Currency Exchange International, Corp. (OTCPK:CURN) Q2 2022 Earnings Conference Call June 15, 2022 8:30 AM ET
Company Participants
Bill Mitoulas – IR
Randolph W. Pinna – President and CEO
Alan Stratton – Interim CFO
Conference Call Participants
Robin Cornwell – Catalyst Research
Jim Byrne – Acumen Capital
Peter Rabover – Artko Capital
James Smith – Private Investor
Adam Wilk – Greystone Capital
Jordan Steiner – LionGuard Capital
Operator
Good morning ladies and gentlemen and welcome to the Currency Exchange International 2022 Q2 Financial Results Conference Call. At this time all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder today’s call is being recorded Wednesday, June 15, 2022. And I would now like to turn the conference over to Mr. Bill Mitoulas, Investor Relations, Currency Exchange. Please go ahead, sir.
Bill Mitoulas
Thank you, Michelle and good morning, everyone. Welcome to the Currency Exchange International financial results conference call to discuss the second quarter of 2022. Thank you all for joining us. With us today are President and CEO, Randolph Pinna and Interim Chief Financial Officer, Alan Stratton. Alan will begin with his brief comments on the second 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 business activities, after which we will 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 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&A. Please note that this conference call will include forward-looking information which is based on a number of assumptions and actual results could differ materially. Please refer to our financial statements and MD&A reports for more information about the factors that could cause these different results and the assumptions that we have made. With that, I’ll turn the call over to Alan. Alan, please go ahead.
Alan Stratton
Thank you Bill and thank you everyone for joining today’s call. I will present an overview of the results of our most recently completed quarter Q2 2022. These results are presented in U.S. dollars unless otherwise noted. As we have stated in the past the Currency Exchange business has been significantly impacted by the COVID-19 pandemic over the past couple of years. It continues to affect international travel as many countries maintain restrictions on unvaccinated travelers or has had onerous testing requirements that act as a deterrent. However, Q2 demonstrated that the recovery and demand for foreign currency is associated with travel, continues to improve as the restrictions gradually ease. It marked the second successive quarter that we generated a record high revenue in a given quarter and meaningful net income. This provides confidence in our beliefs that the company has successfully navigated the worst effects of the pandemic and that our strategic plan is sound as I will articulate in my forthcoming discussion.
Revenue more than doubled in the three months ended April 30, 2022 to 13.4 million from 6.4 million in the three months ended April 30, 2021. The bank note segment represented a 76% share of that revenue, a slight decrease from 78% in Q2 2021. Total bank note revenue increased by 103% to 10.1 million in the three months ended April 30, 2022 versus 5 million in Q2 2021 and that growth was equally split across our direct to consumer and wholesale divisions and reflects not only the increase in consumer demand for foreign currencies but also the fact that in the U.S. the company has added 848 new wholesale clients in the financial institution segment since Q2 2021. During the quarter the company completed its integration of CXIFX, a proprietary software with Jack Henry’s Silverlake, one of the premier core processing platforms for the financial institution industry in the United States. With approximately 1100 clients on that platform our pipeline should continue to be full for some time.
In our direct to consumer division our agent network continued to grow with a new location opening in Terminal 7 at John F. Kennedy Airport. We now have seven locations across Terminals 4 and 7 at JFK and 20 airport locations in total in the U.S. We like the agent model as it provides us with an opportunity to increase our brand’s awareness and presence in high traffic locations. We’ve been very pleased with the performance of these agents as we partner with experienced operators that shoulder the risk of the retail financial commitments, staffing, and operating costs while our investment is limited to providing the sort of currency on consignment software licensing and compliance requirements.
Our company owned branches have outperformed our expectations so far this year though that was helped in part by demand for investment currencies such as the Iraqi Dinar and Vietnamese Dong, though sales and purchases of currencies for travel needs increased throughout the quarter. On April 11th we reopened one of the locations that we closed in 2020 which was in Century City, California where we negotiated a lower rent with the landlord that made the business case compelling and we believe that location has high potential. However, we also closed a location on April 29th in San Francisco that was at the end of its lease. We still have another location in San Francisco and several in the Bay area so we believe that we have sufficient coverage in that region without needing to replace the one that we closed.
Our online FX platform now operates in 37 states which accounts for approximately 76% of the U.S. population. We’ve been very encouraged by the increasing adoption by consumers to purchasing foreign currencies for delivery to their home and expect this trend to continue. Across both our wholesale and direct to consumer channels in Q2, we saw increased demand for Euros and the Sterling as more people traveled to the UK and EU countries. The Mexican Peso also continues to be one of our top five currencies but it is an expensive currency to hedge and the significant volatility during the quarter costs some margin compression.
Turning to our payments segment, its revenue increased 127% to 3.2 million from 1.4 million in the three months ended April 30, 2021. The increase was driven primarily by new client acquisition over the course of the year that has driven increased transaction volume. The company processed 34,840 payments transactions in the three months ended April 30, 2022 up 33% from the 26,112 that we processed in the three months ended April 30, 2021. The absolute dollar amount of those transactions was 1.2 billion up 51% from 786 million in the prior year. Thus the net margin earned on the payments volume represents 27 basis points, a significant increase from 18 basis points in the prior year.
