Currency Exchange International - Q1 2022

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Currency Exchange International, Corp.'s first quarter 2022 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, press star zero. I would now like to hand the conference over to your speaker today, Bill Mitoulas. Thank you. Please go ahead.

Bill Mitoulas (Director of Investor Relations)

Thank you, Stephanie, and good morning, everyone. Welcome to the Currency Exchange International conference call to discuss the financial results for the first quarter of the 2022 fiscal year. Thank you all for joining us. With us today, our President and CEO, Randolph Pinna, and Interim Chief Financial Officer, Alan Stratton. Alan will begin with his brief comments on the first quarter's financial results, followed by his latest perspective on the company's operations. Randolph will then comment on CXI and the Exchange Bank of Canada, the company's sales initiatives and its 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 these assumptions that we have made. With that, I'll turn the call over to Alan. Alan, please go ahead.

Alan Stratton (Interim CFO)

Thank you, Bill, and thank you everyone for joining today's call. I will open by stating that we are very pleased with the group's financial performance in the first quarter. While we had expectations to be profitable, the revenue growth came in stronger than anticipated. That growth came from multiple drivers, which I will discuss in more depth momentarily. However, it validates our strategic plan. To remind everyone, in 2020, we developed a strategy to become a stronger, more resilient company. That strategy was further developed in 2021 and has four key growth pillars. One is the increased penetration of the US financial institution sector being a leading provider of foreign exchange products and services. Secondly is increasing our penetration in the direct-to-consumer market in the United States. Thirdly is the expansion of our international trade in banknotes with foreign financial institutions.

Fourthly is building scale in our corporate international payments business, especially in our subsidiary at Exchange Bank of Canada. Now, this strategy was designed to build diversification in the company's revenue streams in order to reduce concentration risk in any one market segment, while also achieving a higher level of scale that will enable the company to weather volatility and earnings from significant stress, such as the outsized impact that was suffered as a result of the COVID-19 pandemic. Underpinning the four growth pillars is a fifth one, which is building the infrastructure to support a larger enterprise. Data is critical to decision-making, and we need enterprise-grade information systems to support our strategic objectives. I will touch on each of these strategic pillars in relation to the company's performance as I present an overview of the results of the most recently completed quarter, Q1 2022.

These results are presented in US dollars unless otherwise noted. Q1 represented a milestone for the company as it achieved record revenue for any single quarter. The net income of $1.5 million was achieved independent of any government support, representing a true picture of the company's ability to generate solid earnings and cash flow in spite of the ongoing pandemic. Revenue increased almost 2.5 times in the three months ended January 31, 2022 to $12.5 million from $5.1 million in Q1 2021. That improvement reflects the successful execution against the strategic pillars noted previously, in addition to the gradual recovery in international travel that has occurred over the course of the past year as the vaccines have enabled many countries to relax travel restrictions.

The progression has been consistent with double-digit sequential growth each quarter in the past 12 months. In Q1 2022, our sequential growth was 25%, which is remarkable when considering that historically in pre-pandemic times, it was also our lowest quarter in the year due to typical seasonality and demand. Some of the growth reflects the continued recovery in international travel as further relaxation of travel restrictions took effect at the beginning of Q1. On November 9th, the US not only reopened its land borders to non-essential travelers from Canada and Mexico, but also allowed many Europeans the ability to travel to America, with the only requirement being a negative pre-departure COVID test. While these measures contributed to an initial spike in demand in Q1, there was also the impact of the Omicron variant that dampened demand as many travelers chose to cancel or defer travel.

Omicron reminded us that the pandemic is not yet behind us, but the vaccines have proven effective at limiting severe outcomes such that international travel was not as restricted as it had been during previous variants. Banknote revenue still represents the majority of our revenue, accounting for an 83% share in Q1 2022, up from 68% in Q1 2021. Our banknote revenue increased threefold to $10.1 million versus $3.4 million the year earlier. The growth was equally split across our direct-to-consumer and wholesale divisions for currencies associated with international travel. It reflects not only the increase in consumer demand for foreign currencies, most notably the euro, but also the increase in market share. In the US, the company has added 428 new wholesale clients in the financial institution segment since Q1 2021.

We have onboarded new clients at a consistent pace this past year. Acquiring a strong presence in the financial institution segment is central to our one provider-one platform strategy that improves our ability to cross-sell payments and banknotes products. Our direct-to-consumer segment has benefited from not only the ongoing recovery in consumer demand related to international travel, but also the demand for investment currencies that has trended higher than historical norms since the beginning of the pandemic. One of the benefits of our direct channel has been the ability to reach investors of these currencies, and that includes our online FX platform that has seen significant growth in the past year since we launched it. We secured licensing in 5 additional states in Q1, bringing our total to 36 at present. That gives us access to 253 million people, representing approximately 76% of the US population.

Our bricks and mortar branch locations are in growth mode again too. While we permanently closed 12 locations in 2020 that did not meet our minimum financial thresholds, we have been selectively pursuing locations that have historically had strong volumes but were vacated by competitors that left the market during the pandemic. The first new store was in South Coast Plaza in Costa Mesa, California, in November 2020. That store has exceeded our expectations after its first year of opening. On January third of this year, we opened a new branch in the Stanford Shopping Center. This was also the site of a former competitor and ties together our geographic footprint in the populous San Francisco Bay Area.

