Earnings Call Transcript - IMXI Q1 2021

Operator, Operator

Greetings, and welcome to the International Money Express, Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Mike Gallentine, Vice President of Investor Relations. Thank you. You may begin.

Mike Gallentine, Vice President of Investor Relations

Good morning, everyone, and welcome to our quarterly earnings call. This conference call includes forward-looking statements, including our 2021 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.

Robert Lisy, CEO

Good morning and thank you for joining us today. This morning we have some exceptional results to share with you, and we look forward to answering your questions, following our prepared remarks. As you saw in our press release that we issued this morning, Intermex generated another set of impressive quarterly results. Let me highlight some of them on slide three. Net income was $9 million, a 58% increase compared with the prior year period. Adjusted net income was $11 million, an increase of 40% over the prior year period. Adjusted EBITDA increased 27% to $17 million and revenues grew 22% to $95 million. Since we have become a public company less than three years ago, revenue has increased 52% from $247 million to $374 million. Adjusted EBITDA has increased 78% from $40 million to $71 million. Net income has gone from a loss of $12 million to a gain of $40 million, an increase of $52 million. Additionally, Intermex has now obtained or exceeded its quarterly EBITDA target in 11 out of 11 quarters since becoming a public company. Driving these outstanding results is our strong operating foundation that has delivered world-class customer service for our customers and agent retailers. The company has pursued a unique hybrid focus strategy. We focus on partnering with agents that are found in the very best locations and that share our business philosophy, placing the consumer first and as a result, providing the utmost in customer service.

Andras Bende, CFO

Thanks, Bob, and good morning to all the analysts, investors, and customers that have joined us. Turning now to slide seven, let's walk through a really strong first quarter in more detail. As Bob mentioned, this was another double-digit growth quarter across really every one of our key metrics. In the quarter, revenues were up 22.4% over the prior year quarter and finished at $94.6 million, driven by a combination of factors. The company was up 14% in customers alone, so we continue to competently take share. Total remittances were up 19.3%, which allowed us to capture a significant tailwind from average remittance amounts, up right around 10%. In the quarter, the company delivered net income of $9 million, an increase of 57.8% versus the prior year period, which translates to an adjusted net income of $10.6 million, which you can see on page eight, an increase of 40% versus the prior year. The revenue growth I mentioned was a big driver; however, lower depreciation and amortization and interest expense were all big contributors as well.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of David Scharf with JMP Securities. Please proceed with your question.

David Scharf, Analyst

Thank you. Good morning, everybody. First off, Bob, just a little more granularity or insight into the geographic mix expansion. Appreciate the transaction growth rate provided by your markets. But can you just remind us, particularly given how quickly your emerging markets have been growing, what percentage of the revenue mix is coming from the core versus emerging?

Robert Lisy, CEO

Yeah. We haven't disclosed the percentage of the core versus the emerging. But the emerging is now, it just continues to grow in the high 30% to 40% or more. And there are some quite large markets there. I mean, the Dominican Republic, for instance, as an opportunity is among the top three or four markets in Latin America. So, it would easily fit in size-wise with El Salvador, Honduras, and markets of that size. It is becoming a significant share of our transactions, hundreds of thousands, but we don't disclose the exact makeup of the percentage versus the core markets.

David Scharf, Analyst

Okay. Understood. I think you partially addressed the follow-up question related to this topic. Are there any specific countries in the emerging markets that we should particularly focus on?

Robert Lisy, CEO

Our growth is primarily driven by Mexico and Guatemala, which have shown exceptional performance. These are the largest and most profitable markets in Latin America based on gross margin per transaction. Despite our increasing market shares in these areas, we see significant potential for further growth. Additionally, there are still many opportunities in El Salvador and Honduras, which have recently grown much larger than the Dominican Republic, even though they were once comparable in terms of our transactions. Colombia also presents a substantial opportunity, along with Ecuador, Peru, and Nicaragua. While these countries may not reach the sizes of Mexico or Guatemala, they have the potential to be similar to the sizes of Honduras and El Salvador, which we currently consider part of our core markets.

