Currency Exchange International, Corp. (CXI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Currency Exchange International Fourth Quarter and Year-End Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Bill Mitoulas. Thank you. Please go ahead.

Thank you, Stephanie, and good morning, everyone. Welcome to the Currency Exchange International's year-end conference call to discuss the financial results for the fourth quarter and full year ending October 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 his brief comments on the quarter and year-end financial results followed by his latest perspective on the company's operations. Randolph will then comment on the bank's performance, sales and business activities, after which we'll open it up for your questions. Today's conference call is open to shareholders, prospective shareholders, members of the investment community, including the media. For those of you who may happen to leave the call before its conclusion, please be advised that this conference call will be recorded and then uploaded to CXI's Investor Relation's website page, along with the financial statements and MD&A. Please note, this conference call will include forward-looking information 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've made. With that, I'll turn the call over to Stephen.

Thanks, Bill. Good morning, everybody. Thanks for joining today. So I'll give you a brief overview of the results for the 2019 fiscal year as well as the most recently completed final quarter of 2019. As usual, these results are presented in U.S. dollars unless we say otherwise. And as we've indicated in the past, the CXI's currency exchange business is typically very seasonal and it coincides generally with the peak spring and summer travel seasons in the U.S. and Canada. So often, the first and second quarters are the slower ones and the third and fourth quarters are usually stronger. So the bottom line results for 2019 are below those of 2018, as you would have seen. However, Q4 2019 did see improvement in EBITDA over the same quarter of 2018. And that was the first quarter of 2019 in which that was the case, and we will be building on that as we move forward. For the year, revenues increased 7%, tied to 8% growth in transaction volume. The banknote portion of the business, overall, increased 4.5% in 2019 versus 2018, with the eZforex acquisition contributing about 0.6% of that year-over-year improvement. And then as you will recall, that transaction was completed in early September. So we only saw the benefit of it in the -- for the 6- or 7-week period in the final quarter. We continued to add clients and locations through the year. And the growth that -- other than the eZforex growth in the banknote that was split evenly between some pricing actions that we took earlier in the year as well as new clients and new retail locations. We had 1,685 wholesale of company relationships, representing 19,509 transacting locations at the end of 2019, which is up from 1,337 and 17,482, respectively, at the end of 2018. In 2019, revenue and EBITDA were impacted by the so-called exotic currencies, which contributed to a revenue decline of $1.65 million for the year. Excluding the impact of those currencies, which can fluctuate significantly, as you've seen, if you followed us, revenue growth was 11% for the year. Payments revenues grew almost 55% and grew to 6.3% of total revenue compared to 4.4% a year ago. So we're really pleased with that growth in that segment. So overall, revenue increased 11.7% in Q4 2019 compared to Q4 2018 to $11.5 million from $10.3 million. And total transaction volumes increased by 10% over the fourth quarter of last year. The factors that contributed to that were growth in wholesale volumes for high-volume existing clients, growth in new business, growth in payments volumes and growth in check volumes. And significantly, revenue from exotic currencies was down by less than $100,000 in the fourth quarter from same quarter last year. So the tail effect of exotic currency is -- has dwindled. Core revenues in the retail business remain strong, with overall growth in volumes year-over-year in the major and minor currencies, which excludes exotics. Profit margins were a little lower, however. And so that meant that the returns in the retail sector were -- retail business were lower than they had been in the past. In Q4, the company added 2 new branch locations, bringing the total branch network to 46 across the U.S. And in light of the overall decline in retail revenues, though, the company has curtailed plans to add new stores in 2020, pending a detailed analysis of the retail business. There is one exception to that, which is a store that was already in plan in 2019, and it's carrying over into 2020. But other than that, we will not be adding new locations. Q4 continued to see an increase in the number of customer transactions resulting from the addition of 226 new customer relationships, representing 834 new transacting locations. And in 2018, those same numbers were 298 customer relationships, but only 400 transacting locations. So you can deduce from that, that the clients that we're attracting are larger. In the note to the financials, you'll see that we've disclosed payments revenue separately. And they remain below the 10% threshold for