Q1 2022 Deluxe Corp Earnings Call
For standing by and welcome to like a lot.
First quarter 2022 earnings.
Participants I also loved entity.
We will begin with opening remarks, and introduction and at this time I would like to turn the conference that was your host Vice President.
Please go ahead.
Thank you operator and welcome.
Earnings call joining.
Joining me.
On today's call is Barry Mccarthy, our President and Chief Executive Officer, and Scott at the end of today's prepared remarks, we will take questions.
Before we begin.
As seen on this slide I'd like to remind everyone that comments made today regarding management's intentions projections financial right.
Expectations about the cost.
Our forward looking in nature as defined in the private Securities Litigation Reform Act of 1995.
These comments are subject to risks and uncertainties, including without limitation risks related to COVID-19. The rest of the company's recent acquisition of first American payment system or any other.
Acquisition.
First energy and risk to any future acquisitions or divestitures will not be consummated.
Many of these risks and uncertainties could cause actual results to differ materially from our projections.
Additional information about factors that may cause our actual results to differ from projections and <unk>.
And in our Form 10-K for the year ended December 31, 2021, and in other company SEC filings.
On the call today, we will discuss non-GAAP financial measures, including adjusted EBITDA and free cash flow.
Our press release or presentation, and our filings with the SEC you will find additional disclosures regarding the non-GAAP measures, including reconciliations of these measures to the most comparable measures under U S. GAAP.
Now I'll turn it over to Barry.
Thanks, Tom and good morning.
Everyone.
Had a strong quarter with better than expected revenue growth.
Revenue growth was 26%.
Excluding <unk>.
First American revenue increased seven 1%.
Once again, we delivered sales driven growth in all four segments.
We did benefit from previously announced pricing actions.
Albert.
We're particularly pleased to report that we have continued to experience strong volume. Despite these pricing actions.
Demonstrating the fundamental strength of our business and the continued strong demand for our products.
We have been sharing with you for some time.
Our transformation into a trusted payments and data company discontinuing as.
As demonstrated by our strong revenue performance.
While adjusted EBITDA margin rate was impacted by inflation and other factors.
Adjusted EBITDA dollars improved over 10% year over year.
With our expectations.
During the quarter payments performance was primarily driven by the continuing positive results the first American and growth in our digital payment services.
We continue to be proud of our transformation into a payments company.
As a reminder, we're on track for payments to equal <unk> is our largest business by revenue heading into 2023.
Another key milestone for us.
<unk> growth was driven by data driven marketing our GBM.
Promotional solutions benefited from the implementation of key wins from last year and checks performance was driven primarily by business checks and new competitive wins.
Before I go on to additional highlights.
I want to welcome our new Chief Technology, and digital officer.
Yoga Raj giant Pakistan to the executive leadership team.
<unk> has more than 20 years of digital data and technology Engineering experience. Most recently with American Express serving as unit CIO and head of engineering from VW digital payments experience and data platforms.
His background is directly on point for the future. We are building here at deluxe.
I am confident he will also help us accelerate our transformation into a payments and data company.
I also wanted to be sure to thank my thought was a luxury for the continued dedication and unwavering commitment to our customers.
Simplification recently, Newsweek naming deluxe one of America's most trustworthy companies.
This is something we're very proud of and is a recognition of the long term consistent commitment.
All <unk>.
That was consolidated highlights for the quarter.
Revenue was $556 million up 26% year over year.
Not including the positive impact of first American sales driven revenue was up a strong seven 1%.
This was the fourth consecutive quarter of sales driven growth.
Proves that our ability to grow is real.
And it's sustainable.
Adjusted EBITDA improved to 10, 1% to $99 $6 million.
Adjusted EBITDA margin was 17, 9% consistent with our guidance.
Scott will provide details.
Moving on to some segment revenue highlights.
For the first quarter, our payments segment more than doubled year over year.
This was driven by the 2021 addition, an outperformance of Firstmerit.
Which grew this quarter at eight 4%.
As you know first American has been a low single digit grower prior to the acquisition.
Since the acquisition and the implementation of our one deluxe model with our trusted reputation.
Solid balance sheet and deep customer relationships first of all there are tenant has been exceeding our expectations.
Our belief that we could help first American grow faster in <unk>.
Moving to be true.
