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

Good morning, ladies and gentlemen, and welcome to the Currency Exchange International 2023 Q2 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Wednesday, June 14, 2023. I would now like to turn the conference over to Mr. Bill Mitoulas. Please go ahead, sir.

Thank you, Michelle. Good morning, everyone. Welcome to the Currency Exchange International conference call to discuss the financial results for the second quarter of the 2023 fiscal year. Thanks for joining us. With us today are President and CEO, Randolph Pinna; Group CFO, Gerhard Barnard; and CFO of Exchange Bank of Canada, Alan Stratton. Alan will begin with his brief comments on EBC's second quarter performance, followed by Gerhard's comments, who will provide an overview of CXI's financial results and his latest perspective on the company's operations. Randolph will then provide his commentary on CXI's strategic initiatives, sales efforts and business activities, after which we'll open it up 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 the 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 we have made. With that, I'll turn the call over to Alan. Alan, please go ahead.

Thank you, Bill. I'll just begin by saying that while the bank's performance didn't meet our expectations in Q2, we believe that many of the factors that created headwinds for us will prove to be temporal in nature. The reported segmented information in U.S. dollar states that Canadian-based revenue declined by 7% to $3.6 million from $3.8 million in Q2 of 2022. It's important to note, however, that the bank actually generated revenue growth of 9% in its functional currency, the Canadian dollar, to CAD 5.2 million from CAD 4.8 million in the prior year. Differences in the rates used to translate the foreign subsidiaries results, as well as intercompany sales from the bank to CXI that get eliminated on consolidation, resulted in a decline in the reported segmented revenue in U.S. dollars. Now, the bank's revenue growth was attributable to the banknote product line, which grew to CAD 3.4 million from CAD 3 million in the prior year. Strong demand for foreign currencies related to the recovery of international travel drove a 39% increase in the bank's domestic client base. This was partially offset by a 33% decline in revenue from foreign financial institutions, and that decline has been largely attributable to the weakening of the U.S. dollar earlier this year that resulted in lower volumes of dollars converted to local currencies by the customers of our financial institution clients. Now, as those customers accumulate dollars, they will typically convert them within 6 to 12 months' time. Our expectation was that the bank would have been able to mitigate some of this by trading with new clients in the quarter, but that did not occur. While there are foreign financial institutions that want to trade with EBC, they have requested a guarantee from CXI in order to meet their underwriting criteria for credit. And the banking crisis that began with Silicon Valley Bank's collapse in March didn't help our cause as EBC's financial capacity is small relative to the value of the dollars being traded. We have been working through the complexities of implementing the parent guarantees are in the process of executing documents with those clients that require it such that it is anticipated the bank will commence trading with new clients in Q3. Now, the bank's payment segment also experienced a decline of revenue of 8% in Q2 to CAD 1.7 million from CAD 1.8 million in the prior year. That decline was primarily related to a reduction in transaction volume of 6% as average transaction value increased by 8%, and the number of transacting clients increased by 22% over the prior year. So the lower volume has been attributable to many clients reducing their inventory purchases or being impacted by their customers reducing purchases. This is partly due to advanced purchasing made in 2022 as a consequence of supply chain issues and rising consumer demand. As both of those factors moderated, many businesses appear to be returning to patterns more typical of pre-pandemic levels. We anticipate that volumes will increase as inventories are replenished, given that consumer demand continues to hold up well. The bank has continued to grow its client base with 80 new corporate clients added in the quarter. The bank's operating leverage turned negative in the quarter as operating expense growth slightly outpaced revenue growth, and the primary driver was an increase in variable costs associated with shipping. In late Q1, there was a change imposed by our primary domestic carrier to its insurance coverage that resulted in us doubling the number of packages shipped per order. And this generated approximately CAD 1.5 million in unexpected shipping costs in Q2. Identifying a long-term solution took time as it involves a mix of alternatives, including more cost-effective carriers in certain markets and implementing a new pricing strategy to fully recover shipping costs that, for most of our clients, has been embedded in their margins. The solutions are being phased in with full implementation completed by early July. By then clients will have full visibility to the shipping costs, and we are providing them with multiple options where feasible. The bank's EBITDA margin fell to 8% in Q2 from 10% in the prior year, and this coincided with the seasonal low for demand of foreign currencies associated with international travel as strong demand for travel is forecast for the summer. That coupled with the initiatives underway that I've discussed are expected to generate an improvement to the EBITDA margins in future periods. I'd now like to turn it over to Gerhard Barnard to discuss the group's financial performance.

