Q1 2022 Dye & Durham Ltd Earnings Call
Good afternoon. My name is Kelsey and I will be your conference operator today at this time I would like to welcome everyone to the dine during our fiscal 2022 first quarter results earnings call.
I would now like to turn the call over to Ross Marshalls Investor Relations on behalf of Dine during him. Mr. Marshall You May begin your conference.
Thank you Kelsey and good afternoon, everyone welcome to dine during fiscal 2022 first quarter results conference call before we start we'd like to remind you that all amounts discussed on this call are denominated in Canadian dollars unless otherwise indicated please.
Please note that statements made during this call may include forward looking statements and information and future oriented financial information regarding dine Durham, and its business and disclosure regarding possible events conditions or results are based on information currently available to management, which indicate managements' expectations of future growth results of operation business performance and business.
Prospects and opportunities.
Such statements are made as of this date hereof, and dying Durham assumes no obligation to update or revise them to reflect events disclosures or circumstances, except as required by applicable securities laws.
Such statements involve significant risks and uncertainties and are not a guarantee of future performance or results.
Number of these risks or uncertainties could cause results to differ materially from the results discussed today, given these risks and uncertainties one should not place undue reliance on these statements information. Please refer to the forward looking statements information and if you try and paid financial information section of our public filings without limitation, our MD&A earn.
Earnings press release issued today for additional information.
Joining us on the call today are Matthew proud <unk>, Chief Executive Officer, and <unk> <unk>, Chief Financial Officer, I'll now turn the call over to Matt for his opening remarks.
Thanks, Ross and good afternoon, everyone. We're pleased to be with you today to review recent developments at <unk> as well as our financial and operating results for the first quarter of fiscal 2022 for the period ended September 32021.
On page four of the presentation, we've built a highly reliable platform that generates digital infrastructure light cash flow.
Annuity like nature of our revenue and the relatively fixed nature of our cost base provides for a tremendous level of predictability both for revenue and adjusted EBITDA. It also allows us to drive the high EBIT margins, we do because revenue can scale dramatically without a corresponding cost increase.
We have grown to more than 50000 customers.
Acquisition growth models are often face with customer churn. This is not the case for <unk>. Our net revenue retention is an incredible 159% for the.
In the quarter.
Which demonstrates our ability to retain customers and grow with them as we optimize the value of the platform and the value of the efficiency of generates for the people that use it.
The business today is dramatically larger than it was at the time of IPO on our revenue and adjusted EBIT basis, we're achieving a scale in the market. Furthermore, our operational footprint has grown as well with more than 1500 people today working at di and Durham across the three major markets that we're in.
We continue to execute on our strategy to acquire integrate and operate to drive EBITDA. This afternoon, we reported revenue of approximately $113 million and adjusted EBITDA of more than $62 million in the first quarter.
We continue to constantly deliver on adjusted EBIT margin of above 50%. Despite the strong growth.
The growth, we're delivering really comes into focus when you look at these figures on an annualized basis.
When you do that it's $452 million in revenue and nearly $250 million and adjusted EBITDA.
To put that.
Adjusted annualized adjusted EBIT figure into perspective.
It's in line with what market expectations for our fiscal year 2023 are.
And we are all we're already at that level in the first quarter of fiscal 2022 with much more growth to come.
To date, we have $1 $7 billion of capital available to us to acquire new assets from the recent recapitalization, we announced in October with Aries and.
And I can tell you we plan to deploy.
We have a pipeline with more than $500 million.
Of incremental adjusted EBITDA and that factors in that we recently did two major acquisitions.
These opportunities fit.
With the model.
Acquiring and operating mission critical software that powers the transactions in the economies we service.
We've created a global leader in software that services legal and business professionals for workflow solutions and regulatory data and information.
Our products are used for a wide array of underlying transactions across major western English speaking economies with the vast majority of revenue being driven by.
By transactions in the real estate market.
We integrate workflows and processes that legal professionals use every day, sometimes multiple times a day into one convenient platform and we're focused on expanding our value proposition to customers by extending our reach into adjacent markets of their ecosystem.
During Q1, we continue our acquisition strategy with two more acquisitions and the deployment of approximately $320 million.
We've now deployed just over $1 1 billion in acquisitions since IPO.
Of course, we prefer to pay less.
Versus more but the key metric we evaluate acquisitions on is how valuable is that asset in our hand.
We target post synergies post synergy.
We target a post synergy metric of less than five times EBITDA compared to the purchase price.
We have the capital to continue to execute on our build to a 1 billion strategy as we continue to scale the business for the future.
