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

Ladies and gentlemen, thank you for standing by, and welcome to the Currency Exchange International Q1 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, sir.

Thank you, Stephanie, and good morning, everyone. Welcome to the Currency Exchange International conference call to discuss the financial results for the first quarter ending January 31, 2021. Before we begin, please let me remind you that during the course of this conversation for the 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 into the future. With us on the call today are President and Chief Executive Officer, Randolph Pinna; Chief Financial Officer, Stephen Fitzpatrick. Stephen will begin with a brief comment on the first quarter financial results, followed by his latest perspective on the company's operations. Randolph will then comment on the bank's performance, along with sales and business activity initiatives. 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 will be recorded and archived on Currency Exchange International Investor Relations website page. With that, I'll turn the call over to Stephen. Stephen, please go ahead.

Okay. Thanks, Bill, and thank you, everyone, for joining us today. So as usual, I'll provide a brief overview of the results for the most recently completed quarter, our first quarter of fiscal 2021. And as usual, I'll just clarify that these results are presented in U.S. dollars unless we indicate otherwise. And as we've stated in the past, the Currency Exchange business is typically seasonal and coincides with the peak spring and summer travel seasons in North America. So usually, the first and second quarters are the slower quarters, with the third and fourth, usually much stronger. However, as you all are aware, this is anything than a typical year. And like many businesses, we've been significantly impacted by the COVID-19 pandemic. So with that said, let's move into discussing the Q1 performance, and I'll talk about revenue first. The revenue decreased 48% in Q1 of 2021 to $5.1 million compared to $9.9 million in Q1 2020. Although I should point out that this was in line with our internal expectations. This reflected the unprecedented -- precedented decline in travel and tourism as a direct result of measures imposed by governments to contain the spread of the coronavirus. Our banknotes segment decreased by 62% to $3.1 million. However, this represents a slight improvement over the comparative decline in Q4 2020. While travel-related demand remains weak as expected because of the ongoing pandemic. Some of the impact has been mitigated by increasing volumes with international banks, principally through EBC. Banknote revenues reached a floor or hit a floor in July of 2020, and they've been gradually improving since then. So it clearly isn't at a velocity that would be associated with a full recovery just yet. Our retail footprint is 24% lower in Q1 2021 compared with 35 stores compared to 46 a year ago. In addition, many of CXI's banknote customers continue to operate at reduced capacity, while the domestic market for banknotes remains tepid. Interest in our solution from national institutions in the U.S. has remained very strong. Over the past year, CXI has onboarded 304 new clients, representing 580 locations this is encouraging for 2 reasons. One, it indicates that the national institution market continues to see a future in offering banknotes to its customers. And secondly, it increases our addressable market for our payments products in the U.S., and that's a good segue into the performance of the payment segment for CXI, which grew at a blistering pace, increasing 82% for the quarter over the year prior to $1.6 million. Most of this growth was in Exchange Bank of Canada where we've added over 300 new corporate clients in the last year, a large proportion of which is attributable to the Denarius acquisition made on July 29, 2020. So the payments business accounted for 32% of our total revenue in Q1 2021, up from 23% in the fourth quarter 2020 and 10% a year ago. Our long-term strategic objective is for these 2 segments, these 2 businesses to contribute roughly equally to our revenue. Payments as diversification, as we pointed out before, since it's a function of economic activity, not travel and tourism. This helps to smooth out the effects of seasonality in banknotes, but it also provides some protection against shocks that impact international travel, such as we're experiencing now with the pandemic. So my last comment on revenue before I move on to discuss operating expenses is that I should highlight that we report revenue inclusive of hedging gains and losses. In Q1, the revenue and consequently, earnings, were depressed by a write-down of $565,000 on our holdings of Iraqi Dinar, a onetime, which was a one-time cost. So that -- absent that, the performance would have been not much stronger. Turning to expenses. Total operating expenses were $6.4 million in Q1 '21 compared with $8.7 million a year ago, a decline of 26% or $2.3 million. Part of this due to lower poses and