Thank you, Alan. Well said, and thank you to everyone for joining us on today's call. I will now present an overview of the results of the quarter ending April 30, 2023, with a consolidated CXI Group. These results are presented in United States dollars, unless otherwise noted. The second quarter of 2023 demonstrated strong year-over-year growth as the group continued to see increased demand in international travel and a return to a more traditional seasonality in travel patents with historically -- which has historically translated into the first quarter being the weakest quarter and the third quarter being the strongest quarter as it relates to banknotes revenue. Management anticipated this pattern will reoccur in 2023, supported by continued year-over-year growth. Using Bain's low-growth air travel scenario, they expect 95% of pre-pandemic level travel for the financial year and around 103% of pre-pandemic levels for 2024. The group continues to focus on executing against its strategic plan, which Randolph will tell us a bit more about, in which significant investments are being made in our people. CXI and EBC has nearly 385 full-time and part-time employees, continue to focus on infrastructure. We have opened an additional 9 airport agent locations and 14 non-airport agent locations. Our total year-to-date active locations is around 18,000. And technology platforms, NetSuite went live on May 1, 2023, and our team is excited to experience its benefits. Kyriba, our new treasury management system has completed Phase 1 and Phase 2 is scheduled for completion in the third quarter. Alessa, an AML compliance controls, monitoring and fraud detection software is making good implementation programs. And our IT team is exploring ways they can leverage the power of the cloud computing to enhance integration capabilities, improve scalability, performance and resilience. All of these initiatives or investments will support more efficient future growth. And I can personally tell you that our team are super excited and ready to start harnessing the operational efficiencies and benefit these technology platforms will bring. However, these investments will impact the operating leverage of the group due to setup, consulting and implementation costs that are mostly not capitalized. The second quarter continued the successful transition to our new organizational structure that took effect on November 1, 2022, and I am confident that we have the right team and systems to achieve our vision of being the preferred provider of foreign exchange solutions. Let's look at April 30, 2023's consolidated performance for the 3 months ended April 30 compared to the previous 3 months ended April 30, 2022. The group generated a 30% increase in revenue in the 3 months ended April 30, 2023, of $18.3 million compared to $14 million. The prior year was impacted by COVID-19, notably in Canada, where travel advisories and restrictions, which have now been lifted, reduced demand for international travel. The group's top 5 currencies by revenue were the U.S. dollar, Canadian dollar, euro, Mexican peso and British pound sterling. South American and Asian currencies are slowly recovering, but with Japan and more recently, China relaxing travel restrictions on foreign nationals, these markets are expected to see increased travel demand in 2023. The revenue increase over the comparable period in the prior year also reflects the acquisition of new customers in both the banknotes and product and payments product lines. As I mentioned, the group also added 9 airport agent locations and 14 non-airport agent locations in the second quarter. The group recorded net operating income of $3.7 million, a 30% increase compared to the $2.9 million, which was accompanied by the corresponding increase in salaries and benefits in addition to shipping costs, which was associated with the growth in revenues. The group generated $2.2 million in net income during the 3-month period ended April 30, 2023, compared to $1.3 million. When comparing the 3 months period ended April 30, 2023, to the same period in the previous year, the following is notable. Revenue in the payments product line decreased 7%, as Alan elaborate a little bit on that to $3 million in the 3-month period ended April 30, 2023, from $3.2 million in the same period. So $3 million versus the $3.2 million, while client acquisitions remain consistent in the same -- with the same time last year, certain top clients experienced declines in their volumes as a result of the slower economy. However, the group was successful in onboarding new clients and processed more payment transactions, but with lower volumes. The group processed close to 30,000 payment transactions, representing $2.6 billion in volume, and this compares to about 29,000 transactions on $2.8 billion volume in the same period of 2022. Our revenue in banknotes product line increased by 41% to $15.4 million from about $11 million. The growth is attributable to 3 main drivers. Firstly, consumer demand for foreign currencies have significantly improved as restrictions on international travel have ceased over the past year. Now, between February and April of 2023, they say approximately 260 million travelers passed through the TSA checkpoints in the United States airports, approximately 81% of the pre-pandemic levels. This is an increase of -- from about 10% in April 2022. Secondly, the group was successful at increasing its market share, as indicated by the increase in new wholesale clients and developing its direct-to-consumer footprint through new locations, including agents and its FX online (sic) [ OnlineFX ] platform. Thirdly, the group has increased its penetration in global banknotes trade, partially driven by EBC's participation in the foreign bank international cash services program with the Federal Reserve Bank of New York. Relative to the first quarter, banknote revenue increased by $2.4 million or 18%, which coincides with the typical seasonality -- seasonal recovery in tourism in North America. Relative to the most comparable period to the pandemic, and that would be the 3 months April -- ending April 30, 2019, banknotes revenue has increased 76%, reflecting the impact of increased market penetration and expansion of international trade. Now, operating expenses also increased to 31% from $14.6 million compared to $11.2 million for the 3-month period ended April 30, 2022, represented mostly, as Alan also alluded to, by postage and shipping, a 109% increase to $3.3 million from $1.6 million. Losses and shortages is up 470% to close to $0.5 million from $100,000 and bank services charges nearly 40% to $0.7 million from close to $0.5 million. The group recovers some of these shipping costs through fees that it charges to its clients and client negotiations are ongoing. In some cases, it is built into the margin and the group has implemented some price increases to compensate for these higher costs in shipping. The ratio of total