Currency Exchange International Corp

TSX:CXI

Earnings Call Transcript

[Operator]

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 2019 Financial Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Bill Mitoulas. Please go ahead.

[Bill Mitoulas, Investor Relations Manager]

Thanks, Stephanie. Good morning, everyone. Welcome to Currency Exchange International's First Quarter Conference Call to discuss the financial results for the 3-month period ended January 31, 2019. 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's financial results, followed by latest perspective on the company's financial performance. Randolph will then comment on the bank operation, sales and business activities and after which, we'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 this conference 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 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.And with that, I'll turn the call over to Stephen.

[Stephen Fitzpatrick, Chief Financial Officer]

Thanks, Bill. And thank you, everybody, for joining us today. So as Bill said, I'm going to give you an overview of the results from the quarter. These results are in U.S. dollars, unless we indicate otherwise.And as we've stated in the past and really it will be a theme on this call this morning, the currency exchange business of CXI is typically quite seasonal, and it coincides with the peak spring and summer travel seasons in North America. So the first and second quarters are usually the slow ones and the third and fourth quarters are usually much stronger.And I've seen some of the commentary advice through e-mails and others, and I can tell that -- for many of you that the results for the first quarter range from surprise to disappointment.So I want to highlight for -- I'll call them megatrends or macrotrends within our business before I actually get into the details. So there are -- and these are factors that we are constantly trying to manage. So the first is that the mix of U.S. dollar transactions compared to FX transactions, which for us, is everything that's non-Canadian, non-USD. That mix has been trending towards -- in the first quarter trended very heavily towards USD, where our margins are lower.Second of all, when you look at the overall revenue growth and subtracting out the exotics that's an 8% growth rate, but that doesn't tell the whole story either. Because wholesale growth -- revenue growth was 19% in the first quarter, which is still strong and consistent with the patterns that we've seen over the last several years in wholesale. And we feel we have a strong pipeline on the wholesale side.Retail volumes are below what we're expecting, and that's -- the difficulty for us is knowing how long that might continue. And at the moment, we think throughout 2019, that trend may still be there, and Randolph will get into that in a little more depth. And the last is a comment I want to make before I get into the details is on an expense growth.A number of you have expressed concern about our rate of growth with expenses compared to revenue, which is a fair comment to make. But the level of expense growth in Q1 was planned, so the results there from our point of view were not surprising. The 2018 end of year run rate is really what you're seeing manifest itself in the Q1 expense numbers. And typically, first quarter expenses are about a quarter of that total year. In other words, expenses are spread out evenly over the year and revenues are not.So those 4 factors are all at play as you think. So the trend of slower first quarter continued in quarter one, now in Q1 2019, and it is reflected in the results that were released yesterday.The core banknotes and retail business remains strong, like I said, with 19% growth in wholesale revenue. And we continue to add wholesale clients and locations. Payments revenues grew 22% overall and increased to 6.6% of total revenue.In Q1 2019, year-over-year revenues and EBITDA were impacted as we noted by a significant drop in revenues from exotic currencies, which contributing only $780,000 to Q1 revenues compared to $1.4 million a year ago, so 45% decrease.If you ignore the effects of those currencies, which do fluctuate significantly, then revenues increased 8% overall. And as I mentioned a few minutes ago, the mix of wholesale and retail brought down 8%. The decline in exotics revenue, which is largely in retail, is somewhat offset by an increase in other currency volumes in retail compared to Q1 of 2018.It's important to point out, I think, that the Q1 financial results are more comparable against Q1 2017, 2 years ago, then against Q1 2018.In Q1 2017, we experienced a loss in the first quarter as we did this year. And then next quarter, we also did not see any significant upsides from exotic revenues. In fact, it's yearly comparable to look at the 2 quarters.In Q1 2017, we had $865,000, an exotic revenue compared to $780,000 this year, and had a net loss of $86,000 EBITDA of $290 million so it's more or less in line with our net loss of $170 million and EBITDA of $270 million. So comparing those 2 quarters, and our view is a little more of an apples-to-apples comparison.Revenues increased 