shipping costs by $600,000 for our banknote segment, and that cost varies with revenue. But the majority of the cost reduction relates to debt cost reduction measures that we implemented in 2020 in response to the pandemic. The most significant of which was a net reduction in 98 positions, which led to a decrease in salaries and benefits of $800,000 compared to Q1 2020. The reduction from the start of the pandemic though is actually much higher at 122 net positions. That includes the impact of growth in the Payments segment, which added approximately 13 new positions since January of last year. So we've really eliminated approximately 135 positions or 38% of our headcount at peak, which was 354 on March 11, 2020, when the pandemic was declared. These reductions were primarily in the banknote segment, many of which were in our retail division, where we permanently closed 12 branch locations, reduced operating hours in the remainder and consolidated management positions. We had to part way -- chose to part ways with many dedicated employees, which was a difficult but necessary decision in order to resize the business, resize the cost structure based on our expectation of a protractive recovery in travel and tourism. Almost all of our expense categories declined significantly due to our recycling efforts is up for a few. Bank charges grew by 16%, and they are directly related to payments transactions. So it's not surprising. Insurance expense grew where we've had significant increases in premiums for both D&O insurance and IT, which is related to cybersecurity coverage. So we've -- and then overall, our operating expenses were in line with our expectations for the quarter, and we continue to monitor them judiciously. The cost reductions offset approximately half of the revenue decline, resulting in a net operating loss for the quarter of $1.3 million compared with operating profit of $1.2 million in Q1 2020. Notably, this represents a decrease of $500,000 from the Q4 2020 net operating loss. This improvement from 2020 or Q4 2020 reflects the cost reduction efforts that we've made and puts the company in a position to generate positive operating leverage at around $30 million in annual revenue. Including the repayment of approximately $2 million in lease payments that are excluded from rent expense under IFRS 16. In Q1 2021, company's operating cash flow adjusted to include the lease payments, but excluding working capital changes, was negative by approximately $500,000 per month. We're focused on closing that gap and eventually returning to cash flow positive and profitability. The net loss for the quarter ending January 31 was $1.7 million compared to net income of $100,000 a year ago. The loss reflects $400,000 in future income tax benefits associated with losses in CXI. Company is not currently recognizing a future income tax benefit on losses in the Exchange Bank, which would have decreased the net loss in Q1 to $1.5 million have they been recorded. In total, there are $1.2 million in unrecognized future income tax benefits associated with EBC. And as soon as there is reasonable probability of generating taxable income in order to be able to utilize them, then we will recognize them. Turning briefly to the balance sheet. Although we incurred a loss that has reduced our retained earnings. We continue to maintain a strong balance sheet with $57 million in equity at January 31, working capital was $46.5 million at quarter end with unrestricted cash balances of $57.1 million. Liquidity is strong as unrestricted cash comprised of 69% of our assets. Cash and bank accounts has decreased somewhat from year-end, that's partially offset by a $7 million increase in inventories. We are underlevered -- underleveraged with only $6.9 million of our available lines of credit we used at quarter end. Company has $2 million in income taxes receivable at January 31, which relates primarily to our 2020 fiscal year. Fortunately, under a special onetime provision in the CARES Act in the United States, companies can carry back net tax losses from 2020 up to 5 previous tax years in order to claim a refund. We are doing just that, and we're in the process of finalizing the 2020 tax return and we will be filing them shortly. So in conclusion, while Q1 performance was a net loss. It was, I want to reiterate, it was in line with our expectations for the quarter. Most importantly, it represents a stabilization in the business, and it demonstrates the benefit of progress made from the resizing. We are taking a cautious view as to future revenue growth in the banknote segment, but we are encouraged, obviously, by early indicators around the mass vaccination programs in North America and in fact, worldwide. We're confident that we will eventually return to profitability, and our objective is to ensure the long-term sustainability of the organization by building diversification, scale and resiliency into our business models. It's -- with this in mind, that we continue to invest in initiatives that support our strategic plan. And with that, I'll turn the call over to Randolph.