Being able to cross sell to our approximately 4000 financial institutions and 4 million small business customers first American has successfully offering a host of deluxe products.
In addition, during Q1 first American side bar financial institutions during the quarter.
So they would have previously in a typical year.
Quite simply the one deluxe model works.
Excluding first American payments revenues increased four 3% with growth in our other major businesses.
<unk> digital payments and lockbox.
Our payables as a service offerings, which include our deluxe payment exchange, our Gtx and medical team in exchange for MPLX continue to experience strong growth.
In terms of new wins, we signed a build though which is a large payments platform used by over 30 million consumers thousands of financial institutions Fintech.
Yeah.
Bill goal, we will use our digital GPS technology to process millions of payments.
The less network, which will lower costs and increase efficiencies from Bill goes customers.
Cloud solutions had another solid quarter by 11, 7% year over year.
<unk> performance benefited from BT with full relationship expansion with key finance sales wins and positive impacts of a recovering economy and our DDS business.
We continue to pursue additional verticals beyond financial institutions and in the first quarter key wins once again included new customers and programs and the telecom retail E Commerce and high Tech security sectors.
Also in cloud we're pleased to announce we have completed the sale of our Australian web hosting business originally announced in March we.
We will continue to assess our portfolio to focus on businesses that can benefit from the one deluxe model those business is well positioned and secular growth market.
Now onto our promotional solutions cycle.
The rational solutions had another strong quarter on the topline improving 7% year over year positively impacted by core business of central products as well as key wins, we announced last year.
During the quarter, we partnered with one of the most well known brands in the World Porsche.
From a premium preferred supplier to a brand in North America.
This is an exciting new relationship for deluxe.
First we will be providing promotional items signage and other services in support of portion of New racing series in North America called <unk> Com.
Second through this relationship we are a sponsor of this series, which will drive brand awareness in new markets.
Finally, our very profitable cash generating check business also had another strong quarter growing six 9% year over year, which is significantly better than long term industry trends.
The performance was largely driven by new wins.
Solid growth from business tracks and price increases to offset inflationary pressures.
Beyond the strength in generating free cash flow check significant strategic value is to provide leads for our other segments.
Examples from the first quarter, where we sold first American merchant services to existing checks customers include.
Virginia Credit Union, a Richmond based financial institution with $5 billion in assets.
Century Bank, a community bank in New Mexico, which appreciate the benefits of partnering with a true processor versus an ISO.
And freedom first part of the Union.
$900 million in assets, serving 33 counties across south and Central Virginia.
In each case deluxe as long standing trusted relationships led to our sales teams being able to successfully cross sell additional products.
These are clear examples, but the one deluxe model works.
In summary, we're pleased with our first quarter results, which plainly show our momentum a rockwell a strong start in 2022.
We continue to be confident in our guidance of 8% to 10% revenue growth was approximately 20% adjusted EBITDA margin for the full year.
Our first quarter performance and outlook are further evidence of our transformation into a payments and data company.
Now I'll turn it over to Scott, who will provide more details on our financial performance.
Thank you Barry and good morning, everyone.
Go through the consolidated highlights for the quarter before moving on to the segment.
Yeah.
For the first quarter, we posted total revenue of $556 million up 26% year over year.
Not including first American revenue came in at $472 7 million up seven 1% year over year.
The revenue performance was driven by a combination of solid ongoing demand for our products and price increases.
We reported first quarter GAAP net income of $9 7 million or 22 per share in the quarter.
Compared to the prior year first quarter GAAP net income was impacted by $12 $7 million the acquisition amortization as well as increased interest expense both related to the first American acquisition.
Adjusted EBITDA came in at $99 6 million up.
Up 10, 1% from last year, driven by the acquisition and strong performance at first American.
Adjusted EBITDA margin was 17, 9% down from 25% from last year's first quarter.
The adjusted EBITDA margin rate decline was expected and due to a return to a pre COVID-19 seasonality patterns and our corporate cost structure and product mix.
Planned technology investments and inflationary pressures, partially offset by pricing actions and operating leverage from strong revenue growth.
These factors were then and consistent with our full year guidance.
As a reminder, the first quarter is traditionally the lowest margin quarter of the year.
Expect to progressively expand margin rates throughout the year.
First quarter adjusted EPS came in at $1 five down from $1 26 in last year's first quarter.
