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Good day and thank you for standing by. Welcome to the Currency Exchange International Third Quarter Financial Results Conference Call. [Operator Instructions]I would now like to hand the conference over to your speaker today, Bill Mitoulas. Thank you. Please go ahead.
Thank you, Stephanie, and good morning, everyone. Welcome to the Currency Exchange International conference call to discuss the financial results for the third quarter ending July 31, 2021.Before we begin, please let me remind you that during the course of the conference call, Currency Exchange International's management may make forward-looking statements. These forward-looking statements are based on current expectations that are subject to risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in the Risk Factors section of our listing statement filed on SEDAR. Any forward-looking statements should be considered in light of these factors. Please also note that any outlook we present is as of today, and management does not undertake any obligation to revise any forward-looking statements into the future.With us on the call today are President and Chief Executive Officer, Randolph Pinna; and interim Chief Financial Officer, Alan Stratton, who will begin with his brief comments on the quarter's financial results followed by his latest perspective on the company's operations. Randolph will then comment on the bank's performance, sales and business activities, after which, we'll open it up for questions.For those of you who may happen to leave our call before its conclusion, please be advised that this conference call will be recorded and archived on the Currency Exchange International Investor Relations website page.With that, I'll turn the call over to Alan. Alan, please go ahead.
Okay. Alan, before you go. If I could, everybody take just one moment, please to -- as you may know, Stephen has stepped down from the business, and we want to thank him for all of the hard work he's done over the last 3, 4 years with the organization. And just as importantly, I want to welcome Alan Stratton, who's been working with us for about 1.5 years or more, as the interim Chief Financial Officer. So thank you very much, Alan. Please go ahead.
Thank you, Randolph. I'll echo those comments. I have had the benefit working with Stephen for quite some time and can say that he has left CXI with a strong and capable team. And we all do wish him well in his next chapter.I'll now provide a brief overview of the results for our most recently completed fiscal quarter Q3 2021. Note that these results are presented in U.S. dollars unless otherwise noted. And as we have stated in the past, the currency exchange business has been significantly impacted by the COVID-19 pandemic.That said, Q3 represented continued progression towards a return to profitability. The quarter marked the first period since the pandemic began that we returned to both positive operating leverage and cash flow, excluding the effects of changes in working capital. While this is partly due to an improvement in demand related to international travel, it is also reflective of our persistent focus on executing against our strategy of revenue diversification and operational efficiencies.Revenue more than doubled in the 3 months ended July 31, 2021, to $8.6 million from $3.9 million in Q3 2020. It's noteworthy that the comparative period was the first fiscal quarter to include results since the declaration of the COVID-19 pandemic by the World Health Organization. It also represents the low point for revenue since that declaration, which reflected the sharp drop in demand due to lockdowns, travel restrictions and closures of not only our retail stores, but also many of our wholesale clients' locations as well.However, what is also important to note is the sequential increase in revenue in Q3, which was 31% over Q2 2021. The sequential improvement from the nadir has been in the range of 27% to 31% each quarter, yet, we are still 30% below our comparable pre-pandemic peak for revenue, which was $12.4 million in Q3 2019. Our bank note trading currencies are largely dependent on international travel is still down by approximately 60% when measured against our base line of same stores and clients that we had in the Q3 2019 period. That's our ability to mitigate part of that gap lies in our strategy of increasing market penetration, both domestically and globally, as well as our expansion in the international payment space.Payment's revenue has almost tripled to $2.1 million from $700,000 in Q3 2020. It was July 29 of last year when we completed our Montréal-based acquisition. Thus, it contributed very little to our results in Q3 2020. However, that acquisition catalyze an expansion of our sales team in that segment that taken together have contributed to us building a book of well over 500 active trading clients, which is more than 10x that, which we had before the acquisition.These