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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 Full Year 2017 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Bill Mitoulas. Please go ahead, sir.
Thank you, Stephanie, and good afternoon, everyone. Welcome to Currency Exchange International's year-end conference call to discuss the financial results for the fourth quarter and the full year 2017. Thank you all for joining us. With us today are President and CEO, Randolph Pinna; and Chief Financial Officer, Stephen Fitzpatrick. Stephen will begin with a brief comment on the quarter and the year-end financial results followed by the latest perspective on the company's operations. Randolph will then comment on the bank's performance, sales and business activities, after which he'll open it up for questions. Today's conference call is open to shareholders, prospective shareholders, members of the investment community, including the media. And for those of you who may happen to leave our call before its conclusion, please be advised that the 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 the assumptions that we have made. With that, I'll turn it over to Stephen.
Okay. Thanks, Bill, and good morning, everybody. Thanks for joining the call. So as usual, I'll just give a brief overview of the results from the fourth quarter and for the year and just a brief discussion of how that compares to what happened a year ago. As you all know these results are presented in U.S. dollars. So unless we say otherwise, we're talking U.S. dollars when we speak about currency. And as we've said in the past, this business, the currency exchange business of CXI, is quite seasonal and it coincides with the peak spring and summer travel seasons in Canada and the U.S. So for us, usually, the first and second quarters are the slower quarters and the third and fourth quarters are stronger, and that trend did continue in 2017. But one caution or one note we should be aware of is that in Q4, our EBITDA results were affected negatively by somewhere between $250,000 and $300,000 because of the effects of Hurricane Irma in September when it struck Florida. So that's a combination of extra costs and lost revenues. So that was one impact that did dampen the results in the fourth quarter. So just focusing on revenues. They increased 22% from Q4 a year ago and 21% for the year-to-date results compared to 2016. That increase is attributable to an increase in the number of -- largely because of an increase in the number of transactions. We added 3 new branches, CXI-owned branches; 49 wholesale relationships; and 1,423 new transacting locations. So that's a 10% increase in the number of transacting locations since the end of October last year. And payments revenues, while still only about 3% of our total revenues, have increased by 54% over last year. So we are seeing growth in that area of our business.Operating expenses, up 23% from Q4 a year ago and from -- the same for the year-to-date results in 2016. Our operating leverage, that's -- and for us, we say that's percentage change in EBITDA in relation to the change in revenues, it increased to 89% in Q4 compared to 43% in Q4 last year so significant improvement there. And the result is an improvement in the year -- the results for the year, to 85% from a negative number a year ago, negative 170%. So while our costs are still an area of focus and we have initiatives underway to lower shipping costs in particular, we are -- I think you can see that we are making headway on improving that ratio of expenses to revenues.Expenses increased from last year largely due to some onetime executive replacement costs as well as increased legal, accounting and professional fees that supported CXI's wholly owned sub, Exchange Bank of Canada. There were also increases in rent for the 3 new locations, along with increases in postage and shipping costs that really correspond to higher transactional activity. But in particular, around the posting and shipping expenses, as I mentioned a couple of minutes ago, we've really focused quite sharply on that expense line in the last 2 quarters. And if you were to look at Q4, for example, the shipping costs were 13% higher than a year ago but -- in that quarter but overall, year-over-year, 35% higher. So that's indicative of us having -- being challenged earlier in the year with shipping costs, but it's an indication that in Q4 -- in the second half of the year, particularly in the fourth quarter, we were able to bring those costs -- expenses down in relation to revenues. And we're continuing to focus on that cost particularly in Canada.Overall, net operating income, which is really a proxy for EBITDA, increased by 18% from Q4 a year ago and 15% year-over-year. The diluted earnings per share was $0.21 for Q4 compared to $0.22 a year ago and $0.61 for the year compared to $0.58 a year ago.Just a little bit of detail on some of the branch locations in Q4. We opened one in New York City, bringing the company's total branch network to 41 locations across the U.S. We still expect to add 3 to 5 locations per year. We added in the quarter 23 new wholesale relationships that represented approximately 52 transacting locations. The majority of them were added in the U.S., and they consist of banks and credit unions, along with some corporates. So we now have established over 15,000 transacting locations, with nearly 980 wholesale relationships. One point I particularly want to make about the results is that when you look at the growth in net income compared to growth in revenue and in EBITDA, there's quite a difference. The majority of the company's revenues and most of our profits are currently earned in the U.S., and for 2017, that factor explains why the effective tax rate for CXI was so high. The recent U.S. tax reforms, which were enacted into law in December, will