mandatory disclosure, but as we've said before, because it's such an important part of our strategy, we feel it's important to be transparent and to disclose those payments revenues. Turning now to operating expenses, which have been the focal point of discussions with many of you throughout the year. We continue to invest in business growth and in establishing the bank in Canada. Operating expenses increased by 15% for the year or $4.7 million across all expense categories, but over 50% of that increase was in salary expenses on both sides of the border. To support strategic initiatives, our legal and professional fees increased 10% over the previous year. However, management has been closely managing expense growth in that area. And certainly, when you're involved in things like acquisitions, those costs can go up. There were also increases in rent related to new branch and vault locations, our Montréal vault was fully operational in 2019, and postage and shipping costs because of higher transactional activity. In 2019, shipping costs were 12% higher than a year ago, and the growth in transactional activity was 8%. But partly what drove those higher fees was an increased frequency of inbound and outbound armored shipments. However, we did renegotiate our shipping contracts in 2019, leading to, in the fourth quarter, only a 6% increase in postage and shipping costs compared to a 10% increase in transaction volumes. So that's an indication of improved productivity in this expense line. As you know, it's been a line we've been focusing on. Expense line, we focus on all the time because it's such an important component of our cost. And we are optimistic that we've now turned the corner with those renegotiated contracts. In Q4 2019, operating expense growth was 12%, below the overall growth rate for the year, which was 15%, as I said a few minutes ago. It wasn't below the rate of revenue growth, but it was certainly a step in that direction after several quarters where expense growth was significantly higher than revenue growth. Our degree of operating leverage, the percentage change in EBITDA in relation to percentage change in revenues has decreased significantly year-over-year. However, in the fourth quarter, we saw an improvement in operating leverage compared to the full year. The ratio of operating expenses to total revenue for the year -- for the full year was 85% compared to 78% a year ago. However, at the beginning of the year, in the first quarter, that ratio was 97% compared to 84% in the fourth quarter. That ratio is traditionally higher during the winter months and decreases as the fiscal year progresses, but there were other factors as well that contributed to that drop to the 84%. So overall, as a result of these challenges, EBITDA in 2019 decreased 24% or $2 million from 2018. But it did improve by 9% in the fourth quarter of 2019 over the fourth quarter of 2018 to $1.9 million for the quarter. For the year ended October 31, diluted earnings per share fell from $0.67 to $0.46 a year ago. In terms of our balance sheet, we continue to remain financially strong, well-capitalized with almost $63 million in cash at the end of the year, up from $56 million a year ago. Accounts receivable, which is the other large working capital asset, increased just under $1 million since October of 2018. These balances do fluctuate significantly depending on the settlement timing for customer transactions. And you should know that all significant items in accounts receivable at the end of the year were subsequently received in November. We carried $0.5 million in short-term debt at year-end through our line of credit, which is a small increase from carrying 0 a year ago. And we strategically used our intercompany loan to fund short-term borrowings and leverage -- use it as a leverage for -- as a natural hedge, I should say, against inventories in the bank. So that has reduced the balance that we draw on our external line of credit compared to the prior year. Biggest change in our balance sheet, and I want to draw your attention to it, is -- came in the fourth quarter and relates to the acquisition of eZforex, which closed on September 6. The purchase price was $4.2 million including about $1 million in cash for a net purchase price of $3.2 million. The acquisition resulted in the creation of several intangible assets, including $1.2 million in goodwill. $700,000 of that goodwill amount arose as a result of the deferred tax liability that's created by the difference between the accounting basis and the tax basis of the intangible assets. That deferred tax liability will diminish over time as our recovery is booked in the P&L to match the amortization of the intangible assets. This accounting treatment is prescribed under IFRS 3, the accounting rules. And that's how the goodwill gets generated. Apart from the accounting treatment, though, I do want to point out, and I'll end my remarks on this point, that in the 7 weeks post-acquisition, this new business, eZforex contributed $117,000 after tax, with expenses, including onetime costs of $52,000. So partially, and finally, as a result of that business combination in part, total assets grew to $82.7 million at October 31 this year, 2019 versus $73.3 million a year ago. So at this point, I'll turn it over to Randolph for more remarks.

