International Money Express, Inc. Q3 FY2024 Earnings Call

Good day and thank you for standing by. Welcome to the International Money Express Third Quarter Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference call is being recorded. I would now like to turn the conference over to Alex Sadowski. Please go ahead.

Good morning. And welcome to the Intermex third quarter 2024 earnings call. I would like to remind everyone that today’s call includes forward-looking statements and actual results may differ materially from expectations. For additional information on International Money Express, which we refer to as Intermex for the company, please see our SEC filings, including the risk factors described therein. All forward-looking statements on this call are based on assumptions and beliefs as of today. You should not rely on our forward-looking statements as predictions of future events. Please refer to Slide 2 of our presentation for a description of certain forward-looking statements. The company undertakes no obligation to update such information, except as required by applicable law. On this conference call, we will discuss certain non-GAAP financial measures. Information required by Regulation G under the Securities and Exchange Act for such non-GAAP financial measures is included in the presentation slide, our earnings press release and our annual report on Form 10-K and quarterly reports on Form 10-Q, including reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures. These can be obtained in the Investor section of our website at intermexonline.com. Presenting on today’s call is our Chairman, Chief Executive Officer and President, Bob Lisy; and Chief Financial Officer, Andras Bende, as well as other members of the senior leadership team. Let me now turn the call over to Bob.

