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

Good morning, ladies and gentlemen, and welcome to the Currency Exchange International 2022 Q2 Financial Results Conference Call. [Operator Instructions] As a reminder, today's call is being recorded, Wednesday, June 15, 2022. And I would now like to turn the conference over to Mr. Bill Mitoulas, Investor Relations at the Currency Exchange. Please go ahead, sir.

Thank you, Michelle. Good morning, everyone. Welcome to the Currency Exchange International financial results for the conference call to discuss the second quarter of 2022, thank you all for joining us. With us today are President and CEO, Randolph Pinna; and Interim Chief Financial Officer, Alan Stratton. Alan will begin with his brief comments on the second quarter's financial results, followed by his latest perspective on the company's operations. Randolph will then comment on CXI and Exchange Bank of Canada, company sales initiatives and business activities, after which we'll open it up for 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 uploaded 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 Alan. Alan, please go ahead.

Thank you, Bill, and thank you, everyone, for joining today's call. I will present an overview of the results of our most recently completed quarter Q2 2022. These results are presented in U.S. dollars unless otherwise noted. As we have stated in the past, the currency exchange business has been significantly impacted by the COVID-19 pandemic over the past couple of years. It continues to affect international travel as many countries maintain restrictions on unvaccinated travelers or have had onerous testing requirements that act as a deterrent However, Q2 demonstrated that the recovery in demand for foreign currencies associated with travel continues to improve as the restrictions gradually ease. It marked the second successive quarter that we generated a record high revenue in a given quarter and meaningful net income. This provides confidence in our belief that the company has successfully navigated the worst effects of the pandemic and that our strategic plan is sound, as I will articulate in my forthcoming discussion. Revenue more than doubled in the 3 months ended April 30, 2022 to $13.4 million from $6.4 million in the 3 months ended April 30, 2021. The banknote segment represented a 76% share of that revenue, a slight decrease from 78% in Q2 2021. Total banknote revenue increased by 103% to $10.1 million in the 3 months ended April 30, 2022 versus $5 million in Q2 2021 and that growth was equally split across our direct-to-consumer and wholesale divisions. It reflects not only the increase in consumer demand for foreign currencies, but also the fact that in the U.S., the company has added 848 new wholesale clients in the Financial Institution segment since Q2 2021. During the quarter, the company completed its integration of CXIFX, our proprietary software with Jack Henry, Silver Lake, one of the premier core processing platforms for the financial institution industry in the United States. With approximately 1,100 clients on that platform, our pipeline should continue to be full for some time. In our direct-to-consumer division, our agent network continued to grow with a new location opening in Terminal 7 at John F. Kennedy Airport. We now have 7 locations across Terminals 4 and 7 at JFK and 20 airport locations in total in the U.S. We like the agent model as it provides us with an opportunity to increase our brand's awareness and presence in high-traffic locations. We have been very pleased with the performance of these agents as we partner with experienced operators that shoulder the risk of the retail financial commitments, staffing and operating costs, while our investment is limited to providing the float of currency on consignment, software, licensing and compliance requirements. Our company-owned branches have outperformed our expectations so far this year, though that was helped in part by demand for investment currencies such as the Iraqi dinar and Vietnamese dong. Those sales and purchases of currencies for travel needs increased throughout the quarter. On April 11, we reopened one of the locations that we closed in 2020, which was in Century City, California, where we negotiated a lower rent with the landlord that made the business case compelling, and we believe that location has high potential. However, we also closed a location on April 29 in San Francisco that was at the end of its lease. We still have another location in San Francisco and several in the Bay Area. So we believe that we have sufficient coverage in that region without needing to replace the one that we closed. Our online FX platform now operates in 37 states, which accounts for approximately 76% of the U.S. population. We have been very encouraged by the increasing adoption by consumers to purchasing foreign currencies for delivery to their home and expect this trend to continue across both our wholesale and direct-to-consumer channels in Q2. We saw increased demand for euros and sterling as more people travel to the U.K. and EU countries. The Mexican peso also continues to be one of our top 5 currencies, but it is an expensive currency to hedge and the significant volatility during the quarter caused some margin compression. Turning to our Payments segment. Its revenue increased 127% to $3.2 million from $1.4 million in the 3 months ended April 30, 2021. The increase was driven primarily by new client acquisition over the course of the year that has driven increased transaction volume. The company processed 34,840 payments transactions in the 3 months ended April 30, 2022, up 33% from the 26,112 that we processed in the 3 months ended April 30, 2021. The absolute dollar amount of those transactions was $1.2 