By geographic segment the United states represented 75% or 10.1 million of the revenue generated in the three months ending April 30, 2022 and this was an increase of 97% from the 5.1 million generated in the three months ended April 30, 2021. The growth was across both segments with the recovery in international travel gaining momentum when a number of restrictions on travel began to ease last fall such as the reopening of the land borders to vaccinated travelers and foreign nationals from Europe being admissible again. However, the payments segment has also been a driver of the growth with the company processing 30,015 payments transactions in the U.S. in Q2, an increase of 31% over the prior year. On a dollar basis, the volume increase was 45%. Many of our financial institution clients are both bank now and payment clients, part of our one provider one platform strategy.
At our subsidiary Exchange Bank of Canada, revenue increased by 155% or 2 million in the three months ended April 30, 2022 to 3.3 million from 1.3 million in the prior year. This increase was due to a combination of factors. Firstly, the bank has benefited from the recovery in international travel that began last summer though demand was impacted by the Omicron variant as the federal government re-imposed certain travel restrictions and advisories. Demand recovered in March as the variant receded and on April 1st, the government eliminated the requirement for a negative pre-departure COVID-19 test on reentry that has proven to be further catalysts for demand. However, the bank has also grown its trade with international financial institutions and banknotes since being admitted to the Federal Reserve Bank of New York’s foreign bank international cash services program in Q4 of 2021. EBC has taken a cautious approach in onboarding new clients to ensure that we have all aspects of this operating model working effectively. Now that we are past this normalization phase, we will be pursuing new clients as we seek to increase market share. While the onboarding process takes time in order to satisfy compliance criteria, we have several clients already in the pipeline.
Lastly, the growth story wouldn’t be complete without mentioning our success in building the corporate payments business at the bank. This segment has outperformed our expectations so far this year, as we have a strong team that not only continues to add new clients, but have increased the margins as well. While revenue grew by 108%, total operating costs rose 50% to 10.5 million in three months ended April 30, 2022 compared with 6.9 million in Q2 2021. Variable expenses accounted for approximately 146% of the increase primarily as a result of the higher volumes rising from 1.7 million in Q2 2021 to 2.9 million in Q2 2022. These included postage and shipping, bank fees, commissions, expense, and third party technology fees.
Postage and shipping costs have risen by about twice as much as the increase in banknote revenue and part of that reason is really the new FBICS program with the Federal Reserve where we use a third party to process the bank notes, which allows shipments to go direct, facilitating a short settlement cycle. And some of those shipments also traveled by air and armored transport which is more expensive than traditional shipping methods. However, there have also been significant increases in fuel surcharges over the past year that has impacted all shipments. Where possible we pass on the shipping costs to clients and we have implemented some price adjustments in Q2 to mitigate that. Other operating costs accounted for the remaining 7.7 million in expense growth with 65% of that attributed to salaries and benefits. 44% of the increase relates to an increase in variable compensation with sales commissions expense being the largest contributor to that variance by 509,000 while 274,000 relates to other incentive compensation driven primarily by the improvement in the company’s performance. The remaining 56% of the variance is primarily related to the inflationary increases in base salaries, wages, and benefits following a freeze in the prior year.
All operating expense lines have experienced growth in Q2 as business activity continued to recover. However, the pace of growth is much slower than the growth in revenue and all of our expense lines have been in line with expectations as we continue to invest in areas that support our strategic plan, especially information technology. In the three months ended April 30, 2022 the company generated positive operating leverage of 22%, a significant improvement from the negative margin of 9%, generated in Q2 2021. The net income for the three months ended April 30, 2022 was 1.3 million, compared to a net loss of 0.9 million in Q2 of last year. That performance translates into net income per share of $0.20, a significant improvement from the loss per share of $0.14 in Q2 of last year.
Turning to the performance for the six months ended April 30, 2022, revenue grew 120% to 25.8 million from 11.7 million a year earlier. That improvement reflects the impact of the recovery in international travel of course the last year coupled with the success in driving strategic growth initiatives. Bank notes accounted for 79% share of revenue in the six months ended April 30, 2022 and increased from 72% in six months ended April 30, 2021. The bank note revenue increased by 142% to 20.5 million in the six months ended April 30, 2022 versus 8.4 million in six months ended April 30, 2021. The growth was equally split across our direct to consumer and wholesale divisions for much of the same reasons that drove the quarterly improvement.
The payments segment revenue increased 64% to 5.4 million from 3.2 million in the same period of the year earlier. The growth was attributable to new client acquisition in both the U.S. and Canada. By geography the U.S. accounted for 19 million of our revenue in the first half of the year, an increase of 10.2 million from the same period in the prior year. At 74 percentage share revenue was down marginally from 75% last year. In Canada, the bank’s revenue increased by 133% to 6.8 million in the six months ended April 30, 2022, in comparison to 2.9 million in the six months ended April 30, 2021. Thus, the improvement in revenue is broad based both from a product line and geographic perspective, reducing our overall concentration risk.