One of the benefits of opening in locations that were operated by former competitors in the FX space is that they are already designed to suit our purpose, which limits our build out cost. This is critical to us as we choose not to enter into long-term leases for branch locations given the unpredictable nature of demand experienced during the pandemic. This provides us with some downside protection should a location's performance fail to achieve expectations necessitating closure. For this reason, we are also relying more heavily on our agency model to drive expansion in the direct-to-consumer segment. Through this model, we open a new location in the Minneapolis-Saint Paul International Airport in Q1. This complements our growing list of high-traffic airport locations that include JFK, Newark, Chicago O'Hare, Portland, and Charlotte. Our international banknote channel also experienced strong growth in the quarter.

This was driven in part by Exchange Bank of Canada's participation in the Federal Reserve Bank of New York's Foreign Bank International Cash Services program. It was the first full quarter operating in that program, so we took a gradual approach to increasing volumes while we normalize the operating model. While the margins are lower than our domestic wholesale channels, the international trade compensates with higher volumes. As we gain more experience, we expect there to be a high degree of predictability as well. CXI also began trading with a Latin American institution in the quarter. That includes the exchange of foreign banknotes, which contributed to growth in this segment in the US We view the international market as an opportunity to diversify from regional fluctuations in demand and therefore continue to seek institutions that meet our rigorous compliance and anti-money laundering standards.

Turning to our payment segment, its revenue increased 31% to $2.1 million from $1.6 million in Q1 2021. This reflects growth in the transaction base from 15,383 in Q1 2021 to 23,478 in Q1 2022, and volume from $1.56 billion to $2.34 billion, respectively. The primary reason that revenue hasn't increased at the same rate as transaction volume is related to US dollar payments stemming from the US The company doesn't earn a foreign exchange commission on those transactions, but it does earn a fee. While that impacts the overall margins, we do like this business because it is a low touch model whereby we have very little human involvement in the processing of the transactions.

Our financial institution clients are the ones that engage directly with the parties that are sending the payments, and that comprises both consumer and commercial customers. We are pleased with the continued growth in this segment in both the US and Canada, where in the latter we added 71 new corporate clients in the quarter at Exchange Bank of Canada. While the predominant currency pair is CAD-US, which is a competitive space in Canada, we have been effective at increasing margins as the clients come to value the proactive customer service, especially around managing their exposure to volatility. Payments revenue is mainly driven by import/export activity, and as such, it suffers less from seasonality than travel, but does tend to correlate with economic output.

While revenue grew by 145%, total operating costs rose 46% to $9.3 million in Q1 2022 compared with $6.4 million in Q1 2021. This translated into operating leverage of 25% in Q1 2022 compared with -25% in Q1 2021. This demonstrates that the company has achieved a reasonable level of scale and represents a remarkable turnaround in the course of the year. Variable expenses accounted for approximately 50% of the increase in operating costs, primarily as a result of the higher volumes rising from $1 million in Q1 2021 to $2.5 million in Q1 2022. These comprise postage and shipping, bank fees, commissions expense, and third-party technology fees.

Fixed and semi-fixed operating costs accounted for the remaining $1.4 million in expense growth, with $594,000 of that attributed to increases in salaries and benefits. While there has been modest growth in year-over-year head count to account for part of that increase, the company did implement broad-based cost of living adjustments for employees at the start of the fiscal year to counteract the impact of inflation. Almost all operating expense lines experienced increases relative to Q1 2022 as business activity has recovered. Travel and entertainment has recommenced but is still well below the pre-pandemic peak. We continue to see above average increases in insurance premiums for all lines of coverage, most notably cybersecurity and directors and officers' liability. Losses and shortages increased by $173,000, which is higher than the commensurate increase in banknote activity.

The reason for this was related to a burglary that occurred at one of the company's branches in Q1, resulting in a loss of $50,000. Burglaries are rare, but the company has undertaken a review of its procedures to determine if any changes can be made to further mitigate such an event from occurring. The company has also increased its investment in information technology, most notably in the pursuit of its strategic pillar around infrastructure. This includes an investment in a new customer relationship management platform to support the payments business segment, and we expect to implement other applications in the future. The one area that declined was rent expense, as the company settled a dispute in the quarter with one of its landlords for seven branch locations.

This resulted in the company recognizing approximately $120,000 in rent abatements and reductions related to prior periods. Normalizing for the non-recurring rent adjustment, the loss associated with the burglary and the rent payments that are captured as amortization under IFRS 16, the company's adjusted EBITDA was $2.6 million in Q1 2022 versus -$1.8 million in Q1 2021. This translates into an EBITDA-adjusted EBITDA margin of 21% versus the reported margin of 25%. The net income of $1.5 million compares to a net loss of $1.7 million in Q1 2021. That performance translates into earnings per share of $0.23, a significant improvement from the $0.27 loss per share in Q1 of last year.

Turning to our balance sheet, one will see that there was significant growth at January 31, 2022, with total assets of $129 million versus $103 million at our most recent year-end. That growth was primarily in the form of working capital, as increases in cash balances were offset by increases in accounts payable, holding accounts, and also the lines of credit. The increases were primarily driven by the growth in the international banknote trade, where single transactions are often in millions of dollars. While the settlement cycle is usually no more than a few days, depending on shipping time, these transactions are normally on a prepaid basis, which means the company does not take on any credit risk. Payment is made only after the banknotes are received and counted.

