西聯匯款 (WU) 2012 Q3 法說會逐字稿

Good day, and welcome to the Western Union third-quarter 2012 earnings call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mike Salop, Senior Vice President, Investor Relations. Please go ahead.

Thank you Valerie. And good morning, everyone. We know many of you on the East Coast are joining us from home today. We hope everyone is safe. We considered delaying today's release, but given the nature of the information being provided, we felt it was best to move ahead as planned. On today's call, Hikmet Ersek, Western Union's President and Chief Executive Officer, and Scott Scheirman, EVP, Chief Financial Officer and Global Operations, will discuss 2012 third-quarter results. Following their remarks we will open the call for question. The slides that accompany this call and webcast can be found at westernunion.com under the Investor Relations tab. And will remain available after the call. Additional operational statistics have been provided in supplemental tables with our press release.

Today's call is being recorded and 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 2011 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 items 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 noted in our press release, Western Union has not authorized, and disclaims responsibility for, any recording, replay, or distribution of any transcription of this call.

I would now like to turn the call over to Hikmet Ersek.

Thank you, Mike. And welcome, everyone. First, I want to say our thoughts are with those who have been impacted by Tropical Storm Sandy. As we always do in times of need, we are supporting our customers, colleagues and partners in parts of the Caribbean and the East Coast of the US, where the storm has caused damage. As is our tradition, when disaster strikes, we will be working with our agents and partners to provide support to people and NGOs in the impacted areas.

Turning back to the third-quarter results, our revenues increased 1% in the quarter. Similar to what many other global companies have reported recently, we have felt the effect of softer global economic conditions. Our retail money transfer business was also impacted by compliance-related changes in a number of markets and competitive pricing pressures in certain corridors. In constant currency terms, our Western Union-branded C2C revenues increased slightly in the quarter. But transload from the first half of the year.

We are implementing a series of action plans to spur long-term growth in the current retail money transfer environment, which I will discuss with you in a few minutes. Western union Business Solutions proforma revenues were flat in constant currency terms, due primarily to soft global trade conditions and very challenging comparison with the third quarter of last year. As you may recall, we had an extraordinarily strong third quarter with Business Solutions in 2011. We are continuing to execute our strategies for future growth in business-to-business, adding new customers, and expanding to new countries.

Our Business Solutions customers comp increased 5% from prior year. And we are expanding our presence to three new countries, bringing the total to 29. We are also continuing to make great progress in the fast-growing electronic channels portion of consumer money transfer. Our digital business delivered another strong quarter of transaction and revenue growth, while at the same time adding new talent and developing additional product capabilities. In total, our electronic channel revenue, which includes digital and comp-based money transfer through banks, increased 25% in the quarter.

We continue to increase our points of presence, as well. One example is in Brazil, where Banco do Brasil customers can now receive Western Union money transfers at 44,000 ATM machines across the country. In stored value, we further expanded our US distribution. And we just announced we are teaming with ICICI Bank and MasterCard to launch a unique prepaid card to potentially serve millions of customers in India.

Turning back to consumer money transfer, as we have progressed through the year, and especially the last few months, the market environment in retail money transfer has become more difficult. And we have market share challenges in certain key corridors. While we believe we have gained or largely maintained market share the last several years, a combination of factors appear to be driving challenges this year, especially in recent months. These factors include the impact of compliance changes, particularly those related to our Southwest border agreement. The level of our prices related to competitors in certain corridors. And higher market growth in the higher principal electronic segment that has seen a relatively smaller presence here, although we are growing very fast and have a big opportunity.

We have made and will continue to make compliance-related enhancements and changes around the world to meet new and evolving requirements. These actions have had a negative impact on our revenues in some markets and have added expenses to our cost structure. However, we believe it is our responsibility to maintain our industry leadership by implementing feature-rich compliance practices to protect our customers and agents around the world. The biggest impact from compliance-related changes has been in Mexico and Latin America.

In Mexico, our Western Union brand is performing largely in line with the market. However, our overall revenue decrease over 20% in the quarter due to declines in our Vigo and Orlandi Valuta brands. We ended relationships with over 7,000 Vigo agent locations that could not meet our new compliance requirements. We also experienced operational challenges from related system implementations for our Vigo brand in Latin America, as we moved this onto our Western Union platform.

We are executing action plans to address our challenges in this region. We are actively signing new agents for Mexico, including most recently Banco Ahorro Famsa and implementing consumer and agent marketing initiatives to recapture customers. We are likely to see similar revenue trends from Mexico over the next few quarters. But we believe we will emerge in back half of 2013 with a stronger network and better consumer proposition, allowing us to drive growth again in this important market.

Aside from compliance-related issues, we are also seeing market share challenges this year from competitive pressures in other parts of the world. We are implementing a series of strategic actions to quickly adjust to this environment and regain market share momentum. These plans are focused on, first, enhancing our value proposition in key corridors. Second, accelerating investment in the fast-growing digital channel business. And, third, taking steps to further optimize our cost structure. Enhancing our value proposition will include steps to improve the consumer experience, as well as accelerating pricing investment in key corridors. Our pricing investments have been relatively small the last few years. And we are now seeing some impact from differentials in certain large corridors, especially in this economic environment.

While our brand remains strong and stands for trust, reliability, speed, and convenience, we need to enhance overall consumer value proposition in certain corridors. For competitive reasons, we will not disclose these specific plans, but beginning in the fourth quarter, we will accelerate our pricing actions in key corridors. In 2013, we will also address other areas of the consumer value proposition, as needed. While not finalized at this point, we expect our 2013 pricing investment may be in the mid single-digit range as a percentage of revenues compared to 1% in both 2011 and 2012.