All operating expense lines experienced growth in the first half of 2022 as compared to the same period in 2021 but the 44% rate of growth was much lower than the revenue growth, contributing to positive operating leverage of 23% as compared to negative 16% in the prior year. While total operating expenses increased by 6 million, variable expenses comprised 3.2 million or 53% of that increase. Postage and shipping accounted for 1.9 million of the increase for the same reasons that I mentioned previously. Sales commissions accounted for 1 million of the increase and is associated with the revenue growth, bank fees increased 0.3 million or 41%, which is much lower than the revenue growth through the payments segment.
Postage and shipping expenses — sorry, other operating expenses accounted for the remaining 2.8 million in expense growth, with 2.1 million of that attributable to salaries and benefits. Half a million of that increase relates to higher variable compensation primarily attributable to the improved financial performance. 400,000 of the increase has been driven by higher payroll taxes and benefits, half of which was the reinstatement of the company matching benefit associated with employees retirement savings plans. The remainder relates to the inflationary increases that were granted at the beginning of the fiscal year after freezing wages the prior year.
In addition to a few incremental growth roles in the organization, really to support the strategic plan, as well as an increase in hours for staff and the direct to consumer division as the company has reverted to its pre-pandemic operating hours at most branches, the increase in the operating expenses are largely in line with expectations given the significant increase in business activity and the progress achieved on our strategic plan. The resultant net income for the six months ended April 30, 2022 was 2.8 million compared to a net loss of 2.6 million in the six months ended April 30, 2021. This translated into earnings per share $0.44, a significant improvement from the $0.41 per share loss in six months ended April 30, 2021. This represents a remarkable turnaround in the course of one year and reflects the dedication and efforts of the employees across the organization to accomplish it. We are truly grateful to our loyal employees that have displayed unwavering confidence in the organization’s long-term viability.
Turning to the balance sheet, there has been a significant increase in cash holdings to 111 million from 67 million. Approximately 90 million of the increase relates to banknote inventory balances that increase to 65 million from 46 million a year earlier. About 5.5 million of that increase is associated with inventory consigned at agent locations, given the growth in our agent network over the past year. The remainder of the increase is largely to support what is expected to be a very busy summer for travel. Given the inherent unpredictability and demand right now, the company has elected to increase its banknote inventory in certain currencies to mitigate the risk of having insufficient supply to fulfill orders. Over time, we expect demand will become more predictable as travel patterns normalize. We view it as important to maintaining our customer relationships over the long-term toward holding more inventory than we have in the past.
The other $26 million increase in cash holdings relates primarily to payments in the settlement cycle, including funds held in trust for customers identified on our balance sheet as holding accounts. Most of the accounts payable relates to payments and banknotes transactions in the settlement cycle and is more than offset by the other working capital lines. The positive earnings have allowed CXI to recover some of the capital that was used to support the business during the pandemic. Net equity has increased to 60.8 million from 58.0 million at April 30, 2021. CXI is in a strong financial position with this capital base and positive working capital of 53 million at April 30th. Liquidity also remains strong with 111.3 million in unrestricted cash. While we had just over 28 million outstanding on credit facilities at the end of the quarter, we still have approximately 13.7 million in unused capacity.
So in conclusion Q2 represented a solid quarter for CXI, and provides us with more confidence about the future as it relates to international travel and demand for banknotes. While there are various risks that may impact future results such as high energy prices, high inflation, the Russia Ukraine war, and potential future COVID-19 variants we believe that CXI is well positioned to weather fluctuations in demand. Based on the past two quarters, we do believe that CXI has regained financial sustainability. Our focus continues to be on our strategic initiatives with the objective of achieving returns on capital that are commensurate with our peers. At this time, I would now like to turn it over to Randolph Pinna, our CEO to provide his update.
Randolph W. Pinna
Thank you, Alan and thank you everybody for joining our call, especially those out West, I know it’s early. This is an exciting time for CXI and Exchange Bank of Canada. This week, our Board of Directors and our Senior Executive Team sat together for a full day where we reviewed our updated strategic plan. I’m proud to announce that our strategic plan that we updated significantly in the last year continues to be our focus. We are very focused on our risk adjusted return on our capital deployed, and we have created a laser focus on each of the four pillars. Those four pillars are of course our foreign exchange banking services at Exchange Bank of Canada, where we’re focused on international payments. Additionally, our international payment business at CXI is continuing to grow and that is a core focus for both the bank and for CXI.
On the banknotes side, we have the pillar of our direct to consumer, which is our retail stores, our online store, as well as our agent locations. And lastly, our most core pillar is our one provider, one platform initiative, where we’re expanding our relationships with current customers as well as establishing new relationships for both banknotes and payments. There is a fifth pillar that is our ensuring that we have the support mechanisms in place. Primarily, that’s technology. We’re very happy with the sales force investment that we’ve made, it is continuing to improve efficiency and improving customer relationships. Additionally, we have implemented a project to switch to NetSuite. Oracle’s NetSuite will become our new GL system, which will allow for better management reporting, and support better efficiency in our operations.