Good morning, everybody. Thank you for your time, especially those on web that are up real early to hear us speak this morning. As usual, I'd like to start on Exchange Bank of Canada. That's the biggest asset that our company has invested into. And as we've all noticed in the last year or so that the costs of building out Canada's next great bank are significant. However, the Board and management and I are -- all are aligned in ensuring that we build the bank with a solid structure and such structure includes not only good management, like our Chief Risk Officer, our Chief Compliance Officer, Stephen as CFO, but it also includes infrastructure, technology investments in our payment system since that's a top focus for our bank. Along those lines, to build out a solid bank, we need to establish long-term strategic banking relationships. We've been very active in this regard. The reason we create -- one of the reasons we created the bank was to be able to have central bank relationships. I'm proud to report that there's several central banks interested in exchange bank relationship. And such establishment of those relationships will be a long-term fundamental asset for the bank group because that allows us direct access to the core currency at no markup. If you recall from the early days, this was a significant factor in why we were building Exchange Bank of Canada. And I'm happy to report that it -- that is progressing, of course, slowly since they are central banks. We are focused also on our remote image capture, which has, as Stephen said, been growing successfully, very good business. It continues to work well, but we are looking at -- just like shipping costs, we're looking at the best long-term provider in that regard. We are happy to say that Exchange Bank, with our structure and systems, have been testing in a pilot phase, a new product that should launch, hopefully, in the next few months. And that offering is going to be very well received and complementary to our payment business. We are done increasing costs as best we can. With that being said, we are focused on growing our sales team. Salespeople are an investment, and we feel that our new Senior Vice President of Sales that we're very close to engaging, will bring 1 or 2 people with them and really build out the sales culture and sales initiatives expected of Exchange Bank of Canada. So overall, we are in a good spot with Exchange Bank of Canada. We feel the hardest and heaviest lifting is behind us, and we look forward to a great year for Exchange Bank. Moving on to CXI. Stephen did talk to you about the retail business. And it is true that we still have one store that we have contracted to open. We're very proud of the relationship. It goes along with our other Manhattan stores but we will be opening a store near Ground Zero in the next few months, which will complete our in-house company-owned locations, bringing it to 47. As I said on my last call, the reason we feel we're at a point of not opening new stores is, one, they're costly, but the malls in which we typically open have been quite challenged in their own right, losing some anchor tenants like Forever 21. In spite of the mall's volume of traffic going in, our stores continue to see decent growth in -- with the exception of exotics, has been a drag on that, but the retail business is solid. We've built out, Philadelphia was our last market that we wanted to actually have a company-owned store in. That store is up and running and doing well. And so now our focus on retail has been on efficiency. We've promoted someone that's been in the retail unit for several years, probably close to 8, and they're now the Vice President of Retail Operations. He's doing an in-depth review of not only the costing around the rents and payrolls over time and all the elements that make up the joy of running a 7-day a week retail operation, but also margins and promotions. One thing we found with the acquisition of eZforex was they had a product called Currency Price Protection, CPP. And Currency Price Protection in his business, the proprietor that is now our Vice President of Marketing, it showed with the historical analysis of their business versus ours because EZ was not a retail store. They did only wholesale in 2 credit unions and travel agencies around the United States. And the product of CPP allowed for an increase of the total average transaction size. At our retail business, our transaction sizes are usually around $400 to $500, depending if you're Beverly Hills or if you're in Virginia. The CPP average at his business with 21,000 transactions in the last year showed his average was over $900. And for the $10 that a Currency Price Protection costs the consumer, it increases their ability to say, I can buy as much as I may ever need and with my $10, I can come back and not lose anything. I get all my money back if I choose not to use all that. That emotional advantage increases your transaction size. What we saw is only 8% actually utilize CPP because most people end up getting -- instead of $500, they get the $1,000. And then they spend most of it, if not all of it. So CPP is being ready to be piloted in our CXI retail stores, and should that work, we may expand it into the wholesale model as well. So that's a new project in pilot getting ready to start in the retail division. We also have another pilot. Hopefully, we're going to start soon, which is adding some new currencies to our currency mix of what we can exchange. And that's at very early stages. But overall, we are very optimistic and very happy to have a large network of soon 47 stores in all the strategic main markets of the United States. Future growth in retail will look more like what we just announced with the Duty Free America group, which is based in Florida but has stores all over the United States, and they even have an international division of Duty Free stores. Phase 1 is about done. There was only 5 stores still left to roll out. But the beauty is, December was a good example of the benefit of Duty Free America with their stores on the northern border between U.S. and Canada. So when you come over the bridge at Buffalo, on the U.S. side, you would notice that currency exchange at the Duty Free store. That is our company location under our license. The beauty is we pay no rent, and we pay no payroll. We do a revenue share with the proprietor. And so far, it's been very successful, especially since their stores are open 24 hours a day. Moving on to wholesale. As you know, our focus has been on payment expansion. So while, on both the EBC and CXI, we do not plan on any serious hires outside of the Senior Vice President of Sales in Exchange Bank, we are expanding our sales team on both sides of the border, investing in people to grow both the payment business and the cash business. Our payment expansion with remote image capture, Global EFT has been working, that's why we've seen 56% increase in revenue growth, and we think we're going to continue along that path of seeing good returns on our payment expansion. Additionally, you may know that the business was doing a pilot in the Caribbean. There has been a lot of opportunities. Some of the big banks have been derisking themselves or exiting the smaller territories of the islands. But because of our Miami business logistics into the islands is efficient for us because of our software, we feel we can handle the higher-risk jurisdiction, utilize -- because we require our customers to utilize that. So we have expanded our Caribbean pilot to include 6 countries. A couple of banks that we have relationships in North America with have bank subsidiaries or sister banks in the islands, and they have continued to add to our growth in the banknote business in the islands. We've -- as Stephen, I think, alluded to, the fourth quarter saw a lot of new client relationships start, which now are actually transacting in our 2020 year. And our domestic pipeline in the United States is also quite very full due to our sales efforts and other situations in the marketplace. And so that brings me to that other situation in the marketplace to remind everyone that our technology business has always been focused on our software and our systems. And we take cybersecurity very seriously. We've done recently a complete review of not only of our systems and our firewalls and our backups, our business continuity plan, and this remains on a high focus for our group. Internet has opened up the world for good and also allows the bad on there. And so our focus is to ensure that us and our customers using our systems are secure. And should anything happen to us that we would be able -- following our business continuity plan, be able to recreate our good software within a day's notice. And our team will continue to stay focused on that and remain ready for any actions that may occur. And so in summary, I remind the business that we are very well capitalized. We have a great roster of customers. We have a great team of management. We have a great Board with 9 Directors. We are in a great position to really maximize our new decade ahead of us. We are going to continue to focus on containing costs while we will enjoy the continued revenue growth that we anticipate. So with that all being said, I'd like to open up the line to questions. And Stephen and I will be happy to answer them for you.

