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

Good morning, ladies and gentlemen, and welcome to the Currency Exchange International Corporate Update Call. [Operator Instructions] Also note that this call is being recorded on February 19, 2025. At this time, I would like to turn the call over to Bill Mitoulas, Investor Relations. Please go ahead, sir.

Thank you, Sylvie. Good morning, everyone. Welcome to the Currency Exchange International Corporate Update Conference Call. With us today are President and CEO, Randolph Pinna; and Group CFO, Gerhard Barnard. They will both discuss yesterday's press release titled CXI Announces Strategic Decision to Discontinue Operations of its Subsidiary, Exchange Bank of Canada, Pursue Referral agreements with Appropriate Parties and Seek Discontinuance from the Bank Act. Following management's update and commentary, we will open up the lines 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. With that, I'll turn the call over to Gerhard. Gerhard, please go ahead.

Thank you, Bill, and thank you for taking time to meet with us today. We wanted to take the time to ensure that you understand the rationale behind our objective to seek discontinuance under the Bank Act and pursue several referral opportunities and to answer any questions you might have. Currency Exchange International Corporation announced its decision to cease its operations of its wholly owned subsidiary, Exchange Bank of Canada, a federally chartered non-deposit taking, non-lending Canadian Schedule I Bank. Following the cessation of operations, EBC intends to apply to the Minister of Finance to discontinue from the Bank Act. The voluntary discontinuance is expected to be completed in the fourth quarter of 2025, subject to receipt of all necessary regulatory approvals. On January 7, 2025, CXI announced that a Special Committee of independent directors was actively considering a range of strategic options for EBC with the aim of identifying opportunities to maximize long-term value for shareholders. After the assessment of strategic options, assisted by an independent financial adviser, INFOR Financial, Inc., CXI's Board has decided to discontinue operations of its subsidiary, Exchange Bank of Canada. As part of this process, the Special Committee actively explored different options and supported a plan to cease EBC's operations, pursue referral agreements for both the majority of its customers and select employees to well-established Canadian financial businesses and seek discontinuance from the Bank Act. Now as Randolph has mentioned, this decision to seek discontinuance from the Bank Act for EBC was taken really very seriously and not made lightly and reflects the difficult business environment in Canada. And we are optimistic that the contemplated referral agreements are the best outcome for EBC stakeholders as well as CXI shareholders. Importantly, the CXI Group continues to perform well. This strategic move allows CXI to focus resources on its U.S. operations, where we see significant growth potential with both existing and new client relations. The potential referrals of EBC's customers and employees will mutually benefit all parties and will enable a more orderly discontinuance process that will ensure CXI resources are focused on its U.S. business. CXI's long-term outlook remains positive due to the company's focus on its growing fintech businesses in the U.S. and anticipated additional new product growth in the U.S. market. The company will provide further updates as the Canadian business operations are being discontinued. In connection with the cessation of operations and discontinuance, certain onetime costs will be incurred primarily over the next 6 months. These are largely driven by restructuring, vendor termination fees, severance obligations, professional fees and other related charges. CXI expects to remain profitable during this period. During this process, EBC is committed to ensuring minimal disruption for all its stakeholders. CXI is grateful to all EBC's team members for their contributions over the years and is committed to providing support and guidance to all employees during this transition to ensure a smooth and respectful process. I will now hand it over to Randolph, and we will deal with questions.