As normal I’d like to give a little highlight on each of these initiatives in more detail. At Exchange Bank of Canada, I’m very pleased to see the continued growth in our payment business. Our relationship foreign exchange banking initiative is successful, where we have experienced foreign exchange bankers, developing strong relationships with corporations with international activities, and that relationship allows us to execute on their foreign exchange needs both in the short-term or in the forward. Additionally, we’re following what CXI’s success has been with payments. Exchange Bank of Canada has identified another vertical or two to further expand our business. So our payments team in Canada is continuing to grow as we invite new employees that specialize in foreign exchange to join Exchange Bank of Canada.
Now on the bank notes side, we’re very happy to see that the travel restrictions in Canada is being lifted. We’re seeing a significant increase in the domestic banknote business all throughout Canada and we expect that to continue. Internationally as Alan clearly pointed out, the Federal Reserve relationship is a significant component to Exchange Bank’s bank note business and its future growth. The international activity is exposed to additional volumes because of the fact that these countries are looking for direct source of U.S. dollars. We are going to be slowly continuing to expand our relationships with select banks internationally.
Moving on to Currency Exchange International bank note business, it too is continuing to see the demand and growth in its international banknote space, primarily in the Caribbean and starting to be in Latin and Central America. We are seeing a lot of demand for banknote activity utilizing our Miami facility since it’s a natural hub to the South and the Islands. Domestically, our banknote business is growing both on the wholesale side with additional financial institutions using CXI for their domestic banknote needs for foreign currency sales. The consumer division as Alan rightfully pointed out, is continuing to exceed our expectations, both our own company owned stores are performing better than expected this year and we’re very pleased to see that as we continue to look for potential additional location selectively in key markets such as Florida, New York, and California.
Our online store allows us to not have to have a retail store and still provide customer service by providing foreign currency for home delivery. We have a plan on expanding our online foreign exchange store. We’ve recently employed an experienced Digital Online Manager to generate new relationships utilizing our online foreign exchange platform with other websites that may have traveled. Most importantly at CXI is our one provider one platform initiative. This is where we are integrating with core banking software systems, allowing a simple access to RC [ph] fixed system, we’re utilizing their one platform in their integration with their core processors such as Jack Henry.
So in summary, we’re expected to have a strong year, the travel demands for the summer as the bookings have been indicated and clear that they’re strong. We hope that there’s no deterrence like a war, a bigger war, or any new restrictions on travel due to any new virus that may come up. But in summary, CXI has a strong team, it has a clear strategic plan, and we are planning to execute nicely on this. So I invite you to ask any questions for Alan and I and thank you.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from Robin Cornwell, Catalyst Research. Please go ahead.
Robin Cornwell
Hi, good morning, and congratulations on a great, great quarter. Looking forward to more exciting times. I know the travel segment anyway the planes are jam packed. Sorry, the airports. So that’s exciting news. My first question was Alan, wondering if you could quantify — you said the volatile currency mark has impacted the revaluation and hedging costs in the quarter, was that significant, could you quantify it or was it material?
Alan Stratton
Yeah, we had. It was probably about $300,000 that was the net impact from that specifically and mostly related to the Mexican Peso — normal trends would have been.
Robin Cornwell
Right. So you mentioned the volatility in the currencies generally. But has that eased off, have you seen any recurrence of that in the current quarter, I know you can’t comment too much on that but?
Alan Stratton
It was primarily in April where we saw some large swings especially intraday swings in the currencies that made it more expensive to hedge the Peso and the forward points have been increasing. But the currency markets always have some inherent volatility in them. It’s just that occasionally they go through periods of extreme volatility, and that’s what we saw in April.
Robin Cornwell
Okay, terrific. Randolph, now that you’re on the Jack Henry platform, is there any kind of — you must have an idea of what kind of penetration rate you might see and I guess it was about 1100 potential clients, can you expand on what your thoughts are with respect to just throwing into that platform?
Randolph W. Pinna
Sure, thank you, Robin. And just to be fair, just before we answer that I do want to ask for your courtesy on last call, we had a bunch of questions from you and we ended up not being able to take two other people’s calls. So if we can do just couple of questions like this and then reach you, just preparedness for other callers. But back to the question about the Jack Henry and the platform and again, why we call it one provider one platform, is a lot of the customers both on the Jack Henry and as you may recall from previous calls to Fiserv Wire Exchange, we are integrated into two core banking software systems. That enables us access to, not guaranteed to get those customers, but access to their entire portfolio of customers using the Jack Henry general ledger system. And so it is quite nice when they are an already existing customer for bank notes services and now, because of the automation, we can do a straight through transaction where they’re able to do the transaction on their platform but it really is integrated into ours and it saves accounting back office work as well as it makes it very fast and simple for the banks. So what we’re doing is we are focused on increasing the awareness of their portfolio of 1100 customers of the fact that CXI can provide both banknote and international payments services. So we have a dedicated sales team, it’s led by Chris Johnson, who’s been with the company since it started. He’s proven to be a strong leader of our sales organization at CXI. And his team is focused on continuing to get penetration and new customers on that system. Does that answer your question Robin?