By implementing these immediate actions, our goal is to drive market share growth, gain customers, and optimize long-term revenue and profitability. Pricing investments typically result in immediate transaction growth and a decline in revenues in the first 12 months. But this is offset by increased customers and usage, typically leading to revenue growth after the first year. We know from experience that these actions have worked in similar situations, such as with our very successful US domestic money transfer repositioning in late 2009. We have the results from over 100 other corridor pricing actions over the last five years to guide our expectations.

Additionally, we will also be improving our consumer value proposition. This will include a more attractive and easier to use point of sale process in key send locations, more tailored communication with each consumer, and better overall customer service and support. To remain a global leader in money transfer, we must adapt quickly to the evolving environment. We have seen a significant decline in our cross-border principal movement in just the past few months. That is why we are implementing these actions for our business immediately.

In addition, there is opportunity for us to expand our presence in the digital and electronic channels. While the retail or cash-to-cash remittance market is growing, the digital and account-based segments are growing faster. And we are committed to increase our participation in these areas. We are obviously very well-positioned and have been investing for the future with westernunion.com online money transfer. Even in difficult market conditions, this digital channel is executing against the plans implemented last year. And remains on target to become a $500 million channel by 2015.

One of the key capabilities in the higher growth segment of the market is to be able to send online for delivery into a bank account. And we are making progress in establishing these connections. We also continue to expand the world's largest financial service distribution network by integrating banks' online banking platforms for account-based money transfer. We have now signed nearly 110 banks for online banking to connect to the Western Union network, including recently one of the world's largest industrial and commercial Bank of China.

But having the largest network and expanding it is not enough. It is our goal to build the best network with the best agents, the best products, and the best consumer experience in the industry. Our strategy going forward continues to be to execute on our vision, to be the premier financial service provider for underserved consumers and businesses globally. Our plans for the remainder of the year and 2013 are intended to drive us closer to this vision in an increasingly competitive market.

To fund the investments required for the strategic growth actions and to maintain future profitability, we will implement the first phase of new productivity and cost savings initiatives, which have been a focus area under my leadership. We will also implement changes to our management structure to better support our multi-product, multi-channel focus, and improve customer-focused decisions.

To better coordinate and manage all of our businesses as an integrated whole, I will be more directly involved in driving performance from our business units. To this end, we will no longer have a President of Global Consumer Financial Services. And Stewart Stockdale has left the Company. We thank Stewart for his contribution over the past four-and-a-half years and wish him well in his future endeavors. All global business leaders will now report directly to me. Change is always challenging, but I have a long history of being in the market. And I believe it is time to adjust our structure to tie all of our channels and products in a seamless fashion moving forward.

Turning back to 2012 results, we have had to adjust our full-year outlook to reflect softer revenue trends in the second half of the year. As well as anticipated fourth-quarter expenses for the cost-savings initiatives. Our focus in 2013 will be on increasing customers and market share in consumer money transfer. And continuing to execute our strategies in business-to-business, digital and stored value, while taking the steps to improve productivity and optimize operating expenses.

We remain very confident in the long-term opportunities for the business. We are a leader in a growing market. We have a strong global brand, a large and growing agent network, and a global organization with best payment capabilities and the local market expertise. Our cash flow generation remains strong. And we are pleased to announce that our board of directors approved a 25% increase in our dividend and $0.50 per share annually. And the new $550 million share repurchase authorization, which gives us the opportunity to repurchase up to approximately $750 million of our shares through the end of 2013.

Although the strategic actions we are implementing now will likely negatively affect short-term results in 2013, we believe they are the right steps to position us for long-term revenue and profitability growth in the current environment. And we are managing this business for the long-term. We believe our strategic actions will result in a return to revenue and profit growth beginning in 2014.

In summary, in this challenging economic environment over the past few months, we have seen a mix of positive and negative trends in our business. On the positive side, we have been successful in executing our strategy for providing our customers multiple products in the retail, online and mobile channels. However, we have also recently seen challenges in our core retail money transfer business in certain key markets. We have recognized these issues and are in the process of taking immediate actions to address them. Our vision to be the premier financial service provider for underserved consumers and businesses is correct. Our strategy to diversify from a single product, single channel business is correct. We remain optimistic about the future opportunities in our core retail money transfer business. And we believe that our current plans are the right measures to keep Western Union as an industry leader for the long-term.

Now, to give you a more detailed review of the quarter and our updated outlook, I would like to turn the call over to Scott.

Thank you, Hikmet. Overall for the quarter, we reported consolidated revenue growth of 1% on a reported basis, and 3% in constant currency. Consolidated proforma revenue decreased 1% constant currency, including Travelex Global Business Payments in the prior-year period. Constant currency revenue was negatively impacted by approximately 2 percentage points due to declines in the Vigo and Orlandi Valuta brands, which resulted from Southwest border compliance-related changes.

In the consumer-to-consumer segment, reported revenue decreased 4%, or 1% constant currency. While transactions were flat compared with the prior-year period. Excluding the Vigo and Orlandi Valuta brands, Western Union branded consumer-to-consumer constant currency revenue grew 1% on transaction growth of 3%. We are generally seeing softer economic conditions in much of the world, including continued weakness in Southern Europe and some slowing in the US. C2C cross-border principal declined 7% in the quarter, or 4% on a constant currency basis. C2C principal per transaction declined 6% year-over-year, or 3% on a constant currency basis.

Turning to the regions, C2C revenue in the Europe and CIS region, which represented 22% of consolidated revenues, decreased 9% year-over-year. This decline included a negative 5% impact from currency translation. Transactions in the region declined 3%. Germany continued to hold up well, with strong growth in the quarter. But many other parts of Europe have slowed and Southern Europe remains soft. Russia is down, attracting to our outlook, as we implement our turnaround strategies and build our retail network in that market.

Turning to North America. Revenue declined 8% from the prior year, while transactions were down 5%. The region represented 20% of total Company revenue. US outbound revenue declined. While domestic money transfer revenue remained flat on transaction growth of 7% in the quarter. The domestic 5 for 50 program continued to have strong growth. However, there was slowing in the higher principal bands in the US.

