Good day, and thank you for standing by. Welcome to the ISC's second quarter 2024 earnings conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jonathan Hackshaw, Senior Director, Investor Relations and Capital Markets. Please go ahead.
Thank you, Andrea, and good morning to everyone joining us today. Welcome to ISC's conference call for the quarter ended June 30th, 2024. On the call today are Shawn Peters, President and CEO, and Bob Antochow, Chief Financial Officer. This morning, Shawn will take you through some of the highlights of the quarter. Bob will then provide some financial and operating highlights for the quarter before passing the call back over to Shawn for some closing remarks. Before we begin, we would like to remind everyone that we will only be summarizing results today. The company's financial statements and MD&A have been filed on SEDAR+ and are available on our website. We encourage you to review those reports in their entirety.
I would also like to remind you that any statements made today that are not historical facts are considered to be forward-looking statements with the meaning of applicable securities laws. The statements may involve a number of risks and uncertainties that are described in detail in the company's SEDAR+ filings. Those risks and uncertainties may cause actual results to differ materially from those stated. Today's comments are made as of today's date and will not be updated except as required under applicable securities laws. Today's conference call is being broadcast live on the Internet and will be archived for replay shortly after the call on the investor section of our website. With that, I would now like to turn the call over to Shawn.
Thank you, Jonathan, and good morning everyone joining us for today's call. Following a strong start to the year in the first quarter, the second quarter of 2024 saw record revenue and record adjusted EBITDA for the period, up 27% and 53%, respectively, compared to the second quarter of 2023. The robust year-over-year growth was, as usual, due to strong operating results from across the company. In Registry Operations, strong performance from the Saskatchewan Registries, combined with the full effect of fee adjustments implemented in 2023, produced revenue and adjusted EBITDA for the quarter that were up 39% and 68%, respectively.
We saw strong performance across all sectors in the land registry, resulting in an increase in overall volumes compared to the second quarter of 2023, combined with the positive impact of the fee adjustments implemented in July 2023 in connection with our extension agreement and annual CPI adjustments. Also, in Registry Operations, during the quarter, we announced that through our wholly owned subsidiary, Reamined, we entered into an amended and restated license and information technology services agreement with the Government of Ontario to continue to manage and operate the Online Property Tax Analysis system for the Government of Ontario until March 31, 2028, with two additional options for one-year renewals. In Services, revenue and Adjusted EBITDA were up 18% and 29%, respectively.
Increases in due diligence activities from existing customers, as the compliance environment continues to be more stringent within the lending industry, drove up revenue within our Regulatory Solutions division. Asset recovery also saw increases in assignments, and more importantly, improved year-over-year vehicle sales, which contributed to the growth in our Recovery Solutions division. Subsequent to the end of the quarter, we launched the online self-service, self-service customer portal for the Bank Act Security Registry under a 5-year contract with the Bank of Canada. This registry now offers 24/7, 365 service provision and a range of online submission and search capabilities for customers, allowing for seamless experiences for users to track, manage, and utilize their submissions in real time. With that, I'll now turn the call over to Bob to discuss some financial highlights in more detail before providing some closing thoughts.
Thank you, Shawn, and good morning, everyone. As Shawn mentioned, 2024 is showing strong performance, with the second quarter of 2024 continuing to deliver results in line with their expectations. The record performance for the quarter was driven by a number of factors, which I will now highlight for you. Revenue was a record CAD 67.8 million for the quarter, an increase of 27% compared to the second quarter of 2023. This was driven by Registry Operations' strong performance from the Saskatchewan Registries division, combined with the full effect of fee adjustments made in 2023 and record high-value property registrations in the Land Titles Registry. Further contributing to this growth was the Services segment, with continued customer and transaction growth in the Regulatory Solutions division and increased assignments and sales in the Recovery Solutions division.
Net income was CAD 10.3 million, or CAD 0.57 per basic share and CAD 0.56 per diluted share, compared to CAD 8.2 million, or 47 cents per basic and 46 cents per diluted share in the second quarter of 2023. Strong adjusted EBITDA growth in all operating segments drove the increase in the quarter. Net cash flow provided by operating activities was CAD 24.1 million for the quarter, an increase of CAD 9.8 million from the CAD 14.3 million in the second quarter of 2023. The increase was driven by increased contributions from the Registry Operations and Services segments.... Adjusted net income was CAD 14.1 million, or CAD 0.78 per basic share, CAD 0.77 per diluted share, compared to CAD 9.3 million, or 52 cents per basic share and 51 cents per diluted share in the second quarter of 2023.
