Jul 24, 2007
TRANSCRIPT SPONSOR
Executives
Gary Kohn - IR Christina Gold - CEO Scott Scheirman - CFO
Analysts
Adam Frisch - UBS Kartik Mehta - FTN Midwest Jim Kissane - Bear Stearns Liz Grausam - Goldman Sachs Charlie Murphy - Morgan Stanley Greg Smith - Merrill Lynch Craig Maurer - Calyon Securities Tim Willi - AG Edwards Pat Burton - Citigroup Tien-Tsin Huang - JP Morgan
Operator
Good day, ladies and gentlemen, and welcome to the Western Union second quarter earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr.
Gary Kohn, Vice President of Investor Relations. Please proceed, sir.
Gary Kohn
Thank you, Annie. Good morning, everybody.
I assume by now you've seen this morning's press release. Welcome to the Western Union second quarter conference call.
In a moment, I will turn the call over to our President and CEO, Christina Gold. Also joining her on the call will be Scott Scheirman, Executive Vice President and Chief Financial Officer.
On today's call, Christina will review the quarterly results and update you on Western Union's strategy. Then Scott will review the financials in more detail.
Following Scott's comments, we will have time to answer your questions. Before turning the call over to Christina, I would like to take a moment to remind you that today's call is being recorded and that our comments include forward-looking statements.
I ask that you refer to the cautionary language in the earnings release and in Western Union's filings with the Securities and Exchange Commission, including the 2006 Form 10-K, for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements. During the call, we will discuss items that do not conform to Generally Accepted Accounting Principles.
We have reconciled those measures to the GAAP measures on our web site at WesternUnion.com under the Investor Relations section. As a reminder, 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, Western Union has not authorized and disclaims responsibility for any recording, replay or distribution of any transcription of this call. With that, it is my pleasure to turn the call over to our President and CEO, Christina Gold.
Christina Gold
Thank you, Gary. Good morning and thank you for joining us today.
As you have seen this morning, Western Union reported revenue of $1.2 billion and earnings per share of $0.26 for the second quarter. We are pleased with these results, as they are in line with our expectations and consistent with our full year guidance.
Some highlights from the quarter: Our Consumer-to-Consumer segment exceeded $1 billion in revenue in a single quarter for the first time in our history. Our Mexico business saw accelerating growth in transactions throughout the quarter with June being the strongest at 9%.
These results were ahead of market growth rates for April and May. Our domestic business, which has been and continues to be affected by immigration issues and general market softness, improved.
For the domestic and Mexico businesses, we are pleased to see the June transaction trends holding in July. International turned in another strong quarter.
India and China continued to power these results and together are now 5% of Western Union revenue. We have nearly 70,000 agent locations in these two countries.
The transaction growth rate for India was 76% and it was 22% for China. Significantly, in China, second quarter revenue growth was 31%, which outpaced transaction growth.
In a subset of our international business, the nearly $2.5 billion in annual revenue generated from transactions that are originated outside the United States grew revenue at 21% and transactions at 29%. In addition, we remain enthusiastic about our consumer business segment with revenue growth of 13% and a 32% operating income margin.
I'd like to make a few more comments on highlights during the quarter, and then Scott will provide further detail on our financial performance. You will recall that to address the issues surrounding our Mexico business, we employed a four-prong strategy: to build our distribution, invest in advertising and promotion, reduce foreign exchange spreads in certain markets, and conduct community outreach to restore the Mexican consumers' conference in Western Union.
In the second quarter, we saw further evidence that this strategy is starting to work. Transactions in our Mexico business increased 5% in the quarter versus 2% in the first quarter.
Our results show that the actions we took in the first quarter got the Mexican customer back at the right price. We understand that this improved transaction growth must translate into revenue growth.
Thus, as we move through the second half of the year, we expect that revenue and transaction growth rates will converge and revenue growth will turn positive. Mother's Day in May is an important indicator for how we are doing in the Mexican market.
We are pleased to report that we exceeded last year's strong Mother's Day performance with a similar level of marketing investment. Our international business delivered transaction growth of 20% and revenue growth of 14% in the second quarter.
These results reflect the power of our distribution network of more than 312,000 agent locations, over 250,000 of which are outside the United States. In May, we met with our agents in Istanbul.
It was one of Western Union's largest agent meetings ever with 500 agent participants from 120 different countries, representing 150,000 Western Union locations. The meeting was an opportunity for me to spend time with agents.
It is clear how powerful the energy is that they bring to this business and the amazing things we can do together. It is their efforts that help build our business and ensure we connect with our customers.
We recognized many of our agents at the Istanbul meeting for their outstanding performance. For example, the Network Expansion Award for the agent with the most locations added for the year went to Wiseman Forex Limited in India.
They added a total of 2,700 new locations, which represents 60% plus growth in 2006. The Newcomer Award went to the Russian Post, which had 41,000 locations and added Western Union services to 2,000 of these locations in a six-month timeframe.
Transaction and revenue growth is ramping up nicely. Western Union is growing its market share and expanding its global presence by executing against four key strategies: (1) To expand and diversified global distribution; (2) To build our brand and enhance the consumer experience; (3) To develop consumer choice and convenience; and (4) To develop new technologies and service offerings.