Mexico revenue declined 22% and transactions decreased 18% in the quarter. As we told you in February, we anticipated losing revenue and market share in Mexico due to compliance-related changes throughout the year. In the third quarter, we implement a series of new system requirements that impacted our Vigo and our Orlandi Valuta agent networks. As many of our agents could not meet the new requirements to increase our realtime transaction visibility, we had to end those relationships. Which resulted in a reduction of approximately 7,000 locations, or 40% of our network in Mexico. New requirements and system conversions for Vigo also caused disruption to our business in several Latin American countries. We expect the Mexico trends to be challenging over the next three to four quarters, while we work to increase our agent base and implement other consumer and agent-focused actions.

Turning to the Middle East and Africa region. Revenue in the quarter was flat on a reported basis, including a negative 3% impact from currency. While transactions grew 4%. The Asia-Pacific region grew 1%, including a negative 1% impact from currency translation, with transaction growth of 2%. China revenue increased slightly, excluding the impact of currency, following declines in the first half of the year. The Latin America and Caribbean region delivered revenue trends similar to the second quarter, with revenue growth of 4%, including a negative 3% impact from currency. Transactions declined 2% in the quarter and were negatively impacted by the compliance-related changes we made to our Vigo business, while revenue benefited from geographic and product mix.

Westernunion.com C2C revenue increased 22%, including a 4% negative impact from currency translation. And remains on track to our targets. Westernunion.com transactions grew a very strong 40%, aided by some of our promotional activity to acquire new customers. As a reminder, westernunion.com results are not included in the growth rates of the other five regions, although they are included when we discuss specific country trends.

Total electronic channel revenue, which includes westernunion.com, as well as account-based money transfer and mobile increased 25% in the quarter. Electronic channels now represent 4% of total Company revenue, up from 3% of revenue in the year-ago quarter. In addition to the westernunion.com growth, revenue from account-based money transfer through banks increased 32%. We now have nearly 110 banks signed for account-based money transfer, with about 50% of the banks already launched. We also have 37 mobile network contracts, with 15 actively operating.

Prepaid revenue increased 9% in the quarter. In total, prepaid, including third party top-up, represented approximately 1% of Company revenue. Our prepaid cards were available at approximately 31,000 retail locations globally at the end of the quarter, including approximately 1,000 locations outside of the US.

Turning back to the total C2C business, the spread between transaction and revenue growth in the quarter was 1 percentage point, excluding the impact of currency, which negatively impacted the spread by 3 points. For C2C, the impact of net price decreases was approximately 2% in the third quarter, while mix was favorable by 1%. On a year-to-date basis, the pricing impact remains at approximately 1% of Company revenue.

Moving to the consumer-to-business segment, revenue decreased 5% in the quarter, including a negative 3% from currency translation. The US walk-in business declined. And the electronic business continues to be affected by the pass-through of some of the debit fee savings related to Durbin. The South American business continues to have steady growth.

Business Solutions reported revenue of $95 million in the quarter, which compared to $34 million a year ago. On a proforma basis, including Travelex results in the prior year, Business Solutions' constant currency revenue was flat, although it did increase from the second quarter. The business was impacted by slowing global trade and high growth comparisons with the third quarter of last year, when Western Union Business Solutions revenue increased 31%, or 22% in constant currency terms

. Our customer count is increasing nicely, up 5% from a year ago, and we continue to expand geographically. Transactions are growing in low double digits, but principal per transaction is down, in part due to deaccelerating trade growth. We have updated our full-year revenue outlook to low to mid single-digit growth for this business, which reflects the economic slowdown in key markets. The Travelex integration is on track and remains planned for completion in 2013.

Turning to consolidated margins, the third-quarter consolidated GAAP operating margin was 25.7% in the current and prior-year period. Consolidated operating margin was 26.4%, excluding $10 million of Travelex integration expenses, compared to 26.7% excluding $14 million of restructuring expenses in the prior-year period.

EBITDA margin, excluding integration expense, was 30.7%, which increased from 30.0% in the third quarter of last year, excluding restructuring expenses. Compared to prior year, the consolidated margin benefited from currency, lower compensation costs, and Durbin. But these benefits were offset by Business Solutions amortization, incremental compliance costs related to Southwest border, and Dodd-Frank, and investments in IT and westernunion.com.

The tax r-e in the quarter was 16.8%, which compares to 23.6% in the third quarter of la- year. As a reminder, the decrease in our tax rate is primarily due to the resolution of the US tax treatment of our international operation, as we noted in the announcement of our agreement with the US Internal Revenue Service last December.

Reported earnings per share in the quarter were $0.45 compared to $0.38 in the prior year. EPS was $0.46 excluding Travelex integration expenses, which compared to $0.40 excluding restructuring charges in the prior year. Earnings per share increased 15% excluding integration expense in the current quarter and restructuring expense in the prior-year period. The C2C operating segment margin improved to 29.4% compared to 29.0% in the same period last year. The margin benefited primarily from currency and lower compensation costs with partial offsets from IT and other investments, and higher compliance costs.

The consumer-to-business operating margin increased to 25.3% compared to 21.0% in the prior-year period. The margin improvement was primarily driven by lower debit fees related to Durbin. Business Solutions reported an operating loss of $7 million for the quarter compared to a loss of $2 million in the year-ago period. Last year's operating loss does not include Travelex Global Business Payments. The current quarter's $7 million loss includes $17 million of depreciation and amortization, and $10 million of Travelex integration expense. There's approximately $1 million that is included in both amortization and integration expense. Depreciation and amortization in last year's third quarter was $5 million. Business Solutions EBITDA margin of 20% excluding integration expenses improved from 8% in the first quarter and 15% in the second quarter.

