Q3 2021 Conduent Inc Earnings Call
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Greetings and welcome to Conduits third quarter 2021 earnings results conference call at.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Please note that this conference is being recorded.
I will now turn the conference over to our host Giles Good Byrne, Vice President of Investor Relations for conduit. Thank you Sir you may begin.
Thank you operator, and thanks, everyone for joining us today to discuss condo instead quarter 2021 earnings. We hope you had a chance to review our press release issued earlier this afternoon joining.
Joining me today is cliff Skelton, our president and CEO and Steve Wood, our CFO.
Today's agenda is as follows Cliff will provide an overview of our results and a business update Steve will then walk you through the financials for the quarter as well as providing our financial outlook. We will then take your questions.
This call is being webcast and a copy of the slides used during this call as well as the press release was filed with the SEC. This afternoon on form 8-K with.
This information as well as the detailed financial metrics package are available on the Investor Relations section of the conduit website.
During this call we may make statements that are forward looking these forward looking statements reflect management's current beliefs assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements.
We feel about the remainder of the year.
So if you turn to slide four you'll see that our revenue in Q3 came in at $1 $38 million virtually unchanged from the prior year.
And slightly up when compared to the strong Q1, and Q2 performance of 2021. Meanwhile, EBIT came in at $130 million very similar to Q2 of this year and similar on a year over year basis. When you compare to last year normalized for cost saving efforts. We had last year. These one time temporary cost savings we had last.
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Margins remained flat quarter over quarter at 12, 5% of course, thats somewhat benefited by the strength in our government payments business.
Regarding new business sales Q3 delivered $344 million.
That brings our year to date sales to $1 475 million Thats, a 4% increase over prior year and that's so far obviously.
As you know new business TCE can really be quite lumpy in any individual quarter, but we feel really bullish about the pipeline for the remainder of 2021 and into 2022 across really all segments and we think that's a good signal for sales.
New business sales anyway in 2022.
New business <unk> is also up versus the prior year at $297 million.
And that was with $87 million in IRR contributed in Q3 again, our belief is what you really want to look at is this annualized gradual improvement each quarter, because thats really what we think is the key to future growth.
Given what is always variation in timing of deals and revenue ramp.
Finally, this net AAR metric, we've talked to you about in the past, which is that trailing 12 months metric that we've discussed with $132 million.
This is our fourth quarter of positive net IRR.
And while you may expect some occasional lumpiness there.
Up 25% compared to last quarter.
As we've mentioned in the past this net AR metric is particularly important it's really a much better indicator of growth and retention than other metrics that other folks using like we've used in the past like renewal rate.
While necessary to maintaining our momentum in the next phase of this growth effort we've had underway.
If youll turn to slide five you can see the consistent performance net annual recurring and nonrecurring new business revenue. Despite any possible lumpiness you might notice in any individual quarter as.
As I mentioned that $21 billion of high quality opportunities in our pipeline.
Is better than ever right now in terms of our confidence levels again as mentioned that really helps us out in our bullishness for 2022.
Let's go back just for a minute to this net activity metric the thing I'd like everyone to remember here is that while not tied to any particular revenue recognition date the.
The fact is that the metric is all inclusive. It includes deals we won deals we lost price changes up and down and contracted volume changes.
As I mentioned, what's really key here is that once we've outrun those legacy losses, which we're rapidly approaching and Steve is going to materialize for you in just a minute.
This metric is the best possible indicator of growth.
And the four quarters that we've been measuring this trailing 12 month metric has been positive and growing each subsequent quarter.
Our strong <unk> for the last six quarters combined with better client retention is driving the strength in that number we expect the momentum to continue.
On slide six Youll note examples of our continued momentum in the market.
Our <unk> filings and in the appendix of the presentation.
Let's turn to slide eight and discuss the Q3 2021 results starting with the P&L.
We finished the quarter in line with our internal revenue expectations with revenue at $2.038 billion down 0.3% year over year.
Revenue benefited from increased pandemic snap volumes and our government segment and increased new business ramp and our transportation segment.
As we begin to implement some of our previously announced flagship deals, including Ohio lanes on highways, England.
This was offset by lost business from prior years.
Adjusted EBITDA for the quarter was $130 million down seven 8% year over year.
With the prior year compare benefiting from temporary cost savings associated with COVID-19.
Our adjusted EBITDA margin for the quarter was 12, 5% down 100 basis points compared with Q3 2020.
Both EBITDA and margin was slightly above our internal expectations.
My short term cost savings that benefited Q3, 2020 as well as revenue mix.
Our government's segment revenues increased 3% for the quarter.
Increased pandemic snap volumes and our government payments business offset loss business from prior years.
Additionally, our government healthcare business lapped the runoff of the Kamus contract showing the third quarter and is positioned well for growth.
Governments segment, adjusted EBITDA increased by 4%, while the adjusted EBITDA margin of 38.1% increased by 130 basis points.
This margin improvement was driven by revenue mix.
Our transportation segment revenue grew 2.9% as compared to Q3 2020.
This was primarily driven by increased volumes and new business Ram, including contributions from highways, England in Ohio lanes.
This was partially offset by Los business from prior years.
In the quarter, we announced an additional domestic tolling when the Virginia V Dot I 64 express lanes contract.
These significant new tolling contracts positional transportation segment, well the continued growth as we exit 2021.
Transportation segment, adjusted EBITDA was down 29% compared with Q3 2020.
Which was our margin high point in 2020.
Like last quarter. This was driven by temporary cost savings that benefited Q3, 2020 as well as revenue mix.
Adjusted EBITDA margin for the quarter was 13.9%.
One 610 basis points year over year.