I will also note that the other current assets include a receivable from the IRS in the amount of $3.4 million that relates to the Employee Retention Credit, which the company recognized in Q4 2021, and that I discussed in the previous earnings call. The claims for those credits were filed in February, and our tax advisors have told us to expect the IRS to take up to six months to process them. Irrespective of the time that it takes to receive those funds, the company has a strong liquidity position with $96 million in cash holdings, $52 million in net working capital, and an additional $22 million of unused capacity in credit facilities at the end of the quarter.

The net equity position increased to $59 million at the end of Q1, which equates to a net book value per share of $9.25. Translated at yesterday's closing exchange rate puts that book value at CAD 11.77 in Canadian dollars. We recognize that the high quality liquid assets on our balance sheet can support a higher degree of leverage than what currently exists. We will work to increase our capital efficiency as the company demonstrates the ability to sustain the earnings and cash flows necessary to support additional leverage. While the Q1 2022 performance was strong on a relative basis, what is most important is demonstrating that it is sustainable.

We believe that the fundamental drivers to sustain that performance are in place, but we are mindful of the risks to future earnings posed by the emergence of new COVID-19 variants, high oil prices and inflation that may impact consumer demand, as well as the potential for escalation in the Russia-Ukraine conflict. Airports Council International recently released a forecast in February projecting that global passenger air traffic will recover to approximately 70% of 2019 levels this year. However, they did acknowledge that demand could be dampened by any of the risks that I just mentioned. While we remain optimistic, we are taking a prudent approach to planning in the event that there is a regression in demand. However, the growth in our revenue base from international transactions and payments are improving the resilience of the company in being able to withstand shocks in the domestic banknote market.

As we continue to execute on our strategy, that resilience should continue to grow. Finally, I'd like to speak to the ongoing conflict between Russia and Ukraine. The company does not have any significant exposure to either country. Rubles have never been a significant source of revenue, and our holdings in the currency are de minimis. Similarly, very few transactions in our payments business are destined for Russia. The biggest impact to our business has been the increased measures to ensure compliance with the sanctions, which we take very seriously. The real impact of the conflict is the humanitarian crisis that has been unfolding in front of our eyes each day since the invasion began. The Ukrainian people are in our thoughts, hearts, and prayers during this most difficult time. Now I will turn the call over to Randolph Pinna, our CEO, to provide his perspective.

Randolph Pinna (President and CEO)

Thank you. Thank you, everybody. Thank you, Alan, for a very detailed update. I appreciate that. I'll try to keep this high level and not repeat too many things Alan said. As usual, I'd like to start with Exchange Bank of Canada. First of all, if you hadn't noticed, we completed our fifth year at Exchange Bank, which we kind of viewed as our startup years. We're now in our sixth year, and it's very nice to see that the bank completed the entire quarter profitably, and we feel is structured to continue to do so. This next phase of the bank's growth is really where we scale up the business in both of its key strategic areas. As you know, the core of Exchange Bank and our group is banknote exchange.

Starting first with Canada, our domestic business is coming back quite strongly due to the borders now being open, travel being eased. Some of our big banknote customers pre-pandemic have once again become very active in anticipation of the spring break and summer travel periods. We are seeing that activity increasing, and we do anticipate that it should increase, provided none of the risks that Alan Stratton mentioned become bigger than they are. Additionally, in banknotes, we have accepted a few select customers internationally. The Federal Reserve Bank of New York relationship is very strategic and a long-term benefit to our group. It has reduced our sourcing costs or offloading costs on US dollars, allowing for a better profit margin on the US-Canadian trade.

It also has opened up the door for us to take on select international banks in key markets that we feel are safe, and the volumes are quite nice. Besides reducing our sourcing costs, we are seeing additional revenues, and we anticipate additional customers as we grow the international customer base. Moving on to international payments. As you know, our team is very strong with foreign exchange relationship banking. We have continued to grow our corporate relationships. It is right now strongly led out of Montreal. Our team in Montreal has done a great job. They have gelled very well. As you know, the acquisition that we did a while back and the teams that we have grown has been very well in executing on our plan to service small to medium-size international businesses that are based in Canada.

We have also expanded the team now to Ontario, and the Ontario team is also doing quite well, and we look to continue to grow that business throughout Canada as the months ahead transpire. To assist with that, as Alan mentioned, we have implemented the leading customer relationship software, and that is allowing for better efficiency and improved customer service. I confirm that the pipeline for both domestic and international banknotes, as well as corporations in Canada for FX payments is quite full, and having this additional software will allow our team to better maximize and become more efficient. It is being led by a very strong, experienced leader, James Devenish, and we're very supportive of James' initiatives to continue to grow the FX payment business as well as the banknote business. We have a strong executive team.

Besides James, we have several other key executives at the bank, and we're very proud of the team that we have as we continue to grow Exchange Bank of Canada. Moving on to CXI. I'm proud to announce, if you hadn't noticed, this is our tenth year as a publicly traded company on the Toronto Stock Exchange. We're very proud of our relationship with the TSX, and we continue to enjoy the fact that we are a public company and have the benefit of having our stock represented to the world. At the business at CXI, as you know, we have all four of our pillars represented. We have our consumer division, which is continuing to do quite well. Our retail stores, as Alan has told you, is performing above plan.