billion, up 51% from $786 million in the prior year. Thus, the net margin earned on the payments volume represents 27 basis points, a significant increase from 18 basis points in the prior year. By geographic segment, the United States represented 75% or $10.1 million of the revenue generated in the 3 months ending April 30, 2022, and this was an increase of 97% from the $5.1 million generated in the 3 months ended April 30, 2021. The growth was across both segments with the recovery in international travel gaining momentum when a number of restrictions on travel began to ease last fall, such as the reopening of the land borders to vaccinated travelers and foreign nationals from Europe being admissible again. However, the Payments segment has also been a driver of the growth with the company processing 30,015 payments transactions in the U.S. in Q2, an increase of 31% over the prior year. On a dollar basis, the volume increase was 45%. Many of our financial institution's clients are both banknote and payment clients, part of our one provider, one platform strategy. At our subsidiary, Exchange Bank of Canada, revenue increased by 155% or $2 million in the 3 months ended April 30, 2022 to $3.3 million from $1.3 million in the prior year. This increase was due to a combination of factors. Firstly, the bank has benefited from the recovery in international travel that began last summer, though demand was impacted by the Omicron variant as the federal government reimposed certain travel restrictions and advisories. Demand recovered in March as the variant receded. And on April 1, the government eliminated the requirement for a negative predeparture COVID-19 test on reentry that has proven to be a further catalyst for demand. However, the bank has also grown its trade with international financial institutions and banknotes since being admitted to the Federal Reserve Bank of New York's Foreign Bank International Cash Services program in Q4 of 2021. EBC has taken a cautious approach in onboarding new clients to ensure that we have all aspects of this operating model working effectively. Now that we are past this normalization phase, we will be pursuing new clients as we seek to increase market share. While the onboarding process takes time in order to satisfy compliance criteria, we have several clients already in the pipeline. Lastly, the growth story wouldn't be complete without mentioning our success in building the corporate payments business at the bank. This segment has outperformed our expectations so far this year as we have a strong team that not only continues to add new clients but have increased the margins as well. While revenue grew by 108%, total operating costs rose 50% to $10.5 million in the 3 months ended April 30, 2022 compared with $6.9 million in Q2 2021. Variable expenses accounted for approximately 146% of the increase primarily as a result of the higher volumes, rising from $1.7 million in Q2 2021 to $2.9 million in Q2 2022. These included postage and shipping, bank fees, commissions expense and third-party technology fees. Postage and shipping costs have risen by about twice as much as the increase in banknote revenue. And part of that reason is really the new FBICS program with the Federal Reserve, where we use a third party to process the banknotes, which allows shipments to go direct, facilitating a short settlement cycle. And some of those shipments also travel by air and armored transport, which is more expensive than traditional shipping methods. However, there have also been significant increases in fuel surcharges over the past year that has impacted all shipments. Where possible, we pass on the shipping cost to clients, and we have implemented some price adjustments in Q2 to mitigate that. Other operating costs accounted for the remaining $7.7 million in expense growth with 65% of that attributable to salaries and benefits. 44% of the increase relates to an increase in variable compensation with sales commissions expense being the largest contributor to that variance by $509,000 while $274,000 relates to other incentive compensation, driven primarily by the improvement in the company's performance. The remaining 56% of the variance is primarily related to the inflationary increases in base salaries, wages and benefits following a freeze in the prior year. All operating expense lines have experienced growth in Q2 as business activity continued to recover. However, the pace of growth is much slower than the growth in revenue, and all of our expense lines have been in line with expectations as we continue to invest in areas that support our strategic plan, especially information technology. In the 3 months ended April 30, 2022, the company generated positive operating leverage of 22%, a significant improvement from the negative margin of 9% generated in Q2 2021. The net income for the 3 months ended April 30, 2022, was $1.3 million compared to a net loss of $0.9 million in Q2 of last year. That performance translates into net income per share of $0.20, a significant improvement from the loss per share of $0.14 in Q2 of last year. Turning to the performance for the 6 months ended April 30, 2022, revenue grew 120% to $25.8 million from $11.7 million a year earlier. That improvement reflects the impact of the recovery in international travel over the course of the last year, coupled with the success in driving strategic growth initiatives. Banknotes accounted for a 79% share of revenue in the 6 months ended April 30, 2022, an increase from 72% in 6 months ended April 30, 2021. And the banknote revenue increased by 142% to $20.5 million in the 6 months ended April 30, 2022 versus $8.4 million in 6 months ended April 30, 2021. The growth was equally split across our direct-to-consumer and wholesale divisions for much of the same