of unfavorable currency translation. On a constant currency basis, revenue growth rates have increased 200 basis points sequentially over each of the past two quarters. C2C transactions grew 9% which translated to 1% revenue growth in the segment or 2% constant currency growth. In global business payments, 9% reported revenue growth resulted from the addition of Custom House, partially offset by the anticipated decline in the US bill payment business. Total Western Union transaction fee revenue represented 78% of Company revenue and was flat from prior year. Foreign exchange revenue represented 20% of total Company revenue and increased 15% in the quarter, benefiting from the acquisition of Custom House.

C2C transaction growth further accelerated our third straight quarter of increased growth and up 600 basis points from the 3% levels experienced in the second and third quarters of 2009. Revenue in international C2C business grew 2% in the quarter, or 4% constant currency on transaction growth of 7%. Performance was driven by continued strong trends in the US outbound business as well as growth in Europe and Asia Pacific, partially offset by modest transaction declines in the Gulf states. The Company's C2C cross border principle volume increased 6% in the quarter or 7% constant currency, and we believe we continued to gain global market share. C2C principle per transaction decreased 2% compared to the same period a year ago. The constant currency principle per transaction decline has moderated over each of the past two quarters. The spread between C2C transaction and revenue growth in the quarter was 8 percentage points or 7 percentage points excluding the impact of currency. Similar to the first quarter, the factors affecting the currency adjusted spread included the domestic money transfer repositioning, international pricing, and mix. The success of the US domestic repositioning and specifically, strong growth in the 50-and-under principle band continued in the quarter. Domestic money transfer contributed 4 points of the transaction to revenue spread, as a result of both pricing and mix.

Excluding currency in the impact from domestic money transfer, the other factors impacting the transaction and revenue spread were generally consistent with prior quarters. Second quarter operating margin of 24% was impacted by $35 million of pre-tax restructuring expenses. Excluding these charges, the consolidated operating margin was 27% consistent with the second quarter of last year, and up 150 basis points compared to the first quarter of 2010. To provide an understanding of the factors driving profitability, I will focus the remainer of my margin commentary to exclude the impact of restructuring expenses but I will provide additional color on these charges in a moment.

Compared to the second quarter of 2009, margins benefited primarily from lower marketing expense offset by Custom House investment spending and amortization. The negative impact from the assumption of the retail money order portfolio was 40 basis points. Marketing expense was slightly below 4% of revenue in the first half of the year. We expect the second half to be slightly above this level, resulting in a full year expense of approximately 4%. Earnings per share for the quarter were $0.33 or $0.36 excluding restructuring expenses. On a constant currency basis, EPS was $0.01 higher or $0.37 excluding restructuring expenses. This compares to GAAP EPS of $0.31 in the second quarter last year. The 2010 second quarter EPS benefited by approximately $0.01 from the favorable resolution of some tax matters with the IRS that relate to the 2002 to 2004 tax years. As Hikmet mentioned, we are undertaking some restructuring actions, as described in our May 27 press release, designed to better align the organization for long-term growth and operating efficiencies. These actions are expected to result in charges of approximately $80 million through 2011, with the majority to occur in 2010. In the second quarter, the Company recorded $35 million of restructuring expenses or $22 million after tax. Of the pre-tax expenses, approximately $10 million is reflected in cost of services, and $25 million in SG&A. Restructuring charges are not included in segment operating results. We expect to achieve an annualized pre-tax savings of $50 million when the plan is fully implemented beginning in 2012. Interim savings are estimated at $10 million in 2010 and between $30 million and $40 million in 2011. Turning to segment operating margins, our C2C segment operating margin was 29%, an increase of 150 basis points over the same period last year, primarily due to lower marketing expenses and operational efficiencies. Segment margin increased 170 basis points compared to the first quarter of 2010. For the full year, we continue to expect 2010 C2C margins to be higher than last year. Global business payment operating margin of 19% included the Custom House intangible amortization expense and investment spending for future growth. Excluding Custom House, segment margin of 25% was down 130 basis points from last year.