operating expenses to total revenue was 80% compared to more or less 79% of the previous 3 months in 2022. Salaries and wages increased to $7.5 million from around $6 million from the previous year and is driven by incremental growth in headcount to 385 from 272 in the comparative period. The increase is intended to assist the group in coping with its growth in the business, as well as the group continues to recover from COVID-19 and continue to backfill some of the vacant roles that were cut as part of the group's restructuring plan during COVID-19. In addition, a partial increase in cost is driven by inflation in base salaries and wages as the group implemented broad-based increases in 2022 to maintain its competitiveness in the labor market due to inflationary environment, whereas wages were largely frozen in early 2022 due to the ongoing pandemic. As we mentioned, postage and shipping increases due to higher volumes of shipments associated with the banknote product line and product mix as international banknote trade involves airfreight and third-party processing fees, as well as lower dollar values allowed per sent package, which led to an increase in the total number of packages being sent. Inflation, driven in part by higher fuel cost also has been a contributing factor. Losses and shortages increased related to shipment lost in transit at the group self-insurers, reflecting the significant increase in shipping volumes. Now, foreign exchange gains and losses includes the revaluation of outstanding balances with foreign currencies to market value. Together with the net gain or loss from foreign currency forward and option contracts used to offset the revaluation of inventory positions for foreign currency exposure. The foreign currency net gains for the 3-month period ended April 30, 2023, are attributable to the gains realized on the revaluation of the banknotes inventory. For the 3 months period ended April 30, 2023, the majority of the gain amounts were associated with rate changes relative to euros, British pound and Mexican pesos, whereas the rate change in these currencies, in addition to the U.S. dollar and the latter's strengthening in the prior year contributed to the majority of the losses over the 3-month period ended last year. Now, let's take a quick look at the -- well, let's take a high level look at April 30 consolidated performance for the 6 months. And again, I'm going to compare it to 6 months, April 2023 compared to the previous 6 months, April 2022. The group generated a 31% increase in revenue for the 6 months up to $34.9 million compared to $26.5 million, with net operating income of $6.5 million, an 8% increase compared to the previous terms, $6 million. The group generated $3.8 million in net income during the 6-month period ended April 30, 2023, compared to $2.8 million. When comparing the 6-month period ended April 30, 2023, to the same period last year, the following is notable. Revenue in the payments product line increased by 21% to $6.5 million from $5.4 million. Revenue in the banknotes product line increased 34% to roughly $28.5 million from $21 million. Now, operating expenses increased as well by 38% to $28.4 million compared to $20.5 million in the 6-month period ended April 30, 2022, represented mostly by postage and shipping for the 6-month period, that is up 95% to $5.4 million from $2.8 million. Losses and shortages due to the higher volumes, up 200% to $0.8 million from $0.3 million and salaries and wages, as we mentioned, up 35% to $15.2 million from roughly $11 million and stock-based compensation up close to 100% to $1 million from $0.5 million. The growth in expenses have our full attention and management continues to focus on cost management and negotiations with our clients to recover some of the inflation we're seeing in shipping costs through fees. The ratio of total operating expenses to total revenue was 81% for the 6 months compared to 77% in the previous 6 months. Salaries and wages, as I mentioned, increased 34% to $15.2 million from $11 million due to the incremental growth in our headcount to 385 from 272. Foreign exchange gains and losses for the 6-month period ended April 30, 2023, are primarily attributable to the gains realized on banknotes inventory revaluation under our hedging program. Most of the gains were attributable to rate changes related to euros, pounds and Mexican pesos, whereas these currencies in addition to the U.S. dollars, have resulted in losses in the same period of the previous year. Now, the group recorded an income tax expense amount of close to $0.5 million in the 6-month period ended April 30, 2023, in comparison to an income tax expense of about $1.1 million in the prior period. This 11% effective tax rate compares to a statutory tax rate of 26%. The variance reflects the recognition of a deferred tax asset of $600,000 related to stock-based compensation expenses that will be deducted -- deductible on exercise in the future. The benefit was derived by a significant increase in the group's share price during the 6-month period ended April 30, 2023. Further, there was an impact of a tax structuring that the group used, allowing it to reduce its income tax provision by 4%. These were partially offset by certain permanent differences between taxable income and income recognized under generally accepted accounting principles. Now, let's take a quick look at the balance sheet. The group's capital base as at April 30, 2023 has grown to $73 million from $71 million in net equity. In addition to the growth in its capital and its credit facility, with its primary lender, as mentioned previously, to $40 million from $20 million. Working capital has grown to $64.5 million from $60.5 million. This securely positions the group to support its strategic plan from a liquidity position. The combination of solid capital base and debt capacity provides sufficient liquidity to continue to meet its financial obligations and ensure that CXI is well positioned to support its strategic initiatives that include the organic, as well as inorganic acquisition of new clients in both the banknotes and payment product lines. Return on equity is close to 15% for these 6 months period ending. The group had a total available balance of unused lines of credit of $35.5 million compared to $55.5 million as at April 30, 2022. Given the unpredictable nature of demand and the significant increase in volumes during the summer, our busiest third quarter, the group held higher inventory balances of certain currencies to mitigate the risk of running out. I would like to conclude my discussion reiterating the group's continued focus on executing against strategic plan with a particular focus in 2023 on making significant investments in our people, infrastructure and technology platforms to be in a position to create even brighter future for all our stakeholders. At this time, I would like to turn it over to Randolph Pinna, our CEO, for his perspective.

