The Western Union Company
Q4 2012 Earnings Call Transcript

Published: 13 Feb 2013

[Operator:]

Good afternoon, and welcome to the Western Union Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mike Salop, Senior Vice President of Investor Relations. Please go ahead.

[Michael A. Salop:]

Thank you, Lauren. Good afternoon, everyone. On today's call, Hikmet Ersek, Western Union's President and Chief Executive Officer; and Scott Scheirman, EVP and Chief Financial Officer, will discuss 2012 fourth quarter and full year results and the company's outlook for 2013. Following their remarks, we will open the call for 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 2011 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.

[Hikmet Ersek:]

Thank you, Mike, and good afternoon, everyone. Today, we announced financial results for the fourth quarter and full year 2012, which were largely consistent with the outlook we provided in late October. Scott will give you a more detailed review of the results later on the call, but I would like to spend a few minutes recapping 2012 and discussing our priorities for 2013 and beyond. Overall, the business delivered a third consecutive year of constant currency revenue growth despite challenges from compliance-related changes affecting Mexico and Latin America, economic softness in Europe and competitive pressures in some parts of Consumer Money Transfer business. Our digital and electronic account-based money transfer business grew rapidly, and we continue to see our online channel attract new customers. For the year, electronic channel revenue increased 27% and now represents 4% of total company revenue. Although we're seeing in business solutions, revenue growth was not as strong as planned, we made good progress integrating the Travelex acquisition and further expanding our product offerings and geographic reach. Some of the great aspects of our business model is generating strong cash flow. In 2012, we continued this trend and cash from operating activities reached approximately $1.2 billion last year. Over the course of 2012, more than $1 billion was returned to shareholders through a combination of stock buyback and dividends. Moving to 2013, our strategies are focused on 3 key initiatives

[Scott T. Scheirman:]

