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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 Year-End Financial Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Bill Mitoulas. Please go ahead.
Thank you, Stephanie, and good morning, everyone. Welcome to Currency Exchange International's Year-End Conference Call to discuss the financial results for the 3-month and full year period ending October 31, 2018. 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 commentary on the quarter and the year-end financial results, followed by his latest perspective on the company's business activities. Randolph will then comment on the bank performance, corporate operations and sales initiatives. After which, we'll open it up to 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 call will be recorded and then uploaded to CXI's Investor Relations website page, along with 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. And 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 Stephen. Thanks, Stephen.
Thanks, Bill. And thanks, everyone, for joining the call. Good morning. I will give a brief overview of the results and the -- for the year as well as for the quarter, the fourth quarter. And as always, these results are in U.S. dollars unless we say otherwise. As we indicated in the past, CXI's currency business -- exchange business is typically very seasonal, and it coincides with the peak spring and the summer travel seasons in North America. So the first and second quarters are usually slower and the third and fourth are usually much stronger. This trend has continued in Q4 2018, and that's reflected in the current results that we released yesterday. However, the Q4 revenues and EBITDA did not continue to benefit from higher volume in so-called exotic currencies. They only contributed $690,000 to the Q4 revenues compared to $1.2 million in Q4 a year ago, that's a 43% decrease. But overall, revenues increased 20% compared to the previous year to $39.1 million from $32.5 million. Total trade volumes in dollar terms increased nearly 50% over 2017, largely attributable to the growth in wholesale volumes for existing clients, but also onboarding new high-volume banknote clients, particularly in the bank, in EBC. We also had significant growth in payments volumes. Q4 growth while strong -- revenue growth while strong was slower than we had expected, particularly in the retail business. And as I mentioned earlier, that was driven largely by the decline and slowdown in exotic revenues -- core revenues. The banknotes and payments remained strong. So apart from the effect of the exotic currency transactions on the top line, the increase in revenue is largely attributable to an increase in the number of customer transactions from the addition of 3 new branches in the U.S., 360 new wholesale relationships, 2,724 new transacting locations, which represents an 18% increase in activity since October of last year. Payments revenues increased significantly compared to 2017. It now represents 4.4% of revenues, up from 3.5% in 2017. And while that may not sound like that much of an increase, a 1 percentage point increase, that's on revenues that have grown 20% overall. So it is still fairly significant growth. In the notes to the statements, as I've mentioned in the recent earnings calls, you'll see that we have disclosed payments revenues separately. They are still below that 10% threshold, which would be a threshold for mandatory disclosure, but we're trying to be transparent and to disclose the growth and the trends in our payments business because it is core to our strategy. So as I mentioned, during 2018, the company added 3 new branch locations. We closed one. So that brings the total branch network in the U.S. to 43 locations. Retail and consignment revenues are up 9% from a year ago. And I mentioned a couple of times, I won't mention it again about exotics. We still expect to add 3 to 4 locations this year. Operating expenses are up from the previous year by 26%, and this is really the significant story in our 2018 financial results. Revenue growth, obviously very strong, but we felt we needed to sustain our investment plans and our strategic initiatives rather than defer them into 2019 or beyond. We had a total spend of nearly $1.4 million, of which $680 million was capitalized -- $680,000 was capitalized. And intangible assets, another -- just over $700,000 was expensed. These initiatives included the loss of a payments platform, an agreement to acquire a Montréal-based payments company, which is still subject to regulatory approval, opening a second vault in Canada located in Montréal and support to expand public offerings such as ForEx, which also require regulatory approval, as well as other regulatory and compliance initiatives. These expenses mainly were in the legal and professional fees category on the income statement. Compared to 2017, the combination of business growth and the investment in strategic initiatives led to increase salary costs as we hired for nearly 50 new positions. There were also increases in rents related to new branch locations. Postage and shipping costs were up because of higher transactional activity, although at a rate that's below the rate of wholesale revenue and volume growth. A particular note regarding posting and -- postage and shipping expenses, we have focused on those and we continued to focus on them for the last 4 quarters. In 2018, shipping costs were 32% higher than a year ago while revenue increased 36% and volumes were up about 50%, as I mentioned earlier. So those costs are not realized growth at the same rate as our revenues or volumes, and we even had generally increase in shipping