Q1 2023 Dye & Durham Ltd Earnings Call
Okay.
Good afternoon, My name is column and I'll be your conference operator today at this time I'd like to welcome everyone to medallion Durham first quarter fiscal 2023 earnings call I would now like to turn the call over to Russ Marshall Investor Relations on behalf of Die in Durham. Mr. Marshall You May begin your conference.
Thank you operator, and good afternoon, everyone.
Welcome to the <unk> 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 diet, derm businesses 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 operations business performance and business prospects and opportunities.
Statements are made as of this date hereof, and <unk> assumes no obligation to update or revise them to reflect the events disclosures or circumstances.
As required by applicable Securities law.
Such statements involve significant risks and uncertainties and are not a guarantee of future performance or results.
A number of these risks or uncertainties could cause results to differ materially from the results discussed today.
These risks and uncertainties no understood.
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 our earnings press release issued today for additional information.
Joining us on the call today are Matt Brown, <unk>, Chief Executive Officer, and Frank <unk>, <unk>, Chief Financial Officer, a question and answer session will follow the formal results for research analysts I'll now call turn the call over to Matt for opening remarks.
Thanks, Ross and good afternoon everybody.
Our business continued to perform well during the first quarter, despite an extremely challenging real estate market, particularly in Canada.
We built the business is diversified across geography geographical markets and across various product lines.
I'm often asked how resilient is the business in the face of the deteriorating real estate market.
Real estate transaction volumes have come under significant pressure, especially in Canada since December 2021.
<unk> is up high.
Hyper while we believe.
And we've seen the fastest increase in interest rates since the 19 seventies.
In Q1, we reported a good quarter. Despite these challenging headwinds.
This afternoon's results demonstrate the strength of our underlying business with more than $120 million in revenue during the quarter and.
And $64 4 million of adjusted EBITDA.
We delivered this consistent performance in the face of monthly year over year real estate transaction volumes in Canada, which were down between 25% to 32% in the July to September period.
One of the reasons.
The resiliency of the business.
As our revenue exposure to the global real estate market.
Which is at 68%.
Only 68% of our volume.
Is exposed to real estate transactions.
One third of the business globally, it's not directly tied to real estate transaction volume.
Narrowing and further on our largest market, Canada, 43% of our revenue is exposed to the Canadian real estate market.
While still significant in both cases, what we often see is modeling that assigns signs the real estate transaction growth rate or decline in Canada across the entire business and this is a vast overslip co location of the business in our view.
We've done a good job of managing through the deteriorating market transactions with increase in the price per unit.
The EBIT, we buy synergies to be realized with acquired businesses with the capital we deploy remember a lot of our model has to do with capital allocation.
Touching on the deteriorating market.
I've always been a large believer in running a business with operational and financial discipline.
This is more important than ever right now given the macroeconomic environment remains extremely challenging and continues to deteriorate in many cases.
As such I've decided the companies to act more aggressively and decisively to protect its business and financial position. Therefore, we will be implementing cost reduction initiatives to reduce the cost of the current over operational cost by at least 10%.
<unk> in the second quarter of fiscal 'twenty, three I E. The current quarter. This is happening now.
We continue to execute on our strategy of disciplined capital allocation to build a business of scale through acquisitions and investment in our existing platform.
These acquisition acquisitions and investments drive enhancements and new capabilities of the platform that improve efficiencies and productivity of our customers.
The business is dramatically larger today than it was at the time of IPO, two and a half years ago.
We're building a global leader in the <unk> software and services space that supports legal and business professionals.
As you can see we built a highly resilient business.
In a highly reliable business that generate digital infrastructure cash flows.
The annuity nature of our revenue and the relatively fixed nature of our cost base.
We have managed.
We manage an extremely disciplined manner through the recent inflationary period and this provides for tremendous levels of productivity our revenue and.
And our revenues as well as adjusted EBITDA.
It will also allows us to drive the high EBIT margins, we do because the revenue can scale dramatically without corresponding cost increases.
Importantly.
This afternoon.
We announced a $150 million substantial issuer bid or SIB given.
Given the capital market's dynamics.
The consistency of our business in the face of real estate headwinds and the strength of our balance sheet.
We believe there's no better use of capital at this point.
Especially given the significant discount.
Some may even say silly discount at which we trade in the market given the scale of our business today.
Okay.
The initial details of the SIB. Our present are presented in the earnings release and once we once we are out of the earnings blackout will be providing more disclosure on the terms of the modified Dutch auction style bit.
In addition to the SIB. We've also been using the normal course issuer bid, we announced in September which Frank will address in a moment regarding the details of that normal course issuer bid.
Underpinning our entire business strategy is disciplined and effective capital allocation.
Look we've demonstrated the ability over and over again to acquire assets integrate them and scale them, while maintaining strong margins.
We believe this is an extension of this capital allocation strategy.
So what does this mean as it relates to future acquisitions.
We can walk and chew gum at the same time.
We believe a recessionary environment will lead to stronger opportunities for additional M&A in the long term, which is a tailwind for our business.
