Good day, and welcome to the Western Union Second Quarter 2023 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tom Hadley, Head of Investor Relations. Tom, please go ahead.

Thank you. On today's call, we will discuss the company's second quarter 2023 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. Joining me on the call today is our CEO, Devin McGranahan and our CFO, Matt Cagwin. 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 2022 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 in our earnings release attached to our Form 8-K as well as on our website, westernunion.com, under the Investor Relations section. I will now turn the call over to our Chief Executive Officer, Devin McGranahan.

Good afternoon, and welcome to Western Union's Second Quarter 2023 Financial Results Conference Call. We are pleased with the results we reported today and the progress we are making against our Evolve 2025 strategy. The work we have been doing to deliver sustainable, positive revenue growth is beginning to take effect. In the quarter, we continued to drive improvements in the underlying trajectory of our business with positive transaction trends across both our branded digital and our retail businesses. Recall, 2 key pillars of our Evolve 2025 strategy includes stabilizing our retail business and returning our digital business to low double-digit growth rates. The second quarter was continued evidence we are making good progress on both objectives. The second quarter was the first time in 8 quarters that we have achieved positive transaction growth across the company with total C2C transactions excluding Iraq, growing 2% year-over-year. This is a significant improvement from the double-digit negative transaction trends we saw for most of 2022. I will provide more details on some of the initiatives we are working on. But first, let me provide a quick summary of our financial results. Our total revenue in the quarter reached $1.17 billion reflecting a 9% increase on a constant currency basis when excluding the contribution from Business Solutions compared to the same period last year. This growth was driven by several factors including improving fundamentals in our core business, the increase in revenue from Iraq and the benefit of Argentinian inflation. Adjusted earnings per share came in strong in the quarter at $0.51. Matt will further discuss our financial results in more detail and provide an update on our enhanced 2023 financial outlook. Shifting to the macro. Last month, the World Bank came out with its semi-annual migration and development brief, which is calling…

Thank you, Devin, and good afternoon, everyone. I'm delighted to be here today to discuss our financial performance over the past quarter and highlight some of our key achievements. I will also outline our outlook for the remainder of the year. Let's start by discussing our financial results. In the second quarter, Western Union delivered adjusted revenue of $1.17 billion representing a 9% increase year-over-year, which exceeded our internal expectations due to the revenue increase from Iraq as well as a 3% benefit from Argentinian inflation. As you may recall, we shared last quarter that a monetary policy change in Iraq drove a 2% benefit to adjusted revenue as we were able to quickly adapt to serve our customers. That benefit continued in Q2, providing a 10% benefit to adjusted revenue. While this meaningful benefit in the quarter, we expect Iraq volumes to be significantly lower going forward. I will discuss our forward-looking assumptions when we get to the financial outlook in a few moments. We also continue to make progress with our Evolve 2025 strategy, growing C2C transactions for the first time since 2021, led by the continued momentum of our branded digital business, which grew 12% in the quarter. As Devin highlighted earlier, we are optimizing our branded digital go-to-market strategy and saw sequential improvement in overall funnel conversion during the quarter. Our retail business also saw improving transaction trends even excluding Iraq. Adjusted operating margin was 21.8%, compared to 23.3% last year. Nearly half the decrease was driven by currency impacts, including those related to our hedging program. The remainder of the decrease was due to higher variable costs in investments related to our Evolve 2025 strategy, partially offset by lower marketing spend and net savings related to our expense redeployment program. As you may remember, last…

[Operator Instructions] Our first question comes to us from Will Nance from Goldman Sachs.

You mentioned you think you might be trending ahead of your own expectations of the Evolve 2025 strategy. Obviously, great [indiscernible] a lot of it aside that strategy. You mentioned a few things that you're doing to improve authorization rates customer acquisition, digital transaction growth, anywhere in particular within those initiatives where you would point that kind of drove back? And then I guess, secondarily, you kind of had this sort of one-off with [indiscernible]. You mentioned accelerating some investments in the quarter, at least that being an offset in the quarter on the Evolve 2025 strategy. So if we put it all together, you're ahead of plan and you've got more investment resources, where do you think is the best place to incrementally accelerate that to that strategy?

