Currency Exchange International, Corp.

Good morning, ladies and gentlemen, and welcome to the Currency Exchange International Q2 2024 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, June 13, 2024. I would now like to turn the conference over to Bill Metoulas, Investor Relations Manager, please go ahead. Thank you, Operator. Good morning, everyone.

Welcome to the Currency Exchange International Conference call to discuss the financial results for the second quarter of the 2024 fiscal year. Thanks for joining us. With us today are President and CEO Randolph Pina, Group CFO Gerhard Barnhart, and Group Treasurer and Interim CFO of EBC, Katie Davis. Gerhard will provide an overview of CXI's financial results and his latest perspective on the company's operations. Randolph will then provide his commentary on CXI's strategic initiatives, sales efforts, and business activities, after which we'll open it up to your questions. Today's conference call is open to shareholders, prospective shareholders, members of the investment community, including the media. For those of you who may happen to leave our call before its conclusion, please be advised that this conference call will be recorded. and then upload it to CXI's Investor Relations website page, along with the financial statements and MD&A. Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and actual results could differ materially. Please refer to our financial statements and MD&A reports for more information about the factors that could cause these different results and the assumptions that we have made. With that, I'll turn the call over to Gerhard. Gerhard, please go ahead.

Thank you, Bill, and thank you, everyone, for joining today's call. I will present a more condensed overview of the results of the consolidated CXI group for the second quarter ending April 30th, 2024, to allow more time for questions at the end, as requested. These results are presented in U.S. dollars, and my overview will also incorporate the results of our wholly owned subsidiary, Exchange Bank of Canada, where the most significant financial event of the quarter was management's reversal of the deferred tax asset allowance of its wholly owned subsidiary, Exchange Bank of Canada, and recognizing the expense of about 1.4 million US dollars in the income statement due to continuous challenges. The group continues to focus on executing against its strategic plan, and with significant investments being made in our people, CXI and EBC combined have 391 full-time and part-time employees, a decrease from 406 of the previous quarter. We continue to invest in technology platforms, which remains a huge focus for us. NetSuite has proven to provide our executive team with real-time data to better manage the group's operations. Additionally, Kariba, our treasury management system, and Alyssa's AML compliance software is heading towards the final stages of implementation and operationalization by the end of the fiscal year. Our IT team continues to leverage the power of the cloud computing to enhance integration capabilities, improve scalability, performance, and resilience. These initiatives and investments, among others, support more efficient future growth for the group. On November 29th, 2023, the group announced its notice of intention to make a normal course issuer of it, NCID, or share buyback, and to purchase for cancellation the maximum amount of 322,000 common shares, representing 5% of the company's issued and outstanding common shares. At the end of the second quarter, the company bought back 52,100 shares at an average price of roughly $24.50 Canadian dollars, for a total investment of 1.3 million Canadian dollars. Now let's look at the consolidated performance for the three months ended April 31st, 2024, compared to the previous three months ended April 30th, 2023. The company reported half a million of net income, which is 1.7 million or 77% lower than the same period last year. But when we take into account the $1.4 million of deferred tax expense recognized related to Exchange Bank of Canada during this period, it is important to note that the adjusted net income was $1.9 million, a decrease of only $300,000 or 14% compared to the same period last year. Adjusted net income in the United States grew about 400%, $1,000 or 15%. whereas adjusted income in Canada declined by $700,000. The group's adjusted return on equity for the current period was 12%, compared to 19% for the same period last year, driven by slower revenue growth in Canada during the current period. The company generated $20 million, a 7% increase from the same period last year, and noticed and noticeably new customer acquisitions in both the banknotes and the payments product lines. Compared to the first quarter of 2024, revenue increased by 2 million, or 11%, which is consistent with the cyclical growth patterns, where revenues increased for the first quarter to the second quarter in 2023 by about 1.8 million, or close to 11%. The top five currencies are the Euro, U.S. dollar, Canadian dollar, British pound sterling, and Mexican peso. The 7% year-over-year growth in revenues, or $1.4 million, was primarily due to the growth in the U.S. payments business of about $900,000, followed by growth in the direct-to-consumer bank business of $315,000. Revenue in the United States increased by 1.4 million, or 10%, over the year, while Canada remained fairly flat. Operating expenses increased by 1.3 million, or 9%, primarily attributable to an increase in salaries and benefits. The company recorded net operating income of 3.8 million in the three-month period ended