Turning to our cash flow and balance sheet. We continued to generate strong cash flow. Year-to-date cash flow from operations was $860 million, which includes the impact of approximately $90 million of net tax payments relating to the agreement with the IRS. There are approximately $100 million in tax payments related to this agreement that remain to be paid. And we expect to pay those in 2013. Capital expenditures in the quarter were $62 million, or 4% of revenue. Depreciation and amortization expense of $61 million in the quarter.

At the end of the third quarter, the Company had debt of $3.4 billion and cash of $1.4 billion. Approximately 50% of the cash was in the United States. During the third quarter, we repurchased approximately 6 million shares totalling $112 million at an average price of $17.51. In addition, we declared $60 million in dividends. Year-to-date, we've returned over $600 million through buybacks and dividends. Our repurchases this year represent approximately 4% of the total shares outstanding. As of September 30, our shares outstanding were 599 million shares. And we had $194 million remaining under our existing repurchase authorization, which expires at the end of 2012. Today, we announced a 25% increase in our dividend to $0.50 per share annually. And an additional $550 million repurchase authorization, which expires at the end of 2013. We would anticipate continuing to increase the dividend in future years, consistent with business performance.

Turning to the outlook for 2012, we have updated our projections to reflect lower second half revenue trends and the impact of expenses related to the productivity and cost-savings initiatives. We are implementing some new cost-savings initiatives in the fourth quarter to help fund growth investments and enhanced long-term profitability. These initiatives contemplate a reduction of the Company's overall head count. And the migration and consolidation of positions from various facilities, primarily within the United States and Europe to regional operating centers and third-party providers, among other actions. We have currently identified actions that should generate $30 million of annual savings by 2014. To realize these savings, we will incur pretax expenses of approximately $30 million in the fourth quarter of this year, which is now reflected in our margin and EPS outlook. We anticipate identifying and implementing additional cost-savings initiatives throughout 2013.

As a result of these items, the updated 2012 outlook for revenue and margin is now 4% to 5% constant currency revenue growth, including a 4% benefit from the full-year inclusion of Travelex. GAAP revenue growth 2% lower than constant currency. GAAP margins of approximately 23.5%. Operating margins excluding TGBP integration expense of approximately 24.5%. EBITDA margins excluding TGBP integration expense of approximately 29%. Although margin metrics are down 1 percentage point from the previous outlook, with 50% of the decline due to the $30 million of expenses related to the cost-savings initiatives and the remainder primarily due to lower revenue projections.

For the full year, we now expect a tax rate between 14% and 15%, which is down from our previous outlook, partially due to expenses related to the cost-savings initiatives, reducing US-based income in the fourth quarter. We currently would expect the 2013 effective tax rate to be somewhat higher due to some non-recurring benefits in 2012. The updated earnings per share outlook for 2012 is GAAP EPS in a range of $1.60 to $1.63, which compares to $1.68 to $1.72 in the previous outlook. And EPS excluding Travelex integration expenses of $1.65 to $1.68, which compares to $1.73 to $1.77 previously. EPS was negatively impacted by $0.04 from our prior outlook, due to the $30 million of expenses related to the new cost-savings initiatives. Our outlook for cash flow from operations is now expected to be approximately $1.1 billion, or approximately $1.2 billion excluding payments of $90 million that have already been made relating to the IRS agreement. We will provide our outlook for 2013 when we announce our fourth-quarter results in February.

As Hikmet mentioned, while we're still evaluating several potential pricing actions, we currently expect consumer money transfer pricing investments as a percentage of revenue to be in the mid single-digit range in 2013. Pricing investments typically result in revenue declines in the affected corridors in the initial year. But they drive transaction growth and customer acquisition, leading to subsequent revenue growth in the future. Based on current economic conditions and expected accelerated pricing investments, we currently anticipate slight revenue declines in 2013 in constant currency terms. As part of our strategic action plans, we also anticipate significantly increasing investments in 2013 across IT and other areas to support digital, stored value, other new product developments and innovation, and the customer experience.

Combining revenue declines, costs associated with higher transactions, and the incremental investments we believe GAAP operating income in 2013 could decline 10% to 15% from 2012 levels if all plans are implemented, as contemplated, and the economy remains soft. Business Solutions profitability is expected to improve significantly in 2013, including the impact of lower integration expenses and higher synergies. These are very high-level expected projections, as we have not yet completed a bottoms-up financial planning process for 2013. But directionally, we believe these ranges reflect expected impact of the strategic actions and current environment. We will have a clearer picture of 2013 in February when we will update you with a more detailed outlook for the year. We would expect our strategic actions to lead to positive revenue and operating income trends in 2014.

To summarize, while some parts of our business are facing economic, competitive, and compliance-driven challenges, we believe we have the right action plans in place to position us for long-term growth in retail and digital money transfer, as well as Business Solutions and stored value. We also expect to continue to implement productivity improvements and cost-saving initiatives to drive our business and profitability over the long-term.

Operator, we are now ready for the first question.

(Operator Instructions)

Darrin Peller of Barclays.

Hikmet, I would like to just hear here, if you don't mind, your overview of long-term strategically what you see each of these businesses growth profile looking like. I know generally and historically you've said this was a company you thought should be a growth company. Can you just tell us the B2B segment, at first maybe, where do you see that being long-term average growth rates? And what can you do to get it back to that kind of growth rate that I think you initially thought it would be when you bought Travelex? And then maybe just touch on similar answers for the other two segments. That would be appreciated.

Sure. Hi, Darren. Generally, I would say that the global economic environment, like when many companies, has been also challenging for us. Especially the global trade has been slower than we thought. But transaction-wise, I think the B2B business is doing pretty well. Had a good quarter. Also comparing with the last quarter, quarter three, 2011, which we have extraordinary strong growth there. So the revenues were flat, but it impacted also from global trade things. Don't forget that the principal amount in this quarter was quite flat, lower than we thought. So it impacted the revenue.

