西聯匯款 (WU) 2020 Q3 法說會逐字稿

Good day, and welcome to the Western Union Company Third Quarter 2020 Earnings Release Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Brendan Metrano, Vice President of Investor Relations at Western Union. Please go ahead.

Thank you. On today's call, we will discuss the company's third quarter results, our financial outlook for 2020, and then we will take your questions. 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. Western Union is still following a work from home policy.

So on our remote call today is our CEO, Hikmet Ersek; our CFO, Rajesh Agrawal; and Head of Treasury and Investor Relations, Brad Windbigler. 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 2019 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 the Investor Relations website. We will also discuss certain adjusted metrics. Although the expenses that have been excluded from adjusted metrics are specific to these initiatives, the types of expenses are similar to those that the company has previously incurred and can reasonably be expected to incur in the future.

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 will now turn the call over to our CEO, Hikmet Ersek.

Thank you, Brendan, and thank you all for joining our earnings call this afternoon. I'm pleased to say that our business continues to rebound from the global shock caused by COVID-19 pandemic and delivered solid third quarter results with improving top line trends, operating margin expansion and very strong earnings per share. The quick and dramatic rebound we experienced beginning late in the second quarter reinforces our conviction in the solid foundation of our business and the effectiveness of our strategy.

Although macro uncertainty globally remains elevated, the resilience of our business, employees and customers gives us optimism that prospects for the global community and our company are headed in the right direction. Given improved visibility into market dynamics and the trajectory of our business, we have reissued a financial outlook for full year 2020, which Raj will discuss in more detail shortly.

Moving to the third quarter results. As you may recall, we saw robust consumer-to-consumer trends in the later part of the second quarter and into July. The performance carried through the third quarter with transactions growth of 6% and cross-border principal growth of over 20%. Year-to-date, our cross-border principal is up 8%, which strongly suggests we are outperforming the remittance market-based on previous independent forecasts.

The primary driver of the sequential improvement in our C2C business was retail money transfer, led by improving transaction trends and strong growth in principal per transaction, while the digital business stayed elevated. The quality and scale of our network continues to be an important differentiator that allows us to better attract and retain customers who choose to transact at a physical location or digitally.

Our digital channels continue to perform exceptionally well, both westernunion.com and digital partnerships. Digital money transfer transactions grew 96% in the third quarter and reached new highs for both westernunion.com and digital partnership transactions. We also generated a new quarterly high of over $230 million of digital money transfer revenue accounting for 21% of C2C revenue and 31% of C2C transactions.

Westernunion.com continued to deliver impressive performance in the third quarter, generating approximately 50% transaction growth and approximately 45% monthly average active customer growth both for the second consecutive quarter. According to the mobile market intelligent firm Sensor Tower, westernunion.com once again led peer money transfer companies for mobile app downloads by a wide margin in the third quarter. So the targeted investments we are making in customer acquisition and engagement are clearly paying off.

At the same time, we continue to see the general pricing environment as stable. The foundation of our digital success is an unmet omnichannel platform. The vast majority of our digital transactions are paid out at the Western Union agent location. The omnichannel capability continues to be a competitive advantage for Western Union as this type of physical payout transactions is challenging for digital startups to execute.

At the same time, Western Union account-to-account capabilities with payout in the billions of accounts in over 120 countries, including real-time payouts in 80 countries to select bank accounts and wallets is allowing the company to continue to capture incremental growth in the fast-growing account-to-account channels with our account to account on transactions up over 130% in the quarter.

As we previously discussed, we are extending the capabilities we have developed with our branded retail and westernunion.com offerings to third-party partners to target a new and incremental market, which was using cross-border net banking for cross-border money transfer. We are focused on financial institutions who have customers with cross-border money movement needs that historically use more costly and less efficient services like the correspondent banking system, and now they are seeing the advantages of switching to our high-quality and efficient cross-border platform.

We have seen the early success as our initial partnerships are delivering meaningful results, and the pipeline continues to build. This go-to-market approach and advantaged competitive position in digital should support strong long-term top line growth for years to come. Importantly, the digital business is value-enhancing for us.

First, it is highly incremental. Over 80% of westernunion.com customers are new to Western Union company, and our account to account is growing in a new attractive segment of customers that generally have not used our service in the past. In addition, the digital partnership business targets a large market opportunity that Western Union has historically not participated in, which represents roughly half of the $700 billion C2C remittance market.

Second, the digital channels have strong profitability on both at dollar and margin basis. Overall, the economics of the westernunion.com business today are similar in the nature to the retail business. For digital third party, although the revenues per transaction is lower, margins are even higher and incremental to overall margins, and this business is still in early stages. As this business continues to ramp up, it should help drive margin expansion for the company.

Now putting the pieces together, the digital business is an important source of incremental profit for the company. The large business-to-business market is another important long-term growth opportunity. Our Business Solutions segment which represents approximately 7% of total company revenue has been affected by macro headwinds related to COVID-19 over the past 2 quarters due to exposure to small to medium-sized enterprises, travel and tourism and education. However, both revenue and margins improved from the second quarter.

