International Money Express, Inc. Q2 FY2020 Earnings Call

Greetings and welcome to the International Money Express Inc. Second Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Gallentine. Thank you, Mike. You may begin.

Good evening. Before we begin, let me remind you that this conference call includes forward-looking statements, including our third quarter guidance. Actual results may differ materially from expectations. For additional information on Intermex, please refer to the company's SEC filings, including the risk factors described therein. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today. I refer you to Slide 2 of our presentation for a description of certain forward-looking statements. We undertake no obligation to update such information, except as required by applicable law. On this conference call, we also have a discussion of certain non-GAAP financial measures. Information required by Reg G under the Securities and Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call. These slides can be obtained at the Investors section of our website, intermexonline.com. I also refer you to Slides 13 through 17 of the slide presentation for a reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures. On today's call, I'm joined by our Chairman, Chief Executive Officer and President, Bob Lisy; and Chief Financial Officer, Tony Lauro. Let me now turn the call over to Bob.

Good evening, and thank you to our analysts and investors for your participation in tonight's earnings call. Before I begin my formal remarks, I would like to offer my continued thanks to our dedicated and hardworking employees, our agent retailers and, of course, our loyal customers. I'm extremely proud of the resolve and dedication displayed at Intermex every day, especially amid the challenging times we have all experienced the last few months. We hope everyone is well and that we can all emerge from this crisis in the near future. We'll start on Slide 3 by highlighting the record financial performance that Tony will speak about in greater detail later. We were able to grow revenue by 3% year-over-year. And more impressively, we grew our net income by 27% to $9 million. As a result of our efficient and durable business model, we grew EBITDA by 7% versus last year. Adjusted net income increased 13% compared to last year and helped drive free cash up over 16% to $10 million compared with the prior year quarter. We are proud of these strong results when you consider that significant areas of the country were essentially closed down for much of the quarter. Let's go to the next slide to talk about some of the keys to our ongoing success. As you have heard me say many times in the past, Intermex has been built as a house of brick. We believe that this fact is a key aspect of our story and a key reason why we're able to consistently deliver strong results. This philosophy is ingrained in everything we do, and we believe that it sets us apart from the money remittance industry overall. Most importantly, Intermex has always taken an approach that drives profitable and sustainable growth. We have executed this strategy in our legacy markets, and it will guide us as we look towards delivering future growth. The pursuit of profitable and sustainable growth has enabled Intermex to build a differentiated business model that has proven to be resilient through difficult and challenging times. We leveraged our profitability to invest in industry-leading customer service and technology, which are critical components to our winning formula. Intermex also takes great pride in our unique approach to agent recruitment. While many competitors focus on ubiquity and exclusivity, we focus on agent productivity and ultimately, profitability. Our highly targeted and metrically based strategy recruits and activates agents in precise geographies, down to the ZIP code level where our customers live. Our approach to agent recruitment feeds directly into our profitable and sustainable growth philosophy. It has proven its ability to deliver strong results regardless of market conditions. Our state-of-the-art technology enables agents to process transactions faster with greater ease and efficiency. This is a critical differentiator, given that the majority of the agent business occurs during the peak times of Friday through Sunday. This creates a faster and more efficient process for both the customer and the agent retailer. The customer focus is also apparent in our customer care. We averaged a hold time of just 3.4 seconds, which is incredible compared to the competition and even across other industries. The other very important and related component of our house of brick philosophy is that our model creates exceptional liquidity and superior free cash generation. This liquidity and cash flow contributes to our reputation for customer reliability. And in times of stress and volatility, it is a significant differentiator. Throughout the current crisis, we have heard from some of our payers that a number of the smaller competitors have had liquidity shortfalls resulting in the receiver not receiving their funds in a timely fashion. Those issues of reliability and inability to pay out remittances timely do not occur at Intermex. And we expect our reputation as a highly reliable provider will continue to drive our success and aggregate market share. Ours is a powerful capitalization model, which is critically important in times of uncertainty, and we have continued to generate cash throughout this crisis. Tony will detail our cash later in the call. But I will simply state upfront that Intermex does not only possess more than ample capital to fund our business as we navigate the upcoming quarters, but we have continued to generate significant amounts of cash. Let's turn to Slide 5 to look at some of our growth drivers for the quarter. I think this quarter, when much of the country was significantly shut down is a great example of how our approach to differentiated business leads to proven resiliency. Intermex increased our customers 6% to 2.1 million and increased our remittance transactions by 3% to $7.6 million compared with the second quarter of last year. If you look at specific months, April was down 7%. As we started to open back up certain states, May quickly rebounded with transaction growth of 7%. This positive trend continued with transactions up 8% in June and 13% in July. This is a great example of the resiliency and strength of our focused business model. We continue to experience dramatic growth in our mobile app, with our customer usage up 600% and our transactions increasing more than 880% compared to the prior year period. Again, our differentiated and focused approach to critical service allows us to perform at this level. Let's move to Slide 6, and I will further expand on the online and other growth initiatives. Our expansions into Canada as an outbound market and Africa as an inbound market continue to grow rapidly, as do our online, white label, and card products. In fact, from the first quarter to the second quarter, these products have combined revenue growth of 78%. In addition to these new products and channels, we want to share with you impressive growth in what we call our Tier 3 markets in LATAM. These are markets for us that are not yet as developed as our Tier 1 markets of Mexico and Guatemala or our Tier 2 of Honduras and El Salvador, yet these emerging corridors grew revenue by 17% from Q1 to Q2. These growth initiatives are expanding rapidly and are meaningful to our overall performance and now represent over 7% of our total revenue. The company's strong financial performance is the direct result of our house of brick mentality. The underlying appeal of our business model with superior customer service and a highly productive agent network allow us to continue to outperform the broader market regardless of the market conditions. We remain confident that our philosophy and dedication to profitability and sustainable growth will drive a significant competitive edge for Intermex during these uncertain times and beyond. With that, I will turn the call over to Tony.