Were to come out of this stronger.
As you can see in the link administration disclosure, where we are in discussions with them to acquire the corporate markets and bcm business.
We would retain their bcm business and then look to divest the majority of our business in due course, we believe their corporate market business is an attractive asset who will further diversify our business. Both by product line geographically. It's also a business that does well in a high rate environment would be very complementary to ours.
As of today, we have no further updates on the stage those on the state of those discussions and there is no certainty. This deal will close as with any M&A deal.
In parallel with the said, we're moving forward with our strategy to continue to diversify our core business with new acquisitions that address workflow efficiencies needs of professionals legal market.
As part of the strategy, we intend to continue to expand our market reach and entering adjacent ecosystems in Canada, the UK and Australia through acquisitions.
Our pipeline remains very very strong.
As we've demonstrated through multiple market cycles, we're able to manage the business with <unk>.
<unk> and substantial performance sustainable performance.
As we continue to execute our strategy of scaling through acquisitions.
We rapidly built a business that generates strong topline growth.
Within the industry to provide stable cash flow.
Very healthy margin I wouldn't say so.
We look forward to update you on the progress as we move forward.
I am now going to turn it over to Frank to review the financials.
Thank you, Matt and good afternoon, everyone. Thank you for joining us today.
This is my first time participating the call.
While it's only been here for a few months I am excited to be part of the team.
We've seen strong growth in the business their operating capabilities and the <unk>.
Established cost management practices they have in place.
We reported revenue of $120 2 million during the first quarter, an increase of $7 5 million or 7% from the same period last year.
We generated adjusted EBITDA of $64 4 million, an increase of $2 1 million or 3% from the same period last year.
We continue to maintain our strong EBITDA margins coming at 54% this quarter, which is in line with our target range of 50% to 60%.
Topline growth has been fueled by both the acquisition, we've completed along with the integration activities and our and our organic growth, which indicates which includes the realization of synergies from price adjustments.
In the face of rapidly.
Inflation, we have maintained strict controls on the cost structure.
We have a disciplined practice of managing costs as demonstrated by essentially coming in flat on a sequential quarterly basis.
Total operating costs, which include direct cost technology operations costs, and G&A and sales and marketing were $55 7 million for the quarter or.
Or 46% of revenue compared to $50 2 million for the quarter of the prior year.
Included in the operating cost of the cost increase related to implementing a new managed service platform of <unk> 7 million.
To help streamline the business, we do not expect this cost to continue going forward.
The increase in other operating costs in the year over year period is due to cost acquired from acquisitions completed during the period.
We expect our operating cost to continue to be within the 40% to 50% range of revenues.
Net finance costs for the quarter were $16 2 million compared to a negative $4 6 million in the first quarter of the prior year.
The increase is due to high interest high interest and accretion expense of $18 3 million relating primarily to the <unk> credit facility as well as the recognition of noncash gain on the change in fair value of convertible debentures, only $9 1 million compared to $15 3 million same period last year as a reminder.
Winder.
Accounting rules require us to mark to market or fair value of these instruments each quarter. So we do expect this variability in our finance cost to continue.
Acquisition restructuring and other costs for the quarter were $18 5 million compared to $10 6 million in the first quarter of last year.
The increase was due to $11 4 million and higher acquisition cost primarily due to the linked transaction activity and $1 8 million in higher restructuring costs compared to the same period last year.
This was offset by $3 million in prioritization costs not incurred in the current period and $1 3 million decline in integration costs.
We've built a resilient business on slide eight you can see the growth that we've delivered on our adjusted EBITDA in the last 12 month period.
We've managed puts and takes through this period to deliver consistent performance.
Despite lower real estate market transactions, our adjusted EBITDA performance remained strong.
It's a great example of how we can manage the business through cycles, while we deliver shareholder value.
Our conversion to adjusted EBITDA to cash flow was strong.
We reported net cash provided from operating activities of $41 million in the quarter, an increase of $8 1 million or 25% compared to the same period last year.
Subsequent to quarter end, we announced a normal course issuer bid, which Matt referenced earlier.
We have purchased and retired two 8 million outstanding shares at this current stage under the program, which represents $46 2 million in capital deployed to shareholders.
As of September 30 of this year, we had over $500 million liquidity for the SCB and new acquisitions.
This liquidity consist of cash the revolving credit facility and the delayed draw term loan.
Our leverage ratio on a net basis is currently two five times as of September 30th, which we believe provides sufficient headroom with our strong cash flow free cash flow conversion of 50% plus.
We intend to deploy that capital towards new acquisitions in the current capital repurchase programs as Matt mentioned earlier.
Earlier today, our board approved a quarterly dividend of $1 80, $718 75 per common share payable on November 23 to shareholders of record of <unk> 16.
This concludes my formal remarks, and with that I would like to turn it back to the operator for Q&A.
Operator.
Thank you.
And gentlemen, we will now conduct a question and answer session.
If at any time you'd like to ask a question. Please press Star then the number one on your telephone keypad, if you'd like to withdraw your question. Please press two four star full by two and if you are using a speaker phone. Please lift the handset before pressing any keys one moment for your first question.
