西聯匯款 (WU) 2016 Q4 法說會逐字稿

Good afternoon and welcome to the Western Union fourth-quarter 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Mike Salop. Please go ahead.

Thank you, Amy. On today's call, Hikmet Ersek, Western Union's President and Chief Executive Officer, and Raj Agrawal, Executive Vice President and Chief Financial Officer, will discuss the Company's 2016 fourth-quarter results and our initial 2017 outlook. Then we will take your questions.

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 the 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 2015 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. We will also discuss certain adjusted metrics. Although the expenses that have been excluded from adjusted metrics are specific to unique initiatives, the types of expenses may be similar to the types of expenses that the Company has previously incurred, and can reasonably be expected to incur in the future.

All statements made by the 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 good afternoon, everyone. I am pleased with our business performance in the fourth quarter, as we delivered 4% constant currency revenue growth despite continued [micro] challenges in several markets. Our US-originated consumer-to-consumer business once again produced strong results, and WesternUnion.com money transfer continues to excel, delivering 30% revenue growth in constant currency. These positive results helped offset continued softness from the oil-producing countries, and the impact from the India government demonetization program, resulting in 3% overall currency revenue growth for our consumer money transfer business in the quarter.

For the full year, we delivered our financial outlook, with adjusted earnings per share of $1.75, exceeding the high end of the original outlook, driven by favorability in expenses and our tax rates. Our business again generated over $1 billion of cash flow from operating activities, allowing us to return almost $800 million to shareholders through dividends and share repurchases.

Before turning to our 2017 outlook, I want to take a few minutes to discuss the legal settlements with US federal and state government agencies that we recently announced. Late last year, late 2016, the Department of Justice provided us a proposal for a combined resolution of the US Attorney investigations that were previously disclosed. We then sought to coordinate a joint resolution with other potential government claims. After engaging in intense negotiations with multiple agencies, we reached the agreements that were announced in January. We worked hard to put these investigations behind us, and we are pleased to move forward. The issues cited in these investigations occurred mainly over the 2004 through 2012 periods.

As most of you know, we made significant enhancements to our compliance programs over the last several years. Improvements that have been implemented include adding more employees with law enforcement and regulatory expertise to our compliance leadership team, strengthening consumer education and agent training, bolstering our technology-driven controls, and changing our governance structure so that our Chief Compliance Officer reports directly to the Compliance Committee of the Board. We have over 2,000 employees dedicated to compliance, and spent approximately $200 million a year on these activities.

Over the last 10 years, reported fraud represented less than 1/10 of 1% of consumer money transfer transactions. We have also received praise and letters of commendation from many federal, state, local, and international regulators and law enforcement agencies for our compliance innovations and cooperations in the last few years. As always, we are fully committed to vigorously protecting our consumers, and we will continue to invest in these efforts.

So let's turn back to the business. As we enter 2017, we are facing many of the same micro challenges we saw last year, including soft economies in oil-producing countries, and an uncertain geo-political environment, as well as the negative impact of the stronger dollar on our reported revenues and profits. We generally expect business conditions to be similar to last year, and we are projecting low single-digit constant currency revenue growth with continued strong growth from WesternUnion.com.

We also remain focused on maximizing our long-term opportunities. Our global network is strong, with a leading combination of locations, digital assets, partners, cross-border money movement expertise, and regulator and compliance infrastructure.

In 2017, we are emphasizing expanding online and mobile offerings in two additional markets, building the account payout business, and increasing the footprint; improving customer experience through initiatives such as [stage] and pay, where consumers can initiate a transaction on a mobile device and pay in cash at retail; and, leveraging the Edge digital platform to acquire more clients and gain share in business solutions.

We are also embarking on comprehensive efforts to change how we work as an organization and how we can better maximize our opportunities. To accomplish this, last year we began a program that we called WU Way. The WU Way is a Companywide initiative designed to transform the Company's operating model to better enable innovation, improve the customer experience, and drive cost efficiencies.

WU Way initiatives focus on technology transformation, network productivity, end-to-end improvements in customer and agent processes, and organization redesign. This includes transforming our technology group to create a more agile and centralized fintech organization that can better respond to the evolving digital focus of our business. We have dedicated significant resources to the WU Way and are investing heavily in the program in 2017.

In addition to technology, we are in the process of redesigning and creating new operating structures, applying lean methodologies to streamline processes, and driving productivity and efficiencies throughout the Company. We will talk much more about these efforts in coming quarters.

Finally, we are very pleased to announce that our Board of Directors declared a 9% increase in our quarterly dividend and approved a new $1.2 billion share repurchase program. We remain confident in the cash-flow generation of the business, and firmly committed to strong capital allocation for our shareholders. Now, I will turn the call over to Raj to further discuss our fourth-quarter results and 2017 outlook.

Thank you, Hikmet. As I review 2016 financial results, I will focus primarily on the fourth quarter, so similar information for the full year can be found in our press release and the attached financial schedules. Fourth-quarter reported revenues of $1.4 billion declined 1%, or increased 4% on a constant currency basis, compared to the prior-year period. The impact of currency translation, net of hedge benefits, reduced fourth-quarter revenue by approximately $59 million compared to the prior year.

In the consumer-to-consumer segment, revenues were flat in the quarter, or increased 3% constant currency, while transactions grew 2%. C2C constant currency revenue benefited from strong growth in WesternUnion.com, while geographically, results were led by the North America and Latin America regions.

