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

Good afternoon, everyone. I'm Rayna Kumar and I lead U.S. payments processors and IT services equity research here at UBS. I'm fortunate today to be joined by Intermex's CFO. Thanks for joining us today.

Happy to be here. Thank you.

Great. So maybe to start, can you spend a few minutes providing an overview and history of Intermex?

Sure. Intermex started in the private world in the mid-90s by an entrepreneur named John Rincon, who actually still sits with our Board, grew over time, first started sending remittances to Colombia and then very quickly focused on Mexico and Guatemala, who are really 2 of the most important countries to focus on in Latin America. I can talk a bit more on why shortly. But they grew over time, expanding an agent footprint. So really serving the community that's coming to the U.S. for a period of years to live lean and send as much home as possible then go back to a better economic situation. But grew over time, expanding our footprint into the retail space. So these are small Latin American owned business partners that do other things besides send remittances but grew over time to a footprint of about 5,000 agents, ran into some financial challenges around 2009. Current CEO came in as a consultant then, changed some focus on the business to be -- pared that 5,000 agents down to 2,000, became very, very focused, laser-focused on efficiencies. And what you see in the business today is really 10, 12 years of building that agent network, bases of agents who are in high-volume areas, which make good partners which value the Intermex value proposition.

Wonderful. So Intermex's omnichannel strategy and market focus are very different than your peers. Could you talk about your distribution strategy and focus on being a value-added premium remittance provider?

Sure. Sure. We talk a lot about retail and sometimes we want to make sure that we don't leave the impression that we don't focus on digital. We really believe in omnichannel. We believe in being anywhere that the sender wants to send. So if they want to send it at a retailer in cash, we can do that. If they want to send it at retail with a debit card or a credit card, they can do that. They want to send online via an ACH, they can do that. So our belief is not to overfocus on one channel versus another. And the retail channel maybe wasn't optically the most fashionable 1 years ago, but it's been growing very well, and it's very, very profitable. So we never wanted to take our eyes off of our retail routes as a company because we do it well and we're very profitable from that perspective. We also have the ability to send digitally. That's growing triple digits year-over-year. But I think a different tact that we've taken is we're letting that grow more organically versus putting immense amount of investor capital into that channel because to our U.S. to Latin America corridor, the payback is not as certain in terms of some of those heavy investments in digital marketing. So we're taking a different tack.

And remind us how large your digital business is?

Yes. We -- I'd say it's in terms of percentage of our overall business, it's still in the single digits. The industry defines digital more broadly as if it was the transaction was cashless on either side. So if it was originated in cash that went directly into a bank account, the industry considers that a digital transaction. If you include that for us as well, you'd be talking about we're in the 20s being cashless on either side, but the digitally originate is a smaller portion, but it's growing very nicely, and it's becoming a much more sizable portion of our business. And we're happy to say that we're doing that with relatively minimal marketing spend. 2023, we'll spend more on digital marketing than we ever have. But -- and compared to other approaches in the market, we believe if we're omnichannel and we're keeping a tight pulse on consumer behavior, that we'll be able to better allocate capital when that makes more sense.

You have traditionally grown faster than your peers and have taken market share. How have you consistently done that?

Yes. When we go into a retailer and what we've done is really -- and I say it's more of a decade or decade plus grind as we look at ZIP code by ZIP Code in the U.S., we'll look at data that's marketing data, embassy data and find where there are a large number of foreign borns in the consumer bases that we serve. And then we'll go and see how well we're represented, if at all, in those areas. And what we'll do is we'll actually go feet on the street, and we'll go and see -- we don't desire to be exclusive. We know we can differentiate with our products. So we'll go and see where the wires are being sent, who would make good retail partners, and then we'll go to those retail partners and we'll go and ask them, "Hey, tell us about some of your pain points." And inevitably, we hear things about speed and ease of use of technology and support for that technology. We'll hear things about customer service, and we'll hear things about banking relationships. And all of those things are separate ways that Intermex excels and allows itself to differentiate and be a better partner for those retailers.

Talk to me a little bit more about your digital strategy. You do it a little differently than your peers as well. And also, if you can talk a little bit about pricing in your digital business. One of your peers, based off of my own channel checks is starting to cut prices significantly in many digital quarters. Are you seeing that? And how are you reacting?

