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Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Currency Exchange International Q1 2018 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Bill Mitoulas. Please go ahead, sir.
Thank you, Stephanie, and good morning, everyone. Welcome to Currency Exchange International's first quarter conference call to discuss the financial results for the 3-month period ending January 31, 2018. Thank you so much for joining us. With us today are President and CEO, Randolph Pinna and Chief Financial Officer, Stephen Fitzpatrick. Stephen will begin with a brief commentary on the quarter's financial results followed by his latest perspective on the company's financial performance. Randolph will then comment on the bank operations, sales and business activities, after which we'll open it up for your question and answers period. Today, the 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 are 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 it over to Stephen.
Okay. Thanks, Bill, and good morning, everybody. So I'll give you a brief overview of the results from the first quarter of 2018. I'll take a few minutes longer than usual because there are a few things going on in these financials that I think would be helpful to you when you are looking at our results. So overall, as usual, the results are presented in US dollars unless we say otherwise, and as we've also said in the past, the currency exchange business of CXI is typically quite seasonal and it coincides with the peak spring and summer travel seasons in the U.S. and Canada. So usually, the first and second quarters are the slowest, and the third and fourth quarters are usually much stronger. We've seen that trend to a degree in Q1 of 2018, certainly in the core banknote business. That's what we've seen, and so it is reflected in those results that we released yesterday. However, it is important to know -- for you to know that the Q1 revenues and EBITDA benefited from higher volumes in so-called exotic currencies, which added about $500,000 to our -- to both revenue and EBITDA compared to a year ago. So overall, revenue has increased 38% from Q1 a year ago to $8.4 million from $6.1 million. Apart from the effect of the exotic currency transactions on our top line, the increase in revenues is largely attributable to an increase in the number of customer transactions, which emanates from adding 3 new stores, 3 new CXI-owned branches, 63 new wholesale relationships and over 1,400 new transacting locations, which represents a 10% increase in the number of transacting locations since a year ago. Also, we've seen growth in our payments revenues. They increased over -- almost 250% over Q1 a year ago and they have now grown to represent 6% of our total revenue compared to 3% last year, and you may not have had a chance but when you do, you'll notice in the notes to the Q1 financials that we actually disclosed payments revenues separately from bank note revenues although we are not required by our accountants to do that until -- under the accounting rules to do that until we get to 10%. We think it's helpful to start disclosing that information since it's a core part of our strategy and it's part of what we -- also an important element of what we discuss with you. Moving to operating expenses. They're up 15% from Q1 a year ago. Our degree of operating leverage is -- it feels almost silly to say it, but it is when -- it is for change in the EBITDA in relation to the change in revenue percentage-wise and it's up 1,300%. So obviously, that's a bit of an exaggerated number. That ratio is high. But the important message out of that is that we've addressed the relationship between expenses and revenue compared to a year ago, and we still are continuing to focus on our expense performance and I think Randolph will address that even more in his remarks. So expenses have gone up from a year ago, as I said, largely because we're hiring. We're hiring people in new positions that support our growth in retail, in our payments group, in sales and operations, in our control areas like risk and compliance and we have also increased our legal, accounting and professional fees, partly due to our auditing costs for the bank but as well because we need to spend money in these areas as part of implementing several of our strategic initiatives. There were increases in rent for the new branch locations along with increases in postage and shipping. A cost that is really attributable to higher transaction volumes. What's particularly of note with respect to posting and shipping expenses is that we focused very intently on that line in the last 3 quarters and although the shipping costs were 20% higher than a year ago, as a percentage of revenue, it's dropped from 10.2% to 8.9%. And so we -- and although we made progress on