Total C2C cross-border principal declined 1%, or increased 1% on a constant currency basis, while principal per transaction declined 3%, or 2% in constant currency terms. The spread between the C2C transaction growth and the revenue growth in the quarter was approximately 2 percentage points, including a negative 3% impact from currency. Mix had a negative impact of approximately 1% in the quarter, while pricing had a positive impact of 2%, and we continue to view the current pricing environment as stable.

Turning to the regions, consistent with prior quarters, I will be referring to constant currency movements as I discuss individual contributions to the regional results. North America generated strong growth again in the fourth quarter. Revenue grew 7%, or 8% on a constant currency basis, while transactions increased 7%.

US outbound continued to drive the region's growth, led by sends to Mexico and Latin America. Our business in Mexico grew faster than the market again, based on the latest Banco de Mexico principal and transaction data for the fourth quarter. In the US domestic money transfer business, revenue increased 2% while transactions grew 4%.

In the Europe and CIS region, revenue declined 1%, or increased 3% on a constant currency basis, while transactions increased 5%. In the Middle East and Africa region, revenue declined 8%, or 5% constant currency, and transactions were down 9%, as low oil prices continued to affect the region.

In the Asia-Pacific region, revenue was down 7%, or 5% constant currency, while transactions decreased 9%. India was the main driver of the weaker trends in the region due to the government's currency demonetization program, which began in early November and impacted cash availability in the country.

India revenues decreased about 25% in the quarter, although the decline was over 30% following the demonetization. Restrictions appear to be easing in India, and while we have not yet returned to pre-November levels, we are seeing some improvements in the business relative to the end of the year.

Revenue in the Latin America and Caribbean region grew 11% and increased 16% constant currency, while transactions grew 14%. Revenue growth in the region was driven by strong results from Argentina, as well as inbound business into the region from the US.

Included in the regional numbers discussed, WesternUnion.com C2C revenue continued its strong performance, with revenue growth of 27%, or 30% constant currency, and it represented 9% of total C2C revenue in the quarter. WesternUnion.com transactions increased 28%, while US-originated online transactions grew 33%.

In the consumer-to-business segment, revenue declined 4%, or increased 9% on a constant currency basis. Constant currency revenue growth continued to be driven by the Argentina walk-in and US electronic businesses, which were partially offset by declines in US cash walk-in. The decline in reported revenues was a result of the depreciation of the Argentine peso compared to prior year.

Business solutions revenues declined 3%. In constant currency terms, revenue increased 1%, led by good growth in Europe; however, the loss of the XE.com business negatively impacted results by approximately 2 percentage points.

Turning to margins and profitability, the consolidated operating margin in the quarter was negative due to the impact of the $571 million settlement charge with the government agencies. For the full year, the charge was $601 million, and we have previously accrued $30 million for the SEC matter. The full-year amount consists of $586 million to be paid to the federal government, $5 million for the state attorneys general settlement, and $10 million for the estimated three-year cost of the independent compliance auditor.

In addition to the settlement charge, we incurred approximately $13 million of costs related to the WU Way business transformation initiative in the fourth quarter, primarily related to consulting expenses. We have provided adjusted margins and earnings in our financial statements and tables, which exclude both the legal settlement charge and the WU Way-related expenses.

For the full year, the WU Way expenses were approximately $20 million, and we have adjusted previous quarters to isolate these expenses. The legal settlement charge and the WU Way-related expenses are not included in the operating segment results for 2016.

Excluding the impact of the settlement charge and the costs related to the WU Way, adjusted operating margin was 19.7% in the fourth quarter, which compares to 20.4% in the prior-year period. Compared to prior year, the adjusted margin was negatively impacted by foreign exchange and incremental technology expense.

Foreign exchange hedges in the quarter had a positive impact of $10 million, down from a benefit of $21 million in the fourth quarter of 2015. In total, currency negatively impacted operating profit by approximately $28 million in the quarter, compared to the same period in the prior year.

Compliance expense was 3.6% of revenue for both the quarter and the full year. EBITDA margin was negative due to the settlement charge. Adjusted EBITDA margin was 24.5% compared to 25.4% in the prior-year period, with the decline due to the same factors affecting operating margin.

The effective tax rate was negative in the quarter due to the net loss before taxes resulting from the settlement charge, as we did not record any tax benefit associated with the $586 million federal government payment. Excluding impact of the settlement charge and the WU Way-related expenses, the effective tax rate was 6.5%, which compares to 10.4% in the prior-year period. The decline in the adjusted tax rate was driven by various discrete items.

The GAAP loss per share of $0.73 in the quarter included a negative $1.18 impact from the settlement charge and a negative $0.02 impact from the WU Way-related expenses. Adjusted earnings per share of $0.47 increased from $0.42 in the fourth quarter of last year.

The C2C margin was 22.8%, which compares to 24% in the prior-year period, with negative impacts from foreign exchange and higher technology expense. The consumer-to-business operating margin was 5.7% in the quarter compared to 11.9% in the prior year.

The margin decline was primarily due to customer and funding mix in the US electronic business. The mix impacts continued to relate to the addition of a large new biller at low margins, and general increases in credit card usage as a funding option by consumers.

