International Money Express, Inc. (IMXI) Earnings Call Transcript & Summary

Welcome to the fireside chat with Intermex conference call. My name is Hilda, and I will be your operator for today. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Mark Palmer. Sir, you may begin.

Thank you. Good afternoon, everyone. I'm Mark Palmer, financials analyst at BTIG, and I have the pleasure of hosting this fireside chat with International Money Express, aka Intermex, during which we will talk about the impact of the coronavirus on the U.S. money transfer industry and how Intermex has responded to it. If you have any particular questions for the company, please e-mail them to me at [email protected], and we will pass them along to the company. On with us today are Bob Lisy, Intermex' Chief Executive Officer; and Tony Lauro, its Chief Financial Officer. And now with some opening remarks, here is Bob Lisy.

Good morning, everyone, or good afternoon, I should say. Thanks, Mark, and thanks to BTIG for organizing this call. We really appreciate it. We thank all of you that are joining us either live on the call or that will listen to it later. It's a great opportunity for us to be able to speak to you all directly about our company and to be able to convey to you the confidence that we hold in our company through this challenging period. We'll talk a little bit, I think, as we'll go through the process today and the question-and-answers, just how well positioned we are and how we built a company that's -- I'd like to think of it as being built of brick versus straw or sticks, a company that can withstand the downturns in the market, as many of you that we've met with in the past know and we speak about, our ability to persevere through difficult times as well as good times. So we feel like we're uniquely positioned right now. Our model, which has been a model built upon profitable, sustainable growth versus growth that is not necessarily sustainable or is kind of chasing the latest showy number, is something that will withstand and hold us. Our great margins, our great operating capacity, all of those things are things which we will and continue to leverage, and we've already begun to leverage through this process. So we'll talk a little bit about all that as we go through the conversation today. So again, thank you all for your attention, and we hope it's beneficial for all.

Okay. Thanks, Bob.

And with that, I'll turn it over to Mark.

I guess -- thank you. To begin, broadly speaking, what do you think investors should know about Intermex specifically and the U.S. money transfer space in general in terms of operations during the crisis that they may not know?

Yes. I think the first thing that everyone should know is this really is an essential business, right? I mean whereas we all participate or see or experience the rush on supermarkets, gas stations, all of the normal staples that we all need to have for the possibility of shortages, the same thing happens in the money transfer industry. The difference is that the ultimate purchase is going to happen in Mexico, Guatemala, El Salvador, Honduras or other countries. But the initial push to be able to send money happens here in the United States. All the individuals that are here working want to make sure that their families are fully stocked up and safe and all the rest of it. So it's a very essential business. It's really unlike other businesses that might have recreational purposes or something other than essentials. Basically, most of the money sent is used for food, shelter, medicine and schooling for children. So these are critical wires that are being sent. And I think in many cases, many of the local authorities that even close down retail agencies recognize that it's a critical sort of need for the community. As it comes to Intermex, I think the important thing about us and how we've differentiated ourselves over the years in the industry is that we've been a value-added provider, one that's leveraged our great technology along with our customer service orientation and a careful picking of agents that has created the most productive agent network ever in the history of money transfer. That network sustains us through these difficult times because we don't have a lot of waste in the system. So we're really, really efficient. We're not seeing grace over too many unproductive agents. Our agents are generally productive wherever we are. Our technology, the speed of transactions and the trust that consumers and agent retailers put in us because of the way we've delivered both in terms of our technology and our customer service, so those are things that cause us to be in a better position with the retailer and the consumer during a crisis, that trust that they have in us. Additionally, that same model, though, has created the kind of stability in our company that's made us highly profitable with really high margins. So a couple of things that are there. We know we have a lot of resources relative to free cash on the books of the business, more than enough to get past this crisis. So we can be a little more specific, Tony will, as we go through the conversation today. And secondly, that we're throwing off still free cash flow in March. Now if the economy tends to slow down a bit more, that free cash flow may be reduced, but we have the ability to reduce our transaction count by tremendous amounts and still be cash flow positive because of the economies of scale, because of the efficiencies, because of the way we built the model, so tremendous stability. And again, as I said earlier, sort of the brick house of the money transfer industry, certainly of the competitors other than the Western Union world, we're very solid financially.

