Currency Exchange International, Corp. (CXI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Currency Exchange International Third Quarter ending July 31, 2020 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Bill Mitoulas. Thank you. Please go ahead.

Thank you, Stephanie, and good morning, everyone. Welcome to the Currency Exchange International conference call to discuss the financial results for the third quarter ending July 31, 2020. Before we begin, please let me remind you that during the course of this conference call, Currency Exchange International's management may make forward-looking statements. These forward-looking statements are based on current expectations that are subject to risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in the Risk Factors section of our listing statement filed on SEDAR. Any forward-looking statements should be considered in light of these factors. Please also note that any outlook we present is as of today, and management does not undertake any obligation to revise any forward-looking statements in the future. With us on the call today are President and Chief Executive Officer, Randolph Pinna; along with our Chief Financial Officer, Stephen Fitzpatrick. Stephen will begin with a brief comment on the quarter's financial performance, followed by his latest perspective on the company's operations. Randolph will then comment on the bank performance, sales and business activities, after which we'll open it up for your questions. For those of you who may happen to leave our call before its conclusion, please be advised that this conference call is being recorded and archived on the Currency Exchange International Investor Relations website page. With that, I'll turn the call over to Stephen. Stephen, please go ahead.

Thanks, Bill, and good morning, everybody. Thank you for joining the call. So I'll give you a brief overview of the results for the most recently completed quarter, Q3 of 2020, as well as year-to-date for the first 9 months. So these results are presented in U.S. dollars, unless we indicate otherwise. And as we stated in the past, the currency exchange business is typically very seasonal, and it coincides with the peak spring and summer travel seasons in North America. So usually, the first and second quarters are the slower quarters and third and fourth are much stronger. However, this is anything but a typical year. And like many businesses, we have been significantly impacted by the COVID-19 pandemic. So with that said, I'll get into the Q3 performance. So revenue decreased 69% in Q3 2020 to $3.8 million from $12.4 million a year ago in the third quarter. This reflects the unprecedented decline in travel and tourism as a direct result of measures that were imposed by governments to contain the spread of the novel coronavirus. Our banknotes segment decreased by 73% or $8.6 million in what is traditionally the strongest quarter for CXI, as I said a minute ago. Entering the quarter, all of our retail branches were closed. And while the reopening process began in May, 13 were still closed as we exited the quarter at the end of July. In addition, many of CXI's banknote customers closed or significantly scaled back the operations -- their operations during the quarter. And as a result of this situation, management elected not to renew leases on several retail branches, and we consolidated several as well. So we've reduced our active locations to the low 40s from 46, and we're continuing to monitor the performance of branches that have reopened. And so far, so far, they are meeting or exceeding our rather conservative expectations. On a positive note, our payments segment continues to grow. While growth has slowed to 13% for the quarter over the prior year, this space has held up well despite a record contraction in economic activity in calendar Q2. The segment accounted for 18% of our total revenue in Q3, up from 5% in Q3 2019. CXI's wholly owned sub, Exchange Bank of Canada, successfully closed its first acquisition on July 29. We acquired a payments business located in Montréal for a total consideration of $4.7 million. This significantly expands our footprint in the Québec market and will enable growth in the future. Total operating expenses were $5.9 million in Q3 compared with $9.5 million in Q3 a year ago. However, making a comparison requires a normalization for the impact of the adoption of IFRS 16. So on a comparable basis, operating expenses in Q3 would have been $6.5 million, a reduction of $3 million from the prior year. This reflects the impact of lower postage and shipping costs by $1.3 million in our banknotes segment and because those costs are variable with revenue as well as cost reductions virtually across the board in the company. The most significant of those is in salaries and wages, which saw a decline of $1.1 million. Most of our retail staff were furloughed for at least a part of the quarter. And in addition, we've eliminated approximately 40 positions in the quarter. The company recorded $300,000 