Q3 2022 Dye & Durham Ltd Earnings Call

Good afternoon. My name is Pam and I will be your conference operator today at this time I would like to welcome everyone to the dine during the third quarter fiscal 2022 earnings call.

I would now like to turn the call over to Ross Marshalls Investor Relations on behalf of danger him. Mr. Marshall You May begin your conference.

Thank you Pam and good afternoon, everyone and welcome to the Diana <unk>, Inc. 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 note that statements made during this call may include forward looking statements and information and future oriented financial information regarding <unk> business and disclosure.

Riding possible events conditions or results that are based on information currently available to management, which indicate managements' expectations of future growth results of operations business performance and business prospects and opportunities.

Such statements are made as of this date hereof, and <unk> assumes no obligation to update or revise them to reflect events disclosures or circumstances, except as required by applicable securities laws.

Statements involve significant risks and uncertainties and are not a guarantee of future performance or results. A number of these risks certainties 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 and information. Please refer to the forward looking statements and information.

And future oriented financial information section of our public filings without limitation, our MD&A and our earnings press release issued today for additional information joining.

Joining us on the call today are Matt proud Dine Durham, Chief Executive Officer, and Zika boat Dine Durham, Chief Financial Officer, a question and answer session will follow the formal remarks for research analysts I will now call. The turn the call over to Matt for his opening remarks. Thanks, Rob we're pleased to be here with you today to review recent developments at <unk>.

Hmm as well as our financial and operating results for the third quarter of fiscal 'twenty two for the period ending March 31 2022.

We continue to execute our strategy to build a business of scale through acquisitions and investment in our existing platforms to drive enhancement and new capabilities that improve the efficiency and productivity for our customers.

Today, the business is dramatically larger than it wasn't the time of our IPO 24 months ago in the last 12 months, we generated $430 million of adjusted.

Our revenue and $241 million of adjusted EBITDA, We continue to deliver against adjusted EBITDA margins, well above 50% with this strong growth.

We're creating a global leader in the <unk> software and services space and services legal and business professionals, and we're expanding our market reach by entering adjacent ecosystems in the UK and Australia with the acquisitions, we've recently announced.

Our products are used for a wide array of underlying transactions across major western English speaking economies, we integrate workflows flows processes that legal and business professionals use every day, sometimes multiple times a day into one convenient platform.

We've built a highly reliable platform that generates digital infrastructure light cash flows the annuity like nature of our revenue.

And the relatively fixed nature of our cost base provides for a tremendous level of productivity 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 any corresponding cost increase.

Why are we pursuing an acquisition based strategy.

The annuity like nature of the revenue streams customers in our line of business are extremely sticky.

Building our business organically is challenging it's a slow process and there is no certainty of success.

We have a proven track record of acquiring assets optimizing the value the assets generate for customers and retaining those customers at the same time.

Our acquisition strategy has broadened our product offering with complementary solutions. This service adjacent markets extend our position in the value chain and create opportunities to cross sell with our existing customers law firms and financial service providers.

The results speak for themselves adjusted EBIT in the quarter of nearly $67 million revenue of nearly 123, each of which are up 78% compared to the same period in 2021.

We are delivering this strong performance despite challenges experienced in the real estate market a market we serve.

Our conveyancing workflow software generates the vast majority of our revenue today, we earn a fee per transaction on a per transaction basis.

Real estate volumes were down significantly on a year over year basis in fiscal in Q3 of this year.

We've managed to migrate this by establishing a new pricing model that reflects the value of our platform delivers to customers in terms of efficiency and productivity.

<unk>, we charge is a relatively small portion of the total closing costs and a real estate transaction to ensure an efficient and secure housing transaction for what is likely the most important transaction and our customers' customers lives.

We've demonstrated through multiple market cycles that we're able to manage the business and retain share and we continue to do that today.

As you've seen by today's results.

In January of this year, we introduced a new subscription model that allows our conveyancing workflow software customers to lock in at a fixed price for the three years for three years in most cases based on a minimum number of transactions.

By moving to a subscription based contract model, we're seeing good transaction transact traction and pick up with our customers in the early days.

Again, just launching this in January after a very short period of time, we've signed up 21% of our targeted customers, including 42% of the top Ontario customers on our conveyancing workflow software products. We anticipate this number to grow significantly over the coming quarters.