Thank you, Gerhard and Alan, for your detailed review, as well as thank you all for attending this early morning call. I want to start off at a high level, just to say that I am very pleased with all the progress that CXI and Exchange Bank has done this year. Financially, you see our revenues are continuing to grow. And while you and I and all of us are not happy seeing higher costs than we would want. However, those costs, as Gerhard clearly discussed is needed to allow us to continue to have this nice growth in revenues and volumes and become more efficient. I'm proud of our team implementing their NetSuite in the Kyriba systems, and I watch to see these other systems continue to allow for an efficiency, allowing the company to grow with always -- not always having to hire new people. So all in all, I'm very pleased with our progress and very excited about the years ahead, especially the summer that's right in front of us started already. To begin with, as you know, we have our 3 operating units, the bank, our wholesale business at CXI and our consumer business. I would like to start with Exchange Bank of Canada. That's our biggest asset besides the team that we have built. We have a great team of people, and I'm very pleased at both the bank and CXI. But at EBC, we're a little perplexed with seeing that the payment business was relatively flat. On a yearly basis, you can see that our trend is continuing to grow, and we stand strong to our investments in growing our payment business. Our current business, as you know, is developing relationships, foreign exchange relationship banking, as we call it, where we identify corporations in Canada that have needs internationally. And we dedicate a relationship banker to maximize their opportunity for foreign exchange. We will continue to grow this business. We are running ads right now looking for people that may want to come over and help us grow Exchange Bank of Canada's relationships. As we've seen in the U.S., we have existing customers that may be doing banknotes, financial institutions that we feel there could be an opportunity to tap into their existing flows of international payments. As you know, we have great APIs and we have proven that our integration capabilities with other core systems has generated profitable returns. We look to expand our relationships in Canada and the payment focus. So one by one, corporate by corporate, as well as looking to expand with potential financial institutions in Canada. The next area of EBC's growth and is a critical part to Exchange Bank of Canada's original business plan is its international customer expansion. Our focus has been on ensuring that our operations are supportive. As Alan pointed out, one realization we've come to is the large global banks recognizing Exchange Bank is a very small Canadian bank has asked for this parental guarantee from CXI. And we have worked through all of that. And so, we're very proud to report that you will see that Exchange Bank will be seeing new customers from countries like Spain, Brazil and Singapore starting soon hereafter. These clients are primarily needing to buy and sell U.S. dollars either want to source mint notes directly freshly printed from the Fed or to offload currencies like in Brazil, there's a lot of dollars that they want to convert back to digital dollars. Our relationship with the Central Bank, the U.S. Federal Reserve, is critical to our international [Technical Difficulty] and Exchange Bank are now 2 years in its relationship, and we continue to remain in good standing with the Fed, and they're eager to see us expand selectively market by market. As you know, our Board must approve each new country, and these countries, Spain, Brazil and Singapore, have already been approved. Our bank also looks to expand its Central Bank relationships. Starting with the next most important bank, which is Bank of Canada. I am happy to report that we have had progress with discussions with the Bank of Canada, and we will continue to work through the details and is trying to establish a Central Bank relationship with Canada. Being a Canadian bank, having a direct reliable source of Canadian dollars is critical to Exchange Bank's international customer expansion. As Gerhard pointed out, dollars, U.S. and Canadian are our primary currencies exchange, of course, euros and Mexican pesos as well. We currently have a good reliable source, actually 2 sources for Mexican pesos. We have a direct source to the Federal Reserve, and we've already been discussing with the European Central Bank as well about establishing a euro relationship. And therefore, we will continue to ensure to be the world's leading foreign exchange processor will be supported by having actual correct sources of currency. Moving into domestic banknotes. As you saw, that was the biggest driver of revenues this year in Exchange Bank because we are seeing both in the U.S. and Canada, a strong rebound to international travel. So our customer base, which are financial institutions, money service businesses have continued to all see increased significant growth in demand for international travel. We are looking at possibly opening -- reopening our Montreal vault. We have -- we expect to see increased volumes from the province of Quebec because of our expanding relationships in Quebec. We're very proud of that. With the Montreal vault, will allow us to update our business continuity plan and ensure that we have the latest plan to ensure that if there's a disruption in Toronto, we could