prices in that time. So we are making progress in managing this cost, but we have more -- we still have more work to do on our view. Increased bank service charges because of higher payment activity, a higher stock-based compensation and loss -- the higher losses and shortages, which are really related to growth in banknote volumes. They're typically in the 0.5% to 1% of revenues range. And it was -- that particular line was impacted by nonrecurring onetime losses in the second quarter. These -- all of these items, they're all factored into the expense increases. And as result, our operating -- degree of operating leverage, which is a percent change in EBITDA in relation of the change in revenues decreased to 12% for the year. Obviously, that's not a number that we're happy with. But as I've said and as Randolph will elaborate on, these were expenditures and expenses that we had to make in order to keep the business growing down the road. So despite of all these challenges, net operating income, EBITDA in fiscal 2018 increased to $8.1 million, about 3% up from last year. Diluted earnings per share increased to $0.67 from $0.61 a year ago. And finally, in terms of our balance sheet, we continue to remain financially strong, well capitalized, over $56 million in cash as of October 31, 2018. Total assets, $73 million versus $64 million a year ago, so up 14%. Accounts receivable increased, $3.2 million. This is a fluid number that relates to timing of transactions. I can assure you that all significant items in the accounts receivable at the end of October were subsequently received in November. We basically operate on an under 5-day turnaround on these receivables. We carried no debt at year-end, and we have access to lines of credits for seasonal peak periods: $20 million in BMO Harris, $6 million Canadian from BMO for EBC. So overall, a strong balance sheet. We're well positioned for things that we might want to do. So at this time, I'll turn the call over to Randolph.
Thank you, Stephen, and thank all of you for getting up, especially the folks out west, early for this call. We appreciate your time. As usual, I'd like to start with the bank. As you know, the group sees it very strategic that Exchange Bank of Canada allows for a global correspondent relationships, which will keep us competitive with the global banks in the payment and note arena. Payment revenue at the bank was up over 600%. From a small number, that's easy to do. But the fact is we now have over 100 active corporate clients trading regularly with us and growing. As Stephen said, we put in a treasury management system for both the bank and CXI, which now allows for this type of triple-digit growth in payments without the risks associated around hedging and management of all those positions. While the bank did lose money for the year, we feel we have reached a turning point, and the bank is well positioned. It has the staff, as we can clearly see in the expenses, but it has the staff that is required to really allow for a bank to grow rapidly. It has the platforms, the TMS and EBC FX, the software to allow for customers to see the advantages of utilizing a special fee bank like Exchange Bank of Canada. So not only were the payments up, but the banknotes continued to grow. Our vault that we've opened in Montréal is strategic. We have good customers in the province of Québec, and we anticipate getting additional business now that we have manpower and a physical office downtown Montréal. We are focused on growing the business not just organically, but as you know, we are anxiously awaiting the approval of our acquisition of an established -- well-established team in Montréal that will add another 400 active trading corporations, bringing the grand total to 500 as of today if we were to close soon. We will continue to focus on growing the bank's business, making it profitable and having it as a key contributor to the overall group's growth. For CXI, the business continues to do well. Besides opening a few more retail stores, we did recognize one store, a location where we had 2 stores in the same location and to start our effort this year of cutting costs while continuing to grow revenue. It made sense for us to close the second location and just expand the first one. So the retail business is continuing to contribute roughly right now at 10% in same-store year-over-year sales, and then adding a few more locations this year will continue to allow the retail branch network to contribute to our overall growth. We're very pleased with the notes business. We see other opportunities in other segments that are relatively new to the company. I mentioned them before in our other calls. Those -- that is materializing, and we do anticipate a few new higher volume customers in these markets. Our staff in CXI is also well positioned. We have the team now in place to continue to allow for growth. I have started to lean more on our team to do some of the administrative functions of the CEO office, so I can focus a little more on overall relationship growth in landing some other key major players. And that is a focus of mine personally this year. Yes, the costs were up, but the revenues are up. We feel, this year, we will be focusing on continuing to grow the revenues, while I think we've got all the teams in place that we don't have to add additional major hires like we had in the last year or 2. We are positioned for a great 2019, and we appreciate everybody's involvement and support of our group. So I would like to open it up to the floor to answer your questions. Thank you.
[Operator Instructions] Our first question comes from the line of Dylan Steuart with Industrial Alliance Securities.