Business solutions operating profit was $10 million, or a 9.7% margin, compared to operating profit of $4 million, or a 3.7% margin in the prior-year period. The improvement was driven primarily by lower compensation-related costs.

Depreciation and amortization for business solutions was approximately $12 million in the quarter compared to $13 million in the prior-year period. The business solutions EBITDA margin was 21.8%, which compared to 16.2% in the fourth quarter of 2015.

Turning to our cash flow and balance sheet, cash flow from operating activities was $1 billion for the full year. In the fourth quarter, capital expenditures were $53 million. At year end, we had $2.8 billion of debt and cash of $878 million, with approximately 20% of the cash held by United States entities.

In October, we retired $1 billion of maturing notes. These were partially replaced by a $575 million term loan, so our debt balance at year-end was lower than previous quarters.

During the fourth quarter, we paid $77 million in dividends and repurchased approximately 4 million shares for total of $79 million. At year end, we had $231 million remaining under our previous authorization, which is in addition to the $1.2 billion new authorization just announced. The outstanding share count at year end was 482 million shares.

Turning to 2017, as Hikmet mentioned, our outlook assumes a similar macro environment to what we saw last year. As a result, we expect GAAP revenue to be flat to down low single digits, with constant currency revenue increasing in the low single digits.

We anticipate foreign exchange rate changes and reduced hedge benefits will negatively impact revenues by approximately $140 million, and operating profit by approximately $50 million compared to 2016 rates. Included in these numbers is an expected benefit of approximately $25 million from foreign currency hedges in 2017, which is down from $48 million of benefit in 2016.

We will report both GAAP and adjusted margins and earnings in 2017, as we will separate out the approximately $100 million we anticipate spending on WU Way during the year. These costs will occur throughout the year and we will note them each quarter. The costs relate primarily to implementation, consulting, and severance costs for the WU Way transformation program.

We expect to generate savings of approximately $20 million in 2017, and an additional approximately $25 million in 2018 from efficiency actions included in the initiatives. From a GAAP perspective, we expect operating margins of approximately 18% in 2017, but we expect adjusted operating margins, excluding the WU Way-related expenses, of approximately 20%. This is slightly below the 20.4% adjusted margin in 2016.

The 2017 margin outlook reflects a negative impact of approximately 50 basis points for foreign exchange and increased compliance spending, partially offset by cost saving and tight management of operating expenses. Compliance spending is expected to be in the higher end of the 3.5% to 4% of revenues range compared to 3.6% in 2016.

Our EPS outlook also includes the interest-expense impact of issuing additional debt early in the year, which will help us fund the settlement payments. The US government settlements required us to pay approximately $150 million within five days of the agreement last month and the reminder within 90 business days. Due to the planned debt issuance, we don't anticipate any limitations to our normal capital allocation programs for share repurchases and dividends in 2017.

The GAAP effective tax rate this year is projected to be approximately 11%, while the adjusted rate is expected to be approximately 13%, up from an adjusted rate of 10.5% in 2016. The GAAP rate is slightly lower than the adjusted rate, as the majority of the WU Way-related expenses are expected to be incurred in higher tax countries.

The full-year tax rates are expected to benefit from some discrete items at the end of the year, and the adjusted tax rates in the first three quarters are expected to be in the mid-teens. We expect full-year GAAP earnings per share in the range of $1.48 to $1 60, and adjusted earnings per share, excluding the approximately $100 million of WU Way-related expenses, in the range of a $1.63 to $1.75. Both earnings-per-share ranges reflect an approximately $0.09 negative impact from foreign exchange.

GAAP cash flows from operating activities is expected to be approximately $200 million in 2017, due to the impact of the $591 million payments related to the settlement agreement with the US and state governments announced in January, and approximately $100 million of anticipated final tax payments related to the previously announced IRS agreement in December 2011, and the WU Way-related expenses. Excluding these items, we would expect operating cash flow of approximately $1 billion.

To summarize, we are pleased to deliver solid performance in the fourth quarter of 2016 and meet our full-year business outlook in a challenging environment. We anticipate results in 2017 will again demonstrate a resilient business model, and we expect to continue delivering strong shareholder-focused capital allocations. We are also continuing to execute against our long-term strategies, including implementation of the WU Way program, to transform our operating model to drive efficiencies and future growth.

Operator, we are now ready to take questions.

(Operator Instructions)

Darrin Peller, Barclays.

The trend seems fairly stable in the quarter. I just want to ask a little more about the investments you're making in the business, what's actually included in your margins now. I know you mentioned, obviously, WU Way costs are backed out.

If you can you give us a little more color on what you anticipate the effect of the WU Way investment to be on the business model's margins in the years after. In other words, not just the cost you're spending on that itself, but what that could do to the business model going forward. And then think about, in terms of guidance, what's being impacted -- what's impacting the margin that's going to repeat in the next two years versus potentially lighten up?

Yes, Darrin, this is Raj. Let me just start. The WU Way costs are obviously being excluded, and we expect a margin of around 20% this year. And that's down a little bit from last year just due to the higher impact of FX, as well as the spending on some of the activities, so -- on the compliance activities.

So I think for this year, the margins are 20%. As you look forward in future years, I don't want to give you a margin projection, but if you look at the last few years, we've been at around 20% operating margins. And there's been some variability related to it just due to foreign exchange. As we look forward, we are going to get some benefits from the WU Way efficiencies, $20 million this year, and then an incremental $25 million next year. And so, putting everything else aside, we should get that benefit.