April 30, 2024. or 2% higher than the same period in the prior year. EBITDA margin for the current period was 19% compared to roughly 20, 21% in the same period last year. The following is a highlight of the revenue by product line for the three months ended April 30th, 2024, compared to the same period, 2023. Let's focus on banknotes. Revenue in the banknotes product line increased about half a million or 3% due to the continued growth in demand for travel currencies from increased travel levels. Between February 2024 and April 2024, approximately 215 million travelers passed through the TSA checkpoints in the United States airports. This is an increase of almost 8% compared to the same period. direct-to-consumer banknotes revenues increased 310,000 or 5%. This growth was attributable to increases in volumes in branch locations as newly opened locations continue to mature over the time and drive higher volumes in addition to the geographical reach of the FX online platform, which has recently entered the state of Ohio in the fourth quarter of 2023. The state of Alabama, in the first quarter of 2024, as well as the state of Wisconsin in the current quarter, which represents an opportunity for the company to offer its online services to almost 91% of the United States population. Also, banknotes increased by about 190,000 or 2%, despite the decline in transacted U.S. dollar volumes with international clients in Canada. Relative to the three-month period in the January 31st, 2024, wholesale banknotes revenue increased by about 1.2 million, or 14%, which coincides with the typical seasonal increase in tourism in North America. The focus on payments. Revenues in the payments product line increased 30%, primarily driven by new customer acquisitions, and increased activities from existing financial institution customers in the United States as direct result of the company's continued investment in integration with core banking platforms. The payments product line in the United States grew 53%, whereas Canada remained fairly flat compared to the same period last year. The company processed roughly 37,000 payment transactions, representing $3.4 billion in volume, for the three month period ended April 30th, 2024. And this compares to roughly 30 and a half thousand transactions and 2.6 billion of volume in the same period in 2023. Now I would like to discuss revenue by geographic location for the three months, April 30th, 2024, compared to the same three months in 2023. In the United States, revenues grew by 10% during the three-month period, led by $910,000 or 53% growth in payments, and roughly $310,000 or 5% growth in banknotes, with the remainder of the growth related to wholesale banknotes. Payments growth was primarily the result of the company's investment in integrations, with core banking platforms that allowed onboarding of new financial institution customers during the period in addition to increased activity from existing customers. Now, banknotes revenue, including direct-to-consumer, were largely impacted by new customer acquisition, increased transactions, and demand for travel currencies, and certain exotic currencies complemented by growth across most of the branch locations, and through the company's FX, online FX platform. Revenues in the United States represented 81% of total revenues by geographic location in the current three-month period compared to roughly 80% in the previous period. Now in Canada, revenues were flat during the three-month period in the 30 April 2024. Growth in domestic FX bank notes was offset by a decline in transacted volumes for U.S. dollars with international clients. Payments volume had a 10% growth based on volumes with marginal increases in certain existing clients' transactional volumes in addition to new relationships. Overall, revenues in Canada represented 19% share of the total revenue. Now, operating expenses increased 9%, for the three months ended April 30th, 2024, compared to the previous period ending April 30th, 2023. The U.S. had expense growth of 9% and Canada of 12%. Income tax expense for the current period included the $1.4 million related to the deferred tax expense as mentioned earlier, specifically related to the unused loss carry-forwards in its wholly owned subsidiary, Exchange Bank of Canada, which the company has reassessed its recoverability and accordingly reduced the deferred tax benefit amount and increased its deferred tax expense by the same amount. Salaries and wages increased when compared to the prior year, mostly driven by higher average headcount in addition to partial increase in cost driven by inflation in base salaries, and healthcare cost. Postage and shipping continues to decrease. It had a 24% decrease when compared to the same period last year despite the growth in banknotes volumes. This decline reflects cost management initiatives implemented by the company which were adopted during the second half of 2023. The increased cost in information technology expenses during the second quarter were associated with the company's continued development of its technology solutions to support and streamline its business and customer service delivery, including expansion in the payments product line and integration with core banking platforms, security systems, and technology solutions. Now, foreign exchange gains and losses represented the net result after considering hedging and risk management strategies designed to reduce the inherent risk in the company's exposure to foreign exchange, thereby minimizing volatility in earnings. The Mexican peso was a driver of foreign exchange losses in