that, we're continuing to focus on that line, particularly in Canada. So overall, our net operating income increased and EBITDA increased over 500% from Q1 a year ago to $1.8 million. Our diluted earnings per share went from $0.01 loss a year ago to a $0.05 profit in Q1. So it's been a good start to the year.In 2017 -- during 2017, we added 3 new branch locations. This brought the total to 41 across the U.S. We still expect to add 4 to 6 per year with 4 scheduled in 2018, none opened in the first quarter of 2018, but we have 2 scheduled in the second quarter. Retail and consignment revenues are up 21% from a year ago. We added 22 -- 27, rather, new wholesale relationships in the quarter which represents 1,372 new transacting locations, and we added 36 new payments relationships and those are primarily in the corporate sector. The majority of those -- of the customers were added in Canada as opposed to the U.S. and that is because of the payments -- growth in payments clients. So we now have when you add it all up, on the banknote business where it matters, we have over 15,000 transacting locations, which is nearly 900 -- almost 1,000 wholesale relationships. I want to talk about the net income line, in particular the U.S. -- the impact of U.S. tax reforms. As you know, the majority of our revenue and most of our profit is currently earned in the U.S. and so the recent U.S. tax reforms, which were enacted into law in December, they will have a positive effect on our earnings in 2018 overall but in Q1, they had a negative effect. I spoke about this on the year-end earnings call, but now it is tangible. I'll walk you through how it affects CXI. And we did put some explanatory notes in the MD&A to this effect, but in case you haven't had a chance to look at that, I'll just -- I'll address that. So our income tax expense increased to $1.50 million from $21,000 a year ago and that's a total of federal income tax as well as state and provincial taxes for all the jurisdictions where we operate. And that increase is really caused by 3 things: the first, obviously, is increased profitability in 2018 compared to 2017 and that -- the impact of that is about $641,000 in the quarter; but the other two factors are one-time adjustments that relate to the Tax Cuts and Jobs Act of 2017. On December 22, the President in the U.S. signed the tax reform legislation, which is -- which includes a broad range of tax reforms [indiscernible] businesses including corporate tax rates, business deductions, international tax revisions and a lot of those changes differ significantly from what was in effect previously. In January, the income tax expense includes a one-time increase in deferred tax expense of $308,000 and that arises from a reduction in deferred tax assets. The deferred tax asset is placed on the -- was placed on the books and they arise because of differences in timing on the accounting expenses versus tax expenses. So it created an asset at a higher tax rate then what we will now be able to realize those assets at, so the -- as the deferred tax asset is liquidated over time, it will be liquidated at a lower rate. So we, like many other companies, have had to write down that asset, that total was $308,000 and there's an additional $80,000 that's a one-time expense related to repatriation, our repatriation tax on retained earnings outside the country, and that's outside of the U.S. since 2011. So that effect is related to the bank subsidiary of CXI in Canada. So that -- those are the one-time amounts of $388,000 in total. So without those one-time adjustments, our effective tax rate for the quarter would have been 34.6% compared to 23% for last year. That's also affected by the changes only coming into effect in late December. So for the first 2 months of the quarter, essentially, we were at a high tax rate in the U.S. and for the third-month in January, we were at the lower rate. So for the remainder of the year, we expect our combined income tax rate will be 26.7% in the U.S. and 26.5% in Canada. So essentially the same rate between the 2. So finally, just to talk about the balance sheet, we remain financially strong and well-capitalized, over $65 million in cash as of January 31. Total assets of $79 million versus $64 million a year ago, 25% increase. Accounts receivable increased $2.1 million and this number is really fluid as timing and depends on the volume of activity at month end. But any significant items in accounts receivable were subsequently received in February. If you were to look at our aged receivables, 95% are under 30 days, and they are typically paid within a week. We don't have any debt financing at this time. We have access to a $15 million line of credit with BMO Harris in the U.S. and a $3 million line of credit for the bank in Canada. So thank you. At this point, I'll turn it over to Randolph.