Well, thanks for joining the call. We are excited about the progress that we're making with Evolve 2025, and I think as demonstrated today in the sequential improvement, in transaction trends, in both digital and retail, we're at or slightly better than what we expected, as we had talked about first growing customers, then growing transactions, which will then turn into revenue. Our ongoing investments fall into 2 or 3 categories. One is around continuing to update our product experience and our customer service and agent experience. And you heard today some of the places where we've been investing in our platform and our products and our ability to deliver those seamlessly to our customers and through our agents. As we find opportunities and have the capacity we will continue to accelerate in those kinds of investments that can indeed improve either our onboarding experiences, our funnel output or our agent support experiences. Many times, that requires investing in technology. As we talked about in Evolve 2025 driving both our customers and our agents towards better self-service and more automated experiences not only reduces operating costs, but it improves our ability to serve and grow those customer bases. The second place where we really look is to our go-to-market. And you heard on the call today, both continuing to invest in our audience targeting and our marketing as well as in our retail footprint and our go-to-market strategy. So again, as we have capacity and ability, we'll continue to make investments in those. The third place is in our human resources and on our team and our talent. You heard about 2 additions today, to our senior team that is trickling through our entire organization as we bring new capabilities and new team members on board to help drive the strategy. I'll turn it over to Matt for the second part of your question.

Will, just to your second part, Also, as you think about this, the vast majority of the uplift we got from Iraq, we have flowed through our revised guidance. We've only taken a modest amount into our investments, Devin just walked through. As we also highlighted, we've been able to save much faster than investment levels.

Got it. Appreciate that. And then maybe just a clarification on the Iraq moving pieces. I mean you mentioned in the press release having discussion with policymakers, obviously, sanctions. I guess on the other side of this event, like do you expect the Iraq revenues to be like the same? Or is it going to be at a lower level post the sanction event? And then on the expense side, are there any expense complicated investments that will result from the subsidy?

Yes. Well, thanks for the question. So since the new guidance coming out from the U.S. Fed, which was put out about a week ago, we've seen a decline in our run rate from the first part of July by about 70% reduction, that turned off a number of our agents in that marketplace. To your question about investments for compliance and other things, as you know, we've got a very robust compliance program, it's one of the reasons why we were able to take, ability to service these clients when the opportunity came arise. But we have also put a little bit more money into that market, some of where the incremental revenue and profit we got from Iraq hows going back into the compliance space over the last few months.

Our next question comes to us from David Togut from Evercore.

Just to clarify, how much of the $0.10 increase in the EPS guidance range for this year comes from Iraq?

David, this is Matt. Virtually all of it. Or all of it, to be honest. All of it. Our core business is operating as we expected. We had a -- as we talked about our guidance last year, we put out a range, and we are well on our way for where that was and then Iraq driving the after uplift.

And then maybe just staying on this point, how much of the change in Iraq do you think is structural where there could actually be some benefit to Western Union beyond 2023?

It's too early to know, David. That's one of the reason why we put it out there, is it being uncertain. It's been a very evolving situation. We have regular calls with the regulators in both markets. We're trying to help them understand what's going on. They're trying to balance overall macros around the world. So it's uncertain what they're going to do.

The only thing I would add, David, is evidenced by the last, call it, 4 or 5 months, we are well positioned in the market relative to other alternatives. As Matt highlighted, we have very strong risk and compliance. And so as the situation evolves, I know that we are at the ready and prepared to evolve with it and take advantage of anything that might be advantageous for Western Union and our customers in Iraq.

Our next question comes to us from Darrin Peller from Wolfe Research.