Innovation is top of mind for us. We have a number of pilots in the market today, and although they are not contributing meaningfully to revenue currently, we will continue to evaluate the viability of each to ensure we are investing appropriately to drive future growth, including attracting new customers to Western Union.
Mobile money transfer -- using a cell phone to send cash -- is a promising technology that is getting a lot of industry attention. Mobile technology represents an opportunity to make Western Union service available to consumers with whom we do not do business today.
Through a pilot program now in several U.S. cities, we have demonstrated the feasibility of transferring money via mobile phones for payment at any Western Union agent location worldwide.
We are now in active discussions with leading mobile network operators and expect to launch expanded market tests this year. We are well-positioned to attract these new customers.
Moreover, we are best in class in areas that are critical to succeeding in the mobile market. We have extensive compliance capabilities and systems, the ability to handle cross-border transactions, an expansive physical agent footprint worldwide for putting cash in and taking cash out, and the trust that consumers have in the Western Union brand to get the money there.
Also in the area of new offerings, we are especially proud of our recent development with the Western Union prepaid MasterCard. As you may know, we introduced this reloadable, open-loop debit card in 2004.
We are continually identifying ways to make the card easier for consumers to find and to use. One such innovation is to provide the card in-lane at agent locations, meaning that shoppers can easily find and buy this reloadable Western Union MasterCard right in lanes at the cash register.
The card features a variety of loading mechanisms, including payroll deposits, and it can be loaded at any of the nearly 50,000 Western Union agent locations in the United States. We are currently piloting this in-lane service with our valued partner, Kroger, at 200 of its stores in the Atlanta area.
We expect to be in-lane with additional partners in the future. We are also testing a Western Union and money transfer card that is available on J-hook displays at selected Mac's convenience stores in Canada.
Mac's parent company, Alimentation Couche-Tard, is the third-largest convenience store operator in North America. It is also Canada's third-largest retailer with over 2,000 stores.
We are in the early stages of the program with Mac's, but we have already observed that customers are sending cash within Canada and to the U.S. as well as Jamaica, Nigeria, the Philippines and Korea, among others.
What's more, many of the customers using the card are new to Western Union. On the consumer-to-business side, the Western Union Global Business Payment service was launched.
This offering is a web-based service that provides small to medium-sized businesses a variety of different payment options. The pilot service is a fast and reliable way to make foreign currency payments from the United States to over 100 countries.
Another area we focused on is the possibility of using the Western Union International Bank to enter the micro finance or micro lending space, which involves loaning or advancing money to consumers. We recently held a summit in Austria to investigate the potential for a Western Union micro-lending initiative.
The meeting included a variety of attendees, including participants from the World Bank. To oversee our brand, new product and innovation efforts, we recently announced the hiring of a Chief Marketing Officer.
Gail Galuppo comes to us with more than 20 years of industry experience in financial services. Most recently, she was Chief Marketing and Customer Officer for Standard Charter Bank in Singapore.
Previously, she was with Sears, GE Capital and Discover Card. With the addition of Gail, we have further strengthened Western Union's senior management team.
The spin-off from First Data is truly behind us, and we are focused on the future, a future which will include many exciting new offerings from Western Union. Turning now to efforts to build the brand, we currently have nearly 9 million Western Union Gold cards in use in the United States and around the world.
We continue to make further enhancements to our Gold Card loyalty program. We are rolling out more non-cash rewards that consumers can earn when they use the card.
We have begun working with partners that make it possible for us to offer the customer more reward choices and to make the program more cost efficient to us. These rewards now run the gamut from discounts on food items all the way up to discounts on major appliances.
Over the past several years, our Gold Card customer database and other retention tools have helped bring on a distinct change in our business model from a transaction focus to a customer focus. We are very pleased with the Gold Card program, in particular as a means of gaining retention among customers and increasing their certainty of use.
Also on the brand front, we now offer our services through four distinct brands, Western Union, Orlandi Valuta, Vigo, and Pago Facil. Each has its unique value proposition, service level and price, giving us a portfolio to serve different consumer needs.
We have expanded and will continue to expand Vigo globally into selective markets where demand exists for this service. We introduced Vigo in Italy by opening approximately 40 agent locations in very strategic areas.
We are attracting new customers as they seem to be switching to Vigo from their previous provider. We have seen little cannibalization of our existing Western Union customer base in the overlapping geographies.
Turning now to our strategy of offering convenience and choice for consumers, you'll recall that we introduced WesternUnion.com in 2000 to make it easy to send money transfers over the Internet. In the United States, this business slowed when there was a significant increase in fraud as a result of increased retail credit and debit card database compromises.
We are working hard to solve this problem and Scott will detail more in a moment. Despite recent challenges, we remain fully committed to WesternUnion.com.
Also in the area of consumer choice and convenience, we are leveraging the Western Union network to build a substantial international intra-country business. Currently, we are seeing transaction growth of over 30% on the international intra-country transactions.
It is our expectation that the intra-country business outside the United States will be an $80 million business in 2007 with Chile and the Philippines being strong contributors. Another example of convenience and choice for customers is the work we have done in Brazil.
Until fairly recently, 100% of our Brazilian business was inbound. However, after describing the reliability of the Western Union network and services to Brazilian regulators, we received approval to open the Brazilian market for outbound transactions.
In fact, 10% of our Brazilian revenue is now outbound. As a part of our strategy to expand and diversify global distribution, we had a number of key signings and renewals in the second quarter.