the three-month period ended 30th of April 2024, representing roughly two-thirds of the losses during that period. Interest expense has significantly declined in the period, compared to the same period last year, as a result of a notable decline in average borrowings, utilizing of short-term working capital needs during the current period, directly due to the reduction in the US dollar activity internationally at EVC. Let's look at the consolidated performance for the six months ended April 30th, compared to the previous six months. The company reported 1.36 million of net income during the six-month period and at April 30, 2024, 2.5 million or 65% lower than the same period last year. Please note, adjusted net income was 2.8 million, a decrease of 1.05 million or 27% compared to the same period last year. Adjusted net income comprised Reported net income adjusted for the deferred tax expense related to Canada as previously discussed. Adjusted net income in the United States grew by 1.1 million, or 28%, compared to the same period last year, where Canada declined by 2.1 million. The company generated revenue of 38.2 million for the six-month period ended April 30, 2024, a 7% increase that was mostly due to the growth in direct-to-consumer banknotes of $1.3 million and the growth in the U.S. payments business of about $800,000. Operating expenses increased by $3 million, or 10%, primarily attributable to an increase in salaries and benefits. The company recorded net operating income of $6.1 million, in the six-month period ended April 30, 2024, 6% lower than the same period in the prior year. EBITDA for the current period was 16%, compared to 19%. That's EBITDA margin. Revenue by product line for the six-month period ended April 30, 2024, compared to the previous six-month period. Banknotes, revenue in banknotes product line increased 1.85 million, or 6%, with direct-to-consumer banknotes revenue increasing 1.3 million, or 11%. Now, payments revenue product line increased by 11%, driven by new customer acquisitions and increased activity from existing financial institution customers in the United States, a direct result of the company's continued investment in integration with core banking platforms, which resulted in a 42% increase in the US region for this period. Canada declined by 21% as a result of reduced volumes. Revenue by geographic location for the six-month period ended April 30th, 2024, compared to the same period in 2023. Revenues in the United States grew by 15% during the six-month period, led by 1.5 million or a 42% growth in payments and 1.3 million or an 11% growth in direct-to-consumer banknotes, with the remainder of the growth related to wholesale banknotes of 1.2 million or 10%. Revenues in Canada declined by 15% due to reduced transaction volumes from certain key clients in the payments product line and lower transacted volumes in US dollars with international clients. Revenue in the payments product line decreased about $715,000 or 21%, while banknotes product line decreased about $635,000 or 11% compared to the same period last year. Operating expenses increased 10% for the six months ended April 30th, 2024, compared to the previous six-month period of 2023. This increase is higher than the 7% growth in revenue, primarily due to slower revenue growth in Canada. Variable expenses within operating expenses represented by postage and shipping, sales commission, incentive compensation, and bank fees totaled $9.2 million compared to $9.8 million in the previous six-month period. The decline of 6% was primarily driven by a decrease in posting and shipping. The ratio comparing total operating expenses to total revenue was 84% compared to 82% in the previous period. As mentioned, postage and shipping had a 70% decrease as a result of cost management initiatives implemented by the company. Losses and shortages represented shipment loss in transit that the company self-insures. The favorable variance in losses and shortages was primarily due to a significant decrease in lost shipments and as a result of cost management initiatives that the company implemented to manage its shipments. The variance in foreign currency exchange gains and losses was due to volatility in certain currencies, with the Mexican peso being the main driver of foreign exchange losses in the six-month period ended April 30, 2024, representing roughly $210,000, completely offsetting net gains in other currency exposures in this category for the period, whereas the euro represented a $500,000 gain in the same period last year. Now let's review the balance sheet for the second quarter. As of April 30, 2024, the company had a capital base of $80 million and $5 million drawn on its line of credit, with $45.3 million in borrowing capacity. This compares to $14.9 million drawn and $35.7 million of borrowing capacity same period last year. average outstanding borrowings of the company amounted to $5.9 million during the six-month period, ended April 30, 2024, compared to $12.8 million during the same period last year, which led to a significant reduction in cost of borrowing. The average interest rate of borrowing was 8.7% for the current period compared to 7.2% for the previous period. The group continues to focus on capital allocation, and the normal course issuer of it, NCIB, or share buyback, confirms both management and the board's belief that the underlying value of Currency Exchange International may not be reflected in the market price of its common shares from time to time. Now, at this time, I will turn the call over to Randolph Pena, our CEO, to provide his perspective.