Long-term prospects remain favorable, and we are positioning the business for a recovery pushing forward with payment product enhancements like our new refunds and vendor payment product within global pay for students and support for more currencies in our mass payment products.

Moving to our strategy and near term objectives. Over the third quarter, we gained a better understanding of the effects of the pandemic on our market, our ability to adapt our strategy and opportunities available in the new normal. This experience coupled with consideration of risk and reward reaffirms to us that we should rigorously pursue key objectives for our growth strategy. We continue to develop our digital offerings, including significant investment in customer acquisition for westernunion.com, data analytics capabilities to enhance customer insight and dynamic pricing and infrastructure to support third-party services.

We remain focused on advancing our solid pipeline of third-party prospects. We are ramping up our platform initiative and continue to invest in technology to move more of our operations to the cloud. This will provide a more flexible and scalable infrastructure to enhance current execution and our competitive position. It will also support growth, including both current initiatives like our digital third-party business and new use cases that may arise in the future, such as additional services for consumers, businesses and governments.

We are further enhancing our market-leading network by improving the coverage, cost and quality. Year-to-date, we have renegotiated agreements with nearly 340 existing agents and added 90 new agents with over 18,000 locations. We also continue to add additional wallet and card payout capabilities and we are on track to achieve 100 countries with real-time account payout capabilities by the year-end.

Our focus on lean management, which we call WU Way, has enabled good progress in creating a more efficient organization. We are on pace with the savings targets we described during our September 2019 Investors Day. Specifically, we expect to deliver, at least, $50 million in annual productivity savings this year as well as the 3-year target of $150 million.

So in closing, the third quarter 2020 was an important chapter for Western Union. Our business continued the recovery that began during the second quarter, and we delivered solid financial results. Like many global CEOs, I am hoping the COVID-19 pandemic comes to an end soon, and our society can live in a less risky and safer environment. We all need to take the preventative steps to avoid further spread of the COVID-19 virus and get back to a new normal as soon as possible.

At the same time, Western Union's future continues to be very exciting. We have strong conviction that we will achieve the key initiatives underlying the strategy that will enable us to drive meaningful profitable growth for years to come.

With that, I will turn the call over to Raj.

Thank you, Hikmet, and good afternoon, everyone. My comments today will focus on third quarter results, along with our newly reissued financial outlook for 2020 and some high-level thoughts as we look forward to the remainder of the year.

As Hikmet discussed earlier, the position of the business improved during the third quarter, supported by the foundation we started to lay last year with our digitally focused growth strategy. We see our growth strategy taking shape with the continued rebound of our resilient retail business from the impact of COVID-19, strong top line and customer trends for westernunion.com and significant incremental growth from digital partnerships.

Digging into the details of the third quarter, revenue of $1.3 billion, declined 4% compared to the prior year period, while constant currency revenue declined 1%, a substantial improvement from last quarter. Currency translation net of the impact from hedges, reduced third quarter revenue by approximately $41 million compared to the prior year, primarily due to the depreciation of the Argentine peso.

The decline in the peso negatively impacted reported revenue by 3%, while the effect of inflation on our Argentina businesses is estimated to have positively impacted constant currency revenue by approximately 1%.

In the C2C segment, revenue declined 1% or was flat on a constant currency basis, with transaction growth offset primarily by the impact of mix. Transactions grew 6% for the quarter, led by 96% growth for digital money transfer, partially offset by declines for retail money transfer. It is worth noting that the sequential improvement in C2C transactions from minus 8 in the second quarter was primarily attributable to improving retail trends, while our digital business sustained its high growth.

Total C2C cross-border principal increased 23% on a reported basis or 24% constant currency, driven by growth in digital money transfer. Principal per transaction or PPT was up 13% or 14% constant currency and it increased across all channels. Multiple factors contributed to higher PPT that can be characterized broadly as changes in consumer behavior and business mix.

The spread between C2C transactions and revenue growth in the quarter was 7% or 6% constant currency. Excluding the mix effect of our digital white label partnerships, the spread was close to 0. Current digital white label partnerships carry a lower revenue per transaction for RPT than Western Union branded transactions. The partnerships were just getting started in the prior year period and grew significantly year-over-year, which drove a greater mix of white label partnerships that reduced RPT.

Digital money transfer revenues, which include westernunion.com and digital partnerships, increased 45% or 46% constant currency and accounted for 21% of total C2C revenue and 31% in of total C2C transactions in the quarter. The spread between digital transaction growth and revenue growth was primarily attributable to the mix effect of digital white label partnerships that were incremental to the business this year, in addition to certain strategic pricing actions for westernunion.com. As we mentioned last quarter, our objective for westernunion.com is to price dynamically to drive customer acquisition, transactions, and revenue over the long term, which contributes to higher lifetime value of customers.

Westernunion.com revenue grew 33% or 32% constant currency, with cross-border revenue up approximately 46%, partially offset by continued declines in domestic money transfer, Westernunion.com transactions increased 53%. As Hikmet noted earlier, we are pleased with the results of the targeted pricing we employed this quarter to drive customer acquisition for westernunion.com, while overall, we continue to see the pricing environment as stable.

