CAB Payments Holdings Limited (CABP) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our 2024 Annual Results Presentation. I'm joined here today by our CEO, Neeraj Kapur; and our new CFO, James Hopkinson, and I'm Gaurav Patel, Head of IR here at CAB Payments. Neeraj will be covering a lot today, including key highlights, an overview of our 2024 financial performance, and then he will give a strategic update. After the presentation, there will be an opportunity for Q&A, which we will answer via the web platform. With that said, I'll hand it over to Neeraj.

Thanks, Gaurav, and good morning, everybody. Moving to Slide 2. I wanted to use this slide to make our business model clear to you. The left shows that previously, the business derived most of its revenues from market volatility and dislocation in high-margin emerging markets. The business was quite siloed and missed the opportunity of incremental value the banking relationships and platform could add. The result is a business that was unpredictable, highly correlated to macro conditions. We are changing our approach to generate more predictable income that are demand-led in vast markets and specifically demand our products to deliver material growth. As part of this drive, we are diversifying our clients and geographies. We are integrating our business and products better so they drive each other to provide multiples of volume growth in FX, Payments. As I mentioned earlier, we are now a relationship-driven bank rather than purely product-driven, and we are becoming more geographically diverse and using technology to drive that growth. So moving to Slide 3. The key thing to bring out here is that our strategy is working. This is evidenced by our operational and strategic KPIs moving in the right direction. We have a more diversified business with multiple income drivers that will allow us to grow sustainably. We saw increasing market share and good growth in volumes. We grew our revenue-generating client base, and we significantly expanded the use of our balance sheet to generate increased client loyalty and feed our FX and Payments business. We mentioned at the beginning of the year that we are taking actions to reshape our business and cost structure to better reflect our growth strategy. These are well underway and delivering. Slide 5, you'll see on this slide, it was evident that there was a material reduction in revenue versus 2023. We have, however, made strong progress in diversifying our income profile, driven by a mixture of FX, Payments fees and net interest income. Looking at revenue generation, we flagged at the end of last year that we were experiencing lower flows from IDOs and a stronger dollar. The latter has the effect of reducing average transaction values and hence, reducing the income we earn as a result. Furthermore, unlike 2023, we did not benefit from any significant market dislocations. There were some, but not as material as the exceptional naira performance in 2023. So total gross income fell 23%, but was flat year-on-year when adjusting for the exceptional Nigerian naira and Central African franc and West African franc, XAF and XOF. Our Wholesale FX and Payments business fell 39%, but when adjusted for the naira, XAF and XOF, it fell 7%. Fees from our same currency payments grew 3%. Banking income increased 8% due to better asset allocation, mitigating a falling rate environment. Costs were up 6%, largely driven by investment in enhancing our technology infrastructure and new office space in London, Amsterdam and New York. So moving to Slide 6. I wanted to show you our income stack over the last 3 years, both by product and by client type. By product type, we view our business as having 3 primary revenue drivers: FX payment fees and interest income. This illustrates a good proportion of our total income is fairly predictable, banking, payment fees and the developed market FX portion of income. In 2024, we certainly had a better balance of income, which plays to the strength of our business model and the ability to underpin growth. FX and Payments in emerging markets remains our core business and defines our specialism, but this is also the source of income volatility, which our new strategy aims to stabilize. If you compare 2022 and 2023 to 2024, you can see just how impactful the naira and, to a lesser extent, XAF and XOF were to our business. Revenues from these 3 corridors dropped GBP 31 million year-on-year in 2024. Outside of this, our FX and Payments performance, notably in emerging markets, included other take rate and volume dynamics, which I will explain on the next slide. By client type, excluding the noise of the naira, XAF and XOF, we can see there is relatively steady progress in all of our client types despite the falling market, showing we are building strong relationships and remain highly relevant to their needs. So Slide 7 shows our developed market volumes have been growing steadily year-on-year with consistently stable take rates, demonstrating our ability to provide a valuable service to our developed market clients and successfully compete for business against larger institutions. To be clear, developed