Thank you, Stephen. Good morning, everybody on the call. As I sit here in Florida, where the country, the state is open, and talk regularly with our team in Canada to see the start differences. It's difficult for me to swallow saying that we lost this kind of money, but this was in our plan. However it is in our plan. We looked hard. We resized our business over the last year, and we made sure that we did not overcut our strategic plan, which was refreshed, as you know from my last call, was -- is very clear. And the 1 thing we did not want to do is cut where it would cause risk or damage to the company and its customers and employees. We kept our structure strong in order to maximize our business opportunities that have presented themselves. Our strategic plan does show a recovery in the business over time. The exact timing of that is unknown. I am as well as Stephen, encouraged by the progress, especially in the U.S. on the vaccinations. And internationally, it seems to be doing well also. I usually start on Exchange Bank of Canada, and I would like to do that again today. The exciting part, as you saw was our payments business is really growing strongly there. This is partly because of our acquisition, but also because of our focus on relationship banking. Foreign exchange is a big need for most businesses in Canada because of their close ties in the U.S. and Europe. And our choice to bring in a seasoned leader, James Devenish to lead our efforts in Canada has been successful. James has a lot of experience in foreign exchange and in relationship banking as he spent some time at a very large institution that's -- also operates in Canada. Our team is very well-established and experienced bankers, and we continue to reach out and tracked good quality businesses for foreign exchange activities. In the banknotes section, we have 2 lines of banknote business. Currently, the main business used to be our domestic Canadian banks and the financial institutions across Canada. That has been hit the hardest with the lockdown of the borders, both in Europe and even in New York, it shows that, that business has suffered the most. Even still, we continued to work on establishing new financial institution relationships and maximizing the existing relationships that we have. What has helped the bank over the last few months is our international customers. Exchange Bank has a few select banks, financial institutions internationally, and we've seen a lot of activity with U.S. dollars, Mexican pesos, and some euros. The international expansion of the banknote business is going to continue to receive attention. We are very close to establishing a major central bank relationship, which will reduce our sourcing costs for U.S. dollars as well as open up the opportunity to expand to other FATF countries for selling dollars in bulk. Our offering globally will be both U.S. dollars and Canadian dollars in bulk as well as Mexican pesos and other currencies as needed by our international customers. So overall, Exchange Bank of Canada continues to remain very well structured. It has a very good management team, experienced team, both in the front line with sales, operations, as well as, in the second line with our risk and compliance. And our technology is always core to our both businesses, and we continue to invest there to ensure that our systems are up-to-date and staying in front of the changes that occur in the cybersecurity area. Moving to CXI. Our strategy is very similar. Except that we are focused, unlike Canada, on consumer, we have a consumer direct division, which includes our retail footprint, which we resized lost 12 locations, added 1 new one, which is a strategic location. And we feel these markets that we're in are core to CXI's business in the United States. Our consumer direct is not just physical retail stores. We'd also have an online store that has been very successful and profitable. We also continue to add products. You may recall seeing a press release recently about us being able to sell cryptocurrencies as an agent of an established international crypto exchange. We, therefore, are called an on and off ramp to the crypto world by us only dealing in U.S. dollars, accepting the U.S. dollars, passing that to the exchange and the exchange selling the actual physical crypto to the client using a card. Moving over to our core business, which is what really got CXI to where it is today is servicing financial institutions in the United States. Do partly exit of 1 of the largest money service businesses in the world, they exited the Americas, and that has allowed us to add more wholesale relationships with financial institutions. In addition to that, our core business has always been servicing financial institutions. And you recently announced our new relationship with 1 of the core software providers to major financial institutions as well as many small to medium-sized banks as well. This allows for our strategic initiative, which we've nicknamed OPOP, 1 provider, 1 platform, allowing the financial institution to use their core software but still get all the advantages of the CEIFX software that we continue to improve upon. This enables the bank to do a debit to the client's account and simultaneously credit us pass the instructions without ever having to toggle to our software because of this seamless integration. It allows for a true straight through process. So in summary, our strategic plan includes international foreign exchange focused on banknotes, both in the U.S. and in Canada, it includes relationship banking, specialized foreign exchange relationships with corporations, a consumer direct division that allows for consumers to deal directly with our select retail branches in key markets in the United States. And most importantly, our relationships with financial institutions through core integrations like we did 2 years ago with Fiserv, and we are doing now this year with Jack Henry. So with that being said, I'd like to open up the floor for questions. Thank you.