in rent abatements for branches that were closed by -- forced to close by our landlords. And lastly, and unsurprisingly, we had savings in the areas of travel and entertainment as well as losses and shortages for approximately $300,000 to round out the key drivers of the quarter -- quarter-over-quarter savings. It should be noted that we incurred approximately $200,000 in costs to complete the acquisition in Montréal. But legal and professional fees were flat over the prior year in spite of this because we have been assiduously working at reducing the use of advisers and consultants. Unfortunately, the reduction in operating expenses wasn't enough to offset the dramatic decline in revenue, so we had a net operating loss in the quarter of $2 million compared with a net operating profit of $2.9 million in Q3 last year. Fortunately, EBC qualified for $400,000 in nonrepayable government grants in the quarter to offset its wages, our salaries and wages. They've been reported in other income on our financial statements. Interest expense decreased by $100,000 from the prior year, primarily because management chose to draw down most of its operating line of credit early in the pandemic to provide maximum liquidity and ensure liquidity. The interest on lease liabilities, coupled with depreciation of right-of-use assets, totaled $500,000 and is a result of adopting IFRS 16. It's largely offset by a reduction in rent expense, such that, on a net basis, the impact is immaterial. While not that material, it is worth noting that stock-based compensation was higher than Q3 2019, primarily because of an option exchange program that was offered to directors and officers for certain options that were granted in fiscal 2016, '17 and '18. 241,463 options were canceled on July 31, resulting in a onetime charge of $100,000 for the unvested portion of the canceled options. Those options will be replaced at a ratio of 1 for every 8 that was surrendered, but not until at least 90 days have lapsed from July 31. The exercise price of any replacement options will be the fair market value of the shares at the date of the grant. The program -- this program particularly was designed to create room to issue options in the future, consistent with the company's goal and ensuring that management and directors balance a long-term and short-term focus in our decision-making. The net loss for the quarter ended July 31, 2020, was $2.3 million compared to net income of $1.8 million a year ago. It would have been $2 million. However, we chose not to record a $300,000 income tax benefit associated with current year losses in EBC. Those losses require taxable income to offset against in order for the benefit to be realized. But given the uncertainty in the current economic environment, we chose to defer recognition until we can demonstrate a significant probability of recovery. Management is confident that it can restore profitability and eventually realize the benefit of those tax losses being carried forward. On a basic and fully diluted basis translated into -- this translated into a loss of $0.35 per share in Q3 versus earnings of $0.28 a year ago. Now turning to year-to-date performance. Revenue for the 9 months ended July 31 was $20 million, $20.1 million, a decrease of 34% from the same period in the prior year. Strong growth in the first 4 months of fiscal 2020 has been overtaken by the record decline since the beginning of the pandemic in mid-March. Our core banknotes and retail business declined 38% in the first 9 months of fiscal 2020 compared to the prior year. Payments revenue, on the other hand, has increased 21% over prior year, achieving 12% share of revenue, up from 7% a year ago. It is a strategic objective for the company to reduce its concentration in the banknote segment and driving towards a more balanced revenue picture between payments and banknotes. Operating expenses in the 9 months ending July 31 were $23.2 million, a decrease of 11%. This includes -- these year-to-date results include an unusual loss of $1 million that was recorded in Q2 of this year and that I spoke of in our last conference call. I will reiterate that to have a bad debt is an anomaly for CXI. Our customer base is predominantly comprised of international institutions and money service businesses with whom our credit risk is low. Our risk is limited to bulk currency trades generally, with a settlement cycle of 24 to 48 hours. However, we did experience an isolated incident with one of our wholesale customers that filed for bankruptcy on April 29, without having settled an outstanding trade balance of $1 million. We have filed a claim, and there is a reasonable possibility we will recover a portion of that receivable. But because of the uncertainty, we chose to record a provision for the entire amount. Adjusted to remove the impact of IFRS 16 as well as the nonrecurring bad debt expense, the operating expenses were $23 million -- $22.7 million, I should say, on a normalized basis, representing a decrease of $2.3 million or 