Just a couple of quick clarification questions. Just you made the point on the exotic currencies, $600,000 versus $1.2 million a year ago. Was that for the entire fiscal 2018 or was that for Q4?
That was just for the quarter.
Just for the quarter, okay. And it looks like the Q4 fee income was lighter than historical, you've spent half the level of historical levels. Was that due to the currency -- the exotic currencies? Or was there something else going on there?
Yes. It was partly due to that. I would have to look to see if there was any other like fee waiving. I'm not -- it didn't jump off the page for me.
All right. And just on the expenses, you mentioned about $700,000, I think, believe that was capitalized due to the initiatives in the quarter. Is that considered nonreoccurring going into 2019 or just kind of simply for an indication of run rate expectations for the new year?
Those are -- I would categorize those as -- it was about $700,000. We capitalized about $680,000 and $700,000 was in expenses, and those were the nonrecurring nature. They were intended to -- they were put into strategic investments. So that -- those investments, for the -- 90% are -- they're 90% complete. So there will be a little bit of carryover into 2019 for those specific initiative, but the nature of the spending was nonrecurring.
Okay. So yes. Overall, a little bit carryover for 2019, but nowhere near the level we saw this quarter?
That's correct.
That's correct.
And maybe just one final one for me. I'll requeue. But just on the payments business, you mentioned last quarter improving the functionality of the software. Just wondering how that initiative is going and expectations for the growth in that segment.
That initiative is complete. The platform is live. It went live early September, so late in the year, in the fiscal year. So we're now starting to ramp up payments, sales and activity with our salespeople on both sides of the quarter. So we're positioned now. That work had to get done. Although the growth has been strong. When you look at the revenues, it's not that much. So as Randolph said, it's growth from a small base, but with that platform in place, it positions us to manage that business in a much more efficient way.
Yes. Dylan, the -- some of these nonrecurring costs were around upgrading that system, and the treasury management system is now fully in place in both businesses. Another initiative, which is not revenue generating, but most importantly, for all of our shareholders is our RCM project was completed. And while will continue to operationalize all the elements of the RCM, which for those that don't know, RCM is Regulatory Compliance Management system. So we did install and centralized compliance system in-house, and that also was part of these nonrecurring costs of getting that up to speed, hiring some consultants to ensure we've programmed it and covered all points. So in '18, it was a lot of investment. A good chunk of that was a nonrecurring that is now done and in place, the softwares are both up and running. And so we have the TMS system that allows the sales and the customers to interact on a broader basis with us as a wholesale bank, and we have the RCM system in place to ensure that we remain in compliance with all the regulations, both for the bank and for the group. Did that answer your question, Dylan?
Yes. No, that's great. I'll requeue a bit. Much appreciate it.
Your next question comes from the line of Robin Cornwell with Catalyst Research.
I just wanted to go back on the extra new expenses in the -- I believe it was the fourth quarter, you're referring to the $700,000?
That was for the year.
That's for the year. Could you sort of quantify what the expenses would have been in the fourth quarter, because fourth quarter seemed to be elevated as well?
I don't have that at my fingertips, Robin. But the fourth quarter was a heavier -- a heavy quarter because a lot of these projects were coming to an end, and so we were investing them. But the bulk, I mean that $709,000, it would have been primarily in the third and fourth quarters, but that would have been expensed. So...
Okay. So with...
We can take it offline, so we can give a better answer for you.
So basically, as we were discussing, going forward, looking at these lumpy other expenses, which would include your computer upgrades and things like that, going forward, you would expect those quarterly numbers to kind of level off or decrease?
The expense numbers?
Yes, the other expenses other than your -- the postage or salaries and things like that. When you look at other expenses, if those -- that category, those other categories, if you could...
Yes, we would look at legal and professional to be at a lower level, I would say, because we don't have those initiatives going forward. I don't know, because those were a bit of a tail like I said a couple of times...
I see. So the professional fee was a big element?
Yes. That's where costs largely showed up. There's a little bit of salary, but for the most part, it's in those legal and professional fees because we had to get outside help and support to help us get these projects done. We're going up as volumes grow -- payment volumes grow. There's bank service charges, for example, and that's tied to payments activities. So there are some lines, but that's -- it's like a -- that's more -- makes it more of a variable cost. What we're trying to compare, our -- I'll put them in the fixed category.
