Western Union hit by remittance slowdown

Highlights for the fourth quarter included:

* Global consolidated revenue of $1.3 billion, a decrease of 1%; or flat year-over-year euro adjusted
* EPS of $0.34, up 6% compared to last year's fourth quarter
* EPS of $0.37, an increase of 16% excluding fourth quarter restructuring expense
* Operating income margin of 26%; or 28% excluding fourth quarter restructuring
* Net income of $240 million, a decrease of 2%; or an increase of 7% excluding fourth quarter restructuring

Highlights for the full year included:

* Global consolidated revenue of $5.3 billion, an increase of 8%; or 6% euro adjusted
* Cash provided by operating activities of $1.25 billion
* EPS of $1.24, an increase of 12%
* EPS of $1.31, an increase of 16% excluding restructuring expenses and 2007 accelerated stock compensation charges
* Operating income margin of 26%; or 27% excluding restructuring expenses
* Net income of $919 million, an increase of 7%; or 11% excluding restructuring expense and 2007 accelerated stock compensation charges
* Grew agent locations to 375,000 at year end

Western Union President and Chief Executive Officer Christina Gold stated, "In 2008 we gained market share and handled $67 billion of cross-border remitted principal, 17% more than last year. This was a key driver of our financial performance which included earnings per share and cash flow in line with our guidance. Our revenue performance in the quarter, however, was adversely affected by softening demand for money transfers and bill payments in light of the global economy.

"In 2009, we are confident in our market position. Western Union is the premier brand in the industry with a strong and proven business model, unmatched distribution, and considerable financial strength. In fact, we had more than $1 billion in cash on hand at year end and expect to generate cash flow from operations in excess of $1.1 billion in 2009. We will ensure that we maintain liquidity while usinill ensure ty while usinill ensure that we maintain liquidity while using this cash to invest in market share initiatives, strategic acquisitions and to return capital to shareholders. I am confident that we will emerge from these unprecedented times with an even stronger competitive position that will result in creating value for shareholders over the long run."

Consolidated Results

In the fourth quarter revenue was $1.3 billion, down 1%, or flat euro adjusted. Operating income, which included $33 million of restructuring expenses, was $334 million, down 8%. Excluding the restructuring expenses in the quarter, operating income increased 1%. Fourth quarter operating income margin was 26%, or 28% excluding restructuring expenses, compared to 28% in last year's fourth quarter. The euro translation decreased revenue $13 million and contributed $6 million to operating income.

The tax rate for the quarter was 21.5%, or 22.8% excluding restructuring expenses, and benefited from the favorable resolution of certain U.S. tax matters. The tax rate was 27.4% in last year's fourth quarter.

Full-year revenue was $5.3 billion, up 8%, or 6% euro adjusted. Operating income, which included $83 million of restructuring expenses, was $1.36 billion, up 2%. Excluding 2008 restructuring expenses and the $22 million accelerated stock compensation charge in 2007, operating income increased 7%. Operating income margin was 26% for 2008, or 27% excluding the restructuring expenses, compared to 27% in 2007 on both a GAAP basis and excluding the stock compensation charge. The euro translation contributed $82 million to revenue and $19 million to operating income.

The tax rate for the year was 25.8%, or 26.6% excluding the 2008 restructuring charges, compared to 2007's tax rate of 29.9% on both a GAAP basis and excluding the stock compensation charge.

Capital Deployment and Liquidity

Western Union's cash flow from operations of $1.25 billion less capital expenditures of $154 million equaled 120% of net income. In 2008, the company repurchased 58 million shares for $1.3 billion and paid a dividend of $28 million.

Cash on hand at year end was $1.3 billion. Outstanding debt at year end was $3.1 billion, of which $500 million comes due in December 2009, $1 billion is due in 2011, $1 billion is due in 2016, and the last $500 million is due in 2036.