Yes. I mean I think from a pricing standpoint in digital, it's still in a discovery mode, and we're going to react as we need to on that side. But from a -- it's a fraction as profitable as our retail front end is. So that's why we're -- we don't have an incentive to go and start transitioning a great retail customer base over to digital. A lot of what we're growing in digital is additive, primarily additive. You'll find folks who are more in the bank part of society and where the Intermex brand has resonated there as well, which is great. And I think for digital, our strategy is be there with a great product, don't overinvest, don't burn capital. And from a pricing standpoint, we'll just react as we need to. But we haven't seen from that standpoint, anything that is concerning or is detrimental to what's still a fledgling portion of our business.

Understood. Your 3Q numbers were better than others in the remittance market. Can you talk about the continued remittance strength and what drove your good results?

Yes. I think it's just a product of the -- our strategy to grow is to take share, right? And if you look at the company from -- if you look from 2009 to 2015, the market from the U.S. to Latin America, remittances from U.S. to Latin America really didn't grow much at all. And Intermex grew 3x. And the reason for that is the strategy is grow by taking share. And there is a tremendous amount of -- people ask me what gets me most excited about the company from a growth perspective. I think they want to hear M&A or digital. Really, what's the most exciting is if you -- the company is in all 50 states, California is our biggest state. But if you looked at -- if you matched our penetration in the west of the U.S., that we have in the East, and it's just where the company grew up, the company more than easily doubles its size. So that organic white space opportunity on the retail side is exciting for us. And our ability to differentiate on the retail side is -- it's a huge opportunity.

Great. Okay. So we have a question coming in from the audience. What drives the lower profitability in digital versus retail? And do you think that will improve?

Yes. I think that the -- it's mainly the market and where pricing is in the market. I think there was a concept that once you shifted to digital, that portion of the commission that you shared with the agent was going to go away and everything was going to be better. When you move to digital, you've got processing costs now. That fee that you have to the payout network is still there. You're going to have higher fraud costs. So all in your margins are going to tend to be tighter. And if it cost you a lot to pull that agent through Facebook advertiser or pull that customer through Facebook advertising or whatever, you really need to make sure and that person is really transacting maybe 8x a year, you really need to make sure that payback is there.

Great. Are you seeing an impact from inflation on your customers in terms of their send amounts? How has Intermex weathered economic slowdown in the past? And if you can talk about how we should think about next year as well tied to these macro headwinds, that would be helpful.

Yes. No, I think from a send amount standpoint, I think you would have seen in 2021, we had a really outsized average send amount growth. I mean it was in the double digits almost every quarter. And that was pretty atypical. I think part of that was a lot of stimulus in the economy, but also the consumers that are Intermex consumers, the jobs that they serve, there was a great need and there was a lot of, I think, wage inflation there. And I think that was helpful. I think now over time, what we've seen is the principal amounts. Even though when we planned this year, we said, okay, we can't plan on these growing forever. Still in the first quarter, it grew by about 8% principal amount. Second quarter was like 3.4%. Third quarter, it was just under 1%. So you're seeing them kind of level off. And that could be some of inflation working its way into housing costs and housing costs and food costs. Most of our consumers wouldn't be out there driving big gas guzzling cars. So energy is, I don't think they're sensitive to, and they're not big consumers buying basketball goals and things like that. So it's not one for one with your typical U.S. consumer. But that's how I think inflation is kind of impacted. I think that you're seeing a leveling off of send amounts. But your other question was about how has the business weathered economic storms in the past? As I mentioned, 2009, 2015, market didn't grow, Intermex grew 3x. I can't promise that. I mean there's a lot of large numbers here. But with the strategy of growing by taking share, we still are positioned to -- we still are in a position where we can grow. We also have -- are well represented in industries that are kind of evergreen. So we have a lot of consumers who are in agriculture, a lot of consumers who are in food and food services. Construction is one where you may see a little bit more cyclicality, but you have a very driven consumer base that redeploys very quickly. It's kind of very nimble about finding other opportunities as well. So we think we're well positioned, and I think in recessionary times in the past, the business has still been able to grow well.

Understood. What would Intermex's biggest single growth opportunity be? And a question tied to that, what will be your largest areas of investment for the next 2 to 3 years?