The growth in adjusted net income is for similar reasons as net income, which was offset by increased interest expense associated with additional borrowings that were used to fund the upfront payment. Adjusted EBITDA was a record CAD 27.2 million for the quarter, compared to CAD 17.8 million in the second quarter of 2023. The increase was driven by Registry Operations' strong performance from the Saskatchewan Registries division, combined with the full effect of fee adjustments made in 2023 and record high value property registrations in the Land Titles Registry. Further contributing to the growth was the Services segment, with continued customer and transaction growth in the Regulatory Solutions division, as well as increased assignments and sales in the Recovery Solutions division.
Adjusted EBITDA margin was 40%, compared to 33.4% in the second quarter of 2023, driven mainly by the pricing and volume increases in Registry Operations' Saskatchewan Registries division previously mentioned. Adjusted free cash flow for the quarter was CAD 15.7 million, up 26% compared to CAD 12.5 million in the second quarter of 2023. This growth was driven by stronger adjusted EBITDA results across all our operating segments. This was partially offset by increased interest expense on the borrowings that were used to fund the upfront payment. Voluntary prepayments of CAD 10 million were made towards ISC's credit facility during the quarter as part of the company's plan to deleverage towards a long-term net leverage target of 2-2.5 times. Further details on our debt and our credit facilities can be found in our MD&A and financial statements.
Additionally, capital expenditures have increased as expected, albeit remaining relatively insignificant overall. Sustaining capital expenditures, including registry enhancement capital, rose to CAD 2.7 million for the second quarter of 2024, from CAD 0.8 million in the corresponding period in 2023. After all this, as at June 30, 2024, we held CAD 22.1 million in cash, compared to CAD 24.2 million as at December 31, 2023. Subsequent to the end of the quarter, the first of five annual cash payments of CAD 30 million was made pursuant to the extension agreement to extend ISC's exclusive right to manage and operate the Saskatchewan Registries division and Registry Operations using funds drawn from the credit facility. We remain focused on continuing sustainable growth and deleveraging our balance sheet towards a long-term net leverage target of 2-2.5 times.
The prepayments described in management's discussion and analysis for the fourth quarter and year-ended December 31, 2023, are a reflection of the deleveraging plans. In February, we provided our outlook and guidance for 2024, and this is also included in our MD&A, which I encourage you to read. As a reminder, we've maintained our annual guidance for 2024, which, as a reminder, is: revenue is expected to be between CAD 240 million and CAD 250 million, and adjusted EBITDA is expected to be between CAD 83 million and CAD 91 million. Before I turn the call back over to Shawn, I'd like to finish by highlighting that we also announced yesterday that our board of directors approved a quarterly cash dividend of CAD 0.23 per share.
That dividend will be payable on or before October 15th, 2024, to shareholders of record as of September 30th, 2024. I will now turn the call back over to Shawn for some concluding remarks.
Thanks, Bob. It's been a tremendous quarter and first half of 2024. The Bank of Canada has now lowered its key interest rate twice in 2024, and with a forecast of further cuts as inflation nears the Bank of Canada's long-term target, strong activity in the Saskatchewan real estate market is expected to continue in the near term, despite inventory challenges in lower-value homes. We continue to monitor interest rates and other economic conditions which can impact real estate activity. However, factors such as strong population growth and improved market confidence create an environment for heightened real estate activity, most notably benefiting the Saskatchewan Land Registry. In addition, the realization of a full year of fee adjustments, including those amended in July 2023 because of the extension agreement and our regular annual CPI fee adjustments, will continue to support strong revenue and Registry Operations.
Services will continue to be a significant part of our organic growth, with a forecasted increase in transactions and number of customers. The current trend of enhanced due diligence in an environment of increased regulatory oversight is expected to continue and positively impact the Regulatory Solutions division. Further, the decline in used car values, which worsens the loan to value of the vehicle and reduces any equity that debtors may have in their existing vehicles, coupled with current mortgage, rental, and inflationary pressures, is expected to negatively impact consumers' disposable income and lead to increased assignment levels in our Recovery Solutions division. Overall, the record performance in the second quarter and first half of 2024 are in line with our expectations and our guidance, and are reflective of the strength of the company's business.
In keeping with our commitment, we're executing against our five-year goal to double revenue and Adjusted EBITDA by 2028. With that, I'll now turn the call back over to Jonathan.
Thanks, Shawn. Andrea, we'd now like to begin the question and answer session, please.
Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Scott Fletcher with CIBC. Please go ahead.
Hi, good morning, and nice quarter. Good to see some real growth in the registry. On that, with the strong quarter, you guys maintained the guidance despite that. Is it fair to assume that we should be looking at the upper end of the guidance range, just given this was, you know, it makes the upper end a lot easier to achieve, given the numbers in the quarter?
