Good afternoon and welcome to The Western Union Third Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mike Salop, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Laura. On today's call, Hikmet Ersek, Western Union's President and Chief Executive Officer; and Raj Agrawal, Executive Vice President and Chief Financial Officer, will discuss the company's 2016 third quarter results, 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 2015 Form 10-K for additional information concerning factors that could cause actual results to differ materially from the forward-looking statements. During the call, we will discuss some items that do not conform to generally accepted accounting principles. We've reconciled those items to the most comparable GAAP measures on our website, westernunion.com, under the Investor Relations section. All statements made by Western Union officers on this call are the property of The Western Union Company and subject to copyright protection. Other than the replay noted in our press release, Western Union has not authorized and disclaims responsibility for any recording, replay or distribution of any transcription of this call. I would now like to turn the call over to Hikmet Ersek.

Thank you, Mike, and good afternoon, everyone. Overall, we are pleased that our diversified global business and strategic initiatives enabled us to deliver another solid earnings performance in the third quarter. And we accomplished this while navigating current headwinds and macro challenges in some international markets. Our U.S. business remained strong. And westernunion.com money transfer accelerated nicely, increasing 28% in constant currency. This growth helped us balance all related softness in many of the Middle East and African countries. We delivered good margins, coming in at over 20%, despite negative impact from currency and the legal matter accrual. And we continue to generate strong cash flow and returned significant funds to our shareholders. We are on track to deliver on our full year earnings outlook and are affirming our earnings per share range of $1.60 to $1.70. Total revenue in the quarter increased 2% on a constant currency basis, with the consumer money transfer business increasing 1%. Within money transfer, the U.S. business was strong across the board with good growth from both outbound and domestic money transfer. Our U.S. to Mexico business continues to shine and has now outpaced market growth for principal and transactions in each quarter for the past three years. In addition, we recently greatly expanded distribution in Mexico nearly doubling our network. This was driven by the activation of our transfers services at OXXO, which is Mexico's largest convenience store geographically with 14,000 locations. With this new service, customers can stage transactions on the phone in advance or through dedicated phones and digital kiosk in the stores and then receive their funds at the counter. Turning to westernunion.com, this quarter's revenue increase is impressive, given the larger size of our digital business relative to competitors. We continue to see tremendous growth from the mobile app…

Thank you, Hikmet. Third quarter reported revenues of $1.4 billion declined 2% or increased 2% on a constant currency basis compared to the prior year period. The impact of currency translation net of hedge benefits reduced third quarter revenue by approximately $52 million compared to the prior year. In the Consumer to Consumer segment, revenues declined 1% in the quarter or increased 1% in constant currency, while transactions grew 2%. C2C constant currency revenue benefited from strong growth in westernunion.com, while regional growth was led by North America and Latin America. However, softness from the oil producing countries continued to negatively impact the Middle East and Africa and part of the Asia Pacific region. Total C2C cross-border principal declined 3% or 2% on a constant currency basis, while principal per transaction declined 5% or 4% in constant currency terms. The spread between the C2C transaction growth and the revenue decline in the quarter was approximately 3 percentage points including a negative 2% impact from currency. Mix had a negative impact of approximately 2% in the quarter and was affected by the principal per transaction decline, while pricing had a positive impact of 1%. Turning to the regions, consistent with prior quarters, I will be referring to constant currency movements, as I discuss individual country contributions to the regional results. North America continued to deliver strong results in the third quarter. Revenue grew 6% or 7% on a constant currency basis, while transactions increased 7%. U.S. outbound sends to Mexico and Latin America drove the region's revenue growth. In Mexico, our business continued to grow faster than the market based on the latest Banco de México principal and transaction data for the third quarter. Our U.S. domestic money transfer business also posted good results, as revenue increased 4% and transaction growth…

We will now begin the question-and-answer session. And our first question will come from Jason Kupferberg of Jefferies.

