International Money Express, Inc. Q3 FY2020 Earnings Call

Greetings. Welcome to International Money Express Third Quarter 2020 Earnings Conference Call. All participants are currently in a listen-only mode. A brief question-and-answer session will follow the formal presentation. I will now turn the conference over to Mike Gallentine, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to our quarterly earnings call. This conference call includes forward-looking statements, including our fourth quarter guidance. Actual results may differ materially from expectations. For additional information on International Money Express Inc., which we refer to as Intermex or the company, 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 on this call are based on assumptions and beliefs as of today. Please refer 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 discuss certain non-GAAP financial measures. Information required by Regulation G under the Securities and Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, including reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures. These can be obtained in the Investors section of our website at intermexonline.com. Presenting on today's call will be our Chairman, Chief Executive Officer, President, Bob Lisy; and Chief Financial Officer, Tony Lauro. Also on the call today is Joseph Aguilar, Chief Operations Officer; and Randy Nilsen, Chief Revenue Officer. Let me now turn the call over to Bob.

Good morning, and thank you all for joining us today. We have a lot of great things to talk about and look forward to answering your questions following our prepared remarks. Before we dive into the results, though, I would like to thank our employees and our agent partners for all their hard work in making our results possible during these challenging times. Now, I will start on Slide 3 by highlighting some of the record quarterly financial performance. Intermex generated record net income of $9.5 million, which is an increase of 135% versus Q3 2019. Adjusted net income of $12 million, an increase of 28% over the prior year quarter. Revenues grew 12% to $95.6 million on transaction growth of 13%, driven by an 11% increase in customers. Adjusted EBITDA growth outpaced revenue and increased 16% to $19 million as our focus on efficient growth continues to drive success. We converted the majority of our adjusted EBITDA to $10 million of free cash generation. These totals in revenue, adjusted EBITDA, and free cash generation are each quarterly records for us, which is truly amazing given today's macroeconomic backdrop. On the next slide, highlighting some of the keys to our ongoing success. You've heard me say Intermex has been built as a house of bricks. The building blocks are a reputation for quality, service, and dependability with our agents and customers alike. This is combined with the management approach focused on driving profitability and sustainable growth. This is why Intermex has grown profitably in good times and even more importantly, has grown profitably in challenging times. This quarter is a great example of how we have executed this strategy and how we continue to guide us to our future growth. One of the primary ways that Intermex differentiates itself versus our competition is our unique focus and localized approach to agent recruitment. While many competitors focus on ubiquity at the expense of productivity and sound business economics, we focus on agent productivity and ultimately, profitability. Our approach to adding agents uses a variety of demographic data that allows us to activate agents in precise geographies down to and below the ZIP code level in neighborhoods where our customers live and work. This approach to agent recruitment leads to a highly productive agent and feeds directly into profitability and sustainable growth philosophy regardless of market conditions. This is why the average Intermex retailer produces many more wires than those of our competition. Our state-of-the-art technology enables and empowers our high-quality agent partners to produce transactions at the point-of-sale much faster with greater ease and efficiency. The retailer can process a face-to-face transaction with the consumer in a fraction of the time that it takes with our competitors. Another way Intermex differentiates itself, mostly versus our smaller independent providers is that we are well capitalized and able to prefund our wires without any issue. This means the funds will always be available to the recipient as desired. This saves both the sender and the retailer from potential concern as to whether the wire will be available when promised. The lack of this availability can cause the sender to cancel the remittance and resend it with an alternate provider. This process can take on a life of its own and may take minutes or longer to get the appropriate person on the phone at the competitive providers' offices and ultimately days to get the wire refunded. This customer focus is also apparent in our customer care with an average telephone answer time of under 5 seconds, while competitors can take minutes to do the same. This is a critical differentiator, given the majority of our agent business occurs during the peak times throughout the weekend. Our system creates a faster and more efficient process for both the consumer and the agent retailer. And unlike many of our competitors, our customer service is located in the two largest markets, Mexico and Guatemala. As a result, the center and receiver will be speaking to someone who has language, cultural, and geographical expertise. This quarter, when much of the country is facing pandemic-related disruptions and restrictions, it's a great example of how our unique approach to agents, coupled with our world-class customer service leads to a differentiated business with proven resiliency. As noted on the next slide, this approach has helped Intermex increase our customers by 11% to $2.2 million, an increase in remittance transactions by 13% to $8.7 million compared with the third quarter last year. We had our second-best month ever in the quarter, with August 2020 realizing just under 3 million remittance transactions. Turning to the next slide. As a result of our strong growth in transactions, Intermex once again increased our market share. In our core markets of Mexico, Guatemala, Honduras, and El Salvador, we grew our share to 19.2%, up 80 basis points from the same period in 2019. We have consistently shown that our unique approach and business model can increase market share in good times and in bad times. We've experienced continued strength in remits demand. As we begin the fourth quarter, October has come in very strong. We exceeded 3.1 million remittances in the month, up over 19% versus October 2019. This is the company's best month ever. This strong rebound in growth in remittances is also very evident in our emerging and newer markets, which include those in Africa. As we've seen on the chart, while we dipped down in Q2, these markets are now growing remittances quickly as they were in the pre-pandemic period. On the next slide, we continue to experience strong growth in mobile app with a number of customers using the app increasing 48% and transactions up 142% compared to the prior year. We have increased our focus and investment in our digital offering. During the third quarter, we hired a Vice President of Digital and Director of Digital Marketing to help bolster our growing digital organization. We also signed an agreement with the developer, ArcTouch, for a comprehensive enhancement of our mobile money transfer app. This improvement of the user interface will further enhance the functionality and ease of use of our mobile app. I want to reiterate that we believe, especially for most of the Latin American corridors, our brick-and-mortar business model will continue to be the primary method to send money for years to come. Having said that, we believe that it is critical for the company to have a strong product offering on both the cash and digital side of the house. We will continue to focus on the digital opportunity while delivering transaction growth, profitability, and cash flow from our traditional business. In closing, the underlying appeal of our business model with superior service quality and highly productive localized agent network enables the company to deliver consistently strong financial performance. We remain confident that our philosophy and dedication to profitability and sustainable growth will continue to drive significant competitive advantage for Intermex during these uncertain times and beyond. Before I turn the call over to Tony, as you know, this is his last quarterly earnings call with Intermex, and I would like to thank him for all of his contributions to our success over the last two-plus years. Tony has done an excellent job with our investors and our coverage analysts and was a key member of the management team as we moved Intermex into public company status. The management team, the Board of Directors, and the employees all wish Tony continued success and good health as he moves to his new assignment. With that, I'll turn the call over to Tony.

