The Western Union Company (NYSE: WU - News), a leader in the money transfer segment of global payments, today reported financial results for the second quarter.
Financial highlights for the quarter included:
- Global consolidated revenue of $1.3 billion, a decrease of 7% compared to last year's second quarter; or down 2% constant currency adjusted
- GAAP and constant currency EPS of $0.31, flat to last year's second quarter; or down 6% excluding the $23 million pre-tax restructuring expense incurred in the second quarter of 2008
- EPS was impacted by $0.01 due to a $12 million reserve on the receivable from the Reserve International Liquidity Fund
- Operating income margin of 27%
- Year-to-date cash provided by operating activities of $606 million
Other highlights included:
- Entered into a money-transfer agreement with Fifth Third Bank, with over 1,300 banking center locations in 12 states
- Announced agreement to acquire Custom House, Ltd., a leading international business-to-business payments provider
- Grew agent locations to 385,000
Western Union President and Chief Executive Officer Christina Gold said, "Our second quarter results were in line with expectations and we are pleased that Western Union is on track to achieve our full-year revenue and earnings targets. Global consumer-to-consumer transactions continued to grow for the period, and despite a challenging operating environment, we delivered strong margins and cash flow. In addition, we continued to make significant strategic progress on our growth initiatives, building on first quarter momentum."
In the second quarter, revenue was $1.3 billion, down 7% from last year's second quarter or down 2% constant currency adjusted. Operating income was $342 million, up 2% or down 5% excluding the restructuring expenses taken in the second quarter of 2008. Second quarter operating income margin was 27% compared to 25% in last year's second quarter. Excluding restructuring expense, the second quarter 2008 operating margin was 27%.
Earnings per share were $0.31, flat compared to last year's second quarter, or a 6% decrease excluding restructuring expense from last year. The tax rate for the second quarter was 26% and the company continues to expect a full-year 2009 tax rate of approximately 26%.
Capital Deployment & Liquidity
Western Union's year-to-date cash flow from operations was $606 million and capital expenditures were $40 million. Through six months, Western Union repurchased approximately nine million shares for $100 million at an average price of $11.39 per share. The company maintains its target of $400 million in repurchases for 2009.
Cash on hand at quarter-end was $1.8 billion. Total outstanding debt at quarter end was approximately $3.0 billion. The nearest-dated debt maturity is $1 billion due in November of 2011. The company has a commercial paper program that is fully backed by a $1.5 billion revolving credit facility that expires in 2012. At quarter end, there was no commercial paper outstanding and this facility was undrawn.
In the third quarter of 2008, the company reclassified $298 million from cash to a receivable pending receipt from the Reserve International Liquidity Fund. In January 2009 Western Union received $194 million and in June 2009 received $41 million from the Fund resulting in total collections of $235 million and a remaining receivable of $63 million at quarter end. In the second quarter management established a reserve of $12 million against the remaining receivable which impacted "Total other expenses, net" by $12 million, or earnings per share by $0.01.
The consumer-to-consumer segment, representing 85% of Western Union's revenue, posted revenue of $1.1 billion in the second quarter, a decrease of 7%, or down 2% constant currency adjusted. Operating income was down 4% on an operating income margin that improved to 28% from 27% in last year's second quarter. Western Union handled 49 million C2C transactions, a 3% increase over the second quarter of 2008.
For the international portion of C2C, revenue declined 5%, or was up 1% constant currency adjusted, on transaction growth of 8%. Revenue from the subset of the international business, those transactions that originate outside of the United States, declined 5%, or increased 3% constant currency adjusted, on transaction growth of 12% during the quarter.
The difference between revenue and transaction growth rates for the segment, particularly within the international C2C business and the international transactions that originate outside of the U.S., narrowed slightly compared to the first quarter to about 10 percentage points. Four factors contributed to the C2C segment's difference in revenue and transaction growth rates: currency translation, geographic mix, product mix between intra- and cross-border transfers, and pricing. In the second quarter, currency translation totaled half of the difference and the impact from the other factors has remained relatively consistent with the last several quarters. The company continues to expect pricing decreases for the full-year to be 2% of revenue.
The Europe, Middle East, Africa and South Asia (EMEASA) region, which represents 45% of Western Union revenue, saw revenue decline 5% and transactions grow 11% compared to last year's second quarter.
Performance in the Gulf States was strong, but transaction and revenue growth slowed from the first quarter. Western Europe, with the exception of Spain where unemployment remains a significant factor, saw stable transaction growth rates compared to the first quarter. India achieved revenue growth of 11% and transaction growth of 27% in the quarter.
An important element of Western Union's growth strategy in Europe was the acquisition of FEXCO's money transfer business. The acquisition added a sales force and operating platform that better positions Western Union for the upcoming implementation of the Payment Services Directive throughout the European Union. The integration is on track and the combined sales force is making progress signing agents in new classes of trade that are now able to offer money-transfer services. These agents will extend Western Union's reach to new customer segments.
The Americas region, which represents 32% of Western Union revenue, reported a revenue decline of 11% compared to last year's second quarter while transactions decreased by 5%. The domestic money transfer business saw revenue decline 12% in the quarter on a transaction decline of 8%.
The Mexico business, which is 6% of Western Union revenue, had a revenue decline of 20% and a transaction decline of 15% in the quarter. Results for Mother's Day, which is an important send holiday, were as expected, but the results in this corridor as well as in the U.S. continue to be impacted by challenges related to the economy.