1% overall compared to Q1 2018 from $8.4 million to $8.5 million, given the actual dollars. Total trade volume in dollar terms increased by nearly 25% over Q1 2018, which is largely attributable both to the growth in wholesale volumes and high-volume in existing clients, which [ typically a ] EBC and growth in payments volumes.Q1 revenue growth was slower than we expected, we'll admit that, particularly in the retail business, driven largely by that decline in exotics, as I mentioned a few minutes ago, and the delays in achieving target revenue levels from new stores. The core revenue in the retail business remains reasonably strong, overall growth in volumes year-over-year in major and minor currencies, excluding the exotic.In the retail, we added 1 new location, bringing the total of our branch network to 44 locations across the U.S. And while we currently have plans to add 3 to 4 locations per year, we're reviewing that -- or we're considering that strategy in 2019.We continued to see an increase in the number of customer transactions, resulting from the addition of the 4 new branches, 356 new customer relationships and 2,748 new transaction locations, which is an 8% increase in transactional activity since January of last year.In the notes of the statements, you'll see that we've disclosed payments revenue separately. And as I've mentioned before, we're not obligated to do that until we get to the 10% threshold. We're trying to be transparent, given that a lot of our strategy will drive less average growth in payments and you can see that revenue line is growing at a faster rate than banknotes is.To talk about, now turning to operating expenses. So they're up from the previous year by 23%. Revenues can be low in the first quarter, we typically -- while they do tend to be lower, we typically incur our operating expenses evenly over the fiscal year, as I mentioned earlier.So compared to 2018, the combination of business growth and the investments in strategic initiatives led to higher salary costs as we hired nearly 45 people over the course of 2018. And the full running rate impact of that is what you're seeing now.To support strategic initiatives, legal and professional fees increased 10% over the previous year. But I should point out, that is well below what we have budgeted for the quarter.There were also increases in rent, related to the new branch locations and to opening up a second location in Montréal, in Canada. And postage and shipping costs were more or less in relation to higher transactional activity.That's as I said before, that the line we focus on and we have renegotiated our contracts with our suppliers and the benefits of that should start to show in the coming quarters.Overall, CXI continued to progress against our strategic objectives in the first quarter. We opened the Montréal processing center on time and within budget. We continue to make progress on the acquisition that we highlighted in our statements, which is subject to regulatory approval. And we continue to look at -- focus, our attention on alternative strategic opportunities in the interim that we think can be accretive to our earnings.I want to talk a little bit about offsetting leverage. The ratio of stocks [ versus ] debt trend is not something specifically to talk about because it's a ridiculous ratio. But I do want to point out is that the ratio of operating expenses through total revenue in the quarter just ended was 97% compared to 79% a year ago. But again, when you look back to the first quarter in 2017, operating expenses to total revenues were above 95%. So pretty much on prior with where we were a couple of years ago when the exotics were less in a factor.So this is due to cyclical -- and that ratio traditionally is higher in the middle months and it decreases as the fiscal year progresses. And that's because of the cyclical nature of the business. We have higher exchange volumes from March to September, and we typically able to redeploy currency we purchased in the summer months from branch locations and moved out to our FI and non-FI customers. We -- that ratio is have seasonality and the impact of seasonality is something that is just a characteristic of this business. And I think it's something that we're relying on as the year moves forward.Overall, in 2019, EBITDA down 84% to $275,000 from a year ago, and diluted earnings per share decreased to a negative $0.03 from $0.05 a year ago.Turning to the alternative rate from the income statement and just focus on the balance sheet for a moment. In terms of the balance sheet, we remained financially strong. We're well-capitalized, over $56 million in cash as of January 31, 2019.Total assets are $82 million versus $72 million and year ago, 12% increase. Accounts receivable increased $10 million, since January of last year. But this is a fluid number related to timing. And all significant items in accounts receivable at the end of January were subsequently received in February.We carried $8.5 million of short-term debt through our line of credit and that relates largely to financing the accounts receivable position.That concludes my remarks, and I'll turn it over to Randolph.