Within our digital partnership business, digital white label partners continued to perform exceptionally well with strong transaction growth. There still seems to be some misunderstanding about the profitability of our digital business. So I would like to take a minute to discuss the economics.

Starting with westernunion.com, which is most of our digital business, the overwhelming majority of the transactions are funded, [debit] card and payout at one of over 550,000 Western Union agent locations in 200 countries. These transactions have unit economics that are relatively similar to our retail channel, and over time, we think they could be even more profitable.

The digital third-party business, which today largely consists of only a handful of partners, yields are lower than Western Union branded transactions because we play reprocessing role. At the same time, margins are generally higher than Western Union branded digital transactions because we incur fewer costs such as customer acquisition, fraud losses and funding. So the profitability of our combined digital business is compelling, particularly compared to native digital players.

To put this in perspective, the mix of digital revenue in our C2C business for the third quarter increased 700 basis points year-over-year from 14% to 21%, and we still generated strong adjusted margins of 23.5%.

Turning to the regional results. All regional trends increased sequentially from the second quarter, led by improvement in retail and bolstered by continued strong growth in digital money transfer. North America revenue trends improved to flat year-over-year on a reported basis and grew 1% on a constant currency basis on transaction growth of 1%. Both constant currency revenue and transaction growth were driven by the U.S. outbound business, primarily sends to the Latin America and Caribbean region, partially offset by continued declines in U.S. domestic money transfer which was less than 5% of total company revenue during the quarter.

Revenue in the Europe and CIS region improved and increased 3% on a reported basis or 1% constant currency on transaction growth of 24%. And constant currency revenue growth was led by Germany, France and Russia. Spread between constant currency revenue and transaction growth was primarily due to channel mix driven by the digital white label business in Russia. Revenue in the Middle East, Africa and South Asia region also improved and increased 2% on both a reported and constant currency basis, while transactions grew 15%. Qatar and Saudi Arabia led with solid constant currency revenue growth in the quarter, while the UAE continued to experience economic pressure resulting from COVID-19.

The spread between constant currency revenue and transaction growth was attributable to strong growth in Saudi Arabia, driven by the digital white label business. Revenue in the Latin America and Caribbean region improved substantially, but still decreased 21% on a reported basis or 8% constant currency on transaction declines of 21%. The combination of restrictive government policy responses to COVID-19 in some countries, coupled with high rates of inspection in the region contributed to the negative performance in the quarter. We've also not seen the same offsetting benefits from digital [in lockdown] due to slower adoption by governments for electronic compliance methods, which have generally been adopted in other regions.

Revenue in the APAC region also improved and increased 4% on a reported basis or 5% constant currency. Constant currency revenue growth was primarily led by Australia. Transactions declined 6%, primarily driven by the Philippines domestic business, which has limited impact on revenue.

Business Solutions revenue trends improved from the second quarter but decreased 11% on a reported basis, or 13% constant currency and represented 7% of company revenues in the quarter. Revenue declines were the result of ongoing impact of COVID-19 on the business as cross-border trade has declined and small and medium-sized enterprises have reduced visibility to future hedging and payment needs.

Other revenues represented 5% of total company revenues and declined 33% in the quarter. Other revenues primarily consist of retail bill payments in both Argentina and the U.S. as well as money orders in the U.S. The revenue decline was due to the depreciation of the Argentine peso and the ongoing impact of COVID-19.

Turning to margins and profitability. I will focus on consolidated margins as segment margins are not comparable with the prior year period due to expense allocation changes implemented in the first quarter of 2020. Consolidated GAAP operating margin was 22.7% in the quarter compared to 15.1% in the prior year period. The increase was primarily due to restructuring costs incurred in the prior year period in conjunction with current year productivity savings and additional cost management measures, partially offset by revenue declines.

Additional cost savings realized in the quarter mainly reflect the timing of certain expenses or lower levels of expenses related to business activity, such as lags in hiring or travel. I'll talk more about margin drivers for the remainder of the year when I discuss the reissued 2020 financial outlook in a moment.

We incurred $9 million in restructuring expenses in the third quarter related to our productivity program. We continue to expect total restructuring-related expenses of approximately $150 million. And since the start of this, we have incurred approximately $140 million. Adjusted operating margin in the third quarter was 23.5% compared to 22.3% in the prior year period, with expansion driven by the same factors stated previously and adjusted for restructuring and M&A costs.

Foreign exchange hedges had a negative impact of $1 million in the current quarter and a benefit of $10 million in the prior year period. The GAAP effective tax rate was 12.4% in the quarter compared to 16.8% in the prior year period, while the adjusted tax rate was 12.7% compared to 18% in the prior year period. The decrease in the GAAP and adjusted effective tax rate was primarily due to higher prior period domestic pretax income due to the sales of Speedpay and Paymap businesses, offset by increased discrete expenses in the current period.

GAAP earnings per share in the quarter was $0.55 compared to $0.32 from the prior year period. Year-over-year EPS growth benefited from higher restructuring expenses incurred in 2019, additional productivity and cost earnings in 2020 and a lower effective tax rate and share count, partially offset by revenue declines.