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

That was a very good performance given the rough conditions we're all facing. The first question. Stephen, I wondered if you just run over the burn rate again for me. I wasn't too sure I caught what it was in the quarter and what you see going forward?

You're talking about the cash flow, free cash flow?

Yes. Well, no, not really cash flow, but just the potential, given the current conditions, what the potential loss rate, burn rate being using up cash, yes, over there. Like I think you reduced it from $500,000 to $300,000 per month, that was a last discussion. I think we had.

Yes. And in this quarter, it was a little higher than that. It was $500,000 a month again. But that's really a function of how the business is structured right now. We did resize. As we said, as we indicated after the January call. And so the burn rate was what we expected it to be in the first quarter. But we have resized the business to accommodate higher levels of revenue. We have not sized the business so that we would have ongoing losses. So I mean I can't -- obviously, we've built a business plan that sees this business recovering, and that's a function of what's happening in the marketplace. So we would not -- that burn rate is not something that's acceptable to us over the longer term. That's -- we are well prepared to accept that in the short-term as in this quarter that just ended. However, that's not a $6 million annualized clip. That's not the number that we're prepared to live with.

And the...

We haven't built the business around that kind of loss either.

The overhead being basically salaries and benefits. Do you kind of see that rate in the quarter being fairly steady going forward now? In other words, you're not looking at any further cost reductions or significant increases in staffing?

No, we're not. We're not looking at increases at all. If there -- if the pace of growth was actually slower then we would look at further reductions to keep the rate down. That's -- we've built our plans for this year around the cost base that we have. And so that's -- and so that's based on some anticipated recovery. Which we -- and when you look around and look at the economy, there is certainly a recovery that's starting to happen. So as I said in my comments, there are good signs with the vaccinations, the programs around the world. Randolph mentioned what's happening in Florida. So we have -- if we had to, we would make further reductions, that's not -- we think we've resized it appropriately.

Okay. And then the final 1 for you was just in the loss you were mentioning about the foreign exchange loss. Could you just repeat your numbers again, the write down?

It was $565,000.

And that was directed towards...

There was one -- it was one currency, the Iraqi Dinar and the government of Iraq wrote the currency down by 20% 1 day, [ arbitrarily ] just made that decision. And it happened that we were -- we actually had good demand for that product, I should say, even though we had the write-down, the revenues from that currency have almost exceeded that write-down already. So -- but it's just that you have to take the write-down when it happens as a onetime expense. And so that depressed the earnings and also it does affect cash flow. So that number and even though it's an unrealized loss, it affects the cash flow calculation. So in that $0.5 million a month I'm giving you, it includes the $565,000 loss. So the actual cash burn rate is less.

Okay. Okay. And what item does that $565,000 appearing?

Yes, it appears in air quotes in revenue. So we report revenue inclusive of gains or losses on hedging. This is not hedging, but it gets included within that expense bucket or gain bucket for us. So it's now included in the revenue number.

So the revenue was lower by that much. Okay.

By that amount. Yes. The stated revenue was lower by that amount.

Perfect. Randolph, I wondered if I could ask you a couple of questions on the EBC. The -- on the payments you had noticed -- noted the 76 new corporate payment clients. Are your new clients that you're adding largely still in Québec? Or are you able to spread the business now more across the country?

Yes, Robin. The original expansion of our payments business started in Québec. So the majority of the clients are in the province of Québec. It doesn't mean we're restricting our sales. We've actually taken clients out in Vancouver and Toronto. So -- but it is correct that the majority, since the team, the acquisition, everything is in Montreal, and our main payments drive is focused in Québec, the majority is from Québec, but we are obviously accepting customers nationally. And we are doing sales through a national campaign, marketing efforts in all the provinces, mostly, of course, in 3 main ones with DC, Ontario, and Québec. But again, we are a national bank, and we are continuing to focus our marketing as a whole country, not just in 1 province.

Okay. And the -- back to your cryptocurrency offering, how does it get received by your wholesale clients? Do you sign separate deals with each wholesale client in order for them to offer your crypto service?

You bring up a great question because right now, we're in a pilot which is our own stores. They're not even in all 36 stores. We're currently offering this as a pilot in 12 of CXI's company stores, owned and operated. Our expansion plan is. And again, it's so far been pretty well received that we will graduate the pilot and roll it out to all of our company-owned stores. And then the real exciting part starts where we intend -- we have several financial institutions that are interested in putting our product on their shelf as well. And then we could actually start utilizing our large network of other transacting locations. But as of right now, it is strictly to our consumer. And how it physically works because, as you can imagine, it's taken so long to get both internally, the Board comfortable and our regulators in the respective states comfortable was the process around knowing our customer and how we transfer the cryptocurrencies to the client knowing that we're giving it to the right client and not someone else's digital wallet. We actually have a chip card called the tandem card. That's a virgin that it has no value until the client buys, let's say, $500 worth we passed the $500 to the exchange. The exchange loads that on that virgin card, thereby allowing me to give the consumer at the desk who we've already validated their -- the crypto asset. And so that process has now been bedded, tested. The pilot is off to a good start, and it is anticipated that the pilot will graduate and start to expand with our own retail stores and then selectively with some of our wholesale customers and as the world adopts these new digital assets, which leads to other digital assets because we are very close to the Central Bank digital currencies. China, as you may have heard, has launched their digital currency in the U.S. and Canada, central banks are looking at that as well. So this sets the stage for us to become a digital exchange, not just a physical cash exchange. Did that answer your question, Robin?

Yes. The chip card, is that unique to use in when you issue that chip card with nothing on it. How does it...