Yes.

We also continue to invest heavily in our offering since the acquisition of the <unk> financial solutions business in December we've enhanced our offering to lenders and lawyers by adding two new financial institutions, TD and simply by CWC.

These have been added to our platform to assist lawyers and the discharge of their mortgage. This is in addition to our relationship with BMO that already existed on the same product.

Better connecting lenders and lawyers was a large part of the thesis behind the tell US financial solutions acquisition and this is us executing against that thesis.

Okay.

Moving to page seven of the presentation that goes along with this quarter. We believe scale is important and since the IPO. We've rapidly built a business that generates strong topline growth with an industry leading margin profile as exhibited in this chart on the right you can clearly see where we perform in the upper right hand quadrant relative to our peer set.

Which is clustered towards the middle of the four quarters.

We received a number of questions recently on the announced acquisition of linked administrative holdings out of Australia.

First some background context in December we entered into definitive agreement to acquire link group for approximately Canadian $3 2 billion.

The acquisition of link positioned Dion Durham with significant larger scale in Australia and the UK.

And moves to diversify our revenue mix. It provides a highly recurring revenue compared to the highly reoccurring nature of our revenue that we have today.

As an update on where we are in this transaction process of here is an update on where around the transaction process.

This week, the Australia Court approved the convening of the link group's shareholder meeting the scheme meeting to vote on the proposed acquisition of link group by Diane Durham by way of a scheme of a scheme of arrangement.

The link group also dispatched to its shareholders. This week explanatory booklet for the scheme meeting. The scheme meeting is currently scheduled to be held in mid July with a closing of the transaction targeted for early to mid August this year.

<unk> Board of directors have unanimously recommended to link shareholders. They vote in favor of this transaction.

The transaction requires a 75% approval from linked shareholders in order for it to proceed.

Subsequent to the closing we have already begun the preliminary preparations for the sale of the Bcm in fund solutions business, which are noncore to the acquisition as it relates to <unk>.

This was previously stated.

Earlier in the last quarter in December .

The link group acquisition gives us significant financial.

And operational scale across core geographies in Canada, Australia, and the UK.

Put simply link is a transformative acquisition for us.

As we continue to scale this business globally and further demonstrates in position to die in Durham as an Unparallel Canadian success story when it comes to technology.

With that I'm going to turn it over to LPG.

Thank you, Matt and good evening, everyone. Thank you for joining us today.

It was another record quarter for US we reported revenue of $122 9 million during the third quarter, an increase of 78% from revenues of 68 nine.

$9 million a year ago.

We generated adjusted EBITDA of $66 8 million up 78% from $37 6 million a year ago.

We continue to maintain a strong EBITDA margin coming in at 55% this quarter, which is in line with our target range of 50% to 60%.

Our significant topline growth has been fueled by both the acquisitions we completed.

In the last 12 months, along with the integration activities and our organic growth, which includes the realization of synergies from price adjustment Mac just discussed in his remarks.

Total operating costs, which include direct cost technology and operations.

And G&A and sales and marketing costs were $56 1 million for the quarter or 45, 6% of revenue compared to $31 4 million for the third quarter of prior year.

The increase in direct cost is directly tied to our revenues and will increase proportionally as our revenues increase.

Increase in other operating cost is primarily due to costs acquired from the acquisitions completed during the period and our continued investment in human capital for scale, including a significant investment in our technology operations.

We expect our operating cost to continue to be within the 40% to 50% range.

Net finance costs for the quarter was $18 3 million, an increase of 30% compared to $26 million in the third quarter of prior year.

The decrease is primarily due to noncash fair value gain on change in fair value of convertible debentures of $38 million for the quarter.

Again, as a reminder, <unk> accounting rules require us to mark to market or fair value or convertible debentures each quarter. So we do expect this variability in our finance costs to continue.

In addition, during the quarter, we made a partial repayment of the Ares credit facility, we had drawn down in December .

Reducing our debt by $615 million.

As a result, we paid $12 million of additional interest as prepayment premium and also recognized noncash loss.

Of $18 million due to write down of.

The unamortized portion of issuance costs.

Acquisition restructuring and other costs for the quarter were $12 7 million compared to $5 9 million in the third quarter of last year.

Acquisition costs.

I'm really late to the linked transaction and the professional fees paid related to the CMA matter.

Now onto slide 12.

