Euronet Worldwide, Inc.

Greetings and welcome to the Euronet Worldwide second quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this session, please press star followed by the number one on your telephone keypad. If you need operator assistance during the call, please press star zero. It is now my pleasure to introduce you to your host, Mr. Scott Kloss, General Counsel for Euronet Worldwide. Thank you. Mr. Klassen, you may begin.

Thank you. Good morning, and welcome, everyone, to Euronet's quarterly results conference call. We'll present our results for the second quarter of 2020 on this call. We have Mike Brown, our Chairman and CEO, Rick Weller, our CFO, and Kevin Caponecchi, the CEO of our ePay division, on the call. Before we begin, I need to call your attention to the forward-looking statements disclaimer on the first page of the PowerPoint presentation we'll be making today. Statements made on this call that concern YourNet or its management's intentions, expectations, or predictions of future performance are forward-looking statements. YourNet's actual results may vary materially from those anticipated in such forward-looking statements as a result of a number of factors that are listed on the first page of our presentation. URNET does not intend to update these forward-looking statements and undertakes no duty to any person to provide any such update under any circumstances. In addition, the PowerPoint presentation includes a reconciliation of the non-GAAP financial measures we'll be using during the call to their most comparable GAAP measures. Now I'll turn the call over to our CEO, Mike Brown. Mike?

Thank you, Scott, and welcome everybody who are joining us today. We certainly hope that you are all healthy and safe. Well, while the 2020 COVID-19 pandemic has continued to provide us with challenges, and our results certainly reflect those challenges, I am pleased that we were able to exceed the results we anticipated in April. As I reflect on why this was possible, I would start with the strength of our balance sheet. With more than $1.2 billion in cash and no debt maturities for the next five years, we've been able to focus on opportunities as opposed to figuring out how to survive. So rather than our employees worrying about whether the company would survive and whether they had a job or could pay their bills, our incredible employee base has been able to focus on business activities like providing world-class service to our customers Thank you for joining us today. to drive the business forward and ensure continued growth in the future. I have never been more proud to lead this organization, and it is truly their dedication that has driven all of the successes that I get to tell you about today. As we move through the second quarter, we were pleasantly surprised that the transaction levels we were seeing in the business in April, when we provided you with our anticipation for the quarter, were about the low point of the COVID pandemic. From that April snapshot, we have continued to see improving trends, particularly in ePay and money transfer. To provide a little more color on where the segments stand today, I will hit a few highlights for each. In EFT, to offset the significant transaction declines, particularly in our high-value cross-border transactions, the EFT team has achieved in the second quarter nearly $25 million in cost savings. The run rate of these cost savings should continue to benefit the third and the fourth quarters as well. Moreover, we have identified additional quarterly cost savings of approximately $15 million. As shelter-in-place orders were lifted, we began to see domestic transactions on our ATMs ramp up in both Europe and Asia. This trend appears to be continuing into the third quarter, with many European countries beginning to open their borders to other EU member states. I should also point out that in the event that we see greater transaction volumes than anticipated, we would need to roll back some of these cost savings I just mentioned. But this would be a good thing that I truly hope happens. And finally, on cost savings, while EFT led the way with nearly $25 million, the total company achieved approximately $35 million as identified and we have identified additional quarterly savings of approximately $15 million. If you sum these quarterly savings, you can see that we are in line with what we showed you last quarter, roughly a goal of $130 million in cost savings. We have started to see a slight pickup in international transactions in Europe. In our Asian markets, the borders for international travelers remain largely closed. and on the outsourcing front, as we have progressed through the global economic uncertainty, we have found banks still interested in outsourcing ATMs or even selling their ATM estates. We will continue to evaluate these opportunities to help drive the business forward. We still expect and are managing the EFT business, anticipating a more significant recovery in 2021 as travel schedules resume. In April, we mentioned that we are seeing good sales of self-use prepaid content during the start of the pandemic. That strength continued through the second quarter. We experienced strong sales in both physical stores and through digital means. Physical retailers such as grocery, pharmacy, and convenience stores were deemed essential, and so their doors remained open, allowing customers to continue to purchase content. In many markets, our leading digital market position is and expanding digital platforms enabled more online and in-app sales. Our technological leadership made it possible to have connections to more wallets in India and Brazil, which drove app-initiated mobile digital media transactions even higher. In fact, in Brazil, our mobile top-up transactions in the digital channel grew more than 900% over the prior year, and in India, we are now processing more than 5 million transactions a day through mobile wallets. Based on the current transaction trends, we are cautiously optimistic the growth trends in ePay will continue. Finally, in money transfer, as shelter-in-place orders were lifted and unemployment rates started to relax, Transactions bounce back more quickly than we anticipated. This is consistent with our experience that immigrants sending money home are very responsible and think of their family first when they receive their pay. While government stimulus programs have certainly helped to stabilize the money transfer volume, we have seen signs of our smaller competitors struggling with liquidity issues during the pandemic, Well, our customers and agents have benefited from the strength of our balance sheet. For some insight on how the business is performing around the world outside of the