After we reduced our footprint to ensure that we have a good return on the capital deployed. We are back into a growth mode with the one store that we just recently added in the San Francisco Bay Area, and we continue to be very selective with any potential new store openings. We do anticipate, which I'll tell you in our looking forward statement, is we are looking at another store in Florida, our home base of CXI. What's been really nice is the agent locations where we don't pay rent, we don't pay payroll. We work directly with the local retail operator and the ability to open up in airports, which is a new industry for our company. We have serviced other airport operators in the past at a wholesale basis, but that was under their brand.

Now we are through this agent location, we are seeing our brand represented in key airports like New York, New Jersey, Minneapolis, Chicago. Alan listed them all, and we anticipate that business to continue to grow as the international travel continues. Besides our own retail stores, our agent locations, we are also growing our online foreign exchange business through our website, OnlineFX. Alan mentioned the number of states we're in. We anticipate to grow that. This allows for multi-state foreign exchange where we can deliver currency from either the Los Angeles or the Miami vaults to people's homes in those states. Additionally, the state licenses allow us to do foreign exchange payments for corporations in those states, and we do anticipate growing that business.

On the international side, our hub in Miami continues to take on selective customers, financial institutions, in Latin America, in the Caribbean. While this business is only adding maybe one or two customers a quarter, it is higher volumes and it is a diversification to the domestic currency business in the United States. The biggest driver of revenues at CXI is what we call one provider-one platform. That is where we have integrated, as you know from past calls and with Fiserv and their WireXchange software has been successful. Most recently this quarter we have finished our integration with Jack Henry & Associates' SilverLake System. We already have a customer. The first customer on that just went live this last week.

This business is a focus for us to integrate our system with existing banking systems, allowing for that one provider being us in the one platform. The pipeline is full in all categories. We're very excited about the position we're in. The fact that a large competitor has exited the market has allowed us to take on lots of new customers and have a very strong pipeline. As we look forward, we are focused on our four pillars, our direct to consumer, adding more states, continuing to expand our Online FX through digital marketing, growing our international customer base in both businesses and our FX payments in both businesses through Exchange Bank of Canada and our one provider, one platform marketing initiative. We also separately, Alan and I are looking at accretive merger opportunities. We are active in that.

We don't have anything to announce at this stage, but we are looking at opportunities to grow and add talent, possibly technology and new customers to our group. This is a focus of our company as we continue to grow the business. To support this, as Alan has led and mentioned, we are looking at improving our software systems, growing our correspondent banking relationships around the world, and ensuring we have the right operating structure and systems to support a continuing growing business. Lastly, I do want to touch on the digital currencies. While we decided to exit our pilot of selling cryptocurrencies at our retail stores, we had a 12-branch pilot. While revenues were good, the impact from a reputational or relationship banking point of view was higher than expected, and revenues were still lower than what we had anticipated.

We actually have shifted that focus from cryptocurrencies to be focused on central bank digital currencies. As all the major governments around the world are continuing to explore how to migrate from paper currency to digital currencies. We are active in participating in the think tanks and working with other financial institutions, including central banks, so that the company can become the digital currency exchange of the future. I'm happy to answer all your questions. I did want to remind you today for all of our shareholders and potential shareholders, we are having our annual shareholder meeting at noon.

I believe the press release has dialing instructions for this. It is a virtual meeting. We anticipate next year to revert back to either being digital and or you can come in person, which is what I prefer. This year for safety we have chosen to be 100% virtual in our annual shareholder meeting, and I hope to see you there. I will turn it back to Stephanie to open up the lines for any questions you may have for Alan and I. Thank you again for your interest and support of Currency Exchange International.

Operator (participant)

At this time, if you would like to ask a question, please press star then the number one on your telephone keypad. That's star one. Your first question comes from the line of Robin Cornwell with Catalyst Equity Research.

Alan Stratton (Interim CFO)

Hi. Good morning.

Randolph Pinna (President and CEO)

Good morning, Robin.

Robin Cornwell (Founder and Principal Shareholder)

A pleasant surprise, as the beautiful revenue numbers blew my estimate out of the water, which is great. One quick question before I ask the more pertinent ones. The $1.8 million bankruptcy claim, do you still expect to get 6%-20% of that back?

Randolph Pinna (President and CEO)

That's a good question. As you know, Robin, we have fully written off the loss, the theft. It was fraud, as you may recall. We have been told by the trustees of the bankruptcy that there will be money given back. They have, you know, gotten a forensic, you know, it's gone deeper. When that will happen, we hope it'll be this year. It should be. What that number is, we have no idea, Robin. If any money comes in, which we do anticipate money coming in, but how much I have no clue and it's out of our hands. We do hope to just bring closure so that's behind us. It would be nice to see a chunk of money come back to Exchange Bank of Canada.

Robin Cornwell (Founder and Principal Shareholder)

Okay.

Randolph Pinna (President and CEO)

-uh, from-

Robin Cornwell (Founder and Principal Shareholder)

Great

Randolph Pinna (President and CEO)

from this process.

Robin Cornwell (Founder and Principal Shareholder)

Okay, my main question is banknotes because obviously it recovered very strongly. I'm curious as to you mentioned euros were very strong. What other currencies were strong that you noted were-

Randolph Pinna (President and CEO)

The Mexican peso. Sorry, Robin. Yeah, the Mexican peso has been the strongest currency in the last year. This quarter, the euro was always our number one currency exchange for CXI. Obviously in Canada, the number one currency would be USD and then euro. But Mexico for both Canada and the US in the last year, including this last quarter, is one of the top currencies. For US, it was the number one currency exchange, and euro was right there with it. We are seeing the rebound in international travel as well as for Americans, domestic travel just going south over the border.