Reduced volumes in the US bill payment business were responsible for the declines. As we integrate this business into the Americas region, we are exploring opportunities to drive growth as well as leverage existing infrastructure, to run the business more efficiently. The Custom House core business remains profitable but as previously discussed, overall contributions to earnings is expected to be slightly diluted this year due to incremental investment spend and intangible amortization. We do not anticipate dilution from Custom House beyond 2010.

Turning to our cash flow and balance sheet, our solid financial position again gave us the ability to invest in the business while also returning significant capital to shareholders. In the second quarter, we generated cash flow from operations of $252 million while capital expenditures were $29 million. In the quarter, we repurchased 13.3 million shares, at an average price of $16.32 for a total of $217 million. We also paid $40 million in quarterly dividends. As of June 30, we had $583 million remaining on the share repurchase authorization, as we completed $417 million of repurchases in the first half of 2010. At quarter-end, the Company had total debt of $3.3 billion and cash of $1.7 billion of which approximately $900 million was outside the US. In June, we completed a debt offering issuing $250 million at 6.2% notes due in 2040. Our next debt maturity is approximately $700 million due in November of 2011. On a year-to-date basis, cash flow from operations was $326 million and includes the impact of the $250 million resignable tax deposit that we made with the IRS in the first quarter.

I will now review our outlook for the remainder of the year. Based on our first half performance and current business trends, we are raising our constant currency revenue and earnings per share outlook for 2010 excluding restructuring charges. Our constant currency revenue outlook is increasing 1% compared to the prior outlook, and is benefiting from better than expected performance from the Americas region. From a GAAP perspective, our revenue outlook is decreasing 1% compared to the prior outlook. GAAP revenue is being impacted by approximately 2% of negative currency translation, due to the strengthening of the US dollar against other major currencies.

We have increased our constant currency earnings per share outlook by $0.04 excluding restructuring charges. This increase is being driven by higher constant currency revenues, a lower tax rate and restructuring savings. These benefits are being partially offset by increased interest expense due to our $250 million long-term debt offering. On a GAAP basis, the EPS outlook is negatively impacted by $0.07 related to the restructuring charge and approximately $0.02 from currency translation. Although our hedging strategy largely minimized the foreign exchange impact, we are not completely hedged so large swings in currencies do have some effect. We expect operating margins, excluding restructuring charges, to be between 26% and 26.5% for the year, which includes higher marketing spend in the second half of the year relative to the first. From a GAAP perspective, including a restructuring charges, operating margins are projected between 24.5% and 25%. Due to the strong success of the five-for-50 US domestic money transfer business, our calculated pricing investment for the year is anticipated to be closer to 4%. As a reminder, our pricing calculation includes all transactions at a newly price band so a large increase in transactions will impact what we report. Domestic money transfers responsible for approximately two-thirds of the 2010 pricing reduction. In reality, many of these transactions are incremental so some portion of this investment could be considered more mix than pricing. Beyond 2010, we would expect strategic pricing reductions to be in our historical 2% to 3% range. We constantly evaluate pricing across our corridors and try to set the prices that will drive the most long-term revenue. Since our cost of services is largely variable, this strategy can be beneficial to margins over time as revenues increase.

Returning to our 2010 outlook, we expect other expenses to be approximately $170 million for the year. This is up from our previous outlook of $160 million due to the added interest expense from the $250 million 30-year debt issuance. We expect a full year tax rate excluding the restructuring charge impact to be between 23% and 24%. The 2010 tax rate is benefiting primarily from the settlement of certain matters with the IRS relating to prior years. Including the impact of restructuring charges our GAAP tax rate outlook would be between 22.5% and 23.5%. As a result of all of these factors, our updated outlook for the full year 2010 is GAAP revenue in a range of minus 2% to plus 1%, constant currency revenue growth 2% higher than GAAP, which would be a range of flat to plus 3%. GAAP EPS of $1.24 to $1.29 including $0.07 of restructuring charges, EPS excluding restructuring charges of $1.31 to $1.36, and constant currency EPS $0.02 higher. We expect GAAP cash flow provided by operating activities of $800 million to $900 million, including the $250 million reduction from the first quarter refundable tax deposit. Capital expenditures are projected at 2% to 3% of revenue. Our outlook assumes no significant shifts in global economy, although there are continued challenges in some parts of the world, and global employment has not yet rebounded, we are pleased with the performance of our diversified portfolio and the improved outlook. That concludes our prepared comments on the quarter. Hikmet and I will be answering your questions this morning and operator, we are now ready for the first

(Operator Instructions). Your first question comes from the line of James Kissane of Bank of America Merrill Lynch. Please proceed.