Bob, you built Intermex' business model and positioned the company as a premium provider in a differentiated way in the space. How does that stack up now as a liability or an asset for the company during this crisis?

Well, I think the first thing, Mark, as we were saying, if we were a company with very thin margins, a company that was a high discounter, going very aggressively and selling only on price and not on value added and joined into the fray, which has really been commoditizing portions of the industry, we wouldn't have a lot of margin to play with as the business might slow down. And as I've said, it has not yet slowed down through March. But as there may be a downturn temporarily in the economy, there could be a slowdown. As that happens, it puts us in a position because we have such great margins per transaction and great EBITDA margins relative to revenue. It puts us in a position with a lot more headroom to actually not even dig into cash reserves as there's a downturn in the economy. But the second important thing is that same approach to the market, which leads us to be cash positive even in a downturn, is also the one that's created the great cash reserves that we have. I mean just in first quarter, we've added -- we expect to add to our free cash $6 million or $7 million, where a lot of companies in our industry in the first quarter, particularly the small niche guys, are actually digging into cash reserves because it's a slower time of the year. So we think the model in -- will -- as we go forward day-to-day because we'll be able to continue to still be cash flow positive at much lower volumes, which we have not anticipated or experienced yet. And also, if that happens, and it wouldn't even drop any further than that, we have tremendous cash reserves that could get us through months and months of a downturn without any trouble at all.

Now you had mentioned in the company's March 19 press release that it had closed 33 company-owned stores. First of all, can you give us a sense for the percentage of revenue that you generate from those stores? And then more broadly, to what extent is Intermex open for business right now?

Yes. So the stores, their branches, and they do -- just so we're clear, it's not a strategy -- a go-to-market strategy for us. The 33 branches we have are really -- are great opportunities for us to be a testing ground. We're able to speak directly to the consumer without the agent, and they're sprinkled throughout the country and they've been opportunistic. When we've seen something where an agent retailer was selling a location, we might purchase it and turn it into a company store. But first of all, it's not -- never been a key point of our strategy. We're not a brick-and-mortar with us owning that brick-and-mortar with our employees in the store kind of model. We're an agent model. So as a result of that, those 33 stores were important for us. And whereas they're great information for us or a testing ground, able to target consumers we otherwise might not have targeted, they only represent about a little over 1% of our overall transaction volume, and so it's not a very significant amount of the business. It -- we have about -- well, we have thousands of retailers. I'm not going to disclose the number, but thousands of thousands of retailers and the majority of those are open. We believe that probably somewhere between 5% to 10% of those might be impeded in one way or another. They might be in areas that have been given a quarantine and have participated in that quarantine. There are other agents we have that are in -- agent retailers that are in quarantine areas that have been able to provide the authorities with information we've given them about being a licensed money transmitter and that it's a critical and essential service, and they've been able to remain open. We have a big share of our retailers at our food or food service oriented businesses. And that's well over 50% of our agent volume. And those stores, obviously, are central businesses and are -- don't come under any scrutiny even if they're in a quarantined area. They may be a bodega, a small supermarket, a small carryout restaurant or whatever. So ultimately, the agent network is operating at very close to full efficiency. We were looking at it -- Randy Nilsen, who's our Chief Revenue Officer, and I were looking at it this morning, and we had a slight increase over the weekend in agents that did 0 wires, about 450 more agents than normal, which would really account for, on our agent base, about 5% of our agent base. So it's not a big amount that's really inoperative at this time. We feel that generally, it's full go out there in the marketplace.

And what percentage of the money transfers that Intermex facilitates are used for consumer necessities?