But then there are number of other factors that will impact margins, like foreign exchange rates, like revenue growth, ultimately, it's the number one driver for us, and then the various other cost items. So there are number of other factors that are going to determine where margins end up being, but certainly from this activity just on its own, we should get some additional benefits.

And then, just lastly on the competitive dynamics, obviously, we had hoped that a lot of these investments would try to push out and act as a barrier to entry for the competitive landscape. Can you just comment on that in terms of your expectations in the next one to two years, once again? Are these areas that you're investing something that your competitors are at a disadvantage now at? And maybe talk about pricing in that dynamic. Are we seeing more stable pricing, partly as a result of this? Thanks guys.

Thanks, Darrin. Let me start with the pricing. I think the pricing environment has been very stable in the few quarters and has not changed actually. We have been able to really adjust our pricing quarter by quarter, and in some quarters, even increase our FX rate.

But the pricing has been very stable; we don't see big competitive changes here, and I feel comfortable with our pricing strategy as it is today and I feel comfortable. And it has not changed the environment. And we do still going to go do pricing quarter by quarter, as we operate in 16,000 corridors, and we will adjust our pricing to the environment. But I see it, in general, very stable.

On general, I would say this investment is really being more digital faster closer to the customer. As you know, the business evolvement has been the business evolved over the years. We have been very successful with our digital expansion. Last quarter, we had a 30% constant currency revenue [quote] from the mobile. Actually on the mobile -- not on the mobile; WesternUnion.com it was 30%.

On the mobile side, the growth is coming from the mobile; 65% of the transactions generated in the US with the Westernunion.com are coming from the mobile. It's extremely strong growth. We are with our mobile, it's already on 17 countries, with WesternUnion.com in 37 countries. So the expansion is very fast here, and that's going to continue to be here.

And we're going to invest also in the technology, especially in the compliance environment, but also in the technology. The competitive advantage to be more -- having 200 regulator license worldwide, we would like to be a more technology-focused Company. [That's why] the investments are really preparing also for stable growth, stabilization of the business and being more efficient.

That's good to hear. Thank you.

Tien-tsin Huang, JPMorgan

Just a couple questions on the WU Way program, just to clarify. How much of that $100 million is one time versus recurring? It sounds like some of it is consulting and severance. Is there a better way to unpack that?

Yes, Tien-tsin, this is Raj. Just to reiterate, we spent about $20 million on the WU Way program last year, and we're spending about $20 million of it this year. We are spending about $100 million this year. All of that is related to the WU Way program. It includes costs that are consulting, severance, and other program implementation costs.

So we may have incurred costs like that in the past, but these are specific to this program and that's why we're breaking it out and have added that back to the non-GAAP measure.

I see. So some of the benefits could drive some growth on the digital side. I think it's 9% of revenue now. Do you have a view on your digital revenue growth outlook for FY17? Can it be stable or could it accelerate?

Do we want to grow the digital even stronger? Obviously. We want to expand globally. We are in 37 countries, and we would like to expand that to more countries and we are on the way actually.

One of our focus areas is the Asia environment, where we are pretty well in North America and in Europe. In North America, we have customers, they're coming back, they're using us really more often. In Europe, we're still in the growth areas, still new customers, getting new customers. And in Asia-Pacific, that's an untapped opportunity for us. That's going to happen, the digital expansion.

The other thing is also with that combining the digital send with the account payout. We have now about 2.5 billion accounts worldwide, we have over more than 100 banks who are linked to the account payout, and in more than 50 countries. So sending money from your mobile device in minutes to worldwide to an account, it's one of our new strengths, and we see a very good [intentional] -- digital is definitely a focus area for us.

Okay. Great. Thanks.

Bryan Keane, Deutsche Bank.

Just on the pricing on the quarter in C2C was up 2%. Was there anything in particular that drove stronger pricing?

It's a mix, and in some quarters, we adjusted pricing, but there was nothing that particular. It's really the adjustment of the pricing and the [other part] of it is mix, and FX increases has been driving that one.

We changed FX spreads a little bit in some parts of our business. Nothing, no single action there. But if you look at our overall price investment for the year, it's flat and it was also flat last year. So again, we have always moved prices either up or down depending on specific markets, but overall, it's still relatively stable.

Okay, and then just on the WU Way expenses, what makes those expenses one-time in nature and you adjust the amount of earnings? It sounds like a lot of those are just investments in the platform and the business that usually would be expensed. So how did you guys decide to exclude those costs rather than expense them in adjusted earnings?

Yes, these are costs, as we said, Bryan, these are costs similar to what we may have incurred in the past or may have in the future. But we have broken them out because they are very specific to the WU Way program. And it's a broad, large transformational activity within the Company.

So we have broken them out just to give visibility to investors. And these are not necessarily costs that we would need to run the business on an ongoing basis, so that's why we have really broken them out.

It's like the transforming our operating model, really focusing on the technology transformation, like the network productivity. And these are really very related to WU Way, that's a huge program. It's a lean management methodology we use here. Given, Bryan, you know me, given background both with Six Sigma, it's a -- I am a big fan of that. I think that's really, I think, that we really much focus on the WU Way. It's a lean management here.