Adjusted earnings per share in the quarter was $0.57 compared to $0.49 in the prior year period with the increase due to the factors stated previously and adjusted for restructuring and M&A costs.

Turning to our cash flow and balance sheet. Year-to-date cash flow from operating activities was $586 million. The year-over-year decline in operating cash flow was primarily due to the timing of payments for restructuring and other activities partially offset by lower income tax payments and an increase in operating income.

Capital expenditures in the quarter were approximately $22 million. At the end of the quarter, we had cash of $1.3 billion and debt of $3 billion. Our financial position is among the strongest within our payments peer group. We have an undrawn $1.5 billion revolving credit facility and no significant debt maturities until 2022.

We returned $92 million in dividends to shareholders in the third quarter and had no share repurchases. The outstanding share count at quarter end was 411 million shares and we had $783 million remaining under our share repurchase authorization, which expires in December 2021.

Turning to our financial outlook. Note that we have made key assumptions that the current economic environment will persist for the remainder of the year with no significant worsening of the current pandemic. We expect GAAP revenues for the full year to be down high single digits due to the impact of COVID-19 and the 2019 divestitures of Speedpay and Paymap.

On an adjusted constant currency basis, which excludes the impact of the divestitures and Argentina inflation, we expect revenues to be down mid-single digits. The spread between transaction growth and revenue growth should temporarily widen further in the fourth quarter as we continue to cycle through incremental year-over-year digital white label transactions and some targeted price increases in the fourth quarter of 2019. The gap should narrow over 2021 as these factors diminish.

As I mentioned earlier, excluding the mix impact, from the significant ramp-up in the digital white label business, C2C transactions and revenue growth were similar to each other in the third quarter. GAAP operating margin is expected to be approximately 20%, while the adjusted operating margin is expected to be approximately 21%.

I'd like to provide some context on cadence of quarterly margins recall that in the early stages of the pandemic, we slowed a number of initiatives and investments due to significant macroeconomic uncertainty. As business conditions improve during late second quarter and third quarter, we pushed forward the previously planned activities but there could be a lag of weeks to months before some of the associated costs actually hit the P&L. So the fourth quarter will incur a higher level of expenses.

Although we are expanding margins in line with our original 2020 targets, GAAP EPS for the year is expected to be in the range of $1.72 to $1.77, while adjusted earnings per share is expected to be in the range of $1.80 to $1.85.

To recap, we are pleased with the financial results and progress of our business this quarter as we continue to rebound from the impact of the COVID-19 pandemic and advance our growth strategy.

Looking forward, our business is well positioned for continued progress with solid market fundamentals and an effective strategic agenda, which we believe will create long-term value for our customers and our shareholders. Thank you for joining our call today.

And operator, we are now ready to take questions.(Operator Instructions) The first question comes from Darrin Peller of Wolfe Research.

When we look at the actual additions that you have in your business and the transaction growth versus principal, looks like principal per transaction was up meaningfully double digits. And I think you mentioned something about types of customers driving these. I guess I'd be curious to hear what you're seeing -- how you're seeing this trend, is the current principal per transaction sustainable? And maybe if these new customers are really sticky for you guys?

And then just bigger picture, when we look at the digital mix here, I know it's a little early to ask this, but once we anniversary, hopefully, some of these trends, and let's call it, middle of next year, do you think that this 28% plus type mix from digital is sustainable at that rate based on behavioral trends of what you're seeing in your base?

Darrin, this is Raj. On the first question -- on PPT trends, we're quite pleased to see that we're still learning, I would say, in this environment because people have changed your behavior a bit. Certainly, the customers that are remaining in our business are the customers that they're transacting at a high level, but they also have a higher ability to pay or to send money, and so they're sending higher principal amounts.

Even the new customers that are coming into our business are inhibiting the same kind of characteristics. I would say that it kind of remains to be seen on how long this is going to stay in place. But most of the customers that are coming in, they say they're going to continue to use us. And there's certainly a strong need for the receive markets to keep receiving money. So it's going to continue in the short term, but we're going to have to see how this plays out longer term.

Hikmet, do you want to add anything to that or?

Yes. I think, Darrin, the customers we acquire, especially the digital ones with westernunion.com, they are new to us. We know that 80% of the customers, they use us, and they are more stickier. They stay and they use a higher principal. They use their cards, accounts or debit cards and are stickier. And they stay, and we have with them a direct connection with our westernunion.com, loyal customers. So we'll allow that -- which direction that goes also with the higher principal.

And your question around digital mix, yes, on your question around digital mix, we had a dramatic turnaround in the retail business in the third quarter. It's still declining on the retail side, but it's much better than it was in the second quarter, and we still maintain roughly 20% mix on digital. So we think that digital will continue to be a very strong contributor. It's running now at $230 million of revenue this quarter. So we still see good growth opportunities there. And we want to do everything we can to bring the retail business back and also maintain that kind of a digital mix.

The next question comes from Jason Kupferberg of Bank of America?

To start with kind of a trajectory question on the C2C business, I was wondering just kind of how the quarter progressed month-to-month and what you've been seeing in October so far relative to the 6% number that you saw for the full quarter in Q3.