Thank you, Hikmet. As I review 2012 financial results, I will primarily focus on the fourth quarter. Similar information for the full year can be found in our press release and the attached financial schedules. Overall for the quarter, we reported consolidated revenue of $1.4 billion, which was flat with the year ago quarter on both a reported and constant currency basis. Consolidated pro forma constant currency revenue, including a full quarter of Travelex Global Business Payments in the prior year period, decreased 1% and was negatively impacted by 1% by the Vigo and Orlandi Valuta brands. Revenue for the Vigo and Orlandi Valuta brands declined over 50% primarily due to the Mexico location reductions in the third quarter, which resulted from the Southwest Border compliance changes. Vigo and Orlandi Valuta represented about 2% of total company revenue for the full year. In the consumer-to-consumer segment, revenue decreased 2% on a reported and constant currency basis, with transactions down 1% compared to the prior year period. Excluding Vigo and Orlandi Valuta, Western Union branded consumer-to-consumer constant currency revenue grew slightly in the quarter on transaction growth of 3%. C2C cross-border principal declined 3% in the quarter or 2% on a constant currency basis, an improvement from last quarter's rate. Western Union branded principal increased in the fourth quarter. C2C principal per transaction declined 2% year-over-year, which also represented an improvement from the third quarter rate. Turning to the regions. C2C revenue in the Europe and CIS region, which represented 22% of total company revenue, decreased 5% year-over-year. The decline included a negative 2% impact from currency translation. Transactions in the region were flat with the year ago quarter. Although much of Europe remains soft, Germany continued to perform well. And overall revenue transaction trends for the region improved relative to the third quarter. Turning to North America, revenue declined 9% from the prior year and transactions were down 6%. The region represented 19% of total company revenue. U.S. outbound revenue declined in the quarter, while domestic money transfer revenue was flat on transaction growth of 7%. U.S. outbound revenue was impacted by some of our pricing actions, which, as we mentioned, are meeting our overall expectations. Mexico revenue declined 25% and transactions decreased 21% in the quarter. Mexico revenue is being impacted by a full quarter of the compliance-related reduction in Vigo locations and by the pricing investments that were implemented in the quarter for the Western Union brand. For the Western Union brand, Mexico revenue declined 8%, while transactions increased 2% for the full quarter. As Hikmet mentioned, transaction results improved to mid-single-digit growth in December, following our pricing actions. In total, Mexico represented 4% of total company revenues in the quarter. While Mexico revenue trends will be very challenging until we reach the anniversary of the Vigo location reductions and the pricing actions, we're actively working to expand our agent locations in the country and leverage the Western Union brand. Regarding the Southwest Border agreement. The Monitor's term was scheduled to end July 31, and we are continuing to work diligently with the Monitor's recommendation. We have spent over $40 million on Southwest Border compliance activities since we signed the agreement in early 2010 and made major changes to our business model in Mexico. While we have devoted significant time and resources to these efforts, we do not expect to have all of them fully implemented by July 31 due to their extensive and complex nature. Western Union Business Solutions was recently added to the scope of the Monitor's review. And in late January, the current Monitor resigned. The new Monitor is in the process of being identified. We're conferring with the State of Arizona about the company's progress and implementing the recommendations and the implications for the agreements. We will update you when we have further information about the status. Turning back to the Middle East and Africa region. Revenue in the quarter increased 3% on a reported basis, including a negative 2% impact from currency, while transactions grew 6%. Trends improved compared to the third quarter, as strong outbound business from the Gulf States help drive the growth. The Asia-Pacific region was flat in the quarter -- the Asia-Pacific region revenue was flat in the quarter, including a positive 1% impact from currency translation with flat transaction growth. China revenue increased slightly in the quarter, but this was offset by declines in other large inbound markets. The Latin America and Caribbean region revenue grew 2%, including a negative 2% impact from currency. Transactions declined 5% in the quarter and were negatively impacted by the Vigo and Orlandi Valuta compliance-related changes implemented in the third quarter. Westernunion.com C2C revenue increased 16% on a reported basis and has no impact from currency. Transaction growth accelerated to 46%, largely driven by the success of promotional and enterprising investments intended to accelerate customer acquisition. As a reminder, westernunion.com results are not included in the growth rates for the other 5 regions, although they are included when we discuss specific country trends. Total electronic channel revenue, which includes westernunion.com, account-based money transfer through banks and mobile increased 22% in the quarter. Electronic channels represented 4% of total company revenue, up from 3% of revenue in the year ago period. Revenue from account-based money transfer through banks increased 37%. We now have nearly 115 banks signed for account-based money transfer, with service launched at over half of these banks. Prepaid revenue increased 16% in the quarter. The prepaid business, including third-party top-up, represented approximately 1% of company revenue. Prepaid cards were available at approximately 40,000 retail locations globally at the end of the quarter, including approximately 1,500 locations outside the U.S. Turning back to the total C2C business. The spread between transaction and revenue declined in the quarter was 1 percentage point, and there was no impact from currency. For C2C, the impact of net price decreases was approximately 2% in the fourth quarter, while mix had a positive impact of approximately 1%. For the full year, the pricing impacts was approximately 1% on both C2C and total company revenue. Moving to the Consumer-to-Business segment. Revenue decreased 1% in the quarter, including a negative 3% impact from currency translation. South America continues to have steady growth, but this was offset by declines in U.S. walk-in business. Business Solutions reported a revenue of $93 million in the quarter, which compared to $68 million a year ago. On a pro forma basis, including a full quarter of Travelex results in the prior year period, Business Solutions constant currency revenue was down 2%. Our Business Solutions customer account continues to grow, and we now have a presence in 30 countries compared to 23 a year ago. The transactions are growing in double digits, but principal per transaction declined, an indication of the soft global trade conditions. Turning to consolidated margins. The fourth quarter consolidated GAAP operating margin was 20.1%, or 20.9% excluding $12 million of Travelex integration expenses, compared to 25.0% in the prior year period and 25.4% excluding $5 million of integration expenses. The current quarter includes $31 million of expenses related to new cost-savings initiatives. In addition, the margin was negatively impacted by the higher Business Solutions bank fees and other spending, pricing investments, increased marketing, higher compliance related to the Southwest Border and Dodd-Frank and increased bad debt expenses. EBITDA margin was 25.2% compared to 29.2% a year ago, excluding integration expenses in both periods. Other expense net was $41 million in the current quarter compared to $6 million a year ago. As a reminder, in the fourth quarter of 2011, we recognized a gain of $20 million related to the revaluation of the company's previous ownership position from European superagent, Finint, and a gain of $21 million on foreign currency forward contracts related primarily to the acquisition of Travelex Global Business Payments. Reported earnings per share in the quarter was $0.40 compared to $0.73 in the prior year. EPS was $0.42, excluding Travelex integration expenses, which compared to $0.40 in the prior year excluding the $205 million tax benefit related to the IRS agreement. EPS in the current quarter includes $0.03 of expenses related to the cost-savings initiatives. The C2C operating segment margin was 25.0% compared to 28.0% from the same period last year. The margin was impacted in the quarter primarily by cost-savings initiatives and expenses, price investments, increased bad debt expenses and higher market. The Consumer-to-Business operating margin was 17.0% compared to 27.3% in the prior year period. The margin decline was primarily driven by the impact of the renegotiation of the third party sales and distribution agreement, which should benefit C2B margins in future quarters, and expenses related to cost-savings initiatives. Business solutions reported an operating loss of $18 million for the quarter compared to a loss of $2 million in the year ago period. Last year's operating loss reflected only a partial quarter of Travelex Global Business Payments following the November acquisition. The current quarter's $18 million loss included $18 million of depreciation and amortization and $12 million of Travelex integration expenses. The depreciation and amortization of last year's fourth quarter was $13 million, while integration expense was $5 million. Bank fees from higher transactions and IT and compliance spending also increased compared to last year. Turning to our cash flow and balance sheet. We once again generated strong cash flow in 2012. Cash flow from operations for the year was approximately $1.2 billion, which includes the impact of $92 million of net tax payments relating to the agreement with the IRS. We have approximately $100 million of remaining tax payments related to this agreement, which we expect to pay in 2013. Capital expenditures in the quarter were $85 million and included increases in agent signing bonuses, including some major renewals. For the year, capital spending was just under 5% of company revenue, in line with our outlook. Depreciation and amortization expense was $62 million in the quarter. At the end of the year, the company had debt of $4 billion and cash of $1.8 billion. Approximately half of the cash was held by United States entities. In the fourth quarter, we issued $750 million of debt, including $500 million of 5-year notes at a coupon of 2 7/8% and $250 million of 3-year notes at a coupon of 2 3/8%. We plan to use a portion of the proceeds to pay out $300 million of notes that mature in March. During the fourth quarter, we spent $351 million to repurchase approximately 27 million shares at an average price of $13.12. In addition, we declared $72 million in dividends, which were paid in December. As Hikmet mentioned, we returned over $1 billion to shareholders through share repurchases and dividends in 2012. We repurchased 51 million shares last year, or just over 8% of total shares outstanding. As of year end, we had 572 million shares outstanding and $394 million remaining in our repurchase authorization, which expires at the end of 2013. Turning to our expectations for 2013. Our outlook reflects the strategic actions we are implementing this year to drive future revenue growth and enhance long-term profitability. The strategic actions are expected to negatively impact revenue and profitability in 2013 but lead the growth in 2014 and 2015. We expect the economic environment of 2013 to be similar to 2012. The outlook includes a pricing investment of approximately 5% of total company revenues, approximately 6% to 7% of C2C revenues in 2013. We expect these pricing investments to improve transaction trends this year, with Western Union branded C2C transactions anticipated to increase mid to high-single-digits in 2013 compared to 4% in 2012. Total C2C transaction increases are expected to be about 2 percentage points lower than Western Union brand due to the clients from the Vigo and Orlandi Valuta. The transaction growth rate should improve sequentially as we move through the year, as the pricing and other actions take effect. We have only implemented about half of our planned pricing investment so far and are still building awareness of the actions in many markets, so we would expect to see an overall transaction lift for the Western Union brand beginning in the second quarter and then see acceleration as we go through the rest of the year. To increase productivity and fund a portion of our growth base spending, we're implementing additional cost-savings initiatives. Net impact of these cost-saving initiatives is expected to be negative in 2013 due to the upfront costs but beneficial to margins and profits beginning in 2014. The outlook includes approximately $45 million of expenses from new cost-savings initiatives this year, which is in addition to the $31 million incurred in the fourth quarter of 2012. These initiatives include expenses such as severance, outplacement and other related benefits, and expenses related to relocation of certain operations to existing company facilities or third-party providers. Cost-saving initiatives are expected to generate approximately $30 million of savings in 2013 and approximately $45 million of savings beginning in 2014. The 2013 outlook also includes approximately $20 million of expenses for continuing Travelex integration. As a result of all these factors, the outlook for revenue and margins in 2013 is

