Currency Exchange International Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 13, 2024

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Currency Exchange International Q2 twenty twenty four Financial Results Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, June 13, 2024. I would now like to turn the conference over to Bill Mitulis, Investor Relations Manager.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone. Welcome to the Currency Exchange International conference call to discuss the financial results for the Q2 of the 2024 fiscal year. Thanks for joining us. With us today are President and CEO, Randolph Pinna Group CFO, Gerhard Barnhart and Group Treasurer and Interim CFO of EVC, Katie Davis.

Speaker 1

Gerhard will provide an overview of CACI'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 to 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 and 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.

Speaker 1

Please refer to our financial statements and MD and A report 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 Gerhard. Gerhard, please go ahead.

Speaker 2

Thank you, Bill and thank you everyone for joining today's call. I will present a more condensed overview of the results of the consolidated CXI Group for the Q2 ending April 30, 2024 to allow more time for questions at the end as requested. These results are presented in U. S. Dollars.

Speaker 2

We'll also incorporate the results of our wholly owned subsidiary, Exchange Bank of Canada, where the most significant financial event of the quarter was management's reversal of the deferred tax asset allowance of its wholly owned subsidiary Exchange Bank of Canada and recognizing the expense of about US1.4 million dollars in the income statement due to continuous challenges. The group continues to focus on executing against its strategic plan and with significant investments being made in our people, CXI and EBC combined have 391 full time and part time employees, a decrease from 406 of the previous quarter. We continue to invest in technology platforms, which remains a huge focus for us. NetSuite has proven to provide our executive team with real time data to better manage the group's operations. Additionally, Kareba, our treasury management system and Alyssa's AML compliance software is heading towards the final stages of implementation and operationalization by the end of the fiscal year.

Speaker 2

Our IT team continues to leverage the power of the cloud computing to enhance integration capabilities, improve scalability, performance and resilience. These initiatives and investments among others support more efficient future growth for the Group. On November 29, 2023, the group announced that notice of intention to make a normal course issuer bid in CIB or share buyback and to purchase for cancellation the maximum amount of 322,000 common shares representing 5% of the company's issued and outstanding common shares. At the end of the second quarter, the company bought back 52,100 shares at an average price of roughly CAD24.5 for a total investment of CAD1.3 million. Now let's look at the consolidated performance for the 3 months ended April 31, 2024 compared to the previous 3 months ended April 30, 2023.

Speaker 2

The company reported $500,000 of net income which is $1,700,000 or 77% lower than the same period last year. But when we take into account the $1,400,000 of deferred tax expense recognized related to Exchange Bank of Canada during this period, it is important to note that the adjusted net income was $1,900,000 dollars a decrease of only $300,000 or 14% compared to the same period last year. Adjusted net income in the United States grew about $400,000 or 15%, whereas adjusted net income in Canada declined by $700,000 The group's adjusted return on equity for the current period was 12% compared to 19% for the same period last year, driven by slower revenue growth in Canada during the current period. The company generated $20,000,000 a 7% increase from the same period last year and noticeably new customer acquisitions in both the banknotes and the payments product lines. Compared to the Q1 of 2024, revenue increased by $2,000,000 or 11% which is consistent with the cyclical growth patterns where revenues increased for the Q1 to the Q2 in 2023 by about $1,800,000 or close to 11%.

Speaker 2

The top 5 currencies are the euro, U. S. Dollar, Canadian dollar, British pound sterling and Mexican peso. This 7% year over year growth in revenues or $1,400,000 was primarily due to the growth in the U. S.

Speaker 2

Payments business of about $900,000 followed by growth in the direct to consumer bank business of 315,000 dollars Revenue in the United States increased by $1,400,000 or 10% over the year, while Canada remained fairly flat. Operating expenses increased by $1,300,000 or 9%, primarily attributable to an increase in salaries and benefits. The company recorded net operating income of $3,800,000 in the 3 months period ended April 30, 2024 or 2% higher than the same period in the prior year. EBITDA margin for the current period was 19% compared to roughly 20%, 21% in the same period last year. The following is a highlight of the revenue by product line.