Well, generally, I would say that the business is improving and improving day by day, and we like how and which direction the business going, I mean big contributions are -- retail is coming back, big contribution is the digital growth, it's really in the high revenue growth.

And additionally, incrementally is also our third parties, right. Their digital transactions, really adding to our success currently. And it looks like we are gaining market share just compared with the independent outside [such is like, The World Bank] look at -- 8% on principal gain has been pretty good. So I would say that it's all over.

Yes. I mean, the third quarter trends you asked within the quarter, I would say there were some holidays and other impacts. So it's not really that -- when you look at the monthly data, it's not that relevant. It's more important to look at the entire quarter, and about 6% transaction growth is really a good level for the -- for where the business is. And October, I would say, is just in line with our expectations, so nothing new there at this stage.

Okay. And just in terms of capital deployment, I mean, obviously, you guys suspended the buyback back when COVID hit, and now the business is clearly on firmer footing. You've reinstated guidance, which is great to see. So just curious how you guys are thinking about what needs to happen before you're comfortable buying back stock again?

Well, as you know, we still have an authorization for buyback stock, right. The environment definitely still -- we are still in the pandemic situation. We are still looking around, but we feel day-by-day more confident about our business. And our dividend policy has been very good, and we will definitely consider other ways of giving back to the shareholders as we get more confident about our business.

Next question comes from Tien-Tsin Huang of JPMorgan.

So the retail improved nicely, that's great. I'm curious, just with thinking about the guidance that's reinstated, as Jason mentioned, the mid single-digit decline, I think you're at 3.5% down year-to-date, Raj, if I'm correct. If so, are you expecting or bracing for potentially things get a little bit weaker in the fourth quarter? Or is that just conservatism on your part?

No, no. It's -- the tables don't exclude the benefit of Argentina. So that's embedded in the year-to-date numbers and the outlook we've given excludes the impact of Argentina inflation. So Argentina inflation was about 150 basis points year-to-date. So that -- you have to take that into your account as well, Tien-Tsin. So it's really -- for the fourth quarter, I would say that -- yes, for the fourth quarter, we haven't really assumed a material change in trends. So we're expecting more of the same. Obviously, we'll see whatever the pandemic does. But generally, we would expect more of the same sort of trends.

Thank you for correcting me there. On the targeted pricing that you mentioned, on the digital side, is that reactionary or maybe opportunistic to acquire customers when digital demand is so high right now? Just trying to think about what the motivation there was.

It's not -- as you know, we are seeing so many corridors with our westernunion.com and sending money to 200 countries, more than 75 countries, sending money to 200 countries, and we are adapting our prices to new countries. And we also talked about the dynamic pricing. We are changing the pricing. It's typical thing, it's nothing special as we are doing corridor pricing, as we are doing holidays pricing and that's what we are really focused on, nothing extraordinary here that's reacting to the customer needs.

And Tien-Tsin, also, as you know, the market has been quite stable in the pricing market. So that's -- it's also we really can go and have a targeted actions for loyal customers. So that's important and you can see that we are very successful there.

Yes. And as you said, the LTV is high once you get the digital customer.

Absolutely.

Yes, we had 47% growth in the active average monthly customers in [dot.com] so that's much more sticky business than other parts of our business.

Next question comes from Bryan Keane of Deutsche Bank.

Yes, it's good to see the progress, at least. That's definitely positive. I wanted to ask on the last quarter when we showed July transaction trends for wu.com, digital transfer and C2C, and they were quite a bit higher than where they ended up coming out with the quarter. That decel we saw, is that all explained away by the holiday? Or was there also some decel in the fundamental business in those 3 metrics?

Yes. There's a lot of calendar stuff going on between July and August and September, and that's why the most representative numbers are for the full quarter. Regardless of which channel you're talking about. So on the digital side, we started to see some grow over from the digital white label business that began last year. So that's some of what you're seeing there. But otherwise, it's really the full quarter numbers that are more relevant to really pay attention to there, Bryan.

Got it. And then when I back into the fourth quarter EPS number on an adjusted basis, you came quite a bit ahead on the quarter in adjusted earnings, but when I back into the fourth quarter, it looks like it's a little bit below Street. And it looks like the margins might be down a little bit on a year-over-year basis. But just to make sure I understand that point, Raj, it sounds like there are some investments that will be made that were kind of pushed off and caused the margins potentially to drop in that fourth quarter, which might be what we didn't model correctly on the Street.

Yes. Given the performance that we've had so far, we did hold back on some planned spending in the second and third quarter, Bryan, that is now -- we started to relaunch some of the spending in the latter part of the third quarter, which will hit mostly in Q4. And what we're really pleased with this that we're now at 21% for the full year for our outlook for margins, which is really -- it's our original margin objective for the year, even in a very down revenue environment.

So we're really pleased with that, and I think it just gives you a sense of the flexibility we have and our operating model with our 55% to 60% of our costs being variable in nature. So we're very pleased with that. And I don't see the fourth quarter really being as representative of the baseline of the business, it's more about the full year numbers for us. Hikmet, you wanted to add something?