reasons that drove the quarterly improvement. The Payments segment revenue increased 64% to $5.4 million from $3.2 million in the same period of the year earlier. The growth was attributable to new client acquisition in both the U.S. and Canada. By geography, the U.S. accounted for $19 million of our revenue in the first half of the year, an increase of $10.2 million from the same period in the prior year. At 74%, its share of revenue was down marginally from 75% last year. In Canada, the bank's revenue increased by 133% to $6.8 million in the 6 months ended April 30, 2022, in comparison to $2.9 million in the 6 months ended April 30, 2021. Thus, the improvement in revenue is broad-based, both from a product line and geographic perspective, reducing our overall concentration risk. All operating expense lines experienced growth in the first half of 2022 as compared to the same period in 2021, but the 44% rate of growth was much lower than the revenue growth, contributing to positive operating leverage of 23% as compared to negative 16% in the prior year, while total operating expenses increased by $6 million, variable expenses comprised $3.2 million or 53% of that increase. Postage and shipping accounted for $1.9 million of the increase for the same reasons that I mentioned previously. Sales commissions accounted for $1 million of the increase and is associated with the revenue growth, bank fees increased $0.3 million or 41%, which is much lower than the revenue growth for the Payments segment. Postage and shipping expenses I'm sorry -- other operating expenses accounted for the remaining $2.8 million in expense growth with $2.1 million of that attributable to salaries and benefits, $0.5 million of that increase relates to higher variable compensation, primarily attributable to the improved financial performance. $400,000 of the increase has been driven by higher payroll taxes and benefits, half of which was the reinstatement of the company matching benefit associated with employees' retirement savings plans. The remainder relates to the inflationary increases that were granted at the beginning of the fiscal year after freezing wages the prior year. In addition to a few incremental growth roles in the organization really to support the strategic plan as well as an increase in hours for staff in the direct-to-consumer division as the company has reverted to its prepandemic operating hours at most branches. The increase in the operating expenses are largely in line with expectations given the significant increase in business activity and the progress achieved on our strategic plan. The resulting net income for the 6 months ended April 30, 2022, was $2.8 million compared to a net loss of $2.6 million in the 6 months ended April 30, 2021. This translated into earnings per share of $0.44, a significant improvement from the $0.41 per share loss in 6 months ended April 30, 2021. This represents a remarkable turnaround in the course of 1 year and reflects the dedication and efforts of the employees across the organization to accomplish it. We are truly grateful to our loyal employees that have displayed unwavering confidence in the organization's long-term viability. Turning to the balance sheet. There has been a significant increase in cash holdings to $111 million from $67 million. Approximately, $19 million of the increase relates to banknote inventory balances that increased to $65 million from $46 million a year earlier. About $5.5 million of that increase is associated with inventory consigned at agent locations given the growth in our agent network over the past year. The remainder of the increase is largely to support what is expected to be a very busy summer for travel. Given the inherent unpredictability in demand right now, the company has elected to increase its banknote inventory in certain currencies to mitigate the risk of having insufficient supply to fulfill orders. Over time, we expect demand will become more predictable as travel patterns normalize. We view it as important to maintaining our customer relationships over the long term to warrant holding more inventory than we have in the past. The other $26 million increase in cash holdings relates primarily to payments in the settlement cycle, including funds held in trust for customers identified on our balance sheet as holding accounts. Most of the accounts payable relates to payments and banknotes transactions in the settlement cycle and is more than offset by the other working capital lines. The positive earnings have allowed CXI to recover some of the capital that was used to support the business during the pandemic. Net equity has increased to $60.8 million from $58.0 million at April 30, 2021. CXI is in a strong financial position with this capital base and positive working capital of $53 million at April 30. Liquidity also remains strong with $111.3 million in unrestricted cash. While we had just over $28 million outstanding on credit facilities at the end of the quarter, we still have approximately $13.7 million in unused capacity. So in conclusion, Q2 represented a solid quarter for CXI and provides us with more confidence throughout the future as it relates to international travel and demand for banknotes. While there are various risks that may impact future results, such as high energy prices, high inflation, the Russia, Ukraine war and potential future COVID-19 variants, we believe that CXI is well positioned to weather fluctuations in demand. Based on the past 2 quarters, we do believe that CXI has regained financial sustainability. Our focus continues to be on our strategic initiatives with the objective of achieving returns on capital that are commensurate with our peers. At this time, I would now like to turn it over to Randolph Pinna, our CEO, to provide his update.