The company has in place a commercial paper program that is fully backed by a $1.5 billion revolving credit facility that expires in 2012. Included in the outstanding debt at year end was $100 million of commercial paper.

Consumer-to-Consumer (C2C) Results

The consumer-to-consumer segment, representing 85% of Western Union revenue, posted revenue of $1.1 billion in the fourth quarter, a decrease of 1%, or flat euro adjusted, on transaction growth of 9%. Operating income grew 4% on an operating income margin that improved to 29% for the period from 27% in fourth quarter 2007.

Full-year revenue grew 9%, or 7% euro adjusted, and transactions grew 12%. Operating income grew 13%, or 11% when excluding the 2007 stock compensation charge. Operating income margin was 27%, compared to last year's 26% or 27% excluding the stock compensation charge.

Segment revenue was impacted by the worsening global economic environment and its effect on Western Union customers. Fourth quarter transaction growth slowed sequentially from the third quarter and the amount of money consumers remitted per transaction declined year-over-year resulting in less transaction fee and foreign exchange revenue.

The difference between revenue and transaction growth rates for C2C, particularly within the international C2C business and the international transactions that originate outside of the U.S., widened in the quarter. Four factors contributed to the difference in growth rates: currency translation, geographic mix, product mix between intra and cross-border transfers, and pricing. In the fourth quarter, currency translation was the largest contributor to the total C2C difference, totaling 4 percentage points of the 10% difference. In the third quarter, currency helped narrow the difference between C2C transactions and revenue growth rates by 3 percentage points. The impact from geographic mix, product mix, and pricing reductions were consistent with the three previous quarters. Pricing decreases totaled 1% of consolidated revenue in 2008, compared with 3% in 2007.

The international portion of C2C grew revenue 1% and transactions 12%. A subset of the international business, those transactions that originate outside of the United States, posted revenue and transaction growth of 2% and 18%, respectively in the quarter, and 18% and 25% for the full year. This subset contributed 55% of full-year consolidated revenue.

EMEASA C2C

The Europe, Middle East, Africa and South Asia (EMEASA) region, which represents 44% of Western Union revenue, experienced fourth quarter revenue growth of 1% on transaction growth of 16%. Full-year revenue and transactions grew 16% and 23%, respectively. Operating margin for the year improved to 28% from 27%, excluding the stock compensation charge (26% GAAP) last year.

Within EMEASA, the Gulf States performance was strong despite falling oil prices. India's performance contributed to the region's results with revenue growth of 29% and transaction growth of 50% in the quarter. The relative strength in these key markets was more than offset by slower growth throughout Europe.

Americas C2C

The Americas region, which represents one-third of Western Union revenue, reported a revenue decline of 5% compared to last year's fourth quarter while transactions were flat. Full-year revenue declined 1% on transaction growth of 2%. Operating margin was 27% for 2008, compared to 28% on a GAAP basis and excluding the 2007 stock compensation charge. Results in this region continue to be impacted by the challenging U.S. economy. The domestic money transfer business saw revenue decline 5% in the quarter, and 6% in 2008. Domestic transactions declined 4% for the quarter and 3% for the full year.

The Mexico business posted revenue and transaction declines in the quarter of 10% and 3%, respectively. For the full year, revenue was down 2% and transactions declined 1%. Mexico pricing remained stable throughout 2008 and Western Union continues to outpace the market as reported by Banco de Mexico.

The fourth quarter revenue decline in Mexico was larger than expected. In October, the value of the Mexican peso decreased dramatically against the value of the U.S. dollar. This change prompted a spike in transactions, as U.S. senders moved to take advantage of the more favorable exchange rates. However, because the devaluation of the peso was so sudden, Western Union needed to acquire pesos temporarily at less favorable rates in order to meet the demand for immediate payment in Mexico. This unusual occurrence, which was primarily attributable to Vigo transactions, impacted Mexico revenue growth by nearly 500 basis points.