I mean, very quickly, just a follow-up again on Iraq, but I do want to ask another more fundamental question. But the magnitude of contribution from Iraq, I guess, 10 points over $100 billion -- I guess it's a bit surprising. You generally don't see more than a few percent concentration in any one given market. So how is it that material? To you guys, given the -- what you're describing as a 10-point lift to revenue growth. Maybe just help us understand the dynamics. So some of that may be sustainable, some part of that seems pretty high. And then more constructively and fundamentally, I would say, the digital transaction acceleration to be followed by revenue growth across the business is definitely what we wanted to see. And so, Devin, maybe just revisit that again. I mean the time line on transaction acceleration in U.S., maybe Europe next, how that translates to revenue growth reacceleration on the digital side? And then a quick comment on retail because it looks like that did get a little better just looking at the math between the digital growth and the total transaction growth and what's going on in the retail space.

Darrin, thanks for joining the call. With regard to Iraq, remember back in February, early March time frame, there was a change in the Central Bank policy for the entire country. Western Union was uniquely positioned given the strength of our agent distribution relationship, particularly the relationship with local Iraq banks to take advantage of that change in policy and enable the ongoing outflow of remittances and remittance values, which as you can see from this, were significant. In essence, what was a shutdown of the banking systems ability in Iraq to do outbound remittances. We would not have any expectation that it would continue as Matt has -- at this level. has highlighted both the regulators in Iraq and in the U.S. as well as the central banks are working to find a new policy and a new procedure for the regulated banks in the country to go back into the export of remittances. That said, as I said earlier, we continue to be well positioned. And as the market evolves, one of the things that we have noted is there's been an adoption of more digitally oriented services, of which, again, we've had strong partnerships with, the digital players and the digital wallets in the country which may induce consumers to stay within that experience and not go back to the more bank-oriented experience that prevailed in the marketplace before this change. So it's a rapidly evolving situation. We continue to have strong presence on the ground. We continue to work across the regulators and the Central Banks, and we look forward to keeping you guys updated as it goes along. Outside of Iraq, we are pleased with the trajectory, both on digital and retail. For digital, we continue to lay out a plan that brings us to…

Our next question comes to us from Bryan Keane from Deutsche Bank.

Devin, I want to follow up on that on Europe and CIS that improvement that's it's been significantly negative growth rates, double-digit growth rates for several quarters. Just to understand the turn there, it's almost flat now. And what's the outlook going forward? Can that go positive going forward in Europe and CIS region?

Look, we have -- Europe is the place where we've been working quite hard, particularly on the retail side, and there are multiple factors in Europe, both across the macro of the region, but also across our own history in the region. So what you see is we are seeing pockets of growth where we've made investments where our ingoing position with our agents and our customers was better. Those include Spain, the U.K. and Italy, in larger markets where like France and Germany, where we have a weaker starting point from when we launched the program, those are still mid- to high single-digit negative transaction growth. So we believe as we bring the larger countries and we add more agents and we add more distribution closer in line with some of the other places where we're seeing net transaction positive growth, we can get the whole region as we have stated in our strategy last fall to low single-digit transaction growth.

Got it. And I don't know, Matt, if you guys gave this number, but the -- in the Middle East and Africa, that region that had the big pop in revenue growth, primarily due to Iraq, was -- what would have been the normalized transaction growth rate, I guess, ex Iraq in that region?

We did not provide that number -- it would have still been a sequential improvement like many of the regions around the world approaching 0.

Our next question comes to us from Tien-Tsin Huang from JPMorgan.

Just on the acceleration to the 12% growth, that's nice to see for the digital branded piece, does that change your thinking on broadening your promotions in geo expansion. I'm curious on that. And is it related to some of the comments you made on improved -- transaction approval rates and things like that? I wasn't sure if those things were tied, and I guess, you don't mind if I just add my follow-up to that, is with the improved approval rates. Any changes in the fraud activity or surprises there?