Speaker 2

For the 3 months ended April 30, 2024 compared to the same period 2023. Let's focus on banknotes. Revenue in the banknotes product line increased about $500,000 or 3% due to the continued growth in demand for travel currencies from increased travel levels. Between February 2024 April 2024, approximately 215,000,000 travelers passed through the TSA checkpoints in the United States airports. This is an increase of almost 8% compared to the same period.

Speaker 2

Direct to consumer banknotes revenues increased $310,000 or 5%. This growth was attributable to increases in volumes in branch locations as newly opened locations continue to mature over the time and drive higher volumes in addition to the geographical reach of the FX online platform which has recently entered the State of Ohio in the Q4 of 2023. The State of Alabama in the Q1 of 2024 as well as the State of Wisconsin in the current quarter, which represents an opportunity for the company to offer its online services to almost 91% of the United States population. Also banknotes increased by about 190,000 or 2% despite the decline in transacted U. S.

Speaker 2

Dollar volumes with international clients in Canada. Relative to the 3 months period ended January 31, 2024, total banknotes revenue increased by about $1,200,000 or 14% which coincides with the typical seasonal increase in tourism in North America. The focus on payments. Revenues in the payments product line increased 30%, primarily driven by new customer acquisitions and increased activities from existing financial institution customers in the United States as direct result of the company's continued investment in integration with core banking platforms. The payments product line in the United States grew 53% whereas Canada remained fairly flat compared to the same period last year.

Speaker 2

The company processed roughly 37,000 payment transactions representing $3,400,000,000 in volume for the 3 month period ended April 30, 2024 and this compares to roughly 30,500 transactions and $2,600,000,000 of volume in the same period in 2023. Now I would like to discuss revenue by geographic location for the 3 months April 30, 2024 compared to the same 3 months in 2023. In the United States, revenues grew by 10% during the 3 month period led by $910,000 or 53% growth in payments and roughly $310,000 or 5% growth in banknotes with the remainder of the growth related to wholesale banknotes. Payments growth was primarily the result of the company's investment in integrations with core banking platforms that allowed onboarding of new financial institution customers during the period in addition to increased activity from existing customers. Now banknotes revenue including direct to consumer were largely impacted by new customer acquisition, increased transactions and demand for travel currencies and exotic and certain exotic currencies complemented by growth across most of the branch locations and through the company's FX online FX platform.

Speaker 2

Revenues in the United States represented 81% of total revenues by geographic location in the current 3 month period compared to roughly 80% in the previous period. Now in Canada, revenues were flat during the 3 month period ended 30 April, 2024. Growth in domestic FX banknotes was offset by a decline in transacted volumes for U. S. Dollars with international clients.

Speaker 2

Payments volume had a 10% growth based on volumes with marginal increases in certain existing clients' transactional volumes in addition to new relationships. Overall revenues in Canada represented 19% share of the total revenue. Now operating expenses increased 9 percent for the 3 months ended April 30, 2024 compared to the previous period ending April 30, 2023. The U. S.

Speaker 2

Had expense growth of 9% and Canada of 12%. Income tax expense for the current period included the $1,400,000 related to the deferred tax expense as mentioned earlier. Specifically related to the unused loss carry forwards in its wholly owned subsidiary, Exchange Bank of Canada, which the company as we assessed its recoverability and accordingly reduced the deferred tax benefit amount and increased its deferred tax expense by the same amount. Salaries and wages increased when compared to the prior year mostly driven by higher average headcount in addition to partial increase in cost driven by inflation in base salaries and healthcare cost. Postpaid and shipping continues to decrease.