Thanks, Bob, and good evening to our analysts and investors on today's call. Turning now to Slide 7, let's walk through our second quarter results in a little bit more detail. Transactions and volume grew 2.7% and 5.3%, respectively, as higher send amounts were primarily a result of increased mix of transactions to Mexico. Revenues of $85.1 million represent growth year-over-year of 3%, driven by the growth in customers and transactions that Bob mentioned. Growing the top line year-over-year during this crisis is impressive enough, but it's a tremendous achievement when you realize we had to grow over an exceptional quarter in 2019, where we delivered 17.5% year-over-year growth as compared to 2018. Adjusted EBITDA growth of 6.8% outpaced revenue as we continue to get leverage from migrating to lower cost deposit services and negotiated payer fee reductions. Adjusted EBITDA margin for the quarter topped 20%, which is exceptional for a public company of our size. Additionally, we delivered record net income of $9 million, an increase of 27% compared with the prior year period. Driving this increase was the adjusted EBITDA growth I just noted, coupled with lower depreciation, amortization, and interest expense. We will continue to see lower amortization as the intangible assets recorded in 2017 runoff on an accelerated schedule. Let's now look at our superior liquidity and free cash position, key aspects of our house of brick approach. On Slide 8, you'll see that we generated $10 million in free cash this quarter, a 16.4% increase over the same quarter last year. These figures reflect the conversion of adjusted EBITDA to free cash of 58% after taxes, investments, and debt servicing. Our business model, which combines strong margins and a variable cost structure, where 80% of our costs vary with transaction volume, has proven itself throughout the crisis and throws off capital even in times with slower growth. Turning to Slide 9. Let's look at the efficiency of our adjusted EBITDA conversion to free cash. In Q2 of this year, we converted close to 58% of our adjusted EBITDA to free cash, which we're extremely proud of. This represents growth of close to 5 percentage points to the conversion rate over the same period last year. We feel that our profitability and free cash generation are differentiators that strategically position us and fuel future growth in the quarters and years ahead. Let's turn to Page 11 for our final prepared comments. While the COVID-19 environment has definitely created uncertainty in our future results, we currently expect to generate third quarter revenue of $88 million to $91 million and adjusted EBITDA of $17 million to $18 million. This assumes we do not see a significant worsening of the pandemic. In closing, I'd like to say how proud I am to be a part of this community. Our employees and agents continue to bravely work to provide a service that is so essential to our customers who are just as bravely working in industries that are keeping America fed and keeping the economy going. Thank you all. With that, let me turn the call back to the operator for questions.