I mean we believe almost all, right? I mean there's -- generally, the typical consumer, whether it's a Mexican or Guatemalan, El Salvadoran, Honduran or whatever, it's typically a very humble person with humble means that comes from a small village, sometimes from a big city like Mexico City, but it's coming to the U.S. to basically send money back home for his family and maybe even extended family. And I say it's -- demographically, it skews heavily towards male, skews heavily towards 18 to 45 or 50 year old who are sending money home to their core family or to their core family and extended family for the purposes of buying food, providing shelter, medicine and sometimes schooling for school aged children still. So we feel like that's the bulk. It's not a discretionary. I mean most people can understand that an individual does not trek, particularly those undocumented individuals, does not trek across the desert in the middle of the night, risks as freezing, heat stroke, all the things that our consumers, many of which do risk, those that are undocumented, and there's a share of that in the industry that are Western Union customers, MoneyGram customers across the industry, that they don't risk that for discretionary income. They're risking that because they're trying to provide a better life for their family for essentials. It's a very resilient population. We'll find that, in the worst of times, there still is a strong industry. It may not grow. It may be flat as it was for a number of years from 2008 to 2015. And by the way, during that time, 2008 to 2015, we had astronomical growth and we took share from others. That's how we grew, even though the industry really didn't grow tremendously during that period. But we'll see the stability of that market because it really is. When you're -- it's a lot different when someone's working hard to create money to send home. And if he doesn't, his family doesn't have shelter and they don't have food versus they can't take a Disney vacation. So it's -- this is really essential. And I think our customers, as a result, tend to be very resourceful. And if they're working in a hotel and they're laid off, then they're going to work at the car wash. And if the car wash is closed, then they're going to be standing at Home Depot. And maybe they're sending a smaller amount and we might see principal amounts decrease a bit, but ultimately, their lifeblood for their family depends on them, and it's critically essential that they continue to send money.

And a couple of questions now for Tony. First of all, where does Intermex stand right now with regard to liquidity and availability under its revolving credit facility?

Yes. So let me talk about liquidity. Hi, Mark, and thanks for the opportunity and thank all of you for joining us today. I'll just start with our liquidity position. So if you recall from year-end, we ended the year with about $29 million of free cash outside of all of our working capital that we use to process wires, just truly free cash on the business. Through Q1, as Bob mentioned, we added to that. So now our position by the end of March will be around $35 million, and that's after servicing our debt -- and at the end of the quarter, would include almost a $2 million payment on the principal of our term loan. So even after all that, we're sitting at $35 million. That $35 million is -- even in a scenario where our volumes were to drop, let's say, 75% versus plan from April 1 through the end of the year, we would have enough cash to get well into 2021 without pulling any levers at all. Now obviously, if things start trending that way, we would stay ahead of the curve, and we would pull -- there are some natural levers that we would pull, and there are some things that are more discretionary that we would do well in advance of that to keep our cash burn lower and extend that runway even further and further into 2021. So overall, I would say, we've worked really hard to build a rock-solid balance sheet and we're very confident in our ability to get through this crisis with any reasonable time lines and any reasonable impact and come out the other side in good financial health.

And Tony, to follow up, can you remind us of the cash flow dynamics of Intermex' business?

Sure. So -- and this is where the revolver comes in. So as you know, we use our own working capital, which includes cash that we have in the business, not our free cash but other cash in the business as well as we have a $35 million revolver, which we rarely tap into these days. We maybe use it 1 weekend out of the month, but it's $35 million and it's sitting out there. We take that working capital, and we buy pesos, quetzals, et cetera, for the day, up until about 1:30 based on projected sales for that day. Then those currencies are sent to our payers across the border, and customers throughout the day or throughout the weekend come in. They're in the U.S. They come in with cash to send home. And then those wires are processed and the monies are already sitting across the border to be picked up because we sent it there earlier in the day. They process the wire. The agent then, over the course of the next day or the next several days, deposits that cash into our account here in the U.S. And that working capital excludes that $35 million of free cash that I talked about. But you should also understand that in a scenario where volumes have slowed down, the net working capital, which is in excess of $100 million, that need would be lower. So some of that would be freed up as well if we needed it to be, but we don't anticipate that's going to be the case.

And have you seen any changes in consumer behavior with all of the recent volatility in the peso? Bob?

Yes. Go ahead. Did you want to take that?

Yes. Can you hear me?

Yes.