Hi, guys. This is Ryan Cary for Jason. Clearly, low oil prices continue to be a headwind to results. Should we expect negative growth as kind of the new normal for the time being in the petro producing regions or the impact less structural in these regions could recover relatively quickly with a rebound in energy prices?

Yeah. I think we did see some impact which – especially from the Middle East and Middle East-related oil producing countries. That's a fact. But I will say, overall, being in 200 countries, having that portfolio, that balances the strong U.S. growth. The strong westernunion.com digital growth accelerating the transactions and revenues is really a great result. It has – I would say, it takes time, right? If the oil prices are higher, the jobs have to be created, the investments have to be done in Saudi Arabia or UAE and Middle East countries, that creates jobs and if the people have jobs, they send money. But as you know, putting things in perspective, it's a good part of business but not that big part of business. And being in 200 countries helps us to have good results.

Great. And just a follow-up. How should we be thinking about the tax rate going forward? I believe you call that expectation is for kind of a mid-teens tax rate over the next couple of years. But it seems like over the last three years to four years, that's often been the initial assumption before coming in a couple hundred basis points lighter. So is this a trend that we shouldn't expect to continue going forward or – and I'm trying to get a sense of how we should think about the tax rate, particularly, after kind of the lighter than expected this quarter?

Yeah. Ryan, this is Raj. We still target a mid-teens tax rate, and that's still what we expect for the next couple of years based on what we know today about the tax laws and the current environment with our business. We've continue to benefit from some discrete items that have helped us during the course of the year. In this quarter, for example, we – obviously, we have a benefit from the larger accrual in the U.S. which helps to – helps the mix on the overall tax rate. We also have had some favorable resolutions to various outstanding tax matters with various governments around the world. And so that continues to help us and we're going to continue to try to do that as much as we can. Putting aside the discrete items, we're probably in that mid-teens rate, which is what we fully expected when we came into this year, but we are doing a good job in trying to manage things as best as we can on the tax side and that continues to be our goal.

Great. Thanks for taking my questions.

Sure.

And the next question will come from Jim Schneider of Goldman Sachs.

Hi, Jim.

Hi. Good afternoon. Thanks for taking my question. I was wondering if you could maybe talk a little bit about the acceleration in the westernunion.com business, kind of the – some of the geographies that might have been underlying that and I guess if you can kind of look forward, talk about some of the factors that might help you close the gap between transaction growth and revenue growth?

So, Jim, this is good news, right? This fantastic news, our acceleration of dotcom especially given the size how big our westernunion.com business already is, 8% of our total revenue and accelerating where 28% and transaction by 29%. The growth comes from both sides, expansion geographically and – but also very strong U.S. business, which have been for many, many years so customers are returning using us, they love the app, the westernunion.com app. Our transactions in the U.S. are growing by 33% and that's amazing and we are really gaining there market share and getting new customers, still the customers are new, 80% of the customers using westernunion.com digital environment are new to Western Union, they didn't use in the last 12 months, or, Raj, right? They did not use us the last 12 months and it's a great story and then now we are in 16 countries.

27 countries.

And the westernunion.com 16 countries on mobile app and we recently also launched new features in Canada and UK where you can really stage transaction. If somebody doesn't want to use bank account or credit card, they can go to a location and stage a transaction, pay at the location. So these things are definitely a multi-product and multi-channel environments helping. The other thing is also, what the competitors don't have and that's why they are not growing that fast is that we are in 200 countries. We can drop money in 16,000 corridors with one app. From Canada you can send money to 200 countries. From U.K. you can send money to 200 countries, from 37 countries, electronically digital, you can send money. That's the growth part. So we are very pleased with our digital growth and that's going to continue. Our investment is going to continue and my expectations will be – I'm very motivated with that.

That's good to hear. Thanks. And then, maybe just as a quick follow-up. There's been a lot of headlines around the Walmart U.S. to Mexico kind of pricing structures that they recently published. Can you maybe talk about whether you expect any potential knock-on effect relative to the rest of the market and I know Walmart is pretty small, but still I guess there's a speculation about whether that could have a broader market affect or where you think it's just going to be confined to simply Walmart?