[Randolph W. Pinna, Chairman, CEO & President]

Thank you, Stephen. Good morning, everybody. I appreciate those of you that has woken up very early out West to join us. I do want to continue -- we've been continuing this conversation to a manner that I usually do, which is starting about our biggest investment the company has made, which is Exchange Bank of Canada.I'm proud to report that Exchange Bank of Canada is now almost fully built out in terms of having the staff and the facilities to support the growth that is anticipated.The focus of the board and management has always been on AML, compliance, risk and structure to ensure that the company can grow significantly and safely and fully compliant with all regulations in the jurisdictions the bank operates.Now that we hired as many people as we have, and professional advisors helping us get ready for the growth ahead, we are anticipating a good year for Exchange Bank of Canada.As you know, we are gaining approval of the acquisition of an established payments business in Montréal. The facility has been built. The operation that bought in Montreal is fully operational and is expanding. It is true that the U.S. dollars that we are now processing increases all the transaction volumes, but the revenues are not as significant as foreign exchange.Even still, now that the vault is open as in the first quarter, legal processing, these lower dollar transactions out of Toronto, therefore not being profitable, that is behind us.The vault and the facility itself is ready and the desolating for the additional staff that will come when the acquisition is approved, if it is.The business will be growing. Right now, Exchange Bank of Canada has about 100 corporate clients. I'm proud to have broke that mark. And we are anticipating 400 new corporate clients soon, hopefully.We anticipate that this integration will be seamless. We've been in regular communications with the business and discussing all the details surrounding the integration of the 2 teams.The additional business that will come from the bank is in the area of banknotes as well. So while payments, which is led by the Global EFT product, has been very well received. The banknote pipeline is also very full across Canada. We do anticipate new financial institution customers as well as a few other MSB, Money Service Business customers. So the bank in its third year is well positioned to grow.Moving on to CXI. That is the core business. It is still performing the best within the entire group. And as Stephen tells you, the pipeline is very full there. We have a lot of financial institutions, which include credit unions and banks of all sizes, signing up. We also have other corporate and business opportunities that are coming on board as well us on -- some other financial institutions that have reached out to us around banknotes and payments, including check processing and wire transfer payments.The retail business has probably been the most challenging and drag on the business, besides all the staffing, which some of -- which is from retail. We currently have 4 stores that have not been performing, most of them because they're brand new and they do take up to 6 to 8 months to become profitable. We did, as you know, last year, closed one of the underperforming locations. These locations that we have opened, we are confident will become profitable soon and we are most likely slowing down that expansion of retail.There is only 1 store that is located in Manhattan near Ground Zero that will open this year. And that is the only one that is planned. We will not enter into any new leases until we have a full business plan around the location, ensuring that it has a reasonable rent rate cost and has the demographics to sustain a profitable, long-term expansion in that retail area.The retail, it's been analyzed very closely. And unfortunately, I have to say, there's an effect besides the exotics. The other -- what we've nicknamed the Trump effect. The fact that there's a lot of foreign risks, especially European, including quite a few Canadians, that have boycotted going to the States, currently, because they're not happy with the administration there. And they feel that there's other areas to become a tourist in.Luckily, that is being offset by the selling. The American economy is doing very well, they're at the levels on plenty of everything ever and so the selling of currency to Americans leaving has been up. So that is a positive sign to it.So to look ahead, the focus of management and myself, especially, along with management, is to stop this rapid expense growth. We've renegotiated shipping with our shipping vendor, as they -- FedEx and the others have been raising rates annually. Rent has gone up, as you know, we have to further [ relocations ] with the annual rent increases. And so we have to get a control on that, so we're focused on bringing professional and -- employees.So I can't say we'll not hire any more employees, I'm happy to say that we don't need to hire any heavy extensive employees because we've got a great team with all of our chiefs, Stephen and Jennifer and Dennis, and all the guys in -- our leaders in the company. We don't need to hire anymore. While we will hire 1 or 2 more people in compliance in [ rexample ], we will continue to expand profitably. The biggest focus of the business is technology. Being a fintech company, we've recognized that the key to profitable growth and increasing that efficiency ratio is through APIs.We have signed a contract with one of the largest bank software vendors in the world. And they have a platform for operating system that over 1,000 financial institutions use. And by integrating with that software, it allows the banks to do all the phone wire transfers seamlessly through their core processing system with the direct connection to the CEIFX software.And basically, I'd like to open it up to questions at this point and remind folks that today, at 12:30, at the KPMG building, on the 46th floor here in Toronto on Bay Street, we're having our Annual Shareholder Meeting. So if you are in Ontario and able to come by, we would love to welcome you in person and discuss anything further. So with that, I would like to open up the floor please, Stephanie.