David Scharf, Analyst

Got it. I have one question that may relate to digital. I want to ensure I understand how to interpret some of the metrics. You mentioned that a very small portion of retail transactions are initiated with a debit card, which suggests that many of these centers are primarily non-bank and paying with cash, making them unlikely candidates for digital transactions. I understand that on the receipt side. However, on the receiving side, is there any significance to the metric of 20% being deposited?

Robert Lisy, CEO

I want to highlight a few things regarding our business. We believe that many digital-only competitors are overlooking a significant segment of the market, and we're glad they are because it allows us to capture those transactions and increase our market share. This strategy is proving effective for us, and we're pleased with it. Additionally, we think some of the major competitors, who are perceived as market leaders, have shifted their focus away from retail and are primarily online. This seems unbalanced, especially in Latin America, where retail plays a crucial role in driving business. Our goal is to provide consumers with options; they can shop online or in retail, depending on their comfort and preference. Many of our retail partners accept cash transactions, as well as debit card payments, which is uncommon among other companies. We also facilitate a lot of transactions for consumers who want to send money to loved ones, allowing them to receive cash or deposit it into bank accounts. We collaborate closely with major payers to encourage consumers to use these services. All of this supports our aim of giving consumers the freedom to choose. Our digital business will remain a small part of our operations until there’s a market demand for it. As soon as it becomes more efficient to drive digital transactions compared to traditional methods like wires, we will focus more on that. We are committed to growing our business holistically; for instance, our Mexico operations saw a 14% increase recently, largely due to our retail presence. This indicates that there is significant potential for growth at the retail level, and we will continue to pursue aggressive strategies while also expanding our online offerings and other payment options for consumers.

David Scharf, Analyst

Got it. Thank you very much.

Operator, Operator

Thank you. Our next question comes from the line of Mark Palmer with BTIG. Please proceed with your question.

Mark Palmer, Analyst

Yes. Good morning. The principle amounts during the quarter were quite large once again. And just wanting to get your perspective on, what is accounting for these sizeable principal amounts, which would seem to occur early in the pandemic in terms of their emergence and what is your thinking about the persistence of the larger principal amounts? Is this something that's part of a new normal, or is this something that's likely to moderate going forward?

Andras Bende, CFO

We have seen this consistency continuing well into April. Before the call, we discussed how much larger the principal amounts have become recently. Initially, this was likely due to many consumers, especially in Mexico, still being employed in essential industries such as farming, agriculture, food processing, and construction. They had greater needs back home, which led to them sending larger amounts of money. This trend seems to have persisted, although it's difficult to pinpoint exactly why. One significant factor appears to be the influence of workers in construction, which has been robust lately. While we are uncertain about how much stimulus money directly impacts our consumers, it may benefit them indirectly through local projects like landscaping or home improvements. Despite a strong first quarter, we have not adjusted our guidance because we expect some normalization in the numbers. Historically, we've observed instances where changes, like a presidential election in Mexico, led to spikes in principal amounts that eventually plateaued, creating a new normal. We cannot predict if this will happen again, which is why we are cautious about our outlook for the last three quarters of the year. We are assuming that principal amounts will revert to typical levels, and if that doesn't happen, we could see a very strong performance in that period.

Mark Palmer, Analyst

Thank you. And looking at your cash flow, we are modeling that free cash flow is going to be continued to be very strong for quite some time. If you can talk a bit about capital allocation, what your thoughts are right now. I know in past calls you've discussed the very lofty multiples that are being demanded by potential digital targets. What is your thinking about other avenues for M&A, picking up chains of stores, things of that nature, and other means through which you would allocate some of that cash? And thank you.

Andras Bende, CFO

I'll address the first part regarding capital allocation. From our overall cash flow, we certainly prefer to allocate in the M&A space, but we are approaching this from a position of strength. We want to avoid making the first mistake and overpaying, which is very easy to do in the current environment. If we find the right property, that would likely be our primary focus. I'll let Bob discuss the properties that interest us shortly. After that, we may consider a moderate-sized buyback if M&A opportunities do not materialize. These are our top priorities, but as the situation and environment evolve, our focus could change. Now, I'll let Bob share more about the M&A properties we might consider.