Good morning, everybody. Thank you for taking the time to be on this call. While the decision is a very tough one that the Board and I had to make, we do recognize the value of our business in the United States and how our additional focus can continue to allow us to grow at the rates we've used to been growing at. I want to comment that the Exchange Bank of Canada, some had thought was a failure for CXI Group. And in reflecting back, it actually was part of the development of CXI to the level it is today. As you recall, CXI was a money service business focused on servicing U.S. financial institutions and money service businesses and saw the need to grow its global operations by establishing central bank relationships such as the Federal Reserve Bank. We're very proud of the fact that CXI was able to come into Canada and open a Schedule I Bank, execute on its plan to set up relationships with central banks. And that capability really elevated CXI Group on the global stage. Eight years later as a bank, we have recognized the costs associated in the challenging market in Canada forced us to really review our different options. We considered several different options, and unfortunately, the best option we feel is to cease business in Canada and exit our business here. We have identified several parties that are well-established financial businesses here in Canada that are very likely to welcome the customer base of Exchange Bank since we are hopeful we can refer them to a new vendor, as well as welcoming a good chunk of our select employees of our Canadian operations. While this decision was difficult, it has been made and we're very focused on our exit plan and to discontinue our operations this year so that the years ahead can remain focused on returning to solid growth for our shareholders. I will open it up for questions since we've received several e-mails from many people, and we appreciate your input and your focus on CXI going forward. So thank you. Operator, you can release the questions.

[Operator Instructions] First, we will hear from Robin Cornwell at Catalyst Research.

Well, lots of questions, but I'll try to keep my 2 questions. First, what is a referral agreement? I guess, have you arranged for some of these already? Do you receive payment? Or does it cost you? Just a quick overview of what we should expect.

Robin, if we had a definitive referral agreement in place, it would be announced. We anticipate that we are likely to establish one. It's not for sure. So again, I have to provide you that cautionary statement that until it's executed, we have nothing in place, but we have had a solid ongoing conversations as part of this review process. What is a referral agreement? There is no money being paid to EBC for the referral. The referral -- the purpose of this referral agreement is to assist our customers in finding a replacement vendor for their foreign exchange needs. And the benefit for EBC, of course, will be that we are hopeful they will take a good select number of employees, providing those employees jobs going forward. So that's the only real benefit for us is that there is a reduction of the severance costs for employees that may not have a new work opportunity as well as it accelerates the ceasing of business since once the new vendor takes over, this will relieve EBC of its role of servicing the current customers of EBC. So hopefully, that answered your question, Robin.

Yes. And my second part of the question, I guess, is in expenses and onetime provisions. Some institutions, when they're endeavoring to do what you're doing, take a onetime provision upfront and then they allocate the expenses against that provision. So the provision takes place in the next quarter, I guess -- next first quarter. Are you doing that? Or are you -- it seems like you might be spreading these costs out over a period of 6 months. Perhaps you don't know what all the costs are yet. But is that what you're doing as opposed to upfront onetime charge?

So that's being discussed internally -- sorry, Gerhard, go ahead. The first quarter is where we intend to be able to have a better reflection on the cost for this year ahead. But I'll let -- that is a finance question. I'll let Gerhard answer that.

Yes. So Robin, while the discontinuance of EBC might have short-term impact on our company, CXI's long-term output remains very positive due to the expected cost savings and anticipated growth in the U.S. market. We remain committed to our core business, and we will continue to pursue the growth opportunities in this market and have a more detailed update on the financial impacts at our first quarter financial release later in March.

Okay. So we can expect that in that quarter, we may see some impact on revenues and expenses going forward? Or is it just the impact we're going to see in that particular quarter?

You can expect an update from us at that meeting.

Next question will be from Peter Rabover at Artko Capital.

Yes, difficult decision, no doubt. So my question is, I guess, the 2-parter that we're talking about, one is could you just give us the inputs, I guess, or the outcomes of that decision? What were the good things, the bad things? And then maybe more on the logistics of it, please correct me and the investors, I think I understood that the bank was the function for the Fed relationship as well as for the payments relationship in the U.S. as well. And so I'm curious how that translates operationally if there's any issues? And then on the financial side, whether this releases any capital at all. So any color on those questions you can give us, that would be helpful.