[Operator]

[Operator Instructions] Your first question comes from the line of Robin Cornwell with Catalyst Research.

[Robin Cornwell, President and Founder]

I have a couple of questions. I think, the first one is just the technology side that you've just mentioned. Do you expect that the technology costs were up? Hello? Technology costs were up quite a bit this quarter. Do you expect that to be an ongoing area of cost increase? What's the comments Randolph just mentioned?

[Randolph W. Pinna, Chairman, CEO & President]

I'll go ahead and answer that if I may, Robin. There was what -- what I'll nickname a cover charge to get into the integration with this large software company. And luckily, that is a onetime cost. We saw in the first quarter, the majority of the cost to do the integration. We're now in a final testing phase and expect to announce that when it is completed, which should be in the next few months. And that will open up the gates. The nice thing about that software is we have surveyed many of our customers, and they use that as a core software to run their banks.These are customers that don't use us for wires right now, and this is the business case that surrounded, paying the coverage charge and going through this cost of integrating with that software system. It's the reason they hadn't chosen us for wires, but used us heavily for currencies and [ then micro-cheques ] as well is because the wire transfer system was -- we had, was not integrated with their core, opening up risk and adding costs to be having to run the wires to [ improve ] system. [ Debiting ] the customer on the [ floor ] and then going to our system to have us move the money.With -- once the integration has done, we have over a dozen of financial institutions that had through e-mail or verbally confirmed that they would be using us over their current vendor that's also integrated. We're not the only one, there's about 8 other choices on that software system. Because of our past relationship and service levels, they are interested in wanting to switch. So it was well received by some of our customers. And Stephen, to prove this expansion and paying the cover charge during this business. Stephen did a good job in ensuring that the sales and management and myself really had a strong business case that supported why we're paying these fees and costs in '19. So to answer your question, there will be a little bit of increased cost in IT, but that should be offset by the fact that we may have the opportunity to get over 1,000 banks using us for wires, utilizing this API automation. Did that answers your question?

[Robin Cornwell, President and Founder]

Yes, that's great. So the IT cost would be safe to say that they're going to be sustained near current Q1 levels?

[Randolph W. Pinna, Chairman, CEO & President]

No, again, that Q1, don't know to disclose the exact number, but it is a large fee to integrate. So that will not be in there the rest of the year. That was a onetime -- I'd like to call it coverage charge. To get into the party, you have to pay the fee to do that. That was a onetime cost. We have not hired a Chief Information Officer or any person or there's nothing that we signed that's going to make us pay big fees like that. Again, throughout the year or next year, it was a onetime fee that they charge to allow...

[Robin Cornwell, President and Founder]

Okay, that's great. The next question is the payments system. Can you -- was there extraordinary cost where you reorganize the payments a little bit? What's the severance costs in this quarter? What's happened with the management?

[Randolph W. Pinna, Chairman, CEO & President]

Well, if you're alluding to that there's -- part of our -- as I said in my entry discussion, was that we are focused on staffing costs. So we did make some changes in management. There were a total of 4 people that we separated it with. And so there were some onetime costs around that HR changes, if that's what you're asking?

[Robin Cornwell, President and Founder]

Yes, I'm not sure -- that is part of itself. The salary costs were higher but other expenses are higher too. So I just wondered what the amount of severance could be onetime that was in the quarter?

[Randolph W. Pinna, Chairman, CEO & President]

That's correct. There was fees around that reduction in payroll. [indiscernible] well if it's not disclosed in the management discussion. I believe I can't give that number out, but I can confirm it was a onetime cost there at the end of...

[Robin Cornwell, President and Founder]

Okay. And are you -- you're obviously comfortable with the management going forward, with the potential acquisition that maybe coming. Your -- you've restructured the senior management in that area?