Well, I wouldn't say Walmart is small, in particular, but in this business, it is small. We have 50,000 locations in the U.S. and 26,000 locations in Mexico. And our pricing has been very competitive also, $8 for up to $1,000. And the facts speak its language. We've been gaining market share for three years every quarter and these facts are from Banco de México facts. So the distribution, the product positioning, the pricing, the brands, the compliance programs, all these platforms help us to be gaining market share. So we will always do pricing actions corridor by corridor. We will look at that, but I feel quite competitive with our pricing and I see the pricing is very stable and we're going to continue hopefully gaining market share in this very important corridor for us.

Thank you very much.

And our next question comes from Tien-Tsin Huang of JPMorgan.

Hey. Good afternoon. Thanks for taking my questions. Just on the pricing front. I think I heard plus 1%. So where are you being more opportunist, is this change more on the FX side or transaction-based side. Just any more color there would be great.

Yeah. Well, Tien-Tsin, you know our business so well. We are in – as you know, we are in so many countries, so many bands, so many different things. I would say that generally we still have 15% to 20% premium on average globally. Our price has been not affected and we will – the increases come on FX, most of the time FX increases but in some corridors also in the fee, and in some corridors we decreased actually also prices. And as you know, being in so many corridors, being in so many countries, it's a portfolio management. We feel comfortable by gaining market share also in some corridors, increasing the FX rates, that helped also, and it's mix – basically, it's the mix. It's not a big increase obviously. It's really the mix that impacts our 1%. Raj, is that the truth?

Yeah. I think you answered it well. There was some volatility, as the Brexit activity took place at the end of the second quarter. And that's – we put some different spreads in place. So that helped us, Tien-Tsin, overall in the business from a pricing standpoint, but we do increases and decreases on an ongoing basis throughout our business.

Okay. No, that's good to know. Just on the Business Solutions side, any change in how we should look at that in the fourth quarter and maybe into 2017. I know that FX is all over the place and sort of macro trade is all over the place. I don't know if there has been a share change as well. But any updated insight on Business Solutions?

Sure. On Business Solutions, if you look at the Business Solutions, we are very pleased with our payment sector, the verticals where the students pay as a payment. On the hedging side, volatility always helps, right? The global trade has been slow, Tien-Tsin. That's been mainly affected and especially in the countries we are operating has been slow. Saying that, we will – we are still very strategic, very important for us. That's why we invested in the EDGE digital platform. We have thousands of exporters and importers registered there. They are trading in this platform. And that will be definitely helping on long-term on our numbers. But short term, volatility will help us and the global trade will help us.

Okay. Thanks. As always, I appreciate it.

Thanks, Tien-Tsin.

Thanks, Tien-Tsin.

And next, we have a question from Bryan Keane of Deutsche Bank.

Hi, guys. How are you doing?

Hello, Bryan.

Hi. Good. Good. How are you?

Good, good. Just wanted to ask about the guidance. It looks like you guys narrowed the revenue guidance range to 3% in constant currency. And I believe the first half of the year was 3% constant currency. Third quarter was 2% in constant currency. So I'm just trying to figure are you guys expecting a little bit of a pickup in constant currency revenue growth in 4Q to round out the 3%?

We just – we said approximately 3%, Bryan. So it obviously can be a range of outcomes for the fourth quarter and it still give us 3% for the full year, but that's approximately 3% for the full year. That's about where we've been running throughout the first three quarters of the year and that's about where we expect for the full year.

Okay. And then you narrowed kind of the revenue range, but you didn't narrow the earnings per share and obviously there's still a $0.10 range there, which is a wide variety of outcomes for the fourth quarter. Can you just talk a little bit about what would get you to the low end of the range and to the high end of the range and maybe where you guys feel more comfortable?

