Q3 2022 Deluxe Corp Earnings Call
Now onto our third quarter results.
The luxe delivered another quarter of strong sales driven growth once again, reflecting increases in all four of our business segments and we remain on track to deliver a second consecutive year.
Sales driven revenue growth.
This is a key milestone in our transformation journey as we continue to demonstrate the success of our one deluxe model.
We're extremely proud of these results.
Companywide revenue increased more than 4% from the previous year to $555 million.
And just as a reminder, we've now lapped the first American acquisition and their results are included in these figures.
Excluding business exits quarterly revenue was up nearly 7%.
During the third quarter, we saw some changes in mix and buying patterns.
But as you can see in our performance ongoing demand for our products and services remains strong.
Our revenue growth has been driven by a healthy balance of volume and pricing.
Total adjusted EBITDA dollars increased nearly 2% year over year and excluding business exits adjusted EBITDA was up 3%.
Delivering adjusted EBITDA growth is yet another milestone in our transformation.
And we remain focused on driving adjusted EBITDA growth over the long term.
As expected our adjusted EBITDA margin rate came in at 18, 8%.
Moving onto some segment revenue highlights.
For the third quarter revenue in our payments segment increased nearly 6% year over year with expanding margins.
Merchant services revenue increased four 5% this quarter in line with our mid single digit expectations.
The rest of payments, which includes our receivables and payables business grew seven 5% with impressive growth across our product lines, particularly in Treasury management.
As we've been sharing for the past year, the cross sell opportunities with merchant services have been extensive.
For example, the bank of Missouri was a longstanding customer of deluxe.
Now added merchant services to the portfolio.
This shows our ability to win against one of the top three providers in the industry.
Proving our ability to effectively move upmarket.
We remain on track for payments to be our largest revenue business in early 2023.
This will be another key milestone for deluxe.
Cloud solutions had another solid quarter growing almost 5% year over year, excluding business exits.
Cloud performance was driven by our data driven marketing business, our DBM, which once again experienced double digit growth.
Five G will help us manage cost the match volumes.
Knowing us to maintain our strong margin rates in this segment as they return to normal secular decline.
Our third quarter results highlight the progress we've made and continue to make it on our transformation.
Revenue growth was once again strong across all set.
Tried that has been continuing over the last two years underscoring our ability to execute the one the <unk> model.
We're very proud of our performance and look forward to continuing our growth as a payments and data company.
Now I will turn it over to chip, who will provide more details on our financial performance.
Well. Thank you very good morning, everyone. It's a pleasure to be speaking with you today as the Lexus New CFO I'm really looking forward to continuing my work with Barry and the team to execute on our financial objectives now.
Now, let's go through the consolidated highlights for the quarter moving onto the site.
For the third quarter, we posted total revenue of $555 billion $4, 3% year over year.
Mentioned this revenue performance demonstrate strong demand for our products despite continued pricing actions.
We reported a third quarter GAAP net income of $14.7 million for 34 cents per share up from 12, and a half million dollars or 28 cents per share in the third quarter of 2021.
EBITDA came at $104 $6 million up 1.9% from last year, largely driven by improvements in the payments business.
Adjusted EBITDA margin was 18.8% and in line with expectations.
Third quarter adjusted EPS came in at 99 cents down from $1.10 and last year's third quarter. This decrease was primarily driven by interest expense importantly, we completed an interest rate swap in the third quarter to fix the rate of an additional 20 per cent of our outstanding debts now nearly 60% of art that is fixed rate, which we expect.
Will further than swiped the company from future rate hikes now turning to our segment details.
Payments grew third quarter revenue five 9% year over year $269.8 million, largely driven by growth in our Treasury management business.
Personal services grew 4.5% year over year.
Over the next few quarters this business will be up against top year over year comparisons, but we continue to expect growth in the mid single digit range over the long term.
Payments adjusted EBITDA margin was 21.3% of 160 basis points from last year, largely driven by operating leverage in our Treasury management business.
[noise] term, we continue to expect the payments segment to deliver a high single digit revenue growth rates for 2022 be expected Justin EBIT margin in the low 20 per cent range.