[Operator:]

[Operator Instructions] And our first question is from Bob Napoli of William Blair.

[Robert P. Napoli:]

On your pricing investments that you've made this year, your -- if you -- your pricing gap, I think, versus competitor's has narrowed or is narrowing but is still relatively wide. How confident are you that you won't need abnormal levels of pricing investments beyond what you've announced so far?

[Hikmet Ersek:]

Well, Bob, thank you for the question. If you look at our business, we are pretty confident that the existing pricing action will work. We've done many pricing actions in the past. I've personally done about more than 100 pricing actions -- hundreds of pricing actions in my career. And typically, they come back after 12 to 18 months also to our revenue growth. The pricing actions we implement during the early signings, it's really too early. We started mid-November, beginning of December. But as I mentioned before, the U.S. to Mexico pricing is working so far so good pretty well. We see the price indications in December. Bank of Mexico data shows that there's a decline on principal, but we have a mid-single-digit growth, right, Scott?

[Scott T. Scheirman:]

In Mexico.

[Hikmet Ersek:]

In Mexico, that corridor, so we are beating the market's earlier indications. We've been -- being in so many corridors, we adapt pricing actions to the customer needs. But we are pretty confident that we are turning back in 2014 to 1% to 3% our usual pricing investment. And so the first indications are so far, so good.

[Glenn T. Fodor:]

Okay. On your westernunion.com business, I mean, obviously, great transaction growth, 46%. Revenue growth at 16%. First, what percentage of that business is card-based, credit or debit versus ACH?