Robin Cornwell
Yes, thank you. My last question is you’ve increased your use of the line of credit. And I know you are warehousing some extra currencies and things like that. But the interesting question is, with the banks all having this huge amount of excess capital, I guess my question to you is, do you have areas where you could deploy more capital if you had it, and basically generate even greater future profits?
Alan Stratton
Yes, of course, we as I started off, we’re very focused now on our risk adjusted return on the capital deployed. And so we do want to utilize our capital as efficiently as possible. And so yes, if we had additional capital, we would be able to accelerate our growth even higher, but we are utilizing our lines of credit. In fact, we are just updating our line and getting an increase in such line to support further growth. The company is not interested in issuing any new equities to raise capital in that manner. So we are focused on generating additional retained earnings in funding our future growth and those opportunities we’re discussing utilizing our lending facilities with our primary and our secondary bankers.
Robin Cornwell
Okay, terrific. That’s all for me. Thank you.
Randolph W. Pinna
Thank you, Robin.
Operator
Your next question comes from Jim Byrne for Acumen Capital. Please go ahead.
Jim Byrne
Yeah, good morning, guys. Just a couple of ones from my end. I noticed obviously a pretty significant jump in the payments revenue in the quarter, relative to obviously last year but also just Q1. And actually a slight decline on the banknote business. Maybe you could just let me know if there’s any significant kind of one-time items in there or are these types of run rates what we would expect for the next couple of quarters?
Alan Stratton
Well, the payments segment that as I indicated Jim has been driven by new client acquisition, primarily clients we’ve on boarded over the last six months that are generating a lot more volume of transactions for us. But we’ve also managed to get stronger margins from some of the foreign transactions driven in those payments. So I think we’re — we liked the payment segment because it does tend to be a little more predictable. So with those what we should see is that that provides a new baseline to work from moving forward. The bank notes business is still in a state of flux, as we’re not yet in a period of normalcy yet. The Omicron variant impacted demand earlier in the quarter. We do have probably some normalization or smoothing effect from some of the transactions like with the Federal Reserve Program. Now those volumes tend to be smoothed out so we won’t see the seasonal fluctuations that we may be — we do see with some of the other consumer demand related to that. Plus, we’ve seen the winter in Q1, we had strong performance from the Caribbean countries. And then as people sort of stopped traveling during the cold winter season to their sunny South destinations, they start planning more their spring summer trips and that’s where we see in Q2 pick up with the Euro and the Sterling. And so it is I think, going to take some time for us to figure out what normalcy comes out to be with the travel patterns as right now there’s just a lot of pent up demand and people are going where they can go, where it’s safe, where there aren’t restrictions, and they can get flights to now.
Jim Byrne
Okay, that’s great. Alan you went into details about the operating costs and good to see that you certainly held the line on profitability and given the pressures of some of the postage and shipping and things is this sort of the level of profitability you would expect you could sustain around that 22 percentage range we kind of anticipated wouldn’t be as strong as Q1, because of some of those items but what should we use as a baseline going forward?
Alan Stratton
I think absolutely it’s sustainable. Our goal is to grow that operating leverage. And we do believe that we’ll be able to do that in the coming quarters as we continue to grow the business.
Jim Byrne
Okay, and then maybe give us an update Randolph on M&A activity that you’re working on or seeing in the business, particularly on the payment side?
Randolph W. Pinna
Yes, thank you. We continue. It’s part of — while it’s not the four pillars, that’s an over-arching opportunity that both the CFO and myself have in our agenda. We are always looking at opportunities, there’s a significant premium being paid by several corporations both in the UK and in the U.S., that we feel is not a right price. And so if there’s an opportunity with the right team of people at a reasonable price, that would be an accretive transaction. We would absolutely be interested in that. We have been reviewing a few opportunities. However, due to the extreme price that the sellers are asking we have not — we don’t have anything hot that’s going to close if that’s what your question is. We are continuing to focus on just growing organically and just highlighting to the potential customers the advantages of Exchange Bank of Canada or CXI. But we do continue to keep our eyes open and have continued dialogue with existing — some existing clients that we may consider as well as other opportunities. But there’s nothing imminent if that’s the question.
Jim Byrne
Okay, that’s great. Thanks, guys.
Randolph W. Pinna
Thank you.
Operator
Your next question comes from Peter Rabover of Artko Capital. Please go ahead.
Peter Rabover
Hey guys, thanks for taking my questions. Maybe I just wanted to parse on the operating expense side. So I think you said you had something about 3 million in variable and about 7 million in fixed. And is that 7 million in fixed at pretty steady run rate that we should think about going forward?
Alan Stratton
Yeah, I mean, there will be some modest I think increases there but they will be pale in comparison to our expected growth. So what we’ve really worked on throughout the pandemic was converting more from — more of the fixed costs to the variable cost structure so that that gives us more flexibility if we see sudden changes in demand like we did during the pandemic.
Peter Rabover
Okay. Oh, good.