Among these are Checksmart and Ahold in the United States, Australia Post, Nepal Post, Israel Post, Ecobank, an African banking group with agents covering a potential of 17 countries, and CASH Express in Bulgaria. Also, Orlandi Valuta added 14 new agents throughout Latin America and the Caribbean.
As of June 30, we had more than 312,000 agent locations worldwide, comfortably on-target to reach our year-and 2007 goal of 325,000 locations. On June 1, we renewed our cooperation agreements with Eurogiro.
As you may know, Eurogiro plays a vital role in the worldwide payment system. There are 24 Eurogiro members that act as Western Union agents, including Deutsche Postbank, La Banque Postale of France, and Correos y Telegrafos of Spain.
This is a very important renewal for Western Union because it strengthens our strategic relationships with post offices and post banks worldwide. Of the new contracts I just mentioned in the United States, Checksmart, with more than 260 locations in 11 states, previously used a competing money transfer provider.
Checksmart is now offering core services from Western Union including money transfer, money orders, and bill-payment services. This new contract gives us eight of the top ten check-cashing chains in the United States, which parallels our position of having eight of the top ten supermarket chains in the United States.
In summary, I am very proud of Western Union's accomplishments. As a quick recap, our Mexico strategy is starting to work, and we've made further progress in stabilizing U.S.
domestic and posted strong international growth. We have advanced a number of new product initiatives and hired a new CMO to spearhead these efforts.
We renewed and signed many new contracts, expanding the Western Union brand presence around the world. These accomplishments have helped keep us on course to meet our guidance for 2007.
At this time, I will turn the call over to Scott, who will explain the financial results in more detail.
Scott Scheirman
Thank you, Christina and good morning. As you have seen in this morning's press release, we delivered earnings per share of $0.26 for the second quarter.
Notably, this figure includes an incremental $8 million of public company expenses and $47 million of interest expense, which together represent the equivalent of $0.04 per share. Accordingly, when comparing this year's quarterly results to last year's, bear in mind that we did not have these expenses in the second quarter of 2006.
Year-to-date cash flow from operations is strong at $487 million. We now expect to deliver full year 2007 cash flow from operations of approximately $1 billion versus our previous expectation of $900 million.
This difference is primarily due to stronger working capital. Capital expenditures were $31 million in the second quarter of 2007 and $69 million year-to-date.
I should add here that our capital expenditures expectation for full-year 2007 is now approximately $200 million versus our previous range of $200 million to $250 million. Capital expenditures for agent signings and renewals will be less this year than anticipated.
Agent signings and renewals remain on track, but we expect to be making less upfront capital payments for these contracts. Revenue for the second quarter was $1.2 billion.
Of this figure, $16 million was contributed by the Pago Facil acquisition; a further $15 million came from a favorable currency translation on the euro. Second quarter operating income on a GAAP basis was $323 million, a decline of 1% compared to the second quarter of 2006.
Excluding $10 million and $2 million of incremental public company expenses in the second quarter of 2007 and 2006 respectively, operating income growth was up 1% year over year. The timing of incremental public company expenses will vary quarter by quarter and we still expect incremental public company expenses to be less than $60 million in 2007.
Our tax rate was 31% in the second quarter, compared to 32% in the second quarter of 2006. During the quarter, Western Union repurchased $168 million of the company's shares at an average price of $21.61 per share.
We now have purchased over $300 million of the company's shares under the $1 billion board-authorized stock-buyback program. As you've seen in this morning's press release, we plan to accelerate our stock repurchase activity.
The goal is to buy back an additional $300 million to $400 million of stock during the second half of 2007. We expect that our year end debt balance will be slightly higher than the $3 billion originally planned.
We do not expect our long-term A3 or A- credit ratings to change as a result of our increased stock buyback. We continue to expect full year pricing investments to be approximately 3.5% of revenue and for our marketing spend to be approximately 6% of revenue.
Regarding WesternUnion.com, the full impact of the fraud issues that began in February of this year were felt in the second quarter with revenue and transaction growth trends turning negative. The situation has not worsened, so we continue to project the same $20 million to $30 million revenue shortfall for this year, as we discussed in April.
Here is an update on the actions aimed at getting it headed in the right direction. Our operations and risk management teams are working closely with card-issuing banks and the card associations to reduce fraud and increase card acceptance.
Specific steps include adding new security features to combat fraud, redesigning our process to validate the customer's identity at the initiation of the transaction, and improving call center procedures to identify fraud. As a result of these steps, card-issuing banks are beginning to approve more transfers on WesternUnion.com.
At the same time, we plan to extend WesternUnion.com to more and more countries. We have set ourselves the goal of adding Italy and Spain during 2007.
The international online business is 20% of WesternUnion.com's revenue and has been growing revenue and transactions in the 60% range. WesternUnion.com is currently offered in only 12 countries but the international opportunity here is significant.
Western Union continues to deliver strong profitability with second quarter operating income margin of 27%, which is consistent with last quarter. When comparing the operating income margin from the second quarter 2007 to last year's second quarter operating income margin of 29%, keep in mind two factors: (1) the ongoing mix shift to the faster growing but lower margin international business, and (2) greater incremental public-company expenses incurred in the second quarter of 2007.
Going forward, we expect to continue to achieve strong operating income margins in the business. Several factors will contribute to this.