Cloud solutions had another solid quarter, excluding the impact from business exits segment revenue increased 4.9% year over year to $66.7 billion in the quarter.
Reported basis clouds revenue declined 4% from the third quarter of 2021 due to the sale of our Australian web hosting business earlier this year.
Filed adjusted EBITDA margin in the quarter declined 330 basis points year over year to 24%. This decline was due to increase investments and changes in product next driven by strong revenue growth of the D. D M business and declines in the higher margin hosting.
For 2022, we expect to see mid single digit revenue growth excluding the impact.
Which are detailed on slide 28 of the presentation.
We also expect adjusted EBITDA margins in the low to mid 20 per cent range.
Promotional solutions third quarter revenue was $136 $1 million up 9.2%, excluding the impact the business exits on.
And they reported basis revenue grew 4.5% year over year, driven by new sales wins and pricing actions.
Promotional solutions adjusted EBITDA margin was down slightly year over year to 13, a 4%, but improved nearly 300 basis points sequentially, because we benefit from improved pricing and increased supply availability.
Anticipate that the statement was a meaningful expansion to adjusted EBITDA margin in the fourth quarter due to further improvements and supply availability operational initiatives and our typical seasonal patterns.
Checks third quarter revenue increased 6% from last year $282.4 million as new competitive wins pricing actions and strong demand for business checks outpaced the broader cycling declines with every industry.
As we've said before we had some major customer wins last year that pledge of four consecutive quarters of revenue growth in the statement. However, as these results are now in the comparison.
Will not continue starting in Q4, and we expect to see check revenue returning to normal secular decline.
Third quarter of chest EBIT margin was $44 one per cent down slightly year over year, but within our expected 40 per cent range for the second.
Turning now to our balance sheet and cash flow, we ended the quarter with a net debt level of $1.63 billion down from $1.66 billion in the third quarter of 2021, demonstrating our continued commitment to paying down debt.
Net debt to adjusted EBITDA ratio was three eight times at the end of the quarter improving from $4 three times, a year ago or long term strategic target remains approximately three times three.
Free cash flow defined as cash provided by operating activities less capital expenditures was $23 million in the quarter down from $39 million in the third quarter of 2021 due to increased cash taxes and interest payments is.
This was a sequential improvement from the second quarter.
Or or to prove a regular quarterly dividend of $30 per share on all outstanding shares the dividend will be payable on December 5th 2022 to all shareholders of record at the market closing on November 21st 2012 too.
We are focused on taking a balanced approach to capital allocation as a reminder, R capital allocation priorities are to responsibly invest in growth.
Our dividend reduce debt in return value to shareholders.
Turning now to expectations, we are reaffirming our 2022 full year guidance as follows keeping in mind all figures are approximate.
Revenue growth at 10% to 12%, excluding the impact from business exits. This equates to eight to 10 per cent revenue growth on and as reported basis.
Full year adjusted EBITDA margin rate of 18, the app to 19% and capital expenditures of $105 million.
This guidance includes a partial prior year of first American and is subject to among other things prevailing macro economic condition labor supply issues inflation and the impact of divestitures.
In order to assist with your modeling our guidance also assumes the following.
Interest expense of $95 million and adjusted tax rate of 26%.
Depreciation and amortization of $170 million of which acquisition amortization is approximately $90 million.
And an average outstanding share count of 43, and a half million shares.
To summarize we are pleased with the third quarter results, especially in these uncertain economic times.
Following our story for many years simultaneously delivering sales driven revenue growth is an important achievement.
We're very proud of his performance operator, we are now ready to take questions.
Thank you Mr. <unk>, ladies and gentlemen at this time, if you have any questions simply press star one and if you do find that your question has already been addressed and can remove yourself from the queue by pressing the star one again, we'll take our first question. This morning from Charlie Strawser of C. J S.
Hi, good morning.
Good morning, Charlie.
I was hoping you could give us a little bit more color on the breakdown on you know kind of volume versus price and the various segments.
A little bit more granularity there would be helpful. Thank you.