markets refers to G10-to-G10 transactions. Our emerging market volumes declined versus 2023. This is attributable to 2 factors: a strong dollar lowering transaction values as well as pullback in IDO volumes. Firstly, going through take rates. Emerging market take rates have declined significantly versus last year from 55 basis points to 29 basis points. However, taking out the naira, XAF and XOF currencies, this drop was materially less going from 38 basis points to 30 basis points, illustrating how material the dislocated performance was to our take rates. So why did our underlying take rates fall? This was a function of lower demand for hard currency in certain key frontier jurisdictions and the actions of some competitors who can operate outside of the regulations we do. Further diversification will be key to growing both volumes and take rates with support from the Banking business to build client loyalty. Turning to operating costs on Slide 8. Costs increased by 6% year-on-year, all of which were non-staff costs. These were largely related to investment in our premises and technology platforms with higher expenses reflecting the increasing capabilities of our organizational infrastructure as we prepare the group for future growth. Our new London office and the additional costs of new offices in Amsterdam were not present in our 2023 cost base. Staff costs were held flat year-on-year at GBP 45.5 million. It is also worth noting that about 70% of our operating costs are fixed, which drove negative operating leverage for 2024, but will be a significant advantage when revenues grow. We are taking a series of actions to reshape our business costs to better fit the strategy that we are undertaking. The major initiative here is a reduction of circa 20% in our workforce, which we previously announced as well as upskilling in frontline areas to drive growth. The expected saving is approximately GBP 7 million across staff profit and loss costs and a further GBP 5 million across saved capital expenditure. The former will be contracted by -- counteracted by the new hires we need to make in 2025 to upskill the business as well as annualization of hires made in the previous year. So Slide 9, despite the challenging financial performance in the year, it's important to stress that we remain a profitable business, generating GBP 15.5 million of operating free cash. This was materially down on the prior year due to lower adjusted EBITDA performance and higher CapEx spend versus the previous year. Our core CapEx increased in the year to GBP 12.5 million versus GBP 7 million a year earlier, reflecting a push to enhance our operational resilience and enhance our scalability. Cash conversion fell considerably as a result linked mainly to our lower revenues and higher CapEx. Going forward, we expect all these metrics to improve with increased revenue and a lower CapEx outlay of under GBP 8 million. So to summarize our financial performance for 2024, the business remained profitable and cash generative despite a lower income performance. We continue to have strong liquidity. We have completed some significant large-scale investments to enhance our operational platforms. We have a more targeted CapEx program in 2025, focused on product development and growth. Our income performance was challenging, but we have laid solid foundations with positive actions to start growing revenue in 2025. Our income is becoming more diversified with multiple drivers and will become more stable as a result. We are undertaking cost actions to align our business to our strategy. These actions are delivering. We will continue to manage costs closely. And with 70% of our costs being fixed, we should demonstrate positive operational leverage as our business grows. So now let's turn to the strategic update. I outlined my team's strategic vision for our business at the H1 presentation last year as well as providing the description of the strategic KPIs that we would use to inform you of our progress. This slide evidences the strong progress we are making on executing our strategy. Our network is growing and is being increasingly utilized. This allows us to deliver better pricing to our customers, reinforcing our connectivity in those hard-to-reach markets. Our revenue-generating client base is growing, which is growing, and our corridor concentration is improving to more sensible levels. This also creates a less volatile business. And finally, we are growing our business outside of our core Sub-Saharan African market. All in all, I'm very happy with the way things are progressing, but it is early days, and there is still plenty of things to do during 2025, and it's definitely not a time to be complacent. So let's look at the tangible progress being made and where we are in our journey. We've come a long way in a short time, making our business stronger and more diversified. There is clearly a lot more work to do, but I'm sure you'll agree that this is a good start. Our leadership team is complete. Most recently, we hired James Hopkinson, a seasoned CFO with emerging markets experience, and he's here with me today. He, together with myself, our CCO, our