Peter, I'll answer the first one and leave the finance one for Gerhard. So the first thing that a lot of people thought that the EBC Federal Reserve relationship helped CXI with U.S. dollars. It did not. In fact, the FBICS program, the Foreign Bank International Cash Services program of the Federal Reserve system, allowed Exchange Bank of Canada to be a direct distributor of U.S. dollars globally except for the U.S. since they're based, obviously, in the U.S. The U.S. business has had nothing to do with EBC and EBC was prohibited from selling U.S. dollars from the Fed back into the U.S. So it has 0 bearing on CXI's core cash business in the United States. EBC's role with the Fed was to sell dollars globally, where we did have some customers in Europe and in Central and South America. However, that had nothing to do with CXI. As far as the payment rails, while EBC was one of CXI's payment providers, it was not the only payment provider. And so CXI has, with its core bank in the States, transitioned some of the business already there. And as part of our exit -- discontinuance plan, we will be transitioning 100% of our business to banks based in the U.S. for processing our foreign wires. So we do not anticipate any impact to CXI's current business for both cash or payments on a go-forward basis. As far as the other question, I'll leave that to Gerhard.

Yes. Peter, on the capital question, as mentioned to Robin as well, we will happily provide more details at our first quarter results meeting.

Well, I mean, I appreciate that. I guess, I'm just -- look -- just hark back to the question that I always ask like once a year on the calls is you have excess cash in addition to all your cash or excess assets, want to say, and would it be fair to comment that part of the decision that led to this would be an increase in excess cash that you no longer would have to hold through for the Canadian banking rules?

Peter, this was a difficult decision for us to make. As we mentioned, the discontinuance and the cessation was the first priority that the Board and the advisers worked through. So yes, capital is always an important part of decisions, but it wasn't specifically taken into account in this one. And we would happily share more details of the financial effects at the March first quarter meeting.

Okay. I'll let you answer my question then. Then I guess I'll replace my follow-up with a follow-up of I assume it does not make sense to stay as a Canadian-listed company after you cease operations in Canada. Does that -- would that be a fair assessment to look at down the line?

I think there's many things to consider going forward and that would be one of them in the mix.

Yes. You've got your hands full, I get it, until the fourth quarter. So that's not a pressure question, just more of an implication question.

Next question will be from Robert Van Voorhis at Vanatoc Capital.

Randolph, I just wanted to follow up on your comment that EBC has no bearing on the U.S. business, which I understand but I'd just like to clarify. So in the MD&A, you guys break out the U.S. business and the Canadian business. And so I think last year, the U.S. business generated like $21 million in EBITDA. And so just to be clear, does discontinuing EBC have any impact on that number at all?

The structure -- the group structure of being an international bank group will change and revert back to being a publicly traded fintech money service business. And so there -- as Gerhard just said, there's many, many moving parts. And so there is an impact to the U.S., I think, overall positively. There are shared resources between the two. And of course, this year of '25, we will be executing on our exit plan and ensuring that the group is structured and has an updated strategic plan for the 3 years going forward. And so we do -- again, this is the whole purpose of the Board, review with me was to focus on return on capital deployed and ensuring that our shareholders will be -- see the value of owning CXI stock. And so we do feel that reducing our overall group structure back to being a more nimble fintech-focused foreign exchange operator utilizing its proprietary software was the right decision. Did that answer your question?

Yes. I mean, I think -- I suspect you guys are probably going to provide a more financial update, like you've been saying, in Q1. I was just curious on the specific sort of financial impacts in terms of if discontinuing EBC actually means that you earn less money in the U.S. So I'm not sure that it does. But I'll let you guys do that.

Well, if you do the math, you saw we have $21 million and then we lost money. And so we feel there will be -- we feel that it's a positive move, this decision. That was exactly why we made the decision is to allow CXI to continue to grow without the losses that it has been experiencing in Canada. This year, of course, there will be cost in executing on this plan. But in the years ahead, it should be positive.

Next, we will hear from Jim Byrne at Acumen Capital.