Thanks, Bob. And I would just like to say, I'll always cherish my time at Intermex, and I've enjoyed working with and learning from a wonderful group of people here. I'm leaving confident that together, we've laid the groundwork for continued success and growth at Intermex. Good morning to all the analysts, investors, and customers that have joined us today. Turning now to Slide 8. Let's walk through our third quarter results in more detail. As Bob mentioned, we had a record third quarter across many of our key metrics, which is remarkable considering most of the country is still operating at limited capacity, while last year, everything was normal. It's a true testament to the strength of our business model. In the quarter, we generated record revenue of $95.6 million, an increase of 12% over the prior year quarter, driven by the growth in customers and transactions. The increase in revenues, coupled with continued focus on efficiency, helped generate record adjusted EBITDA of $19 million, an increase of 16% over the prior year quarter. This growth outpaced revenue growth as we continue to generate leverage from the continued migration to lower cost deposit services and negotiated payer fee reductions. Additionally, we continued to benefit from other reduced expenses, including travel. Adjusted EBITDA margin for the quarter was 20%, a 69 basis point improvement compared with the third quarter of last year. This adjusted EBITDA margin is exceptional for a public company of our size. However, we expect adjusted EBITDA margins to come back in line with our historical results as we invest in our digital offerings and other growth initiatives, employees begin to travel more and our hiring accelerates. I will touch on this more when we get to Q4 guidance. In Q3, we delivered record net income of $9.5 million, an increase of 135%, and adjusted net income of $12 million, an increase of 28%, both compared with the prior year period. Driving this increase was the adjusted EBITDA growth I just noted, coupled with lower legal expenses and continued decreases in intangible amortization and interest expense compared to the prior year period. We will continue to see lower amortization as the intangible assets recorded in 2017 run off on an accelerated schedule. These current quarter decreases were partially offset by higher income tax expense. Our business model continues to be an extremely capital-efficient operating model in terms of converting adjusted EBITDA to free cash generation. Turning to Slide 9. In Q3 of this year, we converted 55% of our adjusted EBITDA to free cash, resulting in $10.5 million in free cash generation this quarter, a 79% increase over the same quarter last year. In the prior year third quarter, the company converted 36% of its adjusted EBITDA to free cash generation. We feel that our profitability and free cash generation are differentiators that strategically position us to fuel future growth. In terms of our uses of cash, we continue to invest in our existing business and technology and look for opportunistic accretive acquisitions in brick-and-mortar as well as digital and ancillary products. On Slide 10, for our guidance, we're assuming the country does not experience a significant shutdown of business activity, especially essential businesses due to the ongoing pandemic. Currently, based on recent trends and some historical seasonality, we expect to generate fourth quarter revenue of $93 million to $95 million and adjusted EBITDA of $16.5 million to $17 million. These ranges equate to 12% to 14% Q4 revenue growth year-over-year and 17% to 20% adjusted EBITDA growth year-over-year. The midpoints here imply an EBITDA margin of just under 18%. While this is lower than the Q3 performance, it is in line with our historical margins and reflects the investments in our digital product and other technology efforts as well as the success we have had so far this quarter in ramping up the team. Also, as Bob mentioned, in October, we achieved over 3.1 million transactions, which represents 19% year-over-year growth. It's worth noting and celebrating, but this is the first month that we've exceeded 3 million wires in a month. We reached this milestone just 29 months after reaching the 2 million wire milestone in May of 2018. The fourth quarter is off to a good start. In closing, Intermex delivered an outstanding third quarter by all key measures. Our hyper-local focus on high-quality, high-volume agents, coupled with great service quality, continues to drive our growth and market share gains all profitably. That same business philosophy will continue to guide our strategy and execution into the future. And once more, I'd like to thank our employees, agents, and customers for the outstanding work they do to make such a critical part of our economy run smoothly during such difficult times. With that, let me turn the call back to the operator for questions.