But long-term, we believe that our business integration is growing very well. Our margins are increasing quarter by quarter on the B2B segment. We are now in 29 countries. As we started with the B2B business, after integration, we were at 16 countries. We already are in 29 countries. We recently launched India, which I believe that that's a big opportunity also for the B2B segment. But globally, I would say that the economic environment's challenging. It reflects not only the B2B, I would say, total business, also in the consumer behavior. The Southern European softness and European softness are continuing. Also in the US we see some economic challenges. It's impacting our business.

Okay. What I'm trying to just understand is, though, let's just hypothetically say if you were in a macro environment where GDP was growing at a more state, being in a few percentage points range, do you continue to expect you'd be gaining market share globally? And if so, what kind of growth rates should that generate for the Company long-term? I'm not asking for guidance. I'm just trying to think about how much of a growth story this could be down the road.

If you look at our business, generally I think our business is built on growth. We have the fundamentals. We have the 500,000 locations. We are in 200 countries. We are expanding in electronic channels very good. We have a 25% revenue growth in electronic channels. Even in westernunion.com we have about 40% transaction growth. I think we are reaching new customers here. So digital is very good. I think I am also satisfied with the B2B. And the global trade comes back, that will also be very good. We have only 2% market share at the B2B business. I believe there is a future opportunity. We do have current some challenges in certain corridors which we are fixing and we are focused on that. Long-term, I believe that given our multi-product, multi-channel approach, I think we are on the road. When economy comes back on the growth track. And we are going to give you more color on the 2013 in February numbers. We will give you also more color there.

Okay. All right, thanks, guys.

Julio Quinteros of Goldman Sachs.

Hikmet, I'm trying to just get my arms around the organizational changes and what effect do you think these are going to have. Is the problem for you been lack of information or lack of realtime color in terms of what's happening on the field? Do you expect that having this direct alignment to you will fix that? Or is it more an information systems feedback mechanism that you don't have to really understand what's happening with the business right now because it really feels like a lot of things have gotten away from you in terms of having visibility into the model? Can you help us understand how these changes you think will help you get a better feel for what's happening with the business on a real-time basis?

Julio, first of all, as you know, Stewart's position has been eliminated. I think this region will direct report into me. And Stewart did four years of good job here and we really wish him everything best for his future. But what I would like to do here, also, saying that, I am coming from the market, as you know. I've been 14 years there. I know how that works. I know the agents very well. Before I was coming over to US, I was running 125 countries. I built the international business. Also, knowing the regional heads very well. So I'm very confident that we have the right information with the market and with the regional leaders, and with the agents to continue to grow this business.

Also, I believe we are aligning the organization to multi-product, multi-channel organization. In the future, regions will not only sell retail money transfer, we will also have other products, like prepaid cards, which is happening currently. Our stored value products, selling in the regions, which is the alignment of the new organization. So I'm very confident that we are going to execute against our goals, which we just disclosed.

So having the people report directly to you in terms of alignment, what's different about that? Obviously, you don't have Stewart, that layer there anymore. But what do you expect to learn differently from the alignment, the new alignment of these people actually reporting to you? And how much time do you think that's going to take for us to get a good feel whether or not that's actually working?

I'm very confident the regional heads know the business very well. So they are going to execute that. And they know the business very well and they are going to continue to execute very well. I think having also focus on the big part of our business, the retail money transfer, and having me personally mold here and understand the business environment. And locating the resources to the right part will definitely help us executing our strategy. And especially the recently-announced price promotion, which we are going to launch immediately in the key corridors will help to drive the organization alignment behind that.

Okay, thanks.

Jason Kupferberg of Jefferies.

I wanted to get your read on how much of all this change in the outlook is a function of industry-wide factors versus Company-specific. It, frankly, sounds mostly Company-specific, but you keep talking about macro softness. What's your take on that? How much business is really specific to Western Union versus reflective of any broader industry trends?

Sure. I think there are three big areas. First of all, as you said, it's the economic environment. Macro-economic environment does impact our business. We have some challenges in parts of the world which are increasing. And unfortunately, don't look very bright for the future. The second one is the compliance environment. As we have regulatory environments changing and we are investing more in being an industry leader, putting some compliance requirements for our customers which are tougher and higher than it was in the past. And I believe also that in the future that the competitors will adapt to this compliance environment. We are the industry leader. We are leading that and I think we are protecting our customer.

And the third part is definitely in some corridors we do have some competitive pricing pressures which impacted our business. And we recognize them, just to give you some numbers, in Q2, Scott. We were minus 2% principal. In Q3, we had minus 7% on the principal. And that was in the specific key markets. So we are reacting immediately to do some pricing promotions in that corridors to win the customer back. As you know, the last, we've been investing only 1% in 2011. And this year, it will be also about 1%.

About 1%, yes.

1%, Scott, in this environment from our revenue, pricing investment. But, we were being a little conservative, but now we are reacting to immediate to fix these key markets.

Okay. And can you just give us a little more color on which specific corridors had this sudden change in competitive dynamics over the last couple of months? It just seems a little unusual for things to change so quickly. Maybe you saw some initial signs of it a quarter or so ago. But can you just help us understand what specific corridors? Because the compliance stuff in Mexico, for example, I think was pretty well explained by you guys earlier this year. But it sounds like there may be some newer corridors that now are experiencing the need for a greater pricing investment. If that's the case, can you tell us which ones those are?

Jason, a couple of things related to that. Probably to reiterate what Hikmet said a minute ago, is that if you look at the cross-border principal that we transfer, it grew 2% in the first quarter. It was down 2% in the second quarter. It was minus 7% in the third quarter. So we did see some sudden changes. And there clearly have been some compliance challenges, as we've shared, and as you alluded to. Including not only Mexico, but we had to do things with the Vigo brand that impacted Latin America. So compliance is stretched beyond just Mexico, if you will, into some other corridors.