fall back to Montreal or vice versa. Currently, our BCP is a year or 2 old, and it has us referring to the U.S. CXI for its business continuity because during the pandemic, we did have to reduce costs and -- in reducing those costs, we did have to close down the Montreal vault, thereby requiring if Toronto was closed, that we would have to lean on CXI. International shipments over the border is not a practical business continuity plan, and therefore, it is helped supporting the Montreal vault reopening. Between that need, as well with the increased volumes that we expect in Quebec, we are proud to think that this business will be very profitable and help Exchange Bank of Canada continue to grow its banknote business. Moving into CXI. Our wholesale business has continued to do very well. It's very strong. We too saw payments being flat there. And unfortunately, we lost one customer due to do an acquisition of a bank buying our customer, and that bank did not use at this time, CXI. Our pipeline is very full, however. Our integrations have continued and is freeing up the ability for us to get new customers that have already tied into the platforms we've integrated with. So we do anticipate the payment business continuing to grow at a CXI as well. Our banknote business is our main driver of CXI's wholesale. Our additional financial institutions continue to see increased volumes, as well as our expansion is getting us new customers that also have volumes that now can switch to us. We also, just like we've mentioned, with Exchange Bank, we are looking at how we can utilize existing relationships to expand revenue opportunities. We -- because of our integration that we already have with the Fed, which is FedLine and FED Advantage is a domestic payment system of the Federal Reserve, we are exploring the opportunity to potentially add domestic payment processing for a fee, utilizing the technology system we have. This model is similar to a software-as-a-service model, where we will be having regular recurring monthly income from these banks utilizing our platform, thereby making our system a wire hub, where it can receive both international, what we're currently doing with some of our customers, as well as domestic payment activity. We want to be all of the small to midsized banks in the U.S., full international department, which would include, as well as domestic processing. So the expansion of our payment business is very clear and is being led by Wade Bracy, the Managing Director, who prior to his appointment of being Managing Director was our Head of Payment Operations. So payments is quite dear to his heart, and he is a proven leader to allow us to do to ensure we properly process these. Our FTP rate is running around 99%, which is a great milestone allowing us to continue to add volumes without having to add processing people behind the scenes because it's all automated. On the banknote side, we will continue to see expansion, as I mentioned, with the additional financial institutions. The other additional banknote activity moves us into our consumer unit. Our consumer -- direct-to-consumer is seeing significant growth with online foreign exchange. Both our direct to the consumer where they can order directly from CXI, and we are now licensed to be able to ship to approximately 90% of the U.S. population directly. But we're also putting our OnlineFX in a white label model onto our customer banks, allowing the customer banks customers to no longer have to go to the branch to pick up or order their currency. This is in line with a lot of banks that are trying to push people away from the branches and more to a self-service model online. We are supporting that with our existing proven technology OnlineFX. You will -- as you already heard, we have been successful in adding agent locations, both in airports, noticeable places like Newark, expanding in JFK and additional airports will be coming on board. But there are also non-airport locations, such as the Southern border in select cities throughout the United States because of a large national relationship, we will be adding additional agent locations. This is our primary driver of focus when we go forward with our consumer division because this has a much lower operating model where we don't have to pay rent and payroll. It's more a revenue share with our agents. And this model is sustainable for a lot of growth. But we will continue to open company stores. So selectively, maybe one a quarter at most, we will open our CXI branded branch inside typically shopping centers. And so, between our online stores, our agent locations and our company stores, you'll continue to see that the consumer division will expand and be profitable for the business. All in all, we have just concluded our session with our Board and reviewed the 3-year strategic plan for CXI and Exchange Bank of Canada. And we're very proud to report that our focus remains the same, where we will have integrations both in Canada and the U.S. with financial institutions. We'll be expanding our relationship banking. We'll be expanding our direct-to-consumer business, and most importantly, both EBC and CXI will be continuing to accept selectively international customers. The fifth part of our strategy is well underway, which is to ensure that we have the people and systems to allow the company to double and triple in the next few years. We're very pleased with where we're at, and I thank you as shareholders for your support. And we'll open it up for questions at this time.