Hi. Thanks. Great job, guys. Scott, just a quick clarification in material of the resolution of the tax matters, is that all resolved now or do you still have some issues to resolve?

Jim, we still have some issues to revolve. The items that we did resolve this quarter were, I would say, smaller items. The item we are still working through is the international restructuring we did back in 2003 that relates to the $250 million refundable tax deposit. But we were able to favorable resolve several items that had some help to the tax rate this quarter and for the full year.

Hikmet, can you maybe quantify or give us a sense of the halo effect, the US pricing actions and the impact on the US to Mexico business? And related to that maybe your sense of share gains in domestic US and US to Mexico? Thanks.

Sure. I think this US domestic pricing action is one of our most successful actions. We have 28% transaction growth this quarter compared to 18% transaction growth in the first quarter. This obviously attracts customers to our retailers and these retailers attracting our customers has also -- had a little effect to our South America customer, Mexican customer. We saw transactions grow in Mexico to 4% -- 5% transaction growth revenue growth which is big thing here, right? We are very (inaudible) to have an effect and if you also see on the US outbound business improvements. So totally, our promotion pricing action has a halo effect to the other corridors. And also all banks within the domestic money transfer.

Okay. Just one last question, Hikmet, maybe a little bit more insight into Custom House's solid performance. 8% sequential revenue growth, one of the factors driving that, is there any seasonality there? Thanks.

Well, I think customers business as in Q1 we had $26 million and now Q2 it is $28 million. I think customers -- the core business remains profitable, we do see good progress in our international, especially the Australia and Canada business. So we also started to put our sales efforts in the US. We believe US is a big market here, and we opened sales offices, where our people are getting new customers, and we opened one in New Jersey and one in, I believe, in Atlanta, and we are also on the way to opening one more in the Chicago area. So we are targeting customers and expanding our business. So that has an impact and we really believe it is a huge business and also we are -- we used the PSD license, the European union, our PSD license, allows also to expand customers.

Okay. Great. Thank you.

Thank you.

Your next question comes from Darrin Peller of Barclays Capital. Please proceed.

Thanks. Can you just touch on a little more detail around what's actually driving the revenue guidance increase on a constant currency basis exam and what assumptions you're including in your growth around the bill pay business for the rest of the year?

Sure. Sure, Darrin. On the constant currency guidance, we did increase that 1% compared to the prior outlook and now we are at a range of zero to 3%. Broadly, we have seen a strong performance in the Americas business, would be the primary factor. If you look at domestic money transfer, we saw 28% transaction growth although revenue was down somewhat, we expect revenue to be positive as we get to the fourth quarter. And I have got a 30% margin but also within the Americas, Mexico was solid, and the US outbound business continues to perform nicely, given the backdrop of the global economy.

If you go around the globe, there are some, if you will, puts and takes. Europe, we saw growth there. But we are, keeping our eye on the Gulf. Our outlook for the Gulf is continued softness, and regarding the bill payment business and our outlook there, comments real similar to what we talked about in January is that we think 2010 will look like a fair amount like 2009. Our opportunities with bill payments are continued to consolidate that with the Americas region, to look for revenue and expense synergies, and then look at product and geographic diversification, clearly Custom House is a nice opportunity for us. It is a small business but just as we globalize the C2C business, longer term, we want to globalize the B2B business.

Okay. That's helpful. Thanks. And just to follow up on the -- some of the newer initiatives, I mean the trends are pretty impressive, I think, across the board. The payment services direct you had mentioned -- can you repeat the data points you had mentioned growing at substantial rate and adding about 1% of revenue there. And then also on the prepaid business, the growth there, I mean up to 500,000 cards, I think you had previously guided towards ending the year at 750,000 cards. It seem like you are churning better than that already. Is that fair?

