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Edited Transcript of WU earnings conference call or presentation 1-Aug-19 8:30pm GMT

Q2 2019 Western Union Co Earnings Call

ENGLEWOOD Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Western Union Co earnings conference call or presentation Thursday, August 1, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hikmet Ersek

The Western Union Company - President, CEO & Director

* Michael A. Salop

The Western Union Company - SVP of IR

* Rajesh K. Agrawal

The Western Union Company - Executive VP & CFO

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Conference Call Participants

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* Ashwin Vassant Shirvaikar

Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst

* Bryan Connell Keane

Deutsche Bank AG, Research Division - Research Analyst

* Damian Justus Wille

Barclays Bank PLC, Research Division - Research Analyst

* Darrin David Peller

Wolfe Research, LLC - MD & Senior Analyst

* David Mark Togut

Evercore ISI Institutional Equities, Research Division - Senior MD

* James Edward Schneider

Goldman Sachs Group Inc., Research Division - VP

* James Eric Friedman

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Jennifer Catherine Dugan

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Kartik Mehta

Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst

* Steven Matthew Wald

Morgan Stanley, Research Division - Research Associate

* Tien-Tsin Huang

JP Morgan Chase & Co, Research Division - Senior Analyst

* Vasundhara Govil

Keefe, Bruyette, & Woods, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Western Union Company Second Quarter 2019 Earnings Release Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mike Salop, Senior Vice President, Investor Relations. Please go ahead.

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Michael A. Salop, The Western Union Company - SVP of IR [2]

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Thank you, Andrew. On today's call, we will discuss the company's second quarter results and our full year financial outlook, and 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 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 2018 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 these initiatives, the types of expenses may be similar to 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.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [3]

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Thank you, Mike, and good afternoon, everyone. I will begin with an overview of our second quarter results and business highlights. Afterwards, I will provide more information on the implementation of our new strategy that we announced today.

Revenue trends were steady in the second quarter, and we remain on track with our full year expectations for core business performance. The digital business continues to drive our results with 20% constant currency growth and 15% transaction growth in the quarter for westernunion.com money transfer. Declines in U.S. domestic money transfer are impacting the digital results. However, westernunion.com cross-border transaction and constant currency revenue are very strong, which -- with each growing well over 25% in the quarter.

Total consumer-to-consumer revenues, which represented 83% of company revenue in the quarter, declined 1% on the reported basis or increased 1% constant currency, while transactions grew 1%.

Pricing in the quarter was favorable by 2%, which has pressures driven by price increases in the U.S. domestic money transfer, and we continue to believe that overall cost for the pricing environment is stable.

Geographically, our U.S. outbound and U.S. to Mexico money transfer business delivered good results. We continue to gain market share in the Mexico corridor base on the latest Banco de Mexico data, and Latin America outbound also remained strong. The gains were partially offset by declines in Asia Pacific and U.S. domestic money transfer.

In Business Solutions, we achieved constant currency revenue growth for the fourth straight quarter. Revenue increased 3% on a reported basis or 7% constant currency driven by strong growth in Europe and Australia.

Furthermore, we continue to offer our unique cross-border platform to existing and additional partners. Recently, we announced collaborations that allow other financial institutions and global brands to leverage our cross-border platform and compliance capabilities to make payments from almost any type of account to almost anywhere in the world. Today, we announced an agreement with Toronto-Dominion Bank, the TD Bank, one of the largest financial institutions in Canada, that gives TD customers the ability to send money digitally from their accounts for payout at Western Union locations in over 200 countries and territories around the world.

Last month, we announced an agreement with the U.K. Post Office, which offers U.K. consumers and businesses expanded digital international payment services by integrating Western Union's cross-border platform with the post office digital channel. Customers will be able to access international payment services via U.K. Post and Western Union-branded online portal. Also, businesses will be able to make near real payments in multiple currencies, allowing them to expand their network and connect with new business partners across the world.

These are only 2 prime examples where leading brands are turning to Western Union for our deep financial services expertise, digital know-how and leading compliance capabilities to expand access and create new choices for their customers.

Financial institutions, FinTechs and global companies like Amazon are also choosing our platform, global regulatory framework and network to offer our capabilities to additional customer segments. We think this validates our model and market position and crucially underlines the principle upon which this business has been built: convenience, the high standards of compliance and reliability for the users and communities who interact with the platform. We believe we have a responsibility as we evolve our business to maintain our commitment for those principles both for the benefit of the customers that use our platform and because it's a competitive advantage for Western Union.

I'd now like to provide some additional color on the global strategy initiative that we announced today. We are very confident in the underlying strength of Western Union and enduring value of our unique cross-border platform. This is a stable business with strong margins, but we believe we can deliver additional value to customers and shareholders through a new global strategy designed to drive improved efficiency, profitability and long-term revenue growth. This global strategy is the result of strategic review of the business that we will detail at our Investors Day on September 24.

At Investor Day, we'll provide you with a full view of our new strategy, discuss new initiatives to drive growth as well as detail additional opportunities for efficiencies. We plan to give you an overview of how we expect to generate long-term growth by offering our more efficient and advanced WU platform and operating model to customers globally.