have a positive effect on our earnings in 2018. Had that legislation been in effect in 2017, the estimated impact on our financial statements would have been a decrease in current tax expense of $930,000 and a onetime increase in deferred tax expense of $308,000 for a net overall decrease of $623,000. So that -- and that really represents an estimated reduction in the statutory tax rate in the U.S. for us from 38.5% to 26.7%, and that's a combined federal and state tax rate. The onetime increase or onetime adjustment in deferred tax expense will be recognized by the company in the first quarter of 2018, and that really just reflects lowering the value of deferred taxes as an asset because they were put on the books at the 38% rate and will not be -- and will only be realized at the lower 26% rate. So it's a onetime adjustment. If you saw the announcement from RBC yesterday, it was the same sort of thing, obviously much different dollar amounts but it was the same principle affecting them and the other banks that is affecting CXI. So income before taxes will be taxed at the lower rate on a prospective basis from the date the tax reform legislation was signed, so that will affect 10 months of the 2018 fiscal year for CXI. And there will also be an impact on deferred taxes related to the change in the tax under the tax reforms that relates to territorial taxes on repatriation of funds from the Canadian sub. But we're -- that is not entirely clear at this point, so we will provide more details on that once we can determine what the impact of that is.And finally, just turning to the balance sheet. We remain very strong, well capitalized with over $51 million in cash as of October 31. Total assets, $64 million versus $62 million a year ago, 3% increase. Accounts receivable decreased by $1.6 million since October 31, but this number is fluid and really relates to timing and volumes at month end. All significant items in accounts receivable at October 31 were subsequently received in November. We carry no debt financing. At this time, we have access to a $15 million U.S. line of credit with BMO Harris and a CAD 3 million line of credit with Bank of Montréal for our seasonal peak periods. So that is the financial summary. And I'll now turn it over to Randolph to add his comments.
Thank you, Stephen. Thank you, Bill and Stephanie, and thanks all of you for being here this morning early. As usual, I always like to start off with our biggest -- one of our biggest assets besides people is Exchange Bank of Canada. As you recall, if you follow us quarter-to-quarter, as many of you do, Exchange Bank did have a good year and a bad year. In the sense that it was good, volume has really grown. We've added customers. And as you also saw, there were a lot of costs to get the bank really -- even though it opened, to get it up and running well, and there was some onetime costs there from legal as well as senior management changes. All that's behind us, and I'm proud to report that this year looks quite good for Exchange Bank of Canada. We already have 40 transacting -- regularly transacting corporations, which is helping thrust the growth in the payments business in Canada. Our banknote business continues to expand. The bank itself is also expanding its correspondent relationships with, most recently, establishing a wholesale relationship in Mexico, allowing cheap pesos. So the savings, as we've always looked for, by having the bank is starting to come to reality. These relationships will allow not only Exchange Back to source at a cheaper price but Exchange Bank then can sell to its parent company in the U.S. foreign currency at a cheaper price and still profit, and CXI would also benefit. So the group in whole will benefit. So the business plan of the bank is coming to reality, and we're very pleased with this.Operationally, we -- as you know, we have a good finger on those shipping costs and so forth. And we have seen a lot of business in the province of Québec, and it's very likely in 2018 that the bank will open a processing center in Montréal. This we think -- even though there's higher cost to that processing center but it will reduce shipping costs in one of our busiest areas of the country, and so in total, we're quite optimistic that Exchange Bank of Canada will not be a drag on the business but, in fact, really enhance the group. And so the board and I and management are very pleased with the progress of Exchange Bank. You will see additional costs in the bank. We are adding a senior operations person to help with the planned growth. We have a lot of growth in our pipeline. And you will see a senior person joining us with lots of experience, to give you the equivalent of Bob Dowd, as Senior Vice President of Sales and Marketing for the whole country of Canada. We do intend to also bring 1 or 2 minimum additional salespeople in Canada, maybe 1 out West and, again, 1 or maybe even 2 in Montréal as well.So that's basically the summary on Exchange Bank. Overall, we're very pleased with the progress. We recognize the cost that it did have on the group total performance for the year, but we feel that investment was well worth it.Shifting to the United States. Stephen did a good job telling you all the growth we've done. I'm very proud of our retail division. It continues to be a good contributor of fee income as well as regular monthly profits for all of the stores. As each mature, they get better and better. He did tell you that we've opened in our core markets, San Diego, New York. These are areas that we see continuing growth. We are looking at a few more locations in those same markets, California, Florida, New York area. It continues to be very successful for us as they're very dense areas, and we will continue to invest into select retail locations that have favorable lease terms and high volumes.In the wholesale market, we do