Our first question is from David Scharf with JMP Securities.

Hope everyone is doing well and staying safe. Bob, I wanted to ask about the exceptionally strong results we're seeing, particularly regarding the resilient consumer. Can you provide an update on how the pandemic is affecting our ability to open new agent locations? While we can't predict exactly how severe it may become, could you share your thoughts on how you see the next 12 months shaping up in terms of expanding our presence?

I will start to address your question and then hand it over to Randy Nilsen, our Chief Revenue Officer. It's clear that activating agent retailers from headquarters or from our sales representatives' homes is more challenging than when they are in the field. I want to emphasize that most of our sales team, with only a few exceptions, is back in the field. There are certain regions where our sales reps are not currently working due to the pandemic. However, in areas less affected by the pandemic, they are making retail calls again. Even during the peak of the pandemic, when our sales team was restricted indoors, we still managed to activate a substantial number of new agents. While it wasn't at our desired levels or comparable to previous numbers, it was still significant. We were able to ship equipment through a third-party shipping company and conduct training over the phone. We've kept the business active, especially with portable jobs, although sales roles tend to be less portable. We continue to activate agents. Looking ahead over the next year, if conditions remain stable, we expect to return to our usual process of adding agent retailers. As the situation improves, we anticipate being able to enhance our efforts even further, making new hires and expanding our sales team. I won't delve into specific details, but I’ll let Randy provide additional insights. We have been essentially indoors for about two months with our sales team when they were unable to make outside calls. Now, I'll pass it to Randy for more insights.

Thanks, Bob. Yes, for the last two weeks of March, the month of April, and most of the first two weeks of May, our sales team primarily worked from their home offices. Since then, as Bob mentioned, almost all of our sales team have been out making in-person calls in the field. Occasionally, in states like Florida and Georgia, where cases are high, we'll bring them back for a week or two until things stabilize a bit. However, apart from April, we managed to maintain steady progress regarding our agent activations. I want to highlight our Northeast region, which achieved 123% of their agent activation targets for the second quarter. As you know, New York and New Jersey were largely working from home during that time, yet they successfully activated agents by following up on their pipeline and conducting telesales. I'm really proud of our sales team for activating agents while working from home. To answer your question, David, we expect to remain on track with agent activations, as Bob indicated, if conditions stay as they are now.

Got it. No, that's very helpful. I mean, certainly clear here that all sales people are in the field. Maybe just 1 follow-up then I can get back in queue. Obviously, the last 2 reporting periods, there's been much more discussion and disclosure, not surprisingly, by your public competitors as well on the trends in digital and mobile. I guess it's a 2-part question. One, Bob, is whether or not typically the lower average price point on some digital transactions is impacting your corridors at all. And then more broadly, if you could just expand on whether or not there has been any evolution in your sort of take on whether the Mexican and Guatemalan inbound markets may become more amenable to digital processing than they have in the past.