U.S. domestic business in Malaysia where shelter-in-place orders resulted in the complete shutdown of our retail and agent network through most of May, international outbound transfers grew 8% in the second quarter. North America... North American-originated outbound transactions grew 11% in the quarter, accelerating to over 20% year-over-year growth in the month of June. We also saw a strong rebound in Europe and Africa business, which grew 5% over the same quarter last year, but finished the quarter with June growth of over 25%. And finally, digital transactions initiated through our website or our mobile app grew 98% in the second quarter, accelerating to 120% year-over-year growth in June. I should also point out that through July 26th, all of our regions and channels were performing better in July compared to the already strong June results that I just mentioned. In fact, in the U.S. and Canada, we are seeing a nearly 30% growth rate in July and a nearly 40% growth rate in Europe and Africa, while Asia expanded 10%. And our digital business improved throughout the month, reaching 145% growth aided by our expansion into new markets that I'll tell you about in a few minutes. So while I think some of this is kind of a catch-up for the volume that wasn't sent in April and May, Some of it is a more permanent pickup of business from smaller competitors and those who have exited altogether. Additionally, the industry draws a distinction for so-called self-service, or some in the industry call them, quote, digital transactions. We don't quite believe in that term. These transactions refer to a transfer that is either initiated or terminated in the digital or physical channel with something other than cash. A bank account, a wallet, an ATM, card, or other non-cash instrument. Using this definition, RIA's self-service transactions now account for 24% of RIA's international outbound transaction total and 31% of its volume. Finally, for XD, transactions were up mid-single digits during the quarter, but the international payment volumes trailed last year as a result of the uncertainty from the pandemic Combined with continued uncertainties related to Brexit. Given these trends, for the entire segment, we anticipate that we will produce year-over-year transaction growth in the third quarter and that approaches double digits, assuming no major changes in the global economy and no pervasive lockdown stemming from a second wave of the coronavirus. In addition to managing our business, We have used our leading-edge technology to implement new products for our customers to allow them to be responsive to their business needs during COVID. For example, we quickly implemented cardless cash-out options at ATMs to allow local consumers to collect the social benefits provided by their governments. We enabled the use of expired cards for bank partners when they were unable to reissue cards or deliver new cards to their customers. Our ePay team created a special employee card to allow two leading European grocers to reward associates that continue to work during the pandemic. And in money transfer, we expanded our mobile app and online capabilities to reach 21 countries. In Malaysia, we launched a hybrid channel solution to accept orders via the phone, online, or our staging app, where customers could pay by account at an ATM. or a cash deposit machine when traditional retail agents were closed. We were able to help our customers in these ways thanks to our flexible technology and our single API connection capabilities. As you can see, while we continue to navigate the pandemic and our financial results are not what we hope to report for 2020, we continue to drive the business forward and we have been successful on many fronts. Over the next few slides, I would like to hit on some of these highlights. So let's go to slide number six. The strength of our balance sheet has really allowed us to leverage our other strengths, our digital focus, our flexible technology, our global footprint, our diversified product portfolio, our culture of growth, and our people to take advantage of the opportunities that will drive this business forward. This quarter we have provided highlights and categories to help you understand many of the ways that we have furthered the business through expanded distribution of our existing product portfolio, expansion of our product offering, additional advancement of our leading-edge technology platforms, REN and REV, and through cost-saving measures across the business. I'll start with our product expansion. During the quarter in Italy... We added mobile pop-up voucher sales to Euronet's own ATM network across the country, another cross-divisional product offering. We also enabled cardless payouts for BNP Paribas customers in Poland. In Australia, we expanded our digital media content, including Uber, Netflix, and Spotify, with our new digital retail partner, Afterpay. In ePay, some of our most significant product distribution expansion came through mobile wallets. In India, we used our existing connections to the Google Pay and Amazon Pay wallets to launch numerous digital media products. And in Brazil, we had two important developments. First, we established a direct connection to Sony to launch PlayStation digital codes. And second, we launched iFood Credits, the largest food delivery app service in the country. In money transfer, we expanded and further improved our physical network during the quarter. We launched 15 new correspondents in 11 countries while also signing 12 additional correspondents for the future. These additional correspondents drove a 13% year-over-year increase in our network, which now reaches 435,000 locations in 159 countries. RIA continues to build successful relationships with post offices around the world. As we've mentioned, these institutions remain among the strongest channels for money transfers abroad, and we have seen strong, stable volumes through COVID with our recent launch of B-Post in Belgium. In addition to launching money transfer services with the Austria Post during the peak lockdown in April, our team also launched cash pickup service at over 3,000 locations with Post Finance in Ukraine, and finally RIA signed agreements with the Indonesian Post for their 4,000 locations as well as the Jordan Post. Let me pause here to talk a little bit about the significance of our expansion with post offices. Like with large retail chains in the U.S., post offices have historically largely been served by our two largest competitors. When RIA acquired RIA, we had 42,000 global locations and we couldn't command the attention of our large retailers or international post offices. We have spent more than 10 years investing in our global network and service