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

I guess I have a few housekeeping questions first for Stephen. One, I guess, is the tax rate. It's got me quite baffled. This quarter is quite high. I got it about 50%. Can you expand on that?

Yes. So there was an adjustment at the end of the year in our deferred that -- within our -- rolls out of our deferred taxes, converting deferred taxes to tax expense. I won't get into all the details around it because it can get quite technical. But in essence, an estimate that we had made several years ago on a potential tax recovery, we re-evaluated that estimate and felt that it was less -- the probability of it happening was lower, and therefore, we took an expense in the fourth quarter in the income tax line.

Can you give me an idea? Is it -- would be the difference between the actual and what your normal tax rate would be, say, 23%, 25%?

Our normal tax rate is around 26%, I think, yes.

27%.

26%. The adjustment, I believe, was 250 -- about $300,000.

About $300,000. Okay. All right. Okay. And how is the impact of the intangible? Have you -- in your income statement, are you deducting the intangible as part of your overall depreciation? If so, how much is the intangible?

It is about -- you're talking about in relation to the eZforex transaction?

Yes. What happens is, the major banks, they exclude -- in their adjusted earnings, they exclude amortization of intangibles. So if you can give me an idea of what that is, whether it's related to the eZforex or any other acquisition? They tend to break it out so we can see a better idea of what the operating earnings are.

It was -- in relation to the acquisition, it was about -- it was $60,000.

Okay. And that's in the quarter?

That's in the quarter.

Of course, yes. And will that continue for the next investment made over the next 4 quarters? So it will always be -- it will be there for a while.

Yes. Those intangibles are being amortized on a straight-line basis.

Straight-line. Okay. Sorry for the details, but that's just the way the -- I want to compare you with the major banks, and that's what we have to do. Okay. And extraordinary items in the quarter, whether we've got good tax, and we've got the intangibles. Was there expenses that were considered in extraordinary?

There was a severance of approximately CAD 175,000 in the fourth quarter, in addition to the onetime costs that were attached to the acquisition.