Okay, and $13 million of the WU Way expenses were excluded out of the fourth quarter and the adjusted earnings. I think there was a total of $20 million. So, the $7 million other, were those also excluded in previous quarters or are those now going to be excluded going back to restate those quarters?

Yes, we've restated or we've adjusted metrics for those quarters as well to break those out in the financial table. So you'll see there was some cost in the second and third quarter that add up to $7 million for the WU Way.

But originally they were in the adjusted earnings.

Originally they were in the earnings that we had presented.

Okay. That's all I had. Last question just on stock buyback. Looks like you guys are going to continue with that. Is that the cash flow from the core business providing the funding for the buyback? Or is there anything specific there to think about how you'll fund the buyback? Thanks so much.

Sure, Bryan. No, it's just regular ongoing cash flow. We are utilizing our intercompany working capital programs to enhance our US cash flows, but it is ongoing cash flow, nothing specific there. Obviously, we have to make some payments this year for the legal settlements, and so we will be issuing incremental debt related to those. But otherwise, it's normal cash flow.

Okay. Thanks much.

Jim Schneider, Goldman Sachs.

Thanks for taking my question. I was wondering if you could maybe comment on the overall competitive landscape and how that might change with Ant Financial's announced acquisition of MoneyGram. Can you give us any sense about what you think might -- how that might play out over the longer term and whether you think that might result in pricing pressure, either in the online or conventional venues?

Well, I think from the competitive environment, I feel quite comfortable that we can compete because the same questions I got some was Xoom was acquired by PayPal, how are we going to compete that. I believe that also our digital growth has been impressive and that we execute pretty well in the market.

It's too early to talk about the MGI and Alibaba acquisition probably -- or Ant acquisition. But I think that we are looking at the environment and let's see if that's -- how that acquisition goes through, M&A goes through or not, and we will see how that will affect our business. But I will say that we see us, I feel comfortable on the market where we operate.

Thanks, and then maybe as a follow up, could you maybe comment broadly on the Trump administration's policy objectives? And specifically related to potential corporate tax reform, and given your low tax rate, whether you would benefit or not at all in terms of lowering of corporate tax rate to 25% or something lower. Thank you.

Hi, Jim. This is Raj. Yes, there are a number of different proposals that have been put out, and it's actually hard to understand exactly how it would impact us. There are proposals that would potentially increase our tax rate; there are also proposals that would not necessarily impact us as much, so we'll have to see where that ultimately comes out.

One benefit that's likely, based on what we know, is that if there is comprehensive tax reform, it should alleviate the ability to -- or any issues with repatriating foreign cash, which would be very good for us long term. So we're standing by to see how things actually play out on the tax reform side.

Thank you.

Danyal Hussain, Morgan Stanley.

With WU Way, are any of these costs the same as the elevated technology spend that you called out before? And then as a follow up, just the $100 million, is it possible to quantify how much you expect would fall off in 2018?

Sure, Danyal, this is Raj. With respect to technology portion of this transformation, they are different from the costs that we've called out before. The costs that we have been talking about on the technology side have been, the last couple of years, have been for upgrading of our core legacy platforms. We've consolidated our data centers, we're upgrading our settlement system, and other things.

The transformational cost for technology here are related more to consolidation of our footprint on the technology side and really finding more optimal ways of working with our third parties on the technology side. So it's different; it's more organizational related than platform related.

And then the $100 million that we are planning on spending on WU Way this year, we don't currently anticipate expenses related to this next year. Obviously, there could be some timing shift with the $100 million, but that's our current plan to spend the majority of that this year.

Got it. Thank you. And then, just on the settlement, it sounded like one of the conclusions from the FTC was that the from the agent locations warranting if they're properly vetted or should have been shut down. And then, like that terminated seem like through the end of August 2015, at least that's when their study seemed to conclude.

So was there any impact on your agent location base following the settlement? Are you going have to close down some locations? Just any color there would be helpful, thanks.

Well, let me start, Raj, if you want something. As I mentioned earlier, the main issues were occurred -- mainly, it was 2004 to 2012. The oversight was -- the investigation was till 2015. There was some cases also in 2015 obviously.

But it was -- we are in a much better position since we did the investments since 2012. We did, as you know, we do spend about $200 million every year, and we have about 2,000 employees focused on the compliance environment.

We are really focused on the compliance. We have a great team here and we try to protect our customers. In some cases, we have to close some agencies that doesn't require -- doesn't fulfill our compliance programs and the regulatory environment. And that's what we do; we are very focused. And we continue to advance based on our agreement. We're going to continue to advance our compliance programs, and in some locations, we have to close some locations if they don't comply with our regulations.

Thank you.

Jason Kupferberg, Jefferies.

I just had a follow-up question on WU Way. So by the time we're through 2017, you will have spent about $120 million in aggregate on the program. But it sounds like you're only expecting cumulative savings of about $45 million through 2018. So just curious if there's going to be another gap up in additional savings beyond 2018?

That's all we're calling out at this stage, Jason. It is definitely $45 million of run rate as we exit next year, that's definitely the opportunity. Obviously we're going to look for more if we can, as a result of these initiatives.

I would say it's also benefiting us beyond just the cost savings. We really are optimizing and making our organization more lean and streamlining operational activity within the Company. For example, how we handle customers within our business and how we handle agents within our business, and really allowing us to streamline how we go to market faster.