Good morning, everyone. Thanks for joining us. I’ll get straight to the point. This quarter is a pivotal one for International Money Express. We have achieved strong results that underscore our position as a leader in the remittance marketplace. Additionally, we are making significant strides in executing our strategy shift to fully realize the market opportunity relative to our digital channels offering and ultimately creating greater balance and sustainability in our overall business model. We continue to deliver exceptional performance across all metrics. Our GAAP EPS for Q3 hit a new high of $0.53, up 29.3% year-over-year and our adjusted EBITDA at an all-time high of $33.9 million, growing 7% year-over-year. This quarter’s results demonstrate our ability to perform through both the retail and digital channels, underscoring our role as a multichannel company, espousing an omni-channel strategy designed to meet customers whenever and however they choose to send money. We have expanded our send capabilities to more than 90 destinations, including 14 among the top 15 corridors worldwide. This quarter was not only about short-term results. It was about building for and securing the future of Intermex. Today, we stand as a profitable, highly digital-ready company with a powerful and extremely profitable retail network backing us. As our digital channels margins have surged past those of retail, the proposition is now many times more economically promising than just a few years ago. Additionally, the remittance market is becoming increasingly digital and we are working to balance our company’s portfolio accordingly. As a result, we’ll be in the best position to maximize our market share and profitability in a market that today is estimated to be about 30% digital to Latin America. We hold an important place in the lives of over 4 million Latin American consumers who use Intermex each year. These consumers trust Intermex to send their hard-earned money back home to loved ones. Equipped with a highly profitable proposition in both segments of the market, the timing is now ideal to execute a more substantial but highly efficient investment in our digital channels and extend new business lines that can further benefit our senders in the U.S. and a similar number of receivers in Latin America. The company’s Board of Directors and its management team firmly believes that our current market valuation does not fully capture the company’s performance, superior positive cash flow, intrinsic value or growth potential. We’re committed to acting in the best interest of our shareholders, and to that end, we are initiating a process to assess strategic initiatives, which could include, among others, a potential sale in a private transaction. The company has retained FTP Securities, known as FT Partners, as a financial advisor. We believe this move will create flexibility to optimize our growth and better fulfill our potential as an industry-leading fintech. We feel the optimal time is now to unlock the company’s opportunity regarding its digital channels offering. Our app has been highly regarded by our users, demonstrated by a high level of retention and recurrent usage per cohort, and we feel that our app is as good as any in the industry. Combined with the highest standard of superior customer care and our strong reputation in the Latin American corridor, Intermex is ideally positioned to compete and win. From a financial perspective, we have successfully improved our digital channels unit economics. And today, a digital-initiated transaction delivers a superior gross margin on average than a retail transaction. Digital channels have never looked more promising for Intermex. All that remains for us is to invest in the customer acquisition strategy that will build our business. We will bring the same efficiencies to the digital-based business that have made us so successful in our retail portfolio, reducing the digital consumer acquisition cost even further. In support of delivering against that full opportunity, our approach is to ensure we unlock the full potential of the business and deliver maximum value to shareholders and stakeholders alike. We believe this is the right time to become much more active and aggressive relative to our digital channels and new business lines. And as stated earlier, the Board of Directors and the management team jointly feel the opportunity will best be assessed through reevaluating the strategic options through the initiation of a formal process. During this quarter, we encountered some headwinds in the form of slower market growth and economic shifts, which continue to put pressure on retail. Yet, we are in an excellent position to navigate this transition effectively. Our adaptability remains a hallmark of our operations and we continue to pivot smartly to respond to those dynamics. We believe that we will continue to grow our retail business faster than the market and gain share in retail. I want to reinforce that our retail business remains highly profitable and produces tremendous free cash flow. And importantly, in certain markets, such as Mexico and Guatemala, the majority of remittances still originate from the retail market overall. Our digital channels have become the real success story. Not only are we seeing strong transaction growth, but as I indicated earlier, our gross profit per transaction from a digitally-initiated transaction has now surpassed that of retail. This represents a huge advantage. It’s one of the main reasons we’re leaning so heavily into digital as a core part of our strategy going forward. We are meeting consumers where they are, and increasingly, they are choosing digital solutions for speed, convenience and security. Meanwhile, our retail base, which brings in about $600 million in annual revenue, remains a crucial part of our business. As other competitors pull back from retail, we are capturing more of the market, maintaining a profitable retail operation that helps fuel our growth in digital. This balanced, omni-channel strategy enables us to capitalize on diverse opportunities and ensures that we are not leaving any potential customers behind. Retail has shown remarkable resilience and continues to support our growth, especially as we escalate digital. At this time, although the digital market is growing faster, for many of our core customers, cash is still king and it is not going away in the foreseeable future. This fact helps keep retail relevant. About 70% of the outbound remittance business is sent from retail in the overall Latin American market. We feel deserting this segment of the market prematurely would not be wise for our customers or our shareholders. At Intermex, we do not just run a network of retail locations or offer digital solutions. We’re in the business of facilitating the movement of money for our customers faster, more reliably and more safely than anyone. That is who we are and that is what sets us apart. We have built a strong, reliable brand that customers trust. Our operations are robust and our call centers are world-class. Our customer service has set the industry standard. We also have a top-notch banking and payer network that ensures transactions happen seamlessly every time from cradle to grave. We never fail to honor or pay out a transaction on time and that is a trust we protect fiercely. We have an efficient, productive retail network that is highly cost-effective, enabling us to strategically expand our digital channels offering. It is worthwhile to mention that our retail sales and marketing costs are well below 10% of gross margin, making this business highly profitable. Our digital solutions provide the best-in-class user experience that is fast, secure and designed to meet the needs of today’s consumer. By blending the strength of both our retail and digital operations, we are positioned to maximize growth and profitability while meeting our customers’ needs with flexibility and convenience. Q3 has been a quarter of achievement. Digital channels are performing better than ever with customer acquisition costs down and retention at record levels. Our digital transactions have increased significantly, outpacing the market by a large margin. These are metrics we’re excited about and they point to the growth potential ahead of us. Internationally, our licenses that include the EU, as well as the United Kingdom, are an important step forward in fulfilling our strategy and providing a base from which we can grow in Europe. As we have indicated previously, we believe that the digital channels opportunity will be significant in both geographies. This expansion into new corridors aligns perfectly with our vision for a truly omni-channel future. Domestically, we have streamlined operations and reduced costs significantly to be more efficient. Those cost reductions will be fully realized in 2025. Additionally, we have successfully refinanced our credit line on very favorable terms, giving us greater flexibility to fund our growth initiatives. Our staffing costs are also down as we continue to shift tasks offshore to maximize efficiency and lower our cost basis, bringing up more capital to invest in strategic initiatives. La Nacional and i-Transfer acquisitions remain on track and we are confident they will reach their margin targets by 2025. Both continue to expand their year-over-year EBITDA performance. In summation, we are proud of the results in Q3, but even more optimistic about the future we are building for the company. With that, I will turn the call over to Andras Bende, our CFO, for a deeper dive into our financial performance.