[Operator Instructions] Your first question will come from Jim Byrne at Acumen Capital.

Alan, you did a great job kind of explaining a few of the nuances on the EBC side. I just wanted to get a sense from either you or Randolph, just on the payments business, obviously, down from some of the items you noted. Are you seeing further signs of weakness from some of these clients? Is it kind of the economic backdrop here? Or are you still expecting to mitigate that by adding new clients here in the short term?

Yes. I'm expecting to mitigate that. I do see that the timing, the market -- I mean, there is a softening globally, as I think we're all recognizing. But our momentum both at Exchange Bank and CXI is that, our pipeline is full, and we will continue to see new customers, either one by one, corporate by corporate in Exchange Bank and CXI has already signed some deals that are just starting to take place. So we are confident that you'll see -- on the half year results, you saw 20% growth year-over-year. We think that type of trend can continue on an annualized basis. Again, it is critical that we continue to expand our customer base because some of the customers are just doing a little less than they usually do. Exchange Bank has over 1,200 active monthly corporate payment clients. But again, when we looked at them, the top 25% were all down a bit. And a lot of it is the timing where they prepaid, they pre-bought inventory. And so, we do think on an annualized basis, we will have the payment business continuing to grow. Did that answer your question, Jim?

Yes. No, that's great. Gerhard, you mentioned some of the new programs in NetSuite, Kyriba, all those sort of integrations and technology spend. It sounded like most of it was kind of wrapping up and being expensed. So, I mean, should we anticipate kind of this level of expense for the next couple of quarters and then that should ease and we should see further operating leverage? Or how should we think about how those expense items roll off when they're complete?

Thanks, Jim. So if you think of NetSuite, I think the major lift, which was Phase 1 has been successfully implemented. We are also further enhancing our NetSuite with NetSuite Budgeting and Planning, as well as a NetSuite sort of HR/commissions module. So that will continue for another 2 quarters, say, 1.5 quarters. Kyriba's major lift, which is Phase 2 is mostly integration and redesigning and sort of rethinking the integration and the processes from scratch. So that is less expensive from a cost outlay point of view and more human capital and our own people redesigning those. And then Alessa, which is a less expensive project, but Alessa will probably continue for another quarter or 3 at a lower cost. So yes, I would say those kind of expenses for these Kyriba, NetSuite, Alessa projects definitely decreasing. But as I also mentioned, Jim, is now we're pursuing the cloud environment. So there is some cost associated with that, probably not on the same level as NetSuite. NetSuite was a year plus major lift and fairly costly if you look at our leverage margins and so forth. So Jim, I think if I understood that correct. This year, you'll see these one-time implementation costs. But the 2-quarter comment you made is about right where we think in '24, you will not see the majority of these one-time implementation system costs.

Yes. And just as a follow-up, is this largely in G&A? Or are we seeing some of this flow through some of the other line items?

Sorry, Jim, say again.

Sorry, would this largely be flowing through the salaries and benefits portion? And consulting and profession fee?

Yes, legal and professional fees. Where it's allocated in the expense line, legal and professional, yes.

It's the majority?

Yes, we've got a full-time project manager on it. We've got a very highly skilled individual that drives this process for us. So if you just look at those 2, we treat them as professional fees.

But you can -- Jim, also you can see that in this last quarter, this is just the one we just finished, there was like over time in salaries because that's going live. So we had a lot of -- so there -- it's in both categories, right? This -- as I flagged in the last quarter, this is our big investment year. I'm very proud to see that the revenues continue to grow, and we're optimistic that the second half is -- we will all be very happy. But the systems are costly, and we have went out and hired professional consultants to -- that have done these system implementations. And so, they, too, and that's under the legal and professional, but also salaries because we have been having people work late hours to ensure that our conversion was smooth and most importantly, it has gone smoothly. And I'm very pleased to hear all the team, like we had a guru of our old system that was a little resistant to the new system. And now he's in and he was like, "I wish I wouldn't have waited so long. I really love the new system. It's so good and so efficient." So we're very pleased with it. But this is the year that we will have higher operating costs supporting the structural improvements we've made.

Your next question comes from Robin Cornwell at Catalyst Research.

My first question is really on the tax rate. Can you give us an idea of what the tax rate going forward is going to be because it's quite material differences?

Yes. Alan is our guru on taxes.

Yes. The effective tax rate should, over the longer term, mirror our statutory tax rate of 26%, Robin. So that's probably the best to use going forward.

Okay. So the 4% reduction that I think I picked up is not really of your effective tax rate of 26%.

No, that was a one-time benefit.

Now, I guess, my other question is reflected on the guarantees. I know it's -- I assume it's largely because of the disruption in the banking system and the defaults by several major banks. But what is the cost of the guarantees to you? And how does it work? Maybe you could just run through it again for me?