First, as the higher margin, U.S.-based business stabilizes further, there should be some offsetting of the faster-growing, lower-margin international business. Second, we will continue to leverage our scale and improve our cost structure.
Here are some examples of expenses savings initiatives. Last month, we consolidated support for agents and customers in the Asia Pacific region by moving a regional operating center from Australia to the Philippines.
We took a number of steps to create synergies and reduce costs at Vigo and Orlandi Valuta. We combined sales forces, which reduced cost and improved effectiveness.
Additionally, we have made several system enhancements that allowed us to eliminate over 40 temporary contracts. Already, we have seen improvements in Vigo's operating profitability.
Being a global company, we will continue to have opportunities to optimize our cost structure around the globe. On another note, bear in mind that the completion of the proposed acquisition of First Data Corporation by KKR will impact our EPS and may impact our weighted average fully diluted shares outstanding.
Assuming completion of this transaction in the third quarter, there will be an acceleration of a FAS 123 R Accounting for Stock-Based Compensation Charge that would impact Western Union’s EPS by approximately $0.02. Of course, this is a non-cash item.
This potential $0.02 charge and impact on weighted average fully diluted shares outstanding is not included in our 2007 EPS guidance. In closing, let me say the second quarter was gratifying for Western Union and our 5,900 employees around the world.
We worked hard to reverse a negative trend, and we are seeing clear progress. Despite external challenges, we are right where we should be and we remain enthusiastic about a strong second half for Western Union and our shareholders.
Thank you. Annie, with that we are ready for our first question.
Operator
(Operator Instructions) Your first question comes from Adam Frisch - UBS.
Adam Frisch - UBS
Thanks and good morning. I just had a quick question on the margin.
Even if I add back the $10 million in additional operating costs from being a public company, I still found margins to be down about 160 basis points, year over year. So, I'm not sure why you didn't include more specific guidance in that release.
Can you tell us where we should expect revenue acceleration and margin expansion in the second half of the year, if you could quantify that a little bit?
Christina Gold
I think, just in the margin, as we look at the first half of the year, we basically are on plan and the second quarter was certainly what we expected in terms of margin and results, so we're very comfortable with that. Going forward, I will ask Scott to just give a little color to that.
But as you look at revenue, clearly that's going to be our challenge as we look to the remainder of 2007. As I said before, the second quarter was where we expected.
We are very pleased with the results we saw in Mexico and also the stabilization in the United States. International was extremely strong as we showed you with that segment which is non-U.S.-based.
We have planned this out very carefully. It's not a slam-dunk but we've worked out all of our corridors, we've worked out all our countries, our pricing, and we've really, day by day, calculated what we need to do to be able to meet the guidance for the remainder of the year.
As we sit right now, we feel we can make that number. It's not going to be easy.
It's well planned, well thought out and we feel that we have the plans in place to make it happen.
Adam Frisch - UBS
That's for the revenue side?
Christina Gold
Yes.
Adam Frisch - UBS
Then on the margin side, where can they go in the second half of the year?
Scott Scheirman
On the margins, Adam, we are very pleased. Both first and second quarter margins were at 27%.
As we see the U.S.-based business is getting stronger, that will help our margins as we move through the third and fourth quarter. Also, we will continue to leverage our fixed cost structure.
We are a global business; we do business in 200 countries, so a lot of opportunities to continue to strengthen our cost structure and improve our operating efficiencies. But we continue to see margins being in that 27% range as we move through the third and fourth quarter.
Adam Frisch - UBS
Christina, glad to hear you talk about some of the emerging areas in the business. Specifically on mobile, I've been talking about that for a little while, so I appreciate you finally addressing it, which is great to see.
But on the mobile part, you spoke to the new customers that you will be able to attain. Could you also speak to the potential cannibalization threat?
Because I'm assuming not only with mobile but also the card-based products, most of these are going to be lower price points, so while you will be able to attract new customers, I'd also want you to address what it could do to your existing customers.
Christina Gold
First of all, just to clarify a little bit too, on the tests that we had, and it's limited in terms of what we've been able to see, but on the mobile side, it's a very low principal movement. You are looking at a principal movement of under $100, so it's a completely different type of consumer.
It's really not your average remittance customer. So in terms of pricing and profitability, we feel that we can maintain our business pretty solidly there because it is a very different type of customer.
So, we look at that as an incremental opportunity. The same happened in terms of the card-based products that we see.
Again, a smaller amount, partly driven by compliance because we can only go to certain limits in terms of the total principal. Again, we are able to maintain our price advantage in terms of where we are, so I don't necessarily see that as going to lower fees.
I think it's a different customer with a different price point. In terms of cannibalization, I think this is a lot further out.
I think that, as we look at it, we can move from left to right. I think it's a question of finding the right delivery mechanism for the customer and what they want to use, because it's still a question of cash-in, cash-out.
When you load up a phone, you have to go to an agent and load it up somewhere, and then taking it out is, again, going to an agent. We can send a message or a cell phone transaction can occur to another cell phone advising the receiver to go and pick up the cash.
But it still requires that physical location. So I think our network, our brand, our strength and also the power we have in compliance is very important for us as we look at these two new types of mechanisms.
I don't see them as a near-term threat; I see them as a great opportunity for us to get to new customers.