[Randolph W. Pinna, Chairman, CEO & President]

I wouldn't go as far as to say restructured. There were some changes, we hired -- as Stephen said, we hired a lot of people in the business. We hired heavily last year in the area of payment sales. The results were not there, and so we went ahead and made those changes. We have now replaced those people with a much better employment package for both the business and the employee, if they didn't perform. So these -- the people that have come in now that are already in this quarter's results are on a much lower base. And a much higher commission opportunity. So if they produce, they'll make really good money. And we, all of us, the shareholders, we're very happy because it's still very profitable for us. If they don't produce, the cost won't drag on us as they had in the last few quarters.

[Operator]

[Operator Instructions] Your next question is from the line of [ Nick Cocolin ] with [ Alcom ].

[Unknown Analyst]

So just a couple of questions for me. The marginal bank vault, can you give a little bit disclosure just around when that -- they seem operational?

[Randolph W. Pinna, Chairman, CEO & President]

It was January.

[Stephen Fitzpatrick, Chief Financial Officer]

Late January.

[Randolph W. Pinna, Chairman, CEO & President]

Yes, late January. So the quarter had all the startup costs to it, but it has -- was not contributing. So a big factor that says you got all these new volumes in transactions but no profit from it, was because we were -- we had entered into an arrangement -- with an existing large customer based in Montréal to do a solid processing. And we were to -- because of the timing, we were servicing that opportunity that arose from Toronto anticipation of the vault opening. Now that it's open, it is processing and it is now profitable for the business. But in January -- at the end of January, it happens. So now, in the second quarter, the costs are behind us, it's just a regular vault, which has kept us from needing to hire anybody more in Toronto. And we are anticipating additional growth. The market there, the financial institutions as well as the corporations involved in there. It's been very well received that, that exchange bank is investing in the Province of Québec. We do see this at the group level, as a very strategic expansion. And we are committed to growing that business profitably.

[Unknown Analyst]

That's great. So we should -- should we expect shipping costs to come down in the next quarters? You don't have to shift from Toronto to Montréal?

[Randolph W. Pinna, Chairman, CEO & President]

Correct, that will help. I wouldn't say that they're going to go down, but I think you'll see volumes grow up and the shipping cost growing at a much smaller rate than as a percentage of revenue [ if the ] cost to be a lot, correct, as a percentage, yes.

[Unknown Analyst]

And then one thing, we should handle on is the expense on the quarter that were onetime in nature or will be going forward. So you mentioned the technology costs and severance. Was there any other costs in the quarter related to maybe the bank's soft opening? Or anything else you would like to identify as onetime?

[Stephen Fitzpatrick, Chief Financial Officer]

Not a lot. As I was trying to say, the more these onetime items that Randolph mentioned are nonrecurring items. But the follow expenses for the quarter were pretty much where we expected them to be and the point I was trying to make at the very beginning is that our expenses are less -- or more evenly spread out than revenues. Revenues trying to be weaker in this quarter. So the expense level overall is -- will be puts and takes between -- and as we move forward, because there're always onetime items in each quarter. But the level of expenses, the point that we've tried to make is that the level expenses is reflecting the changes that we made last year, trickling on adding people.

[Unknown Analyst]

And then how would you look forward, when we expect revenue to offset that expense interest?

[Stephen Fitzpatrick, Chief Financial Officer]

That's not a question we could really answer, but...

[Randolph W. Pinna, Chairman, CEO & President]

As Stephen said, the first quarter is usually the worst quarter for every year. Last year, it was a unique year, we had a very strong first quarter.This year, it's back to where usually is, which is the slowest quarter. The second quarter gets better because spring break and a lot of that starts to happen. And then third and fourth are the best of the summer and we anticipate that all of these projects that we're working on, will continue -- will start being accretive to our earnings. So I think, you'll see it keep going up as traditionally has each year.

[Operator]

[Operator Instructions] There are no additional questions at this time.

[Randolph W. Pinna, Chairman, CEO & President]

Okay, thank you, Stephanie. Thank you, again, everybody on the call for listening in. And if there's something that comes after this call, you're welcome to reach out to Bill, Stephen or I. Give us a call or send us an e-mail, we'll be happy to answer your questions if we can. Thank you, and have a good day.

[Operator]

Thank you, this concludes today's conference. You may now disconnect.