Okay, okay. If I could move on to, you were talking, I think, last quarter, Randolph, about relationship status in the U.S. for the payments operation, and I think you were -- you had a -- pardon me?
Go ahead. You're licensing, you got -- somehow, we got disconnected. I heard you.
Okay. I'll just repeat it. It was I think you had 22 states, but then you were looking at doing a transaction or a deal with -- I think it was a Florida bank to get access to more states.
Yes, yes, and that -- what -- we have not signed that deal. It is -- again, we -- any new process, especially one like these that would touch on the whole country, goes through our change management process, which means that we had to -- I had to write up an executive summary, write up the financial savings relative to the costs of doing it ourselves. And then, of course, we had to go to market and talk with several banks to make sure that the bank that we think is the best bank is truly the best bank. We have done all of that. And so we are now -- we are in a position where we're confident that the bank we want to select and work with, one is licensed correctly and we do get the benefit of a national relationship. And so those remaining 28 states would fall under that. And so on the conclusion of entering into such agreement, we would then be licensed in all 50 states, either the 20-odd for ourselves or the other 28 with the other bank. The good thing is the executive team of that bank understands that this is a shorter-term solution. When I say short, 3 to 5 years, that over time, we will peel back certain states back to the business. And that is agreeable and the terms have been very reasonable. So that is an initiative in this year that will keep our costs down as we all see the worst thing about the 18-year was our costs were higher than everyone of us expected. And as Stephen rightly said, we chose to do it in this time so that we are positioned for our next 3-year strategic plan growth and which we are clear on executing. This is one little piece of that, which allows the corporate sales in the United States amongst all 50 states. And so Robin, that's a good point. We haven't finished it, and the reason is we had to go through a very thorough process to analyze the costs of doing it in-house versus partnering with this bank, and then, of course, making sure this bank, relative to the other banks we've worked with, we have bank relationships with, we're somewhat interested as well, including them side by side, and this Florida bank has shown the greatest level of flexibility, allowing us to peel back states over time as we see that each state possibly being more strategic, have their own license. So that we do expect that to happen in the next month or 2. It is a current project on my office for me to finish.
Okay, great. And one final question was, we're discussing some time back with the EBC, having the licenses of bank and your ability to deal with the Fed and Bank of Canada, which would reduce or lower or produce some savings in the financial transactions. Has that come to fruition? I think we are talking maybe $300,000 or $400,000 of savings over time?
Yes. So not all of it, but that is also a current initiative on my plate. Unfortunately, the Bank of Canada has a unique rule that you have to be a big mega bank to bank with the Bank of Canada. So we are captive to -- yes, they only have about 8 customers, I believe. And so we have to be Payments Canada, which is the association of banks in Canada. They -- you're either what they call it direct clear, which means you clear directly with Bank of Canada, or you're an indirect clear, which is Exchange Bank. Our -- as you can tell with our lines of credit, BMO has been designated our direct clear. So we are working with BMO to try to have as a conduit to the Bank of Canada. So no, that hasn't happened there. The Federal Reserve, it's finally recognizing our bank as being a bank. And therefore, we -- it is on our agenda as the board to look at establishing a wholesale relationship. The Fed moves quite slowly. They are quite busy with a lot of things in these last few years, and so -- but that is an initiative. But where we have started seeing savings, we do have a direct relationship with a Mexican bank that allows us to source pesos, and that has definitely added some savings in margin. And so while you don't see the margin savings because of the dilution you see from the high level of payments at low margin blended in with our banknote business, but the banknote business by sourcing directly from Mexico, we are anticipating hopefully being able to source Costa Rica colones, which is another popular currency this time of year in the cold north. And so we will continue to work on getting that $400,000, $500,000, which is growing. As our total volume grows, the savings we get on sourcing of notes is more and more significant, and we will continue to expand our corresponding relationships with select well-run, established, fully compliant banks and jurisdictions where we need to source directly. That's bang on, Robin. You got 2 of my major active projects on my desk today.
[Operator Instructions] Your next question comes from the line of Brian Pow with Acumen.
Thanks for the insight into the quarter on the expenses. I still wanted to chat a little bit more about both your postage and shipping as well as bank service charges. They were certainly up a lot more than the revenue growth, so I guess I'm trying to understand how these will trend longer term? You sort of indicated in the MD&A that there's possible savings on the bank service charges. Maybe you could just sort of chat about how those possible savings may come to fruition.