Robin Cornwell (Founder and Principal Shareholder)

I'm curious of the progression through the quarter of the revenues. Did you see it even throughout the quarter, or was it building higher revenue? The revenue build was higher, say in January than it was December than November. Was there a trend to that you noticed?

Randolph Pinna (President and CEO)

Well, it follows the usual trend. You could imagine December would be busier than January because of the Christmas and holiday seasons. You know, all the celebrations that happen at the calendar year end. January is strong. But we are seeing. We realize when we forecasted the year, we anticipated a return of travel. Obviously the numbers were higher. There's clearly strong pent-up demand that is emerging. I mean, that's clearly happening, but it's, you know, now it's here. I'm sitting in Florida at spring break. It's the city is full where I'm at. It is continuing. We planned on increasing month-over-month for the rest of the year.

So far, as this first quarter showed, the volumes are higher than what we planned. Typically, as Alan said, the first quarter is usually our slowest quarter. We would anticipate the second quarter being the stronger because it starts the spring break season, which has always been, you know, an active time pre-pandemic. Now that the pandemic is subsiding, it is expected that the normal travel trends, which is spring break is very busy. The busiest, of course, would be the third quarter, where we go into the summer travel seasons.

Robin Cornwell (Founder and Principal Shareholder)

Well, that's what was so impressive was the volume in the first quarter. I think that's, as you say, a record level.

Randolph Pinna (President and CEO)

Yes

Robin Cornwell (Founder and Principal Shareholder)

For all quarters. Normally you don't get that level of volume until the summer season. It also begs the question that because you have these other pillars, are you going to release some perhaps revenue numbers as these pillars build? You did the payments. Now this direct agency is what's got my curiosity because between the online FX and the ability to sell in 36 states in the US, it strikes me that this could be a very big revenue producer. Am I too early on this?

Randolph Pinna (President and CEO)

Well, Robin, I can appreciate you share the same optimism as myself. I will take it away as a note on this call to explore if and when we would split out our consumer banknote activity from our wholesale banknote activity. The problem comes into, you know, cost of goods sold because of the wholesale division, if you want to use that term, is where the vaults are stored and the retail and consumer online stores are using the vaults. So it's not as easy as just cutting it where payments are clearly a different business. It is now obviously more than 10%, which is the usual threshold to do so. I'll take that away. That's a good question, Robin. Thank you.

Robin Cornwell (Founder and Principal Shareholder)

The last question I'll slip in is, I guess, your merger opportunities. I know you can't discuss them, but my question is, do you see quite a few, or is it very spotty? That's just an open-ended question.

Randolph Pinna (President and CEO)

Well, for any price of money, there's tons of businesses to consider. We are only looking at strategic opportunities. Strategic in our definition is things that will provide diversified revenue. Our focus is on payments businesses than cash businesses because our banknote business is growing nicely organically, and it's because of our core business that you know. The reason volumes are higher is because we have now international customers in the quarter doing banknotes. To the merger side, we're looking at payment companies, and some of the prices that international well-funded companies are paying right now have driven up price. While we've looked at a few, it did not meet our value.

You know, if we're gonna invest capital, we expect a significant return, and so we can't overpay. Therefore, knowing that we're looking for strategic long-term opportunities that would bring again technology and new payment revenue and people, that there's only a few that we can consider. Again, it's looking for the right partner that is looking to see the value of putting their business with our business. The one plus one instead of equaling two should hopefully equal three or four at least. That's why it's difficult and slow process. Did that answer your question, Robin?

Robin Cornwell (Founder and Principal Shareholder)

Yes. Thank you. That's it for me. Congratulations again on a great quarter.

Randolph Pinna (President and CEO)

Thank you, Rob.

Operator (participant)

Your next question comes from Jim Byrne with Acumen Capital.

Randolph Pinna (President and CEO)

Good morning.

Jim Byrne (Equity Research Analyst)

Yeah. Good morning, gentlemen. Thanks for taking my questions. Randolph, you mentioned the seasonality, and you are anticipating kind of a normal season or normal periods here over the course of the year.

Randolph Pinna (President and CEO)

More normal.

Jim Byrne (Equity Research Analyst)

You know, certainly Q1 is typically the weakest quarter as you mentioned. It's safe to say you are seeing, you know, the return of spring break, the return of travel, and you are anticipating kind of higher banknote business for the course of the year.

Randolph Pinna (President and CEO)

In a normal world, yes, we have that optimism. That is not just my own personal optimism. When you read the headlines, if you want to google Airbnb's bookings, they have announced that Airbnb bookings have, for the first time ever, exceeded pre-pandemic levels. I believe it was Expedia, one of the major travel sites, have shown that bookings internationally, both inbound to the US and out of the US is very strong for the summer periods. So we do have some travel indicators that support why the summer should be as it usually had been our busiest quarter of the year. However, we have a potential world war sitting out there.

We have, as we've seen the last two years, you have a potential for another serious variant to shake and scare, you know, the world, and governments could go back to locking things down. We don't know. To say the next quarters are gonna be great would be not fair because we are aware. The key point that I think Alan was trying to drive is that as we restructured our business during the pandemic, we tried to more variabilize our business. Like the agent model allows, we do share revenues with the operators as they deserve it. The higher the volumes, the higher the commissions go. Same for the salespeople. They're on low pay.