[Hikmet Ersek:]

Well, first of -- we don't -- I don't think we give the numbers here, which percentage is credit cards and ACH. But many is used by the cards. And are -- we are very [indiscernible] despite the growth rates here. We are getting new customers. Just a reminder, 80% of the customers are new to our brand, new to the westernunion.com. Never used Western Union, but new to Western Union data they are using. And we grew 46% on transactions. So that's the current environment, the number that's expected in westernunion.com.

[Glenn T. Fodor:]

Last question just related to that. Are there additional pricing investments in the westernunion.com sector to come?

[Scott T. Scheirman:]

Bob, this is Scott. I don't want to get ahead of myself as far as what pricing we might be doing in certain markets for competitive reasons. But we feel like we're well positioned in westernunion.com, 80% of the customers are new. And to circle back on your one question, just to add -- to color what Hikmet said that as far as the funding methods, it's primarily credit cards for us today. But that's where we see an opportunity as we think about growing this business to provide our customers with different funding sources and payout sources, not only leveraging our 500,000 location network that being able to drop money in the bank accounts, but allowing customers to pay through ACH and other ways. So that's one of the things that allow us to get to that $500 million business by 2015.

[Operator:]

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

[Tien-Tsin T. Huang:]

Just wanted to ask about -- I know there's a lot of detail shared here. Just -- I'm curious, the loss of Vigo and the OV business, were you able to recapture that with your pricing initiatives? What's -- what are you -- most of the intelligence telling you in terms of recapture of share?

[Hikmet Ersek:]

Well, we are basically growing on the Western Union brand business. We did not capture that on Vigo and Orlandi Valuta. We still have location loss last quarter. As you know, Tien-Tsin, about 7,000 locations in Mexico. We are very focused to expand our location network in Mexico. But the pricing actions that we did is -- was on the Western Union branded transfers, and that's working pretty well. The loss of Vigo and Orlandi Valuta is still here, and it's the majority of why the corridor is losing on the performance. But I'm very pleased with the Western Union branded price actions.

[Tien-Tsin T. Huang:]

Okay, good to know. And just on the -- I'm curious, just with all the price cuts, it sounds like you still have a little bit more to do, and we'll learn more about that. But what's been the agent response to the price cuts? And I'm curious of the higher commission comment is tied in any way to the pricing investments that you're talking about or if that's separate?

[Hikmet Ersek:]

I think that's 2 separate things, Tien-Tsin. The agent response were quite positive because our brand attracts traffic to the retail network. And agents were very pleased that they can gain. Again, our ultimate goal is to grow, and it brings traffic in 2013. And they are pretty pleased on that. I did not see any agent negative reaction from market or from somewhere, I didn't hear it so far. Regarding on the agent commission. As you know, that we have the agent's commission -- agent agreements for 5 to 7 years in average. And over the few years, it has been declining. '13, we have a little bit higher commission rates, Scott, right? But generally, our goal is, as you know, bringing down the commission rates and have been situation. I don't see as an early signing that it's a competitive issue or pricing issue. I see that as agent renewal timing issue.

[Tien-Tsin T. Huang:]

Okay, so it's just timing. Very good, that's good to know. Last one and I'll jump off. Just the -- you've returned a lot of capital to shareholders, obviously. But I guess the implication for '13 is a stepdown in buybacks. Is that just a -- again, is that a timing issue or a little bit of a pause, or could that actually step up as the year progresses?

[Scott T. Scheirman:]

Tien-Tsin, this is Scott. We generate strong cash flows historically, $1 billion plus for sure and, historically, have been very committed to getting cash back to our shareholders. Just in 2012, between dividends and buyback, over $1 billion. In fact, in the fourth quarter, $350 million of buybacks. So we're committed, between dividends and buyback in 2013, to return $700 million. We want to continue to target an investment grade credit rating as we move forward. And Hikmet and I continually have dialogue with each other and with the Board discussing our cash flows and how to best to deploy those for our shareholders as we move forward. But our track record has been strong, and I think $700 million is a strong step forward right now.

[Operator:]

And the next question is from Sara Gubins of Bank of America Merrill Lynch.

[David Chu:]

This is David Chu for Sara Gubins. What percentage of your agent base is WU branded versus non WU branded?

[Scott T. Scheirman:]

David, a majority of the agent base is WU branded, if you will. The revenue that we called out for the Vigo and Orlandi Valuta is about 2% of our revenues. So the rest of the network is really, it's a Western Union network primarily.

[Hikmet Ersek:]

Yes. And as you know, Vigo and Orlandi Valuta is mostly Mexican, Latin America.

[David Chu:]

Okay, great. And is there -- can you share kind of your expectations for B2B in 2013?