As far as pricing and actions, hopefully what you can appreciate from a competitive standpoint, I'm not going to do a lot of detail of where we're heading with some of our pricing actions, but we know they work. We've done hundreds of pricing actions. We know how to do these. And the key for us, it's about getting more transactions, more customers, improving our share. We know near term that will impact the financial results, but long-term that will help grow revenues and profits. But I don't want to give a lot of color on specific corridors for competitive reasons.

Okay. Understood. Thank you.

Bryan Keane of Deutsche Bank.

It sounds like Mexico, obviously, was soft. What other corridors were softer than you originally expected in this quarter?

Hi, Bryan. It was Mexico was definitely soft. But also resetting Vigo and Orlandi Valuta, especially Vigo, has impacted some of our Latin American corridors, also. Obviously, closing down almost 7,000 locations, resetting Vigo and taking Vigo platform to our platform and putting different compliance regulations has impacted our business here.

And it sounds like almost everywhere, US sounded weaker, Asia sounded weaker, Middle East and Africa sounded weaker. What was the cause of those weaknesses in those areas?

I think part of this weakness was Europe was definitely the economic environment. Part of it was competitive pressure. But part of it is in Asia economic environment. You could see that the softness of macro environment has impacted our business. But part of that, Germany's still holding. But part of the western of the European countries started to soften, also, given the global economical environment.

So it sounds like, just looking back, pricing actions will be about 1% this year and 1% in 2011. They rise to mid single digits in 2013, which I think is probably the highest in the Company's history. So two questions. One, should you have had more pricing actions earlier, when it was only 1% the past two years? And, two, it really feels like competitively the environment's changed a lot from what Western Union used to be.

Bryan, your pricing action, maybe we could do differently in 2010 and '11, maybe. But these are really certain corridors, Bryan. They are key corridors, which has been under pressure. Don't forget that we are in 16,000 corridors in 200 countries. There is not overall price pressure. Our percentage is still here. The market is growing, and we are in a growing market. So I will say that certain corridors impacted our business. Now, don't forget also in 2010, we had the pricing action of about 34%, including our DMT business. So it's a very success story. You recall we turn around this business and has been delivering very good numbers. And I personally did more than 100 price actions in my career, which has been paying back after a year. And I believe this pricing action we are going to do, immediate price action will pay back by 2014.

Okay. Just last question from me. Scott, I know in the analyst day we talked about maybe getting some margin leverage as we head into '13. And I know we are expecting some of the recent acquisitions to show some leverage in margin into '13. But it sounds like from the comments today that, due to some other activities, it doesn't look like we're going to see much margin leverage. So, A, is that true? And B, what should we expect for margin expansion ex restructuring costs? Will we actually be able to see margin expansion or more flat or down still?

For 2013 -- and again, Bryan, we'll give more color in February -- but margins will be down somewhat in 2013, if you will. And probably one of the most important factors for us is growing the top line. Growing revenue does help with margin leverage from that standpoint. So the actions we're announcing today is really focused at growing that top line and growing profits, if you will. So even though revenues will be slightly down in 2013, we believe, as we move into '14, we have the opportunity to grow revenues and grow profits. I don't want to get ahead of myself about talking about 2014 today, let alone 2013, but what we're very focused on is more customers, more transactions, regaining the market share. We think we've got the plans in place to do that as we move forward.

Okay. Thanks for the color, and good luck.

Tien-Tsin Huang of JPMorgan.

Just a few follow-up questions. The first one, just the competitive pricing pressure, is it coming from the usual suspects, or is it from some of the newer digital players? I'm curious.

It's both. I would say that in parts of Russia, for instance, which we've told already, it's coming from new competitors. Which it will take us about the next few months at end of -- I would say second, third quarter of 2013 turnaround this business because we also have to open retail there. But in some parts of the competitors, like in existing corridors, big corridors, key markets, has been coming from existing corridors. It's a mix of parts. Part of it also is the digital, although we are growing the digital very fast in the higher principal, Tien-Tsin. Like $5,000-plus principal, has been a big growth in this area. And we are very small here. And the lower principal amount on the remittance market is not growing that fast and we have a good market share there.

And we continue to see in our online business, it's mostly incremental consumers. We continue to see that 80% new consumers that are using our online business that are new to the Western Union franchise. We're not seeing a big crossover from digital to cash, if that's what you're asking. The pressure is really more from the cash-to-cash players that we're seeing around the world.

Okay. That is perfect. Just wanted to make sure. I know you can't give details on the pricing, but it sounds like it's going to be still surgical promotions in key corridors. But are we going to see a change in philosophy on pricing, as well, or introduction of new products like 5 for 50?

Obviously I can't give more color, but every pricing has a story behind that. And we are adapting our prices corridor by corridor, obviously. In some corridors, we are getting account-based money transfer. In some corridors it's cash to get retail money transfer business But generally, from philosophy, we are a premium-priced product. We stay service. We're going to stay premium price. And because we have the 500,000 locations, we are in 200 countries, we have a great compliance, we have a great brand, I think the premier price will continue, Tien-Tsin.

Okay. So that philosophy has no change. Okay, good. Last one, just quick one, Vigo, OV, what percentage of revenue is that today? Have you given that before?

I don't think we have. Scott, did we give that before?

No, we haven't given it, but I'll put it out here. It's about 3% of our top line in 2011. But that business was hit hard in the third quarter, with both Mexico and Latin America.

It was about half of our Mexico business prior, but it's less than that now.

Yes, I figured it was something like 3% or 4%. Terrific. Appreciate it, guys.

James Friedman of Susquehanna.

I had a couple of questions. In particular, about the margin. Scott, I was referring to slide 16 and I think it's slide 18. In your margin comments, you highlighted the currency, the compensation and Durbin for the combined margin. I was wondering if you could proportionallize the impact of each of those.