Yes. I think we do have a focus obviously on the new initiatives, the team is working very hard to launch the new initiatives. On the PSD side, I think we recently signed new retailers and you have in Europe you have the banking and positive very strong agent relationship. The retailers, we are signing new like OMV or El Corte Ingles are new big retailers and I am very excited, for instance, about the OMV signing, for gas stations which offers 24-hours service which we didn't have in the past in Europe. We had limited banking opening hours, so we are going serve new customers. We believe that activation takes a little longer time to activate these locations because the retailer -- financial services are also new in Europe. However, we believe it is going to get 10,000 locations by mid-2011. That reflects about 1% additional incremental revenue from total revenue, this new initiatives will bring.

On the prepaid side, I am also very excited this could be a new big initiative for Western Union. I think we started now in US, it is in early stages, but our first indications are quite impressive. We have 500,000 cards in force and we are well underway to reach our 750,000 cards in by year-end. And I believe that is could be also going to be, especially given our global reach, also, international expansion, that's also going to be a huge opportunity for the future.

And there are a lot of the 500,000 prepaid cards came from direct mailing campaigns. Now, as we switched to more retail distribution, we ramp up that distribution, it will be a little bit of a different pace the next couple of quarters.

Okay. You are at about 8,000 locations now?

Yes.

And there's obviously more and there's about 50,000 in the US overall?

Yes. We think there's tremendous opportunity in the US, not only in our existing network but other networks in the US. Then there's global opportunities too. We don't want to get too far ahead of ourselves but we think globally, there's opportunities with prepaid.

Thanks guys.

We are going to share more information on that in our September Investors Meeting. So, we are going give more color on that.

Sounds good. Nice job, guys.

Thank you.

The next question comes from Bryan Keane of Credit Suisse. Please proceed.

Hi. Good morning. I just wanted to clarify,the recovery in Mexico, is that mostly due to the US domestic pricing initiative? Or is that share gains that you're taking? I just want to be clear there.

I think we see some stabilized economic trends in the US, I think with this -- although the unemployment rate has not improved in the US we do see some stabilizing, the other thing we also see is that our initiatives we put around the domestic money transfer, and the other one is also the Mother's Day, went pretty well. We had a good feedback on the Mother's Day. So the response was very well. So I think overall market conditions, and halo effect and Mother's Day had an impact to our Mexico business.

Okay. Just looking at the bigger picture, in the history of Western Union, is it typical that the Americas would recover first before Europe and the Middle East coming out of a recession?

I mean, if you look at our business we are really a global Company in 200 countries, right? We do see improvements in parts of the world and we do still see challenges like in the Gulf states or in Spain -- the employment rate in Spain, it is not a new story for you but it is still challenging. However, parts of that helps our portfolio -- our diversified portfolio helps to respond to the challenge but also to the opportunities globally. And we are very fortunate to have that.

But historically, do we usually see stronger US markets -- domestic markets and then the Europe and Middle East will lag because that's -- it looks like that's what we are seeing here.

Well, just on that first one, I would say in US, we have been much more longer, right? And I think, in the other countries, we have been in new -- within 15 years to 20 years in Europe. Historically, I mean and the recession we had two years ago, never had a -- happened in the past, right? So it is a different situation and I would say -- I wouldn't draw any trends out of this, but I think we are very happy with the quarterly results in Q2.

Okay. Then just finally, what are the expectations for Europe and the Gulf for the rest of 2010? Do you expect similar trends that you saw in Q2? Do you expect a decrease in transaction volumes in those areas?

Bryan, this is Scott, the Gulf, we consider -- our outlook considers continued softness, if you will, as we think about the next two quarters. And then with Europe, we saw growth there, so we are still anticipating some growth there as we move through Europe. But I think what's good about our business is we are in 200 countries, outside of the US, no one country is more than 6% of the top line. It gives us balance as we go around the globe and as economies enter different stages of stabilization or recovery.

Okay. All right. Congratulations, thanks.

Thanks, Brian.

Thank you.

Your next question comes from Adam Frisch of Morgan Stanley. Please proceed.

