Q2 2020 Priority Technology Holdings Inc Earnings Call

Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

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After the speakers presentation, there will be a question and answer session to ask a question during that portion of the cool you wouldn't need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any forgets Houston. Please press star in serum I'll now hand, the conference over to your speaker today Chris.

Commitment.

Good morning, Thank you for joining us with me today, or Tom Priore, Chairman and Chief Executive Officer, a priority technology, holding and Mike Volkmar, Chief Financial Officer.

Before we provide our prepared remarks, I would like to remind all participants that our comments today will include forward looking statements as defined in the private Securities litigation.

Format that 1995 regarding future expectations about the company business management's plans for future operations were similar matters, which are subject to certain risks and uncertainties.

The company's actual results could differ materially due to several important factors many of which are beyond the company's control, including those risks and uncertainties described in the current report on form 10-K filed with the Securities and Exchange Commission on March Thirtyth 2020.

Any forward looking statements. We make today are only as of today's date and we undertake no obligation to publicly update or review any forward looking statements.

Additionally, we may refer to non-GAAP measures, including EBITDA and adjusted EBITDA during the call.

Please refer to our public filings and disclosures, including those referenced in our press release announcing this call for definitions are non-GAAP measures and a reconciliation of these measures to net income.

We've also provided an accompanying presentation with today's call that will help us more clearly articulate our results and go forward strategy.

With that I would now like to turn the call over to our chairman and CEO Tom Priore.

Thank you, Chris and thanks, everyone for joining us for a second quarter earnings call.

As we've done over the past several quarters I'll provide a brief overview of our strong Q2 results and then turn it over to Mike.

We'll go into more detail on the performance of each business segment and cost control initiatives.

Following Mike's commentary.

Our view, how the krona virus is fairly influencing our outlook any actions, we've taken to position ourselves for the long term.

We reported exceptional second quarter results, reflecting the continued underlying strength of each of our business lines. Despite the unprecedented challenges associated with the covert 19 pandemic.

Including a nationwide shelter in place order to begin the period.

Our April results were reflective of the shutdown with merchant <unk> Bank card processing dollar volume down 31.8% year over year.

And a corresponding albeit more modest decline in revenue of 11.7%.

As we quickly adapted and the strength of our product offering and counter cyclical assets to cold.

In June results posted strong improvements.

In may.

Merchant Bankcard profit dollar volume declined 15.8% year over year.

While revenue actually increased 1.7%.

In June merchant Bank card processing dollar volume showed a modest decline of 1.9% year over year.

Revenue continued its positive momentum.

Increasing 10.8%.

For the full quarter.

Increases in E commerce.

Volume mix and product driven vertical strategy growth.

Resulted in a modest revenue increase in spite of the total prostate volume declines.

This revenue stability, coupled with a continuation of automation driven expense management strategies initiated in 2019.

Contributed to year over year adjusted EBITDA growth in each of April may and June.

With 11.6% EBITDA growth for the full quarter.

As you can see our business performed incredibly well during a challenging economic environment.

I'd now like that Mike bulk of our to provide further insights about each month during the quarter as well as current trends with particular emphasis on the business segment performance.

Mike.

Thank you Tom and good morning.

I'll review the trends within the second quarters. Our consolidated results then provide commentary on the business segment performance as Tom mentioned, all comparisons that I make will be between second quarter 2020 in second quarter 2019, unless I state otherwise.

We really needed the SEC the full quarter's results the best understand the financial performance and current business trends, Tom is already shared intra quarter year over year growth rates.

Now, let me recap by each month.

Merchant Bank card volume process was 2.4 billion in April.

3.2 billion in May and 3.6 billion in June totaling 9.2 billion for the full corner.

Revenue was 26.7 million in April.

31.9 million in May and 33.8 million in June totaling 92.4 million for the corner.

Adjusted EBITDA was 4.6 million in April 5.9 million in May and 6.2 million in June totaling two the 16.7 million for the full quarter.

As Tom mentioned the April results reflected the nationwide shelter in place orders.

In May regional economies were opening and our processing volumes volumes began to return.