Robert Lisy, CEO

Thanks, Andras. Mark, I believe there are three categories we might look into for potential acquisitions, and digital acquisition isn't one of them, especially not in terms of digital remittances. Most companies in that space are private, their valuations exceed our market cap, and they may not make the best fit for us. Some smaller players in that market, while we consider ourselves small, might actually be operating at an even smaller scale without profitability. Acquiring them would simply mean spending a lot to invest in a non-viable business that we would struggle to grow just as we do our own. Setting digital aside, we have three potential areas for acquisitions. We're currently having very early discussions in these areas. First, we might target niche markets in U.S. outbound services that we currently don’t serve, or where our service level falls short compared to niche providers. These acquisitions are straightforward since they don’t involve overlaps where we'd lose transfer opportunities due to common retail channels. They would primarily be retail-focused, possibly with some online elements. The second area of interest in the U.S. involves businesses related to remittances, such as B2B or B2C payments. We’ve had talks about a few opportunities that have arisen, including one we discussed prior to the pandemic that was put on hold. These businesses often facilitate regular payments, perhaps using card services. This sector is attractive to us, as companies within it are usually more affordable than larger digital firms, but costlier than the retail-oriented niche players. Lastly, we see potential in geographic expansion, possibly originating wires from Europe or elsewhere, where there may be merger or acquisition opportunities. These discussions are still in very early stages. In summary, while digital acquisition isn't on our agenda, we believe we can grow that sector more efficiently than through acquisition at this time.

Mark Palmer, Analyst

Thank you.

Robert Lisy, CEO

You are welcome.

Operator, Operator

Thank you. Our next question comes from the line of Timothy Chiodo with Credit Suisse. Please proceed with your question.

Timothy Chiodo, Analyst

Great. Good morning. Thanks for taking the question. I wanted to talk about agent location runway. So, certainly, there's a long runway in some of your core states and of course, additional states as well. Maybe you could just give us an update there in terms of how much remains, how you're attacking it, and how that could support further share gains ahead?

Robert Lisy, CEO

Yeah, I'll open it up and then I'll ask Randall Nilsen, our Chief Revenue Officer, if he wants to add a little bit of color at the end of that. There's a tremendous opportunity west of the Mississippi. In the Eastern United States, I would say that we are the dominant number one player to Latin America. Most likely I can't speak that fact, but that's how we feel. There are markets there where Mexico and Guatemala, where we might have 25% to 30% share, states that are like that. On the west of the Mississippi, we have a really great business. The number one state for us in terms of total wires is California. It's bigger today than our whole business was 10 years ago. But there's such an opportunity in the west in states like California, still in Texas, even in states like Arizona and Nevada, Utah, Colorado, our average level of what we call penetration, which isn't really market share, it's a little different, but it's certainly indicative of how well we've conquered the west versus east. It's probably about a fifth as much as we are in the east. So, we could grow there many times over. We don't really even think about it in terms of equaling the same kind of market penetration in the west as we have in the east, not at least from the outset, but we think about that business in the west, which is a big part of our overall business, could easily be more than doubled in the next several years. We think there's a huge opportunity still for us in a lot of those states, a lot of it driven by Mexico, Guatemala, El Salvador, and Honduras, but some markets in the west are quite diverse. Some markets like Texas and others have wires going to Africa, for instance. There's a population, almost every Latin group in the LA area, in San Francisco, quite diverse markets. They can offer even opportunities for us to send money to even countries today that we don't serve. So, we think there's a huge amount of opportunity. We have about a third to a fourth, as many retailers per foreign-borns in the west as we do in the east. So, again, a lot of work to be hitting the right zip codes with our distribution, capturing wires away from competitors and driving that business. Randy, you want to?