Also like in digital expansion, how we launch mobile apps, can we be faster? Can we be getting more market opportunities? All of these are based on these WU Way initiatives.

But our minimum goal is to try to get to the $45 million, and we're obviously going to shoot for more if we can, but that's certainly the goal.

So are you going to be beefing up your -- I know you've got the center in the Bay Area where you're doing a lot of your digital work. Are you going to be beefing that up? It sounds like on a net basis, headcount will come down as a result of this. You talked about some severance, but are you going to be -- certain areas that you will be beefing up?

Well, we have operations all over the world, so it really is looking at our global footprint and how we might optimize that. Obviously, we want to focus our resources in the faster growing areas of our business. And so, digital is certainly an area of focus for us.

Okay. And just last question. I know you mentioned as part of the government settlement you've got the independent compliance auditor, I think, for the next three years. What exactly, what kind of powers does that individual have? Who do they report into if you will, within the Western Union organization? Just want to get a sense of what influence they may or may not have over the next few years.

Obviously, we are still in the process. We just announced the agreement, we just signed the agreement, obviously still in the process and are appointing an auditor together with the regulator, together with the agencies, obviously.

We have a Chief Compliance Officer, compliance department, it's quite independent and that reports -- the Chief Compliance Officer reports to the Compliance Committee of the Board, so that's going to continue to happen. The agreement we've signed, how we progress against the agreement, the programs we put in place. And the programs already access how we can protect the customers and the programs, the items we agreed on that, that will be audited. And looking over that, we will execute against that.

Okay. Very good. Thank you for the comments.

Ashwin Shirvaikar, Citigroup.

A lot of questions been asked on WU Way here. It would help if you gave a better accounting of the breakout, because it's a large sum of money. The normal restructuring type stuff versus the consulting type thing, so we can determine for ourselves what belongs in normal business course investments versus not, is there a possibility you guys could provide that?

Also, any cash versus non-cash split for this? And if I didn't want to exclude these expenses, if I want to treat them like normal business course investments, what is your effective tax rate so I could get a full normal P&L? Any help you can provide and those sorts of things?

Ashwin, we wouldn't have broken out all these costs unless we felt that it was different from our normal ongoing cost of the business, and we don't expect these costs at this stage to repeat for next year. That's why we've broken it out into a non-GAAP measure. So that's really the way we look at it internally. As I described, the technology cost as an example, these are different from the other normal technology expenses that we've had in the business.

With respect to consulting costs, the consulting costs are directly related to the WU Way program. The spending that we did last year related to this program, as well as the spending we're doing this year, this is really to help put the programs in place and the lean processes in place, as Hikmet spoke about.

With respect to cash component of this, we currently expect that most of this will be cash, but it may, depending on the timing of certain activities, the cash portion, some portion of this might pay out in terms of cash next year. Although, we expect that the expense will really be this year. Now, as that changes throughout the course of the year or if it changes, we'll certainly update you on that.

And then the last question you had was around the tax rate. I mentioned in my comments that the adjusted tax rate is 13% excluding these expenses. If you were to include these expenses, the adjusted tax rate -- or the actual tax rate would be 11% because we expect that a lot of these costs will be incurred in higher tax jurisdictions. Hopefully, that answers your question.

Yes, it does. Just want to go back to the pricing comment, because I want to understand, because you guys have said stable pricing now for some time, a couple of -- more than a couple of quarters. But yet, your C2C principal per transaction is consistently negative. Your transaction fees per transaction continues to trend negative. The only offset seems to be the higher FX per transaction.

And so, what I want to understand is, as the difference between what the user sees on the agent's door and the actual total fee that they end up paying when they come in, that keeps increasing. Is there any comment you can give me on market impact from either agents or users?

Well, from a market impact, pricing, I would say, generally is stable throughout the business. We had some spread increases in the fourth quarter, but on a full-year basis, when you look at our business on a global macro basis, it's relatively flat.

The market dynamics, North America and Latin America, they continue to have very strong growth, and the softness that we see in Middle East and Africa and Asia Pacific are not really pricing related. We see transaction softness there because of the oil price situation. And India, for example, in the fourth quarter, that also had a negative impact, and then just remittances to the APAC region for Middle East. Those are all being impacted.

And so from a pricing standpoint, yes, we took some opportunity in the fourth quarter and we changed some spreads. But that's not necessarily a sustainable level that we would have, and we really see the pricing environment being relatively stable in our business.

Okay. Got it. Thanks.

Oscar Turner, SunTrust.

I was just wondering if you could provide any color on which geographies are driving the sustained weak macro outlook? We're hearing from some other companies that the global macro is improving. So just wondering what's driving the difference in outlooks?

Yes, I can't speak for other companies, but our global macro outlook is similar to what it was last year. You've seen it in our trends over the last 12 months. North America has been quite strong, particularly the Mexico and Latin America. Mexico, as we mentioned, has been growing faster than the rest of the market, and we've done a lot of good things in the Mexico market to drive that. Latin America has been quite strong.

Europe has been relatively stable, some pluses and minuses within Europe, but the softness really continues to be in the Middle East and Africa region, as well as in APAC. The lower oil prices continue to impact that market. We saw the OPEC-related markets continue to decline in the fourth quarter. They were slightly better than they were in the third quarter, but they still declined quite a bit. That impacts directly the APAC region, because remittances are going to the APAC region from the Middle East and Africa.