Speaker 2

It had a 24% decrease when compared to the same period last year despite the growth in banknotes volumes. This decline reflects cost management initiatives implemented by the company which were adopted during the second half of twenty twenty three. The increased cost in information technology expenses during the Q2 were associated with the company's continued development of its technology solutions to support and streamline its business and customer service delivery including expansion in the payments product line and integration with platforms, security systems and technology solutions. Now foreign exchange gains and losses represented the net result after considering hedging and risk management strategies designed to reduce the inherent risk in the company's exposure to foreign exchange, thereby minimizing volatility in the Mexican peso was a driver of foreign exchange losses in the 3 month period ended 30th April, 2024 representing roughly 2 thirds of the losses during that period. Interest expense has significantly declined in the period compared to the same period last year as a result of a notable decline in average borrowings utilizing of short term working capital needs during the current period directly due to the reduction in U.

Speaker 2

S. Dollar activity internationally at EBC. Let's look at the consolidated performance for the 6 months ended April 30 compared to the previous 6 months. The company reported $1,360,000 of net income during the 6 month period ended April 30, 2024, dollars 2,500,000 or 65% lower than the same period last year. Please note adjusted net income was $2,800,000 a decrease of 1 point $5,000,000 or 27% compared to the same period last year.

Speaker 2

Adjusted net income comprised reported net income adjusted for the deferred tax expense related to Canada as previously discussed. Adjusted net income in the United States grew by $1,100,000 or 28% compared to the same period last year, where Canada declined by $2,100,000 generated revenue of $38,200,000 for the 6 month period 30, 2024, a 7% increase that was mostly due to the growth in direct to consumer banknotes of 1.7% and the growth in the U. S. Payments business of about 800,000 dollars Operating expenses increased by $3,000,000 or 10% primarily attributable to an increase in salaries and benefits. The company recorded net operating income of $6,100,000 in the 6 months period ended April 30, 2024, 6% lower than the same period in the prior year.

Speaker 2

EBITDA for the current period was 16% compared to 19%, that's EBITDA margin. Revenue by product line for the 6 month period ended April 30, 2024 compared to the previous 6 month period. Banknotes, revenue in banknotes product line increased $1,850,000 or 6% with direct to consumer banknotes revenue increasing $1,300,000 or 11%. Now payments revenue product line increased by 11% driven by new customer acquisitions and increased activity from existing financial institution customers in the United States, a direct result of the company's continued investment in integration with core banking platforms which resulted in a 42% increase in the U. S.

Speaker 2

Region for this period. Canada declined by 21% as a result of reduced volumes. Revenue by geographic location for the 6 month period ended April 30, 2024 compared to the same period in 2023. Revenues in the United States grew by 15% during the 6 month period led by $1,500,000 or a 42% growth in payments and $1,300,000 or an 11% growth in direct to consumer banknotes with the remainder of the growth related to wholesale banknotes of $1,200,000 or 10%. Revenues in Canada declined by 15% due to reduced transaction volumes from certain key clients in the payments product line and lower transacted volumes in U.

Speaker 2

S. Dollars with international clients. Revenue in the payments product line decreased about $750,000 or 21%, while banknotes product line decreased about 635,000 dollars or 11% compared to the same period last year. Operating expenses increased 10% for the 6 months ended April 30, 2024 compared to the previous 6 months period of 2023. This increase is higher than the 7% growth in revenue primarily due to slower revenue growth in Canada.

Speaker 2

Variable expenses within operating expenses represented by postage and shipping, sales commission, incentive and bank fees totaled $9,200,000 compared to $9,800,000 in the previous 6 months period. The decline of 6% was primarily driven by a decrease in posting and shipping. The ratio comparing total operating expenses to total revenue was 84% compared to 82% in the previous period. As shipping had a 17% decrease as a result of cost management initiatives implemented by the company. Losses and shortages represented shipment loss in transit that the company self insurers.

Speaker 2

The favorable variance in losses and shortages was primarily due to a significant decrease in lost shipments and as a result of cost management initiatives that the company implemented to manage its shipments. The variance in foreign currency exchange gains and losses was due to volatility in certain currencies with the Mexican peso being the main driver of foreign exchange losses and period ended April 30, 2024 representing roughly $210,000 completely offsetting net gains in other currency exposures in this category for the period whereas the euro represented a $500,000 gain in the same period last year. Now let's review the balance sheet for the Q2. As of April 30, 2024, the company had a capital base of 80 $5,000,000 drawn on its line of credit with $45,300,000 in borrowing capacity. This compares to $14,900,000 drawn $35,700,000 of borrowing capacity same period last year.