The decrease was driven by the operational items previously mentioned higher interest expense from the first American acquisition as well as higher depreciation and amortization.
First American in total was slightly accretive to adjusted EPS ahead of our expectations.
Now turning to our segment details.
Payments grew first quarter revenue of 109, 1% year over year to $166 2 million.
Largely driven by the acquisition and the outperformance of Firstmerit.
Excluding first American payments revenue increased four 3% year over year.
In addition to first American strong performance, we also experienced growth in our core payments business.
Including first American payments adjusted EBITDA increased 98, 9% in the quarter.
And adjusted EBITDA margin was 21, 9%.
Down 110 basis points due primarily to continued product investments.
Legendary pressure, partially offset by price increases.
With the addition of first American our payments segment has more than doubled in size.
In the first quarter or first american's margins were modestly dilutive to payments.
Were accretive to overall company margins.
Longer term, we expect the payments segment to deliver a high single digit revenue growth rate for 2022, we expect adjusted EBITDA margins to be in the low 20% range.
Cloud solutions had another strong quarter with segment revenue, increasing 11, 7% year over year to $69 $5 million in the quarter.
So its growth continues to be driven by our <unk> solutions, which is benefiting from meaningful relationship expansion with key clients salesmen's positive impacts of a recovering economy and increased marketing spend by our customers.
We continue to add new DBM clients, and new industry verticals and are extending into new product lines, which will benefit us going forward.
As Barry mentioned in March we announced the sale of our Australian web hosting business, which is part of our ongoing strategy to streamline and optimize our portfolio.
Defence financial impact on the first quarter was negligible the cloud revenue will be impacted by about $20 million for the remainder of the year.
This impact is included in our reaffirmed guidance.
Climate adjusted EBITDA margin in the quarter declined 280 basis points versus prior year to 24, 9% due to changes in product mix, resulting from strong revenue growth with union business for 2022, and excluding the Australian sale you expected to see mid single digit revenue growth and adjusted EBITDA margins in the <unk>.
Mid 20% range.
Adjusting for the impact of the Australian sale, we now expect to see flat to low single digit revenue declines for the year.
Promotional solutions first quarter revenue was $133 $2 million up 7% year over year, driven by our core business essentials product <unk>.
Key wins, we announced last year, the price increases to offset inflationary pressures.
Adjusted EBITDA margin for the quarter was 12, 8% down 140 basis points, largely due to increased paper and delivery costs as well as product mix, partially offset by pricing.
April we completed the sale of one of our promotional solutions product areas, so less strategic sourcing for DSS.
This is a part of our ongoing efforts to further simplify the business.
The divestiture of DSS is expected to have a $10 million impact revenue in 2022 with very little impact to EBITDA dollars.
And these factors are included in our guidance reaffirmation.
We are anticipating 2020 to topline growth in the low single digit range and adjusted EBITDA margins in the mid teens.
Checks first quarter revenue increased six 9% from last year to $187 1 million.
New competitive wins.
Reising actions and strengthen our business checks outpaced the continued secular declines in the business.
I should note that while we are very pleased with these results do not expect to see this level of outperformance to continue for the remainder of the year as we will begin to lap new customer onboarding activities from the second half of 2021.
As a result, we expect to have low single digit revenue declines for the remainder of the year.
First quarter adjusted EBITDA margins were 44, 3% down 340 basis points year over year, largely driven by the addition of lower margin new customers.
We also experienced inflationary pressures with notably related to delivery expense.
And input materials that were largely offset by price increases.
Adjusted EBITDA $1 remained virtually flat year over year.
As a reminder, we anticipate the stabilization of checks margins due to the implementation of our new HP <unk>.
<unk> technology.
Turning now to our balance sheet and cash flow.
We ended the quarter with a net debt level of about $1 65 billion up from $714 $6 million last year.
Our net debt to adjusted EBITDA ratio was four zero times at the end of the quarter.
And at year end 2021.
Our long term strategic target remains approximately $3.
Thank you Todd.
Free cash flow defined as cash provided by capital expenditures.
$13 $5 million in the first quarter.
$4 4 million in the first quarter of 2021.
We do expect overall free cash flow to increase in 2022 compared to 2021 is the investments that are major tech platform modernization will decrease meaningfully later this year.