Thank you, Alan, and thank you, everybody, for joining our call, especially those out west. I know it's early. This is an exciting time for CXI and the Exchange Bank of Canada. This week, our Board of Directors and our Senior Executive team sat together for a full day where we reviewed our updated strategic plan. I'm proud to announce that our strategic plan that we updated significantly, in the last year, continues to be our focus. We are very focused on a risk-adjusted return on our capital deployed, and we have created a laser focus on each of the 4 pillars. Those 4 pillars are, of course, our foreign exchange banking services at Exchange Bank of Canada, where we're focused on international payments. Additionally, our international payment business at CXI is continuing to grow, and that is a core focus for both the bank and for CXI. On the banknote side, we have the pillar of our direct-to-consumer, which is our retail stores, our online store as well as our agent locations. And lastly, our most core pillar is our one provider, one platform initiative, where we're expanding our relationships with current customers as well as establishing new relationships for both banknotes and payments. There is a fifth pillar that is our -- ensuring that we have the support mechanisms in place, primarily that's technology. We're very happy with the sales force investment that we've made. It is continuing to improve efficiency and improving customer relationships. Additionally, we have implemented a project to switch to NetSuite, Oracle's NetSuite will become our new GL system, which will allow for better management, reporting, and support better efficiency in our operations. As normal, I'd like to give a little highlight on each of these initiatives in more detail. At Exchange Bank of Canada, I'm very pleased to see the continued growth in our payment business. Our relationship foreign exchange banking initiative is successful, where we have experienced foreign exchange bankers developing strong relationships with corporations, with international activities, and that relationship allows us to execute on their foreign exchange needs both in the short term or in the forward. Additionally, we're following what CXI's success has been with payments, Exchange Bank of Canada has identified another vertical or 2 to further expand our business. So our payments team in Canada is continuing to grow as we invite new employees specialized in foreign exchange to join Exchange Bank of Canada. Now on the banknote side, we're very happy to see that the travel restrictions in Canada is being lifted. We are seeing a significant increase in the domestic banknote business all throughout Canada, and we expect that to continue. Internationally, as Alan clearly pointed out, the Federal Reserve relationship is a significant component to Exchange Bank's banknote business and its future growth. The international activity is exposed to additional volumes because of the fact that these countries are looking for a direct source of U.S. dollars. We are going to be slowly continuing to expand our relationships with select banks internationally. Moving on to Currency Exchange International banknote business. It too, is continuing to see demand and growth in its international banknote space, primarily in the Caribbean and starting to be in Latin and Central America, we are seeing a lot of demand for banknote activity utilizing our Miami facility since it's a natural hub to the south and the islands. Domestically, our banknote business is growing, both on the wholesale side with additional financial institutions using CXI for their domestic banknote needs for foreign currency sales. The consumer division, as Alan rightfully pointed out, is continuing to exceed our expectations. Both our own company-owned stores are performing better than expected this year, and we're very pleased to see that as we continue to look for potential additional locations selectively in key markets such as Florida, New York and California. Our online store allows us to not have to have a retail store and still provide customer service by providing foreign currency for home delivery. We have planned on expanding our online foreign exchange store. We've recently employed an experienced digital online manager to generate new relationships, utilizing our online foreign exchange platform with other websites that may have travel. Most importantly at CXI is our one provider, one platform initiative. This is where we are integrating with core banking software systems, allowing simple access to our CXIFX system, utilizing their one platform in their integration with their core processors such as Jack Henry. So in summary, we're expected to have a strong year. The travel demands for the summer is -- the bookings are -- have been indicated and clear that they're strong. We hope that there's no deterrence like a war, a bigger war or any new restrictions on travel due to any new virus that may come up. But in summary, CXI has a strong team. It has a clear strategic plan, and we are planning to execute nicely on this. So I invite you to ask any questions for Alan and I, and thank you.