Adam Frisch - UBS
One final question on the agent fees. You took out free cash flow because I think you saw lower cap payments in terms of renewing existing agents or signing on new agents, which was great to see because we thought there was a lot of pressure out there.
Are you signing smaller? More agents but they are smaller?
Christina Gold
No. Adam, I would say we are signing the right ones and the ones that we need; small, big and large, all of them.
You know, you look at the Eurogiro agreement, which is very important to us, so we really are signing what we planned to sign. I think it's just a question of how we negotiated the contracts in 2007.
Adam Frisch - UBS
So are lower cap payments being offset by higher pay outs on a per-transaction basis?
Christina Gold
I think it all balances out. Scott, is there anything?
Scott Scheirman
In some cases, it's all economics of the amount of the upfront cash payment and the commissions, but it's the same economics one way or the other, so just how we've negotiated the agreements. We have great partners around the globe.
Eight of the top ten check cashers in the U.S. and eight of the top ten supermarkets in the U.S.
Operator
Your next question comes from Kartik Mehta - FTN Midwest.
Kartik Mehta - FTN Midwest
I wanted to ask you more about the domestic market. I realize transactions were a little bit negative.
I wanted to know, do you think this is more competitive or the market? Has the market just gotten so competitive that this is what we should anticipate going forward, or is this more the result of everything else happening in the environment?
Christina Gold
I think it's a combination of things. I think we've been doing a lot of testing in the U.S.
market to see kind of what variables are making the difference in the marketplace. But clearly, we had some issues in the marketplace.
We see there is competition but it's also a question of just we see some impact in our business because of the economics just in the United States. So I think it's a combination of all; it's not one particular thing that's impacting that.
But we are pleased to see that we're coming out of the second quarter in better shape and going into the third quarter, we are seeing the continuation of that improvement, so I feel very encouraged by that.
Kartik Mehta - FTN Midwest
Scott, you talked about margins in the second half being around 27% and the opportunity to really leverage some of the infrastructure costs that you have in place and the U.S.-base business is getting stronger. Would you think that this trend would continue into 2008 because you're starting in 2007 and obviously the first half of 2007 was weak, so would this continue to 2008?
Scott Scheirman
How we think about it is that we want to continue to keep strong margins; I will call that 27%. We also want to balance those strong margins with investing properly in the business to grow the business.
We have about a 17% market share and enormous opportunities to continue to grow that. So as we move towards 2008, we will share more information with you of our thinking about the 2008 numbers and our strategic plan, but our goal is to have strong margins.
Kartik Mehta - FTN Midwest
Are there any significant contract renewals for agents coming up in 2008?
Scott Scheirman
I don't want to discuss any specific contracts. We are very much on track to renew the contracts we want to.
We are on track for the 325,000 agent locations, so we are in very good shape.
Kartik Mehta - FTN Midwest
If you look at the overall market excluding Mexico, is pricing about where you would anticipate or are there other corridors that are maybe getting aggressive?
Christina Gold
I think we said last quarter where our pricing is, we'd move from about a 3% to 3.5% and that we are consistent with that. I think there's always corridors around the globe where you do feel pressure from competitors from all over the world, but that's something in our day-to-day business that we deal with, but at 3.5%, we feel pretty comfortable with what we have in our plan.
Operator
Your next question comes from Jim Kissane - Bear Stearns.
Jim Kissane - Bear Stearns
Can you give us a little more color on the SG&A trends, specifically around advertising and marketing? It looks like it was maybe flat to even down, year to year.
Christina Gold
Jim, we're still are around the 6% to 7% on the advertising and marketing. However, I would say a little bit more in 2007 has gone to the pricing side; that 0.5% we've moved over to that side.
Maybe Scott can give you a little more flavor on that.
Scott Scheirman
The marketing in the second quarter, Jim, is actually about 6.4% of our revenues; that's up from the first quarter about $7 million additional spend from the first quarter. I would say that the team around the globe has done a good job of managing our expenses, spending our money wisely and leveraging our fixed cost structure.
Jim Kissane - Bear Stearns
I think there's some concern about just the revenue growth guidance. So you are sticking to the 10% to 11%, but it's a little more challenging?
Christina Gold
We are sticking to it. We have a plan for it; it's a challenge.
I mean, obviously we are where we expected at the end of the second quarter, so that's very encouraging for us. We hit the numbers that we expected.
So, we recognize there's a challenge in front of us, but we have the plans in place, the way we see the line of sight at this point, to achieve that number.
Jim Kissane - Bear Stearns
I know in the past you've said CapEx was elevated in '06 and '07, and that you would expect it to tail off somewhat in '08. Is that still the case?
Christina Gold
Yes, I think we did give guidance today that is coming down about the $200 million or under $200 million, and that's because of some changes in how we've done some of the contracts, but I think, going forward, we are in good shape for that.
Scott Scheirman
Jim, I still expect 2008 to be less than $200 million, as we've talked about before.
Operator
Your next question comes from Liz Grausam - Goldman Sachs.
Liz Grausam - Goldman Sachs
I wanted to discuss the trends in the international division. You know, on a fully reported basis, I still saw a little bit of softening in the quarter from 21% to 20% quarter on quarter, but you did disclose for the first time the transactions that are not touching the U.S.
but it is the first quarter we've seen those. Can you help us understand the trends of those numbers that we've seen over the past few quarters so we can understand what has been U.S.
pressure versus what you're seeing really on an international basis?