Yes. I think the -- I mentioned again, the West of the U.S. for us, I mean, if we match our penetration in the East, we can have significant growth in the company doing what we do well. And the nice thing about that is that that allows us to be -- we don't need M&A to grow, but we're in a position where we generate a lot of cash, and we can be very selective in looking at different M&A opportunities as well. So what I say the most exciting growth opportunity is the West of the U.S. and then after that, I would say M&A.

Understood. Maybe talk a little bit more on the M&A opportunity here. What types of acquisitions make the most sense at this point?

Sure. You probably read about our acquisition of La Nacional, who's really the single best brand to the Dominican Republic, which was a geography in -- within Latin America, where we're probably on about a 5% share. And that acquisition of the best brand and to Dominican Republic gets us up to 20%, is a perfect fit. I wish there were 10 more La Nacional's out there. That one just happened to be a great puzzle piece. So while we will look at other remittance providers, I think we're also spending a lot of time looking at adjacencies. We're obviously great at moving money cross-border. We're great at moving information. So where we see we would have opportunity to leverage whether it be our distribution network, whether it be our client base, whether it be our wheelhouse of moving money cross-border, we would consider it. But I would say we're always active looking at a lot of things, which we cast a pretty wide net. But in M&A as a contact sport, you have to look at a lot and we'll just continue to stay active.

Let's take another question from the audience. You've mentioned that you are gaining market share. Who do you think you're gaining market share from?

Yes. I mean there's a -- it's hard to specify who precisely. I mean I think there's a -- we see a broad range of competitors in small retailer. In retail, you'll see Seagate, DolEx, Barri, Viamericas, Maxitransfers. We'll see Western Union's brand Vigo. So can't comment specifically on who we're taking it from, but those are some that we see. We also believe that there's a migration of wires that may have been done previously at big box retailers, which we don't play. We don't see. We think that those -- some of those wires are more migrating and being sent from the neighborhoods where we are. So that's kind of not one we're directly taking share. We're kind of indirectly taking share because of some of the migration. So I think that's the way we're seeing the market evolve.

We see lots of FX volatility in the quarter [Technical Difficulty] translation. Are there any benefits from the volatility in your business?

Yes, it's kind of a short-term thing, which even itself out. So for instance, Chairman probably says something on a Thursday as the dollar strengthens, our consumers will see that the peso went on sale, and we will maybe have a weekend or 2 with a lot of transaction growth and a lot of growth in the amount that's being sent. Likewise, if something happens where the dollar weakens, we'll probably see a couple of weekends where things will be a little bit softer. However, it does tend to just even itself out because even when the peso goes on sale, there's only so much money you can take out of the mattress, our consumers could take it out of the mattress to send home. And then likewise, when they're holding off on sending to see if FX rates become more favorable. Well, ultimately, that send is going to food and medicine and groceries. So that send will happen eventually. So it's a little bit of a red herring what's happening with FX. It tends to even itself out over time.

Do you tend to see an uptick in sends during the holiday season? And if so, what are you seeing so far holiday season?

Mother's Day is an enormous holiday for the industry. I mean everyone is taking care of family back home. So that's a very big holiday for us. And the holidays in December, we'll see a lot of activity, but it's actually an interesting phenomenon is that the average size of send gets smaller in December because you'll find people who are instead of the regular send that they send back to the family to take care of their family, they may send smaller sends as gifts to different family members. So it's kind of an interesting micro cyclicality in the business.

You've been using your free cash flow to buy back stock. Your stock experienced a little pull back after earnings. Are you using that as an opportunity to buy back more stock?

Yes. Well, we always said that we'll be opportunistic with our purchases. We think there's a lot of value where we're trading at the moment, and we'll continue to be active with the buyback.

Related to M&A, you recently closed on the U.S. portion of La Nacional, and you still have to close on the European piece. Can you talk about the timing of that and the rationale for the acquisition?