Our performance this quarter demonstrates the scale that scale, we've grown revenues by more than 400% in adjusted EBIT by nearly 400% year over year, while maintaining world class margins.
That's what we've done.
But I'm much more interested in where we're going.
Slide eight should be familiar to you.
It's the best way I can think of would describe our strategy acquire good assets integrate them efficiently and drive EBITDA. We put this strategy to work as a private company prior to 2020 and effectively since the IPO. We've raised $1 9 billion in equity and debt from June 2020 to March 'twenty one.
We've deployed that capital into accretive acquisitions to drive 398% increase in adjusted EBITDA.
Today as I mentioned, we have $1 7 billion of capital available to deploy a new acquisitions and drive even more EBITDA as we as we build to a $1 billion and execute that strategy.
Slide nine breaks it down for you at the time of IPO, we were doing approximately $40 million and adjusted EBITDA.
We acquired a total of $76 million in incremental EBITDA in the 11 acquisitions, we completed since July 2020.
But we've grown our adjusted EBITDA on an annualized basis to nearly $250 million the remainder of that being made up to us making these businesses much more efficient in our hands.
In aggregate, we have paid approximately 15 times adjusted EBIT for those acquisitions, and we've driven the grouping them down to just over five times EBITDA on a post synergy basis.
What's most impressive as we've all done this in less than 15 months.
That's an incredible performance. We believe there are still synergies recaptured on the acquisitions, we've completed and we are well over our way to driving that number below five times.
We're very serious about our build to a 1 billion strategy today, we have approximately $250 million in annualized adjusted EBITDA and as I've said, a few times access to $1 7 billion in capital.
We plan to deploy as much capital that much capital if not more over the next 18 months as we did over the previous 18 months.
As I previously mentioned, we have a pipeline of more than $500 million of incremental pre synergize adjusted EBITDA.
The opportunities in the pipeline vary in size, including Transformers transformational ones and are well distributed in all the geographies we operate.
Today, we continue to target a five times EBITDA post synergy <unk>.
Trick in all acquisitions, we pursue and as you saw on the previous slide we demonstrated that we can deliver on a post synergy basis to a multiple of just over five four times in just one year and theres more to come out of that.
So all that said.
As we put to work the $1 7 billion in capital our balance sheet. We are confident that we'd be able to achieve the same five times multiple post synergies.
Which will equate to an incremental which will equate to an incremental adjusted EBITDA of $320 million or total EBITDA once deployed and synergize of $570 million once.
Lloyd.
Now I will turn the call over to Al <unk> our CFO.
Thank you, Matt and good evening everyone.
Overall, it was another record quarter for us.
We reported revenue of $112 6 million in Q1 up from $21 9 million a year ago. This represents a growth of 414%.
We also generated adjusted EBITDA of $62 4 million up from $12 5 million or 398% from Q1 of fiscal 2021 and.
In addition, we continue to maintain strong margins coming in at 55% this quarter, which is right in the middle of our targeted range of 50% to 60%.
Significant top line growth has been fueled by both the acquisitions, we completed along with the integration activities at our organic growth, which includes the realization of synergies from price adjustments.
Looking at revenue growth on a sequential quarter over quarter basis, our revenues grew by $28 2 million compared to Q4 of fiscal 2021.
As Matt mentioned, we completed two acquisitions during the quarter Global Act and TM group, which contributed to this growth in revenue in addition to the price adjustments synergies.
Total operating costs, which include direct cost technology, and operations and general and administrative and sales and marketing costs were $50 2 million for the quarter or 45% of revenue compared to $2 4 million for the first quarter of prior year.
The increase in direct costs is directly tied to our revenues.
It will increase proportionally as our revenues increase.
Increase in other operating costs is due to cost acquired from the acquisitions completed during the period and our continued investment in human capital for scale.
We expect our operating costs continue to be within the 40% to 50% range.
Net finance costs for the quarter was an income of $12 6 million compared to a cost of $22 7 million in the first quarter of prior year.
Included in finance costs or changes in fair value of convertible debentures contingent consideration and derivatives.
During the quarter, we recorded $19 6 million of noncash gain on changes in these fair value.
Accounting rules require us to mark to market or fair value of these instruments each quarter. So that we do expect this variability in our finance costs to continue.
Acquisition restructuring and other costs for the quarter or $10 6 million compared to $4 8 million in Q1 of last year. These.
These costs will continue to fluctuate depending on the transaction activity each quarter in.
In addition to our regular acquisition and integration costs during the quarter. We also incurred significant costs, leading to the privatization transaction and legal costs associated with the CMA order.
We continue to maintain a low level of leverage.