As discussed on our last call, we identified opportunities to run our business more efficient -- effectively and efficiently. The global strategy is focused on executing on our opportunities through important changes to our operating model that will meaningfully reduce our structural cost base. Planned changes include a reduction in our total head count by approximately 10% and the consolidation of corporate and business offices while we continue to be a leader in the global cross-border money movement and payments industry. We believe that these actions will have relatively quick return on investments for shareholders while better positioning us to drive growth. Specifically, only from these actions we announced today, we expect to generate $100 million in annual savings beginning in 2021, which should help drive significant margin expansion from where we are today.

We have been working hard and planning this initiative for some time, and we look forward to sharing more details on our Investor Day. Our goal is not only to drive cost savings and margin expansion but to drive growth by delivering the efficient and advanced WU platform to more customers, clients and global brands.

Now I would like to turn it over to Raj for a more detailed discussion of the second quarter financial results.

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [4]

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Thank you, Hikmet. Second quarter revenue of $1.3 billion declined 5% compared to the prior year period. While adjusted constant currency revenue, which excludes our divested businesses for both the current and prior year, increased 4%.

Currency translation, net of the impact from hedges, reduced second quarter revenue by approximately $74 million compared to the prior year, primarily due to 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 both reported and constant currency revenue by approximately 2%.

In the Consumer-to-Consumer segment, revenue declined 1% or increased 1% on a constant currency basis, while transactions grew 1%. The total C2C cross-border principal was flat or increased 3% on a constant currency basis, while principle per transaction was down 1% or increased 1% constant currency. The spread between C2C transaction and revenue growth in the quarter was 2% with a negative 2% impact from currency. Pricing and mix were offset as pricing positively impacted revenue by 2% in the quarter compared to the prior year period, while mix had a negative impact of approximately 2%.

Turning to the regional results. North America revenue grew 2% on a reported and constant currency basis, while transactions declined 1%. The U.S. to Mexico corridor delivered strong revenue growth in the quarter, and the U.S. outbound business also generated solid growth led by transfers to Latin America. These increases were partially offset by continued declines in U.S. domestic money transfer.

In the Europe and CIS region, revenue declined 3% or increased 1% on a constant currency basis with growth led by Spain and France. Transactions in the region increased 4%.

Revenue in the Middle East, Africa and South Asia region declined 3% on a reported basis or 1% constant currency, while transactions decreased 3%, primarily due to softness in Saudi Arabia and the UAE and hard currency limitations in certain African markets.

The Latin America and Caribbean region continue to deliver strong constant currency revenue growth led by Ecuador, Peru and Mexico outbound. Revenue in the region increased 4% on a reported basis or 16% constant currency, while transactions grew 11%.

In the APAC region, revenue declined 14% or 12% constant currency, and transactions were down 9% with Australia, Korea and Malaysia contributing to the revenue declines.

westernunion.com revenue grew 18% or 20% constant currency with transaction growth of 15%. westernunion.com represented 13% of total C2C revenue in the quarter.

Business Solutions revenue increased 3% on a reported basis or increased 7% constant currency and represented 7% of company revenues in the quarter. Constant currency revenue growth was driven by increased sales of hedging products and strong growth in the education and financial institution verticals.

Other revenues, which consist primarily of our retail bill payments businesses in the U.S. and Argentina, decreased 31% in the quarter. The decline was due to the Speedpay and Paymap divestitures in May, which were noncore domestic-focused businesses and the impact of the depreciation of the Argentine peso. Although the Pago Facil walk-in business in Argentina grew transactions in local currency revenue, it declined in U.S. dollar terms. Other revenues represented 10% of total company revenues in the quarter.

Turning to margins and profitability. We will focus on consolidated margins as segment margins are not comparable with the prior year period due to reallocation of corporate costs following the divestiture of the Speedpay business. We are also providing adjusted metrics to exclude the impact of the net gain on the Speedpay and Paymap divestitures, restructuring expenses, merger and acquisition costs and related tax effects.

The consolidated GAAP operating margin was 19.3% in the quarter compared to 20.1% in the prior year period. The decline was due to the impact of the sales of the Speedpay business, higher marketing spending and restructuring expenses, which were partially offset by Business Solutions margin improvement and other operating efficiencies.

We incurred $7 million of restructuring expense related to the operating model changes in the quarter. We anticipate approximately $100 million of restructuring expense for the full year and approximately $50 million to be incurred in 2020. These costs relate primarily to severance as we are reducing our head count by approximately 10% and also include costs per relocation of operations, facility closures, consulting and other related expenses. We anticipate these changes will generate $100 million of annual savings beginning in 2021 with about $50 million of the savings realized in 2020, and we expect these savings to contribute to operating deposits and drive strong margin expansion over the same period.

Adjusted operating margin in the second quarter was 20.3% compared to 20.2% in the prior year period as Business Solutions improvement and other operating efficiencies offset the impact of the Speedpay and Paymap divestitures and the increase in marketing spending.