Yes. I mean we didn't want to tail the wag the dog, right? We had a -- there's a great U.S. business La Nacional. There's a great European business or outside of the U.S. business for La Nacional. We had all of the change of control approvals in all the states that we needed in the U.S., and we're waiting for the European process, which takes a little bit longer, and those time lines moved a couple of times, and we said we can either wait to close this whole thing as one and wait on the European regulator or we can go and endure, which is a little bit of a headache from a legal and a finance standpoint and go bring the majority of the business on now. And that's what we chose to do. So we endured a little bit more operational complexity, but we want to bring the majority of the business on board so we can start working our playbook in that business, the majority of the business sooner than later. I think we're highly confident that we'll get the European regulatory approval. It's just the process takes a little bit longer. So hopefully, early in 2023, we've got that buttoned up, too.

Do you have any plans to expand outside of Latin America? And could you discuss the time line and specific markets?

Yes. No, what I would say is that I think -- and it's to the wisdom of my predecessors is the business, I think, believed if you try to serve everywhere, you don't serve anywhere well. So I think they've been very -- the company over time has been very deliberate in terms of its expansion within Latin America and adding new countries to make sure they could serve them well. I think that we obviously have appetite to go outside of the U.S. and La Nacional was great because it does have that European entity. So it opens up Europe outbound for us. And there are other properties outside of the U.S. that we're evaluating as well. I think short answer is, yes, we have appetite outside of the U.S. However, we're going to be cautious to not overextend because we want to be able to differentiate ourselves wherever we are.

What do you think, if anything, investors are missing on the Intermex story that you would like to highlight?

Yes. I think that the durability of the retail future of this business, I think it's very important. I think we spent a lot of time this year, especially trying to push through some of the misperceptions of that. I mean, probably about 90% of our consumers are paid in cash or check, and that is a robust retail ecosystem that we have and that it goes right down to what we showed at our Investor Day is we actually brought some agent retailers into the Investor Day because that connection between the sender and the retailer that retailer may be from the person's home estate in Mexico, for instance, and help some with a lot of things. That connection is very strong, and then the connection and the trust in the Intermex brand is very strong. And so that's something that's not going away. So I think that we want folks to understand that the future of retail is bright. It doesn't mean that we do any less focus on digital, but we're going to continue to execute the playbook in retail. We feel that we have a lot of opportunity to grow there while we'd be smart about our investments in other products like card and the digital product.

How much larger can your retail distribution become, and could you quantify that by locations?

Yes. We don't specify our precise number of retailers, and it's between 5,000 and 10,000 and we do specify quarter-to-quarter what our growth rates are. But it's not -- I would just say it's not about growing the number of retailers. It's really about making sure we're growing quality retailers. Because if we bring -- if we make the effort and bring a retailer on that's only sending a handful of wires a month, well, that's a lot of wasted resources. So it's always been a mantra since 2009 of this company that we're not going to do that. So we're going to continue to grow. I think there's plenty of white space, as I said, particularly in the West of the U.S., more excited about it.

Going back to your digital business for a second. Can you talk a little bit about the difference in economics between the digital transaction for you versus a transaction that's done in a retail location?

Yes, it's going to depend on -- it's not unusual for us from a margins perspective on -- a typical size transaction in Mexico to be above $5, a retail transaction in Mexico to be above $5. And from a digital sense standpoint, maybe a couple of dollars, though I think there's a lot of price discovery. So if it's only a couple of dollars and you've had investment of $75 to $100 to actually pull somebody out of the Metaverse or wherever, bring them to download the app and start transacting and they're only transacting 8x a year, you need to be pretty sure in terms of the longevity to make sure you get your payback.

What is the average send amount on Intermex? And have you started to see that...

Our average send right now is about $450. And I think on the digital side, it's a little lower than that.

Are you seeing any changes because of inflation or the macro environment in general on that average send?

Yes, I think what we saw happen is we saw a steady growth over the past 7, 8 quarters in terms of the size of the send and now we see it kind of topping out at this point. So we only saw 1% growth in the third quarter. And so the rest of the year, we actually modeled a slight pullback. Now historically, when those send amounts have grown, they haven't typically pulled back, but it's been such an outsized growth. We thought it was prudent to model our guidance to have a little bit of pullback.

Take some more from the audience. You mentioned some overall mix shift of sends from big box retailers to smaller locations. Can you talk about what you think is driving that shift, and if that's sustainable going forward?