Current business with approximately only $240 million in debt, which excludes the convertible debentures.
We believe the annuity like profile of our cash flow allows us to carry more leverage while still be cognizant of the capital market is conservative in nature towards that.
Now I'm on slide 16.
We've built a resilient business.
On this slide you can see the consistent growth we have delivered an adjusted EBITDAR during the past five quarters.
We've managed.
Puts and takes during this period to deliver outstanding performance.
As we all know one headwind is the real estate market.
It cooled off during our fiscal Q1 period, when compared to Q4 of last fiscal year.
We took decisive action in short order and manage through this environment.
Despite lower real estate market transactions, our revenue and adjusted EBITDA growth stayed strong driven by price adjustments synergy.
It is a short term example of how we can manage the business during cycles, while still delivering for shareholders.
We have a proven track record over the past many years of leveraging our strong cash flows and balance sheet to acquire and integrate a company that will accelerate our organic revenue and adjusted EBITDA growth from synergy.
And this slide really shows the strategy at work as we identify strong acquisitions that are complementary to our existing business and provide enhanced.
Customers.
As Matt mentioned, the $1 7 billion in capital available we have for future growth.
One level down and see how it deploying that impacts our leverage ratio or.
Our leverage ratio today is extremely low approximately half a turn.
With the capital we secured from areas transaction, there was a $1 4 billion available net of fees and repayment of current credit facility.
When we evaluate that figure the five times post synergy multiple we have established in our past acquisitions.
We arrive at a leverage ratio of $2 Nymex.
Which we think of as conservative draw.
Drawing down on delayed draw term loan, we again and that we gained another $40 million and adjusted EBITDA, which still keeps us at a reasonable three times adjusted EBITDA to debt ratio.
The key takeaway from this slide as we deploy capital and drive incremental adjusted EBITDA, our net debt ratio remained fairly consistent.
There will be lags from time to time as we acquired the asset in the multiple paid for the existing EBITDA until we achieved a five times post synergies multiple but as Matt described we have a track record of executing on those synergies quickly and less than 15 months based on the 11 acquisitions since the IPO.
Based on the annuity like attributes of cash flows, we're very confident in our ability to deliver and maintain at reasonable leverage ratio.
On slide 18.
Matt mentioned the scale of the business has achieved.
It is evident on this graphic less than 50% of our revenues now delivered from Canada with the UK and Australia, taking an increasingly larger share as we grow in these two markets.
One third is coming from the U K today, and almost one fifth from Australia.
Speak to the diversity and breadth of our business that we built.
We've also managed a tremendous level of growth in our operational footprint from less than 200 employees at the time of the IPO only a year ago to more than 500 today slightly up from where we ended the last quarter.
A question, we often get asked.
How do we manage that growth successfully.
Now on slide 19.
The core objective of every acquisition that we do as synergy realization from value based pricing just like we achieved a new process earlier this calendar year cost reductions and back office integrations, we generally expect to achieve these synergies over a 12 to 18 month period, Jeff Black.
That earlier.
We have a well designed and proven integration blueprint.
Our integration is effectively managed through a dedicated integration management office with the representatives from each of the business areas, including operations finance and sales and marketing HR and <unk>.
Given that the nature of our integration is primarily back office being Microsoft 365 tenants. We deploy the exact same accounting system same policies and processes are integrations are very low and do not interfere with our products and services, we provide to our customers.
We have a proven track record of successfully applying these techniques to more than 20 acquisitions, we have completed since 2013.
The success of this strategy is clearly evident in the five four times multiple that we have already achieved on the acquisition since IPO that Matt described earlier.
We have positioned the company with the M&A pipeline that capital required and the scale to drive a $1 billion in adjusted EBITDA with that I will turn it to the operator for Q&A operator.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
You will then hear three pronged acknowledging your request and your questions will be pulled in the order that they are received.
Did you wish to decline from the polling process. Please press the star followed by the Q.
And if you are using a speaker phone please lift the handset before pressing any keys one moment. Please for your first question.
Your first question does come from it.
This is Matthew Borsch from BMO capital markets. Please go ahead.
Hi, good afternoon.
Just wanted to clarify something you said in the prepared remarks did you say you were hoping to deploy.
$1 5 billion over the next 18 months or did I mishear that.
No. We said were hoping to deploy as much capital over the last eight next 18 months as we did the last 18 months, so closer to $1 billion.
Okay. Thanks.
Thanks for clarifying and then as far as the 250 million pro forma EBITDA run rates just to clarify.
Can you confirm that that includes TM group, but that does not include synergies that you can capture until the <unk> is that how we should think about it.