[Operator Instructions] Your first question comes from Robin Cornwell, Catalyst Research.

Congratulations on a great quarter. Looking forward to more exciting times. I know the -- in the travel segment anyway, the planes are jam packed and so are the airports. So that's exciting news. My first question was, Alan, I wonder if you could quantify, you said the volatile currency markets impacted the revaluation and hedging costs in the quarter, was that significant? Could you quantify it? Or was it material?

Yes, we had -- it was probably about $300,000 that was the net impact from that specifically and mostly related to the Mexican peso versus [indiscernible] normal trends would have been.

So you mentioned the volatility in the currencies generally, but has that eased off? Have you seen any recurrence of that in the current quarter? I know you can't comment too much on that, but...

It was primarily in April, where we saw some large swings especially intraday swings in the currencies that made it more expensive to hedge the peso and the forward points have been increasing. But those -- the currency markets always have some inherent volatility in them. It's just that occasionally, they go through periods of extreme volatility, and that's what we saw in April.

Randolph, the -- now that you're on the Jack Henry platform, is there any kind of -- you must have an idea of what kind of penetration rates you might see in the -- I guess, it was about 1,100 potential clients. Can you expand on what your thoughts are with respect to going into that platform?

Sure. Thank you, Robin. And just to be fair, just before we answer that, I do want to ask for your courtesy. On the last call, we had a bunch of questions from you, and we ended up not being able to take 2 other people's calls. So if we could do just a couple of questions like this and then re-queue, it just prepared us for other callers. But back to the question about the Jack Henry and the platform, and again, why we call it one provider, one platform, is a lot of the customers, both on the Jack Henry and as you may recall from previous calls, the Fiserv wire exchange, we are integrated into 2 core banking software systems. That enables us access to, not guaranteed to get those customers but access to their entire portfolio of customers using the Jack Henry general ledger system. And so it's quite nice when they're an already existing customer for banknote services. And now because of the automation, we can do a straight-through transaction where they're able to do the transaction on their platform, but it really is integrated into ours and it saves a pounding back office work as well as it makes it very fast and simple for the banks. So what we're doing is we are focused on increasing the awareness of their portfolio of 1,100 customers of the fact that CXI can provide both banknotes and international payment services. So we have a dedicated sales team. It's led by Chris Johnson, who's been with the company since it started. He's proven to be a strong leader of our sales organization at CXI and his team is focused on continuing to get penetration in new customers on that system. Did that answer your question, Robin?

Yes. My last question is, you've increased your use of your line of credit, and I know you were housing some extra currencies and things like that. But the interesting question is, with the banks all having this huge amount of excess capital, I guess my question to you is, do you have areas where you could deploy more capital if you had it and basically generate even greater future profits.

Yes. Of course, we -- as I started off, we're very focused now on our risk-adjusted return on the capital deployed. And so we do want to utilize our capital as efficiently as possible. And so yes, if we had additional capital, we would be able to accelerate our growth even higher, but we are utilizing our lines of credit. In fact, we are just updating our line and getting an increase in such line to support further growth. The company is not interested in issuing any new equities to raise capital in that manner. So we are focused on generating additional retained earnings in funding our future growth. And those opportunities we're discussing, utilizing our lending facilities with our primary and our secondary bankers.

Your next question comes from Jim Byrne of Acumen Capital.

Just a couple of ones from my end. I noticed obviously a pretty significant jump in the payments revenue in the quarter relative to obviously last year, but also just Q1 and actually a slight decline on the banknote business. Maybe you could just let me know if there's any significant kind of onetime items in there? Or are these types of run rates what we would expect for the next couple of quarters?

Well, the payment segment, that, as I indicated, Jim, has been driven by new client acquisition, primarily clients we've onboarded over the last 6 months that are generating a lot more volume of transactions for us, but we've also managed to get stronger margins from some of the foreign transactions driven in those payments. So I think we're -- we like the payment segment because it does tend to be a little more predictable. So what those -- well we should see is that, that provides a new baseline to work from, moving forward. The banknotes business is still in a state of flux as we're not yet in a period of normalcy yet. The Omicron variant impacted demand earlier in the quarter. We do have probably some normalization or smoothing effect from some of the transactions like with the Federal Reserve program now, those volumes tend to be smoothed out. So we won't see the seasonal fluctuations that we may be -- we do see with some of the other consumer demand related to that. Plus, we've had seen the winter in Q1, we had strong performance from the Caribbean countries. And then as people sort of stopped traveling during the cold winter season to their sunny south destinations, they start planning more their spring summer trips. And that's where we see in Q2 the pick up with the euro and the sterling. And so it is, I think, going to take some time for us to figure out what normalcy comes out to be with the travel patterns as right now, there's just a lot of pent-up demand and people are going where they can go, where it's safe, where they aren't restrictions and they can get flights to now.

Alan, you went into details about the operating costs and good to see that you kind of have certainly held the line on profitability and given the pressures of some of the postage and shipping and things. Is this sort of the level of profitability you would expect you could sustain around that 22%-ish range. We kind of anticipated it would be as strong as Q1 because of some of those items. But what should we use as a baseline going forward?

I think absolutely, it's sustainable. Our goal is to grow that operating leverage. And we do believe that we'll be able to do that in the coming quarters as we continue to grow the business.

And then maybe give us an update, Randolph, on any M&A activity that you're working on or seeing in the business, particularly on the payment side?

Yes. Thank you. We continue -- it's part of -- well, it's not those 4 pillars, that's an overarching opportunity that both the CFO and myself have in our agenda. We are always looking at opportunities. There's a significant premium being paid by several corporations, both in the U.K. and in the U.S. that we feel is not a right price. And so if the -- if there's an opportunity with the right team of people at a reasonable price, that would be an accretive transaction, we would absolutely be interested in that. We have been reviewing a few opportunities. However, due to the extreme price that the sellers are asking we have not -- we don't have anything hot that's going to close, if that's what your question is. We are continuing to focus on just growing organically and just highlighting to the potential customers, the advantages of Exchange Bank of Canada or CXI. But we do continue to keep our eyes open and have continued dialog with existing -- some of our existing clients that we may consider as well as other opportunities. But there is nothing imminent if that's their question.

Your next question comes from Peter Rabover of Artko Capital.