Our first question comes from David Scharf with JMP Securities.

I wanted to ask about the competitive situation among your agents. During the pandemic, you mentioned that the company's capitalization or liquidity has been a factor for many wires, especially over the weekend. Have you noticed any loss or decline among the smaller competitors in your agent base?

No, we haven't observed any significant fallout, meaning no businesses have shut down. There was a very small company in the Chicago area that went out of business early on. Instead, we've noticed some weakening of our competitors' positions in the market. It's difficult to assess how much they have recovered as the market has improved and they've begun to make adjustments. However, we did notice signs indicating this. Many smaller competitors, as well as some large public companies, laid off parts of their sales teams or modified their commission structures and reduced salaries during different phases of the pandemic, which we believe contributed to a general sense of demotivation among those teams, and we capitalized on that. For more insights, I’ll hand it over to Randy, our Chief Revenue Officer, who can provide additional details.

Yes. Thank you, Bob. David, I would just add that Transfast, they kind of shut down their U.S. business here in the mid-summer months. So there was some opportunity for us to pick up some business that they moved out of their locations. And secondly, there was kind of a mixed bag of dynamics that we saw from the smaller competitors in terms of not necessarily like we saw in April, where they were having a hard time funding their transactions, but just having relationship problems with some of the payers, which gave us an opportunity to pick up some business from them. So it seems like there's always someone that's stumbling a little bit that gives us an opportunity. And we, like always, try to take full advantage of it.

Got it. No, that's helpful. I mean sounds like it's probably a pretty static situation right now. Just as a follow-up, different question. Just to help us frame the market penetration. We appreciate the transaction growth for the emerging markets. Can you update us on what mix of your transactions are represented by the emerging markets that you define?