And revenue and gross profit growth was supplemented by acceleration of our specialized product offerings and counter cyclical assets.

May and June posted increasingly strong results, which is reflected a which is reflective of the strong momentum we have in the business.

This demonstrated revenue stability and performance coupled with the implementation of thoughtful expense management strategies contributed to the year over year adjusted EBITDA growth in each month of the corner as Tom had mentioned.

Full quarter revenue of 92.4 million was above the 92.1 million in 2019.

Throughout the quarter, our diverse distribution channels continued strong new merchant boarding with 4400 added in April 4100 added in May and over 4600 added in June.

This is in line with historic trends of 4500 to 5000 per month, and bodes very well for a stable base revenue outlook as new processing volume is added to the platform.

Full quarter gross profit of $30 million approximated 30.1 million in 2019.

Gross profit margin was 32.4% compared with 32.7%.

This margin performance in light of the overall volume decline reflects growth within our higher margin E commerce and integrated partner businesses.

Full quarter income from operations of $4 million increased 65.5% from 2.4 million.

The expense strategies that we began to put in place late last year helped drive a 7.7% decline in salaries and employee benefits and a 20.8% decline in SGN ethane.

Now, let's break this down within the segments.

Consumer payments revenue was $81.7 million <unk>, 0.3% increase from 81.5 million.

Despite a 16.4% decline in merchant bank card processing dollar volume in this segment.

Revenue increased due to the strong growth delivered by E Commerce.

Merchant Bank card volume processed was 9 billion, a 1.8 billion decreased from 10.8 billion.

Merchant Bank card transactions of 92.8 million declined 28.7% from a 130.1 million and the average ticket $97.06 grew 17.2% from $82.79.

The overall merchant mix drove this higher average ticket in the comparable periods.

Consumer payments income from operations was $7.3 million approximating the 7.4 million in 2019.

Gross profit decreased 5.8 million was almost entirely offset by a point 7 million dollar decline in operating expenses.

This is the result of automation initiatives and focused expense management.

Commercial payments revenue was $5.7 million, 13% decrease of point 8 million.

This was comprised of revenue from CPX of 1.4 million, which was up 7.9% and revenue from managed services, a four point Threemillion, which decreased point 9 million.

The managed services decline was driven by lower program activity and incentive revenue as a result of the covert pandemic.

Commercial payments income from operations was point 5 million compared with a loss of operations <unk> point threemillion in the prior year.

Well gross profit was relatively flat other operating expenses decreased the point Eightmillion again.

This operating income performance reflects the benefits of automation initiatives and focused expense management.

We expect that our current cost structure within the commercial payments segment will support the anticipated accelerated growth.

We'll have in the future.

Integrated partners revenue was $5 million, a 19.2% increase from 4.2 million.

Correct was the largest dollar contributor with a 22% increase.

Hospitality is eat tab ordering advanced solution experienced the strongest percentage growth within this segment at 114.6%.

The integrated partners income from operations was point 8 million up 47.7% from point Sixmillion.

Integrator partners adjusted income from operations in the second quarter of 2020, which excludes nonrecurring integration costs was 1.7 million compared with 1.3 million in the second quarter of 2019.

Corporate expense was 4.6 million compared with 5.2 million in the second quarter of 2019.

Nonrecurring expenses were half a million in the second quarter of 2020 and point 8 million in the second quarter of 2019, so excluding those nonrecurring items corporate expense was 4 million and 4.4 million in each in the second quarter of 2020 and 2019, respectively.

Now, let's review our improved liquidity position.

Our strong focus on cash management resulted in increased unrestricted cash balance and a net repayment of debt during the quarter.

Net cash provided by unrestricted operating activities amounted to $8.8 million, we apply this cash to investing activities and repayment of debt, while increasing our unrestricted cash balance the $5.9 million.

At June Thirtyth, we had $499.9 million of outstanding debt, which included 14.5 million outstanding under the $25 million revolving credit facility.

Our net debt stood at four 494 million and the total net leverage ratio determined under the under the credit facility terms was 7.46 to one down from 7.67 to one at March 31st.

