"...First Data expects to complete the separation in the second half of 2006, and will update shareholders on the structure and timing of the transaction when first quarter results are announced in April..."
First Data Corporation
Quarter 4 2005 Earnings Conference Call
January 26th 2006
Gary Kohn
"...In 2005, the revenue and profits from these businesses were approximately $630 million and $130 million in profit. We will get back to that at the end. The new First Data. The new First Data businesses will have an intense focus on their specific customers while leveraging our global infrastructure. We will increase our focus on those sales and marketing efforts to ensure that we maintain world-class functionality across all of our business lines. While we are rebuilding our organization, please remember, each of our businesses currently holds the number one or a very strong number two in the markets that they serve. The combined growth rate targets for revenue and earnings per share for the new First Data that excludes Western Union will be 8 to 10% and we’re confident that we can meet or exceed that objective.
Our rationale for spinning off Western Union is as follows. We believe a separate Western Union will maximize shareholder value both in the short-term and the long-term by creating an independent company with a management team more focused on its own specific customers, strategic initiatives and growth plans. Western Union clients are consumers, not businesses. All of the other First Data businesses, their clients are businesses. Other than the obvious synergies, network, call centers purchasing powers,synergies are either aspirational, futuristic or very limited here.
This move significantly enhances Western Union’s ability as a separate worldwide high-growth company to attract the best management talent from anywhere around the globe. There will be no competition for capital here. They will be very focused on expanding the power and scope of the Western Union brand. We ran a search of companies around the world and Western Union as a separate company would be one of only four companies in the world with over 4 billion in revenue, 30% profit margin, greater than 12% revenue growth and less than 5000 employees.
Now I am certainly not going to tell this group what the marketplace, how the marketplace is going to value Western Union, but the average market cap of those four companies is $27 billion. Now if you apply two other filters here after this test, one, which company has over 155 years of life, and which company was in and out of bankruptcy in the last decade, you only have one company left; this is Western Union, which will be unique in the world.
Now there are many open the items on this spin, and I know you have a lot of questions. I will give you a couple of answers here, but many more will come and we probably won’t make many comments other than these before April. Christina Gold will be the CEO of Western Union. We will have a world-class management team in place at Western Union within six months, and that will include both internal and external candidates for the position.
The Board of both First Data and Western Union, the new First Data, will be guided primarily by independent directors with experience and skills appropriate for each business. Furthermore, we’re going to take this opportunity to make sure that the governance of both boards will be in the top quartile of best practices for corporate boards. I might add that our existing Board feels that they are already there and may be at the top, so we will just duplicate kind of what we have; not duplicate the Board members, but….
Headquarters for First Data will remain in Denver. The cost of any changes we’re making here are not in your 2006 numbers and the capital structure of each company will be designed to create very strong, as I said before, credit ratings for each company. While we still have Board approval for our stock buyback plan, we will discontinue that until after the spin. And we don’t anticipate any changes in the pro rata dividend paid by First Data, but Western Union will have its own dividend policy, which will be determined as they go out as a public company.
Now let’s take a look at Western Union. As you can imagine, Christina is going to be quite busy in the next couple of months, so I want to give her voice a rest and I’m going to take a run at describing Western Union business here. Our Western Union business generates over $4 billion in revenue and $1.3 billion in profit. It employs 4700 people with a physical presence in more than 200 countries and territories. We offer money transfers under the Western Union, Dego and Orlandi Valuta brands. In addition, we offer other services through our agent network.
The investment characteristics of the Western Union business are clear and easy to understand. We wire money with speed, trust and reliability. This business delivers strong revenue and profit growth year in and year out with outstanding operating margins supported by a first-class global brand. The significant both near-term and long-term potentials come pretty basically from the expansion of our agent networks location, continued growth in the global remittance market, global loyalty programs like our protection insurance product, which I’ll describe in a minute, and alternative distribution points, like Western Union.com.
The two issues about this company and the marketplace that seem to reoccur all the time, particularly in the press, is called regulation and compliance and technology. Here are my thoughts on those two issues. With regard to regulation and technology, we helped write the rules. We operate the highest level of compliance in the industry and we work with regulators to ensure that the market is safe. There was recent article about the Red Cross and the Katrina disaster where there was some fraud there. We helped identify the fraud with two Western Union and with the regulators. Basically, we planned it down. The situation there was, there were some Red Cross call center folks that were a little weak in geography and they thought that the relief money should go to California as opposed to New Orleans. We straightened that out and got that working. But that is an example of how, when we monitor the system, we can see that.
I will give you one closer to home. My son got hooked up on the Internet with someone that was going to give him a plasma TV, this is a true story, for $2500. It was a $2500 plasma TV, he was going to give it for 500. He goes to Western Union and wires the money. Three o’clock in the morning that day, they call him up and say, you can buy the plasma but not through us, because we think this is a bad guy you’re sending this thing to. So I want to thank you for the $500 you saved me here. That is a true story. I have other one this year Western Union. He did not know who we were either, so he wasn’t just trying save my son here.
With respect to technology, we offer money transfers of all types. Our systems allow consumers to send money in many forms, cash to cash, direct to bank, cash to card, cash to ATM. But I want to make it clear, here technology does not drive this business, it’s the consumer preferences that drive this business. We will meet consumer needs no matter how high or low-tech channels they choose to use in sending or receiving money. But for now, they want cash.