9%. $1.6 million of that relates to postage and shipping costs commensurate with the reduction in banknote volumes. Furloughs and terminations have been partially offset by growth of approximately 10% in our employment base at the beginning of the year, generating net savings in salaries of approximately $400,000 year-to-date. Despite the onetime costs incurred to complete the acquisition, legal and professional fees have decreased by $200,000 and rent expense has been favorably impacted by those rent abatements of $300,000 that I mentioned earlier. Travel and entertainment has decreased by almost $200,000 over last year as well. In contrast, there are a few areas where we have had increases, such as bank charges by $300,000, which is reflective of the growth in transaction volume in our payments segment. Also, software maintenance expense is up by nearly $200,000. That reflects additional tools that we've purchased in the past year to support business functions, including treasury, compliance, communication and collaboration as well as the platform acquired from eZforex on September 6 last year. We've also increased our investment in technology to safeguard data from cyber breaches. And lastly, stock-based compensation was up by $300,000 over the prior year due to the higher number of options granted at the end of last year and also related to the options exchange program I mentioned a few minutes ago. Net operating loss for the 9 months ended July 31 was $3.1 million compared with a profit of $4.3 million a year ago. When the impact of $400,000 in government grant income is taken into account, EBITDA is negative $2.7 million, a decline of $7 million from a year ago. Interest expense on a year-to-date basis was $200,000 higher this year because of the increased borrowing I mentioned earlier with respect to our liquidity management. Depreciation on right-of-use assets plus the interest expense on associated lease liabilities was $1.7 million in Q3 compared to $0 in the same period a year ago, and that's because of converting to -- adopting IFRS 16. Net loss before tax for the 9 months was $6 million and net loss after tax, $5.1 million, which compares to $3.1 million -- and a profit of $3.1 million and $2.2 million, respectively, after 9 months a year ago. This net loss would have been $5.3 million had we recorded that future income tax benefit on operating losses in the bank, as I explained earlier. On a per share basis, the loss for the 9 months ended July 31 was $0.79 per share on both a basic and fully diluted basis versus earnings of $0.34 per share in the prior year. Turning to our balance sheet briefly. We continue to remain solvent and well capitalized, with $61 million in equity at July 31, down from $66 million at year-end. Due to the impact of a net loss year-to-date, total assets were $96 million versus $83 million at last year-end, a 16% increase. Liquidity is strong as cash comprises 74% of our assets with $70 million in cash at July 31, up from $63 million at October. With almost $45 million in bank account, the company's liquidity position is very strong. Forward and option contract assets increased by $2 million from year-end as there were significant unrealized gains in the quarter due to fluctuations in foreign exchange rates. And in addition, $5 million of the increase in assets is attributable to the initial recognition of right-of-use assets under IFRS 16, partially offset by $3.5 million decrease in accounts receivable as there were fewer trades associated with our reduced volume. Total liabilities increased by approximately $18 million, mainly due to the increase -- or the drawdown on the line of credit as we drew it down at the beginning of the pandemic, as I mentioned earlier. The write-up of asset liabilities because of the adoption of IFRS 16 in the amount of $5.7 million is virtually offset by a reduction in accounts payable and accrued expenses, which has declined by $6 million. In conclusion, while the company has sufficient liquidity to meet its financial obligations for the foreseeable future, our biggest challenge is we're trying to reliably estimate duration and severity of this pandemic as well as its impact in future periods. We are taking a cautious view as to the economic recovery and as well as out of the travel and tourism sector as we develop a new 3-year plan. Our objective is to ensure the long-term sustainability of the organization and we believe that we can return to profitability. Once the acquisition's completed, we're optimistic that we are in a position to grow our payments segment going forward. We are also encouraged by the number of new wholesale customers that have sought out CXI since the announcement by a major competitor that is leading the North American marketplace. Growing our market share will help accelerate our return to profitability as the banknotes segment recovers. At this time, I'll turn it over to Randolph, who will expand on a number of those topics that I just spoke about in my concluding remarks. Randolph?