COO, as well as the Head of Banking, the Global Head of Sales and the Global Head of Payments presents us with refreshed, highly focused bench strength and experience to grow the business. We have very quickly moved to build an increasing proportion of our network outside of Africa, notably in MENA and LatAm. We are rationalizing our client base to only have income-generating clients and have enacted a minimum fee model for clients who are not using us as much as they should. Our platform is more integrated. We are looking at tighter integration between our FX, Payments and Banking businesses, thus allowing us to facilitate a one-stop shop model for our clients to meet their needs throughout the payment life cycle. And as I mentioned earlier in the financial section, we have closed key gaps in operational resilience, and we are continuing to automate more of our business. This year, we are focusing significantly on driving product development. I have said throughout that there are plenty of market opportunities for us to grow into. I've also said that market size and target addressable market numbers are huge and therefore, not particularly interesting because they are so big, and we will always be a very small percentage of that overall market. What I'm focused on is the sustainability of our future revenue streams as they grow. To this, we are prioritizing our activities. Firstly, the emerging markets countries we are targeting are growing at GDPs at greater than 4%. Their demands will increase, their sophistication will increase and their economies become increasingly open to global trade. West Africa is a great example of this with key exports such as cocoa, oil, precious metals and other commodities. As part of this journey, a key entry point is being able to build solid relationships with central banks, which I referred to earlier. We are still a key partner to IDOs. They trust us because we have years of experience, ability to access special markets and because we are a U.K. regulated institution that operates in line with local regulations. Our IDO business will face some headwinds this year which I'll elaborate on, but some of the products that we are working on such as guaranteed deposits will drive more IDO flow onto our platform, especially those that cannot deal with non-investment-grade institutions. Our proposed MENA office in Abu Dhabi also offers huge opportunities. Not only are there immense flows originating from the UAE and the Middle East into Africa, but there is also a large development organization opportunity within the Middle East itself. So how long is it all going to take us to deliver? Well, we are making strong progress towards building a steady growth business that is diversified and driven by an efficient organization. I believe this is a 12- to 18-month journey with key parts of our initiatives being relationship build and product delivery. Some of the exciting things that we are working on, which I will go into shortly, include structured payment solutions, guaranteed deposits, FX derivatives and payments value-added services. By the end of 2025, we will be in a much better position with most of our platforms delivering. As a business, we are working on some really exciting new products that will deliver a more stable business operating across multiple income streams. The important thing here is we are using the power of our whole business and not just individual businesses operating on their own. Some of the interesting things include an enhanced B2B payment product, which I will touch on later. FX derivatives short-dated forwards operating in G10 and emerging markets. This is in response to client demand. This involved investment and the expertise to get the relevant licenses to operate. Structured solutions, helping clients to find solutions to release trapped funds in certain targeted countries. Our relationships with central banks, ability to manage local liquidity and work with other counterparties means we are uniquely placed to help clients with structured solutions to do this. This is a fee-driven initiative and hence, not subject to market volatility or take rates. And finally, guaranteed deposits, a new initiative that allows us to attract more deposit flows by leveraging the credit rating of a global bank that has agreed to work with us. This opens up significant platform potential, especially with large IDOs and banks that cannot use us because we are not investment grade ourselves. All of these initiatives use the power of our entire platform with the aim of driving more and more FX and payments through our platform. On this slide, I want to show you what we think is one of the strongest enablers of our business, trade finance. Trade finance plays a crucial role in facilitating international trade for emerging market economies, which in turn has a positive impact on their economic performance. With this business comes the need for a best-in-class FX business, and it is our ability to integrate the two whilst also leveraging our banking license that differentiates us from our competitors. Our offering simply makes us easier to do business with. Importantly, providing