In our first quarter earnings call, we mentioned that we're laser focused on a meaningful reduction and leverage we've been hard at work to achieve that objective and hope to have some exciting news on that front in the very near future.

Now before turning the call back to Tom I'd like to provide an update on where we stand regarding guidance.

And our earnings release, we stated that there continues to be considerable uncertainty regarding the duration and the severity of depend dynamic.

Well, we certainly are excited by the momentum in our business for the time being we will continue to refrain from providing financial guidance for the full year 2020.

However, should the current economic environment continue we're optimistic that our financial results. During the remaining months of 2020 will continue to improve over those we delivered in June.

Now I'd like to turn the call back over to Tom.

Thank you Mike.

I'd now like to share more detail about the most recent trend we've been seeing in the business.

As most of you saw on our June 17th really leading up to the annual meeting.

Well the global pandemic has affected priority in a variety of ways.

We successfully withstood its initial impact and quickly rebounded.

In a way very few industry have been able to do.

As Mike noted the decline in processing volume, meaning we've been offset.

Outstanding performance and higher margin E commerce commercial payments and integrated payments segment.

Underlying the strength of our product offering and best in class line service.

Our merchant adoption trends are consistent with historical levels at 4500 to 5000, new merchant boards per month.

Importantly.

As we continued to see accelerating trends from May and June carry into July.

As toll processing volume.

In July improved 1.4% year over year.

And 10%.

Hair.

June to 4.35 billion.

And revenue increased 19% year over year in July.

An 8%.

Year to June.

36.5 million.

Based on these results are preliminary expectations are to achieve adjusted EBITDA of 6.6 to 6.8 billion.

In the month of July depending on the final closing of the month expenses.

This represents an over 60% increase in adjusted EBITDA from July 2019.

Through the middle of August.

Total processing volume is on trend to exceed 4 billion.

Signaling a high likelihood of revenue and adjusted EBITDA result.

In line with July's runway.

Our resiliency through the pandemic reflected number key operational and strategic Differentiators.

Namely.

Priority Virtualized infrastructure and shared service operating model has enabled us to seamlessly adopt.

<unk> working environment.

Position, our service teams to their greatest utility in order to advance the business goals of our partners.

The strength of our diverse sales channels, which continue to add net new merchants.

And last the value of our integrated product offerings in real estate hospitality healthcare.

GDB payments and automated payables.

Simply put as demonstrated by our quarter to result in early Q3 trends.

There's a strengthening foundation.

The resilience of our commercial payments defensively positioned integrated verticals and maintaining our diverse variable costs.

Be distribution channels.

All of these assets are paying dividends for priority, it's customers and shareholders.

Particularly given the current.

Challenging economic environment.

We believe that the conditions influencing behavior in the current environment likely signal a significant change in how businesses will need to operate in the future.

Increased use of technology to support contact lens E Commerce.

Integrated software with digital collected tool.

To support the healthcare revenue cycle real estate payment collections.

Account payables for businesses of all sizes is likely to perform well.

And we certainly positioned our product offering and our distribution channels.

Capture those opportunities.

In addition to building a diversified counter cyclical business well suited for evolving economic environment like today.

We've taken steps to streamline our cost structure by driving automation.

While also investing opportunities to expand.

These integrated payment initiatives to drive long term.

Consistent growth.

Well continue to identify ways to enhance our balance sheet by reducing debt and enhancing overall liquidity.

Giving priority to resources and flexibility necessary.

The only navigate through this uncertain environment.

To merge incredibly well positioned to compete for the long term.

Before I wrap up.

I'd like to quickly thank the priority team for their hard work and dedication getting a job done.

None of our success over the past several months could have happened without a whole team effort to meet the needs of our customers and stays rapidly evolving evolving marketplace.

And everyone dedication to move our mission forward.

Thank you to the entire team for all that you can you do everyday you've done.

In conclusion.

We're very pleased with the second quarter results, especially in light of the ongoing impacted cold in 19 and are excited by the strength, we're showing thus far in.

Q3.