Well, I would say we feel comfortable with the range as it is. We didn't really change the range primarily because we've also taken into account the $30 million of additional legal accruals that we've had now through the last couple of quarters. For us, the outlook really hasn't changed a lot. We continue to see the business trending the way it has been. We reiterated margins at 20%. We also have the same cash flow outlook and our EPS range, we just didn't change it because of the – what we've – because of legal items but you can see that through the first three quarter and even in the third quarter, we got to an EPS of $0.44, which is very much in line with our expectations and we feel good about the full-year outlook.

I think, Raj, we talked about that we wouldn't have the $30 million, that outlook would be different, it would be on the higher end.

Yeah, we would have probably updated the outlook have we not had the $30 million that we've taken into account.

Okay. But no real one-time items to think about on a comparable basis from 4Q last year?

No, no, not really. If we have any one-time type items or things that we might do to address the cost structure, we will certainly tell you about those once we finish out the year but nothing that we can discuss at this stage. We are always looking for cost efficiencies and opportunities for the business but nothing to call out at this stage.

Okay, great. Thanks for taking my questions.

And next, we have a question from Darrin Peller of Barclays.

Hi, Darrin.

Hey, guys. Just a quick follow-up around the margin, I mean, it does seem like there were some items in there and obviously you have been able to maintain it relatively stable despite that. So, I guess, can you just maybe rewind and give us a sense of what you see as the operating leverage opportunity? In other words, if we were to show 3% growth once again in 2017, I mean, is there any reason to see – to expect – to not be able to expect some margin expansion on that?

Yeah, Darrin, I can't talk about 2017 margins, but the reason we've been able to maintain the margin this year at around 20% is we have managed our expenses quite tightly. Even though we've taken into account an additional $30 million of legal cost, we've been able to do that. For us, obviously, we need to get good revenue growth to drive better profitability but then you have to look at our other cost items that will have an impact, obviously, like our commissions, which have been flat the last couple of years, our compliance costs have also been relatively stable at that 3.5% to 4% range. And then, as I mentioned, just earlier we are continuing to look for cost optimization opportunities. So all of those things will have an impact and will have more color for you on those things as we finish out the year. But the margin this year, we are pleased with the 20% operating margin outlook, even in the face of some of these other things that we've had to deal with.

And prices are stable from top-line; that helps also. And also just generally I would say that the company is really operating in a much better way, more efficient way. Despite all the challenges, global challenges, I think we found a way to operate very effectively.

Okay. Thanks. And just a quick follow-up on the guidance question. I understand you're saying it's just 3% and there's a lot of outcomes that can get you there. But I guess I'm just trying to figure out what may have been in your expectations beforehand to be low to mid-single digit top-line versus now 3%. What changed, I guess, and again, we understand it's not a massive move from one to the other, but...

Yeah.

...anything will be helpful?

Well, we had been running at 3% for the first half of the year on a constant currency basis and we still have six months left in the year when we maintained our outlook last quarter, low to mid-single digits. But as we've seen it tick down in the business, given the oil related markets. We're more comfortable with the 3% revenue growth outlook because of the performance that we had in the third quarter. And it's really the Middle East, the oil related markets that have shown a tick-down because we are continuing to get very strong growth in the other markets like the U.S., up on to Mexico, to Latin America, the domestic business, the digital business, obviously, and so those trends haven't really changed. We've seen just the tick-down in the Middle East and Africa business which is impacting APAC as well.

All right. That's helpful. And just quick one, I mean on the mobile side, last quarter I know you guys had a bit of a spread between the revenue growth rate and the transaction growth. It actually looked like, to the point mentioned earlier by someone, it definitely improved. Not only you commented on mobile being a driver of the acceleration on wu.com but can you help us understand why the revenue per transaction would've improved so much given how much is mobile?

Yeah, I mean, we're continuing to see very strong growth in the mobile channel for wu.com and we're pleased with that. So that hasn't changed from before. As we mentioned before, we do pricing optimization throughout our business including our various channels and we did increase some spreads in the dotcom business but our overall pricing in the dotcom business is very market competitive when you look at the rest of the competition. So we're just really aligning and maximizing the opportunity there, and we're getting very consistent growth with transaction growth now, 29% transaction growth and 28% constant currency revenue growth. So it's a pretty consistent picture and it's very consistent with what we had expected coming into the second half of this year.