continue -- because the U.S. is very large, we have a big team, a mature team in the U.S., and we do continue to add customers. He gave you the stats of 23 for the quarter and 49 for the year, mostly banks and some credit unions and a few corporations in the States. We do see the corporate sales business growing because we are also adding a couple of salespeople that have experience in the United States, focused on corporations and another one specifically focused on financial institutions.So now we have over 15,000 locations. Looking ahead, how can we better utilize those locations? We are looking at adding product. You've heard me talk before about possibly selling gold coins and gold bars. That's commonly done by banks throughout Canada. We are -- we've done a change management initiative and analyzed the benefits of adding another currency, if you will, which is metals, and we do see that as profitable. We currently have a limited prepaid foreign currency card business that we do with Mastercard, but this is being reevaluated. We have a very strong project manager that is leading our initiative to really expand this business with a new product. It might be a Visa card. That's not done yet. However, we do see huge value in having a large distribution network of 15,000 locations. And if we can sell more to that same group of customers, it just -- it all falls to the bottom line. So we're very excited about the opportunities that these current relationships have for us, and we do intend to grow that. Our pipeline, again, is very full both in Canada as well as in the U.S. Bob Dowd has done a very good job with his KPIs and really increasing the measurements and performance of the team. And so we are optimistic we will continue to have a strong pattern of growth.The biggest question I get often is, "Is this investment you're making into the payments business worthwhile?" We recognize that foreign currency is still -- when Stephen said that payments is only 3% of our revenues, total, and payments is growing quickly, it's also that bank notes continues to grow so it's hard to catch up. But payments we see as a diversification of our revenue stream, and we see it as helping smooth out that seasonality of the travel business because the currency business goes with the travel times in the summer and holidays, whereas corporate payments are month after month after month. And so we do feel it's a very good investment. We are now at a level of profitability. So in 2017, especially the first half, you saw a drag on the earnings because of this investment that we've made into the infrastructure, bringing in seasoned payment people, treasury management, all of these items. We are just now finished implementing a treasury management system that goes live at the end of the month, and this will allow for us to really quadruple the payments business without having to quadruple the number of people to service it. That investment has been made. The infrastructure now is in place, and so 2018 should really see a great addition in payments. So the drag from the bank and the drag from the investment in payments mostly is behind us, and we do have work. We will be adding some salespeople. That will take a few months to get them profitable, but we are optimistic that the payments business, driven by corporate relationships, will be a very good addition to the overall outlook for the year.Then we are also continuing to look at growing our ATM business. We have not been focused on that. It is not a huge, huge business. But looking at our competitors and other businesses in the marketplace, we do recognize that they are profitable. Our own pilot of ATMs has proven so. And again, we have that senior project manager, which is the same one with the cards, working on this initiative as well. And so we do intend to see more fee income from machines.So lastly, I want to end on just answering some questions you're probably going to ask me. So I'm going to go ahead and bring them to the light. People keep asking me, "What's this with blockchain? What about the cryptocurrencies and the bitcoins and all of that?" And as you know, a cryptocurrency runs on a blockchain network. And we're very -- as you know, we're very strong with technology. A lot of our investors do view us as what we are, which is a fintech company. So we have a very large and experienced technical team, and we do have the capability of building a business-to-business blockchain network. We have yet to have a bank require us to do that. Ripple network is one easy conduit to be on the blockchain system, and so we are abreast on blockchain. We feel that it is a technology. It's similar to SWIFT. The SWIFT network and the Ripple network are very similar, and in fact, SWIFT is coming out with their blockchain network as well. And so we are abreast on it, and we continue to be ready to implement it should our customers like to connect their payments to us utilizing a blockchain as opposed to our secure network we have now through our CEIFX system.More importantly -- or more popular, I should say, is the cryptocurrencies and how will that affect the CXI and the Exchange Bank. Well, cryptocurrency is a currency like any other currency. It's just digital and, currently, very loosely regulated. We're very pleased with the developments. You probably have heard, and that's why the blockchain has gotten so expensive in terms of U.S. dollars, is that in Chicago, they have approved a forward or a derivative product on the blockchain. So the government in the United States is starting to allow this currency to really be traded. In Canada, FINTRAC is now allowing blockchain -- or cryptocurrencies to be registered. And if and when our regulators are comfortable with us trading in another currency, we trade in Australia dollars, we could see B for bitcoins and C for Canadian dollars and D for Denmark. But