As we proceed through the second half 2020, we expect to experience continued growth in our counter cyclical integrated payment assets.

Our E.

Our E commerce acquiring program.

And we'll remain focused on maintaining our leaner cost structure.

And further leveraging our platform to deliver even stronger results in the quarters in years ahead.

Operator, we'd now like open the lines for questions. Please.

Thank you <unk> and that's how we mined ladies and gentlemen, if you have a question just press Star then one when your telephone keypad. So we draw the question just press the pound ASCII.

Please standby well be compiled that Q and a roster.

Thank you in our first question I think some Andrew Scott with Roth Capital Partners. Please go ahead.

Hey, good morning, and congrats on the.

Strong results this quarter.

My first question stems from <unk> integrated partners business I know ex thing first quarter, Yeah pay right and <unk> businesses, we're seeing great momentum a lot of adoption do a corporate 19th Pandemics. If you give us an update as to how these businesses in the second quarter.

Yeah sure the.

So as Mike noted these have a.

Channel are all called the hospitality channel continued to experience triple digit growth.

So that you know that adoption has been up.

As continued unabated, we actually also just released a some new tech in that segment or.

Contactless dine in.

And our in beta with a a.

Fully integrated kind of an omni channel pls.

For for that segment as well so we're pretty excited about what you know what's on the horizon for that business.

The the pay rate segment was a was relatively flat.

We've.

We.

We've got some new initiatives in that arena that you know, we're will probably be in a position to talk to a little bit later in the year, but but that was generally flat for the for the quarter.

Great. Thank you in a looking forward to <unk> later in the year second question here since the deal with.

<unk> came in I was wondering if.

We can expect any changes in model or you guys.

Plans here to.

Pay that off in the immediate future guys kind of comfortable where are you were now in sticking with the original plan and feel confident I'm.

Getting that either way in due time.

Yeah, I mean look right right now we've we've got good momentum behind all our business channels and you know, we certainly anticipate some natural deleveraging.

But.

We are.

We have some opportunities that the you know where we're developing that we think will will accelerate.

The you know the repayment of debt.

And you know as those.

Come into.

You know come into execution will be well, we'll be looking forward to sharing you know those details.

Hopefully in and frankly, the near future.

Like I don't if you have anything further you would add.

No I think that the comments I made you know that we're very laser focused on significantly de levering the balance sheet.

And and we've got good opportunities ahead of us to do that and also creates some good business opportunities at the same time. So we're pretty excited about where we are with that and just.

Stay tuned as all we can say.

Sounds good well congrats again on the quarter and a great momentum you guys have going in the business here.

Yeah. Thank you can look on that note on that note just as it relates to to de leveraging you know we've.

Yeah.

As I'm sure you can appreciate their their number of a payment assets out there. It's been a its been a segment that it's been heavily invested in you know among the private equity community.

And you know there's assets out there that maybe haven't fared as well.

And.

Those partners are recognizing that you know priority does have a very unique operating capability.

To streamline payment operations and operate very cost efficiently you think.

You know for.

For all the difficulty of this.

This particular, you know pandemic a it does afford the opportunity for those.

Those abilities to come to the four because they are tested.

So so we've we've seen a lot of.

You know inquiry into how partners can leverage our platform.

We expect that to be Oh.

Ah Onez, we solidify some of those those partnerships to be a you know really.

Valuable source of Ah of deleveraging or you know for our business.

Great. Thanks again, that's a that's all for me for now.

Thank you enough I remind her ladies and gentlemen to ask a question you want me to press Star one when your telephone.

And our next question is from cloud golf ball with LCR. Please go ahead.

Hi, good morning, Thanks for taking my questions.

Sure.

The commercial payments business pulled back this quarter just wanted to ask what are you doing to accelerate growth in that segment.

Well the.

And Mike I'll feel free to jump in here churn the.

The commercial payments of called the automated payables platform I'm.

Actually.

Grew through the through the quarter.

So.

That that segment.

He is a little bit different than the men service group, which is more of a contract is part of commercial payments, but as a contract for higher.

And that segment backed up.

Because of the the cobot pandemic some of those programs. We're just we're just slower as a result.