Maybe just to clarify, Randolph, about the payments business. Obviously, Canada was primarily focused on that. So you're not exiting the payments business in its entirety, it's just a shift to whatever you can get done in the U.S., is that fair?

Correct. Well, just to clarify for the audience, we have 2 businesses in the CXI Group: CXI, which operates throughout the United States with many financial institutions; and then we have Exchange Bank of Canada. Both of those businesses do payments. It is correct that CXI has used EBC as one of its primary payment rails because EBC did have -- does have connections with global correspondent banks. But CXI, as I said in the previous answer, has its own rails. The payment business at CXI will continue to grow as planned. If you noticed in the last releases, you'll see that the payment growth at CXI has been quite significant. At EBC, which is a little bit of a different model, whereas CXI in the U.S. services banks who services their corporations, here in Canada, Exchange Bank of Canada was Canada's foreign exchange bank and it had direct relationships with over 1,300 corporations throughout Canada in being their foreign exchange bank for payments. That business here is likely to be referred to another payment -- specialized payment operator here in Canada that will be able to honor the current relationships that we have with the corporates in Canada. So again, in summary, the Canadian business, which all the revenues, and hence, all their cost to support those revenues in '26 will not be a part of our financials on a go-forward basis. CXI will continue to remain focused on growing its payment business. And without Exchange Bank, CXI will utilize its other banking partners so that it has to replicate the service provided by Exchange Bank to CXI. So in summary, CXI will continue to do payments with its U.S. clients, which are almost 100% banks.

Okay. No, that's helpful. And then just to -- is there a chance that you could transition some of these European customers? I know some of them were banks, if I recall, to the U.S. business out of Europe. Or is that not going to happen?

CXI has its own business operations in the U.S. that does include a few international clients. However, the current strategic plan for CXI does not have a holistic international expansion plan as Exchange Bank had with its Fed relationship. Since CXI does not have a direct Federal Reserve relationship for cash, it is unlikely to try to transition the international banks to CXI. In fact, it's being contemplated to be referred to another bank operator here in North America. However, the primary goal right now is Canada and our payment business and our Banknote business and the large customer base of Banknote clients we have in Canada, that is our primary focus. The international book, if you will, was not that large and we do not see the value in trying to have those customers go to CXI at this time.

Okay. And then maybe, Gerhard, just I'm assuming going forward, EBC and the Canadian operations will be accounted for just as discontinued operations for the next few quarters here. Is that the way we should think about it? I know you're going to give an update.

You are correct. Starting in the second quarter, we will have discontinued and continued operations. And in the first quarter, we will obviously have this subsequent event, you're correct.

Next question will be from [ Harris Perman at SXC Capital ].

I wanted to follow up on what one of the earlier questioners asked, which is, I think, just trying to get at the question of will the shutdown of the EBC business effectively result at the complete carve-out of all of the Canadian losses or could there be some leakage? Because I think some companies show segment financials and then there's a corporate overhead line item, which you do not do. You have a U.S. and then just the Canada side. So for example, Gerhard and Randolph, are your compensation costs split between the U.S. and the Canadian segments? Or are you simply on the U.S. side? I guess, this is the kind of question that a lot of shareholders are keen to answer.

I'll let Gerhard answer financial questions.

Yes. So [ Harris ], you are correct. We do have transfer pricing in place between the U.S. and Canada or CXI and Exchange Bank of Canada, and it goes both ways. So we will have a more detailed analysis of that stranded cost that you're referring to in our first quarter update.

And at this time, gentlemen, we have no other questions registered. Please proceed.

Okay. Well, thank you very much for your time this morning. I know some have reached out for a regular update call that we've done with shareholders. Please do reach out to Bill or Gerhard should you have a follow-up question. We can only provide what is currently in our press release. As expected, we will be providing a more wholesome financial update as part of our first quarter results. And now I would like to go ahead and close the meeting now. And just thank you for your support and understanding of the situation.

Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.