Thanks, Tien-Tsin. Great to have you on the call. Our ongoing investments, and you can see it in the numbers. We've talked a lot about being very disciplined with our LTV to CAC. And so one of the things we've been working hard with this program is to improve the efficacy of those marketing dollars and to convert more people from our top of funnel to bottom of funnel, which is what I was talking about in terms of our conversion rates, both on registration, on first-time risk acceptance and we're working, Tien-Tsin, more broadly across the funnel in every case to ensure that the changes we're making are sustainable and durable over time. And so as you know, we've talked a lot on the call about ensuring that our promotional pricing activities, in fact, turn into customers and those customers turn into transactions, right? And so I think we have growing confidence that the overall program, aside from the promotional pricing is, in fact, driving real benefits and real outcomes which is now you're seeing in the 12% transaction growth globally and the 15% in North America. So to answer your question, I don't anticipate a lot more rolling out of any promotional pricing activities. There are a few places in the world we might explore. But in most of the big important places, we are well on our way, and we are requiring or needing any more promotional pricing.

Got it. And then just on the fraud piece, I know that in the past, we've always asked about that as you open up the funnel. Does it bring in more fraud? Any interesting observations there?

Yes. Thanks for the question. Early observations there are no -- as we've opened it up, and we've not seen any meaningful change in our fraud losses. It's something we're monitoring very closely and we'll adapt. Our main focus, we've talked about with the team that runs this is we're looking for profitable transactions, not just transactions and revenue. So it's one of those things we're going to monitor and adapt as we find that sweet spot.

And Tien-Tsin, Matt would have the specifics. But one of the things as we, again, are working on funnel optimization. We actually saw our fraud results improve significantly, which then gave us the ability to say how could we use that capability to grow our customers? So year-over-year, period-over-period, our fraud results have improved, not worsened.

Our next question comes to us from Rayna Kumar from UBS.

Just wondering on the second quarter operating margin, that was expected to be below the full year outlook. I think it was your initial guide, but it ended up being near the high end of the range. So just curious what came in better than expected there?

Rayna, this is Matt. The principal driver of that is Iraq, having the extra revenue there that was not anticipated when we put out our guidance that represent a large portion of the over delivery. The other part that's driving it is the fact that we are still outrunning our ability to invest with our cost savings program.

Understood. And then as a follow-up, I know last year, you guided to mid-single-digit EPS growth beyond '23. So is it a safe assumption to say that you're still on track for that mid-single-digit growth in '24, excluding that $0.10 benefit from Iraq?

So I am looking forward to talking about '24 in February, but you've probably -- directionally got some good assumptions.

Our next question comes to us from Tim Chiodo from Credit Suisse. Our next question comes to us from Ken Suchoski from Autonomous.

I like the chart on Slide 8 of the slide deck that shows the transaction growth and the constant FX revenue growth for the branded digital business. And it looks like the gap between those 2 lines has widened a bit in 2Q versus 2Q -- or 2Q versus 1Q. I'm just curious how you expect that spread to trend over the next few quarters?

Ken, as we talked about last quarter, we expected this quarter to be the widest part of that expansion. I think we talked about that in the Q1 call and we would expect it to narrow throughout the remainder of this year. And as Devin talked about a few moments ago, we would -- we've been talking about when we constantly give out our new customer growth. We're expecting the all 3 numbers will converge over the future quarters.

And Ken, the GAAP is probably a little bit wider than we anticipated, and that's driven by success on ongoing customer transaction trends that are slightly better than we anticipated as well. And so what you're seeing is slightly better retention of the new customer base is transacting slightly higher than we expected, which is causing the transaction trends to outpace a little bit of what we thought.

Okay. Great. And then maybe just as my follow-up, I wanted to ask about the composition of the digital business because obviously, this is a business that's accelerating. It looks like North America growth is strong. What's the geographic composition of that business? And maybe you could provide some detail on the growth rates across those regions. I'm just curious if you're seeing an improvement in Europe and other parts of the world?