Randolph W. Pinna
No, no, I was just going to add I mean, there will — we are continuing to invest in the technology as well as the resources. It is known and Alan is comfortable with the fact that we are searching for a Group CFO so we will be having two CFOs, one at the bank and one at the Group level. So we will be making key strategic human resource investments and currently unfortunately, there’s a lot of costs you have to hire and pay a big fee for recruiters because the labor market is extremely tight, both in the U.S. and Canada, and so you will see some increase in fixed payroll costs going forward as we ensure we have the team of people, both in the sales and in finance in compliance, and in risk to ensure that we properly maximize the opportunity that our strategic plan has.
Peter Rabover
Okay. [Multiple Speakers] in the quarter or are they going to be like the research products, etc.?
Randolph W. Pinna
So yes, so that’s — again, as Alan had pointed out, that’s a good number where we’re at, but it will increase as we continue to grow and those investments will show the reward by getting the right people in the right spots. And so there’s been some costs already through the first half of this year. But what you will see that our baseline will be going up as we continue to build out the organization. As you recall, during the pandemic we significantly cut and restructured the organization, and now that we’ve proven that our earnings and revenues will continue to grow, we do want to make those investments and it’s the right way to grow this business. And so you will see a bit of increase in that baseline.
Peter Rabover
Okay. Let me…
Alan Stratton
[Multiple Speakers] three pressures with, a very tight labor market, as I’m sure many of you are aware. And so we need to continue to maintain the ability to attract and retain our employees. And so we’re sensitive to ensuring we keep pace with the market in that regard. And so I think part of it is going to depend on where inflation goes and what happens with the economy in the future quarters with the now the aggressive tightening that the Federal Reserve and Central Banks are on. So that will be one of the factors that influences I’m sure the cost moving forward.
Peter Rabover
Okay. I appreciate that. With the success of — you said you have up to 20 franchise branches now. And that sounds like a model that you prefer, is that something that you would consider just transitioning to long-term like 100%, like does it make sense to own the branches or sell those to potential operators and collect the franchise fee off the top and get rid of the fixed costs?
Randolph W. Pinna
We do like the agent locations, we do also enjoy the full profit potential of a strategic key company locations while obviously at the right price, anything would be for sale. But we are focused going forward is more on the agent model. And just to clarify the number that the 20 were airport locations. We have other agent relationships that are not in the airports that we hope to continue to grow. And so that is our primary growth channel in the consumer side is that but we’ve identified a location in Florida that is likely to be opened in the next quarter because it is our key market, it was a proven location of a competitor that went out of business. And so therefore, we will selectively continue, very selectively continue at the right price in the right location to have company owned locations. And again, as I mentioned, on the online FX for the whole United States, as you know, consumers only in the U.S. for us. And so we are online store and getting additional licenses or permissions from the states that we are allowed to do home delivery in their state that is another key growth plan in our consumer division. Does that answer your question?
Peter Rabover
Yeah, I think that helps. I got to two quick ones. One is, I think you said you really increased your level of cash to I think 110. And I think your net is like 83, based on what you said. I’m just curious that I think you’ve mentioned in the past that your excess level of cash, one that you can use for growth is somewhere between 5 million to 15 million, is that still a number to think about or has that increased in like 10 million to 20 million, is that just that — just for, I guess one more valuation purposes that parts of the cash flow working capital to excess?
Randolph W. Pinna
It is a good question, and I think it’s one of the areas that we’re focused on right now is figuring that out. But the cash balances will naturally fluctuate because of the settlement cycle so when you see sort of the accounts payable and holding accounts jump off, well part of that is going to be in cash balances. And so we kind of look at that as almost third party, so we don’t really consider it surplus. It’s really how much we need for our inventory needs moving forward and what we’re going to do is looking to see what the activity is like over the next couple of months as we get through the summer, and then get a better handle on what the collectability will be to determine the optimal amount of inventory and then that will derive what we think the surplus cash is. So of course as we continue to add earnings we will continue to grow that as well. So your range from before I think still is probably reasonable to use for evaluation purposes right now. But we’ll look for better clarity on that as we get through summer.
Peter Rabover
Okay. Sounds like you guys are setting the record revenues and the last two quarters and third quarter in the past and 2018 of 3.5 million in net — in operating income and 3 million in 2019. So I’m just kind of curious, if we take the growth rates from what you’re doing now in revenues and your fixed expenses sounds like should we expect the third quarter operating income to be higher than those of the past?
Alan Stratton
Well, we don’t do guidance. But typically, and as I said in my initial brief, the travel indications if you saw the news, Airbnb is at record levels. We’re here in Florida at our headquarters, and I can confirm that Florida has been at peak tourist levels and continuing to grow. So I would suspect that third quarter would be a very strong quarter. Again, but we didn’t expect the Omicron and definitely for a month and a half that’s dramatically slowed things down. So we don’t know what’s to come in the third quarter. But provided there’s no — anything out of the normal it should be as it usually has. The summer is always our busiest time for the business.
Randolph W. Pinna
And with revenue growth there we would expect the net operating income to grow as well.