Thanks. Good morning, guys. Given some of the changes in the agent contracting practices, specifically with regard to either exclusivity or pricing, what can we expect with the delta between transaction and revenue growth in the next few quarters?

I think generally are --obviously depending really on the countries and depending on the regions, depending on the corridor, our agent contracts, right? I think we are in most of our countries, we have exclusive long-term agent agreements, which we are -- it's a win-win position and the agents are very happy with our contracts and we are very happy with our agent contracts, right? In countries where we are -- the regulatory environment doesn't allow us to have exclusivity, we don't have -- it depends on the agent relationship, but most of them are exclusive to us, and have a long-term relationship. And I think, our commissions and our thing is -- our commissions are favorable to the agent and it is a win-win situation. If agents are happy, our consumers are happy then we are happy. So it is -- we are really have a pretty well agent relationships on that. Maybe, Scott --

Just that probably two parts that I would add, Adam, is that on agent commissions, if you will,specifically there that we continue to sign agents at lower commission rates as we can, renegotiate existing agents to lower commission rates, strategically not one size fits all. Then as you're asking about transition and revenue spread. As you saw from Q1 to Q2 that spread did come down, specifically we will begin lapping, the domestic money transfer price actions in the fourth quarter, so that should help some narrowing of that spread when we believe domestic revenue will grow in the fourth quarter.

Just following up on the domestic side I think Jim asked some of this stuff but obviously, when you lap it, we are not going to see the transaction growth we've seen. It is going go lower but also not the negative revenue growth, it is -- that's going to turn positive. Can you give us an idea of what we can expect in the domestic corridor going forward after we get rid of -- or after we have these lap these four quarters of some pretty nuance trends?

I think -- I am just very proud of my team and Stewart, I think, we did an excellent job here. This -- it is more than a pricing action, it is really a promotion, using all 4Ps and we turned around. That is also, it is over -- it is really over our expectations, than we were planning that one and the revenue will come back at Q4. So I think we will rebuild that foundation that attracts customers. It is a long-term opportunity here to domestic money transfer. Also, you are attracting new customers, it is not only turning around existing customers with five-for-$50 in lower new bank customers are coming to our locations. So I believe that has a longer response, longer way to go.

Okay. Then, my final question, obviously you mentioned the Analyst Day is coming up at the end of September. Not to steal your thunder, excuse me, but what information or agenda can we expect of that event? Just trying to gauge the catalyst that may be?

I think first of all we will definitely talk about our global core business, core money transfer business, retail money transfer, our global expansion and we will also have a focus on the new initiatives like electronic channels but also prepaid cards, mobile. You will hear more color around that. Also, we're going to talk about processes, our processes speak to the market and productivity, to give you a little bit strategy of Western Union going -- looking forward.

Thanks guys.

Thank you.

Thanks, Adam.

Your next question comes from Tien-Tsin Huang of JPMorgan. Please proceed.

Hi. Great. Thanks. Nice quarter. First I want to ask about C2C margins, that was up quite nicely, looks like it broke through 29%. Can you give us some detail on what's driving that, if it's sustainable? Because it sounds like, aside from marketing I would think that the mix towards domestic should help as well as restructuring, so I am curious if that level is sustainable.

Well, we do believe that change in business -- this is Scott. We do believe that the 2010 margins for C2C will be greater than the 2009 margins. So, clearly, we think we've got a business model, that can drive margin expansion on a long-term basis. 65% of the costs are variable, 35% are fixed. So as the market improves, as revenue reaccelerates, we believe there's opportunities to, if you will, push more dollars to bottom line, clearly balancing that with what are the investments of the business to continue growing the top line. But we like what we saw there in second quarter and as I mentioned earlier we do expect the C2C margins in 2010 to be a little bit higher than they were in 2009.

Right. I mean, Scott, any beyond marketing in the FX, are there any major drags that we should consider for the second half, maybe if I ask it that way?

For the second half it would be, I'd say some just timing of expense spending. You mentioned marketing. Marketing was a little bit less than 4% first half and it will be a little more than 4% second half. FX, hard to call,for sure but with this new outlook, we did increase, excluding restructuring expenses, [Shan Shan], increase our outlook on our margins, from say, 26% to at least a range of 26% to 26.5%.