these services to local institutions gives us the ability to serve countries that would otherwise risk being left out of the financial system. This again solidifies our position with central banks and local regulators. So along with FX, loyalty between the bank and our clients play a key part in trade finance. This was evidenced in 2024 by generating GBP 535 million of gross trade finance volume. And in turn, the same trade finance clients also executed over GBP 3.2 billion of volume through our FX platform. A further enhancement to our trade finance abilities is that we are now able to provide our emerging market clients with the ability to negotiate the repayment of these facilities in the client's local currency and by association, providing us with an additional route to obtaining local liquidity to support even more foreign exchange. Clients no longer have to use their valuable hard currencies to repay their loans. They now have optionality. This aspect is a market first in our segment and further reinforces the mutual dependency we have with our clients and strengthens our overall business model. None of our direct competitors has the experience or the ability to do this as effectively. We are exploring ways to really scale up the Trade Finance business without expanding our balance sheet. We want to remain a capital-light bank, and we have already tested working with third-party capital providers to use our origination capabilities and deep knowledge in local markets to originate deals for which we will earn an origination and maintenance fee. Maintaining our capital-light ethos while maintaining client loyalty and driving multiples of further FX and payments onto our platform is our aim. Let's now move on to exciting things we are doing in our Payments business. The 25% of our gross income come from Payments. Typical payments would be central bank debt repayments, government pension payments, corporate invoice, straight salary payments on behalf of an intermediary. And whilst we have seen about pressure, we've seen pressure on our FX take rate overall, we see that flows which have both an FX and payment component are stickier and command a take rate premium. Over the last decade, innovation and investment has really focused on retail payment transactions. But today, we're seeing focus on B2B cross-border payments. This is really exciting and CAB Payments is uniquely placed with our existing customer base, extensive proprietary network and deep knowledge and experience delivering payments in very challenging markets. So what are we doing to accelerate our Payment business? We are enhancing our pay-ins. This year, we are making it even easier for our large customers to connect to us. They won't need to do heavy technical integrations as our technology will enable them to switch on with minimal effort, resulting in faster implementation time leading to faster revenue realization. So we will be able to ramp up our Payment business more quickly. We are expanding our payout capabilities. Our partnership with Visa enables CAB payments to now cost effectively make smaller B2B2C transactions across 53 markets, 14 of which are brand-new corridors to CAB Payments. And that's for salary payouts, the gig economy significantly adding value to our IDO proposition, where until now, we were only able to offer FX wholesale solution and other parties would do the payouts to individuals. Now CAB can address their payments needs, delivering a one-stop solution in hard-to-reach markets. I'm pleased to confirm we went live with our first client last Friday. Also, for those clients who do not want to open bank accounts to service their cross-border payments as a bank account means trapped cash, resources to monitor, track and reconcile, we launched a CAB accountless proposition. As a client transfers money in a currency of their choice to CAB accountless, we do the FX conversion and make the payment. This solution reduces the lift and effort needed on the client side. We are building out the value-added services from real-time payment capabilities to our mobile wallet offering, mobile wallet capabilities being very relevant for our IDO sector as well as our smart payment routine. This gives us full control to send payment traffic to the most efficient and cost-effective payment channel, differentiating our service offering and allowing us to price accordingly. We are really excited by what our payments platform can and will deliver. It goes to my earlier point about being technology-driven. We have a solid team in place to deliver this and heavy industry experience. So to conclude, while 2024 was a challenging year, it was important to reset the business and get us on a more stable footing. You have now heard some of the exciting projects we are working on to create a diversified and growing FX and Payments business. Our strategy is working, and there is tangible evidence of progress. We are excited by our growth. We are clear on our vision, what we need to do to achieve and how we are going to do it. Our business is, one, built on relationships; two, technology-driven; and three, truly global. We'll now take some Q&A.