We've motivated our teams both in the US and Canada with low base and high variable. If we have great months like you and I both hope for this summer, you'll see a, you know, couple salespeople, you know, sales executives, sales leaders making more money than me as the CEO. I'm happy for that because they've worked very hard to do that, and they've taken a risk by accepting a low base in exchange for having that variable. To your question, I don't know. Typically, yes, I confirm that the first quarter's slower. It gets busier in the second 'cause of the spring break. As I said before, the summer's the busiest because that's when school's out and everybody travels around the world. We're hopeful for that. That's what we had budgeted for. Far, we're ahead of our planning.

Jim Byrne (Equity Research Analyst)

Okay, that's great. Maybe just on the payments business, you know, it was $2.2 million this quarter, roughly $2.1 million, the quarter prior. Is that kind of the run rate in terms of growth we should anticipate, you know, kind of a base business $2 million-$2.5 million a quarter, or you anticipate stronger or weaker growth than that, in the coming quarters?

Randolph Pinna (President and CEO)

We are very focused on continuing to grow that. You know, when we do our strategic planning, we do the typical SWOT analysis. Our biggest weakness or fear is that we are so dependent on banknote revenues, and so we continue to invest in that. Do I think it'll grow significantly more next quarter than this one? It'll have the growth rate you're seeing unless there's an acquisition that we bolt on. But it is a growing business. As Alan said, it's very much more stable business than it is with the travel, you know, seasons. We should continue to see that grow quite nicely.

Jim Byrne (Equity Research Analyst)

Okay, that's great. Then maybe just a couple of the expense items. Alan, you mentioned the rent decrease in the quarter. Maybe just give us an idea of what that number looks like on a go-forward basis. I also noticed you know, legal costs were down considerably quarter-over-quarter, and not surprisingly, shipping was increased. Maybe just talk about a few of those expense items and maybe what you're seeing, if there's any pressure on shipping and logistics. Obviously, oil prices are pushing up gasoline as well. Maybe just a few highlights on the expense side would be great.

Alan Stratton (Interim CFO)

Sure, Jim, happy to. So your first question was around the rent expense and normalizing for that adjustments relating to settling the agreement with the landlord for a number of locations, the rent expense would have been around $290,000, so probably up around $30,000 or $40,000 over the prior year, which isn't that significant given that we have 2 additional locations. What we will see is that for a number of the stores, there's a variable component to the rent expense, and so that as the recovery continues and those stores generate higher revenues and profits, we'll see some of that going back to the landlords that most of them haven't had to pay in the last couple of years. It'll be in line with what we've seen in the past.

The postage and shipping has gone up. There have been increases due to inflation and the fuel surcharges, but we also find that the postage and shipping costs for our international banknotes business as a percentage of revenue tend to be higher than the domestic business because the international involves flights, armored transport, and so forth. Overall, that business tends to also have a nice contribution because we often don't have to do a lot of the touching of the money. Overall, I think as the continued domestic piece grows, then we'll see postage and shipping should still normalize relative to what we've seen in the past.

Jim Byrne (Equity Research Analyst)

Okay.

Alan Stratton (Interim CFO)

And then-

Jim Byrne (Equity Research Analyst)

Last one for me. Sorry, go ahead.

Alan Stratton (Interim CFO)

Yeah, legal. You were asking about legal and professional, which have also increased from the previous year by about CAD 260 thousand. There's a lot of different costs that go in there. During the pandemic, we really throttled back on any discretionary spending in those areas. Now that we're back to more normalizing levels of activity, we are spending in some of those areas, and certainly areas such as internal audit, tax compliance, and other project-related pieces that fall in there, that are strategically important for us, we do need to spend on. Now, if you go back and look at our pre-pandemic levels, this is in line with what we did back in 2019. It's. I think it's more reflective of the fact that last year's activity was just abnormally low.

Jim Byrne (Equity Research Analyst)

Okay. I mean, I guess the bottom line question is, you know, the profitability, you know, on your adjusted number, 21%, the reported number, 25% EBITDA margins, you know, is that a number that we should be using going forward? Do you feel like that's an attainable level, or is there something, you know, out of the norm that revenues grow so fast this quarter that expenses didn't keep up? I just wanna get an idea of the kind of future opportunity on the margin side.

Alan Stratton (Interim CFO)

Well, the fixed expenses, like those legal and professionals, shouldn't continue to grow at a significant pace. The variable expenses, obviously, you can model those out and they will grow commensurate with the revenues. There will be overall expense growth, but what we're seeing is that there are certain segments, like our payments business, that haven't quite achieved the level of scale that we're targeting for. As we do achieve scale in all segments, we should see continued improvement in the EBITDA margins. Does that help?

Jim Byrne (Equity Research Analyst)

Yep, that's perfect. Maybe just, sorry, last one. Wonder if you could just comment on consumer behavior. Obviously, you're seeing a rebound in volume and a rebound in traffic. Are people, you know, using more cash, you know, right now than they did pre-pandemic? Or is there any way that you could help us understand how the return of the travelers, what's the impact in terms of consumer behavior?

Randolph Pinna (President and CEO)

Alan, I can take that. I was just James Devenish and I were just in Washington, D.C. at the annual banknote currency conference that's held there. The Federal Reserve Bank was there as well, and they the key distributor of US dollars domestically and for the US, our relationships on the international distribution side. But one of the keynote speakers was a Federal Reserve leader that distributes dollars, and he did report that ATM usage, which is a key indicator of cash usage, was up for the last year. While places like Canada were more aggressive in saying cash could pass the COVID and they allowed businesses to go cashless, in the US, we saw that cash usage has gone up.