Right. Okay. Good. That's good to know. The domestic transactions, I'd like to ask about that too. That was a large sequential increase and it seems to imply a pretty big uptick to the lower band products, the five-for-$50 that you have been talking about. Can you give us more statistics on that and to what extent it is driving new revenues? How do you measure that?

Yes. It did have a nice effect, transaction growth in the first quarter was 18% and to your point, moved to 28% in the second quarter. We are seeing really nice success in the five-for-$50 and believe a number of those transactions are new customers or customers that we haven't seen for a while. And it seems the team's done a good job of creating a new category where you might give a $50 gift or one of your friends might have a few challenges and you wire them $50. I also think on a longer term basis as we talk about goCASH, I think that will be another helpful product for our domestic and for our global business where between Family Dollar and Murphy Oil will have over 7,500 locations offering that product by the time we exit 2010.

That second product is called goCASH.

Okay. Two more if I could just sneak it in. I apologize, just PSD. What's driving the push out in the PSD retails? I think you said now it is mid-2011 opposed to year-end for the 10,000 locations?

I think our strategy in Europe is working with PSD expansion to retail. We have a huge pipeline -- signing pipeline, as we recently announced OMV and [Telecom] is one of the examples of huge retailers. But it takes some time to activate them because it is also retail -- financial service for retailers in Europe is something new, and their system, all this activation takes some time to do that, and that's why it is 2011. It takes a little bit. But we are very optimistic and I believe that one person revenue incremental revenue for 2011, we are on track on that. So I think, we are quite optimistic on that.

All right. Thanks. Last one I promise. Just a regulatory question if I could, the -- I guess anything in the financial reform bill that could have a direct or indirect impact on you or your agents that we should consider?

Well, I think first of all, it's -- just passed, right? It is really a new and I believe that maybe the disclosure part for the agent location will be impacted but I think they're very well prepared to respond to that. But we are looking at it. It just passed and we are watching it --

Yes, Shan Shan, and the other probably two things I would add that we are closely working with. And to Hikmet's point, it is early days now, and there's a lot of rule making that's probably going to have to happen, but in addition to seeing FX disclosure requirements at a point of sale which we do. We print a receipt, we give disclosure today. There may have to be some pre-transaction disclosure that we'll have to look through but we've got the systems automation to do that. But, in the prepaid area, it does look like general purpose reloadable cards are exempt. So that's good news, if you will.

And then finally in the derivative area, Western Union, like many global companies, uses forwards for hedging. Within that, if you get some forwards that are underwater, you may have to post a collateral. We've got ample cash to do that. And then specifically as it relates to Custom House in the US, it looks like a majority of the Custom House business in the US would be exempt from that. But we are closely monitoring and this will take some time for rule making in the next nine months, 15 months, 18 months in as we move forward.

Great. Thanks for that. Nice job.

Thank you.

Your next question comes from the line of David Parker of Lazard Capital Markets. Please proceed.

Thank you. Good morning. Just a close follow up to Shan Shan's question. Can you just give us any general thoughts on the recent actions in Arizona and around potential for immigration reform in the US?

Sure. Just broadly that -- we think comprehensive immigration reform could be good. It will provide certainty to a lot of, I'll use the word,stakeholders, in all of this, consumers, everybody. So far we have not seen an impact on our business in Arizona. And as a reminder, Arizona is one of 50 states, the US is one of 200 countries. It is relatively small, important but small in the scheme of things.

Okay. Thank you. Then just can you provide us an update on the strategy with the Vigo brand? We continue to see lower advertising and marketing around that brand and understand that some of the restructuring impacted that business. But are you continuing to invest in that brand going forward?

I think Vigo, for us, is a very important brand. It is really a competitive -- we have a second brand especially for our Mexico and Latin America corridors, we do have the brand and we believe that it is really, it helps us to drive our transactions on to our growth.

Great. Thank you.

Thank you.

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

Thank you. Good morning. First question, just wanted to get an update on the bank distribution progress and the strategy in the US and just a little bit of color on the pipeline of potential future banks for distribution.