Thank you, Stephen. Thank you, everybody, good morning. Thanks to you out West who are up real early. As Bill said, I always like to start with Exchange Bank of Canada. The Board of Directors of our group and senior management are very focused on Exchange Bank of Canada and its performance, its security, the overall business as it operates. As you saw, the business has improved in Canada. The banknote business is up. This is due to us adding new customers. There was a change in our -- one of our biggest competitors has chosen to no longer serve as money service businesses. They are de-risking themselves around the world and so it has affected us positively both in the U.S. and Canada. This allowed us to pick up a major airport operator that operates both in the U.S. and Canada with major cities in both countries. And that customer affected our banknote business both in Canada and in the U.S. So while the exotic currency trading has increased, and we benefited from the extra profits because exotics provide a wider margin, we have also seen our core business of regular banknote activity increasing because of new customers, both financial institutions and money-service businesses. Along those lines, as Stephen said in his commentary, we've been very focused on trying to improve our efficiency. Shipping cost is one of our biggest expenses. So some process changes on how we ship, when we ship and most importantly, where we ship. As everybody knows, banknotes is our core experience and so we were very intent on opening a vault in Montréal, and where -- we have not signed anything. We're triple checking all of our math and confirming all the positive benefits that we see Exchange Bank opening in Montréal, and we feel we'll provide to the business as well as the customers and so we're continuing to focus on how we can improve customer service, reduce operating costs while continuing to expand. The payments business has also shown a big lift and I am very happy to finally show that we can disclose the difference between payments and banknotes because they are 2 very different businesses. Margins are very different, operating costs are different, and the risks are different. And the bank has a little over 50 corporate clients that are trading regularly with us and we continue to see the payments business as a strong growth opportunity for both businesses. With that in mind, one needs to remember that as you grow a business at these type of rates, we need to focus also on the risks and controls in place. We will be hiring more people at Exchange Bank in the area of risk, in the area of compliance. We've already had the higher operational staff and some sales staff and we will continue to bring in some key sales people that we have identified to help us really grow the business in Canada. We also saw expenses go up from legal, professional, basically, good consultants. We feel this is a wise thing for an early young bank to do to spend extra money, to have them validate the initiatives that we're doing and so we will continue to see us having increased expenses. As Stephen pointed out, we've got a good handle now on making sure that the expenses don't outpace the revenue growth, but we will spend as needed and they are not directly correlated. We need the team in place to support the growth that our 3-year strategy has. So moving on to America. We did not have any more retail stores, and yes, while we aspire to open 4 to 6 stores per year, because retail does have higher margins and provides what we love, fee income, we are very conservative about entering into the new lease expenses. The dynamic of dotcom and online has threatened the traditional retail model we operate in, which is typically shopping malls. So we look for good locations at reasonable prices and key markets around the United States. At this time, CXI continues not to enter into Canada in the retail market space and so its retail focus at this time is strictly in the U.S. We do have 2 locations scheduled in some good markets and we do have maybe 1 or 2 more to complete probably 4 retail stores for 2018. On the wholesale side in the U.S., banknotes continue to grow. Our pipeline continues to remain very full. We -- our on-boarding teams are busy, and we are staffing more in those areas as well and training additional compliance as well as operations. We are also recruiting a couple seasoned salespeople to help grow the banknote business and continue to grow the financial institution space. Some of the focuses on the expense side also have remained. So while, in Montréal, for the bank, it made sense, we recognized that the business that we do in the islands of Hawaii was costing quite a bit of money from Los Angeles. And so since we had a new retail operation in a brand-new shopping mall in Waikiki beach, we have turned that into a little mini hub to process locally on the island. The islanders are very happy to know that we've expanded our operation in Hawaii, and most importantly, we've recognized savings in that regard. We will continue to look for process improvements in everything we do to ensure that we remain as efficient as possible. On the payment side, both in Canada and in the U.S, we will continue to see some growth. One of our new products, which I may have mentioned in previous calls, is our remote capture. We can now clear -- Exchange Bank of Canada can now clear Canadian items, both U.S. dollars and Canadian dollars drawn on Canadian banks, digitally. This is relatively new to the states. In Canada, it has been -- become pretty popular where you can clear a check digitally. A lot of people know it as taking a picture of your check and depositing it; it's the same thing where you scan a check and clear it. There is big demand for CXI to clear Canadian items digitally, and we intend to roll this out throughout the course of 2018. So last, I just want to look ahead and let you know that we have, as you know, focused and agreed on a 3-year strategy for the group and so far we are progressing on the strategy quite well and we are going to ensure that we execute on both sides of that plan, which is not only a focus on the revenue growth but also on the conservative area of ensuring we have staff at the right levels, inventories at the right levels, and finance in place to ensure that we have the capital to grow. And so with that being said, I'd like to open it up to the floor for questions that you may have for us.