Thank you, thank you, Gerard, and thank you everyone that's on the call. Appreciate your time. I wanted to just start off with the big event of the deferred tax asset. We did, management did choose to reverse this to follow the guidance of accounting standards for taxes. We still do remain optimistic for Exchange Bank of Canada, and we are very focused on turning the bank around. so that it can be a contributor of income as opposed to taking away from CXI's successful growth. In EBC, when analyzing it, as you've heard, the Mexican peso has been the biggest challenge, not only in the FX gains or losses of hedging, but really has affected in the first half of the year, the Mexican peso appreciated probably the most significantly since I've been doing currency exchange over 30 years against the U.S. dollars. Now, the recent election has reversed that, so we're optimistic that the demand for U.S. dollars selling to EBC will resume, and we have started to see that activity now with the weaker peso versus the USD. The pipeline is quite full at EBC, both on the banknote side and on the payment side. On the payment side, I'm very proud to announce that we've done an integration with a fintech company that will enable us to add another 300 active corporate payments for international payment activity. Our partners. Payment team, what we call FX relationship bankers, are continued to focus on adding new clients, as you may have heard. On the banknote side, we have both a strong pipeline in Canada as well as internationally. Domestically, we have several new financial institutions, one of which is already onboarded and should begin trading shortly with mostly U.S. dollars and possibly additional foreign currencies. Internationally, we have added two new banks in Brazil, as I was for the first time in Sao Paulo, and personally welcome the two new customers, as well as a new customer that's just being onboarded now in Europe. And we have a very strong pipeline, both in Central and South America and in the broader European zone. More importantly, I wanted to focus on CXI's very strong growth for the half year. Overall bank notes continue to be up 10%, as you heard from Gerard, that is both in the wholesale category as well as in the direct-to-consumer category. While, yes, we've added a few new clients in the financial institution space in America, but we are seeing increased trading both at all the bank branches as well as our retail stores. We are adding additional retail stores with our newest store opening now in Buckhead, Atlanta. And the next one thereafter will be in the Boston area. Both should be open and contributing for this busy summer season that we anticipate. As you saw, the biggest grower was our payments business. Chris Johnson, our head of sales for the U.S., has been very successful with his team, adding new financial institutions, primarily, as you've heard, through integrations into core or select software systems. that allows for a straight-through process using us as the one provider and their platform as the one platform. We also have some activity in the M&A space. Nothing signed, but we, Gerard and I, are active in exploring good strategic opportunities for CXI in our group. The primary focus of these considerations is in banknotes, not in payments. And overall, we want to just remind the shareholders that now we are entered in this quarter, the third quarter, in our busy summer season. Activity has been strong both domestically in Canada and in the U.S., and we are seeing internationally as well. I wanted to keep this conversation short so that we can open it up for questions, and I turned it over, operator, to allow the questions to flow so Harad and I can answer them if we can.