corporate clients are typically importers and exporters that need to settle transactions in foreign currencies. Exchange Bank of Canada presents a unique value proposition to small and medium-sized businesses that don't get the personal service from their commercial bank but want the security of dealing with a bank. We are pleased at how quickly we have grown this segment in the past year. However, not all of the growth in this payment segment is due to EBC. CXI has been steadily growing its base of financial institution clients that require international payments abilities in order to service their customers' needs.Our solution integrates with their core platforms to provide a seamless experience. While the onboarding cycle takes longer than with our bank note products, once we have these institutions as clients, they tend to be very sticky. Our success has translated into the payments segment accounting for just over 24% of our total revenue in Q3 2021, up from 18% in Q3 2020. In addition to diversification, another benefit from the payment segment is that it doesn't have the significant amount of seasonality associated with it.Turning back over to banknotes, which still make up the majority of our revenue, approximately 76% in Q3 2021. That segment increased by slightly more than 100% to $6.5 million in Q3 2021 versus $3.2 million in Q3 2020. A significant reason for that growth was the fact that our retail locations were open for the entire quarter whereas every one of them was closed for either part or all of Q3 2020.While we have reduced our retail footprint by 24% since the beginning of the pandemic, our stores still generate a significant amount of revenue for the company. Our direct-to-consumer channel has been able to capitalize on strong demand for certain exotic currencies since the beginning of the pandemic, which we also offer through our online store.However, entering the traditional high season for spring fand summer travel, we were pleased to see increased demand in both euro and Mexican peso. That reflected several destinations in the European block that reopened their borders to Americans during Q3. Since Mexico never really closed its borders to tourists that arrive by air, it has continued to be a popular choice for North Americans to holiday.Our wholesale division continues to add new clients at a steady pace of approximately 20 to 30 each month. Increasing our market share is one of our strategic pillars and helps to offset the impact of an overall smaller market. When our integration with the Jack Henry platform is complete later this year, it will provide us with improved access to an additional 1,100 financial institutions in the United States. Thus, we anticipate the funnel for new clients to be full for some time to come.Lastly, while it is hard to quantify, we are benefiting from the decision by one of our largest competitors to exit the North American market last year. With reduced competition in the retail market, we have been able to increase our gross margins on most currencies since the pandemic began. At EBC, the recovery in consumer demand has been delayed as the Canadian government-maintained policies that greatly restricted international travel.Fortunately, late in the quarter, those restrictions began to ease with the elimination of the requirement that vaccinated travelers quarantine for 14 days upon arrival or return to Canada. That has since been followed by a partial reopening of the land border with the U.S. to allow vaccinated American tourists to enter Canada. And as recently as last week, travelers from other countries may also now visit Canada.But despite this lag in consumer demand, EBC has been able to leverage its status as a Canadian bank to deepen its trade with other international financial institutions for major currencies. Much of that volume is in U.S. dollars, and our recently announced participation in the Federal Reserve Bank of New York's Foreign Bank International Cash Services Program is a key enabler to penetrating that trade further in the future.Turning now to the expense side of the ledger. Total operating costs rose 29% to $7.6 million in Q3 2021 compared with $5.9 million in Q3 2020. Not surprisingly, direct variable expenses doubled, commensurate with the growth in revenue. Excluding those, other operating costs rose by approximately $1.1 million. The lion share of that increase relates to salaries and benefits, which were up by $1 million or 30% over the comparable period in the prior year. At first glance, that would seem counterintuitive as our employee base has declined by approximately 68 net positions since July 31, 2020.However, most of those eliminations occurred in our retail and banknote operations divisions, which generally have low average wages as many are either part-time or entry-level positions. Offsetting those reductions have been growth in high-value roles, primarily in sales but also are in commissions. Most of the growth has been