Okay. Yes, I was -- I guess I was not coming through because I was speaking. Can you hear me now?

Yes, we can hear you now. We can hear you. Yes, we can hear you.

Okay. Great. So yes, we've seen historic shifts in the peso. It -- there's been days where the peso overnight has moved a whole MXN 1 per dollar, which is a 5% shift. That very much creates an incentive for the consumer to believe the peso's on sale and there's a rush to send. This has been a historic -- not only the shifting, but there's been historic days of highs. We've had days where the peso has been pushing near MXN 25 per dollar. And when that happens, the consumer believes that their dollars, their money, their currency is worth a lot more south of the border than it is on the north side of the border. And as a result of that, they scrape up any extra money that they can whatsoever to send to Mexico as quickly as they can. It impacts 2 things. It impacts more transactions. Sometimes someone will send a second transaction. But that also impacts greatly the average principal amount per transaction. So as a result, instead of maybe the average send, someone sending to Mexico would be $375, it might go to $450. It might go to $500 when the peso becomes weakened to a great extent, and that's really the biggest change that we see. Now what happens then is you have, like today, where the peso has strengthened, it's come back a little bit, it probably responds to the U.S. stock market -- responding a bit and it's gotten a little stronger, you'll see sales on a day-to-day basis get a little weaker because the consumer will basically look -- the sender will say, "Yes, it's come back. It's not as valuable as it was yesterday. Let me see if it changes tomorrow." And they'll try to hold and you'll see the rush on the days when the peso weakens, and you'll see a little bit slower business when the peso gets stronger. Now over time, if the peso were to stabilize at a higher level, there's only so many dollars people can send, it starts to plateau and we don't see those changes. But volatility will always create sort of big days and slower days just with the consumer trying to pick when is the best time to send, particularly when that might be a difference in if you're sending $500 and it's -- the peso moves 5%, it's $25, that's a lot of money to the consumer here but even more money on the other side of the border down in Mexico. So it does influence behavior to a certain extent.

And you had mentioned in the March 19 press release that your online remittance platform has shown very strong growth. Can you talk about the behavioral trends in particular that you're seeing with your online money transfer platform?

Yes. We are seeing really great growth, and I want to, I guess, first, make clear that from our perspective, we still believe, for this time currently and going forward in the near future, in the middle term, that brick-and-mortar, doing transactions at retail locations is going to be the bulk of the business. But what we are seeing is that we know that there are more and more Mexican senders and Guatemalan senders and others who had become armed to be able to be online. We're doing some of that ourselves with our own payroll card, right? And so those individuals now armed with that payroll card can go online and can send a wire. And whereas they may have still chosen to go at retail because that was a comfortable environment, at this point, with some of the challenges of going to retail or even just the fact that it's less convenient than it used to be, as we said, we still have 95% of the network up and going, but that's a little more inconvenience than it used to be, may have chosen to go to the online site and start to send. We think that we're doing 2 things that we empowered a lot of people to do that because of our card product. We put lots of people on our card now that we've encouraged them to be able to go online and send money, some of which were already doing so, but some of which probably needed the little extra nudge of the uncertain times of going out into the world or maybe the lockdowns or whatever and some of them chose to go online. But I want to be clear, it's not going to create an individual who's unbanked, who doesn't have a credit card or a checking account or a debit card to be able to go online and do wires. There still is that necessity there that is not present in most of the -- in the toolbox of most of our consumers. So we don't see hordes of people. We don't think that, ultimately, this is going to be the precursor to everybody moving online. We do think it's a nudge for people that may have moved online down the road. And we're excited about the fact that our online business is growing the way it is because we believe that it's not so much that we're redirecting customers, but we think we're getting new customers and competing now with -- whereas in the past, people always think about the online guys being disruptors and taking customers from us. We don't see it that way. We don't see that they're coming into retail and taking our customers, but we see our online presence, the way we're equipped with call centers in Mexico, call centers in Guatemala that really know how to speak the dialect, the Spanish that our consumers are comfortable with, that understand the geography, that we're going to be able to take customers from other online providers because we are much more geared to Latin America. So we see it as a really big plus and it's exciting. At the same time, we still see our brick-and-mortar business is going to be really the key to our success now and in the -- certainly, the short and middle run. Online, we'll continue to grow and we're excited about that, and we want to continue to grow it. But again, the brick-and-mortar business is really our focus.