Yes. We haven't typically disclosed that. It's a significant share at this time. But just let me start off by saying when you think of all the money that's sent to Latin America, 75% of the money from a market perspective goes to Mexico, Guatemala, El Salvador, and Honduras. We're a little bit higher indexed in those areas than the market would be, but not tremendously so. And those emerging markets, countries like the Dominican Republic, Nicaragua, Peru, Ecuador, and Colombia are growing much faster than the four core markets that represent for the overall marketplace, 75%. And we think that there'll be the keys to today, we have an overall market share to all of Latin America probably of around 15%. We don't typically disclose or talk about that. So that's basically a ballpark. But we think a lot of the growth to get us to 20-plus percent in Latin America overall will come from markets like that. Some of those are growing really quickly, and we just don't want to denote them as a shout-out to our competition and which of our markets are growing very quickly. But as a group, they're a significant part of the business and will become a bigger part because they're going to grow a lot faster than the core business is.

Got it. Understood. And maybe just one final question for Tony, kind of appreciate the input on some of the investment spending and other factors influencing fourth quarter margins. Not aiming to pin you down on guidance beyond the fourth quarter. But as you think more broadly about the next kind of 12, 18 months of investment spending, whether on digital or otherwise?

That's a challenging question for Tony since this is his last call. We are planning to significantly increase our investment in digital next year. We've already been making investments by hiring a head for our online business who will serve as our General Manager. This individual has prior experience at Western Union, along with a head of marketing focused on digital strategies. Additionally, we've engaged an external provider to enhance our digital front end, ensuring it matches the quality of our over-the-counter solutions. While we have established a strong backend for both our online and brick-and-mortar businesses, we are not ready to provide a specific number for our investments. However, strategically, I can emphasize that this is crucial. Many in the market have been misled; for example, less than 20% of wire transactions to markets like Mexico and Guatemala occur online. We continue to grow our share in brick-and-mortar. The companies that will succeed will maintain a balanced portfolio rather than relying solely on online services. Some of our publicly traded competitors are excessively focused on online offerings, and as a result, their retail share is declining. Brick-and-mortar operations will be vital for future growth and will contribute significantly to our EBITDA. We will invest in online services to ensure a balanced approach, but we cannot specify that investment amount right now; much of it is already reflected in our current figures, including expenses related to our third-party provider and salaries for new senior hires. Next year, we will particularly enhance our marketing efforts for online. Presently, we are focused on driving revenues back to pre-COVID levels, aiming for an increase of several percentage points. While we are not making specific projections, we need to reach those levels to have the resources for online growth. In the next five years, if you’re not involved in brick-and-mortar, you will struggle to compete in Mexico, Guatemala, El Salvador, and Honduras. Online business is still a small part of that market, but it is expected to grow faster than brick-and-mortar, which is why we are committed to investing in it.

The next question comes from the line of Mark Palmer with BTIG.

Kind of dovetailing on what you were just talking about with regard to online. If you can talk a little bit about the profile of the online users who have come to the platform, the extent to which there's overlap with your existing users? Or are they simply distinct?

We believe that our customers who shop online are somewhat different from those who visit brick-and-mortar locations. Many of our brick-and-mortar customers do not have access to the banking services necessary for online transactions, such as ATM cards or bank accounts. We have always maintained that technology is not a barrier for people wanting to make online transactions, as most of our brick-and-mortar customers possess smartphones, which are essential for staying connected with family and friends. Some customers engage in both online and brick-and-mortar shopping. We also see potential in attracting customers who previously used other online services or banks to send money, such as professionals in the U.S. sending funds back to Mexico without ever stepping into a physical store. Currently, our customer bases are more distinct, but we believe this may change over time. A crucial aspect of our strategy is to honor the integrity of our brick-and-mortar operations and the 3.5 to 4 million customers that visit them each year. We want to support customers transitioning to online services while maintaining respect for our agents, who are vital to our business. As of now, we haven't engaged in much marketing targeting our brick-and-mortar customers; we approach them as if we are a standalone online solution. We will determine our position in these markets as we move forward. It’s important that we remain strong in both areas. The revenue generated from our brick-and-mortar business is essential to support our online growth, and we aim to sustain that while expanding our online presence. For the time being, our customers appear to be primarily separate, with some overlap.

The next question is from the line of Mike Grondahl with Northland Securities.