in our payments segment and includes the employees that we acquired in the transaction that closed on July 29, 2020.However, that will explain about half of the year-over-year variance because every one of our retail stores was closed for part or all of Q3 2020. Most of the employees related to those stores were on furlough during that time. Accordingly, they were on leave without pay, but still appeared in our total headcount as we continue to provide them with certain benefits while on furlough.In addition, several members of management took part in a voluntary salary reduction scheme in exchange for stock options, which also lowered the salary cost but was offset by an increase in stock-based compensation last year. As a result of these atypical factors, the salaries and benefits in Q3 2020 was not reflective of a normal run rate for comparative purposes.Another line item that was abnormally low in Q3 2020 was rent expense. During that period, the company received over $200,000 in abatements from mall landlords that required our stores to close. Factoring out those abatements, our rent expense is lower on a normalized basis and reflects the overall reduction in our store footprint. Generally speaking, most of our expense line items are consistent with the prior year though there have been some cost pressures in certain areas, such as insurance expense or directors and officer's liability premiums, in particular, increased significantly upon renewal following the declaration of the pandemic.There isn't much that we can do about that now, but we are hopeful that the market reverts when we finally shut the pandemic. The management team continues to exercise restraint when it comes to expenses and our investments have been focused on those that are directly associated with our strategic initiatives.With growth in revenue outpacing expenses in Q3, we finally returned to positive operating leverage. Interestingly, the operating margin of 12% is consistent with the margin that we achieved in our last reporting period prior to the declaration of the pandemic. In that period ending January 31, 2020, we generated revenue of $9.9 million, which was approximately 14% higher over the Q3 2021 revenue generation.Therefore, we are benefiting from the restructuring actions taken last year. Similarly, the company's operating cash flow, which adjusted to include the lease payments, but exclude working capital changes, was also positive in the quarter at approximately $600,000. This marks another milestone since the beginning of the pandemic and one that we have worked hard to achieve. However, our focus is still on returning to profitability.The net loss for the quarter ending July 31, 2021, was $120,000 compared to a net loss of $2.3 million in Q3 2020. That demonstrates that the company is operating close to breakeven. And what is equally noteworthy is that it comes without any material government support. In prior quarters, Exchange Bank of Canada qualified for significant wage subsidies. But as its revenue has recovered, and only qualified for a very small amount in Q3 2021. And while we are grateful for the support that we have received as it has allowed us to retain many employees, we much prefer being sustainable without it.The performance translates into a net loss per share of $0.02 for the quarter, a significant improvement from the $0.35 per share loss in Q3 2020. And although CXI incurred a small loss that has slightly reduced its retained earnings, we continue to maintain a strong balance sheet with $56 million in equity at July 31, 2021. Working capital was $46.8 million at quarter end, a position that has been fairly consistent throughout the past year.Liquidity is strong with $57.7 million in unrestricted cash. And while we had just over $11 million outstanding on credit facilities at the end of the quarter, we still have approximately $20 million in unused capacity. Also, the company had $2.3 million in income taxes receivable at July 31, which relates primarily to loss carrybacks from our 2020 fiscal year. I'm pleased to say that in August, we received approximately $800,000 of those refunds due. And if indicative of IRS processing time, then we are hopeful that the balance will be received shortly.In conclusion, Q3 performance was largely in line with our expectations, which provides assurances that the recovery in international travel has begun and that our strategy is sound. We continue to take a cautious approach in planning around further improvement in the recovery as there remain many obstacles. Several countries maintain travel restrictions. And the United States has yet to open its land borders with Canada and Mexico to tourists.While we remain confident that we will eventually return to profitability in spite of the protracted pandemic, our objective is to ensure the long-term sustainability of the organization.At this time, I will now turn it over to Randolph Pinna, our CEO, to provide his perspective. Randolph?