Thank you, Bob. On the financial side, in this third quarter of 2024, International Money Express continues to demonstrate the resilience and adaptability of our business model. In the challenging retail backdrop, we posted total revenue of $171.9 million with exceptional digital revenue growth, climbing over 66% year-over-year as we see growing adoption across our digital platforms and the success of our digital partnerships. With a consumer base now reaching 4.2 million, a 5% increase from the previous year, our expanded market reach underscores the effectiveness of our omni-channel approach. Our adjusted EBITDA reached $33.9 million, up almost 7% from a year ago. Importantly, our adjusted EBITDA margins remain strong at 19.7%, a testament to being the player’s best positioned to capitalize on the omni-channel opportunity with the premium product to Latin America. That being said, Intermex’s relentless focus on efficiency continues to serve us well and further bolster our margins as stock costs and G&A are both down year-over-year. As Bob mentioned earlier, we’re very pleased to report that we’re in the very final phases of the La Nacional and i-Transfer integrations, and in 2025, we expect to fully realize the synergies and margin expansion anticipated when we completed the deal. The contribution from that deal is on target to deliver the EBITDA margin potential we had projected before the acquisition. As for EPS, on an adjusted basis, earnings per share came in at $0.61, up 19.6%, while diluted gap EPS reached $0.53, representing a 29.3% increase from the prior year. These results reflect our commitment to operational efficiency and profitable growth. Interest expense rose to $3.2 million, marking a 14% increase. However, most of the year-over-year increases are due to fees from a highly successful refinancing we completed in August. Our tax rate came in at 30%, down slightly from a year ago. Net free cash generated, again, our internal measure that attempts to remove the working capital cyclicality, came in at $17.6 million this quarter, underscoring the strength of an efficient, highly productive model as it pertains to cash. Much of the cash we generated was used to repurchase over 1 million shares this quarter as we leaned heavily into the buyback after our share price decline. As I mentioned earlier, we successfully refinanced and upsized our credit facility on favorable terms, enhancing our financial flexibility as we enter the next phase of growth. As we close the third quarter, our financial strategy remains focused on fortifying our position and outpacing the market at retail, the highly profitable cash-generating heart of our business, managing costs down and buffering macro headwinds, and accelerating our journey in digital as we patiently set the stage to grow profitably with a best-in-class product. And with that, I’ll turn it back to Bob.

In closing, Q3 has been a meaningful quarter for Intermex, with strong results and a clear strategic direction. We are moving forward with purpose, with the needs of our customers and our investors at the forefront of our decisions. We’re excited about what lies ahead and we’re ready to take Intermex into the next chapter. Thank you for your support and belief in our vision. We look forward to your questions and to diving deeper into our progress and plans. We are now ready to take your questions and provide further insights into our performance, strategic initiatives and the outlook for Intermex’s future. Thank you.

Thank you. And our first question for the day will come from Gus Gala of Monness, Crespi & Hardt. Your line is open.

Hey. Good morning, Bob. Good morning, Andras. Can we talk a little bit more about competition, brick-and-mortar retail here? I mean, where are we seeing the most degradation at retail? Is this the pricing of the ramping agents or maybe in the existing agents, you’re seeing more competition at the margins there for wire share? And I just wanted to clarify, should we take your commentary in the prepared remarks to mean, digital share in LatAm is accelerating beyond what we expected? And maybe you can share on what you’re seeing in terms of changes, maybe in terms of habituation or behaviors of bankification, maybe in the U.S. and proliferation of digital endpoints in Latin America? Thank you.