[Operator Instructions] Our first question comes from the line of Dylan Steuart with Industrial Alliance.
Quick question just on, I guess, the banknote business. Even excluding the disclosure on the exotic currencies, it looks like, I calculate growth compared to last year about 27%. So very -- and that's far above the transaction growth. So is that mostly due to favorable, I guess, a cheaper U.S. dollar or maybe just a bit more color on what's going on there?
Well, there -- I don't know if we've analyzed exactly the headwinds or the tailwinds of the rising dollar. For our business, it's actually we're more focused on whether the Euro was rising or dropping. The real growth on the banknotes has come because we've added more customers. We had 3 new stores that we didn't have a year ago. We have quite a few more wholesale customers and then one of those in particular is an airport operator that operates in major airports. So the biggest airport in California, one of the busiest airports, I think, the busiest airport in Florida as well as the 2 busiest airports in Canada, or actually the 3 biggest airports in Canada. So that customer, along with other customers, has allowed for year-on-year growth. And the beauty of that is those customers are all fully transacting. They're pleased with our service and they will be trading year -- all year.
So looking at that airport example, I guess, that would be a case for as you say, customer fully integrated so that would be, I guess, pure organic growth just with the change in relationship.
That's correct. That's correct. And we have a -- they're based in the U.K, and I was just over in London a few months ago with the CEO, and we have a real rock-solid relationship with them now. We had traded on and off before. In fact, our names are very similar, and so we have a good relationship. So we expect that customer to remain all year long.
Okay. Great. And a couple of quick questions, just on the payments. I appreciate the increased disclosure. Just remind me, is there the degree of seasonality as far as the payments business, I guess, compared to the banknote business, which is now obviously, a big factor.
It's much less. We are younger in experience with payments so I can't say it's exactly the same every month. So I imagine there is some seasonality, but unlike tourism driving banknotes where when the summer is here everybody is traveling and when it's off months like February or October, November, it does get very slow, so much lower. So there is much more seasonality in the notes business. Whereas payments, these are businesses operating month after month and so they need to make their payments based on that.
Yes. It's related -- because the clients are largely commercial clients, Dylan, it's related more to economic activity, trade activity. So it's less seasonal, it's more tied to economic trends.
Okay, great. And maybe, just a quick question. I know you talked about the receivables but we saw a fairly big spike in the accounts payable this quarter. Is it pretty similar mindset where it's obviously flows in and out fairly quickly, but just maybe a bit more color what's going on there.
That was actually related to a single transaction. It was one of the check transactions that Randolph alluded to, where we owed the client the money but the client -- it was coming from another bank, and the amount was different than what the client was expecting. So we held onto it until we were able to resolve that difference with the other institution and it was remitted to the client within 4 or 5 -- I think within 5 days of month end. So that was actually more of a one-time event than anything else.
And that explains why the assets on the balance sheet was so high. It changed because on our books we had that asset in hand and the liability to pay the check. But it was a large check item that was clearing right at this quarter end and so that item was in our hands during the close, and hence, our assets were up and our payables were up.