right now, we are not trading in that currency. We have a lot of demand. And so the question is what is the impact if the current -- if these cryptocurrencies become more accepted by the governments who regulate us. We would be very excited about that. It would have a very positive impact because we would mark it up, just like we do the exotic currencies. And if you followed us for several years, you know when there's an increased interest in exotic currencies, that profits the company. Well, right now, we have tons of requests to utilize this 15,000 strong network of distribution to buy and sell cryptocurrencies. We currently are not doing that. But again, just like blockchain itself, we have a very strong pulse on it, and we welcome the opportunity to be able to service some of the blockchain exchanges. That's where the real requests are coming from, to tie their network into ours. But again, we are not at that stage today, but this is something that could change quite quickly as the regulators in both marketplaces have become more comfortable with the currency. They do like the fact that if we were to be doing an exchange of a bitcoin, that it would be going through our software, we would be requiring positive customer identification. As our software does, those names will be checked against lists and so forth. So they're -- people are recognizing that there's a good advantage to allowing established, well-run exchanges like CXI to possibly trade in that currency.So that concludes all of the things on my list that I thought you might -- would like to hear about today, but I now am curious to know what else you might be having on your mind. So I would like to open it up, Stephanie, to the floor for questions. Thank you.
[Operator Instructions] Your first question comes from the line of Robin Cornwell with Catalyst Research.
Thanks for your comments on the cryptocurrencies. I get an awful lot of questions on that. That's very interesting that you can service that market because it's, I guess, more of a concern to some of the investors that you would be shut out of the market. But what you're saying is that you're going to be very much a participant. That isn't actually my question. One of my questions is the -- to Stephen. When you mentioned Irma -- the impact of Irma, you said the EBITDA impact was about $250,000 to $300,000. And so obviously, is that derived from lost -- traditional lost revenues, I assume?
It's a combination of revenue and expense. We had to -- for example, we had to move people out of our Miami vault to L.A. so that we could continue to operate and service clients, which -- so there were costs attached and associated with that. But there was just -- there was lost revenue from having to close locations in Florida. People stopped coming to Florida during that period and in the weeks after because of the damage that was here -- that was caused here. So the impact that we have estimated is between $250,000 and $300,000.
Yes. And just to add, there was, if you recall, a storm that hit Texas, and so that's all in that number. We didn't have to implement our business continuity plan for that storm, but we did have lost revenues from customers in Houston, which -- if you recall. But the storms this year were bigger than we've had in a long time in the States, and it did have costs associated to implementing the BCP, moving cash, moving people, having them stay out for a week in Los Angeles and then, again, the lost revenues that we've guesstimated. We had stores that were closed for 3 to 4 days on end, which are some of our most mature stores in Miami and Miami Beach. And so yes, it did -- it was an unfortunate situation. I think it could have been worse but we managed it well. But most importantly, as our customers, especially the national providers, we're very thankful that we had 0 downtime. Our business continuity plan, we test annually. And this year, we didn't have to pay for a test because it went live, and it was successful again. And so most importantly, the reputation of the company continues to remain strong with our customers and potential customers because we heard that some of the other providers were not as quick to react.
Okay. Terrific. The next question was, I wondered, Stephen, if you could repeat the impact of the payments. I think I've missed the comment. Is -- the 3% was the revenues for the quarter, not for the year, right?
No, it's for the year.
3% for the year?
For the year, it's about 3%, which is 54% higher than it was a year ago in dollar terms. But as Randolph said, both components are growing. But the payments piece is growing faster but it's starting from a much smaller base.
So would it be fair to say then that the -- I think, last quarter, we were talking that the payments, I could be wrong again, it was 3% in the quarter. But would it be fair to say then, even though the rest of the business is growing quite rapidly, that payments is a bigger share of the revenue in the fourth quarter?
Maybe slightly bigger, Robin, not significantly.
I could just -- from a percentage-wise, I don't know, but I do know that the fourth quarter payment revenue was bigger than if you were to look back at the first quarter of the year. There is no question that we are seeing noticeable -- in terms of profitability, I'm now seeing that it is profitable, especially at the bank.
Okay. And I guess that leads to the question we've discussed before. Is that -- will it become a line item in 2018, the payment?
I would like to.
We would like it to be.
I would like it to be, but the auditors have suggested it does not become a separate line item until it's at 10%. We are monitoring it. But -- they currently prefer to keep it all in one basket of revenue from trading, but it is 2 businesses. So as soon as we can and we get everybody comfortable with it being separated, I would like to do that.