Yes, it's -- that's that person. They buy that. It's part of the exchange. And so no, we don't make it, that it's actually, I believe, manufactured in Switzerland. And we bought a box of these cards, and then that's what they're virgin and then we load them. And then that card holds the asset you could literally keep it. I actually had 1-person way back a couple of years. Forgot that we gave them 1 that tested when we first were trying to launch this pilot. And they still had the card and it had appreciated quite considerably. They were very pleased with it. Most people, as I have done myself, was you take the card and then you extract the asset and put it on your digital wallet, which resides usually on an app of 1 of the major exchanges, and you have that value on your phone. And then you can utilize that by transferring that. And then there's other apps that actually allow you to spend the money at Petco or Lowe's and some of these retailers that have already adopted the means of payment.

Okay. Great. Very good. And 1 last question might not be a simple one, but. The Jack Henry VIP program that you're integrating with. Can you give us an idea how that will trends form into revenues for you?

Sure. I would love to, Robin. So first of all, this is not the first integration we've done. You may recall, we spent a lot of money integrating with 1 of the largest core bank software providers, which is called Fiserv. They have a system called WireXchange. And what that enables? So again, a bank, when they become a bank, they need a core operating system. They need their checking accounts, their savings accounts, their online banking, their credit cards, all integrated, and that's a core software system, where the share -- the account holders, either the business accounts or the consumer accounts have their money with their bank. Currently, all the banks that we have serviced in the U.S. require 2 systems to do a transaction with CXI. So what that means is if I am a major bank, and I don't have an integration with Fiserv or with now Jack Henry, I would have to debit the customers' accounts, bank account, and then go to the CEIFX system and execute the transaction and then credit CXI's account separately. And so that's a 2-step transaction. So we have lots for banknotes and even some check processing banks have accepted that because it's not that you do huge dollar values like you would with a wire. And so on wires, we have not been able to get a lot of banks because they don't want to have that risk of that exposure between their core system and dealing with the CEIFX system. So by doing an integration, Robin, it allows them to have that 1 provider, which is us, and using the 1 platform, which is their core system. However, because we've integrated, they get all the benefit. They -- it's a straight through process. So they get -- it's a live feed between the 2 systems, and it allows the bank to do 1 transaction on their core and that data of the actual transaction details comes to us straight through. And so the Fiserv initiative has proven profitable. We're going to existing customers and getting them to turn on product that they haven't done with us before, which is payments. That is our core focus, as Stephen said once or twice about our revenue diversification and allows us to sell more to our existing customers. What we're also seeing, we're getting new customers that want us for wires, and then they'll add banknotes and cheque's as well. And so it's been very successful. And the -- well, Jack Henry hasn't launched yet. We've just -- we've signed the deal. We've been accepted into their vendor program. And we are in the codings stage now where we are coding and testing so that we can launch this in a few months. We already have several of our existing customers lined up to do wires, where they're not doing them now with us. They're using -- usually, it's a Bank of America or a Wells Fargo, 1 of the big, big national banks that already are integrated with these cores. And we are now being able to be put side-by-side with those other competing banks. And since we have existing relationships, doing other products with those banks, and we're already vendor approved. It's a relatively easy sell that they now can say, oh, great, you're on my core. And I can do my wires through on 1 process, and that's with our preferred vendor, CXI, not our competing bank that's across the street. That answers your question?

Yes. That was very good. And you're expecting this to begin -- how soon?

A few months. Like, the IT department hates when we commit to an exact date. But all the specs, everything has been done. The coding is already underway and testing. It's a major process, as you can imagine, especially when you're dealing with wire transfers. So I'm hesitant to give you an exact date, but it's top of mind at CXI. And we have as I was saying, we did not cut in our core areas of focus, which IT is 1 of them. Risk, compliance, and technology as those areas were not cut. So we are fully staffed in our IT department, Paul Ohm, who's been leading our IT department since CXI started is close to this, and we have our project management team. Everybody is -- it's all hands-on deck. So I would like to think in a few months, we should actually go live with our first test client, which will have been after our internal testing. Then once we've added our first client, which is a Florida-based bank, and we will confirm that everything is good, and we will then go on a mass rolling out. We have expanded, as Stephen said, we have hired some in sales, both in the U.S. and in Canada. And so we are geared up ready to -- as soon as it goes live to add all of these existing customers that we know want to come on board as well as hopefully getting some new clients as well.

[Operator Instructions] There are no additional questions at this time.

Great. Well, thank you, everybody, for attending, especially the folks at West. I know it's very early. We appreciate it. If there is a question that comes up afterwards, please reach out to Bill, Stephen, or I. We will hopefully be able to answer it for you. Thank you.

Thank you. This concludes today's conference call. You may now disconnect. Speakers, please hold the line.