Yes. No, I just want to add something because all these investments, which we are doing Q4, Bryan, are really investments for -- also for the future. As we outlined in the -- in our September 2019 part is definitely the marketing, but we are investing heavily in the technology and continue to put everything, as I mentioned earlier, to cloud. And we are really improving here and which will make us even more competitive in the future, I think, and more effective, I believe. And we are still committed to our $150 million 3-year savings. So that brings -- this year, we are confident with our 21% margin. And that's what we gave in the beginning of the year before COVID-19.

The next question comes from Rayna Kumar of Evercore.

So if we take a 3 to 4 quarter view when we might have a vaccine and borders reopen without a 14-day quarantine, would an increase in migration improve your cross-border money transfer growth rate further, assuming we have moderate job creation and high GDP per capita countries to drive it?

Well, we all wait for the vaccine, right? That's something that make us all probably better and we turn to new normal. One thing is clear from a CEO point of view, I can only say you that there will be a new normal. Things will be different, but we are where, as you could see that we are very confident for the future. I think as we were prepared during COVID-19 with our digital, with our global network and with our platform, I think we are also getting ready for the new opportunities.

Of course, the migration helps our business, of course, exports imports more SME using export imports helps our business. Students pay when the students go to the universities, again and cross border, that helps our business. But at the same time, it shows also that even during COVID-19, how strong our brand is, how trustworthy it is, how much we are -- customers like us. They are coming and using us and even -- it shows even how we are gaining market share. So I hope it could answer your question a little bit on that.

That's very helpful. And then for the last several quarters, you've been highlighting really strength in your white label partnerships, specifically in Russia and with Saudi Telecom. Maybe if you can speak a little bit about where there's other opportunities to have those white label partnerships.

Sure. I mean, we are very -- our platform is even adapting to the white label partners. As you could imagine that signing a bank, a larger bank or signing a financial institution or telecom company that after signing that integration takes a little bit of time. And we are -- we do have pipelines, and we do have some signed agreements, some smaller, some bigger, and that will contribute also in the future to our white label growth and we are excited.

And the good thing is also, we see that and shows us also as incremental because this financial institutions were using correspondence banking in the past, which is quite difficult to send money from cross-border and expensive. So -- and we do have programs, compliance, for examples (inaudible) programs state oversight, which are really probably one of the best in the industry. So many financial institutions turning to us saying that, okay, for instance, can you drop for us the exhibit currencies in these countries? Can you do that because you're in 200 countries, and you have a great platform. So this is something that I'm excited about.

The next question comes from James Faucette of Morgan Stanley.

Just wanted to follow-up on the white label. Comments that you just made. When we think -- obviously, there's lots of opportunity, et cetera. But how do we think about how expansive those can be and what your limits are in maybe any particular geography or if there's exclusivity? Just trying to think about how broadly you could take those partnerships.

So on white label, as I said, James, it's a great question. And white label is, though, this is a different environment. The people -- the financial institutions are using correspondence banking already. The customer -- for customers to send money, especially to an exotic currencies, let's say, from dollar environment to an exotic currencies or from euro environment to different currencies worldwide, it's a struggle.

And that's that sending in minutes, we have the real-time payments in accounts. We have real-time cash payouts. And these are big advantages for us. If you drop money in minutes on a location or send money in real-time to an account in the different currencies, this is probably the biggest advantage we offer to the financial institution.

So it's not about exclusivity, it's not exclusive, they already use different methods. It's really replacing, let me say, the struggle they have or costly system they have replacing with our most -- more efficient system and serving their customer in a better way.

Got it. And then as Raj highlighted the strength of the balance sheet and overall capital position. I'm wondering how do you think about and you already pay a nice dividend. How do you think about returns incremental to the dividend, whether it be buybacks versus M&A? And are you seeing opportunities perhaps to put that capital to work in buying new technologies or other businesses, et cetera?

Generally, I would say that as we feel much more comfortable about business, we are not pre COVID yet, but the direction is good. And our programs were pre-COVID, designed pre-COVID and announced pre-COVID. So that's why we have the -- still on buyback, $780 million left, Raj?

Yes.

And we get more confident about the business. On the M&A side, I mean, given our financial strength, we will always look at the market. It has to have the right return, and it has to have to be aligned with our strategy. And that's where we are definitely looking if there is opportunities for us, growth opportunities or even synergy opportunities where we can be more active. We are definitely active in the market also. But I think, from my point of view, I feel much more confident about the business. And I think that the shareholder return has been always on top of my agenda.

Yes. Our capital priorities have not really changed, James. It continues to be to invest in the business to have the organic growth that we have and it's largely digital and technology improvements. We pay a very healthy dividend, as you mentioned. That's a key priority. Third would be M&A opportunities that fit nicely within our cross-border payment strategy. And then the fourth one, an important one, would be stock buyback to the extent we have excess cash flow. So that's really the priority that we think about whenever we're making investment decisions.

(Operator Instructions) The next question comes from Ramsey El-Assal of Barclays.

I wanted to ask you about the Kroger relationship, and there was a change there in terms of exclusivity could you help us sort of dimensionalize how you're thinking about that? Is it -- you have a very diversified business. So will it be perceptible if you lose a little share in that particular client or not?