Speedpay and Paymap contributed about 80 basis points to last year's second quarter margin but had no contribution to the current period margin, while foreign exchange had just provided a benefit of $6 million in the current quarter compared to no impact in the prior year period.

The GAAP effective tax rate was 17.5% in the quarter compared to 14.8% in the prior year period, while the adjusted tax rate of 16.8% compared to 17.3% in the prior year period. The increase in the GAAP rate was primarily due to changes in estimates for tax act provisional accounting in the prior year period.

GAAP earnings per share in the quarter was $1.42 compared to $0.47 in the prior year period with the increase driven by the gain on the sale of the Speedpay business. Adjusted earnings per share in the second quarter was $0.45 compared to $0.46 in the prior year.

We completed the sale of Speedpay business on May 9 for approximately $750 million in cash and also completed the sale of our Paymap mortgage services business in the second quarter. The sale of these businesses generated a pretax gain of approximately $525 million with related taxes estimated to be approximately $145 million based on statutory rates. As we mentioned last quarter, the Speedpay gain also produced a favorable effect on our overall U.S. tax position with respect to the BEAT provision in 2019, which should result in a separate tax benefit of approximately $50 million this year compared to our initial February outlook.

Turning to our cash flow and balance sheet. Year-to-date cash flow from operating activities was $403 million. Capital expenditures in the quarter were approximately $37 million. At the end of the quarter, we had cash of $1.2 billion and debt of $3.1 billion as we paid down some notes that matured in May. We returned $246 million to shareholders in the second quarter, including $86 million in dividends and $160 million of share repurchases, which represented approximately 8 million shares. The outstanding share count at quarter-end was 426 million shares, and we had $1.2 billion remaining under our existing and new share repurchase authorizations, the majority of which expires in December 2021.

Turning to our financial outlook. We are updating our full year GAAP financial outlook to reflect the restructuring expenses related to the operating model changes we announced today. We are also providing adjusted operating profit tax rate, earnings per share and operating cash flow outlooks, which exclude the net gain on the Speedpay and Paymap divestitures, the restructuring cost, merger and acquisition expenses and all related tax impacts, including the BEAT benefit.

We continue to expect GAAP revenues for the full year to decrease mid-single digits due to the divestiture of the Speedpay business in May. On an adjusted constant currency basis, excluding Speedpay and Paymap for both years, we expect low single-digit constant currency revenue increase, which is unchanged from the previous outlook. GAAP operating margin is expected to be approximately 18%, while the adjusted operating margin is expected to be approximately 20%. The change in GAAP margin from our prior outlook reflects the inclusion of the $100 million of expected restructuring expenses. We expect both the GAAP and adjusted effective tax rates to be in the range of approximately 18% to 19% in 2019 and continue to expect the effective tax rate in 2020 to be in the mid-teens range. GAAP EPS for the year is now expected to be in a range of $2.47 to $2.57, down from the previous $2.66 to $2.76 to reflect the restructuring expenses, which impact the full year outlook by approximately $0.19 per share on an after-tax basis. Adjusted earnings per share is expected to be in a range of $1.70 to $1.80. GAAP cash flow from operating activities for 2019 is expected to be approximately $800 million, while adjusted operating cash flow is expected to be approximately $950 million. We continue to expect to spend between $500 million and $600 million on share repurchases in 2019, and we already spent $335 million in the first half of the year.

In summary, the quarter's results were stable with improved pro forma revenue growth compared to the first quarter and solid margins. Excluding the cost related to restructuring, we remain on track with our full year earnings outlook. We continue to return significant funds to shareholders and maintain a strong balance sheet. And we began implementing our new global strategy designed to drive profitability, efficiency and long-term growth with immediate changes that will generate $100 million of annual savings.

Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Tien-Tsin Huang of JPMorgan.

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Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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On the savings. It makes sense. I'm sure you'd give us a lot more at the Analyst Day. But is that a net number that we should expect in savings net of any kind of incremental investments that you might make for growth? I just wanted to clarify that because I've been getting that question.

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [3]

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Yes.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [4]

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Yes.

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [5]

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Yes. We expect most of the $100 million of savings to go to the bottom line and impact positively our margins. So it is a net concept.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [6]

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Yes.

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Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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Okay. Terrific. And then if you don't mind, Hikmet, I want to ask you a crypto question because we've been getting that question a lot since the Libra news came out and then MoneyGram with Ripple and in light of some of these savings you're highlighting. I'm curious how crypto might fit in your road map, something around the fiat currency, et cetera, what that might mean. Anything to say there?

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Hikmet Ersek, The Western Union Company - President, CEO & Director [8]

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Sure. Actually, all the discussion shows how well able our platform is. It's really built on that, and all the discussion shows how valuable it is to be in 200 countries and moving money in 137 currencies. It shows the value of our platform and the regulatory challenges that many environment has. But Western Union has that, right? I mean we are also -- at the same time, we are looking at the innovation on the crypto industry. And we are basically the cross-border machine for many FinTech companies, many global companies, many financial institutions. And I think it's a very important thing.