Speaker 2

The average outstanding borrowings of the company amounted to $5,900,000 during the 6 month period ended April 2024 compared to $12,800,000 during the same period last year, which led to a significant reduction in cost of borrowing. The average interest rate of borrowing was 8.7% for the current period compared to 7 point 2% for the previous period. The group continues to focus on capital allocation and the normal course issuer bid NCIB or share buyback confirms both management and the Board's belief that the underlying value of currency exchange international may reflected in the market price of its common shares from time to time. Now at this time, I will turn the call over to Randolph Penner, our CEO to provide his perspective.

Speaker 3

Thank you. Thank you, Gerard, and thank you everyone that's on the call. Appreciate your time. I wanted to just start off with the big event of the deferred tax assets. We did management did choose to reverse this to follow the guidance of accounting standards for taxes.

Speaker 3

We still do remain optimistic for Exchange Bank of Canada, and we are very focused on turning the bank around so that it can be a contributor of income as opposed to taking away from CXI's successful growth. In EBC, when analyzing it, as you've heard, the Mexican peso has been the biggest challenge, not only in the FX gains or losses of hedging, but really has affected in the first half of the year, the Mexican peso appreciated probably the most significantly since I've been doing currency exchange over 30 years against the U. S. Dollars. Now the recent election has reversed that.

Speaker 3

So we're optimistic that the demand for selling to EBC will resume and we have started to see that activity now with the weaker peso versus the USD. The pipeline is quite full at EBC, both on the banknote side and on the payment side. On the payment side, I'm very proud to announce that we've done an integration with a FinTech company that will enable us to add another 300 active corporate payments for international payment activity. Our payment team, the bank what we call the FX relationship bankers, are continued to focus in adding new clients as you may have heard. On the banknote side, we have both a strong pipeline in Canada as well as internationally.

Speaker 3

Domestically, we have several new financial institutions, one of which is already on boarded and should begin trading mostly U. S. Dollars and possibly additional foreign currencies. Internationally, we have added 2 new banks in Brazil, as I was for the first time in Sao Paulo and personally welcome the 2 new customers, as well as a new customer that's just being onboarded now in Europe. And we have a very strong pipeline, both in Central and South America and in the broader European zone.

Speaker 3

More importantly, I wanted to focus on CXI's very strong growth for the half year. Banknotes continue to be up 10%, as you heard from Harrar, that is both in the wholesale category as well as in the direct to consumer category. While we've added a few new clients in the financial institution space in America, but we are seeing increased trading both at all the bank branches as well as our retail stores. We are adding additional retail stores with our newest store opening now at in Buckhead Atlanta and the next one thereafter will be in the Boston area. Both should be open and contributing for this busy summer season that we anticipate.

Speaker 3

As you saw, the biggest grower was our payments business. Chris Johnson, our Head of Sales for the U. S. Has been very successful with his team adding new financial institutions, primarily as you've heard through integrations into core or select software systems that now allows for a straight through process using us as the one provider and their platform as the one platform. We also have some activity in the M and A space, nothing signed, but we, Gerard and I are active in exploring good strategic opportunities for CXI and our group.

Speaker 3

The primary focus of these considerations is in bank notes, not in payments. And we overall, we want to just remind the shareholders that now we are entered in this quarter, the 3rd quarter in our busy summer season. Activity has been strong both domestically in Canada and in the U. S. And we are seeing internationally as well.

Speaker 3

I wanted to keep this conversation short so that we can open it up for questions and I'll turn it over operator to allow the questions to flow, so Gerard and I can answer them if we can. Thank you.

Operator

Thank you. Your first question comes from Robin Cornwell with Catalyst Research. Your line is now open.

Speaker 4

Hi, good morning. Congratulations on a good quarter. I wanted to start, if I could, just, grand off on the FX accounts using your trust structure. Are you specifically able have been able to start transacting in larger volumes with some of the European coins?