Christina Gold
I would be happy to, Liz. I think the 29% and 21% really gives you the strength that we have of all those businesses that are not touching the U.S.
That's been consistent with the first quarter. Where we really saw a little bit of a dip is where you take the 20% in the 14%; that's really the impact of some of the U.S.
outbound, particularly to Latin America. We see some of that and that is coming back to some of the issues in the United States, into Central America and other parts of Latin America.
That's really what has taken a little bit out of there.
Liz Grausam - Goldman Sachs
So you have seen trends in Mexico bottom and start to turn up a little bit, domestically bottom and start to turn up a little bit? When are we going to see that inflection point in the Latin American business?
Christina Gold
I think we will see that. As we look at our business, the Central American business did not flow as rapidly as we saw the abrupt drop in Mexico and domestic last year when we look at our charts and see April, May, June, and it really went very rapidly.
So I think we will see that come up as we come through the back half but again, it's a combination of all of the elements that make that 20% and 14%, but still very good numbers, and international outside the U.S. is extremely strong.
Liz Grausam - Goldman Sachs
On your financial services strategy, you mentioned micro-finance for the first time on this call. If you could help us understand the timing, some of the regulatory issues that you may have to work through in order to become a more full-service financial firm, particularly out in Europe, and when we can expect to hear updates on that?
Christina Gold
I'm having an update with the team next week. We are very rapidly looking at this to try to come into some plan, hopefully into 2008.
But in terms of the regulatory front, it is not so complicated for us because we have a bank in Europe, and we can use the banking license to drive that. What we're looking at is whether we do small loans through the bank in Europe through micro-lending, and/or at the receive side whether it would be in Africa and other parts of the world, but using our database, which we know a little bit about our customers from our Gold Card program, and looking to create something very unique.
We feel this is a huge opportunity for us. It really takes us to the next step in terms of that relationship with that customer who sends money with us who has other needs.
Now, let's look at how we can do small loans at rates and things that are very competitive and really compelling for the consumer.
Liz Grausam - Goldman Sachs
Do you think that's a 2008 revenue opportunity?
Christina Gold
Yes, but I don't think we're going to see a huge number right away. I think what we've tried to do and the way we work it is work out the kinks, get it to work, make the prototype work and then expand it and roll that out around the globe, where we see it fits.
Operator
Your next question comes from Charlie Murphy - Morgan Stanley.
Charlie Murphy - Morgan Stanley
Scott, I was wondering if you could clarify an earlier comment. Did you say that, in the second half of '07, you expect the company to post 27% EBIT margins in total?
Scott Scheirman
For both the third and fourth quarter and the full year, our margins should be somewhere in the neighborhood of 27%, approximately 27%.
Charlie Murphy - Morgan Stanley
That's including public company costs?
Scott Scheirman
Yes.
Charlie Murphy - Morgan Stanley
Could you remind us, Christina and Scott, what some factors might be that would drive an improvement in the domestic business in the back half of this year?
Christina Gold
I think we are seeing a number of things happening in the domestic business. I think one of them is that we've done a number of strategies as it relates to our Hispanic consumer, where we had a real issue because of some of the activities in Arizona.
As we saw the improvement in Mexico, we are also seeing an improvement in the Hispanic numbers in the United States, and that's starting to lift somewhat, as we saw in the second quarter. We also have been doing a number of price tests and also really grassroots testing and seeing what's the right combination for this business in terms of making this really, let's say, a grower -- not a double-digit grower, but a nice grower.
I think for us, we really feel the stability of it moving up, probably not doing any major pricing or movement on that product, just doing some more testing as we go through '07. I think that gives us a lot of confidence in terms of moving forward.
Charlie Murphy - Morgan Stanley
C2B margins were around 32% this quarter. Do you expect that level to persist through the rest of the year?
Do you see margin improvement in that business?
Christina Gold
We feel really good about this business. I think it's right on track where we expected it to be.
We are constantly looking at other opportunities, whether it be in the acquisition area or whether it be in new products, because we have a new global business payment product for small businesses. So these are all new things that are going into the mix, but we expect that to be a strong supporter of margin.
Operator
Your next question comes from Greg Smith - Merrill Lynch.
Greg Smith - Merrill Lynch
I know you guys don't like to give too much detail on this, but can you at least talk about the performance of Western Union-branded versus Vigo, versus Orlandi and the U.S. to Mexico corridor?
Christina Gold
I can give you a little flavor on it. I think, obviously, the biggest challenge for us going into the second quarter was Mother's Day because that was the only time in the second quarter of '06 where we had a strong push.
We were able to, with the Western Union brand this year, exceed the number that we had last year. As we came out of second quarter, all brands are positive in terms of transactions, so we got the lift in Vigo but now Western Union is ramping up very nicely.
So I'm very pleased to see the progress because that is really a key brand for us, and it's doing well.
Greg Smith - Merrill Lynch
Vigo, you guys talked to this a little bit; you talked to the integration. But how much longer is there to go until we see sort of full profitability realized on the Vigo side?
Christina Gold
It's really improving, and Scott can give you some update. I think the other thing with Vigo is, as we drive the business and leverage it across the world, we can leverage our fixed costs.
That's going to be one of the keys is to expand that business worldwide. Scott, maybe some more details than that?