Sure Charlie Good morning, this is chip.
So when we break down the growth on the quarter of roughly seven per cent per 666, 6% expecting exits we view about 60% of that is the volume increase at 40 per cent of that coming with price.
And so that's a function of the new wins, we've been talking about for awhile and check as we fully lap those but also strong volume in promo and the date of business, specifically and improved operations with that payment specifically within Treasury management.
Got it that's helpful. Thank you very much and then just you on on the cloud side with the Iddm visit soon.
This quarter it looks like there you know kind of what are the drivers et cetera.
That you are seeing behind that.
Sure entirely before I talked about that I do want to just highlight one of the things the trip was saying there a moment ago.
We think the fact that we have been success.
Successful at pricing.
Pricing actions as well as increasing volumes, we think really talk strongly about the demand the elastic demand for our product.
When do I think you'd ask that question of US perform you think that this is another corner, where we are affirming managed showing the strength of demand for our services.
I can't point, though you were asking about his DBM and where is the mix come.
Over the last year or so we've really been making investments to diversify the sources of income coming into the D. D. M business. Historically, you know there was very dependent on the financial services sector and we have invested in our database architecture and more to allow us to expand beyond financial services.
A new furnace announced significant wins in multiple new industries with his help diversify us away from.
Interest rate sensitive categories, and so the driver's going forward is going to be continued expansion in additional <unk> market protocols beyond the financial services and expanding the services we offer within financial services. So for example, if it's in a time of rising rate less interest and mortgage.
There is opportunity for us to do work in other sectors or other businesses within financial institutions, and that's helped US successfully expand the business and that's we think what the future's all of that here.
Great. Thank you Bury on that and then just another question for you if you don't mind.
You're looking at it next year.
Early so.
Is there a path that you can envision to organic growth given the tough concert facing this year.
[noise], Charlie we're not here today to provide guidance for.
For the next year.
But you know <unk>, we've said, we're going to deliver two consecutive years of sales driven organic revenue growth.
And we're very proud of our sales accomplishments the wins, we've had obviously with Chuck returning the secular declines uhm that will have some impact on our business, but we feel good about our prospects going forward.
Alright, Thank you very much.
Thank you the next to Lance been counter at Kevin.
Thanks, guys and congratulations on a great quarter I wanted to start with a question just on the sort of the macro outlook.
Are you are you sensing where results either in the third quarter or perhaps if you're early in the fourth quarter are you seeing any pressure from from any sort of.
Weakening in the economy slowdown consumer spending anything along those lines and do you expect it or are you sort of girding for that perhaps become a bigger problem in 2023.
So lance what.
What we saw in the third quarter, we continue to see is.
Some changes in the mix profile of what customers are buying and we're seeing some months per month variations remind expect for example July to be stronger than August August is stronger than July .
But that is not showing up in aggregate demand.
So we feel pretty good at this point that we are not seeing overall economic slowdown in our numbers you can't see it in some of the mix issues as I said, but we don't see it in an aggregate demand declined.
No one has a great principal ball about what the future is going to look like and we're doing all the things we know to do to help the company succeed regardless of the environment next year.
A very specifically.
Side from from shift to mix in some unusual stuff month to month, we don't see an impact to aggregate demand.
Okay. That's helpful.
On the cloud side.
D V M. P. Obviously doing really well there double digit revenue growth. So I think that that suggests that there was some other portion of cloud.
That was a sort of flattish and I'm wondering if you could talk about what those businesses are and whether you expect that.
Presumably that revenue pressure that you're seeing there whether you think that revenue pressure will abate or in the alternative D. C. Additional opportunities to perhaps divest some of those businesses that might be underperforming.
So in Dbms, specifically I think it really highlights the focus we've had on investing for innovation and to drive new revenue.
So in the <unk> business very specifically, we have seen great growth outside of our financial services financial sector.
And even within the financial sector, we're seeing a shift to non interest rate categories. Obviously, the parson of our business that is exposed to mortgage had some headwinds are headwinds are not as large as what is being reported it largely in the mortgage industry. So.