[Scott T. Scheirman:]

Yes, David. In simple terms, we expect the revenue growth rate and profitability to improve in 2013 compared to 2012. And a couple of things have been really driving that. And first I would say is that we're in a market that's growing. The global market for trade, if you will, is probably growing anywhere from the mid-single-digits to the high-single-digits, depending upon the period. And then the team in London around the globe is very focused on driving increased sales effectiveness, so we're getting very customer-focused there. We're going to expand to more countries. A year ago, we're in 23 countries. Today, we're in 30. When we have this discussion a year from now, we're going to be in more countries. And then we also have an opportunity to diversify our product offering. An example I would give you is we have option products, forward products, but not in all countries. We have opportunities to move those products into other countries. So the simple answer coming back to it is we expect to see revenue growth and profitability improve in '13 compared to where we were in 2012. On a long-term basis, we expect our top line to grow that business in the low-double-digits from a revenue standpoint.

[Operator:]

And the next question comes from Darrin Peller of Barclays.

[Darrin D. Peller:]

Just a quick question first on the corridors that you've actually addressed. I know you can't specifically mention all the ones by name, but just give us a sense maybe how many you've done or how many you still have to do as part of this pricing initiative this year? Can you just tell us maybe percentage-wise how many actual corridors have more to go? And then just a follow-up on pricing.

[Hikmet Ersek:]

So corridor-wise, we won't disclose it. But there's 25% -- we plan about 25% of our revenue -- of our business putting some pricing actions. Some are related to the compliance issues, like in -- some regulatory compliance issue and U.S. to Mexico. But some of them like U.S., the Europe to Africa, and especially France to Africa. It's working pretty well. We did some in westernunion.com, the transactions growth lifted very well, and the -- we have a good traction there. And also, we are planning some U.S. to Latin America. It's in early stages. We started quite late. We do some marketing programs behind that. But please understand that for competitive reasons, I don't want to give more corridor-specific...

[Darrin D. Peller:]

That's fine, I understand. Just a quick follow-up to that, though. I mean a couple of years ago, it sound -- I remember you changed domestic pricing, and the result is very solid. You had great transaction growth pretty immediately. I think it lasted about 1.5 year, where transactions were well above what you'd even -- 20%-ish type range, and then it came down and moderated. And it seems like it's now slowing to -- I mean, you tell me, I think it was down to low-single-digit. I don't remember what you said exactly before, but it's down again. And is that because of just some of the pricing changes you're doing now that go sort of touch on the domestic corridor again and that's having an impact on revenue and transactions now? Or can you help us understand why it wasn't more sustainable, I guess?

[Hikmet Ersek:]

I'm very pleased with the DMT -- U.S. DMT transaction growth. It's 7%.

[Scott T. Scheirman:]

Yes. During the last 3 quarters, it's grown 7% and 8% for the year. So we've got strong, I'll call it high-single-digit transaction growth. Yes, and what you're seeing is some mix where we're seeing more growth in the lower bands, call it 0 to 50. Not quite as much growth in the higher bands. But as you think about what we've done to domestic money transfer compared to having maybe not done anything, now we're seeing more transactions, more customers in the franchise. So as we think about evolving our brand and evolving our product offerings, we've got more touch points with customers. So I still -- we're still very pleased with the success of the domestic money transfer repositioning and pricing that we've done.

[Hikmet Ersek:]

Yes. And 2 years ago, it was really going down.

[Darrin D. Peller:]

But one last question on the dot-com channel. With regard to ACH, I think that came up before. I mean that's definitely one other alternative for help -- to help you price efficiently going forward. How far off do you think you are from getting that capability in terms of more real-time and authorization to go or some of your competition going forward?

[Hikmet Ersek:]

It depends really on the countries. We are very far on the ACH in many countries, especially in the European countries to getting money from your account. It's very common and direct in real-time. And it has definitely better interchange fees with -- than the credit cards. But most of them are still credit card transactions. And the team is very -- it's going very fast, the ACH, and the direct debit is going pretty good. So I believe that will, long term, also help our profitability on the westernunion.com.

[Operator:]

And the next question is from Tom McCrohan of Janney.

[Thomas C. McCrohan:]

What was the transaction growth this quarter adjusted for the situation in Mexico?

[Scott T. Scheirman:]

Are you looking for the total C2C transaction growth or just for Mexico itself?

[Thomas C. McCrohan:]

C2C. Total C2C.

[Scott T. Scheirman:]

All right. Total C2C, it was up 3% transaction growth.

[Thomas C. McCrohan:]

Okay, that's helpful. And how many of your customers for the C2C segment have a bank account?

[Hikmet Ersek:]

About 70%.

[Scott T. Scheirman:]

Of our senders.

[Hikmet Ersek:]

Senders and...

[Scott T. Scheirman:]

And the majority have a bank account.