I’m going to try to remember all those questions first. So let me start with the competition. I don’t believe that there are any competitive issues at retail that have existed for the entirety of our time in the industry. There’s a pocket of guys that operate strictly on price. There are others that operate on a bit of price and quality. We tend to be more towards the quality side of the equation. Any softness in retail, we’re growing faster than the retail market is growing. The challenge that we have related to these days is that the market that just two years ago was growing in double digits, about 12%, is now growing somewhere around flat to 2%. Along with the fact that the digital business now, in our core countries, is about 30% or more. So it’s growing. It’s not accelerating or absorbing or overtaking retail. Retail is still more than twice as big as the digital side, but the digital now is a significant piece of the business to Latin America and that piece is growing faster than the retail piece. That is really absorbing almost all of the industry growth. In fact, more than all the industry growth, while retail is actually negative. So when you look at the two pieces, we’re beating the rate of growth in retail and we’re beating the rate of growth in digital by a large margin.

Yeah. It does. And I want to clarify one thing, is the margin that you guys were beating retail the last couple of years, last call was kind of clear, it’s compressed. Can you talk about that Q-over-Q? Did that further compress? I mean, or have dynamics gotten better?

Your question is our margin per transaction or the margin we’re beating?

No. No. Your spread versus what the industry grows in retail.

I believe we are also adjusting our approach in retail, and our competitive edge compared to the market has narrowed. This trend is not surprising given the current flat growth numbers, as smaller players in the market are likely to become more aggressive. While we continue to outperform in retail, the gap can close during a downturn and will widen again when the market improves. Competitors tend to become more optimistic in growth periods, so even if their growth is less than the market, they may not be as aggressive. In contrast, they tend to act more aggressively in a downturn, even when the overall market is declining.

Okay. I appreciate all that color. My fault.

No, that's fine. Could you please restate your second question?

Yeah. Can you talk about what you’re seeing domestically in terms of more bank accounts amongst your senders and then insofar as you have visibility? And then considering endpoints in Latin America, I mean, like, are you seeing increased digitization changing behaviors? And maybe I’ll squeeze in another one that wasn’t even in the original question, but anything interesting on endpoint diversification at retail in Mexico? I think OXXO owned by FEMSA is looking at doing work there as an opportunity for presence that may be favorable to the U.S.?

Yeah. I mean, I’ll start this out and then I’ll ask Marcelo Theodoro, who’s our Head of Digital and Product to chime in, because he’s certainly the resident expert. But we’re seeing steady movement of more consumers having accessibility to banking on the U.S. side. But one of the biggest hurdles that remain is the fact that many of our consumers, particularly to places like Mexico and Guatemala, are not necessarily bank account eligible in a traditional sense. There’s also not a huge willingness on many of those consumers' parts where we talked about a little bit in the prepared remarks that cash is still king and retail has a lot of resilience. So we’re seeing on the edges maybe more consumers coming in when they’re documented, when they’re coming in with a work visa, when maybe they’re a younger generation. I don’t think there’s every consumer that’s at retail who is an eligible consumer today for digital, nor do I think everybody that’s digital is someone who came from retail. I think many of those consumers are different and they may have been people that were using bank wires in the past. Now, on the other side of the border, we’ve been seeing a higher share of the wires beginning to be deposited into bank accounts, and that’s digital on that side. And sometimes we just talk about that more clearly than we did this time, but that’s a higher share of our business on the digital side.

Okay. That’s super helpful. And my last question will be, you guys removed the guide, can we talk to that decision, is that in the conflict, what does that have to do with the strategic review, is there any connection there? And Bob, you were around for when, I think it was 2007 to 2016, when you were held by Lindsay Goldberg, can you talk maybe about the environment of like maybe the approaches you got from potential different homes back then versus what you’ve seen in the past couple of years?

Well, when I walked in in 2008, probably through 2012 or 2013, we weren’t exactly the prettiest company. So there weren’t a lot of people trying to buy remittance companies, and certainly, Intermex wouldn’t have been at the top of the list. We went through a large transformation that took a company that was a $1 million in EBITDA to where it sits today. So, as we became more successful, we’ve had a number of inquiries in recent years, we won’t disclose who those are. Some strategic, some sponsors have come around the business because of the quality of our performance. When you look at our business and you think about the cash that we throw off and if we applied the increase in earnings per share to where we were trading a couple of years back, we’d be a $25 or $30 stock right now. So, very unappreciated right now on the marketplace and I think, from my perspective that appreciation would be greater in potentially a different environment and that’s why we’re looking at those strategic alternatives.