Yeah, I can start on that, Scott. Thanks for the question, and I'll have Bob chime in as well. You know, very strong quarter. It is part of the seasonality that we see in the land registry, and so that's not unexpected. I think we have probably we talked about this before, that we started to see the seasonality return post the pandemic. And so I think what we would say is we've maintained the guidance and you know, we don't comment specifically where in the guidance range, but you know, we're still confident in that guidance. So Bob, I don't know if you have anything to add to that.
Yeah, just to add, you know, you know, Q2 and Q3 are the strongest quarters, you know, for the land registry specifically. You know, so we still have Q3 ahead of us here as, you know, for the next, you know, till the end of September. So, you know, still a lot to play out. And then obviously in this residential area, we're still seeing shortages, you know, of inventory, in that area. So, yeah, there's still half the year to go.
Okay. That's, that's helpful. And, and then on the, on the high value transactions, obviously a really nice, again, lift in the quarter on that. Can you just help us sort of understand the dynamics behind that? Like, why, as much as you know, why there was such an elevation in Q2, and how much of that might be sustainable? Or if not sustainable, you know, continue at least for a quarter or two?
Yeah. I can start, Scott. So yeah, it's really hard to predict the high value transactions and yeah, you know, you know, this is just speculating, but obviously the declining you know interest rates environment you know may have something to do with it, because obviously these are large dollar transactions. And that's what I would suspect, but other than that, don't really have any view on why why you know the timing of those in this quarter versus other quarters. I don't know, Shawn, anything?
Yeah. You know, only thing I'd add to that, Scott, is that, as Bob said, they're hard to predict, so we tend not to try to predict any sort of unusual activity in high value transactions and tend to go in our guidance with a more normalized level. Having said that, the strong economy is really sort of pushing some of those, and that's probably why we saw some of that in Q2. We may see that again in Q3, or as Bob said, it could just be a timing thing, and they may slow down. But overall, we still think that's gonna fall within our guidance, even with the strong Q2 and the strong high value transactions.
Okay. Thank you. Yeah, it's... I, I understand. It's definitely hard to predict on that front, but the color is helpful. I'll leave it there. Thank you.
Thanks, Scott.
Thank you. Our next question comes from Steven Boland with Raymond James. Please go ahead.
Thanks, guys. Maybe just following up on that, I apologize, a lot of paper coming out in the last day or two. You mentioned, I think, somewhere in the MD&A that the ag sector also had double the two times the high value propositions. Did I read that correctly? And I know you just kind of answered the question about timing of high value, but you know, what are you hearing? Like, is this just a pent-up demand? Is it, again, maybe a little bit of a rate cut? I'm just curious, especially on the ag part of it, of the business.
Yeah, I can start. So, yeah, Steven, yeah, we saw more than, you know, twice the number of, ag transactions in this, quarter than we did, you know, the same quarter last year. You know, we saw-- and we found it a little strange, because normally it's, you know, seeding season, you know, in Saskatchewan, and, normally, you'd expect less activity. But, you know, you're right, that's what we saw. You know, in terms of what's driving that, you know, not sure what specific factors caused the increase this quarter versus, the prior quarter. I don't... Yeah.
Okay. And just that the Ontario Property Tax Assessment Services, the renewal, which is positive, I'm just wondering if there's any changes in the contract, besides the extension? Are fees adjusted? Anything to do with that that could make a difference in revenue, I guess, in general?
Yeah. So Steve, I'll take that. It's a renewal, so it's just standard, normal price increases. The services that we're providing are the same, providing a bit more support to the ministry as the ministry is looking to interact with the municipalities and customers more so, a slight change in sort of the customer service aspect that we're providing, but the fees are pretty-- I mean, that's a very, very steady business because it's contracted fees, and they're really staying the same, subject to normal inflationary increases.
Okay. And the last one for me, you know, when I look at your, I'm not sure if this is the right way to look at, but I do look at your overall, you know, expenses. Yeah, I'm just wondering how variable, going forward now, that, you know, you've made a few acquisitions over the past few years, you know, how much can you shave off on your expenses, or is that just not like, they're pretty fixed with the number of people that you have, et cetera, et cetera. I'm just wondering, is expense management something you obviously keep an eye on, but is it possible to get, you know, those numbers down at all going forward?