The U.S. outbound business, which is the largest component of the Americas region, has had transaction trends remain stable to the previous three quarters.
The Americas team is focused on growth and made progress on certain initiatives: Fifth Third Bank was signed extending the Americas banking strategy, the test of the Western Union MoneyWiseTM Visa® prepaid card was expanded, and Western Union began offering reloadable Visa debit cards to a group of the 8 million gold card members in the United States. These initiatives expand and diversify distribution channels, as well as broaden Western Union's reach to new customers.
The Asia Pacific (APAC) region, which represents 8% of Western Union revenue, had 19% transaction growth while revenue was flat compared to the second quarter of 2008. In the quarter, China revenue declined 10% on transaction growth of 1%.
Global Payments (formerly Consumer-to-Business)
The Global Payments segment represents 13% of Western Union's revenue. Revenue for the quarter was $164 million, a decrease of 8% from second quarter 2008. Operating income was down 11% with an operating margin of 27% compared to 28% in the second quarter of 2008.
This segment continues to have its revenue and margins impacted by a decline in demand for U.S. bill payment services, as many American consumers who are likely to use this service have difficulty paying bills and obtaining credit.
An important step in growing this segment is product and geographic expansion. The launch of bill payment service in Panama and Peru are on track, and Western Union is working diligently toward offering payment service in Brazil.
Another key initiative is the pending acquisition of Custom House, Ltd. This acquisition will allow Western Union to enter a new growth market and to diversify its product portfolio by providing international business-to-business payment solutions for small and medium enterprises. The acquisition is expected to close in the third quarter.
Key Agent Signings
Western Union and Fifth Third Bank, with over 1,300 banking center locations in 12 states, entered an agreement to offer the Western Union® global money-transfer service. The new service offering for Fifth Third account holders and walk-in consumers, will be available in the next several months.
Scotiabank, one of North America's premier financial institutions and Canada's most international bank, and Western Union recently extended their agreement to offer the Western Union global money-transfer service online and across the more than 1,015 Scotiabank branches in Canada.
Western Union signed an agreement with Nuestra Señora de la Asunción to begin offering the Western Union global money-transfer service in place of their own brand. This agent operates 66 locations in Argentina and Paraguay, an important Latin American corridor.
Within EMEASA recent agent signings include: Union Bank in Sri Lanka, Janata Bank, the second largest government sector bank in Bangladesh, the Istituto Centrale delle Banche Popolari Italiane in Italy under which various regional banks will offer Western Union® global money-transfer service, and the Garanti Bank in Turkey expanding Western Union's account-to-cash service.
Also in EMEASA, Western Union and POSTE MAROC, Morocco's postal services provider, celebrated a decade of successful collaboration and reaffirmed their commitment by renewing their multi-year contract.
In India, CMS Ltd has been added as a subagent of Paul Merchants Ltd, an existing Western Union agent. CMS Ltd, through its large network of franchisees, offers public services, like utility payments and applications for public services, under contracts with the governments of several Indian states. Paul Merchants and CMS plan to roll out about 1,400 locations over the next several months.
In Asia Pacific Western Union signed a five-year renewal with Vientinbank in Vietnam under which the bank becomes a direct agent.
On the mobile money transfer front, Zain, the leading mobile operator in the Middle East and Africa, and Western Union announced an alliance to deliver cross-border mobile money transfer service to customers in those regions.
The company reaffirms its 2009 revenue and EPS outlook that was provided during the first quarter earnings release. The company expects 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; GAAP EPS of $1.18 to $1.28; and cash flow from operations to exceed $1.1 billion.
Gold concluded, "Western Union continues to invest its significant financial resources and leverage our brand and network in a variety of opportunities that will grow our business, open new channels, introduce new products and attract new consumers. Specifically, we have added additional banks to our U.S. agent network, announced key alliances in mobile money transfer, and continue to pursue opportunities related to the European Payment Services Directive. Also, in an effort to expand our market opportunity into the broader payments category, we have announced an exciting initiative in the prepaid debit card market and announced our plan to acquire Custom House. Our business model with its strong balance sheet clearly gives us a competitive advantage."
As a reminder, the 2009 outlook does not include the pending Custom House acquisition. Following the anticipated third-quarter close, management expects approximately $0.01 dilution to 2009 earnings per share, with the largest portion attributable to expensing of transaction-related costs, and the acquisition to benefit revenue by less than 1% in 2009.
Western Union presents a number of non-GAAP measurements because management believes that these metrics provide more meaningful information than GAAP metrics alone. These non-GAAP measurements include revenue decline constant currency adjusted, earnings per share change excluding 2008 restructuring expenses, earnings per share constant currency adjusted, 2009 operating income growth and 2008 margin excluding 2008 restructuring expenses, consumer-to-consumer segment revenue decline constant currency adjusted, international consumer-to-consumer revenue decline constant currency adjusted, international consumer-to-consumer excluding United States originated transactions revenue decline constant currency adjusted, and 2009 revenue and earnings per share constant currency adjusted guidance.
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.
Constant currency results exclude any benefit or loss caused by foreign exchange fluctuations between foreign currencies and the U.S. dollar, net of the effect of foreign currency hedges, which would not have occurred if there had been a constant currency rate. The measurement also assumes 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 is consistent with the prior year.
In the second quarter of 2008, Western Union incurred $23 million in restructuring expenses of which $20 million was included in cost of services and $3 million was included in selling, general, and administrative expense. The restructuring expenses were not included in the operating segments results.
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.
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