[Hikmet Ersek:]

Majority of the bank account.

[Thomas C. McCrohan:]

7-0?

[Hikmet Ersek:]

7-0, yes.

[Thomas C. McCrohan:]

7-0, got it. And how does your pricing in that account-to-account corridor or segment compare to your competition with these pricing actions? Are you now in line or below? Just give us some sense.

[Hikmet Ersek:]

It depends really on the corridors. It depends really -- I think they are too much gaining market share there. Just a reminder, our -- westernunion.com is growing 46%. Our account-to-account is growing 50%. And 80% of the customers are new. So we don't give specific corridor numbers, but I'm very pleased with the account-to-account transactions. You signed 115 banks and deactivated, out of the 115 banks, 60 of them and the transaction growth is about 50%.

[Scott T. Scheirman:]

And, Tom, as you know, most of our business is really cash-to-cash or online-to-cash. So we're just really getting started on delivering 2 bank accounts, so not much of our business today actually goes to accounts.

[Hikmet Ersek:]

Yes, additional reports from [indiscernible].

[Thomas C. McCrohan:]

And so even the bank relationships that you've been growing, is that account-to-cash for the most part?

[Scott T. Scheirman:]

Most of that, yes.

[Hikmet Ersek:]

Primarily, yes.

[Scott T. Scheirman:]

Account-based money transfer, which is primarily account-to-cash...

[Hikmet Ersek:]

That it come to retail.

[Scott T. Scheirman:]

Yes. As Hikmet and Mike mentioned, I think dropping funds into an account is an opportunity for us, for sure.

[Thomas C. McCrohan:]

Great. And my last question is just on the regulatory side, with this pushout, I guess, in the deadline for Rule 1073. What -- do you have any insight into how that's going to impact Western Union? And it seems like the banks will have more of a problem complying with these new rules. I just wanted to confirm that with you in how do you -- do you view that new rule as an advantage or a disadvantage for you folks going forward?

[Scott T. Scheirman:]

Yes, I want to make sure you're referring to Dodd-Frank, is what you're referring to?

[Thomas C. McCrohan:]

Yes.

[Scott T. Scheirman:]

Yes, yes. It's hard for me to speak for the banks, but I can speak for what we're doing at Western Union. And we're doing all the things that we need to be ready for that. The initial date was going to be early February, then the regulatory authorities have pushed that out. So probably at the earliest will be mid-summer right now, and the regulatory authorities are still working for that. But we've been working diligently on that and feel like when the time comes, we will be well prepared and our agents will be well prepared.

[Operator:]

And our next question is from Bryan Keane of Deutsche Bank.

[Bryan Keane:]

Just want to ask, it looks like the pricing actions have kind of gone to your expectations. And I know it's early, but as we go into '13, obviously you'll implement more. But I guess how confident are you that you return to revenue growth and profit growth in '14 and '15? And maybe you can just give us why you're confident on that.

[Hikmet Ersek:]

Yes. Bryan, I am pretty confident because we did many pricing actions. And every pricing action, every big investment, of course, in the beginning has a question. But based on my experience, based on the company experience, it takes about 12 to 18 months depending when you start with the pricing. And the pricings we start, I'm confident that in '14, you will see positive impact here on the revenue impact. And so we are targeting 25%. And, Bryan, as you remember, DMT pricing investment, which we did about 2 years ago, in the beginning it has a transaction growth, high-transaction growth. And after about 12 to 18 months, the revenue came also. And we were very pleased and turned around this business. So based on all the experiences, I believe it will be successful.

[Scott T. Scheirman:]

And, Bryan, the only thing I would add to what Hikmet said is pricing is one lever that we're looking at to grow the business in '14 and '15. But we're rapidly expanding westernunion.com. We're doing some really good things with account-based money transfer. We feel like we're on track to grow B2B faster in '13 than we did in '12. We expect some growth out of the C2B business. So I think all those things combined give us confidence that in '14 and '15, we can grow revenues and profits.

[Bryan Keane:]

And then thinking about pricing as we look out, it sounds like we're likely to go back to the typical 1% to 3% decline cycle that we were in previously. I guess, what gives you confidence that there's nothing in the compliance or something that -- things here that you don't know about? Or I mean I guess one of the ways to think about it, I guess, is there's probably -- is there anything out there that could be as large as the situation that happened with Vigo and Orlandi Valuta that could have that kind of an impact on price?

[Hikmet Ersek:]

Well, from today's point of view, I really believe that we're going to come to 1% to 2% pricing environment. The regulatory environment is challenging. It's -- obviously, they are very [indiscernible]-regulated market. But all our investments, about $100 million a year that we invested to anti-money laundering compliance, are really putting us a industry standard. Being a market leader puts us in an industry standard, and we want to be a best-in-class and see that as a long-term competitive advantage. I think regulators are looking also on us, and we do have a duty to satisfy customer needs and we are working very hard on that.