Thank you, Neeraj. We've got a few questions coming here over the platform. So let me just start off with a few that we received earlier on. How is the cost efficiency staff reduction process progressing? Is it in line with expectations?

Yes, it absolutely is, and we expect to have it completed in terms of the effect on the particular staff members very shortly.

And you referenced the slide that it takes you 12 to 18 months. How confident are you? What early stages of signs of progress have you got that you can achieve this within that time frame?

Yes. My confidence levels are reasonably high because I've been spending time with our central bank partners and commercial banks in the emerging markets. And the demand is very clear. Their willingness to want to do business with us is very clear as well. And we have even right now today, people in those territories looking to build those deals so that we can start transacting. And I know that the markets we're operating in are huge and the emerging market demand, let's say, is very, very high. And we are in a very unique position, as we talked about, to do things that many others cannot do.

You mentioned in your presentation that you wish to remain a capital-light bank, but this -- the trade finance stuff that you're doing, feels like you're moving more towards a banking model. Can you just explain how it works?

Yes, sure. So we have something around just under GBP 200 million of trade finance exposures. We are not expecting to grow those significantly. The reason that we have those exposures is to demonstrate our ability to actually write that business, originate that business and service that business. What is out there and in the global trading environment, especially in the emerging markets, where we're talking about commodities such as oil, cocoa, tobacco, gold and other minerals, the amounts of money we're talking about what we could do ourselves are less than a drop in the ocean. So what we're really trying to do, which is very valuable to the emerging markets is that we're using our connectivity with the emerging markets with development banks and guarantor providers in especially the European countries, where they have great motivation to provide development funding into the emerging markets that we are connected with and thereby become the conduit for that origination and servicing for those development banks and guarantee companies and using their capital and liquidity that we can then get the origination fee and servicing fees that come with it. And as we all know, the maturity of these facilities is all less than 6 months, which is why it's very attractive to development banks to be involved in this kind of activity in quite large volume.

Thank you. How should we think about margin expectation as you move to diversify from high-margin FX to other more predictable businesses?

Well, as we're seeing is it isn't really high-margin FX. So margins have been dropping, and they are determined by supply and demand dynamics in the market. We do not determine the take rates, for example, on every currency. Now clearly, the take rates are different for different currencies, but they would -- work within a band. The real value for us whilst we build our business in FX and Payments is to build businesses around our FX and Payments capability that have higher value add and create fees that cannot be mirrored by the take rates. So that is really the opportunity is ahead of us, and that is the opportunity that we are going to capitalize upon.

Okay. And are the naira, XAF and XOF central bank interventions the new normal? Or can volumes ever be expected to revert back to previous levels?

I think from my perspective and the meetings I've had with Central Bank of Nigeria as well as Côte d'Ivoire, Cameroon and others is the fact that there are very, very large volumes of business that we can do, but they need to be done in a different way. The looking for arbitrage opportunities on take rate isn't the way to access the very large volumes. The very large volumes have to be connected to the emerging market countries needs in naira, the Nigerian financial position is that they are very reliant on oil production, for example. So from our perspective, being connected to commercial banks and the government in their need to finance their oil business is the way to improve the volumes in a very material way and also improve our margins to a sustainable level. And doing those things and being more connected to our client base is the way that we're going to bring back not only the economics of the business, but the sustainability and growth of those economics going forward.

And regarding the drop in take rates, can you explain a little bit more what competition being able to operate outside of your regulation means and implies for your competitive position?

Well, like I said, if we want to deal in large volume with any country, you have to have some visibility with the central bank. If you're willing to have limited or no visibility with the central bank, there are places that you can go to get slightly better rates for those exchanges. And those are not the ways that we operate. So we operate with commercial banks in each of the emerging markets, and we are very keen to be very visible to the local central banks so that we can start operating in large volume. And therefore, that kind of arbitrage of the take rate does not allow very, very large volumes to be operated in that way because of central bank intervention. So we are not that business, and that isn't the way to improve our overall profitability and impact in the emerging markets.

And how does Trump's U.S.Aid freeze impact CAB payments? And then the second part of the question is, could you give us a reason for the delay in the U.S. license?

First part is that, of course, it does affect us, but you'll see from our IDO income levels, they're not substantial. They are -- there is a healthy amount of income that we get from IDOs. And clearly, they do help us in our relationships with emerging market countries and the central banks as well as been part of that. However, they are affected by the U.S.'s policy as it's changed. And from our perspective, one of the reasons we talk about moving into the Middle East, Abu Dhabi and those kind of moves that we're making to access other parts of the global ecosystem is that they also have IDOs that are specific to them that are nothing to do with the U.S. and that are putting flows into Africa and other parts of the world. And therefore, one of our jobs is to also diversify our IDO flows into other parts of the world, and we are starting to see direct value from that as well. On the U.S. license, we are unfortunately in the hands of the U.S. regulators, both the New York regulator and the federal regulator. We are in constant dialogue with them in terms of awaiting the license. We have no real reasons to believe that the rep office license won't be forthcoming. However, the American regulators are not operating to a particular SLA on this. And we are being told, due to the change in administration and all the changes that are happening in the U.S. that there may well be some delays as a result. However, we are constantly in touch with them to get an answer so we can start trading there.