Scott Scheirman
What I would add is that our profitability continues to improve. The first quarter of this year was better than fourth quarter, and second quarter this year was better than the first quarter, so the profitability continues to improve.
We have a plan and we're working that plan very hard. I will say that Vigo will not see the margins like Western Union does because of how it's positioned in the marketplace and the service offering and so forth, but we are very focused on driving Vigo to strong, strong profitability.
Greg Smith - Merrill Lynch
So you are going to fully take the Vigo brand and continue to roll it out internationally?
Christina Gold
Yes, we are. I think we just highlighted on this call, we've taken it to Italy and we very strategically placed in markets where we feel it's appropriate.
We will take it to markets where it fits and where we see an opportunity for incremental growth.
Greg Smith - Merrill Lynch
Last question on WesternUnion.com; correct me if I'm wrong, but it sounds like everything is fully up and running. It's just the question of the individual transactions, whether that individual consumer's card gets approved or denied for that transaction.
In the background, you are continuing to work with the banks to increase those acceptance rates. Is that really the only issue going on?
Scott Scheirman
That's correct. It's just working with our customers and the card-issuing banks to get their transactions approved.
Greg Smith - Merrill Lynch
So anyone can go on there and attempt a transaction. It's just whether or not it gets approved by the issuer?
Scott Scheirman
Absolutely. We've had good luck; we've had good partnerships with our banks and more and more of the banks are allowing us to have those transactions approved on WesternUnion.com.
Operator
Your next question comes from Craig Maurer - Calyon Securities.
Craig Maurer - Calyon Securities
I was hoping to get a little more color on mobile payments. I understand the temptation to view this as a cannibalizer of your business, but looking at the transaction sizes and looking at your typical customer -- meaning cash in a shoe box, un-bank types in faraway markets -- and also looking at the numbers we've gathered specifically in the China market, looking at the average size of your transactions, to me this just seems like this is a very far-off cannibalizer to your profits.
The discussion right now, to me, seems a little premature. I do understand the need to discuss technology.
I was hoping you can discuss that versus your average customer and their actual desire for this in places that are your receiving markets, like China, India, Eastern Europe, so on and so forth.
Christina Gold
Craig, I think you are very, very correct in what you say. The concept of cannibalization in the money transfer business is far off because, if you look at our average transaction, it's $350, but in some markets, it's over $1,000 so the concept of mobile phones being the mechanism for that transfer really seems far off at this point.
However, there has been a lot of noise in the marketplace. Plus, it is a technology that is using our core assets, which is really transfer of funds, compliance, regulatory capabilities.
What we saw in the small tests that we've done is this is a very different customer. So for us, as we look at this business right now, we're not looking at it as something for the money transfer business, but rather there's a subset of customers out there that want to use this technology to transfer funds.
We have the brand; we have the capability. So, we feel this is really an opportunity for us to create another subset in the business, learn about it and then be in position at some point, if it ever shifts in our market -- but that's a long way away – we would have that capability.
Craig Maurer - Calyon Securities
If I can just ask you a second question about Brazil, if you could talk about what facilitated that change of heart by the regulators, and if there was a competing business there versus Western Union? I'm curious if you have the same prospects for lifting some of your restrictions in a place like India.
Christina Gold
Well, this is something that we work on on a continuous basis. I think we have a great team on the regulatory/public affairs side and also our in-country management team, who meet regularly with regulators.
Also, our agent in Brazil is the Banco do Brazil, which has been important for us in our transactions. They also are very connected in terms of trying to help us make that happen.
There's been a number of things that have happened with this that also opened up for foreign exchange houses to become agents, so that opens the landscape a bit more. So it's really a matter of perseverance and time.
It's very similar to what happened in Mexico when we launched the outbound business there, about two years ago I think. I know I spent some time there, our regulatory affairs people, we met with the government and over a period of time, they finally said that we could have an outbound business.
Now, we have a very nice business growing at a nice clip coming out of Mexico. So we are working in India; I will be in India next month.
Again, we will go back to the regulators, but these things take sometimes years, but it's about a relationship with our company, the trust in our company, the trust in our brand, and going backwards to these regulators and really working to get the approvals.
Operator
Your next question comes from Tim Willi - AG Edwards.
Tim Willi - AG Edwards
Could you talk about just what you saw with pricing in Mexico, or just thought about that topic as you think about the back half of the year and the revenue growth and the convergence of those growth rates that you talked about?
Christina Gold
As we look at pricing, remember that we did lift the next-day product up to 1,000. We expanded that band in the first quarter.
Where we really focused across all three brands was really our foreign exchange spread. Since the second quarter, really the first quarter, it's been pretty stable.
We don't see any major shifts in pricing as we move into the second half. So, the strength that we gain in transactions will then really push up that revenue line as we move forward.
I think we feel pretty comfortable with that; I don't see anything changing on that front.
Tim Willi - AG Edwards
Great. Then my second question had to do with the new Chief Marketing Officer, realizing that she's obviously only been with the company one or two days here.
Could you just talk about what you would like to see happen or what that experience and skill set brings to Western Union that may not have been there, particularly in a lot of those markets in the Far East and Middle East, areas like that, that you think can really help the franchise expand?
Christina Gold
Well, we announced her hiring. She is actually not in the door yet.
She's coming in another couple of weeks. I think with Gail's hiring, she brings a tremendous skill set to us.