Our board approved a regular quarterly dividend of <unk> 30 per share on all outstanding shares.
Okay.
The dividend will be payable on June six 2022 to all shareholders of record on May 23, 2022.
As a reminder, our capital allocation priorities are to responsibly invest in growth payer dividend reduce debt.
Thank you.
This guidance increase.
These are partially prior year first American is subject to among other things prevailing macroeconomic conditions anticipated continued supply chain.
Since labour supply issues inflation and.
The impact of recent divestitures.
For full year 2022, we are expecting the following keeping in mind that all figures are profitable.
Revenue growth of 8% to 10%, including a full year of Firstmerit.
As a reminder, the transaction closed on June one 2021.
Adjusted EBITDA margin of approximately 20% for the full year.
Interest expense of $90 million.
And adjusted tax rate of 26%.
Depreciation and amortization of $180 million of which acquisition amortization is approximately $90 million.
Average outstanding share count of $43 5 million shares.
Capital expenditures of $105 million.
To summarize we were off to a positive start to the year with the first quarter of 2022 results. We look forward to continuing the momentum in the coming quarters. Operator, we are now ready to take questions.
Thank you and as a reminder, with Starwood that you would like to ask a question I'll pause borrower unless you compile the Q&A roster.
Our first question will come from Charles <unk>.
CJ adds.
Please go ahead.
Hi, Good morning can you hear me okay.
Surely we can hear you just fine.
Great.
Questions for you first on the first American side looks like.
A little bit slower than they are in the quarter longer term kind of what are you expecting kind of a growth rate. There. If you can maybe give us a little color on that.
Yes, Charlie we are still very proud of the results at first American as you know that business. When we acquired it had historically been a low single digit revenue grower and in the three quarters that we know that it has been a high single or double digit revenue growth business.
When we acquired it we told everyone. We thought we would get it to mid single digits and we're very confident of that and we think we can do better over time and in the first three quarters I think are really great.
Set of proof points on that and maybe the best proof point about what the future can look like Charlie is that.
In the.
The first quarter or the first American team sold.
As many new banks in the first quarter as they would do in a typical year. So that is a great leading indicator about sort of the power of the one deluxe model applied at first American.
And what we think can come going forward in the future.
Great. Thank you on that.
It looks like you had a pretty strong quarter revenue wise versus my model.
Kind of what was the main driver of that was it most of the pricing on.
On the check side or was it across the board.
And secondly on the check side.
Obviously much better than expected results there how long you can kind of keep up.
Our pace in that segment.
Yeah, Charley, we feel really happy with the momentum that we're seeing across the business the revenue growth of seven 1% excluding firstmerit.
It was roughly a relatively even blend between pricing and volume and so I think that was a very healthy.
Healthy profile, delivering both volume growth as well as pricing the way we think about the pricing is it was largely amounted to pass through inflationary cost pressures that are affecting the business.
And so.
The net effect of that is just sort of higher revenue levels.
Same EBITDA dollar generation, but a little bit lower margin rate as a result that simply adding.
Cost to our cost of goods and offsetting that are passing that through in the form of pricing, but overall, we felt like it was a really healthy blend up those volume increases as well as as well as pricing.
Pricing to offset inflationary pressures in the business.
<unk> continues its strong performance continues to win new business as you recall, we had a serious large wins last year. So we're really happy with the momentum that we've seen within the check business now just a signal for the balance of the year. We do expect we don't expect to have growth rates.
At the level, we've seen in both Q4 and Q1 are throughout the year as we continue to lap some of those new wins that we on boarded late in 2021, however, as the underlying dynamics in the business are quite healthy.
Got it Thats a good segue into my last question just I know you don't give quarterly guidance, but maybe you could talk about the cadence of how you get to kind of 20% EBITDA margin for the full year.
Well, so there's a few layers to that Charlie so.
As we talked about a little bit during the last quarterly call.
There is some seasonality and we see ourselves returning to seasonal patterns similar to what we experienced as a company before COVID-19. There is a number of onetime factors that affected our.
Cadence over the course of the quarters through 2020 one.
We see our model this year returning system or patterns, we've seen in the past as seasonality is really driven by two things first of all there is some seasonality in the <unk>.
Which we occur benefits cost, which are highest in Q1 and a decrease a decrease.