Yeah. All right. All right. Sounds good. Thanks, guys.

Sure.

Thanks. Thanks, Darrin.

The next question comes from Ashwin Shirvaikar of Citi.

Hi, Hikmet. Hi, Raj. How are you?

Hi, Ashwin.

So I have a question about that legal accrual. I think your presentation did mention that there was an offset compensation in D&A. If you could size that, that would be helpful. And then as we kind of all start thinking about next year's model, what are the headwinds and tailwinds? Is it fair to assume that on the headwind side there is probably about $0.05 of tax rate but on the tailwind side you probably have the hedge roll-off that you don't have anymore? Can you help kind of with the timing of that?

Yeah. Ashwin, let me try to answer your questions. In the SG&A line, as you mentioned, we had the FTC legal accrual for $15 million. That's the size of it. There were some offsets with lower compensation and lower D&A. And SG&A as a percent of revenues was up just a little bit from the last year. So I'll just let you do the math. But there was a slight...

Yeah. The D&A, as we mentioned in the Business Solutions, that was a one-time charge we took a year ago in D&A. So there is about $7 million difference in that Business Solutions D&A.

And the rest of it is just the comp. As you look at next year, I can't really go into specifics. But there are a number of different factors to consider – all of the things that I've mentioned in the previous question around revenue growth as well as the various cost items. But tax will certainly be a consideration. Putting aside any discrete items, as I mentioned earlier, for the next couple of years, we would probably be in the mid-teens area for tax rate. But as I also mentioned, we're always trying to look for opportunities to optimize our tax rate. We will have some interest savings as we go into next year because of the refinancing that we just did.

Yeah.

The ultimate amount of interest savings will depend on our debt level. And then we also have a refinancing next year that we have to do. So there may be some negative carry related to that. And then we also have the hedge gains that will – if rates stay exactly where they are today, then we'll have less in hedge gains. So all of those things will have to come together in how we ultimately look from a profit standpoint.

Got it. So, okay, I guess, the follow-up question is just a clarification. In your presentation, again, in that C2C chart where you provide the transaction to revenue bridge, if there is other mix and I might have missed what the expectation for the other mix was?

Yeah, I mean, it's very simply – we had lower growth or softness in higher RPT markets. Our principal per transaction was down by about 4% on a constant currency basis and that's largely been driven by Europe and certain parts of the Middle East. So it's really the mix impact that's showing up in that negative 2%.

Okay. Got it. Thanks. See you next week.

Thanks, Ashwin.

Sure. Thanks, yeah. See you next week.

And the next question will come from Kartik Mehta of Northcoast Research.

Hi. Good evening, Raj.

Hi.

Hi. How are you?

Good. I wanted to – the wu.com, as you talked about the transactions and revenue are coming in closer and seems as though you've been able to manage the spread there. Is that a result of you pricing differently or is that the result of the competition being less aggressive and allowing you to manage pricing better?

Well, I can't speak in the name of competition, what their issues is that – their issues, I guess, mostly they can't expand globally and they don't have the power to expand globally and they don't have the – they can't drop money to the 2 billion accounts we have and they can't drop money to 500,000 locations and everything, right? I think the strong growth is two things, Kartik. First one is the customers are coming back, who use once mobile, they love it, they stay there, they are coming back. We see that very good and that's the U.S. growth besides getting more customers, we are really having returning customers. And the team is doing good job on that communicating with them online with via mobile, really having a loyalty programs which is great getting them back. The second thing is the geographical expansion. Expansion in Canada, expansion in UK with new devices but also in Europe and now we are starting to expand that also, you'll see recent announcement, coming announcement in other countries, in Asia, and other parts of Europe, in Middle East, we're going to expand our online and our dotcom activities and mobile activities. And it's a good business to expand, Raj.