Speaker 3

The trust agreements are all in place. Unfortunately, they we have yet to have an active customer use it because of the three way agreement and then the client being overseas. They it has taken longer for legal on the other side to approve of the structure. We do anticipate a financial institution using it actually first in Mexico, while the overseas customers that have been considering it in Europe and Asia continue to get comfortable with the relationship with our trust company and the flows of funds. So no, we have not had any usage of it.

Speaker 3

However, it is in place. It is ready to be used and should allow for higher volumes in the second half of the year once the legal and risk departments of these financial institutions get comfort within their own lawyers in their part of the world, as well as one is validating everything with a New York lawyer to confirm that they're comfortable from a legal risk perspective.

Speaker 4

Okay. Thank you. And now my other question is on the payments. The revenue in the U. S.

Speaker 4

Was very strong. Could you I know you mentioned the using your banking platforms, allowing for new financial institutions and customers. But maybe you could expand a little bit about how this is actually working. Is it like relationships like the January, etcetera, that are kicking in? Or is there other dynamics that I'm trying to understand?

Speaker 3

Yes. Thanks for the question. So Robin, yes, the integrations with select software providers like Jack Henry, for example, since you mentioned that one, is enabling existing clients of CXI or new clients of CXI to have a straight through process with us. And that integration, so you understand it, is they have their one platform where their checking accounts and savings accounts at that bank have the money and they get the bells and whistles and all the sophistication of our core software system through the integration. So by choosing us as their processor, they get the benefits of our enhanced payment system.

Speaker 3

And that is allowing, again, existing customers that use us for bank notes and now say, oh, they're now integrated with my core, I can do my payments through there as well instead of with the big banks. And so that's enabling existing and new clients to come on board for payments. And one thing I forgot to mention in my first speech was Canada is now doing that. I mentioned about the FinTech, but we are also working with a financial institution to do an integration there. So we are this we call we nicknamed it the OPOP strategy, again, 1 platform, 1 provider, and we are following that initiative in Canada.

Speaker 3

But I'm not sure if that answered your question, but basically it enables the bank to use their core system and click and but you get the benefit of our system because we're pre integrated and allows therefore them to easily debit an account, credit our account and we move the money. Did that answer your question, Robin?

Speaker 4

Yes. Thank you. And I guess a little bit more leading question is what can you foresee the growth, where it might go from here? That was very strong revenue increase. What do you see going forward?

Speaker 3

Well, as the pie gets bigger, it's harder to do 40% growth each quarter thereafter. But yes, we do anticipate additional significant growth in CXI for sure, as well as once we have some additional integrations in Canada, we'll see growth in payments there as well. We are also focused on some larger institutions, which could really move the needle, because the first batch of customers that we've been having and used our system and the integrations have been more smaller to the small regional type of banks and we're moving upstream to some of the bigger banks that recognize the value of the system. And again, the system is just one element. People use us because of our service and our laser focus on ensuring straight through process and execution of all payments and any follow-up should there be any hiccup along the way.

Speaker 3

And so our reputation as a solid FX specialist provider is enabling our team to get some bigger banks and hence we do anticipate continued growth in the payment space in both the U. S. And in Canada.

Speaker 4

Terrific. Thank you. That's all for me.

Operator

There are no further questions at this time. Please proceed.

Speaker 3

Well, thank you. Again, as you know, we are happy to do earnings call, 1 on 1 type of calls, should there be something that comes up that we haven't discussed today. As long as we're able to discuss it, we'll be happy to. We do have additional meetings. So I know Bill Matulis will be getting a lot of calls asking for maybe that meeting.

Speaker 3

We Gerard and I will not be available for a call until after next Wednesday. But we do invite you to set up a 1 on 1 type of call with Gerard and or myself. So I thank all of you for your support and look forward to talking or meeting you again soon. Thank you.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Powered by Quartr
Earnings Conference Call
Currency Exchange International Q2 2024
00:00 / 00:00