and we have grown the network tenfold to 435,000 locations and offer safe, secure, well-priced transfers to our customers. These attributes, combined with our ability to continue to grow our business across all money transfer channels with independent retailers, with large retailer and digital, RIA has gotten the attention of these post offices. They realize that a partnership with RIA represents growth for them, improved commissions, and affordable pricing desired by their customers, and we are certainly happy to serve them. Also in the second quarter, we launched money transfer services at more than 19,000 OXO locations, a leading convenience store chain in Mexico. This is a big one. We also added Two new cash pickup partners to our network in Vietnam. Finally, our digital team responded to the sudden limitations that COVID lockdowns placed on our customers in many markets. The team worked hard to launch our app in many new markets in Europe throughout the quarter, including France, Italy, Germany, the Nordics, Austria, the Netherlands, Belgium, and others. We now have mobile, web, or staging capabilities in 21 countries. We also increased our digital marketing investment in Q2 by nearly 100% compared to the prior year. All of this drove a 90% transaction growth rate we told you about earlier, but it's also important to understand that our digital channel is profitable, and we expect to produce meaningful results heading into 2021. And let me remind you that our original timeframe to roll out these countries was by the end of the year. and our team has put forth extraordinary effort to launch them all six months early. But we also have a long roadmap ahead of us that includes launching the app in several more markets over the next 12 months, launching new web products, improving our product analytics and adding many more features for our customers. Next slide, please. Slide number seven. and we continue to expand our product portfolio. As I mentioned earlier, we're seeing more opportunities to outsource as banks look for ways to save costs amid economic downturn. This quarter, we signed an agreement with Millennium Bank in Poland to drive the Eurobank 140 ATMs that were acquired by Millennium Bank. We also signed a new ATM driving and card management agreement with Standard Chartered Bank in Pakistan and a similar agreement for... or Ritska Bank in North Macedonia to drive their ATMs. During the quarter, our money transfer teams launched a service to enable deposits into bank accounts through Alipay wallets. This partnership with World First, recently acquired by Ant Financial, allows any of the almost 1 billion users of Alipay to receive a transaction into their bank account through their wallet. We also launched several real-time account deposit services during the quarter. including real-time deposit services to China and Vietnam, as well as deposit services to Coins.ph, a mobile wallet in the Philippines that has 5 million users. Account deposit represents about 25% of RIA's international outbound remittance volume, a figure we believe is likely the highest in the industry among the traditional money transfer providers. Last year, we processed about 65% of this volume on a real-time basis. We see real-time payments as a key differentiator for our account deposit product, and it's an important reason why our account deposit transactions have been growing at a 25% CAGR for the last 10 years. It is worth repeating again that we can send money to more than 3.6 billion bank accounts in over 120 countries, with strong mobile wallet coverage as well. So while cash pickup probably represents 80% to 85% of the payout preference for remittance in the market today, account deposit is quick adoption, and we believe we are the leading network to capture the growth for both remittances and payments. In addition to expansion of our products and network, in April, we mentioned that we had a plan to achieve $130 million in cost savings to preserve cash and to offset some of the financial impact of the shelter-in-place orders and the unemployment brought about by COVID-19. As I mentioned previously, during the quarter, the EFT team achieved $25 million in cost savings while across all segments we achieved approximately $35 million. and assuming current trends, we expect to achieve another 15 million per quarter as we move through the rest of the year without any reduction. Next slide, please. Slide number eight. As we shared with you, our technology is one of the leading factors driving our success. During the quarter, we expanded our agreement with Yes Bank Limited, a large private sector bank, by providing a license to India's first-generation real-time payment system called IMPS. Yes Bank will be able to leverage the REN ecosystem's modern architecture and open systems for processing high-volume, mission-critical transactions. We also launched mobile pop-ups through Amazon Pay Mobile Wallet, as well as mobile Top-Up, Direct Home Top-Up, and Google Play Recharge Credits. These services were quickly added for these leading wallets through the single API connection Amazon and Google had already with Euronet's RAN ecosystem. In Romania, we signed an agreement with Raipaizem Bank for additional web services that will support their RayPay mobile wallet. And in money transfer, we added United Payments Interface, or UPI, the world's most advanced real-time payment system developed by the National Payments Corporation of India, to tokenize and simplify real-time account deposits to India. As you can see, we have continued to focus on driving the business forward, and we remain in a very strong financial position to navigate this darn pandemic. With improving trends in e-pay and money transfer, with weekly year-over-year transaction growth for the first few weeks in July, and continued cost reductions and careful expense management actions, we are cautiously optimistic that based on the recent trends and current global COVID-19 management mandates that our third quarter EBITDA will be in the range of $50 to $75 million and we will produce approximately $10 to $30 million in free cash flow. This COVID-19 pandemic has caused a global economic disaster. Let's not forget. It has negatively affected Urinet in many ways, but it has also hastened our digital expansion and offered us new or expanded opportunities in all three segments. It has had a significant impact on our 2020 financial results, but the strength of our balance sheet, the diversity of our products and geographies, Our flexible technology and our exceptional employee base have allowed us to continue to drive this business forward, and I am confident we will emerge a stronger, more flexible company. With that, I will hand it over to Rick.