[Bryan Keane:]

Okay. And then lastly for me, just 2 macro questions. I know pre the Great Recession, WU quoted that the construction vertical was about 20% to 25% of revenue. I'm just curious what that number is now in 2012, after this year. And then secondly, immigration reform, a lot of talk about that in DC. Can you give us some thoughts on if you think that would be a positive or a negative for Western Union?

[Scott T. Scheirman:]

Yes, Bryan. This is Scott. On the construction, what I would tell you just broadly is that if you think around the globe, our customers come from -- working on 100 different areas. So whether it's in nursing, the service industry, retail, construction, so I would say we continue to be diversified around the globe. I don't have a specific number to give to you on construction. On immigration, in general, what we'd say is that we're not just pushing for one side or the other. But for immigration reform, we think it would be good just so that everybody understands what are the rules, what are the regulations. So overall, we support immigration reform...

[Hikmet Ersek:]

Yes, I think it's -- Bryan, I think it will have a positive impact. I think -- the support immigration reform, I think the people who are immigrated to the U.S. do have relatives, loved ones, and they would like to use a service like Western Union, I believe.

[Operator:]

And the next question is from Jason Kupferberg of Jefferies.

[Jason Kupferberg:]

I just wanted to ask a little bit more about kind of post 2013. And I realized it's really too early to be precise in some answers there. But it feels to me like probably one of the biggest issues for investors is what is the post 2013 earnings power of the company? I mean do you think, is it realistic at some point in time beyond this year for EBIT margins to get back to the mid-20s in a decent macro environment, or are we kind of going to be stuck down more in the lower 20s just given what the pricing environment looks like?

[Hikmet Ersek:]

Scott, just jump in. But generally, what I would say that our business model is attractive too and is built to grow the top line. Every top line growth will help to increase our margins. And so we are -- we will set up in 2013 to bring higher growth, top line growth and profit growth. Scott, any...

[Scott T. Scheirman:]

Yes, there's a couple of things I would add, Jason, to build on Hikmet's point. The most important thing for us for profitability is driving the top line revenue. That is really key. And if you think about our business model, 65% of our costs are variable, about 35% are fixed. And then [indiscernible] that the broadview I put this around is that we're not providing any specific outlook for '14 and '15. It's just too early. But if you think about our business, our C2C cross-border business, we're in a healthy industry where the industry is growing principal in the mid-single-digits. And our long-term goal is we want to not only grow that rate but gain more than our fair share of growth there as we move forward. Also, the B2B business, it's in a market that's growing probably mid to high-single-digits, depending upon the period you look at with what we trade. And then finally, as you think about margins, and this is my -- probably more particular to 2014, is that there is about $65 million of cost that we're going to incur in 2013 that we don't expect to occur -- reoccur in 2014. And specifically, Jason, that's $45 million for the cost-savings initiatives that we're taking on in '13 that we won't have that expense in '14. And then there's about $20 million of Travelex integration that we're incurring in '13 that we won't incur in '14. And then the last thing I would add to that is as we think about these cost-savings initiatives, we believe that will drive about $30 million of savings this year. That'll ramp up to be about $45 million in '14. So we can get a little bit better on the cost savings. But back to the headline or the punchline. What's most important for us for margins and profitability is we want to optimize revenue growth, optimize profit growth. But the goal for us is to really drive that top line, we should be helpful to profit [indiscernible].

[Jason Kupferberg:]

Okay, yes, that's a good color. And just to ask a follow-up on the electronic channels. I guess, we would estimate that in 2012, electronic channels in total was maybe about $200 million in revenue. And I know you guys are standing by your target of $500 million in 2015. I guess I mean do you need to grow this base about 35% or so CAGR over the next 3 years to get there? Is that achievable organically without any acquisitions?

[Scott T. Scheirman:]

Yes, we think it's achievable. And, Jason, let me just throw a little bit color on your numbers just to make sure we're clear. The westernunion.com business that we believe can be a $500 million business in 2015 has about $150 million business today. So the 35% math is probably closer on round numbers to about 50%. But the punchline is that we think that, that is very achievable. And some of the reasons I would give you is we're going to expand to additional countries. We also have opportunity to give our customers more choice and convenience as far as how do they pay for that money transfer, but also how do their loved one pick up their money transfer. And we think there's additional opportunities to leverage not only the best of our cash network of the 500,000 locations but be able to drop money in the bank accounts and other things. So you saw a 46% transaction growth in the fourth quarter, and we believe that, that business will grow faster than the 40% overall rate that we had in '12 and 2013.

[Hikmet Ersek:]

Yes, I mean, the short answer is yes. It is achievable. And our operating plan, incentives, everything is built on that.