Well, we just announced our Kroger relationship, and we are very happy after 35 years, we again extended our relationship. I think with Kroger, it's a great part and we have a very good partnership. And it's -- but one of our partners globally, I think none of our apartments are bigger than 5% of our revenue globally, right? And we have thousands of partners globally, and it's one of the partners, which we like the 35-year old relation very much.

Look, on the exclusivity or non-exclusivity, worldwide we are acting -- like one of our most successful market is the Middle East Gulf states, and they have been always a nonexclusive market, and we've been very much successful there, and we are expanding our market. By the way, the biggest exclusive agent is westernunion.com, right. I mean we are on agent, which has been doing very well. And along this quarter growing very -- again, from a very huge pace, again, growing very strong. And that shows also how we can operate in an exclusive or nonexclusive market, how the customers are choosing us and how we are gaining current market share. So I think we love Kroger, and we're going to be together, again. We are looking forward another multiyear agreement with Kroger.

Yes. I would say, Ramsey, also most of our agents are well below the 5% threshold. There's none that are bigger than that in. So it really is a very diversified business mix that we have and but ultimately, we're also looking at the overall economics to Western Union and what it means as we look at opportunities around the world.

Next question comes from Ashwin Shirvaikar of Citi.

I'm trying to figure out the impact of some of these new shutdowns in France and Germany. Remind me whether the impact was immediate back in March, April? Or is this a situation where a 3, 4-week shutdown wouldn't really affect the numbers much. I don't want to minimize the gravity of the situation, but just from a financial standpoint would that affect you?

I think it's a good question. First of all, as you saw second quarter shutdown in the March area, February, March area is a different shutdown than this shutdown, generally what we see in the market. It's more focused. I think unfortunately, we learned or the governments learned their lessons how to do the new restrictions around to control COVID-19 pandemic. It's -- so it is different.

As you know also that our business after the restrictions get a little bit better immediately bounced back. Also in end of Q2, beginning of Q3 significantly. So I don't expect that this shutdown in France and Germany is the similar one that it happened in February and March. So I am more confident that it will have less financial impact to us. That's why we are also confident of our year-end guidance. We learned also, and that's why we are reissuing our year-end guidance.

Next question comes from Timothy Chiodo of Crédit Suisse.

I wanted to touch on the small but fast growing, I believe, in the slides, 3x growth in terms of the account payout business, so account on both sides. The payout network has gotten quite large now. You mentioned billions of accounts, 120 countries, which is the vast majority of GDP, I would assume. I wanted to talk about a little bit of the mechanics of how this network has been built out to the extent you're leveraging partners like a Visa Direct and Earthport to get access to accounts?

What portion of this is perhaps proprietary integrations that you've built using your global treasury network into perhaps local ACH connections, et cetera, really, the mechanics of how you were able to build out such a broad account to account network?

Yes. I think it's -- we have a big advantage, obviously, we are in 200 countries present already, right? The other fintech companies and other companies struggling to go to another country. Our [present], our licenses, our compliance programs, our settlement programs are already settling so many currencies.

So what we do here is that we really, over the years, as you recall, 2, 3 years ago, we started with the initiative signing more accounts globally because we believe on real-time with that, we are achieving new customer segments with higher principal, different customer segments, which did not use us in the past. And we have -- and what I like is that most of the team did a great job the regional teams, is it in India, is it in Turkey or is it in Bangladesh, they did a great job signing the accounts directly, the banks directly without having to switch.

With that, we do have a more profitable business, direct account to account, we collect from an account, drop in an account without using a switch. That makes us actually to switch in the middle. We can do the treasury ourselves. We can do the settlement ourselves. So that's a big advantage. We signed about billions of accounts or most of them are direct accounts. So what you do is that you sign a bank in China, and you have a direct access. You've signed a bank in Argentina, you have a direct access, same in Brazil. And so with that account to account, it's a highly profitable business. It's still small, it's still growing. It's still -- and the banks on the send side have to promote that, that they can send money via their account directly to an account in Vietnam, and that's what we are doing.

Next question comes from Jamie Friedman of Susquehanna.

Congratulations on the excellent results here. I just wanted to ask the dynamic pricing was a big theme at Analyst Day. It continues to evolve. What percentage of your constituents, your transactions is dynamic pricing applicable? Is it only really in the digital environment? Where do you see that evolving to?

That's a great question. We did talk about that. We do see also as a big advantage, dynamic pricing, obviously, especially we can have dynamic pricing from where we are an agent with westernunion.com, but we also have a retail dynamic pricing. So dynamic pricing is always a definition thing, how dynamic are you? Are you dynamic minutely? Are you dynamic in quarterly or are you dynamic in country wise or corridor wise, [Brent] wise and we do that.

We are almost like an airliner in many -- some corridors, I would not say we are everywhere yet. We are really learning and adapting to the customer needs. We build this customer data. Our data is getting even more intelligent day-by-day to understand and we're getting more influenced -- is it FX rate? Is it the customer need? Is it the customer loyalty? Is it the corridor? Is it processing fees? Is it holidays? All these things we are putting in our system and we are coming -- adopting the prices constantly to the customer needs and that's continue to grow. It's only the beginning. It's a journey, and I believe, being in 200 countries with that, that's huge.