You can Google that yourself and see that cash has not been hurt by the pandemic. Nor has it been hurt by, you know, digital payments or credit cards or anything. I don't think people are running more to cash than they would in the past, like, "Oh, I gotta use my cash." I think the behavior continues to be when people travel internationally while they, of course, have their plastic in their wallet, they still do wanna have $500 or $1,000 of local hard currency so they can tip and go in a market and buy things and so forth. I don't think there's been any radical change to consumer behavior around banknotes. I think it's the usual take a little bit of currency to have it.

I don't think it's gone too much either direction. As we saw in the quarter, that's why euros went way up, is people were buying for their spring Europe trips or their summer Europe trips. We're happy to see that. The old saying was cash is queen. We believe cash is queen. Cash is king. Now, it's cash is queen. The overall consumer behavior is very similar, in my opinion. We're seeing just the pent-up demand. People didn't travel. They had the money saved up now, and they're going. We hope that continues. Provided that we don't have a war or any, you know, locking down again, I think it's likely that you'll see the normal travel patterns resume.

We can't predict that at all.

Jim Byrne (Equity Research Analyst)

All right. Thanks, guys. Appreciate it.

Randolph Pinna (President and CEO)

Thank you, Jim.

Jim Byrne (Equity Research Analyst)

Welcome.

Operator (participant)

Your next question is from Peter Rabover with Artko Capital.

Randolph Pinna (President and CEO)

Good morning, Peter.

Peter Rabover (Managing Director)

Hey, good morning. First of all, great quarter. That's, I hate to say that's a cliché on the phone, but that really was a great quarter. Alan, thanks for the detailed update. That was great as well. I'm gonna try to ask kind of the same questions that others have asked, but maybe in a different way. I guess first maybe more on the revenue line on the banknotes. I know you guys have mentioned your direct-to-consumer business, you know, in 36 states. Can you guys comment maybe on the $10 million or so of revenues, how much that direct-to-consumer business was, like the OnlineFX?

Randolph Pinna (President and CEO)

As Robin asked the question, we currently don't separate out those numbers. For us to throw a number out that's not in our MD&A or in our financials, I'm not sure if we can give that clarity at this time. We will review that question, because I can understand its origin. However, I can confirm that the our banknote revenue, to Jim's question, too, there was no anomaly in there. There was no one thing, oh, that's why it was so high. It was our banknote revenues grew because of our own domestic consumer locations, our agent locations like Duty Free Americas we announced, we can comfortably talk about them.

The borders opened, so you can anticipate that now that the borders opened, those locations on the Canadian-US border obviously had nice increases that were better than planned. The international customers for both CXI and Miami and for EBC with the Fed contributed to that. Yes, consumer was definitely part of it, but exactly how much of the overall banknote revenues we currently don't disclose that split between our consumer division, our agent division, and our wholesale division. It all comes in and out of the vaults. Currently it's all bundled, you know, it's all together. I couldn't give you that over the phone, I don't believe.

Peter Rabover (Managing Director)

Okay. That's fair enough. Okay, let me ask kind of a different question, but maybe same on the consumer. I think your revenue run rate was fairly close to pre-pandemic levels, you know, in terms of I think you guys were at $42 million for 2019, and you guys were about $10 million for the quarter, this quarter, which is a lower seasonal quarter. You have, you know, 36 locations versus 46, you know, back then. Is it fair to say you're selling more, or is it as a result of the branches that you're, I guess, are not in the official count, the airport locations that are kind of more the franchise locations? What

Randolph Pinna (President and CEO)

That's correct. It's the latter. In other words, even though we have less company-owned stores, we have exceeded the total number of consumer direct transacting locations due to the agent locations. Those airports are definitely a part of this, undoubtedly.

Peter Rabover (Managing Director)

Can you tell us how many agent locations you have versus, I guess, both an absolute number and relative to 2019?

Randolph Pinna (President and CEO)

Well, I think we released our total transacting locations. Let me explain. I'll use the JFK Airport because I literally flew through it just recently. There's five booths at the airport, but they're not all open at the same time. The local operator, and this is a business we've never done ourselves because it's a very difficult business to deal with incoming and outgoing planes that are often delayed and so forth. The local operator utilizes those booths that are closest to the active gates. That number changes what I'm saying. Certain times they may have three of the five open, sometimes they may only have one of the five open. That number moves. We don't...

We have a total number of transacting locations that we report, but I couldn't tell you right now exactly how many active today, how many of the five will be open at JFK because we don't get into those details. That's why we do this revenue share where the local operator maximizes the location. We provide the support, the brand, the software. It's a true partnership that we have with our agent relationships.

Peter Rabover (Managing Director)

Okay. Fair enough. I appreciate the granularity. Moving down to more of the expense line. The Fed relationship, it sounds like it's going great. Where do we see the impact of that relationship? Do we see that on a like more net revenue line, or is it cost of goods sold? What are the, you know.

Randolph Pinna (President and CEO)

It's dollar for dollar. It's a great question. In fact, I'm glad you asked it because I did have someone inquire directly to me about, you know, the total volume. Wow, you did $1 billion, you know, but when you look at the revenue per volume exchange, you say your margins are shrinking. Well, because it's dollar for dollar. If I'm selling, usually on international the banks would be buying, let's say $10 million, and they're paying us $10 million for the $10 million, and then we charge a percentage of, you know, so many pips basis points to a fee. That's fee income. The beauty of it is that it's dollar for dollar, so there's no foreign exchange exposure, and it's fee income. But you'll...