That's correct yes.
Okay great.
From a quarterly perspective anything we should be thinking about as far as seasonality or I think the UK real estate market showing signs of a slowdown.
Slow down.
And then you have to mitigating ways I think to offset that but I mean, just how do we think about maybe the.
The linear progression as we think about the upcoming quarter.
Okay.
So there is a slight bit of seasonality in our business not a lot.
So Q2 would naturally be a bit softer than Q1.
That said as I think you've seen we've demonstrated the ability to through realizing synergies improving the business through acquiring stuff to keep growing quarter over quarter.
So that's how we think of it.
I hope that answers your question.
Okay that does.
Last one for me.
For <unk>.
R&D capitalization ticked up a little bit I think it was $5 7 billion in this quarter is that a good run rate or how should we think about that.
That is a good run rate as we brought on the different acquisitions, we've done that as a run rate for the current business.
Alright, Thanks, guys I'll pass along.
Your next question comes from Robert Young from Canaccord Genuity. Please go ahead.
Hi, good evening.
In the as you look forward.
Opportunity to them.
In the Canadian market I noticed there were some price changes in British Columbia I was wondering if you could give.
Do you have any kind of context around what that impact may be on the financial model going forward.
Look as we continue to across the business to make sure that we're pricing.
Our various platforms and applications appropriately.
That pricing reflects the value that we're bringing are our customers.
So you'll see that happen across all geographies across all quarters were currently looking to to keep improving.
I think as <unk> said.
And he spoke at a moment in a couple of moments ago, we have seen a cooling in the real estate market across the board and so we use levers like the one you're referring to to ensure that we keep consecutively growing the business and that's what you'll see out of out of out of.
Changes in the business like that.
Is there a way to put that just in the context of the $250 million of annualized <unk>.
I guess would that price change be included in that number or would that be on top of it.
That price change is not included in that number.
So to be clear.
That <unk> did not taken effect yet.
And Rob Rob the $250 million of adjusted EBITDA simply taking Q1 actual EBITDA multiplied by four.
And the price adjustments you were referring to when.
We're only communicated recently.
Okay and then on.
On the CMA order sorry, if I missed this earlier, but the the limitation on your integration opportunities outside of the United Kingdom.
Is there any way just to.
Maybe not quantitatively describe qualitatively describe them.
How much of an impact that might have been or if it wasn't impact.
Well I think there is definitely impact couldn't do anything.
That has been lifted this.
As of a week or two ago.
<unk>.
So well I don't think Youll see a lot of impact in this quarter coming into Q3 or the next quarter Youll start seeing that that impact as we're sure able able thing to make progress on some of the most more recent acquisitions.
Okay, and then maybe just a little one.
The <unk> acquisition.
You made a little small one.
I'm just curious if you could talk a little bit about the business development there in that business, how it relates to the CT systems across.
Canada starting to go digital I know there was a deal in that space here in Ontario, and I was wondering maybe if you could just talk about how youre thinking about <unk> CA relative to that maybe then I'll pass the line. Thank you.
So I think actually it's like Ross I think that's right.
I think.
I think you just outlined Rob the kind of strategic rationale that we see and it is a fairly small business a very small business.
And we only we only own a a slight majority of it.
Well, we like what the guys are doing we think there's there's room, there's a lot of runway in the future for that business, but it's not overly was not material at all when when taking in the kind of financial scale of our business.
Do you think of it as a business that could have larger scale in the future or should we just think of it as a small <unk>.
Right now.
I think long long term there is an opportunity.
There's also competition for some of the Rfps any bidding against.
But for now I think of it as extremely material.
Thank you.
Your next question comes from Stephen Volkmann from Raymond James. Please go ahead.
Thanks, guys just two quick questions I guess.
On slide 16, it that's very helpful.
The adjusted EBITDA that you acquire.
Or that you'd get to deploy.
Deployment, but $529 million.
Presumed that's assuming that you can acquire companies for.
Like 15 times, and I think that in the past you've said that.
These acquisitions are quite competitive now.
Multiples are moving up so is it still possible to acquire.
Mrs.
Lead times.
Look we we've.
So in one go.
But.
We can't and that's an average then we paid above 15 times in the past the managed to get it down below five times.
So again, it's just taken on a case by case basis and again, obviously, if I can pay less that's a great thing I don't want to do it but I also have to deal with the realities of the market today and I got to pay what I got to pay so when we evaluate these acquisitions. It's on a case by case basis, you're putting on a business case that that assumes we kind of get there or not and if we can.
We it's.
It's very like that because we're not going to do.