I know you don't give agent count numbers, but could you kind of talk directionally about agent adds recently? And how that maybe compares to like a 3-year average? Are you kind of above or below?

Yes. Yes, yes. And I'm going to turn it to Randy again to do that. But I think we've got a number of programs that we put in place that are augmenting against sort of the dip that we had, obviously, as everyone had in second quarter when our field team wasn't out in the field, even though we're still putting up retailers, it was at a slower pace. We've started to rebound now, and I think Randy will talk more about that. But we have a couple of other programs that we put in place with our agent retailers that have been really successful, and that really helped sort of bridge the gap. In the meantime, that's increased the production level of under-producing agents while we begin to bring in new agents again. But I'll turn it over to Randy, and I think he'll have more to add on that.

Thanks, Bob. Bob is exactly right. So we did see a little bit of a dip in our new agent activations in Q2. And in Q3, where the last two months were right where we would have expected to be. We're right in line with where we've been historically in terms of activations on a monthly basis. That continues to be one of our very, very top priorities, and we'll finish the year strong with agent activations as well. Bob's right, during that time, when we were working primarily out of our homes, instead of being out in the field prospecting new agents, we put a couple of programs in place, and we really focused on our under-penetrated agents, and we've been able to get substantially more business from those agents, which really does offset the dip we saw in the new agent activation. So we're pleased with where we are right now in September, October, heading into November on both fronts.

Got it, great. And any quick update on Africa and Canada?

Sure. In Africa, we are continuing to expand our in-country network. We have added some excellent new payers over the past quarter or two, which will enhance our competitiveness in several African countries. We're optimistic about the developments in Africa. In Canada, we also made progress. I previously mentioned that we were able to acquire some business from Transfast, which had reduced its presence in the U.S. and Canada. This was a significant boost on an agent-by-agent basis. Overall, we are experiencing good growth in both Canada and Africa, primarily due to the payer network we have been building within those countries.

The next question is from Josh Beck with KeyBanc.

Thank you for taking the question, and Tony, best of luck in the new role. Yes, I wanted to ask about just kind of the consumer behavior. Obviously, in the last 90 days and 180 days, there's been dramatic shifts and it's rippled all sorts of different ways. So I'm just kind of curious with your consumers, obviously, you saw a really nice bounce back in Q3. That's probably earlier than what maybe many other sectors are seeing. So just curious if there's any changes in the consumer behavior that have really surprised you just in the last 3 months or so.

I believe there are a few key points regarding the recovery. Initially, our industry experienced a significant rebound. Late March and April were particularly challenging, but by May, we began to see improvement, leading to a consistent upward trend. As we moved into the latter part of the second quarter, we were increasingly confident that our business was recovering. Mexico has been leading this recovery in terms of overall financial activity in the marketplace. The country maintained a more constant open approach towards payment systems, which resulted in steadier money transfer patterns compared to some other nations. In certain countries, we observed periodic closures where banks or retailers would shut down during weekends, resulting in a shift of transactions from Fridays and Saturdays to Sundays and Mondays. This was mainly due to the understanding that there was no urgency to send money if the recipient could only pick it up later. While the overall volume of wire transfers remained steady, our growth rate has been somewhat slower, likely impacted by the pandemic. Notably, in the third quarter, the number of consumer transactions increased, indicating that consumers were more engaged with our services. We added new consumers during this period, and they were also more active. This is a positive trend, even though we sometimes see consumer growth tied to the expansion in new retail locations. We have not noticed major shifts in consumer behavior overall. According to recent data, October was our strongest month yet, as we reported over 3.1 million wire transfers. October's growth rate exceeded 19%, which gives us optimism for ongoing recovery. Mexico continues to perform strongly, and we’re also seeing significant growth in other countries beyond our primary markets. The growth rate in these emerging markets has nearly doubled compared to the pandemic levels, indicating a solid rebound from the second to the third quarter.

Really helpful. Thanks, Bob. I also wanted to ask actually on that slide about the core markets and the share. You obviously had a really successful track record over the last multiple years. If you really assume it in the last couple, it seems like in 2019, you gained about a percentage, a little bit over market share. The data, like you said, it's still kind of developing as we close out the year, but it certainly seems like you're on good momentum to maybe do another percent this year. Is that a good cadence just to think about how the market could unfold?