I think the key takeaway there is that we have really built for the future a business that can expand and Tom multiple protocols that gives us lots of growth opportunities regardless of what's happening in the economy.
As far as future disaster terms, I think you've seen F. B, I think very responsible and exiting underperforming businesses and continuing to improve in the portfolio you're harnessed do some of that in the previous quarters.
And I think you would expect to see us continue to be responsible and looking at assets.
We think well underperforming, perhaps making choices at an appropriate time, but as always lance.
<unk>, we don't anticipate anything of mopping up any one of the legs of our school and we think it gives us a lot of good.
Quality diversification and growth opportunity.
Okay.
And then just turning to the to the corporate Express line. It was actually kind of in line with our estimate but I'm wondering if there might be you know, it's just a big number $46 million I think in the quarter are there perhaps opportunities to to sort of whittle that down over time.
Perhaps it.
Is there a or no I mean, the nature. It seems like it's a big number relative to the size of your EBITDA et cetera, and I'm wondering what we might be able to expect in the future on that line.
This is a step I'll take that one so you're right corporate was much more in line.
With everyone's expectations I think this quarter, that's a function of us finally laughing a lot of the headwinds we've been talking about over the last few calls we had to add back some benefits cost disappeared as part of Covid.
The best thing in the technology infrastructure over the last few years. So corporate has been a little bit of a ongoing headwind for us as we digest all that we finally feel like entering into 2023, we're going to turn the corner, there and be able to be in a position taking all cost responsibly continuing to invest where we need to be able to do that.
A way, where we don't have as many headwinds year over year coming in for your portfolio and we do view that is a key area of focus getting that corporate cost center down now three years ago, we alluded to a number of that it's just not playing out that way because a lot of the cost we've taken out that we thought would go to corporate has fond of the segments and benefit of them but.
Getting corporate down bringing that down as a per cent of revenue as a main focus of hours and obviously as revenue continues to grow hopefully in the future will continue to get operating leverage from that corporate cost structure being more fixed by nature, but it's a big focus of ours into next year.
Okay, and then just lastly for me on the balance sheet.
Great job getting that interest rate swap that I'd like to add.
I like the the leverage coming down and I'm wondering though.
Is your sense that you have a lot of dividend oriented shareholders.
During you might get more bang for the Buck using that cash to pay down debt more quickly rather than paying the the ongoing quarterly dividend any thoughts there.
Yes. The board considers that every quarter is very diligent and contemplating how we use that cash flow at we have continued to support the dividend because they know that as part of a part of the investment thesis on hypothesis for our company.
And we remain optimistic about the company's ability to generate income in cash flow.
So the date that the board has not seen the need to to go attack that specifically because we've been able to continue to make progress on our overall capital structure plan.
Understood. Thanks, guys Congrats again.
Mmm.
Thank you we go next amount to Charles Nathan S Stevens.
Hi, Good morning, this is neuman onto the truck.
For taking our questions. So.
What are you <unk> are you seeing any effects from and placing either on the labour side or better <unk> better having any impact on the business.
And then going forward.
Ben or flexibility to have the mitigate any of those pressures. Thank you.
Sure. So I'll start on that ship to add some more color, but we feel like we are sort of caught up now with inflation of course, that's an ever moving target.
But the way our pricing models work, we have notification periods after which time, we can actually implement a pricing and uncertain and I'd say in a significant part of our contracts I believe we have now at the place wherever we are sort of caught up if you will with inflation and we feel pretty good about our ability to.
To continue with inflation.
Continues to.
At this pace, we think we're confident about our ability to keep up with the going forward.
We saw a lot of labour inflation end of last year going into the beginning of this year, we've seen the somber moderation there, which we think is helpful.
<unk> been able to pass along pricing.
To help us offset that we feel pretty good about our ability to do that going forward.
Anything on that ship.
Barry spot on I would say.
<unk> been in ever relevant talking point, all year long and it really started or a year ago. This quarter. It was Q3, a year ago, where really inflation started to hit us directly on and we started to take price of work with customers and do everything we can across the portfolio and like all companies inflation has just been ever growing in a constant issue and we've we feel.