Yes. I think what's driving that shift is just the growth of the Latin American community and small Latin American owned businesses who do remittances. So I think that it doesn't mean that somebody when they go to a Walmart, for instance, one of our consumers goes to buy his work boots and his jeans or whatever, get to Walmart, might stop by the service desk and send a wire that certainly happens. But with more -- on his trip to Walmart, he may pass 6 or 7 other retailers in his home neighborhood, Latin American owned retailers that are offering remittances as well. So I do think that that's a shift that I think that we'll continue to see. I can't really speak to the pace of it, but I do think more being sent from small retail.

Regulatory oversight in the money transfer industry is always of a concern to investors. Anything you would highlight on Intermex' compliance policies or on any regulatory matters that we should be aware about?

Yes. No, I wish we had some wood to knock here. I would say that Intermex has had an outstanding history from a compliance standpoint. We're regulated in 50 states. We've got 10 banks in our banking group. We've got several retail banking relationships, and we are constantly under examination of what our routines and controls from a regulatory AML and OFAC oversight are. That's a good thing. And we've been public for 4 years. And that amount of eyes that focus on this area, which we invest a lot into, builds a reputation that allows us to bring in even more banking partners because banking partners can be skittish about getting involved in the money service business. But for us, when a new bank that we're looking to enter a relationship with steps back and says, "My goodness, look at the long list of banks that they already deal with now, look at how often that they're regulated," it puts us in an advantage position. And those bank relationships are important because, ultimately, when our retail network has to settle with us, because we will go and front the funds to the pay partners and the retailers need to settle with us, we can make it very easy for them. We say we bank with Wells Fargo, U.S. Bank, Bank of America, KeyBank, TD Bank. In fact, there's one right on the corner there, would that make your life easier as a retail? Inevitably it would. So that's scenario that we just can't take our eye off the ball for a second because the -- we don't want to risk losing -- aside from not doing the wrong thing, we don't want to risk ever losing one of the real advantages in the businesses is many banks wanting to work with us.

What do you think your competitive advantage is on the technology side with the merchants?

Yes. I think a simple, clean, easy-to-use interface, and we've been launching a new software and hardware combination that I think by the end of the year, it will be about 35% of Intermex's U.S. wires will be sent from this new technology. Just simple, easy to use, fast. And more importantly, if there's ever any issue with technology or a consumer ever has an issue with the wire, you've got a well-staffed trained call center that we monitor very tightly who'll pick up the phone in 4 seconds, just another reason that we're a good partner for our agent retailers and also for the folks who are sending the money that want to make sure that it's getting where it needs to go.

So we've ever heard from you in the past that Intermex could transact faster. Like it's easier for the merchant to put in that transaction. Is that -- do you think that's differentiated among the industry?

Yes, I think you do. I think it's -- do you think the data that we have suggest it takes about -- on average, about a minute for most of our competitors, and I think that we can send one in about 20 seconds even faster if somebody is using a loyalty card, but just a simple clean, easy-to-use interface because -- and that's of a big advantage because a retailer who's trying to run a store to do other things as well want something that's simple, easy to use. And so that's something that we've prided ourselves as a company since as long as we can remember, is making that technology a differentiator and something that's a preferred use of the retailer.

Here's another one from the audience. Are you primarily focused on consumer remittance or do you think B2B transfers could be a potential opportunity for you going forward?

Yes, I'd say the easy answer to that is yes. I think B2B is an opportunity for us. And I think in that long list of adjacencies that we look at from an M&A standpoint, that is in that list. So yes, we do think there's opportunity there, and we'll continue to evaluate it.

Any opportunity or risk that could be created for you with the emergence of FedNow, which is likely to be introduced in mid-2023?

Yes. I mean we'll continue to study it. I mean I don't think we step back and feel that that creates a concern for us. So now we'll continue to keep our eyes on it.

It looks like we're reaching the end of our time. So just any final thoughts or important points that you would like people to take away from this meeting that we didn't talk about?

Yes. No. I mean I think that we firmly believe as a company that omnichannel is the future. And I think that while we talked a lot about digital or retail today, our digital product is growing triple digits year-over-year. We continue -- we feel that we want to focus and maintain that momentum. But we, as omnichannel, having the data from multiple sources on our client behavior, we think we're best positioned when it makes more sense to allocate more capital in digital channel that will be the ones that do it right, so.

Great. Well, thank you for joining us today.

Thank you. Appreciate the time.