Yes. And let me probably work back from the consolidated margins, even though on slide 16, C2C is 80%-plus of our business. If I had to give you a sense of the things that are helping the margin, directionally, currency, compensation adjustments, and the Durbin fees are directionally all having about an equal impact on the plus side. And then things that are impacting the margin the other way is the incremental amortization because of the Travelex acquisition. We've got incremental costs on Southwest border and compliance. And then we have made some more investments in IT and dot-com. So each of those have pluses and minuses. And the pluses directionally cancel out the minuses, where the margins were down about 30 basis points for the quarter.

It was a good job with the margins. Just to follow up on that, with the Business Solutions. This is my fault for not understanding this. But why is it that there's $17 million in D&A now whereas it was only $5 million in the Q3 last year. If you could share the timing on that, that would be helpful.

Sure. We closed the Travelex Global Business Payment acquisition in November of last year. If you go back to the third last year, we did not own that business. And that's where the amortization with the old Customhouse Business Solutions was about $5 million. And because of the acquisition of Travelex Global Business Payments, we picked up an incremental $12 million of amortization expense as it relates to the purchase price.

Okay, thanks. And then the last thing for me is, at the analyst day, you had shared what you felt were the long-term growth targets of the business. Could you repeat what those were? And just contextualize if you're still comfortable with those long-term growth objectives?

Yes, let me give an overview of what the growth rates are and then I'll let Hikmet give some color commentary. I would just say on a macro basis, first, given the economy, the things we're seeing with compliance and the competitive dynamics, it's shaving some of those objectives. At least in the near term, could be challenging, if you will, for sure. Especially as we think about '13 and '14. But the color we gave set around a couple of things. The C2C business at that time back in May, we expected that revenue growth to be above the 4% range. In the C2B business, we saw single-digit revenue growth. In Business Solutions, we saw that as a double-digit grower, low double-digit grower on a long-term basis. And in prepaid, we had top line growing 20%, if you will. I'll let Hikmet give some color on the long-term objectives.

Sure. Current economic environment did impact, especially our retail money transfer business. We are on the digital pretty much on the road to achieve our 2015 goal, about $500 million business. And it's growing very well. I think we have the right fundamentals also on the B2B business. I'm very satisfied here. I think the global trade will help us. Roger and the team is doing a good job expanding that business also.

On the retail money transfer business, given the current environment, we will give you more color in our February meeting. But we had to adjust some numbers, given the investment, given the slower revenue, given the economic environment. You have to adjust our numbers for 2013. And will have some impact on 2014. But I believe that we are doing the right things here to fix that and to come back to the strong growth rates.

Great. Thank you very much for the perspective.

Tim Willi of Wells Fargo.

I had two questions. The first was just wanted to clarify something on your preliminary '13 guidance. Scott, I think you referenced a decline in GAAP operating income of 10% to 15%. Do you contemplate any additional charges in '13? Or will the $30 million in 4Q take care of these new strategic actions?

Tim, we're currently evaluating and preparing our plans and so forth. We've got some overall strategies. And part of those overall strategies continue to be improving productivity, optimizing our cost structure and so forth. So right now, I would say, yes, I would anticipate taking some additional expenses in 2013. And those additional expenses, you would likely not see a net benefit until 2014 from an expense standpoint. But, yes, we'll likely take more charges as we look at the cost structure.

Okay. And then the second question I had, I think it's been touched on a couple different times, but competitively, thinking about what you're trying to do on price and product and consumer experience, all those things you referenced but don't want to go into a ton of specifics on yet. When you think about MoneyGram and Ria and maybe some others who have greatly expanded their footprints, potentially, I guess you could say, have a little bit more visibility with the consumer. That might have really only saw the Western Union brand in select locations and now they are seeing these other brands emerge with more signs, more locations. And when you talk about dropping price to win those customers back that may have left you to go to other brands and become more visible, where do you get the confidence that once you put the pricing in and bring them back into your store that they will stay? Given that those two brands and probably others intend to continue to build out signage and store locations, and one would assume will continue to innovate their businesses, as well?

First of all, thanks for the question, Tim. I think first of all, we are growing our retail network and we will grow our presence, global presence constantly. 1 million point of sale presence will continue to happen. Don't forget that we just, just as I said in the call, announced about 44,000 ATMs in Brazil. And we have more than 500,000 locations globally. We are the first in the country Myanmar. We just opened the country. So our global presence will continue to expand. And also our PST presence happening very well in Germany. We are opening also in Europe. We are opening more and more retail locations for our consumers.

The second thing is that don't forget our brand awareness is still very high. Our brand awareness is 90%-plus in many receiving countries. And also in sending countries, in Africa, 90%-plus in receiving countries. South Asia 90%-plus. So the fundamentals are here and are going to continue to grow about that. In some parts of the corridors, in some parts of the key markets, we did have very high prices and adjustment of that will continue to give the consumer the convenience. I can tell you an example from US domestic money transfer. As we have the locations in the US, we have the global awareness, adapting our prices, was gaining market share. And the revenue came after 12 to 18 months in a very strong way. And we win again market share here. And the similar things we have done, I have personally done in 100 corridors. I know how to do it, I know it's about 12 to 18 months. Most of the time, we did it in 12 months. The revenues are coming back. And the first two months, you will immediately see the transaction increase, market share gain. And we have done that and we will be active on the market to gain market share.

Can I just ask one last one on that topic, and that will be it? There's been a lot of changes in reporting styles and organization of the Company. I would be curious if you see areas to add to the bench or maybe a different perspective would be helpful? And I think about what you're trying to do, or really trying to manage a brand and develop a product here. Is there a role for somebody that comes from a large global consumer brand company to come and give that perspective? Or do you feel like within Western Union, you've got the right capabilities to move forward on that front of the business?