APAC C2C

The Asia Pacific (APAC) region, which represents 7% of Western Union revenue, delivered 7% revenue growth and 30% transaction growth in the fourth quarter and revenue and transaction growth of 22% and 27%, respectively, for the year. Operating margin for the year improved to 25% from 21%, excluding the 2007 stock compensation charge (20% GAAP) last year. In the quarter, China revenue declined 8% on transaction growth of 3%. Impacting China results is the decline in activity from the entrepreneurs that typically make high-revenue transactions.

Also in the APAC region, the Philippines full-year performance remained strong, and is outpacing the 15% inbound remittance market growth as reported by the Central Bank of the Philippines reported for the first 11 months of 2008.

Consumer-to-Business (C2B) Results

The consumer-to-business segment represents 13% of Western Union's revenue. Revenue for the quarter was $174 million, down 5% from a year ago. Operating income was down 16% with an operating margin of 27%, compared to 30% in the fourth quarter 2007. Full-year results included revenue of $720 million which was flat year-over-year. Operating income declined 11%, or 12% excluding the 2007 stock compensation charge. Full-year operating margin was 28%, compared to 2007's operating margin of 31% on a GAAP basis and excluding the stock compensation charge.

This segment, which derives nearly 90% of its revenue in the U.S., continues to have its revenue and margin impacted by a decline in U.S. bill payment transactions as many American consumers who are likely to use this service are currently unable to pay their bills and unable to obtain new credit.

Focusing on international C2B expansion, Western Union is extending its South American presence and has launched bill payment services in Peru and Panama.

Recent Events

Key agent signings include:

* New relationships with Halyk Bank in Kazakhstan and the Denmark Post, and PayPoint in the U.K. now a direct agent
* Adding to its strong portfolio of check cashers and grocery stores in the U.S., Western Union signed a deal with Check into Cash covering more than 1,000 locations and a renewal with A&P Stores
* A new internet banking money transfer deal with one of Austria's largest bank, Raiffeisen Zentralbank, extending Western Union's reach through new distribution channels
* Renewals with the Belgium Post; the India Post; the New Zealand Post; City Forex in New Zealand, Fiji, Australia; and Exchange & Finance in Fiji

Western Union recently announced another mobile relationship. Together with Vodafone, Western Union will pilot a cross-border mobile money transfer service between the U.K. and Kenya. The service will enable customers to send cross-border remittances from select locations directly to mobile subscribers in Kenya generally in minutes, and the partnership adds to relationships Western Union already has with Orascom Telecom, Bharti Airtel, Globe Telecom, Smart Communications and the GSM Association.

Western Union is in the process of finalizing an acquisition of one of its largest international agents. The acquisition is an essential step in Western Union's strategy of accelerating C2C growth and profitability. Acquiring this agent positions Western Union better to benefit from the upcoming adoption of the Payment Services Directive throughout the European Union. The acquisition will allow Western Union to work directly with the sub-agents, directly manage the brand and operations, and to operate more cost-efficiently. The details of this acquisition are expected to be announced later this month, pending regulatory approval. For 2009, this acquisition will have no revenue effect but will impact operating margin by nearly 40 basis points, with $0.02 dilution to earnings per share.

Outlook

Western Union anticipates that the global money transfer market will grow slower in 2009 compared to 2008. The revenue outlook reflects Western Union C2C transaction growth in the mid- to high-single digits and for principal per transaction to decline. Price decreases are expected to be consistent with 2008 at approximately 1% of consolidated revenue.

The expectation for C2B, which is primarily a U.S. business, is for the fourth quarter 2008 revenue and profit trends to continue into 2009 as the U.S. economic conditions are not likely to improve in the near term.