Randall Nilsen, Chief Revenue Officer

Sure. Yeah. Thank you, Bob. So, just to add a little bit more color to that, we are looking as we continually do at zip codes, as Bob said, housing foreign-borns. We'd look at it by U.S. zip code, by state, by our selling district. So, we know in each sales district what their top zip codes are in terms of underperforming, underserved, or unserved zip codes. So, we'll prioritize those zip codes based on opportunity. And Bob's exactly right. We've taken a very sophisticated look at the state of California, and we know exactly the number of zip codes that are unserved. We've got sales team members pointed to those zip codes. We know the zip codes that were underserved, and we've got sales team members pointed to those zip codes. We've also looked at the zip codes by country. We've taken our top nine countries that we serve outbound to. And we know by zip code which houses the most Mexican foreign-borns, Guatemalan foreign-borns, etc. We know what our level of penetration is in each of those zip codes, how many zip codes were unserved in. And we've got a sales plan pointing our team members to those zip codes as well. So, we think it's a fairly sophisticated look at growing our business. And it's exactly where we're headed for the remainder of this year.

Andras Bende, CFO

To add to that, we have discussed principal amounts and the current state of the business. We want to clarify that we are not expecting improved EBITDA margins as we plan to invest in additional personnel in the field, particularly in the western states, to enhance our penetration in specific zip codes. This will enable us to drive wire business, both in the short term and moving forward. We will be allocating more resources to retail, as well as to online initiatives and new products. However, we believe that the retail sector will be the primary source of cash flow for us for many years to come. Increased investments in this area should provide us with the necessary resources to support our other business lines.

Timothy Chiodo, Analyst

Great. Thank you. Plenty of great detail there. Really appreciate you addressing that.

Robert Lisy, CEO

You are welcome.

Operator, Operator

Thank you. Our last question for this morning will come from Mike Grondahl with Northland Securities. Please proceed with your questions.

Michael Grondahl, Analyst

Yeah. Hey, guys. Thanks and congrats on the progress. Two questions. One, you sort of laid out the runway for agent expansion, but could you talk a little bit, and I know you don't give numbers, but maybe the last six months kind of the new agents you've signed up, just has it been above trend line, below trend line? And then secondly, could you just talk about productivity of the salesforce?

Robert Lisy, CEO

I'll start by noting that we are proud of how resourceful we've been during the pandemic. Randy and the sales team successfully added new retail locations, a feat few competitors managed. Even during the toughest times when fieldwork was restricted, we engaged with retailers remotely by phone, shipped the necessary equipment, and provided training without being onsite, although this did slow our progress. Until the third quarter of last year, the rate at which we added retailers had diminished, but that led to significant pent-up demand, enabling our sales force to hit the ground running. We really saw an increase in the number of new retailers in the third and fourth quarters and into the first quarter of this year, and we expect this momentum to continue. Our average sales representative has been performing exceptionally well, although we don't disclose specific expectations regarding new retailers due to competitive concerns. We're definitely adding many more retailers, and it's important to remember that the bulk of transactions from new retailers typically occur in their second and third years. On average, a new retailer reaches a certain number of transactions within three months, that number generally doubles in the second year, and continues to grow in the third year. This supports our overall goal of achieving high transaction volumes per retailer. So, not only are we adding more retailers, but they are also performing at a high level, driving transactions in promising areas.

Randall Nilsen, Chief Revenue Officer

Thanks, Bob. Good morning, Mike. Just to provide some additional context, Bob is correct. When the pandemic began last March, our sales team was active, but not to the extent they would have been if they were selling in person. We had them working from home for a couple of months. As we resumed full operations in the field during Q3 and Q4 of last year, agent activation levels rose by about 25% compared to Q1 and Q2 of last year. Moving into Q1 of this year, we activated about 50% more agents this quarter than in the first quarter last year. Additionally, this year in Q1, our staffing levels were the highest they have ever been, which meant we had more sales reps in the field and could activate more agents per rep than before. We are pleased with how our sales team is bringing new agents on board. As Bob mentioned, we expect significant growth for the remainder of this year. Another factor to note is that we have updated our compensation plan as we do annually, and this year there's a stronger focus on new agent productivity. Our sales reps will receive increased commissions based more closely on the productivity of their new agents.

Michael Grondahl, Analyst

Yeah. It does. Thanks, guys.

Robert Lisy, CEO

Yeah. Thanks.

Operator, Operator

Thank you. There are no further questions at this time. I would like to turn the call back over to Bob Lisy for any closing remarks.

Robert Lisy, CEO

Thank you all for your attention on the call. We appreciate the interest in the company, and we look forward to talking to you all very soon. Have a great day.

Operator, Operator

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.