Thank you. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star, followed by the two. Please limit yourself to two questions. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Robin Cornwell. with Catalyst Research. Your line is now open.

Hi, good morning. Congratulations on a good quarter. I wanted to start, if I could, just Randolph on the FX accounts using your trust structure. Are you specifically able, have been able to start transacting in larger volumes with some of the European clients?

The trust agreements are all in place. Unfortunately, we have yet to have an active customer use it because of the three-way agreement and then the client being overseas. They have taken longer for legal on the other side to approve of the structure. We do anticipate a financial institution using it actually first in Mexico, while the overseas customers that have been considering it in Europe and Asia continue to get comfortable with the relationship with our trust company and the flows of funds. So, no, we have not had any usage of it. However, it is in place. It is ready to be used and should allow for higher volumes in the second half of the year once the legal and risk departments of these financial institutions get comfort within their own lawyers in their part of the world as well as one is validating everything with a New York lawyer to confirm that they're comfortable using it. from a legal and risk perspective.

Okay, thank you. Now, my other question is on the payments. The revenue in the U.S. was very strong. I know you mentioned using your banking platforms, allowing for new financial institutions and customers, but Maybe you could expand a little bit about how this is actually working. Is it like relationships like the Jack memory, et cetera, that are clicking in, or is there other dynamics that I'm trying to understand?

Yes. Thanks for the question. So, Robin, yes, the integrations with select software providers like the Jack Henry, for example, since you mentioned that one, is enabling existing clients of CXI or new clients of CXI to have a straight-through process with us. And that integration, so you understand it, is they have their one platform where their checking accounts and savings accounts at that bank have the money. And they get the bells and whistles and all the sophistication of our core software system through the integration. So by choosing us as their processor, they get the benefits of our enhanced payment system. And that is allowing, again, existing customers that use us for banknotes that now say, oh, they're now integrated with my core. I can do my payments through there as well instead of with the big banks. And so that's enabling existing and new clients to come on board for payments. And one thing I forgot to mention in my first speech was Canada is now doing that. I mentioned about the FinTech, but we are also working with a financial institution to do an integration there. So we nicknamed this OPOP strategy. Again, one platform, one provider. And we are following that initiative in Canada. But I'm not sure if that answered your question, but basically it enables the bank to use their core system and click and get the benefit of our system because we're pre-integrated and allows, therefore, them to easily debit an account, credit our account, and we move the money. Did that answer your question, Robin?

Yes, thank you. And I guess a little bit more leading question is what can you foresee the growth? where it might go from here. That was very strong revenue increase.

What do you see going forward? Well, as the pie gets bigger, it's harder to do 40% growth each quarter thereafter. But yes, we do anticipate additional significant growth in CXI for sure, as well as once we have some additional integrations in Canada, we'll see growth in payments there as well. We are also focused on some larger institutions, which could really move the needle, because the first batch of customers that we've been having use our system and the integrations have been more smaller to the small regional type of banks, and we're moving upstream to some of the bigger banks. that recognize the value of the system. And again, the system is just one element. People use us because of our service and our laser focus on ensuring straight through process and execution of all payments and any follow up should there be any hiccup along the way. And so our reputation as a solid system FX specialist provider is enabling our team to get some bigger banks. And hence, we do anticipate continued growth in the payment space in both the U.S. and in Canada.

Terrific. Thank you. That's all for me.

If you would like to ask a question, please press star 1. There are no further questions at this time. Please proceed.

Well, thank you. Again, as you know, we are happy to do, you know, earnings called, you know, one-on-one type of calls should there be something that comes up that we haven't discussed today. As long as we're able to discuss it, we'll be happy to. We do have additional meetings. So I know Bill Matoulas will be getting a lot of calls asking for maybe that meeting. Harar and I will not be available for a call until after next Wednesday. But we do invite you to set up a one-on-one type of call with Gerard and or myself. So I thank all of you for your support and look forward to talking or meeting you again soon. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.