In 2005, Western Union’s share of the worldwide cross-border remittance market, which includes Vigo, increased to 15%, up from 12% in 2004 and 10% in 2003. Every year, Western Union continues to gain share in this very fast-growing cross-border remittance market. Even with our past success here, we are not resting our laurels and we have developed what we believe are the right strategic strategies to continue our growth and maintain our market leadership. In 2006, we will expand our distribution network. We believe our strong distribution network, which is now 271,000 locations, I think that’s a new number for most of you, includes Vigo’s 18,000 locations in more than we have in Western Union, more than 200 countries and territories, as I mentioned before.
Additionally, we are focused on building our brand and enhancing our customer experience. Today, we have what we believe is the platinum standard in our marketplace and we remain committed to continuing to improve our customer service. Satisfied customers are repeat customers and repeat customers are key to driving our long-term growth with superior operating margins.
Finally, we will leverage the local knowledge, and this is really important, of the employees and agents. They know what customers want, particularly the agents that help us out here, for product and services as we go forward. In today’s rapidly evolving economy, the customer needs change and it’s imperative that we continue to anticipate those products and deliver the services they demand in the future. And I will give you a little more on these strategies.
One of our key successes in our global brand is our international footprint. We have carefully constructed over the last decade, the following is a very interesting statistic. In 1995, less than 40% of our consumer-to-consumer transactions touched a non U.S. location. Today, 80% of our consumer-to-consumer transactions touched a non-U.S. location. As you can see here on this slide, we have built a significant presence around the globe. The biggest gee-whiz on this slide is probably Europe, Middle East, Africa and South Asia. They now account for 50% of our agent locations and 45% of our revenue. 10 years ago when we started this, we had very little presence in this region. Basically, we had about 5% of our revenue coming out of there.
By developing a global digitation network, we have provided our customers with an unparalleled service platform and the ability to reach almost anywhere in the world. The growing international migrant population illustrates the opportunity for Western Union ahead. Today, there are more than 185 million people that live outside the country of their origin. This group is expected to grow to more than 283 million, about the size of the United States by 2050. Specifically, China, India, Mexico and the Philippines are providing an enormous number of immigrants to other parts of the world. As these individuals move and they continue to move around the globe, Western Union will continue to benefit significantly from this activity.
As I stated, one of the key elements of our successes to satisfy, retain and increase the lifetime value of our customers. We have identified the appropriate benchmarks which we can measure, on which we can measure our long-term success, and these are retention, frequency of use as well as U.S. same-store sales growth. By focusing on these benchmarks, we can react and make necessary operational adjustments or enhancements to our basic service, and then we can offer new products and services for those customers.
One example of an enhancement that we have brought to the marketplace is the loyalty program. You’ve heard a lot about those in the United States, we have one in Western Union. Our loyalty program offers our customers benefits like faster point-of-sale, service at the point-of-sale, rewards like free phone time and something, a very interesting product which I mentioned at the beginning, remittance protection insurance. That is basically, if you have a frequent user, someone comes in and wires basically the same amount of money every month to a loved one back at home, you can sign up for this remittance protection insurance. And basically, he tells the loved one, if anything happens to me, which basically means he dies, between when he sends the remittance one month and next month, they call up Western Union and Western Union will wire 12 consecutive months of payments that that consumer was sending before he died. A very strong product. We don’t have that throughout the entire network now, but it’s being very well accepted where it is. These and other enhancements allow us to cross-sell products and services into this marketplace. This cross-selling gives us an opportunity for additional growth.
In 2005, we had more than 5 million of these loyalty cards. That person would’ve been a member of the ability program. And we anticipate this to grow to more than 15 million by 2008. That loyalty program is now in 56 countries, not the remittance insurance, but the loyalty card, and we plan to be live in 115 countries by 2008. We believe by growing our customer loyalty programs, that will allow us to have the same long-term growth and profitability.
Now I would like to pause and welcome officially our colleagues at Vigo. The Vigo brand is well-established and highly regarded in the marketplace. The Vigo model basically complements the Western Union efforts to provide different services and different prices globally. Vigo is primarily a U.S. to Latin American money transfer Company. We believe that with our great opportunities to expand Vigo’s money transfer business around the globe and to include services like bill payment and money orders in that network. The combination of Western Union’s expertise with Vigo will enable us to bring many more choices and many more controls to customers around the globe.
The strategy at Western Union remains consistent. We continue to execute better and better each year. Over the long-term, we are confident in our ability to deliver mid-teen revenue and profit growth. In 2006, the addition of Vigo will help us deliver high-teen revenue growth and mid-teen profit growth. As always on a quarterly basis, we’re committed to updating you on how the business is performing. We will continue to report on the key drivers, the number of locations, number of transactions, the transaction growth, the revenue and profit growth and the same-store sales growth.
My final comment on Western Union, and I’ve said it before but I will say it again, this is the best business I have ever seen. I have all of the confidence in the world that the performance will only get better as Christina and her team execute on their strategies as an independent public company. When we acquired Western Union in 1995, I asked the employees, I went around and asked them, why did Western Union have this problem since they had to declare bankruptcy. And the universal answer to that question was that we were in too many businesses. We lacked focus. With this move, they certainly won’t lack focus. I think they will execute very well going forward." |