Hey, Steven. Yeah, generally, you know, about 80-85% of our costs are fixed. You know, there are certain parts of the business, like, let's say, the recovery, asset recovery part of the business, whereas volume increases, you need more, you know, hands to process, you know, transactions, as an example. But it, you know, so it varies with revenue. But, you know, we do keep an eye on expenses. You know, obviously, with our growth strategy we announced early this year, we're building, you know, the people technology to support that. But, you know, at this point, you know, our guidance factors in our plans for expenses for the rest of the year at this point, yeah.
Steve, I might just echo Bob's comment there on a couple of things that I think are important. One is that we do watch expenses. We actually watch them more closely than I think probably people think. We are very prudent in that, but we have been talking the last couple of years about investment in people and technology, which is what Bob hit, and that was really so that we could accelerate the growth, which is what we're on the path to do now. So while we do watch expenses, we're cognizant that the registry enhancements and all of the growth come with some costs, and that's what really is creating the strong business for us.
Absolutely, we'll always watch the cost, but I think in the short term, our focus is gonna be on taking those resources and growing the business.
Okay. That's a great answer. Appreciate it. Thanks, guys.
Thank you. Our next question comes from Paul Treiber with RBC Capital Markets. Please go ahead.
Thanks very much. Just a question on Recovery Solutions. You know, quite strong in this quarter. Just looking back, you know, I think it's one of the highest quarters or if not the highest quarter I've seen. Was there... You know, it seems like it's primarily driven by customers facing financial pressures, but was there a catchup of volumes or recovery from prior quarters, or do you see this level as sustainable, just given the economy here?
Yeah, thanks for the question, Paul. Yeah, I think, yeah, you know, this business, you know, where we are in the cycle, obviously, you know, came off, you know, COVID, you know, the COVID period, where different financial institutions maybe weren't, you know, pursuing debtors, plus you had the issue of used car values were higher. So, people, you know, debtors, you know, had to sell their vehicle to pay their loan, you know, they could get a good value for it. Now, what you're seeing is change in the market that, you know, people with the higher interest rates are feeling a squeeze, either, you know, higher rents or higher mortgage payments.
But at the same time, you've got, you know, so you're feeling the squeeze, and you've got, you know, more new vehicles on the market, which is then driving the, you know, used values down. And so we're in this sort of, you know, period where then, you know, if they do have to sell their used vehicle, they can't get the value to cover their, necessarily cover their loans. So, so there's that, that factor in there. And of course, we make more margin when we actually take the vehicle to sale. You know, we make revenue two ways.
One is, administering the file, and if, you know, the loan gets redeemed by the debtor, we just get a, you know, a management fee, whereas if we actually, you know, end up, you know, having to sell it, we do get a commission which results in, you know, a substantially high margin, and that's what we're seeing in the results, for this quarter.
Thanks. A follow-up is, how do we think about the capacity in that segment? You know, is there room for the revenue to continue to rise as recoveries grow, or is there a limit in terms of, you know, having the people available to do those recoveries?
Yeah, you know, we've got... It is a variable business in terms of we can bring people on, you know, to assist us in managing that business. And so obviously, it depends on the assignments from our customers, you know, to work the files. But then, you know, we do have the capacity to bring on people to assist us with the management of that, as well as the systems. And, you know, we did discuss, you know, last year, investment in our Recovery Complete software. Part of that investment was to help us to be more efficient in managing those files.
So we're, you know, we're now seeing the benefit of some of that investment, you know, as the business picks up.
And I might add the growth component to that as well, Paul, which is that, you know, we are heavily focused on improving customer experience, which Bob just talked about through our Recovery Complete software, but also in acquiring new business. So whether that's more business from our existing customers or, or looking for new customers, that is part of the sort of really ambitious services growth plan. So I think, you know, we're looking to continue to grow that business. The economy and the where we are right now, as Bob outlined, is helpful to that in that part of the business, but we're actively looking to grow it as well.
All right. Thanks for taking the questions.
Thank you. Our next question comes from Jesse Pytlak with Cormark Securities. Please go ahead.
Hey, good morning. Looking at the growth in Regulatory Solutions, just wondering if you could maybe give some type of breakdown between how much of that is coming from your existing customers and how much of that might be from new customers?
Yeah. Jesse, yeah, we don't, you know, we don't provide that information. Generally, it's, you know, we, we've got, you know, part of that business is, you know, we've got different divisions of different large companies that use our services, as well as then newer customers that, you know, as they go through their cycle of having to renew their due diligence, they, you know, they then have to update their files and so forth, and so it goes through a cycle. But, yeah, we don't have a specific breakdown of, you know, new from existing.
Okay. I guess maybe with that said, can you maybe give a sense of how much, you know, if you were to take a typical customer in that business, what kind of transaction growth you've been seeing from those customers?