Maybe I just wanted to parse on the operating expense side. So I think you said you had something about $3 million in variable and about $7 million in fixed. And is that $7 million in a pretty steady run rate that we should think about going forward?

Yes. I mean there will be some modest, I think, increases there, but they will be pale in comparison to our expected growth. So what we've really worked on throughout the pandemic was converting more from more of the fixed cost to the variable cost structure. So that gives us more flexibility if we see sudden changes in demand like we did during the pandemic.

Okay. Go ahead.

No, no, I was just going to add. I mean there will -- we are continuing to invest in the technology as well as the resources. It is known, and Alan's comfortable with the fact that we are searching for a group CFO. So we will be having 2 CFOs, one at the bank and one at the group level. So we will be making key strategic human resource investments. And currently, unfortunately, there's a lot of costs, you have to hire and pay a big fee for recruiters because the labor market is extremely tight, both in the U.S. and Canada. And so you will see some increase in fixed payroll costs going forward as we ensure we have the team of people both in the sales and in finance and compliance and in risk to ensure that we properly maximize the opportunity that our strategic plan has.

[indiscernible] already in the quarter? Or are they going to be like the search costs, et cetera?

So yes, so that's -- again, as Alan had pointed out, that's a good number where we're at, but it will increase as we continue to grow and those investments will show the reward by getting the right people in the right spots. And so there's been some costs already through the first half of this year, but you will see that our baseline will be going up as we continue to build out the organization. As you recall, during the pandemic, we significantly cut and restructured the organization. And now that we've proven that our earnings and revenues will continue to grow, we do want to make those investments and it's the right way to grow this business. And so you will see a bit of increase in that baseline.

Inflationary pressures with it's a very tight labor market, as I'm sure many of you are aware. And so we need to continue to maintain the ability to attract and retain our employees, and so we're sensitive to ensuring we keep pace with the market in that regard. And so I think part of it is going to depend on where inflation goes and what happens with the economy in the future quarters with the aggressive tightening that the Federal Reserve and central banks are on. So that will be one of the factors that influences, I'm sure, the costs moving forward.

With the success of -- you said you have up to 20 franchise branches now and that sounds like a model that you prefer. Is that something that you would consider just transitioning to long term like 100%? Like does it make sense to own the branches or sell those to potential operators and collect the franchise fee of the top and get rid of the fixed costs?

We do like the agent locations. We do also enjoy the full profit potential of strategic key company locations, while obviously, at the right price, anything would be for sale. But we are -- our focus going forward is more on the agent model. And just to clarify the number, the 20 were airport locations. We have other agent relationships that are not in airports that we hope to continue to grow. And so that is our primary growth channel on the consumer side is that, but we are -- we've identified a location in Florida that is likely to be opened in the next quarter because it is our key market. It was a proven location of a competitor that went out of business. And so therefore, we will selectively continue, very selectively, continue at the right price in the right location to have company-owned locations. And again, as I mentioned on the online FX for the whole United States, as you know, consumers only in the U.S. for us. And so we are online store in getting additional licenses or permissions from the states that we are allowed to do home delivery in their state. That is another key growth plan in our consumer division. Did that answer your question?

Yes, I think that helps. I got 2 quick ones. One is, I think you said you really increased your level of cash to, I think, $110 million, and I think your net is like 83% based on what you said. I'm just curious, I think you've mentioned in the past that your excess level of cash, one that you can use for growth is somewhere between $5 million to $15 million. Is that still a number to think about? Or has that increased to like 10% to 20%, is that -- just that's just for, I guess, more and more valuation purposes that to parse the cash from working capital to excess.

It's a good question. And I think it's one of the areas that we're focused on right now is figuring that out. But the cash balances will naturally fluctuate because of the settlement cycle. So when you see sort of the accounts payable and holding accounts jump up, well, part of that is going to be in the cash balances. And so we kind of look at that as almost third party, so we don't really consider it surplus. It's really how much we need for our inventory needs moving forward. And what we're going to do is look and to see what the activity is like over the next couple of months as we get through the summer and then get a better handle on what [ depictablity ] will be to determine the optimal amount of inventory and then that will derive what we think the surplus cash is. So -- of course, as we continue to add earnings, we'll continue to grow that as well. So your range from before, I think, still is probably reasonable to use for valuation purposes right now, but we'll look for better clarity of that as we get through the summer.

It sounds like you guys are setting the record revenue in the last 2 quarters and third quarter in the past in 2018 with $3.5 million in net -- in the operating income and $3 million in 2019. And so I'm just kind of curious if we take the growth rates from what you're doing now in revenues and your fixed expenses, it sounds like should we expect the third quarter operating income to be higher than those in the past?