Sure. The first part of your question concerns whether the rise in online transactions has impacted pricing. I believe there is a clear distinction between online pricing and retail pricing, as they cater to different customer bases. While some customers may shift from physical stores to online platforms and remain there, there is also a significant number who move between both. However, I don't think the online pricing trends can be directly applied to brick-and-mortar pricing. From our standpoint, we aren't experiencing increased pricing pressures in brick-and-mortar compared to before. In fact, smaller competitors have been less aggressive with pricing in retail since the pandemic began, despite facing some challenges. While we've observed some slowdowns in specific regions such as El Salvador, Honduras, Guatemala, Colombia, and the Dominican Republic, which have significantly impacted financially unstable companies, we have seen the overall industry surge among Guatemalans and Mexicans. At the beginning of the pandemic, many transitioned to online services, though we haven't seen that level of surge recently as we focus on developing that segment. We acknowledge that the shift to online will continue, although we disagree with the more extreme projections. Currently, we estimate that online transactions in countries like Mexico and Guatemala could be between 15% and 20%, with growth expected, but we anticipate brick-and-mortar will still hold a significant share for quite some time—potentially 5 to 10 years. We are committed to improving our online products without aggressively trying to convert satisfied in-store customers to online. Instead, we are focused on attracting new customers to our online platform, which we believe can compete effectively in the market. With our expertise and resources in Mexico, Guatemala, and other countries, we are well-positioned to challenge other online services, and we feel confident that as online continues to expand, we will capture an increasing share of the brick-and-mortar business while growing online separately.

Our next question comes from George Mihalos with Cowen.

This is Philip on for George. I was just wondering, so the Mexico market looks like it grew about 3% based on the banco de México data. And historically, Intermex has outgrown the Mexican remittance market in terms of transactions. Can you just talk about the puts and takes from this quarter? And do you expect to return to outperforming the Mexican market on a go-forward basis?

Well, we did outperform the Mexico market on a quarterly basis. It wasn't by a large measure, but when you start to get it big months that were negative early in the quarter, then you'll see that those numbers will be smaller in terms of their deviance. But from a quarter perspective, we did outperform slightly the market to Mexico by a couple of percentage, about 1.5%. And we expect that to continue. We expect to continue to outperform the market.

Okay. Great. Did you notice any pull forward in wires this quarter due to the volatility in the Mexican peso, as you have historically mentioned?

No, we did not experience the kind of volatility that typically tracks closely with the U.S. economy and the stock market. The significant fluctuations in the peso occurred in late March and early April, coinciding with major market swings and daily announcements regarding COVID, lockdowns, and the death toll. Each announcement seemed to impact the stock market, which in turn affected the Mexican market even more. Over the past couple of months, the fluctuations have been relatively normal. While there has been some movement, it has not matched the percentage changes we witnessed in late March and early April, where the peso was fluctuating significantly rather than just in minor amounts. Most of this quarter has seen more stable day-to-day variations.

Our next question comes from Mike Grondahl with Northland Securities.

Congratulations on the growth in the quarter, which is significant and successful. During the March and April timeframe, I recall you mentioned that 95% of your agents were open. Have you managed to open all of them? I'm curious about how that has progressed. Additionally, are there any states or regions that you can highlight as having notably outperformed?

Yes. I mean, I'll let Randy answer the agent piece first. Randy, I mean, what are your thoughts in terms of agents open?

Yes. Mike, when we look at April, May, and June compared to the number of active agents in March, April saw a significant decline, with only about 95% of March's active agents. In May, we rebounded to nearly 100%, reaching about 99%. By June, we were actually exceeding March's numbers, operating at around 101% of the active agents from that month. So, in June, we had more agents actively selling than we did in March.