And they serve the likes of American Express and you know other large institutions that yeah as you might imagine you know kind of.

Put the brakes on on a on a few things so.

We're actually.

The pipeline for a the automated payables and the CBS platform is.

Yes.

It is pretty darn full I'm, so there's no north of.

30, plus billion in in and payments volume that were.

You know where in the process Oh activating huh.

And Ah and we are.

You know that that pipeline continues to expand so right now and I think just to be important take away for that business.

Is.

We don't have the need to invest in infrastructure in that business. So as we just convert the pipeline that exists.

Well all of that.

It's going to hit the you know just just flows to the bottom line.

Some of the pipelines been a little bit delayed.

Due to the pandemic as you might imagine.

The constituent there being no commercial banks.

Have a had been a little slower to roll out their programs because.

Their remote but we expect that to.

To pick back up here and in a in terms of Rollouts in the Q4.

And.

And you know convert that that.

Pipeline that that's already in place.

Yeah. The other thing I'd add to that the managed services part of that business is you have to look at that it's just a nice foundational business. It's always generated some some decent cash flow for us.

It's the automated payables and that CPX platform that that's where we're going to get the you know the accelerated growth and it'll it'll like.

Eventually it will you know overshadow, what's going on with what's happened with the managed services, but on the so that they use it to sort of businesses to different complexity is one is a very high growth opportunity business. You know, there's just a nice foundational a cash generator.

Okay. Thanks.

And just one another question.

There are additional cost reductions you can make if processing volumes get worse.

There are there are we.

We actually made.

Well, we would consider pretty pretty modest.

Reductions in.

You know in in personnel.

That were.

Driven by automation that we had begun to put in place in 2019.

We we have some other.

Automation projects that will also just.

Will naturally.

Ah reduce opex as a percentage of of Ah of operations.

Our operating costs.

And and then to the you know if we did see an acceleration of another wave of the pandemic.

There are certainly levers, we can pull but but right now.

We don't.

We don't see the need.

Floor it.

And now would you know frankly be kind of a worst case.

Economic scenario.

But but there's there.

And and right now we're you know we're now we're in a pretty.

Optimized state for.

You know for driving the sales growth it.

We continue to see.

So.

Yeah, and there you know we don't positioning right now.

Sure and we did or furlough and April.

We saw the pandemic you know it's bad as it was two businesses and the economy and too you know through the quarter, we added but some of those folks back to help US you know with the growth that we were seeing that's evident in our May June results.

So we kind of flexed up a little bit and so we know we can we can be responsive to changes going forward.

When need be and we as Tom said it was a modest initiatives, we took which was like plan and we had a plan b, which we didn't have to go to but you know where we will do what we need to do to maintain our profitability and cash flow.

Alright, Thanks, and I just have one last question.

How active do you expect to be on the acquisition front this year, especially given the continuing cobot situation are you seeing valuations come down at all or anything like that.

Yeah, we're we're always evaluating.

Opportunities and and.

It said it if if we were to.

If we were to execute on on a.

Transaction. It would you know would it would certainly need to be a de leveraging one.

So.

You know some of the the.

The ways or would influence the balance sheet wood.

You know would be.

Substantial considerations for us in the types of transaction that we would do we would look at.

Alright, thanks very much.

Thank you and this concludes our Kiani question for today I will like to kinda back in management for final remarks.

Well on behalf of Ah, Mike and the rest of the priority team.

Just wanted to thank everyone for their participation in the call a we're certainly excited about.

The momentum that has been established in the business. We you know we we certainly felt was a was there.

Moving.

Into 2020.

And.

Yeah, we are we're laser focused on the.

On the key performance direct is that you know that that we set forth continue to.

Build our integrated partner channels and.

Stable source of revenue that it we've.

We've clearly seen take hold in Q2.

And.

Utilize that.

As a means to to further de leveraged balance sheet in thoughtful ways.

And.

We will.

We will be intently focused on those on those records through the remainder of 2020. Thanks, everyone for your time and I Hope everyone has a great day and continues to see safe.

And healthy.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.

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