The question is always, what is the cryptocurrency? Is it a fiat currency? Or is it a settlement currency? I think the differentiation has to be done in a very good way and understood by the industry. I think there's a lot of noise there. They are mixing everything between fiat currency and settlement currency. I think that needs more discussion. But most important thing is that it is a regulated environment, and Western Union has all the framework. It is -- has a settlement machine, and we can offer our settlement to many FinTech companies.

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Operator [9]

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The next question comes from Darrin Peller of Wolfe Research.

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Darrin David Peller, Wolfe Research, LLC - MD & Senior Analyst [10]

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Just to take the other side of Tien-Tsin's question on the margin, so I guess in terms of investment in growth that we might want to hear about at the Investor Day. First of all, can we expect to hear some greater discussion of where you're going to invest for purposes of accelerating growth? Or is it really going to be more of a margin focus? And maybe just give us a preview of a couple of areas you're hoping to talk about on enhancing growth, and then I just have a quick follow-up on the westernunion.com business.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [11]

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Yes. I think that's a great question. Business that it is really making our platform more efficient and really looking at additional growth opportunities. And we believe that we can run this business, especially the core business in a more efficient way, and we've been thinking about that for a longer time. We were planning about that, and we are very confident that we could do that. So this is very important. That will also -- this platform running in a different way with all our WU Way activities, with all our performance gives us, also growth opportunities.

As I mentioned on the call in my script, as I mentioned, many companies turning to us. Financial institutions, FinTech companies, Amazon, global brands are using our platform to achieve also new customer segments. That means for us also growth opportunities, long-term growth opportunities. I think besides serving the Western Union C2C customers, we believe there are also big opportunities to serve with our platform new customer segments, and this is something that I would like to share at the Investor Day.

The other thing is also the growth opportunities are existing business like artificial -- using artificial intelligence for more dynamic pricing. We are today 20,000 corridors, but we could be more with artificial intelligence with more corridors, more dynamic, more growth opportunities I believe that are there.

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Darrin David Peller, Wolfe Research, LLC - MD & Senior Analyst [12]

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All right. That's helpful. And then just my quick follow-up is on the westernunion.com site. But obviously, revenue growth continues to hold up well. I think it accelerated a little bit this quarter. But I noticed transaction did decelerate. So I'm just curious if that -- I may have missed some of the prepared remarks. Was that just mix? Or was there -- are you finding ways to have a higher revenue yield on certain transactions?

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Hikmet Ersek, The Western Union Company - President, CEO & Director [13]

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Yes. I -- as Raj and I mentioned earlier, I think the transaction growth was impacted by the U.S. domestic money transfer declines. As you know, the U.S. domestic money transfer has been quite under pressure for a while. And that has been -- but it's -- 80% of our revenue and the westernunion.com is cross-border, and that has been very well growing 25%, accelerating even transaction and revenue. And we are now in 71 countries with our outbound business, and we believe that we can expand even more there. So it's impacted mainly by U.S. domestic.

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Operator [14]

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The next question comes from Bryan Keane of Deutsche Bank.

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Bryan Connell Keane, Deutsche Bank AG, Research Division - Research Analyst [15]

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So I want to ask about the global strategy and how it compares and contrast with WU Way.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [16]

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So WU Way, as you know, was driving the lean operating principle throughout our organization to enable that our platform is much more better and we operate in a more efficient way. And we did find significant increases in productivity on areas.

What we have done is that over time, the WU Way activities, we learned a lot, and we're really taking this WU Way activities to the next level. During our first phase of WU Way, we invested back in the compliance, in GDPR, in privacy, in marketing activities, growing the westernunion.com to more countries. Here, what we have done is really taking this WU Way -- our learnings and taking the WU Way to the next level actually. And we trained 6,000 people. They are all Lean manager-trained. We trained -- looking at the process in a different way. And we found -- identified the last -- we've been working a longer time on that and really identified additional opportunities around this business more efficient and so using more technology in a -- technology in a more efficient way, consolidating some of the offices and using more artificial intelligence. We really identified them, and that's a result of -- first results of the global strategy.

There are more to come at the Investor Day to share with you, Bryan, and I'm looking forward to that. Actually, I'm very excited because the team is really very motivated. And they really -- the management will share our -- more detail on that.

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Bryan Connell Keane, Deutsche Bank AG, Research Division - Research Analyst [17]

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Got it. Got it. And then post 2021 when you expect -- after you expect to generate the $100 million in savings, I think that'll be starting in 2021. When you look a little longer term then, what is the global -- what does the operating margin and profit look like in the global strategy longer term? Does it have leverage? Or is it more stable margins as we've seen post the WU Way originally?

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [18]

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Yes. Bryan, we will give you more color on our growth strategies. Obviously, that plays a big part in where the margins go beyond 2021, but we do believe that there are additional opportunities for efficiencies that can drive further cost opportunities and margin expansion beyond what we announced today. But obviously, revenue plays a big part of that, and that's something we want to give you more color on. But we feel good about the longer-term opportunities here.