[Jason Kupferberg:]

Okay. We just need to see, I guess, that gap narrow a bit obviously between the transaction growth and the revenue growth in that channel.

[Hikmet Ersek:]

Absolutely, yes.

[Scott T. Scheirman:]

Absolutely.

[Operator:]

And our next question is from Ashwin Shirvaikar of Citi.

[Philip Stiller:]

It's actually Phil Stiller on for Ashwin. Scott, I was just wondering if you can help us with the timing of the $65 million of one-time expenses throughout 2013, and what segments those will be focused on?

[Scott T. Scheirman:]

Yes. Phil, primarily they'll be in the first 3 quarters of the year. So primarily in the first 3 quarters of the year. Clearly, the $20 million will be all in the B2B segment for integration, then the remaining $45 million will probably fall a little heavier to the C2C business. So that's about 80% of our business, and then lesser extent, to the C2B segment and the other segments.

[Philip Stiller:]

Okay. And then just one other question on the C2B business. You talked about some investment that occurred in the fourth quarter that impacted the margins. I was just wondering if you can provide some more color around that and what the impact on 2013 will be.

[Scott T. Scheirman:]

Yes, absolutely. We think that we had an opportunity to renegotiate a sales and distribution agreement that cost us some money in the fourth quarter. But we believe that, that will have benefits in '13 and '14 for sure by saving some distribution costs that we will no longer have to incur. As we think about the C2B business, it has probably a business that will have to in front of the margin on a go-forward basis and then probably have some revenue growth on a go-forward basis, too.

[Hikmet Ersek:]

Yes.

[Operator:]

The next question is from John Williams of UBS.

[John T. Williams:]

Just had 2. I don't want to harp on the westernunion.com thing. But you did talk a little bit about the delta between transaction and revenue growth. I just wanted to get some help from you on the margin structure of those transactions. Seems like they should be meaningfully higher given the lack of a send-side commission. But it seems like you might also have pricing impacting that and making it less of a factor. Could you just give a little bit detail on that?

[Hikmet Ersek:]

Yes, I think it's really a profitable model. But in the -- don't forget, as I mentioned before, the majority of the transactions are credit card transaction. It has the interchange cost fee, so it does impact. As we move more to ACH direct to bank and direct debit, the interchange fee should be more profitable. Long term, we believe that we have the savings on the send-side commissions. On the receive side, it depends on if you drop it to a bank account or if you pay it out in a retail money transfer as a cash, it differentiates from the commission side.

[John T. Williams:]

I know in the past when we've talked, you said that the margin profile is similar to the rest of the transactions that you typically see. Is that safe to say or are they somewhat higher still even after the interchange is taken into account?

[Scott T. Scheirman:]

John, let me put it in terms of this that today, the dot-com business, even though we don't have a send-side commission, we are heavier in the credit cards and we're transitioning that model. But on a long-term basis, we do see the margins being, I'll say, closer to the company average on a long-term basis. Today, because we're making some investments and we've got to do some things to scale a little bit there, the margins are somewhat lower than the company average. But we believe we can get to the company average as we get into 2015. It is a profitable business today.

[John T. Williams:]

Okay, so they're currently lower than your typical transactions is what you're saying?

[Hikmet Ersek:]

Yes, because of the investments, because of the credit card fees, they are lower than current margins.

[John T. Williams:]

Okay. Just one other question, just in capital allocation. Obviously, the business has a pretty consistent cash flow profile. The one question we constantly get from investors is just what's keeping you from taking a bigger step here and taking advantage of the dislocation in the share price and maybe doing a bigger buyback or something that's going be more weighty than executing against the current authorization?

[Scott T. Scheirman:]

John, thanks for the question because we get that question at times, too. But we have been active in deploying the capital. Again, we -- to your point, we generated billion dollars of cash flow. It's very strong, it's very consistent. We did deploy $350 million just in the fourth quarter to buy back our stock. We plan to deploy about another $400 million in 2013 to buy back our stock. And then Hikmet and I continue to have discussions with our Board, with each other. We'll take into consideration our cash flows. We do want to maintain an investment grade credit rating, because that's important from a business standpoint. But we'll continue to have that dialogue with our Board and ourselves as move forward.

[Hikmet Ersek:]

Also just as a reminder, a big part of our cash is growth. So that has also impact on our cash flow. Before we close, I just want to thank you for attending this call. As I mentioned before and as Scott mentioned before, we expect that 2013 is really a transition year. We do reset the pricing actions in key corridors. We invest incrementally on the infrastructure to drive really the future growth. We believe that '13 is a transformation year, but we are confident that we have the plan, we have the strategic actions that 2014 and '15 will be future growth year. And I'm confident that we can execute against that. So thank you again attending this call, and we will talk to you soon.

[Operator:]

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