And then you have things like the India demonetization impact, which is something that none of us saw coming, obviously, in the fourth quarter. But, so it's things like that that have really driven our outlook for this year.

And do you think that the sustained rebound in oil prices could, I suppose, boost [spend] trends in EMEA and APAC and other oil-linked markets?

Sure, that will help us, of course, and the price goes up to $75, $80 or even $100, it was there, it will help. It's still at $50, $53 and it has to go up. And it doesn't have an immediate effect. The jobs that are created again and the investment has to be done in the Middle East and Saudi Arabia and the UAE, that all the infrastructure investment which create jobs, so the people have -- send money back home. And so that will take some time, but it's definitely oil price increase will help to drive the transactions again.

Okay. Thanks for that color.

David Ridley-Lane, Bank of America Merrill Lynch.

When you say that the settlement and IRS payments will not impact your cash return policy, does that mean we should expect cash return, forms of dividends and buybacks to approximate the pace of the last three years?

Well, the dividend, as you know, we raised the dividend level today, so that's -- we've been paying a little more than $300 million a year on dividends. And we're pleased to be able to raise that today.

On stock buyback, the new program that was announced is good for three years; that's good through 2019. And as we've always done, we obviously, we plan to buy back stock, but it's going to be dependent on market conditions. It's going to be dependent on the other cash priorities that we have within the business.

But the -- our point in saying what we said was that the settlements themselves will not necessarily have a specific impact to our capital return, because we did have some debt capacity at the end of last year as we paid down some debt. We ended at $2.8 billion, and so we will be able to make the payments within our current debt capacity. And then it continues to leave us flexibility to do other things that we've been doing.

And within the framework of your 2017 guidance, where would you expect to end the year at in terms of gross debt to EBITDA? And are you comfortable operating with that higher financial leverage on a go-forward basis?

Yes, I don't have a projection to give you on the exact debt level, but if you just go back the last couple of years, we've been on a trend of paying down a little bit of our debt. So we're just getting back to where we were before in terms of debt levels.

So we're not going outside of the bounds of where we've been operating anyway. And what you've seen is some of the cash efficiencies that we've gained throughout the last couple of years we've been able to pay down some debt. But we're just taking the debt level back up to where it was.

If you go back far enough, when we spun off as a Company, we had about $3.5 million of debt. It's not too far outside of where we've been in the past.

Understood. And then within your revenue guidance for the year, are you anticipating pricing being flat to positive?

I think the pricing is going to be stable. And so, historically, we've been reducing prices in the low single digits, but it just depends on what the market calls for and what that competitive environment is like.

I think from today's point of view, it's stable.

All right. Thank you very much.

Rayna Kumar, Evercore ISI.

Are you seeing any pricing pressures specifically in US domestic and US to Mexico resulting from the new Walmart contracts with MoneyGram and Euronet last quarter? And then secondly, can you comment in which regions you able to increase prices in the quarter, and if it was cash to cash and/or online?

First of all, we are very pleased with our Mexico business, Banco de Mexico, that really is the gain. And you could see that quarter over quarter, we are really gaining market share and beating the markets. So we are pleased with our Mexico business, especially from US to Mexico. Generally, I would say that our business has been quite stable.

And on that 16,000 corridors, we do pricing in some quarters we don't increase, some quarters decrease. It's really a portfolio management where we see the needs of the customer, the use cases. We adopt, sometimes, we adopt a fee, sometimes the FX rates. And also, we do have different prices depending on the customer needs on the digital, on the mobile apps, and on the retail. We do see sometimes even have street corner prices depending on the customer needs. So it's really, we are reacting to the market needs.

Overall, I would say though, we are stable with our prices. We are still 15% to 20% higher than the competition. The people are really -- the consumers who use us paying for the convenience for global reach, for the security, and for sending the money. So we feel comfortable with the pricing environment.

What are the next steps you think you have to make with investments to your online business? And now are you able to do instant ACH in most corridors?

So instant ACH, as you know, it's a US thing. But generally, I would say that next investments are definitely mobile, mobile, mobile, mobile, mobile, and being in -- as we started two years ago, we were few countries; now we are in 38 countries. Is it 37? 37 countries on dot-com, and we are going to expand our presence in more countries, sending money and receiving money with mobile and with digital expansion.

The trick is we that what we have is that fantastic actually, we are combining mobile with retail, retail with mobile, mobile to mobile, mobile to mobile wallet, mobile to bank accounts. This kind of reach allows us, and this kind of fundamental allows us to expand our digital growth.

On ACH, as you know, it's a US-specific thing. ACH, where we need ACH we have the ACH. But most of our transactions are coming from credit cards in the US. But worldwide, we do also have direct debit from bank account to bank account, debit card to bank account, or we do offer depending on the areas, the possibilities.

And one final question from me. Do you expect the situation in India, as it improves, for people to play catch up on receiving remittances in India? And do you see that benefit coming in in the first or second quarter?

We see slight improvements already as it gets better. I can't say it's the first quarter or second quarter, but the improvements are coming. And the beauty of our Western Union businesses is that you have almost 100,000 locations in India.

As you know, some areas got more affected than other areas in India. So given our 100,000 locations, we, compared with the competition, had only 25% decrease on our business last quarter and, I think 30% total in 2017.