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Operator [19]

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The next question comes from James Faucette of Morgan Stanley.

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Steven Matthew Wald, Morgan Stanley, Research Division - Research Associate [20]

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It's Steven Wald on for James. Just a couple of questions. As we've been seeing Visa and Mastercard and some of the other diversified payment names make some more cross-border moves recently. I just wanted to get a sense of how you view the competitive environment on the cross-border side from the more diversified players?

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Hikmet Ersek, The Western Union Company - President, CEO & Director [21]

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Well, competitive environment has not changed in the cross-border, and we are really a -- we are a leader on this area, and it's our expertise. This is our sweet spot. This has been activated in -- really in that area. I think the others are catching up on that one and really trying to acquire things.

But what I see here is that our new cross-border is really a competitive advantage because we are building on our existing strength and existing values, and we really want to expand that to new customer segments. Like today, we are serving a certain customer segment, the C2C customer segment with Western Union brand. The examples I brought before and the other examples are really serving also additional businesses, additional brands for their customers offering our platform.

And the big difference probably in ours is that not many companies own the end-to-end processes. We do end-to-end processes. Not many companies have the compliance programs. We do have the compliance programs. Not many companies can settle in 137 currencies. We do settle in 137 currencies. So it is a big advantage.

And we additionally have our network that people can walk in to our network, but we also have 4 billion bank accounts and wallets. We build that. I think in the future, we're going to talk more about the Investor Day, but I'm excited also how we offer the network to new brands and new customer segments and really using our -- let's say, the others have to build that. We have it.

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Steven Matthew Wald, Morgan Stanley, Research Division - Research Associate [22]

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Okay. Great. Yes, and then just maybe one more quick one there. I think I might have missed this earlier on. But when you guys were talking about the head count reductions and relocation, can you give us any additional granularity on where some of those head count reductions are going to focus or be focused on in terms of like job function?

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [23]

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Yes, it really is -- the best way to answer that it really is throughout our entire business. It's not focused on any particular area. There are some more senior-type roles that we are taking out in places, but we're consolidating corporate and business offices in different parts of the world. So it's not particularly focused in any particular area. We're still in the process of notifying employees over the coming weeks. So that's -- it's really a global effort on our part.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [24]

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It's also really finding the right place to be operating in a right way. That doesn't mean that we're going to have -- closing some corporate offices that we are not going to operate in 200 countries. As I said, that's our strength. We will continue to operate even more efficient there but really consolidating some of the offices where the experts are, where we can really get more efficient go-to-market activities. That's what we are doing.

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Operator [25]

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The next question comes from Ramsey El-Assal of Barclays.

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Damian Justus Wille, Barclays Bank PLC, Research Division - Research Analyst [26]

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This is Damian Wille on for Ramsey. I just wanted to ask on this recently announced partnership with Visa. Just how much of your volume do you think could ultimately be sent through cards instead of bank accounts and then paid out in cash? And do you see this sort of opening up a new service potentially for your customers?

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [27]

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Ramsey, this is Raj. We look at that as just being another channel for our customers to use. Customers will have the ability to initiate a transfer online and send it to somebody's Visa debit card in many, many different countries around the world. And we're going to start piloting it later this year and roll it out more broadly next year. So it's still early stages. But for us, it's another channel. We're trying to have account capabilities all over the world, and this is just another angle to that. So we're pleased to have an opportunity with them, and we'll see how it transpires.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [28]

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It shows also how companies like Visa cooperate with us. It shows also our competency where we can -- Visa strengths combined with our strengths and really reach out to new customer segments.

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Damian Justus Wille, Barclays Bank PLC, Research Division - Research Analyst [29]

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Okay. That's great to hear. And maybe a little bit more on like the -- on the U.S. domestic money transfer business. I know you previously mentioned that despite the competition from folks like Zelle and Venmo, that there's still the need for cash-to-cash payments. Do you see the decline sort of stabilizing in the near term? Or maybe a broader question too, do you see that this P2P app phenomenon occurring in other geographies around the world?

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [30]

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Yes. I would say on the domestic money transfer side, in total, last year, it was about 7% of our revenues. The year before, it was about 8% of our revenues. So it has been a gradual decline for the digital business. As Hikmet mentioned, DMT is about 20% of the digital revenues. So that's seeing more of a decline. But overall, we've taken those things into account in our outlook, and we assume that the domestic business will continue to decline. It's not very large in any other part of the world other than in the United States. So that's really where we have the most material revenue. In other markets, it's still relatively small. And in our -- most of our businesses are still really cross-border in nature. So it's a -- it's on a more stable basis.

The digital part, we did see a little bit more of a decline in the quarter than last quarter, but we're certainly managing that. We see good things overall for our digital business. As Hikmet mentioned, 80%, which is cross-border for our digital business, is going well over 25% in both transactions and revenue. So we feel very good about that part of the business.