I think it's important to note that while we won't discuss specific states, it's clear that some areas of the country were hit hard. The Northeast, as Randy mentioned previously, has recovered impressively. We've experienced occasional minor disruptions in California and other regions, but the Northeast, especially around New York, initially saw a significant downturn in our business at the beginning of the pandemic but bounced back quickly. Even during the low points, we managed to retain a remarkable amount of business, with drops of around 25% to 30%. The level of shutdown in New York at that time is a testament to the dedication of our agents, the resilience of our customers, and the strength of our brand, all of which held up well throughout the situation. Now, the Northeast is one of our strongest regions, and we haven't faced major issues in specific areas. There are other parts of the country that have remained relatively stable during the pandemic. Overall, we've maintained a solid presence nationwide. Additionally, looking at the numbers from Mexico for the quarter, we actually performed slightly better than the reported figures. While the June growth rate was 11%, with a country number reporting a drop of 2% and a slight gain of 3.5%, our overall growth for the quarter was just over 4%, meaning we exceeded the market's performance. In early July, while we don't have complete industry numbers, we’ve been observing encouraging growth across all other countries, with our July growth appearing to exceed 13%. Each month is showing improvement; we transitioned from a 7% decline in April to a positive 7% and then 8%, and now July is at a 13% increase. We believe August has the potential to outpace that as we gradually work our way back to a 20% year-over-year growth figure that we feel confident about.

Our next question comes from Josh Beck with KeyBanc.

This is Alex Markgraff speaking for Josh. Regarding the operating factors from this quarter, could you clarify what stood out the most? Additionally, as we look ahead, how much of this leverage is a one-time issue, and how much will have a lasting impact? Some of this seems reflected in the guidance, but any further details would be appreciated.

I'll let Tony get into specifics. The first point I want to address is that over the past quarters, we've sometimes encountered disappointment from some people who expected our growth to be stronger. We've always mentioned that while growing faster is not hard, our focus has been on sustainable and profitable growth. Our performance during the pandemic and in recent months can largely be attributed to how we built the business, as much as to our recent actions. Answering that question without considering the whole picture would overlook the fact that we aren't simply cutting expenses temporarily to meet a number. If it were that easy, our competitors would achieve similar results, but we're not seeing that happen. Our business is built on a solid foundation, lacking unsustainable or unprofitable growth. As a result, when things fluctuate or decline slightly, we're not over-leveraged, allowing us to maintain our growth figures. We've become a bit more efficient, and while there isn't much to highlight specifically, I’ll turn it over to Tony to expand on that. Overall, the significance lies more in the type of business we've established rather than just what occurred in the current quarter or Q1, as this is an ongoing process. In Q1, we experienced 23% EBITDA growth, while our competitors did not perform nearly as well. In Q2, we achieved 7% EBITDA growth during the peak of the pandemic against a competitive landscape that also underperformed. So it's clear this isn't just a temporary situation. Tony, do you want to add anything?

I can identify four key areas of efficiency or cost savings. Two of these stem directly from our continuous efforts to enhance operational efficiency, as outlined in the presentation. First, we have reduced banking fees or deposit costs, which are influenced by the volume of dollars remitted. These costs increased by about 2%, while the dollars remitted rose by over 5%. Ongoing savings will continue as we transition agents to lower-cost deposit methods. The second area is payer costs, where we are actively negotiating better rates with payers on a monthly and quarterly basis. This helps our customers shift to bank deposits, which are less expensive for us than cash pickups. As we expand and improve our position, we gain more pricing power, which will sustain these improvements. Additionally, due to the pandemic, particularly in the early part of the second quarter, our hiring slowed down more than we anticipated, resulting in lower salaries. However, we have recently achieved significant hiring success, which will catch up in terms of our run rate. The savings from this will be beneficial. Travel costs also saw a decline since we restricted travel for the initial 1.5 to 2 months. Although travel has not returned to normal levels, such as attendance at investor conferences, we will maintain a lower travel run rate rather than completely shutting down like we did in March and April. I am pleased to highlight these points and want to emphasize that we will continue to implement efficiency initiatives to support future growth investments.

We have one more question from Daniel Bella Hessen with Columbia Threadneedle.