Throughout throughout the balance of the year and there is some seasonality around the mix of goods, we sell primarily into promotional solutions business, where we have a series of high high margin goods that.
That are sold as part of our year end promotional.
Social segment.
Business that doesn't repeat in Q1, so we still.
We feel that we are in a good position from a margin rate perspective.
We'll continue to increase steadily throughout the year based on some of the seasonal factors.
Look it's Q1, we're continuing to watch it but feel good about the momentum we're seeing so far.
Excellent that's great and then just lastly, so you just hired a new CTO, maybe if you can give us a little bit more about his background and what he brings to the table of deluxe.
Charlie we're really pleased to have you join us at least had a very distinguished career at American Express and we went specifically with the market.
Essentially a new role, where we are adding digital capability together with our technology organization, which I think is a really clear message and signal about where the company is headed.
We are doubling down on our focus on Digitization of all of our businesses, but also a big message that we are clearly focused on being 18 months and data company and that is where <unk> background and experience.
More than a decade at American express is going to be really helpful to us <unk> had lots of choices of what he could decide to do next and he was very attractive to our transformation story here about taking this proud company with 4000 Bank partners 4 million small businesses hundreds of the world's leading.
Brands and building platforms as a service in the payments and data marketplaces and.
He wants to be part of it and you just started this week at US is off to a great start.
I think Charlie the key message there, though is to understand we really need it.
We are a payments and data company and we are doubling down theyre, bringing in talent to help us accelerate that and.
Bringing people in from some of the best payments companies in the World is is one way for us to help accelerate that progress.
That's helpful. Thank you for taking my questions.
Our next question will come from Kristine <unk> with Sidoti.
Go ahead.
Good morning can you guys hear me.
Yeah, Hey, good morning.
Good morning, Great. So I'm stepping in for Chris Mcginnis This morning, and have a few questions.
The first is going to be on payments organic growth. So how do you see that trending for the remainder of the year and if youre experiencing an improvement what are the factors in the improvement of the organic growth rate.
Yes, so in the payments business overall.
The call of the original businesses, which are around accounts receivable accounts payable and small business payments, specifically HR and payroll and of course, the assets with first American and the businesses around.
And the HR payroll.
Grew mid single digits, our expectation for those businesses is that they will trend up towards high single all towards lower double digits.
We are very pleased with the pipeline and we have a backlog of things to get implemented we continue to work on the platform or the backlog Im sorry continued to work on the backlog.
But I got to tell you you can't see it specifically on the numbers, but in the areas, where we have the most optimism for growth around our gtx, the deluxe payment exchange and MTX medical payment exchange.
There are those businesses are seeing a very very material growth and we continue to expect to put more more fuel in the tank and get those customers that are in the implementation queue boarded and then see some steady improvement with that business over time.
Okay great.
My next question was there any impact of Ami Crunch operations and <unk> 22.
We are certainly not EMEA like any business too.
Covid implications.
And I am sure there is some impact, but we have not quantified that in the first quarter to a specific number.
I would just add that we've referenced a few times, but certainly inflation is everywhere, it's affected us in our cost of goods. We felt like we were successfully able to.
Offset that through price increases sort of almost one to one deferred based on product line of course.
Not directly omicron, but kind of macroeconomic conditions have indirectly as it relates to our staffing.
We felt like we were able to operate effectively and push through any implications that were weighing on the business.
Yes that actually was my next question. So what are you on the yes on.
On the inflation front, so where are you seeing the greatest cost pressure and.
<unk>.
And the like what point are you in that price cost equation.
Yes, as we mentioned in the in the <unk>.
The opening comments, we feel like we were able to successfully sort of one to one pass along the inflationary cost in our cost of goods in the form of price increases the primary areas, where we've seen pressure has been then improved materials.
And factoring processes source goods that we distribute on behalf of our customers and wage rates and our operational facilities, whether it be a lockbox facilities.
Contact center, our manufacturing environments. Those are the primary areas, where we've seen the impacts of inflation, but again, we feel like we've covered in the quarter.
Okay great.
And then.
Did you guys might have touched on this but could you.
Honestly.
<unk> performance in the quarter.
Whereas the growth driven by an easier comparison and the rebound in the market.
So sorry, let me rephrase it so.
Protect performance in the quarter with growth driven by an easier comparison and the rebound in our market and likely to normalize for the remainder of the year.