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Operator [31]

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The next question comes from Ashwin Shirvaikar of Citi.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [32]

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Just the question I have is when I look at the last 5, 6 years, there have been multiple transformation initiatives, restructurings, including WU Way for a prior question. And frankly, it's kind of, in some ways, creditable that you're maintaining a stable rev growth and stable margins. But none of these initiatives have actually managed to increase either of those even with the benefit of the cycle. So I guess I'm a little bit confused with regards to -- again, if you could just explain to me why this is different and why they should improve margins or help the growth rates.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [33]

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Yes. This is different, Ashwin. As you know, in the past, we announced several actions. But we also had savings, and we used them for regulatory -- mainly for the regulatory environment, upgrading our regulatory framework, upgrading our technology, upgrading our -- investing on the westernunion.com, which you could see already that it's paying back, right, I mean how strong our westernunion.com is. Other competitors are far away from the growth of westernunion.com and from the business of westernunion.com.

This is different because we are also committed to margin expansion. In the past, we said that we're going to do further investment in the business where we needed and where we had to upgrade our -- some of the things we -- because the regulatory environment has changed and technology has changed. But this is really different. This is really a commitment to our shareholders. This is really a commitment that we're going to have $100 million run rate savings. And that's a big difference than in the previous one, as you recall, Ashwin.

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [34]

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Yes. And Ashwin, we have set up specific processes internally to ensure that we -- the savings that we've identified, we are able to capture and take to the bottom line. We have different things in place, controls in place that we are driving for these savings. So we feel comfortable and confident that we will be able to get these savings.

And then as we mentioned earlier, as we talk over the next few weeks and then at Investor Day, we do want to talk about the growth opportunities because we still see more growth opportunities and we see further efficiency opportunities beyond the scope of what we announced today. So I would just say...

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Hikmet Ersek, The Western Union Company - President, CEO & Director [35]

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Definitely further opportunities on that.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [36]

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Got it. And with the -- I guess a quick follow-up, if I can. Are you seeing any kind of benefit than -- the question still is, why now? So are you seeing a benefit from maybe the ID requirement that one of your -- actually, 2 of your competitors have talked about it at a major retailer. I mean any optionality for agent gains as well, anything like that where you're seeing change in the market?

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Hikmet Ersek, The Western Union Company - President, CEO & Director [37]

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Yes. I think this is an issue for the other competitors, not for us. We have the right compliance programs into place. We use a lot of investment. You mentioned earlier, what happened to the WU Way savings? It went to the compliance investment part of it, part of it to the artificial intelligence. I think this is particular for one area for the competition to have an ID requirement. We do have our control programs. We have our business model, which is really very compliant. I don't see any changes there from that.

The first question was why now, Ashwin?

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [38]

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Yes, yes. Why now?

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Hikmet Ersek, The Western Union Company - President, CEO & Director [39]

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I mean now it's because we are coming from a position of strength. We feel really very comfortable with our business. The pricing environment is stable. This quarter was even -- there were -- some parts of that was mix and some U.S. domestic price increases. But pricing environment is stable, and we feel really we are acting from a position of strength. We are not leaning back. We are really looking forward. That's why we are doing also the Investors Day to show you, to investors and to analysts how that company will look in a longer way how the -- our platform will be slimmer and more agile and more effective to go to a new opportunity, and our commitments on the savings, our commitment to the shareholders for margin expansion. Of course, we need also revenue growth, right? That's exactly what we are focused. All of this based on our today's economical view. Of course, you'll never know, but we feel very confident about our future.

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Operator [40]

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The next question comes from Jim Schneider of Goldman Sachs.

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James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [41]

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Just wanted to ask on the -- on performance in Latin America, that continues to improve relative to, I think, last couple of quarters. You called out a couple of countries including Ecuador, Peru and some others. But I'm curious, is the improvement more a statement about the market and the macro trends? Or is this a statement about your market share within it?

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [42]

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I believe it's a little bit of both. The economic conditions are generally good in the markets that we called out. We also see good amount of business going to Colombia as a result of the exodus from Venezuela. So the inbound business to Colombia is also benefiting us there. And so it's been a good grower for us, as you mentioned, Jim, for quite some time now, and we hope to keep that going as much as we can. So it's been performing well, as you said.

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James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [43]

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Great. And then just curious, in terms of making a network more efficient from a delivery perspective, any examples you could give us in terms of what costs might be rationalized and whether that would, in any way, kind of reduce the span or footprint in any way on the receive side of your network?

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [44]

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Yes.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [45]

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It's in network.

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [46]

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No, no, no. It's -- I think the -- what we talked -- what we've announced today is really more around the head count reduction throughout the globe and then also some corporate and business offices. We are going to look at other components of our cost structure, which would include commissions and other things. And that's some of what we want to lay out for you as we get to Investor Day. But it does not sacrifice the quality of distribution that we have around the world.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [47]

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Opposite actually, right?