Guys, I hope you're both well. I really appreciate the little bit of color you shared about the hyper local focus and expanding upon that. I think it's really misunderstood driving your competitive advantages here. I'm most interested in how you guys can use this time to set the business up over the long term, particularly around share gains and how much share is up for grabs. You've spoken in the past about some of the aggressive price discounters on the brink of failure. Is now the time to put your foot on the gas? Has some of that part of the industry played out the way that you expected? And similarly, from the field work we've done, you've really created this local kind of community effort that's driving the agent network. How much of the value proposition is in that local approach and the strong relationships that the new agents create in the communities, of course, driven by the incentives that you and the managers lay out for them, kind of hampered by COVID? And is there a way that you can continue the playbook and allow you to continue expanding the agent network the way you normally would? Or are things kind of put on hold at the moment to some extent just given what that playbook usually looks like and the feet on the ground that are required?

That was a lengthy question, and I want to make sure I address it effectively. The key point I gathered is that we are focusing significantly on preparing ourselves for the future. This preparation goes beyond our physical locations; we believe we are performing exceptionally well in our brick-and-mortar operations. Notably, we are outpacing market growth in all our major countries and performing particularly well in many of them. While there is a shift towards online business, we are actively gaining market share in brick-and-mortar every day. However, simply being a larger player in a shrinking market is not our goal. Alongside our brick-and-mortar success, we have made substantial progress in our online business, investing time to enhance our service quality. This includes improving the front-end technology to complement our industry-leading customer service in the back end. We are also working to capture a larger market share online. Additionally, we have developed a card product that serves as a differentiator and connects our brick-and-mortar and online offerings. This product empowers previously unbanked consumers to transition from retail to online services. Over the past few months, we have been actively positioning these initiatives and hiring top talent with significant online experience. We are also recruiting an online marketer to further grow this segment of our business, while continuing to invest strongly in our brick-and-mortar operations. We recognize the challenges faced by some of our larger competitors, particularly regarding liquidity and reliability, which has helped us gain share in the market. While recognizing that brick-and-mortar remains a crucial part of our future, we are also gearing up for growth in the online space. We have taken this time to assess our organization for any inefficiencies, as maintaining efficiency is a continual process. Our goal during the COVID period was to ensure that the turnover for the first half of the year was more profitable than in 2019, which we achieved with a 13% increase in EBITDA compared to that timeframe, and significant revenue growth despite the pandemic. Overall, we aim to strengthen our position in brick-and-mortar while also preparing our new products and exploring potential acquisitions that align with our business strategy. We are committed to building our team, bringing in quality personnel, and focusing on future opportunities while maximizing our current market share in brick-and-mortar.

That's really helpful. And Bob, on the online portion of the business, is the hyper-local focus that's been such a compelling part of the customer and agent value proposition as relevant when you guys think about what the online business will look like, not just today, but down the road?

We are exploring ways to enhance our online presence, but the pricing model differs since it typically reflects a single price across the internet. Although pricing can be influenced by regional differences, it's not as granular as ZIP codes or specific street corners. Our goal is to ensure that our online product performs effectively. Our business has seen significant growth, and we believe that our physical locations provide advantages in speed, reliability, and user-friendliness. This represents our goal for our online operations as well. We are actively refining our online offerings to make them better, smoother, and faster, and we will continue to invest in this area in a way that differentiates it from our brick-and-mortar operations while striving for the best possible offering.

There are no further questions at this time. I would now like to turn the floor back over to Bob Lisy for closing comments.

Yes, we'd like to thank all of you, investors and analysts, for joining us on the call. We hope everyone stays safe. I do like to take my hat off to 3 groups of people. First of all, our employees, who've done a tremendous job through difficult times. Many of them in jobs that have never been previously portable and done a great job in the portability of their jobs and continue to make sure that we put our customer at the utmost. Our sales reps who are back out in the field and are working with our agents very closely and are doing a tremendous job. But also our agent retailers, many of whom, like we said, 95% that remained open as essential services and really were the conduit to so many people here working in the U.S. to send money back home to their families. And then, of course, our customers who I can't have more respect for the resilience of that customer. And in many times, really supplying for all of us, critical services with agriculture, product refinement plants, all the types of things that we need as critical services. So I want to thank those 3 constituents. And it's been a great quarter. We hope you all stay safe, and we'll talk to you all soon. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.