We've built a resilient business.

On this slide you can see the consistent growth we have delivered on our adjusted EBITDA during the past quarters and the growth we have delivered in the last 12 month period.

Managed to puts and takes during this period to deliver outstanding performance.

As we all know and as <unk> discussed one headwind, we continue to encounter as the real estate market. It has cooled off on a year over year basis as sequentially on a quarter over quarter basis.

Again, we took very decisive action in short order and managed it through this environment.

Despite lower real estate market transactions, our adjusted EBITDA growth stayed strong.

With that I will now turn 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 star followed by one on your Touchtone phone.

We're here three ton prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by you and if they're using a speaker phone. Please lift your handset before pressing any keys one moment for your first question.

Your first question comes from Rob Young with Canaccord. Please go ahead.

Hi, good evening.

Sorry.

Any.

Reiteration of the guidance for 2023, I think you said $350 million as a bottom line for 2023 is that still relevant now.

Yes, no change in the guidance.

Okay and I think you also mentioned EBITDA margin target. That's no change either I think you also said something about operating costs at 40, 50% operating cost target, maybe if you could just.

Repeat that.

Yes.

Our <unk> here.

No change in our EBITDA margin targets, Rob the flip side of it which is 40% to 50%.

Operating costs.

So no change from what we've previously guided.

Great and then.

There've been a number of changes in pricing you mentioned new pricing model.

Just talk us through a little bit of what you've seen on customer churn or any.

No.

Customer churn if you could just give us some context around that.

Yes, I mean, it's been mid single digits.

Generally smaller customers, we've seen virtually no churn.

Even with extreme minimal churn of our largest customers, but from his exact context like we're talking as low as 4% in British Columbia.

And kind of five 6% in Ontario.

Okay, and the challenging real estate market conditions, you are talking about.

I think most of your comments were talking about fiscal Q3, but I'm wondering if you could give us a sense of where you see things going.

In the fiscal Q4.

I think to be honest, Rob your guess is as good as mine.

Reality is we are seeing real estate market volume drop in April .

But then they have picked up significantly in may historically.

May and June are a very strong month, so we still remain confident that.

Two months delivered strong performance.

But again there is macro factors that we don't control and we continue to monitor the market.

Okay.

Then last question for me I'm, just getting a few questions about.

Note in the explanatory bookings book with that link.

Link put out around a material adverse change you highlighted around one contract up for renewal and I was hoping you can give us just a little bit of context of what that is all about.

<unk>. Thank you.

Okay.

Yes, Rob it's Matt here I mean look the linq has.

One or two larger customers.

The contract is up for sale.

Renewal is probably what what the public disclosure says.

And obviously if that customer has not been renewed which we don't we don't know to be the case.

That would create a risk so I think thats what disclosures about.

More than that.

That risk exists with us every contract is not renewed you'd have a risk so I wouldn't read too much into that.

So there is not.

You don't expect that you'll get an indication of whether that sort of renewal or not before the deal closes.

Just in case I don't know the answer that question.

Okay.

Okay. Thanks.

Your next question comes from Kenneth <unk> with BMO. Please go ahead.

Hi, good afternoon it.

It seems like there was $80 million of M&A in the quarter that wasn't previously disclosed is there any color you can provide in terms of <unk>.

Jacques or for your type of assets are required.

No. So there was a confidential acquisition that was made.

Nothing additional we can add to that.

I think in that geography.

And it was not a material acquisition for us.

The total amount is being in the column is multiple geographies.

Multiple geographies, but acquisition.

Or is it multiple acquisition multiple acquisitions.

Okay.

Just to clarify so the $350 million targets.

Because basically you've done the additional acquisitions you are maintaining the target. So is the implication that.

The targets would have had to be reduced if not for the acquisitions or was your.

Position that.

<unk> given previously had contemplated future acquisitions that she has since completed.

It's minimal minimal attribution it doesn't change anything materially to be honest part of our business.

Okay.

Yes.

Maybe going back to the June quarter outlook, I mean understanding that there are some moving parts as far as transaction volumes, but.

Might it be safe to conclude that we should see a directional uptick in EBITDA versus the March quarter.

Or is that really can depend on transaction volume shake out.

So directionally, you're absolutely right, we should see an uptick in the June quarter compared to the March quarter.

Okay.