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [48]

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Yes, we're also driving for account payout, Jim. That is going to be a big part of our distribution strategy, both funding and payouts. So that, along with other commission strategies, we believe have some additional opportunities which we want to talk to you about.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [49]

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Remember, Jim, we announced even the wallet strategy, which had good results in Kenya with Safaricom. All these things, dropping money not only on the retail, also in an account but also in a wallet. It's a big competitive advantage. That means that our network looks totally different than it was in the past because we are serving new use cases with our agile platform. That's the story we want to tell you also on the September way how we can see the opportunities for the future.

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Operator [50]

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The next question comes from David Togut of Evercore ISI.

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David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [51]

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Could you provide a little detail behind the 2% price increase in the quarter? I thought I heard you say domestic. Is it all domestic? Or is some of it cross-border? And if there are any specific quarters to call out, that will be helpful.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [52]

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David, as you know, we operate in 20,000 cross-border corridors. And we have a domestic money transfer business. This is about 7% of our revenue, and we did do some price increases there as the transactions are going. I think that our competitive advantage is in the cross-border. In the 20,000 corridors, we sometimes increase those prices, sometimes decrease in prices. And we've been doing that for a lot of time. It's really a portfolio management, and then we use dynamic pricing actions like an airliner, right? And we really use different street corner pricing, different brand prices. That impacts to our revenue. And this -- in this environment actually, the last quarter, the last 2 years, the environment has been very stable, the pricing environment, and we mentioned that several times.

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [53]

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Yes. And the pricing lift was primarily focused in North America, David, which -- and the single biggest area was domestic money transfer. If you look around the world and the other regions, there were other factors like in Asia Pacific, the transaction growth got worse, but it doesn't have much of a revenue impact because it's mostly around the intra business there. So most of the pricing lift was focused in North America.

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David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [54]

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That's helpful. Just a quick follow-up question. On the competitive front, Xoom announced an expansion to more than 30 European countries in the second quarter. How do you assess the competitive threat from Xoom? Is there any -- are there any counter actions you need to take to protect and continue to grow Europe and CIS, which was particularly strong in the quarter?

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [55]

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Yes. We feel very good about our long-term growth opportunities there in our digital business, particularly the international business. We said that the cross-border part is growing above 25%. The international part is growing even faster than that.

And the one differentiating factor compared to others who are in the market is that we have -- most of our revenue is, even today, being paid out at retail locations. Or even though it's being initiated digitally, it's still paid out at retail. And so for us, our growth opportunity is to go account to account and look at digital ways of sending and receiving money, which is where other people, other companies are also trying to play. So we really believe that we're going to be able to create a better overall global cross-border digital business than anyone else will have over the next few years.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [56]

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And long term -- I'm going to share more at the Investors Day. But long term, I believe is that our network coming such a competitive advantage. Is it account? Is it wallet? Is it the retail? Many companies are turning to us, want to use our services, and it's really thinking about our strategy. I'll be giving you more color on that on September 24.

But the European environment has been doing very well actually, and it's continued to doing well. We do have our regulatory framework there. We have our bank license there and our compliance programs, and we are now in 71 countries. And it's just the beginning. I mean -- in the U.S. digital business we have been longer time. European and other countries are new to us and growing that fast. So we're very comfortable with the growth rates in international environment.

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Operator [57]

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The next question comes from Kartik Mehta of Northcoast Research.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [58]

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Raj, in the past, you have talked about in meeting a certain type of revenue growth to get to margin expansion. I understand this new cost-cutting will help you get to margin expansion. But is the formula changed at all once you put in these efficiencies in terms of revenue growth you need to really drive margin?

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [59]

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Yes. I mean, Kartik, what I tried to say in the past is that all else being equal, revenue growth needed to be in the mid to -- low to mid-single-digit type of range to drive margin expansion. Here, we're focused on taking some costs out. So in terms of margin expansion, we do believe we're going to get quite a bit over the next couple of years. And we've assumed a normal level of growth, I would say, in that regard. Normal meaning it's not too extremely high or too low. It's sort of low single-digit type of growth needs to be there for us to get this margin expansion with the cost savings initiatives that we've announced today.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [60]

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And additional opportunities also.

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [61]

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Yes.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [62]

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And then I think on WU Way, you had talked about WU Way doing 2 things. One was obviously reducing costs. The other was helping you drive revenue. I think obviously the cost cutting has really gone through. But as you look back at the program, did it help drive revenue for you?

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Hikmet Ersek, The Western Union Company - President, CEO & Director [63]

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Yes. I mean it's initially -- it's not that big. But all the new initiatives, how we launched 27 countries internationally with dot-com, there was a lean management process behind that. We wouldn't get Amazon on our network if we wouldn't have the WU Way mindset, lean management operating activities. These are all examples which are also driving the revenue. It is really a new way of going to the market being more efficient and really offering our platform to the customers. That has been definitely driven by WU Way initiatives. It's not only a program. It's really how we operate, is the WU Way. And for that, it's a multiyear training, multiyear way of thinking differently and operating differently.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [64]

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And then one last question, Raj. I know you're now giving adjusted EPS guidance. I guess if you compared that to -- if you had given that in the previous quarter, how would it compare?