Ken, we have historically not given that information out, but what we've typically told everybody is, you can look at the mix of our overall C2C by region, and that will give you a sense for the overall dispersion around the world, they pretty closely match the size of each region around the world. So as Devin talked about, we launched in North America first, followed by Europe. Those are the 2 largest -- represent the vast majority of our business. So therefore, you could assume it also represents the vast majority of our digital -- branded digital business.

Our next question comes to us from Jason Kupferberg from Bank of America.

I have a question just related to the outlook for the balance of the year. I'm just looking at adjusted revenue growth through the first half of the year. I think that's up 4%, the midpoint of the full year guide is 0. So I guess we're looking at negative 4% in the second half. I know that Iraq helped you by 10 points in the second quarter. So you would have been minus 1% instead of plus 9%. So I guess I'm just looking at that kind of minus 1% Iraq adjusted number in Q2 and trying to see what the pieces are between the minus 1% and Q2 and then what looks like kind of minus 4% in the second half? And I just want to make sure we have all those piece parts in the model.

Jason, I'm not sure I completely follow but I'll try to play it back. And if I get it wrong, we can take it off-line with Tom and team. But what we have done this quarter is we've taken up our guide based on the revenue expectation from Iraq for the 3-month period of April through July and flowed that through and the outlook for the back half of the year is largely similar to what we had originally when we gave our guide. I don't know if that answered your question of, but we can take it offline and go a little deeper if you want.

Okay. We'll do that. I guess my follow-up just on the C2C transaction growth, if we exclude Iraq and Russia, Belarus, obviously, the plus 2% in the quarter. What are you assuming for that metric in the second half? And then if you would deconstruct it into digital versus retail as well?

Yes, we're not really providing that level of outlook. There's a lot of moving parts in our business, and we're flexing it from quarter-to-quarter making decisions that may move around.

Our next question comes to us from Andrew Schmidt from Citi.

Devin, I appreciate all the commentary here. On the digital business, I'm wondering now that we're further along in the new strategy, are there any comments in terms of what you're seeing in terms of CAC or payback period levels? And then correspondingly, as you do get more comfortable with the unit economics of the digital business post the new promotional strategy, if there's an opportunity to get more aggressive with marketing budgets and customer acquisition cost. Any help there would be helpful.

Andrew, thank you. As you can see in the results, we are, in fact, being disciplined on LTV to CAC, which is one of the reasons marketing spend is down period-over-period. One of the important parts of our program, and that is part of why I was talking about those conversion rates and those acceptance rates is to be able to scale marketing investment profitably in order to continue the growth trajectory that we aspire to. And so we would and will as we can deploy more marketing dollars to drive more growth but we are going to ensure that we are doing so at a responsible level.

Andrew, just a reminder, you've probably heard this last quarter, but our CAC came down last quarter about 20%. We didn't update that this call here, but we're continuing as Devin just talked about, to be very mindful where we spend it and making sure we have that right conversion ratio.

While, we've been driving 20% new customer growth, right? A good thing.

Understood. Very clear. And then just a quick follow-up. Great to hear about the sequential improvement in the retail business. I know we get a lot of questions about that. Maybe in North America, if you could talk about just independent channel versus big box? I know, Devin, you talked about a lot of improvements you're making, and those are good to hear. But curious if there's any just qualitative commentary on the performance across those two channels?

We believe, Andrew, that our branded distribution, both big box and independent is a strategic advantage for us. That's true in North America, but it's also, as we've talked about, true in Europe where we're expanding what we call concept stores or branded exclusive distribution. So we've been actually putting a lot of emphasis on how do we grow that? How do we create great experiences for those agents and how do we serve customers to those channels? As you know, the independent agent channel, the customers exist and the agents basically compete on the basis of price and agent commissions. And so over time, that's just a less attractive channel in which to drive growth. We will compete in it, and I think we're doing well as evidenced by Europe, which is predominantly independent agent channel at this point. But over time, we will be emphasizing our branded exclusive both strategic, which is what you call big box and independent, which is our smaller mom and pops.