Yes, I believe it is. We are still gaining market share, particularly in Mexico and Guatemala, where we hold over a 20% share. This growth is driven by our 35% increase in these emerging markets, which represent a significant portion of our business with several hundred thousand transactions. This pace allows us to gain market share quickly, especially when other markets in the third quarter barely grew while we expanded at 35%. Moreover, we are actually growing even faster as the year advances. If we look at our performance for July and August, our market share in core markets reached 19.9%, indicating further growth. Our core markets are gaining additional momentum, and we believe we are now adding over 1% to our market share. In emerging markets, where growth is typically under 10%, we are expanding at about 35%, revealing substantial opportunities. Countries like the Dominican Republic and Colombia are significant markets where we see potential, as well as in Nicaragua. Additionally, we have opportunities in Africa, where our team is working on developing better payer relationships. We are also exploring a strategic partnership that could enhance our growth in Africa. We've started processing for a company in the Philippines, hinting at potential expansion into Asian markets. While we want to manage our focus carefully, we remain successful in Latin America, increasing our core share, and making impressive strides in emerging markets. Africa presents a considerable opportunity, and we also see potential in expanding from Canada, initially starting with Ontario but looking to other regions worldwide, including non-Spanish speaking areas in Latin America like Haiti and Jamaica. There are numerous opportunities ahead for growth.

Our final question today comes from the line of Timothy Chiodo with Credit Suisse.

I just wanted to dig into online a little bit more. You mentioned that often, the customers coming in are new, or separate, or different customers. That's great color. Maybe we could just talk a little bit about the marketing that you mentioned around the relative levels of return there, tending to repeat those customers coming in. Other competitors have talked about a pretty attractive LTV there, meaning once you get the user into the app, the repeat rates can be high, the LTV can be attractive. Any context to that would be very helpful.

Sure, I'll start by discussing our online business and then I’ll have Joseph Aguilar, our Chief Operational Officer, provide more insights since he’s closely involved with that area. We believe the online business has significant potential, and our focus is on two main aspects: the cost to acquire customers and the value they bring once they’re with us. We’re continuously striving to improve our approach to customer engagement. For example, our average retailer performs four times the transactions compared to competitors because we've developed new strategies to reach customers effectively. It's crucial for our online business to adopt a similar resourceful approach. When we can efficiently acquire customers and manage revenues well, it encourages further investment, creating a sustainable growth cycle. Now, I'll hand it over to Joseph for his thoughts. Joseph, would you like to share?

Sure. We are collaborating with marketing companies to create a strategy aimed at attracting the customers we want for our business. As Bob mentioned, we strive to approach things differently while maintaining the excellent quality of service and brand image that Intermex represents, which will be crucial for our success. This will set us apart in the market. We aim to highlight our brand and the high quality of our service, which is essential for growing our online business. Our goal is to work with our marketing teams to identify the right customers and emphasize what makes us unique, particularly in the markets where we currently excel.

Great. A brief follow-up. I realize it's a small part of the business, but just given the increasing discussion around neo banks and digital banking in the sector broadly, if you could give any brief update on the card program.

Sure. Absolutely. So yes, our card program, we are looking at a better way to do our card program. Currently, we have a very robust program from a payroll perspective, and we are enhancing our experience for consumers with our GPR card as well. But you bring on neo banks and the expansion of that type of service, not only to our consumers here in the U.S., but also our customers in receiving countries and beneficiaries. So we are looking at how do we create a true enhanced experience by a card for really an unbanked population that needs service both in the U.S. and in the countries back at home. So we are positioning ourselves truly at next year to be able to leverage that vision with our customers in both the send and receive countries.

That's excellent. And also, Tony, thank you for all the help and all the best of luck.

Thanks, Tim. Appreciate it.

At this time, we've reached the end of the question-and-answer session. And I'll turn the call over to Bob Lisy for closing remarks.

Yes. Thank you all for joining us today. We appreciate the questions, and we look forward to talking to you all soon. Have a great day. Thank you.

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