Okay. Thank you, Alan. Thank you, everybody, for joining so early, especially those out West. As usual, I'd like to begin with a discussion of our subsidiary Exchange Bank of Canada, and then follow through with CXI at the end.To begin with, as you noted, seen, Exchange Bank is performing very well. We're very pleased with the fact that the payments business is continuing to grow as expected, and most importantly for our banknote business, as we have been accepted into the Federal Reserve Bank of New York's program. They call it FRBNY’s and this program allows us to buy or sell U.S. dollars in bulk, both recycled or even mint notes to distribute both to our locations throughout Canada and customers throughout Canada as well as new customers. I'm proud to report that since being accepted, we've accepted 2 new customers in Europe, 2 fine -- sizable financial institutions.Our account is now open, and we are beginning to utilize this. Not only does it bring in new revenues for banknotes, it also brings in the ability to lower our sourcing costs. This was one of the original reasons why we went out to create the bank is so that we can deal with central banks and reduce our sourcing costs. The value to our current flows of U.S. dollars is quite significant.When the Board of Directors looked at the business and knowing that we have been approved by the Federal Reserve, and knowing that our payments business continues to have opportunity for significant growth, the Board made a decision to inject capital into the bank, both in the form of an equity investment as well as of convertible debenture.Now Exchange Bank of Canada is well capitalized and has the facility both with the people, the systems and the money to continue to grow both its banknote and payment business.On the banknote side, it's not just international as we do know Canada has been locked down quite tight, looking around the world. It's one of the tightest in my opinion. We do see the opportunity for this coming back. Some of our customers are reopening locations. We also are participating on other large bank opportunities that are in the marketplace now.And so domestically in Canada, Exchange Bank still has a lot of opportunity to see growth in this banknote business. As I've already started telling you, internationally, there's a very large demand for Exchange Bank to distribute banknotes or clear banknotes. There is some surplus U.S. dollars in some banks around the world, and they want to get rid of that. So we do buy and sell dollars in bulk.Because being a Canadian bank, we our international offering allows us to sell not only U.S. dollars but also Canadian dollars. And because of our relationships with some strong banks in Mexico, we also can deal with large bulk Mexican peso dollars. As Alan pointed out, the Mexican peso has been a very large currency traded in the last few months. In fact, for the whole year, the Mexican peso has been one of the top 2 currencies being traded besides the U.S. dollar. And therefore, we are well positioned as an international bank to sell currencies globally.Moving into the payments, as Alan pointed out, it has been 1 year that the team in Montréal had joined between the existing team that we have and the new team. We have a very strong payments business. Very proud to report that James Devenish, our Senior Vice President, has been leading this team, has a clear strategy on how to continue to grow and take market share from the other opportunities out there that corporations look to.And so being a bank in Canada with operations where we can provide them with low-value payments, large payments, we can even do forward transactions, has really enabled Exchange Bank to capture some good corporate clients, and we will continue to invest in that regard.Moving over to CXI. Similarly, the banknote business is also showing great growth. Luckily in America, the restrictions are a little less. And as Alan pointed out, some countries are opening their borders to Americans. And we have seen a great increase in business. So our wholesale customer channel of financial institutions has shown growth. Not only have the existing customers come on, but as Alan pointed out, we've been taking on a lot of new credit unions and banks across the United States. Because one of the major competitors here has exited, and it allows us the opportunity to provide service where they are no longer providing.Additionally, we have -- our agent program, as you recall, we announced about a year ago the relationship with Duty Free America. Their business is coming back, but we realized with that agent relationship that we can add additional locations without the rent or payroll costs associated. And as a result, we have struck relationships with some retail operators and airports. As you may be aware that we are operating now exclusively at the Chicago O'Hare Airport and the Chicago Midway Airport. We are also operating at JFK, which is the Delta Terminal, Terminal 2, Charlotte Airport, and also Portland. We do have plans on adding additional locations. And again, I remind you, we are not paying any rent or payroll. It is a revenue share between the airport and the operator and ourselves. This is a great structure where in which the retailer can utilize the brand and software and logistics support of CXI where they -- the local operator, know how best to manage all the gates, the incoming flights and the outgoing flights and dealing with the local authorities and all the pressures that come with operating in an airport facility.So between the wholesale customers, our agents and our own retail locations, our consumer direct division has lots of opportunity for growth. In addition to our online store, where we are continuing to focus our marketing to grow our opportunities. We are currently licensed in over 22 states and we will continue to add locations, states across America, where in which people can go to the online store and have currency delivered to their home.Moving into payments. As Alan pointed out, our current bank customers have -- some of which have been customers for doing check clearing and international payments. We invested a couple of years ago into the Fiserv wire exchange relationship. Fiserv is one of the largest operators of core bank software systems, and we have found that our customers that have been using us for banknotes can now utilize us for wires. Because they on their core system where they would initiate a wire, we are integrated directly. So it is a straight-through process.Because of the success of the Fiserv relationship, as Alan pointed out, and we made an announcement, we have begun integration with Jack Henry. It's nearing completion, and we will be adding another -- the opportunity to service over 1,100 banks. Some of which are already customers of ours and have committed to the fact that if we are integrated into their core that they would also switch their processing from their current big bank to CXI.We have another software system right behind that, that we're intending to integrate into. And this will continue to allow our payments business at CXI to grow. Between the team in Canada and the team in the U.S. our payments revenues were up 197%, and we feel we can continue a strong growth in this business utilizing the strategy that we have in place.So that concludes my overview, and I open up the floor to any questions for Alan and I. Thank you.