Yeah.
Yeah, I think that's sort of the same question, Jesse. I know what you're trying to get at. As Bob said, we don't really disclose that. I would say that in the quarter, the majority. I think we're safe to say that the majority of the transaction increase and the volume increase comes from existing customers and business. And then we add our new customers onto that. Sorry, that's a little vague, I know, but you know, for competitive reasons, we don't disclose sort of the breakdown between new customers and existing customers.
Mm-hmm, yeah. Okay, I can appreciate that. Maybe just moving over to pricing then. I think every July, you do your price adjustments in registry, but can you remind me, is there kind of an annual timeframe in services when you typically put through price increases?
Yeah. And, you know, in services, you know, majority of the business is under, specifically in Regulatory Solutions, is under contract with customers. And, you know, typically those contracts, you know, can range up to, you know, three years in length. And so it's at the time of renewal of each, you know, each contract that we, you know, look at the pricing, you know, at that time of renewal. You know, we do have casual customers that, you know, it's a smaller percentage of the business, and we look at that annually and adjust prices. But of course, you know, most material is on the contracted customers.
Maybe, Bob, you just want to update on the Saskatchewan Registry timing. It's not July.
Yeah. Yeah, and yeah, thanks, Jonathan. Yeah, so Jesse, just, as it relates to the Saskatchewan Registries and Registry Operations, with the, you know, the, amended and, MSA, extension, you know, the fee changes now go into place in, in April versus in July. So, we did implement, you know, you know, fee changes, closer to the end of, end of April in Registry Operations. But given the, the fact that we—there was only one more month of, the quarter left, you know, in June for, for, Q2 here, you know, the impact wasn't significant for, you know, you know, Q2 of this year, so.
Okay. Thank you for the clarification. I'll pass the line.
Thank you. Our next question comes from Trevor Reynolds with Acumen Capital. Please go ahead.
Yeah. Hey, guys. So you guys have highlighted that there's increased due diligence in the current market environment occurring in Regulatory Solutions. Does that reduce, you think, when, as rates fall? Maybe just some color on that.
Yeah, like, Trevor, you know, our understanding is FINTRAC is, you know, picking up, you know, their, the regulation and their oversight of ensuring, you know, companies are complying with FINTRAC, you know, regulations. You know, if you remember, you know, last year there was a number of reports of financial institutions, you know, having fines for not keeping up their, you know, their records and so forth. And, you know, at that point, you know, regulators said they were gonna keep up then monitoring because of the deficiencies they saw. So we see that, you know, continuing, you know, to go forward, you know, into the future. Yeah.
... Okay, so not, not so much, rate dependent then. And then just maybe-
Yeah. Obviously, that's contributed to it now, but, you know, you know, just based on the announcement that they're gonna continue with that, you know, our, our expectation is that continues into the future. Yeah, so.
Okay. And maybe just on the continuing on the regulatory side of things, are you guys still seeing healthy customer growth in terms of onboarding to the Registry Complete? Or, sorry, name eludes me right now, but yeah, maybe-
Registry Complete, Trevor.
Yeah, yeah, Registry Complete. Sorry.
Yeah, we keep seeing, you know, the addition of, you know, new customers. Obviously, we're trying to continue to work to expand that business. You know, as companies look for, you know, solutions to integrate their, you know, their systems that track, you know, you know, registries information, you know, do register liens and so forth. You know, we continue to, you know, to win some business in that area, and we continue to work to develop that.
I think the answer is the same as sort of the recovery from the growth side. You know, one of the areas that we've invested in people is in our sales team, in services. So, you know, we're continuing to really go after new customer acquisition by increasing our sales and marketing and services.
Okay, great. And last one, just like there was a little bump in the EBITDA margins and services, that is that primarily attributed to the recovery, the increase in recovery revenue?
Yes. Yeah. Yeah, yeah, that's exactly it, Trevor. Like when we, because we've increased the sales, you know, increased assignments and then increased sales where we get a commission income and that then resulting in higher margin, just that product mix with the rest of the business has growth driven up the margin and adjusted EBITDA margin and services. Yeah.
Okay, great. Thanks for taking my questions.
Thanks very much, Trevor.
As a reminder, to ask a question, please press star one one on your telephone. One moment for our next question. I'm showing no further questions this time. I'd now like to turn it back to Jonathan Hackshaw for closing remarks.
Thank you, Andrea. With no further questions, would like to once again thank all of you for joining us on today's call. We look forward to speaking with you again when we next report. Have a great day.
Thank you for your participation in today's conference. This concludes the program. You may now disconnect.