The next question comes from Ken Suchoski of Autonomous Research.

I just want to follow-up on Ramsey's question on Kroger because we got this one a few times over the last couple of weeks, but that agreement shifted from an exclusive deal to a nonexclusive deal and I know most agents are below the 5% threshold. But I was curious, what percentage of your total agent locations and transactions are under exclusive agreements today? And I guess, a follow-up on that is just how do you think about maintaining that share with Kroger, once Kroger brings in that second offering?

So let me start with the second one, maintaining. That's easy because we are winning in the market anyway. We are operating in many nonexclusive, nonexclusive areas anyway. It's a customer choice. That's actually -- that's also Kroger's intention being a customer choice who has a better service. If you send money to real-time to an account in Bangladesh or in Vietnam, probably you will go from Kroger and send money with Western Union and continue to -- if you are a loyal customer to Western Union, you're going to continue to use.

So I'm not worried about that. We are winning on the nonexclusive environment constantly and obviously, it shows also the stats currently shows that we are winning. Maybe Kroger is on the top line because it's the U.S. But once you come with me to Saudi Arabia or to UAE or to other countries, you will see in how -- which environment we are operating, which is nonexclusive, and the customers are choosing us, the customer trust us and continue to trust us. Raj, do you want to add anything on that?

Yes. On the first part, Ken, as you said, most of our business agents are exclusive in nature, except the Gulf space and Russia have been nonexclusive for a long time, and we were actually a later entrant into the Gulf states, but that's a key part of our business, middle East, Africa, South Asia, you know what that is in terms of percent of total C2C. So I would say still the vast majority of our revenues and transactions and agents are exclusive.

In Africa, for example, just as another example, you actually cannot have exclusive agreements, but it doesn't mean you can't work with agents exclusively, but it just depends on how you incent agents in different parts of the world. So it's a mixture of different kinds of agreements. But -- and ultimately, as I mentioned earlier, it really ends up being a question of economics, what are the best economics for Western Union? What kind of opportunities do we have, and that's how we make our decisions on whether something is exclusive or not. It's not about just the exclusivity, it really is about economics ultimately.

The next question comes from Kartik Mehta of Northcoast Research.

Hikmet you've talked a lot about dynamic pricing. And I'm wondering now that the digital business is growing so fast, and there are more competitors at least recognizable competitors on the digital side. Are you having to adjust pricing more because of just greater demand, greater competition? I'm wondering if the pricing has to be adjusted more because of that and if you're seeing pricing pressure.

First of all, I guess that you saw during my presentation that obviously, customers choose Western Union. I mean you saw from the downloads they have, app downloads, we are by far the largest at the market, by far the best choice in the market. And that's not my statistic, that's from third-party independent statistics, a customer continue to trust us.

I think if you operate in 75% countries and 200 countries, you do adjust your prices or your customer loyalty programs or your programs cost and marketing programs constantly to the environment. And that's what we are doing. We see this pricing environment very stable. I think that to drop money in minutes to somewhere is not everybody's art. We do it in the probably, we believe that we are doing it the best way. And that's why we are gaining also market share even in digital and especially in digital, and that also retail is coming back. So that is a big advantage for us. And I don't see big pricing movements coming in the next near future.

Next question comes from Matthew O'Neill of Goldman Sachs.

Thanks so much for squeezing in here. So I wanted to I wanted to just focus in on Slide 12. First and foremost, really appreciate Raj, Brendan, you guys putting that together. I think really helpful way to think about the dynamics of the traditional business versus wu.com and of course, the newer white label.

To dovetail on the conversation you're having with Tien-Tsin, about the customer acquisition cost and lifetime value. Just kind of thinking ahead here. I suspect there's even a greater delta between wu.com and the mobile app users as far as the engagement with the brand and the recurring nature of that business, thinking about how that's going to move forward, given that we've had sort of a COVID-driven inflection point in the business to incrementally more digital. Is there an opportunity that the stickiness of those customers could allow for margin expansion starting in '21 and beyond?

So I think Raj spend a little bit time on the margins of the digital margins. We are very pleased with the digital margins, actually. And you're absolutely right. I think we are focused on this business, if that expense really could be also helps in our margin in the future also because you do have less than site expenses on the sales expense or the agent expenses, and you have direct control here with expenses.

So that may help us but at the same time, we really like the digital -- the stickiness of the customers. We are now very much focused on how can we have the customers even more sticky. Can we add additional products to that besides money transfer, can we add additional incremental products, which will drive the margin and revenue for that. That's something that's very interesting.

Our data is unique. Our data has about 150 million customers globally and for our customers, part of that is digital customers, but the relationship with the digital customers is unique. And the customers are asking us, we love your brand would you offer other products also and that's something that we are definitely looking at that. And in the future, long term, we would like to definitely talk more to you about these opportunities.

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

Thank you, Andrew, and thank you all for joining us today and for your interest in the Western Union Company.

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