I think we have a very strong team. We just hired also a very strong CIO, which comes from the very strong capability. David Thompson. We have the very strong general counsel. The HR leader. The new hires has been very strong in the Company. And especially our regional business heads. They know how to run the business. I think we have also very strong CMO, Diane Scott, on the team. The business is unique, has its uniqueness. Has its challenges, but is also very a different business. By the way, we have also very strong board which advises and supports us. And very diverse board. And we are constantly talking to them. And I believe that we have the right organization to grow this business. We are strong brand. We have almost a $6 billion business. We have high margins, we generate high income. I think we have the right structures, right organization in place.

Okay. Thank you very much.

Andrew Jeffrey of SunTrust.

Hikmet, I wonder if you could just, in very concise terms, articulate why you believe what you're doing is truly a strategic repositioning of the business. You, for example, referenced to the price changes in the US, which had some beneficial, it would appear, tactical changes, as you look at 2010 and the beginning of '11. But I wonder just if you could make in an elevator pitch style the strategic defense of Western Union? Because we've been sliding down a slippery slope here on pricing on margins for the last few years. At least that's how it feels to me.

First of all, on the pricing, if you look at our pricing structure the last years, we have been doing 4% investment in 2010, 1% in 2011, and 1% in 2012. But given the Western Union if you lean back, Andrew, as you said, and look at Western Union. We have the global presence, we are in 200 countries. We operate in16,000 corridors. We have different business in Latin America. We have bill payment business in North America, we have bill payment business. We have the B2B business. I think these assets are enormous. Now, if you look at this business, we are a premium price, we are growing this business in many corridors. But we do have recent challenges in key corridors which we have to fix it. You could call that tactical. But I think it's strategic decisions here which we are doing because these are one-time corrections which we will like to do it now and move forward in 2014 with strong growth again. That's the correction in the core business.

But strategically also, you look at our digital business, Andrew, growing very strong. And we did the right investment in San Francisco because we opened, we built the right team, we have the right talent there to grow this business very strong. And no one else than Western Union can connect the digital with physical location, as we do it in 200 countries and 16,000 corridors. That's one of the reasons why it's growing so fast and I am pleased on that.

Okay. That's helpful. And then does there come a point, because I know you've articulated in the past, I believe, a desire to have perhaps as 1 million branches globally. Does there come a point at which there's a change in the balance between return of capital to shareholders, or a thought about the capital structure, versus the investment in branches? Because it does sound like there's a little bit of a handoff of the baton here from physical location-based money transfer to electronic or account-to-account money transfer. Does that change strategic capital allocation considerations for Western Union here? Might we hear about that next, is what I'm asking.

While our original 1 million touch point has not changed. I think we are expanding that. I'm very pleased with the expansion plans on that, and we are on target. But on the existing capital structure for existing retail locations, these are not a lot of capital investments, except sometimes signing bonuses. But these are not capital expense, because the retail locations already exist there. What happens, if you sign a post office or if you sign a bank in China, you do your service on the existing banks or existing retails or existing shops. Which doesn't impact our capital structure much here. Of course, we're going to further connect electronic with retail, retail with electronic account, with electronic retail. That's the beauty of the new strategies of the Western Union world.

I think if you look at the external forecast, other agencies are projecting that the cash-to-cash piece of the business is going to continue to grow. Which we would agree with. But the digital side is growing faster, so we want to continue to invest there and connect more channels and choices for consumers. We're running quite late, so we're going to take one more question.

Kartik Mehta with Northcoast.

I just wanted to go back to a statement you said, Western Union being a premium price brand. Do you think considering what you had to do domestically, and now here's what you're having to do in some of these other corridors for pricing, can Western Union in this environment still remain a premium price brand in your opinion?

Absolutely. Don't forget that we are in 16,000 corridors. Price correction we are doing currently is on certain corridors. We are not touching all market. We are doing the certain corridors. We did that several times. If you recall, Kartik, our investment in Middle East, pricing investment in Middle East, to adopt our prices. And our Middle East out funds has been a success story for many years, and still is a success story. And there we have a premium pricing. And in many of our westernunion.com business is a premium prices in many parts of that. And our existing business is compared with the competition at premium prices, because we have the brands, we have the regulation, we have the best settlement system. We have 500,000 locations. I think these are very much valued by the consumers and that's why I believe the premium price philosophy will exist.

So based on your past experience, when you put in a pricing correction such as this, what does that usually mean for transaction growth, Hikmet? What would you anticipate this resulting in as you go forward?

First of all, depends really. Sounds almost like a politician, but it depends on the corridor, it depends on the market environment, it depends on which bank you do the pricing investment. As you recall, the 5 for 50, the most increase came from lower banks. And the increase was significant, as you recall that. I think in the beginning we had about 20% increase, right, on the transaction?

Yes. Near term, we expect more customers, more transactions. It will take about a year to lap the revenue declines. But we almost immediately see transaction uplift and a lot more customers. And that's the goal of this program here, is to do that.

That's immediate transaction growth. And customer growth, actually, Kartik.

And then just one last question, Scott. You talked about obviously 2013 margins probably won't grow considering the environment we're in. As you look at this Company as we move forward, what kind of revenue growth do you think is necessary in the new cost structure for you to have positive margin?

Kartik, I don't want to get too far ahead of myself for '13 or '14. But clearly -- and you hit the nail on the head -- is we need revenue growth. And year in, year out, if you think about inflation runs 1% or 2% or 3%, pick your number, whatever you may. But clearly, the goal of the programs is to get back to more customers, more transaction and revenue growth. And we clearly do need revenue growth to be helpful to margin expansion on a long-term basis.

Thank you very much. I appreciate it.

This concludes our question-and-answer session. I would like to turn the conference back over to the management for any closing remarks.

Thank you, Valerie. We just want to thank everyone for joining us on the call today. We know it was inconvenient for a lot of you to try to find phone lines today and hard to join. So we appreciate you joining. And we're around all week for any further questions if you want to discuss things further. Thanks very much.

Thank you.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.