It is -- Robin, it's -- the costs are pretty minimal because we're not having a standby letter of credit with the bank. So it's not a bank back to guarantee. It is just CXI giving confirmation that it will support Exchange Bank of Canada and ensure that the transactions EBC does with the international bank will complete and that if there was a problem at EBC that CXI is supportive -- in supporting these transactions. And what's taken -- so the cost is really not a standby fee or anything like that. It's -- so far, it's been all legal paperwork because we're being a U.S. public company supporting its Canadian subsidiary. We did want to make sure that we've documented this correctly. And then, of course, we have to -- those documents have to be satisfactory to the client banks. But the banks are typically wanting to trade, let's say, a USD 30 million for U.S. dollar, that's an example where, again, they give us digital U.S. dollars, and we ship them new U.S. dollars freshly credit from the Fed. They want to make sure that when they prepay that $30 million that we're going to deliver the notes. And so, they want an assurance. And yes, you're correct, Robin, that this really became a new request because of the crisis. And then they recognize, well, Exchange Bank doesn't even have $30 million in equity. So we need this corporate guarantee. And we are doing that with these new banks. And our primary lender is comfortable. They've been involved aware of what we're doing, of course. But it's basically just an assurance from CXI that EBC will complete its transactions.

And Robin, also, as Randolph mentioned, we really enhanced all our risk and compliance on these transactions as well with the stations, and really proper controls with insurance at the station, sign-offs. We've got many, many good eyes from treasury on this, guiding us through this and high involvement to make sure that it continues to 2 years prior with smooth operations.

That's a great explanation. Just a follow-up on that. So the timing of putting all these guarantees in place, I assume that's going on now. Would that be -- you would expect most of them be in place now or in the next quarter? When can you expect maybe that these new clients, international clients would be trading -- back trading [ with you ]?

We call those first-time trades, and we do anticipate -- that's why I called out the 3 countries. We do anticipate a first-time trade with each of those in hopefully, this quarter. Whether 2 of the 3 are standing by, and it could be as soon as next week. But until everything is done, and we get our first trade, I don't want to count it in the bank yet, but it is very likely. In fact, I will be in Madrid, Spain in a few days as part of our expansion. Again, our focus, the Board has already approved of these countries because they are FATF countries, and we will continue to focus on countries that we are already established or have already approved and expand our banking relationships there. And so, I anticipate increased international revenues this quarter continuing to start to go up some more.

Your next question comes from Stephen Ranzini at University Bancorp (sic) [ University Bank ].

I want to talk a little bit about a question relates to seasonality, right? So currently, what we see from your chart at the end of your press release is that, the quarter with the strongest revenue as your quarter that ends in July. And #2 is the quarter that ends in October. Number 3 is the quarter that just ended in April and the weakest quarter for revenue is the one ends in January. Is that actually the typical seasonal flow? Or are the most recent 4 quarters not properly sorted for some other reason seasonality-wise?

For banknotes, which continues to be the majority of our revenues in both businesses follow that seasonality. Again, the third quarter because it's the summer, kids are out of school and international travel is very busy. I've been on the road recently, and I can confirm the airports both here and overseas are quite full. And so, we do anticipate that the third quarter will be very strong and then the next one thereafter. So that trend should continue. The payment business is more straight quarter after quarter is very similar, but there is some timing to it as we saw in this last quarter that it was a little down from other macro factors.

And Stephen, even, if we just look at the volumes that we sent, we are postage and shipping daily out of the box that definitely supports the busy season we're heading into.

My other question is a follow-up on previous discussions on these quarterly calls. Randolph, you had mentioned that the Exchange Bank of Canada was going to undergo a strategic reviews to what its charter, which is currently limited to providing just FX on a business-to-business basis would do going forward. Have you thought about any expansion of authorities there? Have you applied your regulator yet? What exactly are you going to do differently, if anything, there going forward at this point?

So we're going to stick to our 3 areas of focus, which is processing of payments for Canadian corporations. What's new in that category as we've done in the U.S., we are looking to possibly do FX payments or FX services for financial institutions. We service some credit unions and some small other Canadian banks, and we are looking to tap into that. The international customer expansion, as I said, that's a clear part of our long-term business plan. So that customer expansion will continue. There's actually some requests for doing payments, clearing checks, U.S. or Canadian checks are doing a Canadian payment for a fee for these international institutions. So we'll continue to explore those opportunities. And then, of course, our core business of domestic banknote processing will continue to expand. We have some good discussions with some other banks that we're not working with yet that we see the opportunity there. But that's where we are. We are not looking at a critical change to become a deposit-taking institution or a lending-type of bank. While our Schedule 1 licenses could technically allow us to ask that type of request. We do not want to deviate from our strategic plan that we currently have and our business plan clearly outlines how Exchange Bank of Canada wants to be a wholesale foreign exchange bank or financial institutions, both domestically and globally. So did that answer your question, Stephen?

Yes. No, Randolph. I just have a quick follow-up. If you're looking at offering services handling checks, which I think is a great idea. Have you looked at or are you already members of CHIPS, which would be fantastic for processing U.S. dollar checks from around the world?