Great. Thank you, Stephen, and thank everyone on the call for joining this morning. As I usually do, I'd like to talk about the bank. Exchange Bank of Canada, as you know, is a strategic asset of our group. The bank has enabled us to establish strategic banking relationships, which is being expanded. Both -- we have a great relationship with a customer that is also now one of our processors in Montréal. And also we are in the second phase, which is the final phase of our application process, so we can get direct access to U.S. dollars, both recycled and mint notes, which will support both our Canadian business as well as any international customers that we have or may take. That banknote business is not the only value of the bank. The Exchange Bank also with these strategic relationships is very focused on increasing its payments business. The closing on the acquisition definitely helps accelerate that, and we welcome the majority of that team that we kept. And it's been the integration that's been completely done. We had -- it took, I think, 20 days. It was very well managed, and it's been a great team addition to our operations in Québec. We do see payment growth, not only from the acquisition, but we've also centrally -- myself and the HR department have been very focused on increasing the sales team. We're focused on relationship banking. Since we are a specialist bank, we are seeking out corporations with international activities. And our focus will be to continue to add new customers every week to Exchange Bank of Canada that will be doing both payments and possibly banknotes as well. Our pipeline is very full at the bank, partly assisted by the exit of the world's largest nonbank foreign exchange business, did not close its doors completely, but it closed all of its operation in North America. Besides that, some of our existing customers for banknotes have realized that our payment capabilities at the bank are attractive. And we anticipate new growth in payments activity from some of our existing customers as well as the new customers that our sales team that we're building will be seeking. That's about it for the bank. Down in CXI -- or up in CXI, down south in CXI, we are seeing a lot of new business. Our pipeline is very full, and it's true right now, taking on customers that are doing banknotes don't -- doesn't mean a lot in the short term, but it will definitely help accelerate the return to profitability as the world slowly reopens. We added about 1,800 transacting locations already in this quarter, but we have a very full pipeline. And it's not all banknotes. A lot of these financial institutions are seeking check clearing processing as well as possibly payment activity as well. So not only are we receiving activity in America, but our expansion into the Caribbean with CXI has been very successful. Our pipeline is very full south of the border and in the islands as well. And we also are doing, as exchange bank, adding corporate customers doing international activities. Our retail business is the most challenged, as you can imagine, because the malls have been closed. Some like Hawaii or in California are still closed. We are renegotiating leases as they come up with lower rents and better operating hours. We are happy to see that we have a very conservative view on the return of banknote business. And using that as our baseline, we are seeing that activity is a little busier than that, with exotic currencies as well as some people just buying currencies because of future intended travel. The fact that we added our new product called Currency Price Protection, which is similar to some sort of insurance, but we do not guarantee the exact exchange rate. We basically agree for a fee to buy back currency at the spot price. So there is not a hedging obligation to the company to lock in their trades. It just means that when they trade back their currency, there's no gain or loss for us. And hence, for them, they've saved the fee should they end up having to cancel their trip because of the travel changes that frequently occur. Additionally, our online FX business is growing. We -- again, the world's largest currency exchange shut down what they called their travel wallet. And so there is a natural flow of people ordering currencies. Again, there's -- some of it is exotic currencies and some is just for regular transactions they may still need to do. But that business has been growing and continues to grow. And we see that online FX is a key piece of our retail strategy, which is a consumer direct. Our focus is to be able to have stores in the 12 major markets that we feel are core to our business, which, as you can imagine, Miami, L.A., New York, et cetera. We also want to have the ability to deliver currencies to anyone where we are licensed, which is currently about 21 different states. The fact that the competition has been reduced is helpful for our sales team and helpful for our pricing competition. And so we are looking at our business very wholesomely in terms of both having the right price, enhanced revenues as well as cost reduction. We do see, as Stephen told you, we have been unfortunately cutting cost, and we may have to continue a little bit more of that to ensure we are properly sized for 2021 to allow the businesses to get back to profitability. So with that being said, I'd like to open up the floor to questions. And Stephen and I will try answering that the best we can.