And up 40 basis points sequentially.
We expect sequential EBITDA margin improvement in queue for.
For the quarter the companies on allocated costs were $81 million, which included the impact of a one time expense items.
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A balance sheet continues to remain healthy and we have a solid liquidity position.
We ended the quarter with $400 million of cash on the balance sheet.
As of quarter, and we had approximately $740 million a capacity under the revolver.
Our next leverage ratio at the end of the quarter was two turns in line with our target of two to two and a half tons.
On October 15th as planned we completed our debt refinancing a.
Extending our debt maturities to between 2026 and 2029.
The new debt structure consists of a term loan a <unk>.
265 million June 2026.
A term loan B, a 515 million June 2028.
And senior secured notes, a 520 million <unk> in 2029.
Expect revenue to be sequentially higher than Q3, 2021, but slightly lower as compared to Q4 2020 deliver.
Delivering us towards the midpoint of our guidance range.
As we discussed last quarter, we expect our adjusted EBITDA margin to come down sequentially from Q3 and to finish the full year at or above the midpoint of our guided range.
We still expect to convert 20% a full year adjusted EBITDA free cash flow.
As a reminder, normalized for the impact of the Kazakh payroll tax payment to be made in December 2021. This number would be approximately 25%.
Yep, Sharon Steve I'll I'll I'll cover all covered some some some comments on stimulus and then I'll flip it to cliff and Cliff will talk about about the infrastructure Bill. So look stimulus is clearly one of the components that we're dealing with.
As we think about the run off.
From from the effects of Covid, we've obviously had some headwinds and some tailwinds and so whilst I Wanna stop shoulder kind of giving sort of talking about guidance for 2022.
Clearly when we come back and talk about 2022 at the beginning of next year the effects of the off ramp of government stimulus and then the effects that we expect to come back and continue to come back and transportation and commercial are going to be part of that rubric, because we think about.
About 2022 and clearly.
We're going to witness the pandemic snap programs effectively concluded legislatively at the end of September this year, but we've got a remaining elements of paper of that revenue that we will see in queue for yeah, just don't follow up a little bit Shannon on on.
Again not.
In the in the migration to work from home.
By the way I work from home in many ways is a good thing for US we're seeing seeing.
Good SLA performance and I work from home environment higher percentage of our folks currently working for a moment likely to stay at home that create some advantages from a recruiting perspective that we like compared to say retail or others that have to be in a in a brick and mortar.
It would also create some opportunities in a real estate footprint downsize them and so that's that's what we're focused on and that's where do you see a little bit of that increase in restructuring costs and we also see some good work around moving too.
Chief operating officer model, where we've got a heavy focus on quality.
And and efficiency and that's driving some some opportunities for us to to create efficiencies that also contribute to.
Two that restructuring charge. So that's kind of the migration that we're focused on with respect to restructuring.
Great. Thank you very much.
You bet. Thanks Shannon.
Thank you.
Our next question comes from Puneet, Jane with J P. Morgan. Please state your question.
Hey, Thanks for taking my question.
Looks like this quarter.
Number of what's down an ear on yet that's what that's our secret services.
Just like the timing off some of that new projects in the pipeline.
Improvement and you know you you like like like we kind of thinking.
Over the mid terms, that's kind of where we where we want to get the drive is clearly some of those conversion effects are going to be affected by.
Restructuring and other items. So, we'll we'll clearly come back and talk more about.
When we talk about 2022.
Beyond in terms of tons of where we're heading does certainly looking at the loss.
Yeah 218 months so.
We're trying to you in a direction that with with that we're confident with.
Gotcha.
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You bet. Thanks, Thanks, Tony.
Thank you. Our next question comes from Ashwin sure if my car with city. Please to your question.
Good evening.
Yeah.
Hey, So my question was it with regards to sort of be sequential trends that I'm kinda looking at here.
Particularly when a they'll get transportation right and I know that cutie can be.
Generally weak or because of transit theme weeks in the summer.
But is there anything else going on when I looked at 12.1%.
You know grilled <unk>, two Q going down to 2.9 victory seems to be perhaps a little bit more of a detail than one would normally expect.
Yeah actually let let let me cover that so.
So.
And so we're catching up it's coming around.
Okay and by supply chain you mean.
Truckers on highway mainly because.
All these trucking companies are still looking for people to drive that cups.
Ashwin, Mike My comment was slightly slightly different to that I'm actually talking about about getting equipment shifts.
Getting equipment through customs getting equipment.
Literally off of ships. An example would be highways, England, where we're deploying equipment and wear and Theres a lot of development work being done where they need chips and so those two things are causing that project to be slightly behind timeline not behind revenue, but slightly behind timeline. So yes, I mean youre right. Its everything its ships it's true.
Since it is the entire supply chain environment, but that's coming around and the whole industry is feeling the same thing.
Got it got it thank you for that and if I could ask you to kind of look perhaps at here.
<unk> pipeline.
And.
Give us some color on how that is.
Shipping up given all of your efforts.
From a from a cost perspective from a capability perspective is the message getting out that theater.
Transforming yourself clients recognizing it and so on.
It's a great question I wish you'd asked me to ask.
Yes.
I wish I had asked for that because we are very.
We're very bullish on the pipeline the pipeline gross amount of the pipeline is reasonably flat 'twenty, one 'twenty 2 billion.
Which is what we were a year ago, but what's changed in the pipeline is just what you said the confidence level.
Confidence both from us and our clients. So what we're what we're seeing in the deals that are in the pipeline is more confidence in the quality of the deals.
More of the deals in the staging that have moved slightly to the right.
Which bodes well for the last half of 2022.