Management is providing the following 2009 outlook which includes wider revenue and earnings per share (EPS) ranges due to market conditions across Western Union's 15,000 corridors:

* Constant currency revenue to be down 2% to 5%
* GAAP revenue to be down 5% to 8%
* Constant currency EPS of $1.16 to $1.26, including the $0.02 dilution from the pending agent acquisition
* GAAP EPS of $1.18 to $1.28, including the $0.02 dilution from the pending agent acquisition
* Cash flow from operations to exceed $1.1 billion

Other assumptions for the earnings per share range include:

* Net other expenses of approximately $150 million, compared to $116 million in 2008. The $0.03 per share increase is a result of a lower interest income projection for 2009
* A tax rate of approximately 26%
* Stock repurchases of $400 million

Gold commented on the outlook, "The long-term drivers of the money transfer market, notably migration and remitted principal, remain very healthy and Western Union has never been better positioned to capitalize on the opportunity. To that point, our global business model generates cash in excess of net income and we'll use this competitive advantage to grow our core business and pursue other opportunities that create long-term value. At the same time, we will focus on improving operating efficiencies so that as market conditions improve, we will reaccelerate growth and maximize our profitability."

Currency

The company transacts more business in the Euro than in any other foreign currency, but as the international business continues to grow the amount of business done in other currencies will become more significant. As a result, the company will communicate revenue and EPS on a constant currency basis rather than reporting revenue and operating profit on a euro-adjusted basis as done previously. Constant currency results exclude any benefit or loss caused by foreign exchange fluctuations between foreign currencies and the U.S. dollar, net of foreign currency hedges, which would not have occurred if there had been a constant currency rate. The results also exclude the impact of fluctuations in foreign currency derivatives not designated as hedges and the portion of fair value that is excluded from the measure of effectiveness for those contracts designated as hedges. On a constant currency basis, 2008 full-year revenue growth was 6% and fourth quarter 2008 revenue growth was 2%. The benefit to 2008 operating income from using a constant currency basis was offset by derivative losses, so there was no EPS benefit or impact from foreign currency fluctuations.

Restructuring Expenses

Western Union incurred $33 million in restructuring expenses in the fourth quarter from the actions previously announced as well as from an additional reduction in workforce during November for a total of $83 million in 2008. In the quarter, $20 million was included in cost of services and $13 million was included in selling, general and administrative expense. For the year, $63 million was included in cost of services and $20 million was included in selling, general and administrative expense. The restructuring expenses were not included in the operating segments results.

These initiatives delivered cost savings of $10 million in 2008 and the company expects more than $40 million in savings annually in 2009 and beyond.

Restructuring expenses include expenses related to severance, outplacement and other employee-related benefits; facility closure and migration of IT infrastructure; and other expenses related to relocation of various operations to existing company facilities and third-party providers, including hiring, training, relocation, travel, and professional fees. Also included in the facility closure expenses are non-cash expenses related to fixed asset and leasehold improvement write-offs, and the acceleration of depreciation and amortization.

Non-GAAP Measures

Western Union's management presents revenue growth euro adjusted and constant currency adjusted; earnings per share and earnings per share growth excluding 2008 restructuring expenses and 2007 stock compensation charge; operating income growth and margin excluding 2008 restructuring expenses and 2007 stock compensation charge; segment operating margin and segment operating income growth excluding the 2007 stock compensation charge; net income growth excluding 2008 restructuring expenses and 2007 stock compensation charge; 2007 tax rate excluding 2007 accelerated stock compensation charge and 2008 tax rate excluding 2008 restructuring expenses; and 2009 constant currency revenue and earnings per share guidance. The 2007 stock compensation charge was a $22 million non-cash accelerated SFAS 123R stock compensation vesting charge as a result of the change of control that occurred when an affiliate of Kohlberg, Kravis, Roberts & Co. acquired First Data Corporation on September 24, 2007. All of these non-GAAP measures are presented because management believes they provide more meaningful information.

Reconciliations of non-GAAP to comparable GAAP measures are available in the accompanying schedules and in the "Investor Relations" section of the company's web site at www.westernunion.com.