[Operator Instructions] Your first question comes from the line of Robin Cornwell with Catalyst Research.

I hope you're both keeping well. It's a challenging time for you.

That's true.

My first question is really on your acquisition of EFT. The -- can you give us some idea of the potential marginal revenue increase? Sort of quarterly, I guess, the next quarter being the fourth quarter.

Stephen?

Well, it's annual revenue is about $1.6 million.

That's U.S.?

No, that's Canadian. Sorry. That's I think about USD 1.1 million, USD 1.2 million. That's at the annual revenue.

That business is expected to increase revenues because the business did not have the capabilities that Exchange Bank of Canada does. That was one of the attractions that the owner who has stayed on as leading our Montréal sales team right now. He's been very optimistic about the fact that we have better capabilities, especially with U.S. dollars. And so we're very pleased with how that business is blended into Exchange Bank.

Okay. Terrific. Now this question is kind of looking forward, but how many of the actual transacting locations that you have -- I mean, we're talking last year being almost 22,000 and you're adding to them. How many are actually not necessarily doing business but are open? Are most of these locations actually open for business?

Well, we have 2 businesses that make up that number. As you know, being in Canada, a lot of locations are not. So I would say maybe half. I don't have an exact number. But as opposed to in the U.S., I would say 80% of the retail bank branches are open. It is true that some of our retail banks are choosing to close branches. This work-at-home phenomena that's occurred has made everyone realize and reevaluate their real estate needs. So we are seeing some contraction of transacting locations with some of our customers, but that is being actually offset by new financial institutions and transacting locations. And they're not all banks either, there's also MSBs and other types of customers that we are picking up. And so overall, I think, at the end of the year, we should be near where we were between the total, if that's what you were looking for.

Yes, yes. And so the closing of some of the competition, can you maybe give us a little bit more on how you're being approached? How many potential clients that are available? Just some idea of scope.

Sure. So that business, if you're familiar, and out of respect, I'm not going to name them, but they were very heavy into airport operations. They did have a wholesale business. So they operated very similar to us that they operated retail in shopping malls and in airports with their primary retail presence. They also serviced financial institutions, a couple bigger ones and a lot of smaller to midsize ones, just like CXI does. And so those financial institutions are reaching out to us. In fact, several of those employees that lost their jobs have recommended us, which makes it a lot easier, obviously, when someone passes your name and number over. But we've picked up in probably in the last month or 2, even since this quarter, we probably picked up another 40 or 50 new customers. And so they're just reaching out to us. And then the airport operators have reached out as well. We are still sticking to our [ knitting ] and staying away from airports until they maybe recognize a revenue share relationship. It's the only way that we would be interested as opposed to their fixed rents and long hour requirements. But there's a couple of companies that were in partnership. Because if you're familiar with airports, there's a need in many cities to be a minority class business. And so the big company that's headquartered operationally in London partnered with minority MSB-type businesses. And then they together, as a joint venture, service some major airports like JFK, Los Angeles -- actually, not Los Angeles, San Francisco and several airport, big centers like that. And so those entities have already reached out to us, again, looking to establish that same partnership as they had with the other company. And so that is all work in progress. But I don't know if you've been through an airport or not. But right now, it's still very quiet. And so there's not a mad rush to get these stores open today. But you will see that CXI may take -- cherry-pick 1 or 2 while we're closing a few of our slower stores -- or not core, they're not in our core markets, the 12 major markets that we want to be in. We will probably cherry-pick 1 or 2 of their lead, what they would call their flagship stores, 1 in California and 1 in Florida. And so that's us approaching that location. I'm sure that's probably more detail than you wanted, but hopefully, that gave you the flavor of what you were looking for.