Okay. And you -- can you refresh me again on the onetime cost for the acquisition in the quarter?

I think it was $52,000.

$52,000. Right. Okay. Okay. That's terrific. That straightens me out. Okay. I guess for both of you and Randolph, what's the outlook for the operating leverage this year, 2020, revenue growth versus expense growth? I know we had a difficult year. Can you just discuss it where we are going in 2020?

Well, as you know, we're always challenged around providing any guidance. So it's -- obviously, what we're doing isn't sustainable with expense growth exceeding revenue growth. What you saw in the fourth quarter was that it was even. They were both about 12%. And that is -- I mean, all I can say is that what we budget is for positive leverage.

Yes. Robin, as my closing remarks were, is the management team is very focused on containing our costs while the revenues continue to grow. And so we feel that, that should happen in 2020.

I think the other thing we could say as well is that the high growth that took place over the last 2 years was largely related to building out the bank, particularly in what the banking industry would call oversight roles. And so -- and that building out is now complete. So that -- the growth there is really...

Flat.

It will now be flat. So the cause of the larger -- the large jump in salaries, that part of it, which -- I think I said that it was roughly 50-50, that salary growth between Canada and the U.S. In the U.S., it was related to business growth. And in Canada, it was related to building out the bank and particularly in those oversight roles. So -- and as Randolph said, other than adding a senior sales executive, that's -- there are no large-dollar hires, I'll put it -- if I can put it that way that are planned in the bank in 2020.

Okay. That's great. So for Randolph, curiously your payments deal, with the potential acquisition of the company that has 400 clients -- corporate clients, how long does this -- are you able to stretch out this acquisition? I know you're not stretching it out. I know you have to get regulatory approval. But maybe you could give us an idea of where that stands.

Well, it's a very difficult question to answer, Robin, and I wish I could give you a more specific answer. Again, as we were saying, we've been very focused in 2019 to ensure that Exchange Bank of Canada has the people, as Stephen just told you, improvement and increase of the number of oversight function as well as the systems to accept 400 new corporate clients, if and when we are approved. And so we feel we are at that place now. The bank is in a very good spot. The future for Exchange Bank looks quite promising with or without the acquisition. The bank itself is continuing to grow both its payment revenues and bank note revenues, but most importantly, Exchange Bank of Canada, we feel, has now the team, the infrastructure within the organization to move forward. And so I know that's not an answer of timing. However, structurally, we feel we're ready, and we look forward to a strong 2020 year in our group.

Okay. And the last question is just on your Duty Free America transaction, can you give us any idea of what kind of a margin you would expect? Or how you would see it impacting your -- the bottom line, I guess?

We see it as -- we don't because customer contractual relationships vary by customer to customer. So we don't disclose what the deal is. It is a revenue share. And because there's low -- much lower cost, they are our stores so we are having like -- they -- one of the transactions in Buffalo was so busy, their ink printer that we just bought them 2 months ago was already needing a new cartridge. So that's -- so those costs are there. So it's not that it's all profit. So it's -- there is some costs in that relationship, but it is going to -- most of the revenues we share will fall to our bottom line. And so we do see that as -- that's why we press released it. If you -- we feel, when there's a new situation or something that could be positively impacting or negatively impacting the business, we do a press release. And so we did a press release around it because it is a new industry type for us. And it is a larger-type customer, because besides the 30 stores that we're just wrapping up the last 5 opening, there is a Phase 2 and a Phase 3, because they are all over the United States, if you look at their website, and to further add to that relationship. So we are very proud of this new relationship. We're very focused on ensuring we continue to grow the relationship. And it indicates that other retail strategic partnerships would be a great way to add 50, 100 new stores by going to a retailer themselves that have great locations and staff and piggybacking on them, which is new revenue to them, new foot traffic to their core business. So it's a win, win, win situation for all -- everybody involved. And so that Duty Free relationship is an indication that our retail growth would be very successful if we focus on other retail opportunities in the marketplace.

[Operator Instructions] At this time, there are no additional questions in the queue.

Okay, Stephanie. Thank you. Thank you, everybody, for attending. Should a question come up after this call, please feel free to reach out to Bill, Stephen or I. If we are able to answer the question, we will. And we thank you for your support and look forward to seeing all of you again soon. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.