Okay.
A second question.
The increase in your run rate.
Yes, it's $30 million you said revenue synergies are.
We're part of that.
Can you just get a little bit more description in terms of where those are being realized is that price increases at cross selling.
And maybe where the majority of that.
In terms of geography word ups or have some flow.
Yes.
At the Marine focus we optimizing the value of the platform and that comes across both there is revenue synergies.
It's more kind of taking a product and making sure that values optimized less so cross selling.
Okay. Thanks, a lot.
Your next question comes from Paul steep from Scotia Capital. Please go ahead.
Great.
Could you maybe give us an update as to where you stand in terms of leverage targets I know at Investor Day, We talked about two to three five times I guess, given the size of the facility and wanted to see.
If that's still the range, we should be thinking about it longer term or if theres been didn't maybe a change there.
It really depends on what acquisition, we're looking at a time.
As I said when we first started this call. It just base business has turned into revenue and cash flows in many cases that are infrastructure like the ability for this business to support Leverages is huge.
So we can very comfortably go through enough we need to do in the near term to support a transformative acquisition, but we'd aimed to bring it right back down to those numbers you talked about in the medium to long term.
As we are acutely aware of the market's appetite for not having too much leverage.
Okay.
And Matt maybe just talking about how youre thinking about the mix of the business and thinking about that pipeline of potential transactions out there.
Are you looking to shift the business.
Maybe away from real estate or shift towards more of government services type model and is there maybe any geographic bent given that you are now.
Pricing, a little bit overweight, maybe and employees in the U K.
It's fairly opportunistic and what I mean by that is if I look at the pipeline and the opportunities the most accretive.
That's how we are.
Deciding where that kind of spend our time and capital.
And then maybe the last one Fred cheat, how should we think of G debate.
Effects exposure here and I'm only asking that given that the head count number that you provided.
It's fairly larger we actually net long.
Or sort of net exposed in U K pounds versus CAD at this point.
Thoughts on maybe hedging that out.
We do have met exposure today with GDP and Australian dollars.
We do continue to evaluate our hedging strategies and what makes sense from a net investment perspective in each of the geographies. We're in so we do look at that and where necessary, we put the appropriate hedging strategies.
Great. Thanks.
Okay.
Ladies and gentlemen, as a reminder, so do you have a question. Please press the star followed by the one.
Your next question comes from Stephanie price from CIBC. Please go ahead.
Hi, good evening.
If you could talk a little bit about your M&A synergy model going forward and whether you see the same mix of price and cost going forward or do you expect changes to kind of thought that M&A synergy model.
Look I think our model is proven and it works, we don't want a very prominent there's lots of opportunities in our pipeline that enabled us to keep doing this.
And.
As I say, if it's not broke don't fix it.
Fair enough.
You mentioned the normalizing housing market a few times as well can you just talk a little bit about organic growth in the quarter and how you see it trending out.
In the current quarter, and maybe your ability to adjust prices to offset.
Any headwinds in various geographies.
Yeah.
We look at it we measure morning year over year basis organic revenue growth and it's very strong I mean extremely strong.
That said there is also a lot of acquisitions in there, which provided us the ability to kind of drive more efficiency out of what we acquired and our as well as our existing business.
But I think I spoke to it.
Earlier, I know, we did and we have faced headwinds in as number of transactions in the market being less than they were in Q4.
And we had to manage through that through to make our business more efficient and that enable us to have the results that we had.
We sell software products a lot of them out of our business is selling software products that that real estate professionals legal Brussels that folks are mostly rely on.
Transactional base was less transactions in the market. There is less revenue. So we have to kind of the more efficient with the model, which we've done which enable us to keep that consecutive growth up.
That makes sense and then just finally from me maybe this one sure Jay can you talk a little bit about how we should think of the flow through from the integration synergies for the remainder of the year.
Due process integration pretty much complete here and how should we kind of think of that integration.
I'm curious acquisition at this point.
So backend office perspective due process integration is complete.
But as we go through there are more efficiencies to be realized from me to the acquisitions we have.
As we as Matt talked about the CMA order thats really hindered our ability to realize synergies from the UK acquisitions.
So as we work through the CMA.
We will work on the UK acquisition synergies and we expect those to come in meaningfully in Q3 and Q4.
Okay. Thank you very much.
There are no further questions at this time Mr. Proud you May proceed.
Well I want to thank everyone for their time today, we really appreciate it and I look forward to continuing the conversation next quarter.
Ladies and gentlemen, this concludes your conference call for today, we thank you very much for participating in Tennessee you. Please disconnect your lines.
Okay.