So we are not a member of CHIPS, not to my knowledge. We are not, but what we do have is the X9 imaging capability, both for the U.S. and Canada to be able to accept and process a U.S. or a Canadian dollar check using that X9 image. And we have a processing bank that takes these digital images and clears them for us. And so, that's the basis for our expansion of check processing.

Awesome. Well, as more people help create that X9 standard, I think that's great that you're doing that. Super.

Your next question comes from James Smith, private investor.

So if it's already been covered off, just let me know. I'll go back and read the transcript. But Randolph, do you have any update on the M&A activity?

Thank you for that question. I was anticipating that. We do not have any hot deals that are ready to be announced. I do confirm that both Gerhard and I have been spending a portion of our time each month reviewing, considering, and for me, personally meeting the owners. As you know, an M&A, it takes time. These are founders of companies and they value their companies probably just as much, if not more than their own children. And so, the challenge is that, our company will not pay a high premium. We want it to be an accretive transaction. Unfortunately, our current stock price shows our multiple not where we feel it should be. And so, that is a bit restrictive. So it's really a matter of convincing the owners and showing them the value of teaming up with Exchange Bank of Canada, allowing them to focus on their core success, which is getting the customers and growing their frontline business. And they can utilize all the hard work investment which we've done to put in the systems, the compliance, all of that and behind the scenes. And then when they recognize the value of that and potential earn out capability, they could see that that's worth more money. That is a slow process. But I do confirm we do have 3, what I'll call, quite warm opportunities. They're currently all in Canada. We have started with 1 in the U.S., but it's further back. But M&A is still part of our strategic plan. I know in my review I told you our 4 pillars of our current strategic plan, the mergers and acquisition is sits above all of that, that it would most likely add to one of those business lines. I also confirm that our primary focus is on payment processing because banknotes is continuing to do very well. And so, we're not as interested in buying a banknote business as we would be a payment business with a book and maybe even some technology. Did that answer your question about our M&A position?

Yes, it does. Very helpful. And I had a follow-up. And it's a 2-part question. The first part of the question is around, you talk about the objective to double or triple the size of the business. Are you referring to the Canadian subsidiary specifically or the entirety of the business? And then the follow-up which you raised, Randolph, was around, your stock price and the multiple, and in the context of all the growth opportunities that you're talking about, what sort of why do you think the business trades where it does and sort of what are you doing about it?

So those are 2 questions. So first the growth. I do anticipate both Exchange Bank of Canada growing significantly, as well as CXI. The strategic plan clearly shows that EBC will grow its payment revenues, its international revenues, as well as domestic revenues. I told you, we've got confirmation of a noticeable new revenues from the province of Quebec. And so, we're very pleased with our opportunities in the pipeline at Exchange Bank and CXI as the mothership, and has always been, even stronger and more successful with growing. I'm confident CXI will continue that because of its wholesale payments, because of its wholesale banknote clients in the U.S., adding new international clients wholesale, as well as our consumer division and their 3 channels of OnlineFX agents and company stores. And so, I'm quite confident we will continue to see significant revenue growth. And once we get past this year of all the costs of putting in all the good systems, we now have the people, which is the best and most important part. And so, we're confident that we'll have an improved leverage efficiency, unless there's touchwood, there's no red button pushed over in Russia. As long as there's something outside of the ordinary, we should have a very strong few years ahead of us for sure. So then to your second question, why the hell is our stock trading so low? I attribute that to a lot of naiveness, people are confused with, well, are you a bank? Are you a fintech? Are you just a currency exchange? And so, we are working through our investor deck and we have as part of our plan in the next 6 months to improve our IR efforts to bring new eyeballs and awareness to the company. If you just do the math, you see how much cash we have and how much cash we're generating, it doesn't make sense. And so, we will just continue to focus on educating our investor base, our potential investors. But most importantly, the primary focus is on our efficiency and bringing profit to the bottom to those shareholders that have been smart enough to own our stock and hold our stock. That's our focus because if we continue to bring good net income to our shareholders, the sooner or later people will catch that this is a good long term value.

And James, I think just to complement that, Alan and myself and our team is also having a heightened focus on the balance sheet, really working with the Board, working with Randolph on understanding each one of the leverages, return on equity, capital employed, really focusing on the cash flow over there. So, yes, we're -- it's not lost on us that you need to take this from -- as Randolph said, from all the various fronts to get to those multiples.

Ladies and gentlemen, that is all the time we have for questions this morning. I will turn the conference back to your hosts for any closing remarks.

Thank you. And I appreciate everybody's time. I'm sorry we maybe went a little over here. And if you didn't get your question submitted, please reach out to Gerhard, Alan or I or Bill. We appreciate your support and thank you, and I look forward to talking with you again soon. Have a great day.

Thank you.

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