Well, we don't do guidance, but typically, and as I said in my initial brief, the travel indications, if you saw the news, Airbnb is at record levels. I'm here in Florida at our headquarters, and I could confirm that Florida has been at peak tourist levels and continuing to grow. So I would suspect the third quarter would be a very strong quarter, again, but we didn't expect the Omicron, and definitely for 1.5 months, there's dramatically slowed things down. So we don't know what's to come in the third quarter. But if -- provided there's no -- anything out of the normal, it should be, as it usually has. The summer is always our busiest time for the business.

And revenue growth is there, we would expect the net operating income to grow as well.

Your next question comes from [ James Smith ], a private investor.

I have one for Alan and one for Randolph. The question for Alan is on the revolver. I think a prior caller mentioned that you were restructuring or upsizing your lending capacity. Could you please walk us through what the restructured or upsized capacity looks like? And then the question for Randolph on -- so Alan mentioned in his prepared remarks that the EBC has been normalizing its operating model and building the pipeline for the wholesale business now that you've been accepted into the FBICS program. And it sounds like you're now ready to really scale that business. And you'd spoken at the AGM last quarter about being the sole source provider of U.S. dollars to some large Canadian banks. So could you walk us through the pipeline on the FBICS business specifically? And just tell us sort of where you want to take that business over the next 1 to 2 years?

All right. 2 good questions. So on the credit facilities, we're currently in the process right now, working with our primary lender to renew those, and those discussions are going very favorably. We are probably in the final throes of having that finished this month. And we are looking to increase the overall capacity in those facilities. In addition to getting them committed for at least 2 years. So that, I think, is likely to materialize, but we aren't in a position to discuss any specific terms right now because it hasn't been finalized yet. But we are optimistic. And yes, overall, we see that we do want to get more financial capacity for the organization, and that is something that we're working on right now. And so that will probably be more clear when we have our Q3 call in September, we'll be able to give you more guidance around what that's going to look like. So more to come on that.

And Jim, thank you for the question about the Federal Reserve cash program. We are very proud of the fact that Exchange Bank of Canada is the only Canadian financial institution with a direct relationship with the Federal Reserve for the purpose of sourcing U.S. dollars for both local usage in the country as well as international distribution. We currently do have several financial institutions in Canada using us. But believe it or not, all the large major Canadian banks are currently sourcing from another bank that's U.S.-based or a different Canadian bank, but not directly with the Federal Reserve. So this is a growth opportunity within Canada by itself, but you asked about the international expansion. And as you know, we've taken a very cautious approach to our expansion internationally to accepting customers internationally. We started with FATF countries, which is basically the largest countries in the world like in France, we have a good relationship in other parts of Europe, but we also have good strong activity with Mexico and most recently in Brazil. But we do look to potentially expand that to low risk or low- to mid-risk non-FATF countries, but there's a process around that internally and to validate that all compliance and risk concerns have been addressed. And so we are continuing to map out our further international expansion. But so as of right now, we're focused on utilizing our services for the countries we're currently already operating with starting with Canada itself.

Your next question comes from Adam Wilk of Greystone Capital.

And congrats on a great quarter. Operating leverage is really kicking in nicely, which is great to see. I think the majority of my questions were already asked and answered, which is great. Maybe just 1 or 2 for me. I guess I'm trying to quantify the impact of shipping cost increases and additional freight costs related to your participation in the Fed program. And I'm wondering if you think kind of moving forward, if those increases in costs will maybe offset any of the sourcing savings that you're getting? Or how should I kind of be thinking about that?

Well, the sourcing -- the international, that's one advantage of our expansion with select countries, it does provide us a direct source of the low home currency. So while we may sell U.S. dollars or buy U.S. dollars from those countries, we can also source their local currencies, and that is a further driver for us to consider select countries elsewhere. But the shipping cost is one, we're currently renegotiating. We're very active and almost done with a renegotiation of our primary shipper and trying to reduce the amount of increases they've been having because all the shipping companies, both the armored cars for the international stuff as well as the domestic overnight shippers have been significantly increasing their cost because of a -- as we all know, the gas is at record highs right now and so forth. But because our volumes have significantly increased coming off of where we were very slow relative to previous years before the pandemic, we are focused on trying to bring those costs down or keep them contained. However, it is a fact, as Alan said, the inflation both on payroll and on shipping, our 2 most expensive areas, is happening. And so we are focused on ensuring efficiency as best we can.

But just some guidance there in terms of the increase in postage and shipping in the quarter, probably about half of that would be just from that program.

From the Fed program.

Yes.

And our revenues are -- when we quote internationally, we obviously include the fact that we know we're paying this high shipping costs. And so the dollar values of those transactions are typically $5 million, $10 million at a clip. And so we want to ensure that there's enough volume to cover the shipment. Otherwise, the bank would -- and us would agree to wait until they had a bigger need for funds.