[Operator Instructions] Your first question comes from the line of Robin Cornwell with Catalyst Research.
And congratulations on your quarter. You certainly surpassed my expectations. A quick question for Alan. Welcome, Alan. The -- I was doing some of my own margin analysis and that are include some or exclude things like stock compensation expense, et cetera. But when I look back, I guess it's maybe 24 months. The volume, you seem to have doubled basically your operating margin on the same volume. I know it's not easily that comparable, but I congratulate you on that. It -- when we -- you've been positioning yourself to do -- you get a bigger operating margin. Can you maybe talk a little bit more about where you see things going? I know it's a difficult question, but -- that you can sustain these higher margins are very impressive.
Thank you, Robin. Certainly, well, I can provide a little more color on that. It is difficult, of course, to provide forward-looking guidance, especially in the context of the pandemic where it's still uncertain how things will unfold in the quarters to come. But the overall operating leverage should continue to improve with the growth in the revenue. And I think what we're seeing the positive impacts of both repositioning the business around the payments, but also being mindful of the cost base.We will have to make investments moving forward to continue to grow. But as the recovery takes hold, we should be able to see more revenue drop down to the bottom line and then to increase EBITDA margins. Certainly, our view would be -- to be comparable or ideally stronger than what they were prior to the pandemic.
And Rob, I would like to -- I'd like to just add to that, that one factor that I pointed out was for Exchange Bank that is that the sourcing cost for U.S. dollars, which is the #1 bank note traded at Exchange Bank is going way down to next to nothing because we no longer pay basis points. Prior to the Fed relationship, we'd have to use other large commercial banks to source or offload dollars, and that was typically at 10 basis points. So there -- the operating margin on the currency for U.S. dollar for Exchange Bank, will improve. And so I think that there is a good chance that we can keep on to some of that extra margin that we've been enjoying.
Actually, that was my next question as to discussing the benefits of the Federal Bank relationship. And I think some time back, we had talked numbers, and I may -- as you may not be comfortable talking to them directly, but we are talking maybe $400,000 or $500,000 a year based on the then volume. Can you give any insight as to what kind of actual cost savings in dollars that you're talking?
Sure. So it's hard to put an exact number on it. And that's why if we were talking $400,000 or $500,000 that's a rough round number. But if you just take it at a high level, we process approximately $1 billion in U.S. dollars. And now if you were paying 10 basis points on all of that, that would be $1 million in savings. And why it would maybe be a lot less than the $1 million is because we do try to recycle, meaning when we buy in dollars, I don't need to source them. I've got a surplus so that I would sell those out.Unfortunately, it's never a perfect world where the amount of orders you get is the amount of buys you have just did. So often, you'll go out and have to buy dollars to sell them. And very often, you'll end up buying a bunch of dollars that you don't have anyone that needs them right now and then you have to dump them as we call it or get rid of them.And so that recycling could cut it down, but 50% is a rough way to look at it, so $0.5 million same would be seem reasonable. It could be more. What's more interesting is the volumes are now increasing because of the ability to source mint notes, which was much more expensive in the past. So there's a lot of opportunity both in the existing flows and that savings that we were just discussing as well as with future activities.Currently, we are taking a very conservative approach and going to FATF countries, F-A-T-F. For those that don't know, that's basically the big, big countries, the safe countries like Germany and England and Switzerland and so forth, and France, and that's where we are getting a few more customers. But the margins are a little tighter there because these are well-established countries that have alternatives.There is an opportunity down the road to consider some low-risk non-FATF countries, maybe in the Caribbean or in some other Eastern Bloc countries. But at this stage, we are just initially starting conservatively, utilizing our existing customers for the flows we have both in Canada, as you can imagine, some of our good Canadian banks need dollars. And so we now can source mint for them, and ATM fit notes and so forth. And then internationally, we can add on business. So our existing flows can benefit, and we're starting conservatively FATF area where there are banks that would like an alternative, especially since our offering is not just U.S., but we can have the green dollars and the red ones from Canada, and even some pesos.And so this offering has been well received. And we are very focused on our international expansion for Exchange Bank of Canada and CXI as well is looking at international expansion. On its own right, the Fed relationship is exclusively with Exchange Bank. So CXI is not dealing with the Federal Reserve. But CXI being in Miami has a lot of opportunity in the Caribbean and Central and South America that we will selectively look at low-risk customers. So hopefully, that answered your question, Robin.