We've caught up to it we stay on top of it it's part of our operating rhythm. It we feel good about where we sit now in terms of handling all of it whether it's on the late labour side or on the supply side.
Okay. Thank you for the color and then just on a follow up I believe in the prepared remarks, you caught out a nice win within treasury.
Treasury <unk> I was wondering if you could speak to some of the factors either from a competitive.
Standpoint strength within the platform to that led to that one.
Thank you sure. So we continue to have significant wins and Treasury management, which just as a reminder for everybody really is our digital AAR at AP solutions.
But the deal that we specifically highlighted in our remarks squares with the bank of misery and banking, Missouri was a is a longstanding customer of the lungs.
And we were able to bring our merchant services business, which of course, we acquired with first American and we were able to move them off of one of the big three providers centrally to us.
And that is a significant milestone wind for us because it shows our ability that with first American inside of the deluxe family. We tend to help move up in in size and scale of banks and financial institutions that we service. So there's there's too I think really important points there.
First.
The entire hypothesis are a big part of the hypothesis that we would be able to grow and help first American accelerated their growth by deepening the reach across financial institutions because of the locks is again proving that we've been talking about that now uhm for many quarters and we're proving that thesis ongoing banking, Missouri is a great.
Ample the second part of that is they're able to go market.
Two larger financial institutions competing with the three big players and winning now the reasonably one that deal in particular.
Is.
Quality of our customer service is exceptional and if you want to into one of our call centres specifically our main center for first American you would see the wall bind with plaques about being the top performer from our customer satisfaction perspective.
So that is very critical second we continue to add product feature functionality, which was helpful. And the fact that we have a culture and a set of values with a company that alignment the bank. All three of those I think were very important obviously, our ability therefore to help them grow their portfolios.
<unk> was the overarching reason, we want we continue to see wins, an accelerated wind as a result of the connection between first American and deluxe and bring in the best deluxe to those customers that are already partners of ours customer of ours and <unk>.
Spending the relationship.
Great. Thanks for the color of quota.
Thank you.
Thank you and the next now to Margaret against Adobe.
Hi, good morning.
Mark.
So I'm wondering if you could talk a little bit about order visibility.
Within before segments as to how that might change.
Change evolve whether there's the seasonality aspect or you know sort of just trying to get a general sense of if your customers were to to make some adjustments do the recessionary pressures you would like the level of visibility that you might have within each of the segments.
Helped me again with a question I'm not sure I'm not sure I understand what you're trying to drive that specifically.
I was just trying to get a sense of of revenue visibility as far as timing or the like as far as order flow or you know, maybe if you could sort of talk about what.
The visit that you might have.
Missing dynamics or if you have.
To make a gym make a change within the segment when.
What did you see it is what I'm trying to get it.
Yeah, I I got it it's sort of it's leading indicators.
And a couple of things there on price.
I sat in earlier, we have been a successful at taking responsible price increases help us offset inflation and it does not impacted our volume and actually can see the reverse our volume continues to expand because we continue to win business an ongoing demand for the products continue to up your very solid.
As far as this forward order book increasingly have recurring revenue business is certainly not all of them, but increasingly so and I can't.
G b much insight yet the fourth quarter, but.
It appears to be continuing as expected and that will play out over the course of the.
Excellent. Thank you very much.
[noise]. Thank you the next now to David Silver C. L T.
Yeah, Hi, good morning.
I'd like to start out maybe with just a follow up on the bank of Missouri.
When.
And your comments about that but in particular I guess, that's one of your larger wins and you talked about it shifting from one maybe from one platform to another.
But in servicing a larger win like that.
Does that require deluxe to add any features or to build out your infrastructure in any way.
Or on the other hand is it gonna be kind of seamless you have spare capacity and.
You could be immediately kind of try to replicate that deal.
With other potential.
Customers in other words, so so how.
How available or how seamless will the transition for bank of Missouri, B and how replicable do you think that might be over over a one or two year period.
Sure. So you'll recall when we announced the acquisition of first American.
That.