And then you kind of touched on this a little bit. It looks like you've been adding some head count and you've talked about a lot of the sort of growth initiatives that you have and sort of continuing to ramp the organization in that way. I'm wondering if you can disclose maybe what percentage of those new hires or employees are on the sales side, how those efforts are working out for you on the payments business? And then maybe how far along do you think you are with hiring? Or kind of where do you see things headed for the remainder of the year into next year?

So we -- the ratio between revenue-generating people in the second line of defense, as we call it, which is the compliance and risk folks and the finance folks to support all the revenues we're very focused on the efficiency between that. We've implemented initiatives to do further automation on the support functions to allow for more generating -- revenue-generating people. We are focused on adding people, both in Canada and in the U.S. We are -- we have ads running in the newspaper and on indeed.com, looking for experienced foreign exchange relationship people. And so we will continue to add those people because to execute on all of these pillars, you need strong people to generate additional revenues. And so, I don't know if that answered your question, we don't disclose our proportionality ratio. However, I do confirm that, that ratio is of interest for us to ensure that as we keep adding more salespeople that we are not adding exactly the amount of support people there. But I don't know if that answers your question, but that's the best I can do on that.

And then on the Jack Henry side, are there additional compliance personnel required now that the integration is complete? Or is that kind of baked in already?

That would be baked in. So again, once the bank that's using the Jack Henry is a client, which a good chunk of them are clients on the banknote side, then the compliance cost to add the fact that they're going to do wires through the system, it does not increase it. That is not it. Where we're seeing the need for additional compliance and risk folks is primarily on the international expansion side as well as the fact that we're adding licenses in additional states to support our growth initiatives.

Last one from me, I kind of want to press on Peter's question a little bit more -- from a minute ago about excess cash on the balance sheet and kind of the balance between your growth investments and maybe returning capital in any way. If you've gotten that far in terms of your internal plans, can you maybe talk a little bit about, I guess, your longer-term plans for the capital structure? I know you talked previously about maybe introducing some additional leverage into the organization and how you're kind of thinking about that today versus like the growth investments you're making and any potential uses of excess cash?

Currently, the excess cash is being deployed and will be deployed through the addition of new customer relationship, agents, as -- the agents we do have to -- our investment is to put the cash at the location and support it. We do see the fact that we have lots of cash. And now that we're more profitable as an organization, there is interest to borrow to replace that cash. So that cash can be utilized for a merger opportunity or again, significant expansion in any of these particular areas that we're focused on.

Your next question comes from Jordan Steiner of Lionguard Capital.

Most of my questions were asked and answered. Just a quick one on FBICS. Just given it's pretty new story to us investors, and it might be a big part of the story down the road. I just want to make sure I understand what's happening. So just to paraphrase what you've said on this call, you onboarded the first customers last Q4 and maybe Q1. And then in Q2, it sounds like revenues were kind of flat sequentially as you worked on improving money laundering, AML stuff and just general practice in that business. Is that fair to say?

That's correct. That further expansion before we did, we wanted to ensure that the current operating model is in place. And then as you can imagine, each new potential country that we may take customers from, we want to ensure that we've researched all the compliance and risk concerns that could deal -- come with dealing in that -- accepting customers in that new jurisdiction. But we are focused -- one of the salespeople was -- the other call, was asking about hiring salespeople. We are currently looking for a dedicated international leader for our international expansion. We currently do have a couple of people involved with that, including myself because of my experience over the last 30 years in doing international banking. But we are going to be expanding that with a dedicated resource to focus day in, day out on both the relationships as well as the logistics that come with international currency exchange.

And did I hear you correctly before when you said in this current quarter, I guess, it's with the July quarter that we're back to the onboarding process of some new clients there in the pipeline?

That's correct. The pipeline in all of our categories are quite full. We're very happy with that. And I confirm that there are new customers that are just -- have been onboarded and are going to do what we call our first time trade in this current quarter. So you will see continued growth. And I do confirm, as you said, that the Fed program -- and again, it's not just the Fed. Our organization sells Canadian dollars, U.S. dollars, Mexican peso internationally to these banks. And -- but our international customer base will be a significant contributor over the years ahead as we become more experienced and add new countries.

At this time, there are no further questions. I would like to turn the conference back to Mr. Randolph Pinna for closing remarks. Please go ahead, sir.

Okay. Thank you. It was refreshing to hear all the questions, and I thank you for all of your support for all the shareholders. And should there be any questions that come after this, if we are able to answer them, please let Bill, Alan or I know. And again, thank you for your time today.

Ladies and gentlemen, this does indeed conclude your conference call for this morning. We would like to thank you all for participating and ask that you please disconnect your lines.