Got it.

I mean, it’s not unusual to not guide when you go into a strategic process. We carefully examine that with our Board and our council. And then secondly, some of the things that we talk about, we’re going to begin immediately. Some of that investment into digital and things like that. So, it’s not going to be something we’re going to do right now in giving guidance.

No. That’s helpful. Thank you. I appreciate the clarification. I’ll jump back in again.

Thank you. One moment for the next question. And our next question will be coming from Rayna Kumar of Oppenheimer. Your line is open.

Good morning. Thanks for taking my question. It’s good to see that the digitally sent money transfers increased 76% in the quarter. I was wondering if you can walk us through how the economics of digital money transfers versus retail transfers feel?

Okay. So, you mean you want to talk about the unit economics?

The unit economics and margin profile.

Okay. So, I’m going to do a Mexico wire. So, that’ll be a little easier. And I’ll do the retail side. And then I’ll ask Marcelo to do the digital side. So, on the retail side, essentially, we have about a $10 fee. It’s $10 almost everywhere up to $1,000 sent. And then with that, we gain an exchange profit for foreign exchange and that’s typically around 60 basis points. Let’s call that about on $400, that would mean a revenue stream of $10 for the fee and about 60 basis points on $400 or about $2 to $12.40. From that, the agent retailer, it’s a blend. Most of them are around 50%. Some get more. Let’s call that about $5.25. A payer fee, that’s a little over $2. That will bring you down to a margin that will be a little over $5 for Mexico wire. And that’s sort of the retail side of things for Mexico, which is our most profitable. Other countries that are dollarized, for instance, would be much different because you wouldn’t have that FX component. And in those cases, the unit economics could be as low as $3 or less.

Thank you, Bob. On the digital side, we have a gross revenue per transaction around $11. It’s important to highlight that, different from what Bob said, we don’t have to pay any fee to agents, which helps a lot with the cost of it. But on the cost side, the main one is related to the card processing cost. We have around $2.50 when we think about our average ticket. Then you have costs related to chargeback losses and payers’ commission. All together around $3.20, which brings us to something between $6.00 and $6.50 per transaction.

Understood. Thank you for that color. That’s really helpful. I understand you’re not giving 2024 guidance, but I’m wondering if you can say anything about what you’re seeing so far for fourth-quarter trends, maybe on transaction growth or active customer growth?

Yeah. I mean, again, we’re not, I think we did some, it’s difficult to start commenting on parts of guidance, right? But I’ll try to do the best I can here. We believe that the top-line growth in the industry to our core market, especially Mexico, will remain soft in fourth quarter. We might start to see some acceleration, but those are driven by a number of factors, which have been mainly driven by a stronger peso, low housing starts and the fact that we’ve had a long bull market in Mexico. So we’re lapping a long history of high single-digit growth. So, we expect that to be relatively flat in the overall industry growth. The digital business continues to grow at a high measure and if you consider that the digital business makes up around 30% of the business, I’m talking market-wide to Mexico, and that piece of the business has grown at 30%, while the industry’s flat, you get a 9% lift from the digital growth, which means that retail will be kind of negative still.

Got it. That’s very helpful. I appreciate that. And if I can just sneak in one more on your early thoughts on how a Trump administration could impact your business, be it with policies surrounding banking regulation and immigration? Thank you.

Yeah. I hope that he impacts our business the same way he did last time, because we had the best four-year run we’ve had in the industry. I think this is an economics issue. I think when our economy is strong, the challenge we’ve had to Mexico for the last few years is that we’ve had a very weak dollar. So, when you send $500 home, you’re getting far less pesos. That was actually a disincentive to come across economic factors, and the fact that about a third of our constituents work in the housing industry, which is picking up a bit now, but it’s been really slow, part of that is due to high interest rates. From our perspective, we feel like that this did not have a negative impact on our business last time around. In fact, that was the strongest period we had during his first administration in terms of growth.

Appreciate all the color.

Thank you. One moment for the next question. And our next question will be coming from the line of Mike Grondahl of Northland. Your line is open.