[Operator Instructions] Our next question comes from the line of Robin Cornwell with Catalyst Research.
The -- I guess, first of all, Randolph, I wondered if you could give us an update on the progress in the U.S. on the payment side. I think, you'd suggested that you have to get approval by state by state and -- to do business. Can you give us some insight on that?
Yes, good question. We are focused on growing our payments business across all of the United States. We are -- I don't have the exact number. If it's 18, I think, we are allowed to trade in roughly 18 states. The states were very proud that we finally got licensing that we didn't have was the state of New York, which is a very big market, and we have conditional approval in California. I don't know if it started, but basically we will have our license in the state of California. But the other states such as Florida, Texas, Illinois, Washington state and those other major markets that we have a great presence in, we've already have a license. We have it in places like Colorado, Oregon and so forth. But we're not rushing to get all 50 states. Our sales team and our compliance team have agreed that we will do them in batches and those batches will be driven by the prospects that our sales teams feel that they have good prospects in these states, and then we will pursue them. But we're currently in about 18, maybe 20 now states, which we feel is sufficient to allow us to continue to add sales people in the payments area, so we can maximize our licenses.
Okay. The other question I had was penetration of existing business, I think, we discussed even in Canada some of the -- your customers, your clients, you had a part of their business, but you had the potential to get more of the business. Is that still happening?
Of course, yes. Both in Canada and the U.S, it's very often that banks will do what they call a pilot or they will just start giving us some business and we -- it's our job to earn more. And that opportunity exists still to this day. We are continuing to grow our relationships and we're continuing try to cross sell. So we had some banks that to have all of their banknote business, but we don't have their check clearing business and those are the kinds I was alluding to that are interested now that, "Oh, you can clear my checks digitally, now you have an edge on the way I was doing it before." But on the banknote side itself, I can think of a bank that's in Atlanta that we have just a little bit of their business but we have not rolled it out to their nationwide branch network that we hope to do this year.
So we could potentially see locations increasing, even though you haven't added an actual client. Is that correct?
Right, that is correct. What you would see, you may see -- the new relationship wouldn't increase, but you would see our transacting locations increase. And then in Canada, we do have 2 banks -- larger financial institutions that don't give us all of their business. So you may see a situation where -- because it is a centralized vault operation, let's say in Ontario or Montréal, you may see us selling more currency to that same location. And that is one of the driving factors of our conclusion that it does make sense that Exchange Bank of Canada open a processing center in Montréal because the shipping costs are cheaper and the province of Québec is very loyal to their province and so they have -- we've had comments that if you are processing locally: One, it will be faster; two, it'll be cheaper; and three, most importantly, we are knowing we are getting business to a Montréal-based business. And so those are all the supporting elements of why we are very certain that we can execute on our core competency of opening a successful vault operation. So yes, we do intend to get more out of our existing customers.
Okay. And last question would be any update on possible acquisitions in the payment side?
There has been nothing that we can announce at this stage. We do have an acquisition strategy. We are continuing to look at good opportunities both in the U.S. and in Canada. But there is nothing at this time. When as soon as we have something that is material, we will be making an announcement of that.
[Operator Instructions] At this time, there are no additional questions.
Thank you, Stephanie. And for all of you that have attended, I know it's early, but we appreciate your time. As a reminder, we are having our Annual Shareholder Meeting today at KPMG's offices. There was a press release released, I think, yesterday or the day before about that. If you're not able to physically attend, we will try for the first time to do a live webcast of this meeting. There is a link that was in that press release and we invite you to first come down, if you can make it. Because we do have some snacks and drinks and we'd love to see you in person. But if you can't, you're welcome to dial in or view in using the link there. But again, we appreciate your support of CXI and if you have anything in particular that you think of later, please reach out to Stephen or Bill or I. We would be happy to answer it if we can. Thank you, and have a good day.
Thank you. This concludes today's conference. You may now disconnect.