And then I understand that there was a price increase announced for assist effective in <unk>.

July can you just clarify whether that's the case, what's the <unk>.

That's a business that might influence just any color on that would be helpful.

Sorry, I missed the question again, yes.

Yes.

It would be better for me.

Yes, sorry, just my understanding is there was a price increase that was announced for <unk>.

Sure.

<unk> effective in July .

Just wondering if you can provide any color in terms of confirming what proportion of the teller assistance that influences.

Any sense of magnitude or potential impact any color on that would be helpful.

Yes, it is related to the Quebec <unk> portion of the business.

We're bundling I wouldn't call it a price increase or bundling a lot of products together to create more value.

That said it will result in more revenue for us.

But its Quebec only.

And that product did not change the price.

As we did recently in January the rest of the country.

Okay.

Alright. Thanks.

Ladies and gentlemen, as a reminder, if you do have any questions. Please press star one.

Your next question comes from Stephen Volkmann with Raymond James. Please go ahead.

Thanks, guys maybe.

Maybe the first question going back to the booklet.

Part of the Australian regulator.

So is there going to May interview two of your large shareholders do you know.

If that is.

Certain.

When does that occur.

The scope of that meeting.

I'm not sure the question.

Quite frankly.

Frankly I.

I do not believe this Australia regulators.

Our.

Customers, but.

No.

Shareholders, sorry, your shareholders here, thanks for our shareholders.

It just says that any shareholder greater than 10%.

Basically to advise the regulars referred to they can have a meeting with them I was just wondering what the scope of that would be.

You can get back to me.

That can get back to you.

I'll get back in that.

Okay.

And just I just wanted to confirm.

Certainly with the stock price where it is.

Arity is taking stock at a much higher price.

Steve I think you are referring to you said, Australia I think you are referring to the British regulators and some of the European regulators around the fund solutions business, which is one of the assets, we want to divest of that as a highly regulated business and they may talk to shareholders.

As it goes through a process. So you caught me off guard in Australia and regulator, so just to be clear there's more.

Regulators this transaction muscle.

Russell failures in multiple different regulatory jurisdictions. This case, its more European and British regulators, referring to so you caught me off guard with a question.

Sorry, yes, it's quite clear that the document.

British Thats going to the UK and then okay.

I would just.

No.

With the stock price, where it is with Ares getting stock at a much higher price part of the deal.

I mean has there been a discussion about repricing and so it's a question we get a lot.

How fast it.

Yes, Steve it has to be absolutely we have certainty of funds with our vendors.

And so the deal we have is the deal we did and they are they have contracted to give a sponge on the terms we had retail.

Okay and then just my last question.

And again.

Thanks for this but.

The press has picked up.

Meetings with regulators over there.

May not be going great are the concerned about competition things of that sort of could you provide an update how your meetings with the regulators have been going over there.

I, obviously can't give.

To give you that kind of color and context look we there's multiple regulators involved in this transaction, we just talked about.

Handful in Europe is different ones in Australia as well.

I can't comment on press speculation that kind of is.

I can say that.

I think I think that.

Public disclosures the best place to look for answers to your questions.

Okay.

And in your mind, but I'm not asking to comment specifically on certainly your meetings with the regulators haven't opened up any kind of.

No big issues that you're aware.

Maybe the best way to refer to is there anything I don't want to comment on regulators think but I mean linked put out.

Public. Unfortunately, there is no material change that should use and comfort.

Round around some of this stuff.

Okay, that's great and maybe just sorry last one on North Hollywood part here.

Just can you just talk a little bit more about the integration with tell us how that's going where you are at all that kind of operational stuff.

Well look I mean, I think on the.

The performance side.

Sort of like the thesis had to do with connecting lenders and lawyers across Canada as you creep.

End to end transaction management workflow system.

By adding two more banks in the quarter.

Two noteworthy banks.

That four mortgage discharge.

Part of the thesis is.

Is playing out and where it can do what we say we're going to do.

As it comes integration look it's ongoing and this is what we do day in day out our strategy to acquire businesses.

<unk>.

We're in good shape and tracked to plan.

<unk>.

Okay. Thanks.

Thanks, Matt.

Okay.

There are no further questions at this time. Please proceed.

Thanks, operator, thank you everyone for joining us today, we look forward to updating you on our Q4 results Goodnight.

Yes.

Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.