Sure. In the US, we have the US bank and Fifth Third as the active bank, and we have a pipeline we are looking at in the US and people are working on the pipeline. I think it is important strategy is a strategy to expand our network on the US banking strategy. Because, as you know, in Europe, we have the banks and postal offices, the financial services and our network. And where we start in Europe, getting retail started to get also in the US, banks in the USA, so it is important strategy for us and we think it is also helping us for the future, for our account based money transfer will help us to reach into a new customers, account holders. That will also help us to expand our transactions.

Okay. I want to go back to the US repositioning for a second. It looked like the transaction growth, obviously the 28% was great but the spread between the revenue decline and the transactions widened. I guess it is really due to the mix, which Tien-Tsin was getting at. But is there any way to think about the average price decline per transaction? I am also trying to think about what revenue growth could look like in fourth quarter as we anniversary the repositioning initiatives?

Yes. It is hard to give you one simple answer on what is the revenue transaction decline because one of our challenges with the market historically is our pricing was a little bit all over the board. So one of the key strategies was to get to consistent price points which allows you to do national advertising and marketing and clear communication with customers. We do believe that as we get to the fourth quarter, we will have positive revenue growth and that spread between transactions and revenue should narrow.

All right. And then finally, I know a lot of people are worried about the European trends intra quarter. Is there any way you can give us some help on what you saw monthly throughout the quarter -- April, May, June, what the trends might have been in Europe?

I won't get into real specifics month-by-month, but let me give some color on a couple of countries in Europe. I mean, the good news within the EU, is we have a balanced portfolio, and if you take countries such as the UK and Germany, we are solid. Countries such is as Spain continues to be challenged and no surprises there, 20% unemployment in construction. It speaks to the beauty of the business model that we have 200 countries around the globe and 25 to 27 countries in the EU which provides us that balance.

The portfolio effect I can see that daily is that worldwide within Europe Union, within the 27 countries you see the portfolio effect. That's the beauty of our business.

All right. Great. Thank you very much. Thank you.

We are at the bottom of the hour so let's take one more question.

Your final question will come from the line of Ashwin Shirvaikar of Citigroup. Please proceed.

Thank you. Congratulations on the guidance and wish you all the best in future. My question is on the global payment side of things do you look at Custom House as having a set level of revenues in the future so that you can get adjusted margins in that segment to stabilize and perhaps, even drive? And partly would help if you gave a split out for the restructuring between C2C and global payments?

Let me start with general Custom House, I think with the acquisition of Custom House we really added something have interesting and we are entering new customer base, B2B transactions here. This is especially international strength as a very huge potential for us. If you look at the customers currently they're in seven countries, most of them are Anglo Saxon countries, and given our 200 global -- being present in 200 countries in our global reach, if you combine with that, there could be an opportunity, and the -- with the existing market, we had sales of $26 million to $28 million quarter-over-quarter increase. So, I think we are very much -- we believe on customers that could be an opportunity for our future. But we have to think bigger of that. I believe also that B2B generally could be beside the customers and opportunity where we are looking to small business entities who have globally needs to transfer from country to country, we believe it could be playing a niche -- in a niche market there.

The only thing I would add is on the restructuring, to that part of your question, if you will, we did and will take about an $80 million charge, but it has a $50 annual benefit in savings, and what I would add there, that was a comprehensive review of the global organization, both C2C, global business payments really with an aim to improve speed, improve execution and drive long-term growth.

Okay. If I can squeeze one more with regards to Hikmet's comments and on the B2B side, should we look for more M&A in this space following customers?

What we are looking at is that we have now customers we are in the integration phase with the customers. I think next year it won't be diluted anymore. I believe that we have a good base here to expand our business. We hired, started to hire sales people, in the US and I think our Australia and our Canada business are doing well. We are looking at that part and the customers currently.

Okay. Thank you.

Thanks Ashwin.

Thank you very much for being on the call today and again, it has been a pleasure working with all of you but I also wanted to take this opportunity to congratulations our agents and employees for a great quarter, again showing the strength of our Company, our brand and our ability to really service our customers. So thank you and I know that Hikmet's looking forward to great things in the future. Thank you again.

Thank you, Christina.

Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.