Peter Rabover
Great. Thank you so much for taking all my questions.
Randolph W. Pinna
Thank you Peter.
Operator
Your next question comes from James Smith, a private investor. Please go ahead.
James Smith
Good morning. Thanks for taking the question. I have one for Alan and one for Randolph. The question for Alan is on the revolver. I think a prior caller mentioned that you were restructuring or upsizing your lending capacity. Could you please walk us through what the restructured or upsize capacity looks like? And then the question for Randolph, on — so Alan mentioned in his prepared remarks that the EBC has been normalizing its operating model and building the pipeline for the wholesale business now that you’ve been accepted into the FBICS program. And it sounds like you’re now ready to really scale up business. You’d spoken at the AGM last quarter about being the sole source provider of U.S. dollars to some large Canadian banks. So could you walk us through the pipeline on the FBICS business specifically and just tell us sort of where you want to take that business over the next one to two years? Thank you.
Alan Stratton
Alright, two good question. So on the credit facilities, we’re currently in the process right now working with our primary lender to renew those and those discussions are going very favorably. We are probably in the final throes of having that finished this month. And we are looking to increase the overall capacity in those facilities, in addition to getting them committed for at least two years, so that I think is likely to materialize. But we aren’t in a position to discuss any specific terms right now, because it hasn’t been finalized yet. But we are optimistic and yes, overall, we see that we do want to get more financial capacity for the organization and that is something that we’re working on right now. And so that will probably be more clear when we have our Q3 call in September, we’ll be able to give you more guidance around what that’s going to look like. So, more to come on that.
Randolph W. Pinna
And Jim, thank you for the question about the Federal Reserve cash program. We are very proud of the fact that Exchange Bank of Canada is the only Canadian financial institution with a direct relationship with the Federal Reserve for the purpose of sourcing U.S. dollars for both local usage in the country as well as international distribution. We currently do have several financial institutions in Canada using us. But believe it or not all the large major Canadian banks are currently sourcing from another bank that’s U.S. based or a different Canadian bank, but not directly with the Federal Reserve. So this is a growth opportunity within Canada by itself. But you asked about the international expansion, as you know we’ve taken a very cautious approach to our expansion internationally to accepting customers internationally. We started with FATF countries which is basically the largest countries in the world. Like in France, we have a good relationship and in other parts of Europe, but we also have good strong activity with Mexico, and most recently in Brazil. But we do look to potentially expand that to low risk or low to mid risk, non-FATF countries but there’s a process around that internally and to validate that all compliance and risk concerns have been addressed. And so we are continuing to map out our further international expansion. But as of right now, we’re focused on utilizing our services where the countries we’re currently already operating with, starting with Canada itself.
James Smith
Right, that’s helpful. Thanks very much both.
Randolph W. Pinna
Thank you.
Operator
Your next question comes from Adam Wilk of Greystone Capital. Please go ahead.
Adam Wilk
Hey, good morning. Thank you for taking my questions. And congrats on a great quarter. Operating leverage is really kicking in nicely, which is great to see. I think the majority of my questions were already asked and answered, which is great. Maybe just one or two from me, I guess I’m trying to quantify the impact of shipping cost increases and additional freight costs related to your participation in the Fed program and I’m wondering if you think kind of moving forward, if those increases in costs will offset any of the sourcing savings that you’re getting or how should I kind of be thinking about that? Thanks.
Alan Stratton
The sourcing — the international that’s one advantage of our expansion with select countries. It does provide us a direct source of the low home currency. So while we may sell U.S. dollars or buy U.S. dollars from those countries, we can also source their local currencies and that is a further driver for us to consider select countries elsewhere. But the shipping costs is one where we are currently renegotiating. We’re very active and almost done with a renegotiation of our primary shipper and trying to reduce the amount of increases they’ve been having because all the shipping companies, both the armored cars for the international stuff, as well as the domestic overnight shippers have been significantly increasing their cost because as we all know, the gas is at record highs right now, and so forth. But because our volumes have significantly increased, coming off of where we were very slow, relative to previous years before the pandemic, we are focused on trying to bring those costs down or keep them contained. However, it is a fact as Alan said, the inflation both on payroll and on shipping, are two most expensive areas is happening. And so we are focused on ensuring efficiency as best we can.
Adam Wilk
But just as some guidance there in terms of the increase in postage and shipping in the quarter, probably about half of that would be just from that program?
Alan Stratton
From the Fed program, yes. And in our revenues, when we quote internationally, we obviously include the fact that we know we’re paying this high shipping costs. And so the dollar values of those transactions are typically 5 million to 10 million at a clip. And so we want to ensure that there’s enough volume to cover the shipment, otherwise, the bank would thus agree to wait until they had a bigger need for funds.
Adam Wilk
Okay, that’s helpful. Thanks. And then you kind of touched on this a little bit, looks like you’ve been adding some headcount. You’ve talked about a lot of the sort of growth initiatives that you have and sort of continuing to ramp the organization in that way. I’m wondering if you can disclose maybe what percentage of those new hires or employees are on the sales side, how those efforts are working out for you on the payments business, and then maybe how far along you think you are with hiring or kind of where do you see things headed for the remainder of the year into next year?