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [65]

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Not much has changed, Kartik. We're adjusting for the restructuring charges and M&A as well as the gain just to call it out because there's so many moving pieces. So largely, our outlook that we've began with at the beginning of the year has stayed relatively consistent. With the Speedpay divestiture, we mentioned last time that, that was worth about a $0.10 dilutive impact this year and then our tax rate is slightly higher. So if you actually look at the range that we initially gave, we're right on track with what we thought at the beginning of the year.

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Operator [66]

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The next question comes from Jennifer Dugan of SunTrust.

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Jennifer Catherine Dugan, SunTrust Robinson Humphrey, Inc., Research Division - Associate [67]

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Jenny Dugan on for Andrew Jeffrey. If you look at the growth in your big 4 receive markets, how does that growth compare with, say, the combined growth trends in all the other corridors? I'm just -- I'm wondering if there's a meaningful disparity with faster growth outside of those 4 main corridors.

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Hikmet Ersek, The Western Union Company - President, CEO & Director [68]

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Four main corridors, fill it again, Jenny. I'm a little...

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Jennifer Catherine Dugan, SunTrust Robinson Humphrey, Inc., Research Division - Associate [69]

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Yes. Like if you look at the growth and say...

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [70]

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Yes. I mean, well, it's -- the U.S. to Mexico, for example, is one of our key corridors, and we had very strong growth in the U.S. to Mexico corridor. Obviously, we have other corridors like the Middle East to India that are also large that are having their own issues. So you have some large corridors that are performing well. We also have some large corridors that are not performing so well. So I would say it's a mixed bag. There's not a clear differentiation there.

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Operator [71]

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The next question comes from James Friedman of Susquehanna.

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James Eric Friedman, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [72]

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It's Jamie of Susquehanna. Raj, I wanted to revisit the tax conversation. Thank you for those helpful comments that I heard you say something about the $50 million adjustment to the -- from the Speedpay sale. You made some comments about the trajectory for next year. Where are we generally in the tax journey? I know it's a question you get a lot from investors.

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [73]

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In the tax journey, well, this year, as we mentioned, we expect an 18% to 19% tax rate, and that includes a number of different moving pieces whether you look at GAAP or GAAP tax rate or adjusted. Next year, we do believe that the tax rate will be in the mid-teens range. We have solved most of the BEAT issue going forward, and so we're comfortable that we will be back down to the mid-teens level next year for tax rate.

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James Eric Friedman, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [74]

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Got it. Okay. That's helpful. And then I just was wondering, it's not that intuitive that you would've raised prices domestically at a time when there was seemingly some pressure on the business. Maybe I'm just oversimplifying. But was there any elasticity there? Or am I just -- am I on the wrong track?

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [75]

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No. I mean domestic money transfer is not a business -- we've assumed that, that business will continue to decline for quite some time because it's not a business that it has key competitive advantages to it. Our competitive advantage is really cross-border in nature, and so we are trying to maximize our cash flow in that business. And so we do have good balance. We have to make sure we're aware of what the market is like, but we also want to maximize the outcome for our business, and so we would try to balance both factors.

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Operator [76]

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That question comes from Vasu Govil of KBW.

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Vasundhara Govil, Keefe, Bruyette, & Woods, Inc., Research Division - Research Analyst [77]

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I guess, first, I had a quick follow-up on the Visa Direct partnership that you guys signed. I understand that it's opening up more channels for you. But is it also an incremental cost saving opportunity, where you can maybe complete transactions for cheaper using the Visa rails? Or it's just traditional means of moving money?

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Hikmet Ersek, The Western Union Company - President, CEO & Director [78]

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Well, obviously, I mean, as Raj mentioned earlier, the Visa Direct and we came together. We looked at our competency. They looked at their competency. With Visa Direct, you are obviously coming to new customer segments, additional customer segments where you can drop money, and it's linked direct to an account with Visa numbers. Our capability to move money in 137 currencies and being Visa also a global brand, and we believe that there is additional opportunity on that to grow this business even stronger. So I think that shows again our capability to offer another brand to our customers that they can move money globally in a easy way and in a compliant way and in a regulated way. And that's probably the most important part on this agreement.

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Vasundhara Govil, Keefe, Bruyette, & Woods, Inc., Research Division - Research Analyst [79]

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Got it. That's helpful. And I guess just a quick one. I know we will get more detail on the growth opportunity and this new global strategy at the Investor Day. Should we expect to get long-term growth targets both for revenue and margins at the Investor Day as well?

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Rajesh K. Agrawal, The Western Union Company - Executive VP & CFO [80]

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Vasu, we don't really want to get into what we're going to talk about there, but we certainly want to talk about our long-term growth objectives and how we see the growth playing out. And then we also want to talk more about additional opportunities that we may have for efficiencies and -- so we'd give you more of the full picture there in just a few weeks.

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Michael A. Salop, The Western Union Company - SVP of IR [81]

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Okay. Thanks, everyone, for joining us. Have a happy -- have some pleasant afternoon.

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Operator [82]

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Once again, the conference has concluded. Thank you for attending today's presentation. You may now disconnect.