Hey, guys. Thanks. First question, Bob, I just want to make sure I understand your or IMXI’s response to the challenges on the retail side. Are you adding sales people? Are you pushing more incentive? What’s your response to that?

Well, I don’t know what you mean by the response to those challenges. We can’t change the market. The market’s growing flat and we’re still gaining share at retail. So we are trying to be more efficient, targeting the right zip codes and being more aggressive where we don’t have wires and we have an opportunity to get them. We’ll be much more aggressive on price. But I want to be clear, this isn’t our frailty or our failings at retail. We’re still outperforming the market at retail, but we have some strategies in place for growth.

Yeah. No. Hey, I get that. I just wanted to make sure you weren’t just waiting for Mexico to come back either?

What do you think?

Well, a long time, but for many quarters, you talked about hiring sales. So this call, you didn’t spend a lot of time talking about your response.

We’ve increased the number of people in our sales team and rolled up to middle management, and we have a new regional manager and more customer-facing people in key markets. We’ve increased the level of people especially where we have high margin and the opportunity to grow.

Fair. That’s helpful. And then, hey, pivoting to the digital side, what does that investment look like between now and the end of 2025? Is that $5 million to $10 million bucks or more? And then if you could talk a little bit about the CAC and the payback, like, hey, if you spend a $1 million, how many new customers does that get you and what is the payback on that?

At this time, we’re not going to disclose what we plan on spending in 2025. We will clearly invest in digital which is profitable on a unit economics perspective. We’ve done substantial work to make our app one of the best in the industry and are focused on reducing customer acquisition costs. We’ll be looking for strategic ways to optimize our resources and partnerships moving forward.

I agree 100% with Bob. Having the best solution in the market today, we’re uniquely positioned for success. The opportunity to grow exponentially is ahead of us.

Got it. And can you give us roughly what is that CAC today? Is that down to $40, $50, $60 per customer?

I think you are closer to the number. We prefer not to disclose it right now, but what you’re saying is a reasonable number versus our reality.

The more we can leverage co-opting with partners helps build our business faster and lowers customer acquisition costs dramatically.

Got it. Hey, guys. Thank you.

Thank you, Mike.

Thank you. One moment for the next question. And our next question will be coming from the line of Chris Zhang of UBS. Your line is open.

Thanks for taking our question. So I have two questions. The first one relates to your near-term investment needs. I think from your Q&A so far, I think you’ve touched on a number of areas. I appreciate digital is still an important area, but just wanted to see if we could maybe discuss some of the other specific areas and if it could also rank order the areas of your near-term investment needs in the fourth quarter and going into 2025 and also related if there’s any change in your needs, priorities or timelines during the strategic review process?

All our investments revolve around our digital strategy and customer acquisitions. We’re ready now and think the market is ready. Other areas do not have significant need for investment.

Right. Thanks a lot for the color, Bob. My follow-up question is around retention or loyalty terms. I appreciate there can be some benefits, but I guess just from what you’re saying, is there any impact on your retention or is there any customer response to that you’ve been observing or in the early days?

We found that the loyalty program wasn’t necessarily performing optimally, so we restructured it. We don’t expect any impact from that.

Thank you. One moment for the next question. And our next question will be coming from the line of David Scharf of Citizens. Please go ahead.

Hi. Good morning. This is Zach on for David. Quick question first on the 10% share for digital. Just wanted to first check if that’s on the send side or what the end ratio is for digital. And then just on a broader sense, any kind of guidance or insight into trends in the Mexican market, particularly with volatility in the currency? Thank you.

So, the first piece is that send side is under 10% for digital. If we were to consider the payout side, it would be more than that, but we’re talking about the send side.

Got it. Thank you.

When the peso weakens, there’s more of an incentive for people to come to the U.S. and work. Hard to say how quickly that will happen, but a weaker peso typically supports our business.

Thank you. This does conclude the Q&A session for today. And I would like to turn this call back over to Bob for closing remarks. Please go ahead.

We thank you all for your time and attention. We look forward to talking to you all soon. Thanks again.

This does conclude today’s conference call. You may all disconnect.