Okay. So last...
So just to answer your other question, in the fourth quarter, it was marginally higher than 3%. The overall -- I mean, the overall revenue -- overall trades were 33% higher, and revenue was 22% higher. And the payments were a little bit higher than that rate, to bring -- but it was slightly higher than 3% overall.
Okay. Could you repeat that again? So what was 33% higher?
Volumes, trades.
Okay. And the 22%?
22% is revenue, gross revenue. That's combined -- everything combined.
Okay, okay. My last question is on the U.S. tax rate. You gave the impact for 2017, a little over $900,000 reduction. Now how does that work forward with a lower tax rate? What can we see as a tax rate for, say, 200 and -- 2018? Because the full impact isn't until 2021, I think. How does it...
20 -- it will be 2019 for us, full year. The effective federal tax rate for 10 months is about 23.5%. So it will affect us beginning, effectively, January 1, the last few days of December, but for the last 10 months of the year. So the -- if you add in the state rate, we should be somewhere around 28% for the year on the U.S. side, and that's 26% in Canada. So this anomaly that we saw in 2017 will go away.
Okay. So the effective all-in tax rate will be in 2018. Your -- the full impact will be 2019.
Of the U.S. [indiscernible] correct, yes.
Yes. So that would be 28% in '19. And then what about '18?
So in '19, it would be 28%. In '18 -- sorry, it will be -- in '18, 2018, it will be 28%. In 2019, it will be 26% in the U.S.
[Operator Instructions] Your next question comes from the line of Dylan Steuart with Industrial Alliance.
A quick question just on the payments business. It sounds like you're fairly happy with the prospects organically. But just wondering, any prospect or any -- are you looking at acquisitions on either bolstering that or any other part of the business right now?
The answer is yes.
Any more color you can provide on that?
Yes. We've been in discussions with an entity that has a business that's roughly $2 million in revenue, so it's a small little add-on, if you will, but it is 100% corporation-focused. And because we're in -- there's some paper out there that's been signed of discussions, we -- I feel better not discussing it until it could become public. But to your question, the answer is yes. We are -- have identified actually 2 entities, one in the U.S. and one in Canada, that are small but would be nice add-ons. One is 100% payments. The other one is a mix, more currency than payments, but they do both. The second one is actually a customer of ours, and the owner is retiring. But nothing is concrete yet. We're not at the stage of making a release because it's still early, but you could see a transaction this year.
Okay. Perfect. And I guess, just maybe a bit more color on the overall pipeline. It sounds like prospects are fairly bright on both sides of the border. But just given -- off the success of building out certainly in Québec, how does the pipeline look in Canada, specifically on the wholesale side?
Canada is for corporations. As we expected, the smaller, the midsized corporations have been starving for a specialized wholesale bank for foreign exchange. All the big mega banks have -- if you look at their financial statements, you'll see they're doing extremely well with corporations, and so we are growing our corporate -- corporation pipeline quite well. It's quite fat, and we -- it's been very well received. So we'll see that continue to grow. We do see that our office, if and when we open it -- it's not 100% we're doing it in Montréal. We haven't signed any leases or anything, but it looks quite promising that we will have an office there. And besides it being a processing center in a secure facility, we will have a desk -- a little area of sales because, again, the market of Québec has a lot of international activity. And so Canada looks very promising for corporations. Banks, we continue to grow the business in that market as well, as well as nationwide. Some of the big monster banks we've been working on are quite slow, so we don't have a huge win today or next week. But both the currency business and the corporate payment business are both looking good for the year as a whole in Canada.
Okay. And some of those -- certainly, the discussions with some of the slow big banks, I guess, are continuing within the year?
Absolutely, absolutely. We can -- that's our core business, Dylan, that we -- even though we have a focus on payments, we have not lost focus of our core business. And the salespeople that are working those relationships are motivated to close on those transactions.
[Operator Instructions] At this time, there are no additional questions in the queue.
Okay. Thank you, Stephanie. Again, in just closing, I want to thank everybody for getting up early. I know, especially the folks out West, it's very early. People have requested that we do it right after we announced our earnings, after market close as opposed to -- we used to do it in the afternoon. So thank you for being up early with us. If you have any questions that come after, please do reach out to Stephen or Bill or I. We want to make sure you understand everything that's going on. Thank you for your support, and have a good day. Thank you.
This concludes today's conference. You may now disconnect.