All right. That was excellent. So looking forward, and we all hope the businesses get back to some normalcy. And your -- you've drawn down on your bank lines, about 75% utilized. Looking forward, and the expectation that you get substantial new clients and new levels of activity, are your projected liquidity levels enough to support a lot of new growth?

Yes. Yes.

Yes. Absolutely, absolutely. I think I may have highlighted in previous calls, we established with one of our European banks, what they provide is inventory on consignment to us. And that has restarted, so we have inventory. So should volumes, and that would a great problem to have, if volumes are so high that we were already, as you know, prior to the virus, overcapitalized. So we were ready for a big year in our first quarter of this year. We showed that we were on a path to have our best summer ever this summer if the world didn't shut down. So we have enough capital as is. But should volumes be even higher, we would be just requesting more inventory from the major wholesaler. We have several. That wholesale bank based in Europe has chosen to be smart and put their money where their mouth is and put it in our vaults. So we have money of theirs in all 3 vaults, L.A., Miami and the bank has it in Toronto. And so we would just increase that inventory on consignment from them and that would allow that. And so that is not an issue at all. And we probably have access to borrow more from the bank should we need it.

Yes. And just so you know, just Robin to add a little more context to that. We drew that down just because in periods like this in the past, markets 3 years and sometimes, you can't get access to your bank lines. And so we drew that down. But we've -- since the quarter end, we've actually repaid it in full. So we have plenty of room from a liquidity point of view to support growth.

Oh, could I just back up on that? So you said, since quarter end, you've repaid how much?

All of it. We're out of the line at the moment. And we still have...

So you have no lines drawn from BMO or...

None at the moment. BMO, yes.

BMO has?

Yes. Yes, we have.

Yes. I support it, Stephen. Both Stephen and I have been through a crisis or 2 in the past. And with interest rates as low as they are, we both said that is an expense, that is a wise investment just to ensure that we have it. Now the banks and the markets are -- have calmed down and the banks are kind of reopened and we're confident that our line won't get frozen or pulled or anything like that. So we've decided now we're in a very focused -- cost-cutting focus. So we're focused on saving every penny we can and so we paid it back.

Okay. And that's the EBC line as well. I think it's $6 million. So both lines?

I think we might be a little bit into the back line in Canada. But in the U.S., we're completely out of it.

Your next question comes from the line of Peter Rabover with Artko Capital.

Well, I think the previous caller answered a lot of my questions, but I just wanted to get back to the cash question. So what -- sorry, what was the net like gross cash minus the lines of credit cash position this quarter?

Sorry, I'm not quite sure I'm following your question, but we had paid -- we paid down the line of credit, I think, in the U.S. have been drawn down to about $17.5 million or $18 million and that's been repaid. And the bank line and the bank in EBC has drawn to a very low amount, so -- and we are back. Part of the reason for doing that was that, as Randolph mentioned, we do have a relationship with an overseas bank to help us manage our inventories. They had shut down in March and that avenue was not available to us. But as it opened up and it has reopened, that creates liquidity opportunities for us so that we can manage our inventories efficiently and manage the inventories down. So the combination of that availability and having surplus cash on our balance sheet, as you saw, we had $70 million at the end of the quarter and about $45 million almost in our bank accounts. So in paying down the bank lines, we're just -- we talked to our bankers. We're really comfortable with where we are with them and they're comfortable with us. And so we were -- the combination of all of that is what led us to be paying down the bank.

Right, right. Sorry, that wasn't my question.

Okay. Sorry.

I appreciate you giving us the color. So my question was what the net cash position was, gross cash, which you said $71 million, less the bank. What's the amount outstanding on the bank lines right now?

On the bank lines, it's negligible, $0 in the U.S. And I don't have the exact number in Canada, but it's very low. It's very low.

Okay. So my next question is, out of that $71 million, how much would you say, including what you need to manage through the -- coming back to profitability, how much of that is excess cash? Like I guess, overcapitalized, where you can do something with it like stock buyback, an acquisition or something like that? So -- and how much do you need to run the business on a regular basis?