Randolph W. Pinna
So the ratio between revenue generating people in the second line of defense, as we call it, which is the compliance and risk folks and the finance folks to support all the revenues, we’re very focused on the efficiency between that. We’ve implemented initiatives to do further automation on the support functions to allow for more generating — revenue generating people. We are focused on adding people both in Canada and in the U.S. We have ads running in the newspaper and on indeed.com, looking for experienced foreign exchange relationship people. And so we will continue to add those people because to execute on all of these pillars, you need strong people to generate additional revenues. And so I don’t know if that answered your question. We don’t disclose our proportionality ratio. However, I do confirm that that ratio is of interest for us to ensure that as we keep adding more salespeople that we’re not adding exactly the amount of support people there, but I don’t know if that answered your question, but that’s the best I can do on that.
Adam Wilk
Yeah, that’s helpful, thanks. And then on the Jack Henry side, are there additional compliance personnel required now that the integration is complete or is that kind of baked in already?
Randolph W. Pinna
That would be baked in. So again, once the banks that’s using the Jack Henry is a client, which a good chunk of them are our clients, on the banknote side, then the compliance costs to add the fact that they’re going to do wires through the system does not increase it, that is not it. Where we’re seeing the need for additional compliance and risk posed is primarily on the international expansion side, as well as the fact that we’re adding licenses and additional states to support our growth initiatives.
Adam Wilk
Okay, great. Last one from me, I kind of want to press on Peter’s question a little bit more from a minute ago, about excess cash on the balance sheets, and kind of a balance between your growth investments and maybe returning capital in any way. If you’ve gotten that far, in terms of your internal plans, can you maybe talk a little bit about, I guess, your longer term plans for the capital structure. I know, you talked previously about maybe introducing some additional leverage into the organization, and how you kind of — how you’re kind of thinking about that today versus like the growth investments you’re making and any potential uses of excess cash?
Alan Stratton
Currently, the excess cash is being deployed or and will be deployed through the addition of new customer relationships. Agents, as you know, the agents we do have to — our investment is to put the cash at the location and support it. We do see the fact that we have loss of cash and now that we’re more profitable as an organization, there is interest to borrow to replace that cash so that cash can be utilized for a merger opportunity or again significant expansion in any of these particular areas that we’re focused on.
Adam Wilk
Okay, great. Well, I appreciate it. Great job, and thanks for answering my questions.
Randolph W. Pinna
You are welcome. Thank you for your support.
Operator
Your next question comes from Jordan Steiner of LionGuard Capital. Please go ahead.
Jordan Steiner
Good morning, guys. Most of my questions were asked and answered. Just a quick one on FX, just given its pretty new stories as investors and it might be a big part of the story down the road. I just want to make sure I understand what’s happening. So just to paraphrase what you’ve said on this call, you onboarded the first customer this last Q4, and maybe Q1, and then in Q2 it sounds like revenues were kind of flat sequentially, as you worked on improving money laundering, AML stuff and just general practices in that business, is that fair to say?
Randolph W. Pinna
That’s correct that further expansion before we did, we wanted to ensure that the current operating model is in place. And then as you can imagine, each new potential country that you may take customers from, we want to ensure that we’ve researched all the compliance and risk concerns that could deal — come with dealing in that new — accepting customers in that new jurisdiction. But we are focused on one of the sales people as the other caller was asking about hiring sales people. We are currently looking for a dedicated international leader for our international expansion. We currently do have a couple of people involved with that, including myself because of my experience in over the last 30 years in doing international banking. But we are going to be expanding that with a dedicated resource to focus day in day out on both the relationships as well as the logistics that come with international currency exchange that come with international currency exchange.
Jordan Steiner
Yeah, no, that’s great. And did I hear you correctly before when you said in this current quarter, I guess it’s what the July quarter that we’re back to the onboarding process of some new clients, are they in the pipeline?
Randolph W. Pinna
That’s correct. The pipeline in all of our categories are quite full or we’re very happy with that. And I confirm that there are new customers that are just — have been onboarding or are going to do what we call our first time trade in this current quarter. So we will see continued growth and I do confirm, as you said that the Fed program and again, it’s not just the Fed, our organization sells Canadian dollars, U.S. dollars, Mexican Peso internationally to these banks, but our international customer base will be a significant contributor over the years ahead, as we become more experienced and add new countries.
Jordan Steiner
Great. Thanks very much, guys.
Operator
At this time, there are no further questions. I would like to turn the conference back to Mr. Randolph Pinna for closing remarks. Please go ahead, sir.
Randolph W. Pinna
Okay, thank you. It was refreshing to hear all the questions and I thank you for all of your support for all the shareholders. And should there be any questions that come after this if we are able to answer them, please let Bill, Alan, or I know. And again, thank you for your time today.
Operator
Ladies and gentlemen, this does indeed conclude your conference call for this morning. We would like to thank you all for participating and ask that you please disconnect your lines.
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