Our next question comes to us from Tim Chiodo from Credit Suisse.

Great. Sorry about that earlier. The Slide 9 seems to be one of the core slides in terms of the core underlying trend for retail. It excludes some of the year-over-year impacts and the Iraq impact, then it shows improving trend there. I know Jason took a stab at that in terms of seeing where that could exit the year, but it does seem to be working its way back towards positive. Maybe you could just put a little bit more regional color on maybe some of the areas of strength in terms of the core retail business that is driving that line upward. And then as a brief follow-up, this was kind of referenced earlier, but topic comes up from time to time, rather than looking at it on a percentage of retail locations, but maybe you could just give a brief update on in terms of percentage of transactions, how many of those are coming from more exclusive retail partners versus not?

Tim, thanks for joining. On your question about where is it coming from? We're actually seeing strength in really all of our regions. The only place that's really been flat quarter-over-quarter that up on the prepared remarks is LACA, but they've obviously been the high watermark now for a number of quarters in a row. Whereas other regions are starting to make improvement. I also highlighted in my remarks about APAC, they have seen a really strong improvement in retail as well as our digital business. Devin highlighted, and I added to it on Africa, seeing a 500 basis point sequential improvement largely at the retail market. So you can really see this in a lot of places around the world. It's not 1 place. It's a lot of the things that we're building on our platform around customer service and on our POS solutions is benefiting most of the regions, if not all.

And the other thing I would add to that, Tim, right, and it was in the prepared remarks, getting Europe to now what is near flat, negative 1% transaction growth, given the sheer scale of the European retail business and our global retail business is a big driver of the change from negative 6% to negative 2%, just from a math basis.

Our final question comes to us from Vasu Govil from KBW.

I guess two quick ones. One on just the margin guide. I know the margin guide is unchanged but we're tracking ahead on a year-to-date basis. So should we expect to be at the higher end of the range? Or is there any color that you can offer on the cadence of margin expectation from here?

We're not going to guide one way or the other in the range. We intentionally left it wide because we want to have flexibility, but we are committed to the EPS range we provided. So you can model a couple of different sensitivities there and think about where it may go within the range based on what happens in non-op and taxes. But our focus is to maintain some flexibility if the right opportunities for investments happen and then make sure we deliver the commitments we've made to you all and our shareholders.

Got it. And one question for Devin. I wanted to ask a particular bank initiative. I know you rolled it out in a couple of regions in Europe now. In Brazil and the U.S. sort of -- the whole thesis there was to help increase engagement and retention even if it didn't bring any new revenues. And so just curious, it's early days, but what have you seen on that front? And any metrics you've seen that sort of help to demonstrate the increase in engagement that you might be seeing?

Vasu, thanks for asking. I think the comments that we had on the second or the first quarter call now into the second quarter call remain consistent, right? We're live in 4 countries. We're anticipating going live here in Brazil shortly, and we're looking forward to a launch in the U.S., at least in friends and family before the end of the year. Our experience has been pretty much validating, which says current and existing, retail and digital customers as well as surprisingly lapsed retail and digital customers using the digital wallet product end up being more valuable customers to us in the digital wallet product, both from an engagement standpoint, i.e., the number of transactions per month is up significantly as well as on an economic value in terms of the value of revenue generated per customer on a monthly basis. So we've been working hard on improving the experience in the onboarding for those existing and former customers in terms of being able to grow that population of the customer base in the wallet versus what we call new to franchise or customers who are not traditional remittance customers, those look a lot more like other people's digital banking customers which are less economically attractive than our customers using our digital wallet product and services.

Thank you for joining the Western Union Second Quarter 2023 Results Conference Call. We hope you have a great day.