And of course, the U.S.-Mexico border is closed right now. What can you tell us about how that has impacted your business? And what would a prolonged shutdown of the border mean for the business?

Well, let's remember, when we say the border is shut, the border is shut to a percentage of people that are sending remittances every day. What's shut now that's differently is people that are coming through checkpoints that are documented immigrants coming to work legally in the United States. So the first thing is, remember that, that's not going to do anything to do any difference in terms of there could be greater patrolling at the border and all the rest of it, but the rest of the border is not going to be completely locked down or shut down for those people that are coming across the border undocumented. That's still going to be present, and that's a big share of people -- of everybody's customers that are in remittances, particularly at brick-and-mortar in the field. We do see that the H-1N1 (sic) [ H-1B1 ] visa programs, and some of those were farm workers, are on temporary hold. I think there's a lot of controversy about that. I know the White Houses has wanted to do that. California Governor has said, "Okay, very logically, who's going to pick your fruit and vegetables," because a lot of these people are coming in to work in the fields in California and other places that are labor forces that we don't get anywhere else. So I think there could be some bit of slowdown with people coming across the border, certainly legally. But it also means that people are not going to be leaving, that are here in the U.S. And there's going to be a need for some -- from work in other areas that otherwise wouldn't have been available if these H-1N1s came in. So I think it will be a redistribution of people that are already here. There needs to be, obviously, a flow of new immigrants because there'll ultimately be people going back home. But I think in the short term, it's not a terribly scary scenario for us. I think a very weak economy would have more effect on short-term money transfer remittances than locking down of a border would. A border lockdown completely, if it was 100% able to be locked down for the long term, which today seems impossible in the long term, even in the short term to be 100% locked down, that would obviously have an effect. But I don't see that's what's happening. I think there's still people coming across the border today. They're just not coming across legally. And I don't see it as a long term, even with the visa, H-1N1 visas that are going to work in the farm industry, those are going to have to be freed up once we get by the crisis because those are the people that are picking your peppers, your tomatoes, your oranges, your -- all your fruits and nuts, all the things that are picked in the Central Valley of California, so we're going to need that labor.

Now there -- with regard to your U.S.-Mexico business, there have been some cryptocurrency articles published stating that your Ripple agreement doesn't apply to your U.S.-Mexico business. Can you provide some clarity with regard to that topic?

Yes. Mark, it's Tony again. Let me take that one. So let me set the record straight here because I don't think those articles are accurate. So there are 2 products that we are working with Ripple on and we're still very optimistic about those products, the first of which is RippleNet. And as you know, RippleNet is simply a hub where 300-plus financial institutions are plugged into the hub, and when we plug into that hub, we're instantly connected to them. We still have to go in contract with those institutions to be our payers in different countries, but the technical connection would already be there, and that would speed up our onboarding by 3 weeks to 1 month, which is great. In a place like Mexico, where we largely have our payer network completely built out, it wouldn't be applicable. Now it could be applicable, but by and large, it's not because we have a pretty fulsome business to Mexico in terms of payer coverage. Now the second product, On-Demand Liquidity, or ODL, one where we can buy XRP with U.S. dollars in the U.S. and immediately sell XRP into pesos in Mexico, allowing us to basically convert dollars to pesos and send them across the border 24/7, that has the most promise in Mexico of anywhere. So we're very excited about On-Demand Liquidity as a product for helping us be more efficient with our working capital. And U.S. to Mexico, where most of our volume is and where this product is up and running, is right there at the forefront.

Okay. Well, thank you very much. Actually, that's all the questions that we have today. Bob and Tony, on behalf of BTIG, I want to thank you for taking the time today and providing a very helpful update on the business. And for all of you dialing in, thank you as well. If you do have any additional questions for the company, you can e-mail them to me at [email protected], and I'll make sure that they make their way to management. So thanks again.

All right. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.