I would say that there is there is a number of factors here.
The biggest driver has been.
Some of the new wins that we've talked about in prior quarters from late 2021, where we feel like we have.
Gained share in the market and those wins are not.
Not in the comp base, if you call that an easier compare but it's actually because of the proactive actions you've taken in business that we won that's been the real driver and we saw stronger performance in our business checks has held up really well.
As compared to a personal checks results some really strong revenue growth in the business jet segment.
Okay, Great and then.
And the checks business can you just restate the EBITDA margin profile of the business is at 44% or 45%.
So.
We've talked about.
Check margins is sort of stabilizing in the mid 40% range and so give us a working margin around that level.
We've invested heavily in the print technology.
Midway through the implementation of a new set of capabilities to drive efficiency in the manufacturing process for the production of checks to stabilize those margins.
And so we will continue.
Continue to drive efficiency in that operation as the secular declines in the space.
Continue to continue to exist and so we look for that sort of mid forty's as being a stabilization point financial period on Czech market.
Okay, Great I think that's it from my end I really appreciate it thanks so much.
And our next question will come from Charles Nabhan with Keybanc.
Please go ahead.
Good morning, and thank you for taking my question you alluded to some investments some product investments in payments.
On your slide deck and I just wanted to get some specifics around there in terms of the.
The verticals in the distribution that.
Distribution avenues that you might be investing investing in as well as your product roadmap for the division going forward.
Sure. That's a big question. So let me give you sort of the headlines on that.
We are very focused in three areas for growth.
An area we call receivables.
This is the automation of the entire order to cash management process.
Second is sometimes called digital payments or payables or disbursements and this is where we are automating and taking paper out of the disbursements flow.
And the third is around HR and payroll for small businesses. So.
So specifically on the receivables as a service business. Our model there is to sell a white label package against resales through the bank channel. So we have a number of banks that are already live I mean, a number of banks in queue to go live when we find particularly encouraging is the banks that have already gone.
Gone live have long.
Qs of customers their customers bank customers to come on to those accounts receivables management platform.
On the process.
Adding automation tools to allow us to for those merchants faster and also improve the customer on the user experience and the user interface, which will make the product even more compelling.
Payables business the medical payment exchange on the deluxe payment exchange.
These businesses were taking what would normally be a printed explanation of benefits or reconciliation to an invoice that would develop to an envelope with a paper check and we are digitizing that process and allowing it to arrive at the customer via E mail with an embedded.
Digital check that can then be printed if that is the process of the recipient or deposit automatically electronically fully digitizing. The experience end to end, we are seeing fantastic growth in that space. As we are taking millions of dollars of expense out for our customers through the digitization of.
That delivery of that payment.
The final area is around HR payroll. We think this is a market at the low end that is very underserved and under Pat Underpenetrated by the big guys are tools are particularly well suited here for our customers.
Tomorrow is a 50 or fewer employees and we are seeing terrific growth and uptake settled through direct sales through bank partner sales and we're also excited about is the addition of first American and their 150000 small business customers as an additional target.
For those solutions. So those are the three areas, where we are focused and where we're continuing to make investments for growth receivables of the service pay evolve and HR payroll services for small business.
Got it and just as a quick follow up could could you speak to the timing or how you think about <unk>.
Leverage going forward and when you see when you see yourself, reaching that three.
The three times target.
Yes.
Continue to have that as one of the main drivers of our capital allocation policy right, we're going to look for areas to responsibly invest in growth in the business pay our dividend.
Apply excess cash and deleveraging the balance sheet.
Q1 happened to have been a low free cash flow generative quarter for a lot of the reasons, we talked about the seasonality of the business, we do expect free cash flow.
Fleet throughout the balance of the year, enabling us to further deals.
Deleverage.
Over the course of the year and it's going to take US a couple of years to get to the.
The three pointed out a target that we've articulated but we're committed to continuing to take every extra dollar of free cash flow and apply it against the debt balances that we have to steadily work towards that long term target.
Yeah.
Got it thank you.
And I also think today's question and answer session I would now like to turn the call back to Tom Martin for closing comments.
Allergy and services conference on June eight.
Thank you again for joining us.
In August as we share our second quarter 2000.
And this will conclude today's conference. Thank you for your participation and you may now disconnect.
Okay.
Thanks.
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