First of all, she has experience in the financial services area, and she really understands the financial services and the banking side, the marketing side and the customer side, so that's a tremendous asset. As I have gotten to know her in discussion, she also has a great knowledge of understanding databases and information, not just from the U.S.
but really across the globe, and one of her strengths is innovation and product development. I think I felt sometimes on the call it's a little frustration that people are looking for new products a little faster from us.
So we need someone to really help us spearhead that initiative, and that will be her responsibility. I must say also we do have excellent marketers in all of our countries around the globe.
We have people who really understand the ethnic consumer and they are terrific. So taking her brand skills, her products skills, with our ethnic marketing skills I think will just be a powerhouse for us.
Operator
Your next question comes from Pat Burton - Citigroup.
Pat Burton – Citigroup
Congratulations on the quarter. My question, Christina, has to do with the compliance and regulatory capabilities of Western Union.
Briefly, could you just talk about what barrier to entry that is to some of these emerging technologies and what these companies will have to go through to know their customers before they can effectively move significant amounts of money?
Christina Gold
I think, clearly, as we've seen over the last five years, compliance is top of mind, not only in the United States but every country around the world. We at Western Union have almost 300 people in compliance and we spend over $32 million a year to support compliance.
The real issue here is that it's know your customer but also know your receiver, to know your network on the send and receive side; you need to have information. You need to be able to file reports on suspicious transactions if something occurs.
So, there really has to be, at the point of entry of cash and the point of receipt of cash, there has to be controls that run against databases, whether it be databases in the United States or in the UK or in Australia; there's hundreds of them. So every country has their own control mechanism.
Everyone has to understand the regulations of every single country. So if you have capabilities to make phone calls to 200 countries, you also have to have capabilities to deal with regulators in 200 countries because each country is separately regulated and moving money is different than sending a phone call.
There's a high level of concern about governments in terms of understanding through the Patriot Act, understanding with the concerns of antiterrorism, that there really has to be tight control. For us, it's of prime importance.
It's a huge asset and a brand strength, but also it's a risk to anyone who gets into this business and doesn't have the right controls because, clearly, there can be tremendous issues that would happen to a company that did not comply properly, who did not understand what the rules were.
Pat Burton – Citigroup
Thank you. As a follow-up, do you have any idea what percentage of the users or a rough approximation in the U.S.
might be tied to the home-building industry? Thanks.
Christina Gold
In terms of our product, I think that there is a large percentage of our consumers in the Latin American base who are tied to construction. I think, though, that some of the impact we see in the domestic business and also the U.S.
to Latin America does have an impact. In terms of exact numbers, I couldn't say, but I would be saying maybe in the 30% range, but I would really have to go back and double-check and see if I can get a better answer for you.
Pat Burton – Citigroup
That 30% would be in the Latin America and Mexico corridor?
Christina Gold
Yes, that would really be where you see the greatest level of impact.
Pat Burton – Citigroup
In that corridor. Okay, thank you very much.
Operator
Your next question comes from Tien-Tsin Huang - JP Morgan.
Tien-Tsin Huang - JP Morgan
Thanks for all the details. Just a few follow-up questions.
On public-company costs, it looks like you are running at around $25 million, year-to-date. Are you still looking for $60 million for the year?
It looks like you are obviously running closer to $50 million.
Scott Scheirman
Yes, we will still be slightly less than $60 million, but the public company spending can vary quarter by quarter depending upon if it's communications, corporate affairs, revenue, we have a new CMO coming on. So those type of things will impact it quarter by quarter, but we will be slightly less than $60 million.
Tien-Tsin Huang - JP Morgan
Okay, so it will step up in the second half of the year. I know you commented on sticking with your revenue growth target.
Are you still comfortable with your stated 3% to 6% operating income growth target for the year?
Scott Scheirman
Yes, we are comfortable at the low end of that range that we've guided in the April 24 press release.
Tien-Tsin Huang - JP Morgan
Can you also give us the currency impact on revenue and EBIT in the quarter?
Scott Scheirman
The currency impact was about $15 million for the quarter. I will let you do the math from there, but it's about $15 million of help in the quarter.
Tien-Tsin Huang - JP Morgan
I appreciate the comments around the prepaid and the micro-lending. Can you just rank in terms of opportunity, micro-lending versus prepaid?
I'm curious, on the micro lending side, will Western Union be taking on some of the credit risk or will you be partnering with some other institutions there?
Christina Gold
You know, on the micro-lending side, it's early days yet. We've had some discussions to get a better feel of what the business is.
We've talked with our people at the bank. We are looking in terms of whether or not we will partner with others, so I think we will keep you posted on that.
But as we look at the opportunity, we think this is a big opportunity for Western Union.
Tien-Tsin Huang - JP Morgan
Relative to prepaid, how would you rank micro-lending?
Christina Gold
I think that I would say they are both important and time will tell as we test them out and prove it out, which one. But my leaning is a little more to micro-lending only because of the relationships that we've built with our customers.
I don't have the facts yet so I couldn't say that, but that's where I am at on that one.
Tien-Tsin Huang - JP Morgan
Thank you.
Christina Gold
Thank you very much, everybody for being on the call today, and also thank you to all of our employees and agents for supporting us in the quarter. We look forward to talking to you in the third quarter and appreciate your support.
We are very focused on making sure we get the job done. Thank you.