But it starts to come back. I think people want cash. People want to go to a location, pick up their money. In some locations the money has been stored there, they couldn't pick it up, but now they are ready to pick it up. And I think also at the same time, our business to Indian corridors will be in a much better position.

Thank you.

Tom McCrohan, CLSA.

On the compliance side, what business practice changes do you think need to be affected to bring your compliance up to FTC standards? For example, do you have to collect any incremental information either from the sender or the recipient going forward?

I think what we are doing is really analyzing our current situation and constantly upgrading our compliance programs. But one thing is also that we did invest in 2012 in our compliance program significantly. I think the base where we are acting now is different than it was earlier days, so it's the -- we have the fundamentals. We have a great team. We do implement all the compliance programs.

So it's early to say, but there will be some changes. There will be some investments in that program to upgrade our compliance programs to respond to the agreement we signed with the US government. And we will implement this over the coming months and years about the compliance programs. And I am confident that the team will do a good job.

Okay. And then a follow up on WU Way. When you provided guidance for this year, WU Way was not contemplated in that guidance of the EPS range. So what is the right number to use for adjusted EPS? In your disclosures, you have $1.75, but that excludes things that probably were not contemplated when you provided guidance. So I'm just trying to get an EPS number on adjusted basis that compares to your previous guidance.

Let me see if I can address your question. When we gave our last outlook, we had not broken out the FTC costs that we accrued for the second and third quarter, as well as the WU Way costs that we're now breaking out for the full year. So FTC costs that we had previously accrued were $30 million, and then the WU Way costs are $20 million for the full year. So those are the two things that we had not anticipated in the last outlook that we gave.

Okay. Are there any, last question on WU Way, is there any pricing-related investments that's incorporated in the $100 million number for WU Way?

Are there any?

No, no pricing. You mean pricing investments?

Yes.

No, no, no. That's separate. No, that's not.

Okay. Thank you.

John Davis, Stifel.

Just want to touch on the digital business quickly. Revenue growth accelerated almost 1,000 basis points in the second half of the year from first half. It looks like it's mostly driven by the gap between transaction and revenue growth closing. Just wondering what's driving that and do you expect that to continue in 2017?

First, we are pleased with that. The customers are coming back, right? Especially the North American customers who we have been longer in the market with our digital or get used to it, and really using more often, which we are very pleased.

But at the same time, it's on the growth side, it's the global expansion. The new countries we entered in Europe and other parts of the world are showing already some good traction here. So it's really the repeat customer that close -- in the beginning -- that close the gap. In the beginning, as we started that initiative, we did a lot of promotions. And the customer -- we win customers, now we really -- our customers are using us and I think that closes the gap.

Okay. That's helpful. And then, Raj, maybe just quickly on tax repatriation and potential tax reform, if I remember correctly, you guys repatriate currently $200 million a year. Is that number right? I'm just trying to figure out what the potential impacts would be if you do get some tax break on repatriation on the tax rate going forward.

Right, yes, we do repatriate some cash every year. It's in the $200 million to $300 million we typically will repatriate, and then we utilize other intercompany working capital programs just for US cash flows.

If there were a forced repatriation, we don't have a lot of cash sitting abroad, but we do have reinvested profits. So we have retained earnings that we have abroad, and that's over $6 billion. So depending on what is forced, we'd have to certainly consider that.

I think the positive is on two fronts. One is that even if there were a tax associated with that, it would likely be over a multi-year period that we would pay that. And then it should alleviate any restriction from bringing back future cash, if you will, if there was comprehensive tax reform.

Okay. And I assume guidance this year obviously implies the tax code and laws as they stand today. So what drove the difference in the tax rate? I think previously mid teens was the -- what you guys had talked about, and 11% on a reported basis and 13%. Just what's driving that little bit better tax rate?

Yes. We expect that we're, if there were no other discrete benefits, we would be in the mid to high teens tax rate. And this year, as Mike -- as we mentioned in our comments, we plan to have a higher tax rate in the first three quarters of the year and then a lower tax rate in the latter part of the year, which is being helped by some discrete items. We will be at the mid-teens probably in the first two or three quarters of the year, and then drop down from there.

Okay. Thanks, guys.

Eric Wasserstrom, Guggenheim Security.

Thanks for fitting me in. Just one last question on WU Way. Was the acceleration from $20 million to $100 million in 2017, was that always contemplated as part of the outlook or was that part of some recent change in view? And if so, what motivated that change to accelerate the investment in that way?

Yes, no, we took -- we have been thinking about that late in the year last year, and we really brought together the strategy later in the year, and even earlier this year and finalized our outlook this year. And that's really where we've come up with $100 million and it really is a lot of activity that we had in the fourth quarter and early this year to come up with a full view on what we were doing. Because as you can imagine, there's a lot of planning and activities that go into it before we actually get to a full outlook.

But just so I understand, are there specific factors that were motivating that significant acceleration or was that just as you did the budgeting, it simply worked out that the majority of that was going to be realized in the course of 2017?

No, it was really just the planning around these initiatives. So we were not necessarily trying to see which year it fell into; it was really about how do we get ourselves to the next level of efficiencies and growth in the Company? And we felt it was the right time to actually go ahead and restructure components of the Company to get to the right place that we want to.

Thanks very much.

Thanks, everyone, for joining us and have a good evening.

Thanks.

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