Great. And in terms of the Amsterdam office, how is that progressing? Have they achieved what they wanted to achieve in the first place? Are they onboarding new clients? Can you just give us an update on that?

Yes. I mean, as you all know, the license came through last May. And after that, there's been some activities in terms of originating clients and making sure that all the operational requirements are being met properly. We're now seeing a build-out. We have got originated clients from our Amsterdam office that are generating income. They are operating in line with the budget that we've set for them in 2025. And of course, I'd like to see that accelerated, and I'd like to see more revenue being generated. And just to make sure everybody understands that the operation there is very much a sales operation and all of the other sides of actually running that business are outsourced to London, and we operate every other part of the functionality of our European business. So they are very much focused on selling.

Great. And how much of your technology is proprietary versus third party given software and support licenses rose 30%?

So increasingly, and it's very important from our perspective that we remain agile and that we are quick to respond to our customer needs and create solutions that are built fit for purpose but are delivered as quickly as possible. It is normal in the current environment to use software-as-a-service rather than invent your own. There is also a benefit from the fact that the regulatory environments we operate in, which are not just the U.K., which are also all around the world and significantly due to the dollar transactions that we do, significantly obviously mean that we're under OFAC and the federal U.S. regulations as well. So to make sure that our software remains compliant, it is important that we use software that is a software that is being developed by people that are selling it to many others and therefore, keep it very much up to date and invest in it appropriately so that we can use it in a way that we want as quickly as possible. So that is a reason. Now clearly, we do have elements of our platforms that are proprietary that are specific to us, and they are the things that really generate the value. The core of the software that we use does not need to be invented by us and would generally add risk rather than reduce it and also add time-to-market.

Thank you. I think this is one of the last questions. How many -- what sort of areas, how many markets are you targeting that are growing at that 4% GDP growth that you mentioned in your statement?

Yes, it's very interesting because what we're seeing is -- I mean, I've been to a number of countries. And interestingly, countries like Guyana and Suriname are going to be growing at a very rapid rate, having found oil very, very large oil reserves off their coasts. And these countries are quite large in terms of their land mass, but they are very lightly populated. So you find that they obviously are very keen to have support. And we have a long-standing relationship with some of these countries. And I think that this is where it isn't the obvious countries that have really, really high GDP growth. But some of these countries that people know about, like Nigeria and Côte d'Ivoire and Ghana are absolutely growing at very, very high rates. So there are many of these countries, and many of them are not particularly large, but they are growing and they are stable. They have good governance in them to allow them to grow. And ultimately, we can help them with our products and services to meet their objectives.

Great. So I'm not seeing any more questions in the queue. So I'll just refresh quickly. No, I think that's it. So I think we can close the call now, operator. So I don't know if you want to say any closing words?

No, I think it's very important to know that we have come through, as all of you know, and some of very difficult times since October '23. We remain highly profitable and cash generative. And the team that is now in place, including James, who's a very -- the last and latest member joining our team is there to deliver material growth. And the 4 things that we are focused on is that global expansion through the hubs that we have in London, Amsterdam, Abu Dhabi, New York, strengthening our relationships. The relationships are the real reason that our customer base and our customer base is reasonably sophisticated in terms of who they are because they're generally banks, central banks, et cetera. And those connections and relationships will be strengthened over the next coming months. And that drives much more trust with those customers and thereby more business growth in those markets. We are definitely a tech-driven growth business, and we are investing in appropriate technologies like AI, automation, real-time payments to enhance efficiency, security and scalability. But most importantly, we remain agile, and we want to deliver those things in short time scales. All of this is about sustainable success. What we've seen and what many of you have seen is the kind of level of volatility in the business performance starting back in 2023, late 2023 and last year. Last year was a year of very much of resetting things and understanding where value can be obtained for this business in large measure. And that is now our part. And we now have a course that is set that will allow us to deliver that value. It is not an instant fix, I'm afraid but it is something that will deliver valuable growth. We are not competed against by large banks and others because those have generally left all of the emerging markets that we operate in. And therefore, the relationship that we have at very senior levels is very helpful to us, and that will continue. So really, it's all about building our company and preparing it for the future. So thank you very much.