Well, they're -- because they're associated with payments there. When you send wires, there's a feature called BEN deduct. I don't know if you are familiar with it or not, but it turns those activities in -- from a cost into a revenue essentially. It means charging clients for the costs or the -- plus, a little margin for that activity. And so we are getting to a point now with volume where we can't start to charge those fees to our clients. And so that's -- so for bank service charges, even though the core service charges may go up, there will be -- we expect that we're going to see a revenue offset to [keep those]. So we had to look at the 2 of them together. So that we think that you can see that cost being offset. In terms of postage and shipping, we're actually, right now, in the process of renegotiating our contracts with our courier supplier. Because of -- because we're a pretty high-volume user of their services, we do have some leverage. And so we are -- like I said, at the moment, we are renegotiating those contracts. We're expecting to see lower unit costs coming out of that.
Okay. And when we look at the new vault being opened in Montréal, what sort of reduction in postage and shipment should we expect from that move from not having to ship from Toronto anymore?
The -- Brian, so it's about a wash on the fact that the increased lease and employee costs negates the savings we have by shipping locally. While it is a vault for the banknote business, it is also -- we'll be housing the team -- the business that we're merging with or acquiring, they're in Montreal. So it will turn into a full-service bank branch in the sense that it will have corporate payments on the front-end and then the secured vault in the back will be processing. But the savings, it's about a wash though at current volumes with the fact that, yes, there's savings reduction -- the cost reductions of shipping from Toronto every day and we get packages from Montréal to Toronto and vice versa. That goes down significantly, but that is offset by the fact that we are paying rent. The staff is not much different because we -- instead of hiring more people in Toronto, we're actually now have them in Montréal, which has reduced the volume in Toronto. And so staff-wise, there's not too much of a difference. So you shouldn't see it, the -- that it's going to be saving us, let's say, $300,000 or anything. It's -- the money we will save is lost by that rent expense. But that's why it was more a strategic move to invest into the province. Our customers that are based there, we have some sizable customers based there, and they're very pleased with that. And it does open up the fact that we can now do same-day processing and -- which allows us to capture more business from our competitors by having this there. So we do feel it will be a contributor to increase profitability for Exchange Bank of Canada by having this second location.
Okay. And then just again on looking at your payments business. Under the active clients today, you indicated through the acquisition that it will go up to about 500. Should we sort of expect the revenue to incrementally increase about the same amount?
Yes. The transaction is definitely accretive. They are a profitable business. We do not intend to add too much over to their business. We are a bank, so we will -- it will a follow our processes, and those are the costs you're seeing. So now all of their trading activity will go through our treasury management system. All the compliance and regulatory work are being in the province of Québec, which is a bit different than other provinces. It's all part of our RCM, our Regulatory Compliance Management system. So we will put all that through, but I don't think that will cause any undue costs to them. So we anticipate that this business will be accretive. And as soon as it closes, it will allow us to fulfill the budget that we have, which is in line with everybody's expectations.
[Operator Instructions] We have a follow-up question from Robin Cornwell with Catalyst Research.
I just wanted to discuss the potential acquisition in the payments. Has this been approved by the authorities yet, regulatory authorities? Or is it pretty much a done deal?
It has not. And while I would love to think it's a done deal, it is not technically. We're very close because of the forwards product, because this business does forward themselves and the bank needs approval for the forwards. So they are tied together, and that is -- we've been in regular communications, the Christmas and winter -- or the Christmas is behind us. And so we're back to work full speed on this, and we do hope that it comes soon. We do not anticipate any serious roadblocks or anything like that. We are really down to the last dotting of the Is and crossing the Ts in my opinion, but we are subject to the regulatory authorities reviewing this. But they are active, and they're reviewing it. They are reviewing. It's in a good spot, and we are optimistic it should come close to in line with our -- what we have budgeted for. And so I don't anticipate anything too far out of that.
And you are -- I guess, hoping for a closing in the -- your fiscal second quarter, is that correct?
Yes, that's correct.
[Operator Instructions] There are no additional questions at this time.
Okay. Thank you. Thank you, everybody, for joining our call this morning. We look forward to talking to you offline. If there's any other questions you may have, just wish -- contact Stephen, Bill or I. And we thank you for support of CXI. Have a good day.
Thank you. This concludes today's conference. You may now disconnect.