You will continue to see over the next year that our dollar value of money exchanged, similar to the US dollars wires that Alan was saying. In the US, the majority of wires that leave here internationally are in US dollars, but we charge fees for that. You see that in the fee income. You'll see it in additional revenues on the top line.

Peter Rabover (Managing Director)

Okay. That's interesting. You know, I would have thought that's, I guess the savings would have shown up in the-

Randolph Pinna (President and CEO)

Well, the savings is in the cost of goods sold. I'm sorry. These are new revenues from the new banks. The existing dollars, we had a pretty significant US dollar business where we were paying sourcing costs of 10 basis points, typically up to 15 if it was mint currency. Now we pay pretty much nothing. It's part of the fee relationship we have. We no longer have a premium to source dollars or offload dollars. You're seeing that in the net savings of the flows there. New business, it's all we're selling dollars for dollars for a fee.

Peter Rabover (Managing Director)

Got it. Okay. That makes sense. I appreciate the color. Then just, you know, I think the previous caller had started to ask the questions about margins and expenses, and maybe I want to ask that a different way. You know, you had Q1 to Q1 $7.4 million increase in revenue, which is amazing. I think you had about $2.9 million increase in expenses, of which you said $1.5 was increased variable expenses and costs. That's about a 20%. It's about a 60-70% flow through and 20% of which is pure variable. Then on the other $1.4, is that, you know, what's the. I'm just asking big picture, like, right.

I guess, is that an annual, out of the $9.3 million expenses, total expenses. I guess what I'm trying to ask is how much of that is very fixed, and I think you had the number of like $30 million a few years ago at your annual meeting. Has that changed? Is the most of the flow through starts at $30 million or is there a different number now?

Randolph Pinna (President and CEO)

I'll let Alan answer that if he can.

Peter Rabover (Managing Director)

Yeah.

Alan Stratton (Interim CFO)

Yeah, I think our model's changed since a couple of years ago when you're probably looking at the $30 million. That additional $1.4 million in operating expenses that's fixed or semi-fixed is probably reflective of what we would expect to see moving forward because those we need that cost to sustain the business right now. We're continuing to be mindful of not growing those costs any more than we need to. As Randolph mentioned, we've been working on shifting to more of the variable model. I think what you're seeing is that the business, the enterprise is growing.

The cost structure to support the enterprise at a larger revenue base than it had prior to the pandemic, of course, is gonna be higher, but then you're gonna have the benefit of scale in an enterprise that should be generating and capable of generating a higher revenue base. I think it's more around how we can grow the revenue base, and some of that is out of our control related to those macro factors. I think what we've indicated is that we're still working on generating scale, especially in the payments business, and that we're getting close to that phase. What I look at is Q1 is a very good picture of what the company can generate today at that level of revenue. It's not a cloudy picture in terms of looking backwards. It's certainly difficult from a relativity standpoint, but I think it's a good baseline to use as you look moving forward.

Peter Rabover (Managing Director)

Okay. That's great. Maybe just to... I guess I know payments is still a relatively new business, and you know, there are lots of inputs and, you know, in the inputs, and then you had, you know, you said you had mentioned you started the Jack Henry relationship last week officially. You know, the growth rate kind of fluctuates between, you know, 93% down to 31%. Is there maybe a natural growth rate at maybe this, like, CAD 9 million run rate level that you're expecting, you know, that we should look at? Or any color you can give us on that would be great.

Randolph Pinna (President and CEO)

Yeah. As I told Jim on the call, we are very focused on continuing to grow that. It is a more stable business line. How we're continuing to grow that is not only just acquiring customers in our current model. These integrations, for example, open up a whole new bucket of customers. Using the Jack Henry, they have a whole roster of customers that utilize the Jack Henry system, and now we're integrated with them. They can go ahead and use us as their provider and still stay with their one platform that they're running their financial institution on. We anticipate to grow that business.

We also did add a focused, specialized product manager or product owner, whatever term you wanna call it. We have invested into human capital to explore and help guide us as we diversify and add new verticals in the payment channel. Now that our head, Wade Bracy, who's been with the group since we started, who's running our payment operations, he's got a straight-through process rate that, as Alan indicated, is almost touchless, where the majority of our payment activity is very efficient. It allows for us to continue to add new volumes without the costs, you know, adding every X customers, I gotta add this many bodies.

We have invested and succeeded in becoming quite efficient in our payments activity. I think you can see that growth rate continue and hopefully even higher, you know, a higher acceleration rate. Again, that's up to our salespeople to develop these relationships. The infrastructure is in place to support us, you know, eventually doubling or tripling the revenues from payments over the years ahead.

Operator (participant)

At this time, we have reached the allotted time for questions. I would like to turn it back over to management for your closing remarks.

Randolph Pinna (President and CEO)

Okay. Well, I just thank you. This is the first time I think we've exceeded our time. So I appreciate all the detailed questions. If any of you didn't get to ask a question, please reach out to Alan, Bill, or I, and if we can, we will be happy to answer that. Again, I thank you for your support of Currency Exchange International, and we look forward to talking to you again. Thank you.

Operator (participant)

Thank you. This concludes today's conference call. You may now disconnect.