Yeah, I would just add, Kartik, that one unique feature that we have that most of the competition does not have is cash payout. We initiate transactions online but we have a vast retail network that really sets us apart from other competitors.

That link is definitely the compliance programs and you have to have a license to operate in a country. And that's not easy to get it. And we've been there for many, many years and we are really building our digital transformation. The digital transformation is happening built on our fundamentals and the other – the competition has to probably get there first.

And then just on overall pricing, obviously, you had a positive impact. Anything that you see on the horizon that changes that or do you think this environment, you'll be able to kind of sustain the pricing levels that there are right now?

Well, if you look at, the market is quite stable, right? I don't see any big noise out there. There has been some announcements done by the competition, but we feel we are pretty well positioned. Overall, we still have 15% to 20% premium globally and so we will continue the pricing actions but it won't have – we're going to stay in our historical norm and that will have been – we feel comfortable on that. For the near future, I don't see big changes.

And then just last question, Raj, just want to make sure I heard you correctly. You said, I know you don't want to give 2017 guidance, I understand that, but you were talking about some of the things that we should consider. On interest expense, did you say you thought that would be a headwind or did you not say that?

I did not say that. I said that interest expense would likely be lower next year given the refinancing we've done. Part of the refinancing was with the term loan, as I mentioned in our comments, which is at LIBOR plus 150 basis points, which is lower obviously than the note that we just retired at 5.93% and then we use some commercial paper. So we'll get interest savings there but it might be offset with some other components that I also mentioned and then we also have another refinancing to do next year of $500 million, which is at the end of the year, but we may refinance that earlier in the year, so there could be some negative carry as well associated with that.

Perfect. Thank you very much. Appreciate it.

Sure.

Thanks, Kartik.

Laura, I understand there is one more question in the queue.

Yes, that question is from Matt O'Neill of Autonomous.

Yeah, hi. It's Craig Maurer for Matt O'Neill. Just a broad-based question. You had stated in the prepared comments that you're comfortable with pricing where it is now. But should the oil economies not recover and the global economy remains suspect, do you have any other pricing leverage other than risk that you could use to reverse the decline in transaction growth?

Well, if you look at our business, I mean, there is a global challenge. It's for all, right? It's not a competitive challenge. It affects everyone. I think that in the markets where we feel very competitive with pricing – as I said earlier, we will always do pricing. That's the beauty of having this portfolio. And we didn't do 16,000 corridors. We have different customer use case. We have different bands, receiving center, FX and fees. So we can do that – we're going to continue to do that, and I feel comfortable where it is. I think it was more of noise out there with the announcements and currently – near future, what I hear from my market leaders, they feel comfortable. What I hear from our digital leaders, they feel very comfortable that – and we are growing with our numbers. 28% digital growth is impressive, very stable, very resilient retail business. And for the near future, I don't see, I can't predict the future – long-term future, but I feel comfortable where the business is.

Okay. All right. So just thinking ahead, I know you don't want to comment on 2017. But I mean, your positive comments seem to be slanted toward some level of recovery in those markets. So I suppose, as we think out to the guide, should you not get a – should you not get any improvement in the oil economies, we should probably expect a continuation of trend seeing the quarter.

Well, I can't predict the economy – the oil prices, right? I can't predict the global economy. And that's something I am always cautious. And I said at the beginning of the year, 2016 is cautious. And today I am still saying cautious, right? But the beauty of our business, if you look at our top two business, not only U.S. but worldwide, we've been always up and down. And currently in the U.S., we're doing a good job. Outbound and intra-business is doing very well, digital doing very well. Parts of like UK, although there were Brexit talk and everything, UK business is doing very well. Our Australia business is doing well. We do have – impacted in Saudi Arabia and UAE where they send money mostly to South Asia. This corridor has been impacted. And that's why some parts of the like India corridors has been a slower growth, because Saudi Arabia send and UAE send has been slower.

Okay. Thank you.

Okay, thanks, Craig. I think that's all the questions we have in the queue. So I want to thank everyone for joining us and wish you have a good evening.

Thank you.

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