Yes. That was very good. One final question, if I may. Just looking at your banknote business, it's expanded quite a bit faster than I expected. Even though we're starting to reopen, but where do you see it consistent among your -- are your -- all the locations in the U.S.? Or is it spotty for major cities. Can you expand on where you're seeing the business starting to perk up a bit?
Yes. Well, yes, Alan mentioned it. We have -- and I mentioned it as well, that the Mexico peso has been -- it always had been in our top 10. But in the last year, it's been the top 2 or 3 currency traded. And the reason is because they have been welcoming Americans vaccinated or not. They do -- there are some rules around quarantine and so forth, but they've been very friendly to tourism. And so it is that probably right now the #1 destination there. So as far as the new locations, because of that, we're seeing a lot of activity where that traffic normally originates from California, from Texas and from Florida.So primarily, the southern half of the United States has been leading the whole United States in that banknote growth. We are seeing activity, New York is finally coming back alive, which used to be a great market for us, Chicago as well. So it is -- there is some of the spottiness, but if you were just flying over the U.S. and look down, I could comfortably say the southern half clearly has been where the significant increase of notes have been happening. And as we go forward, we continue to see that.But again, like the JFK location, it wasn't even opened the whole quarter. We noticed it in the last month of that quarter because it opened in July. So now in the fourth quarter, you have New York location that's doing quite well because JFK is Delta's big hub for a lot of their international flights overseas. And so we're seeing it so it's all over, but the southern half is definitely there and the currencies we're seeing coming back alive are -- of course, euro has always been one of the top ones. Euro's there, and pesos is what's bigger than it used to be. And so -- and we think that trend will continue.
Okay. That's terrific. And one more for me. The locations you're adding, particularly in the U.S., you mentioned credit unions. Is credit unions the business now one of the biggest new prospects for the banknote business in the U.S. [indiscernible] for that fact.
For financial institutions, so in them and the United States, there's 10,000 banks roughly. 5,000 of those banks are commercial banks, and probably 5,000 are credit unions. So we've never ruled them out. We have -- since we had always more focused on the commercial banks. That's why you're seeing us take on more credit unions whereas the competitor that left had a stronger market share of some of the credit unions. And this is why we are taking -- getting a lot of these newer credit unions. But we have added commercial banks as well. We have a very good relationship with one of the largest banks in Texas, and they're doing well. And we've added some smaller banks in Texas, for example.But we -- financial institutions are clearly there. And our -- part of our strategy is what we call OPOP, which is One Provider One Platform. And that symbolizes the fact that we're integrating into the bank's core platform. So they can use us as the One Provider and use their platform as the One Platform, which is getting the benefit of our software because it's integrated.And so we are not discriminating from 1 bank or credit union. We have based on our priorities because we're very focused on capital returns. And we are, of course, choosing the larger of the banks. So if it's a small institution with less than $100 million in deposits. That might be a bit smaller. We may have fees associated to setting you up since the return on the relationship may not be there. But they are financial institutions, both credit unions and banks based on their locations and their asset size, and of course, what software they're currently using, if they don't want to just use ours alone.
[Operator Instructions] There are no additional questions in queue at this time.
Okay. Well, again, I would like to thank everybody for their time. And if there was a question that comes up later, if you want to shoot Alan, Bill or I a note, we can answer it if we can. If we can't, we'll have to defer. But again, thank you for your support, and look forward to talking to each of you again sometime soon. Have a good day.
Thank you. This concludes today's conference. You may now disconnect. Speakers, please hold the line.
Thank you.