Mmm.
Buying a company with a solid robust and already scaled platform.
And that is why we chose first American too controlling the family.
And that's playing out here for example on the bank of Missouri.
Because of that deal we can take their volume and put it onto our platform that is already scale that can certainly take the additional volume.
So we think it will be relatively seamless for that business to continue to grow on our platform and of course, they chose us because they believe that we can help them accelerate the success of their merchant program.
We are always investing an additional feature functionality and expanding the tools and offerings, we have but we won because of the existing set of solutions we have <unk>.
And the the scale at how we are able to prove to the bank that helped other banks expand their merchant business and be even more successful and just I think to you the question <unk> replicable.
You know I think here the date, we are several times.
<unk> and the number of Bank partners were signing then the first American would have done historically on their own I think typically they would do a handful of a new bank partnerships in a year and as a result of the alignment between the locks and first American you know.
I think we're signing several handfuls of new bank customers.
And that just I think is further evidence.
And that support for what we're doing with first American that we bought a terrific asset.
That has ability to scale or bringing the sales tools and the reach of the lungs and together, we're helping that business growth.
[noise], Okay, and maybe just one more.
Angle on that but I don't know if you can answer this or not but maybe for the first 12 months that bank of miseries in the fold I mean do you have kind of.
Assumption or a target for maybe the incremental revenue from that and then secondly would I be correct in assuming kind of the incremental revenue would have a pretty high.
Incremental margin to it in other words above the the average margin for for that class the business sense, it's kind of incremental business being added to existing.
Existing platform.
Sure I understand the question, but obviously it.
Competitively sensitive information for a bank so I can't really comment on the scale of it specifically just in fairness to the bank shall we have had.
Many of these wins amazing that's gonna help you know.
Solidify that business like we've been saying for for a long time now.
Very confident we can hold that is Ah.
Mid single digit revenue growth business for the long term it very healthy March.
Alright, Thanks, I try not to ask too many questions about your legacy check business, but there are one or two that just pop out, but you know I've noticed kind of the continued improvement they're financially.
You know you're introduced.
Print on demand opportunity a few months ago and I assume it's kinda very early early days for that but could you may be comment on how popular that option.
Is may be.
From your customers perspective, how anxious are they to access that and would you point to any other kind of innovations there that you think have incrementally.
Added to the results this your ear today.
Sure. So for those folks that are listening in our new to our story.
We are we have invested in in the process of investing in a new setup technology in our check and our promo business.
That takes what was formerly a multistep process.
With a fair bit fixed expense and moved it to a largely variable. So now we can.
Produce many more different designs are much more efficiently and then we can scale, our production capacity up or down depending on the volume.
Particularly important and then the check business, which of course is returning to its normal secular decline so liberally bandage expense.
Directly in alignment with volume so that's how I feel confident about our ability to hold margin in the Czech business margin rate and the check business of that bid 40% range because we'd been investing in this technology, but importantly, it's not just about maintaining margin. It's also helped us win a couple of very.
<unk> significant deals that were laughing those as we go with the Q4, but we've had a significant take away from our chief competitor, because we were able to offer more actual check designs.
And better overall quality, which allowed us to have those wins and that helped us to have this year.
Rose in check.
And for the long term, but we think it will be competitive advantage as we renew and as we go against our Chief you know.
Rival in the space.
As you can as you know we've been winning a lot of market share are improved capability, including what we can do a print on demand is part of our value proposition for.
For those customers and partners and we're only part way through that implementation, but pleased with the progress.
[noise], Okay, great. Thank you very much.
Thank you and with that I'll turn things back over to Mister <unk> closing comments.
Thanks, Bo before we conclude I'd like to mention that management will be participating in the Stevens annual investment conference on November 17th 2022.
Thank you again for joining us today, and we look forward to speaking with you in February as we share our fourth quarter and full year 2022 results.
Thank you Mr. Murveit, Okay, ladies and gentlemen that will conclude deluxe third quarter of 2022 earnings conference call, we'd like to thank.
Thank you all so much for joining us.
A great day Goodbye.
[music].