Q2 2024 Earnings Summary
- Intermex is outperforming the market in both retail and digital channels and plans to invest more in digital to enhance future growth. The company believes they are beating the market at retail by 1-2 percentage points and outperforming in digital as well. However, they are currently overweight in retail and underweight in digital, so they see a huge opportunity to invest in digital, which has explosive growth potential and higher gross margins.
- Significant opportunities for expansion in Europe, both in retail and digital channels, leveraging a more advanced digital market and higher banking inclusion. Intermex's European business, currently a low single-digit percentage of the company's overall business, has the potential to grow several times over by expanding into key markets like Germany, France, and the UK. The European market is more receptive to digital services due to higher rates of banked consumers, presenting a tremendous opportunity for digital growth.
- Strong financial performance and cash flow enable Intermex to invest in growth initiatives like digital expansion without compromising profitability. The company reported over $120 million in EBITDA and is projecting $55-$60 million of free cash flow, which allows them to invest in digital marketing and customer acquisition while still growing earnings per share. Their digital business has attractive unit economics with gross margins about 40% higher than retail, and the investment in digital is expected to drive future growth without causing significant red ink.
- Declining Retail Segment Due to Macroeconomic Factors: The company's retail remittance business has faced a decline of approximately 3% to 4% in Latin America, particularly in Mexico, attributed to macroeconomic conditions like inflation and a softer retail market. The CEO acknowledged that the retail market is smaller than it was a year ago, and this is impacting their overall performance.
- Digital Business Underrepresented and Requires Significant Investment: Despite the growth of the digital remittance market, which is estimated to be about 25% of the remittance volume to Mexico with a growth rate of around 40% , the company's digital business remains in the single-digit percentage of their operations. The company needs to invest significantly in marketing to drive customer acquisition for digital services, which could impact margins and profitability. The CEO mentioned that they have not been spending as much on marketing as competitors and need to invest more to catch up.
- Shift in Capital Allocation Away from Share Buybacks: The company has reduced its share repurchase activities, deploying just under $35 million year-to-date, compared to a prior rate of approximately $20 million per quarter. This reduction is to preserve capital for potential M&A opportunities and to invest in growth capital for their European business. This shift may raise concerns about the effectiveness of capital deployment and potential dilution of shareholder value.
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Macro Trends
Q: Are June's positive trends in Mexico holding up?
A: In June, we saw a surge in business due to a weakening peso from election activities in Mexico. However, this uplift was short-lived, and we are not seeing that trend continuing into July. The retail market is currently at minus 3% to minus 4%, but we're outperforming the market despite these macro challenges. -
Digital Investment
Q: Can you elaborate on investing in digital?
A: We're focusing on marketing and product management to drive our digital business. Our customer acquisition cost has decreased by half , yet we need to invest more to attract customers. The unit economics are strong, with our digital gross margin being better than retail by almost $1. Despite this investment, we're still making over $120 million in EBITDA and growing our earnings per share. -
Retail Challenges
Q: What's causing challenges in the retail segment?
A: The retail market faces macro-economic pressures, not increased competition. Historically, the Mexico market contracts by mid to high single-digits during downturns. We believe the retail market is currently at minus 3% to minus 4%, and we're still outperforming it. We're enhancing execution with new leadership like Chris Kawula to mitigate these challenges. -
Capital Allocation
Q: Are share buybacks being reduced in favor of M&A?
A: We've dialed back buybacks to focus more on M&A opportunities. This quarter, we closed a U.K. acquisition for $1.5 million, providing us with a license in the U.K.. We're exploring M&A in areas like agent retailers in the U.S. and digital business opportunities to drive growth. -
European Digital Expansion
Q: What's the digital opportunity in Europe?
A: Our European business is a low-single-digit percentage of our overall operations. There's significant potential to expand in countries like Germany, France, and the U.K., which could triple our business. European customers are generally more banked, with 85% to 90% of retail wires using a debit card, making them more ready for digital services. -
Competitor Failures
Q: Why did competitors like Sigue fail?
A: Sigue's demise was due to poor technology and misinvestments. They lacked a quality retail application and made unprofitable acquisitions. In contrast, we've focused on key markets like Mexico and Guatemala, building a strong cash-generating base. We're metrically-driven and invest strategically, differentiating us from failed competitors.
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