Okay. Your first question comes from Robert Young from Canaccord Genuity. Robert Please go ahead.
Okay.
For the substantial issuer bid and just.
That's in addition to the previous in CIB I think in the release, you said youre no longer going to.
Work CN CIB, what is the total outflow.
Across the two of them are approximately $200 million is that correct.
So Rob it's Frank here.
The $1 50 for the SAP and then we've already deployed $46 million of the NCI, So theres roughly.
Small portion remaining there.
But what's what's really will stand right now is the site what that smaller portion to come later.
Okay, and then post that.
If you're going to pursue a transaction for the linked cm business for us.
Generally it need additional funding for that can you just give us a sense of what the comfort around leverage ratio is.
Ted.
Make that transaction successful.
Hi, Rob very high.
Look we're in a lucky state we're a business that still has a very strong performance. We produce a lot of cash to have a lot of EBITDA.
And youre seeing even despite challenging markets that performance continues so.
Look as we always said we are willing to.
To take the leverage up temporarily as long as we can bring it back down to that two to three times range fairly rapidly again, which we consistently demonstrate ability to do.
Okay.
In your prepared comments you were focused on Canada, the real estate.
Market there.
Maybe you just talk about Canada, the United Kingdom, Australia, like what are the relative <unk>.
Transaction volume impact from the macro.
Issues, we're seeing today.
Jeff will be an update more color on those markets that would be great.
Our volumes generally trend with with the data youll see that come from the various market sources in that in that market and we are seeing.
Volumes trend almost exactly in line with that.
Obviously, we have changed our <unk>.
Across all geographies upwards.
Which is helping with the downward pressure.
And leaving it.
So that's been a big offset the increase in GPU.
The volume decrease.
And then of course, there is obviously the non real estate part of our business.
Debt.
<unk>.
The THAAD and Pac kit.
Okay, TPU as price per unit correct Yep.
Great.
Okay last question from me and I'll pass it over I, just give us a little more detail around the 10% cost reduction how do you plan to achieve it.
Can you just give us a sense of where that's coming from.
Are you.
Shutting down any businesses or.
Just some more color there would be helpful. And then I'll pass the line.
Yes look.
The largest cost we have is people. So we'll be letting people go in addition to that we look for efficiencies across our business.
Is there anything more you can.
Elaborate on efficiencies what type of efficiencies that you're looking for.
Unnecessary vendors, we have or opportunities.
To get a better a better price from vendors.
Nice to have soft stuff discretionary spend.
But obviously the largest.
Cost will.
Come from the reduction of people.
We again, we believe that that we can reduce costs by that much.
Without damaging the business.
And Frank said in the prepared comments that free cash flow.
As a percentage of revenue margins.
50% roughly is that the target to maintain that level and then I'll ask one we'd.
We'd like to be higher obviously theres acquisition costs.
In there that are pushing that down with particularly with linked in the last two quarters, where it's been quite substantial.
But that was a very controlled transaction was very expensive.
So that will continue going forward.
Okay. Thanks, I'll quit hogging the mic.
Your next question comes from Dan <unk> Mouse trap pulse from.
BMO capital markets. Please go ahead.
Hi, good afternoon.
Just to expand on the Opex reduction.
I think you still have maybe some cost synergies from prior M&A that youre, capturing so does the 10% reduction include some of those cost synergies or are there incremental cost synergies from integrating things that could be additive to that 10% reduction.
We're not breaking out the two.
I think what you should be looking for is at least a 10% reduction on what are our current off.
Opex is in the coming quarters.
We're going to look to execute on that this quarter.
And anticipate Youll see most of that in the following quarter coming out.
Okay typical rule of thumb from restructuring charge would be I guess, taking the cost savings and annualized yet.
Would that be fair or how do you think about the restructuring charge required no we don't do that.
When you look at our restructuring costs.
Things like the onetime cost of of.
Of making something redundant severance that we're not taking the cost that hey.
We got rid of $100 of costs and therefore, there is a $100, but board and restructuring line item. It's just the cost of removing that that expense that gets restructured.
Okay any update on the PM group divestiture.
The process is underway.
And that's all I can really say.
Okay, maybe one last one for me.
In terms of the parts of the business that arent.
Tied to property volumes just to confirm has doesn't holding steady has there been growth has there been any macro pressure how would you characterize what you're doing in the rest of the business.
It's been pretty steady I mean, obviously, we yes business as usual, especially describe it has been.
Sandoz, we did update the MD&A you would see in the quarterly metrics section that we have included.
Those percentages driven by real estate transaction in the last eight quarters, so you'd be able to see that lets you get a look through.
Okay I appreciate the new disclosure.
Best of luck.
Hello.
Your next question comes from Stephen Boland from Raymond James. Please go ahead.
Hi, guys just one question.
You withdrew the guidance for the year.
Citing conditions, but what are you seeing.
What's your view in terms of.
Conditions this quarter, but it's ongoing but the next couple of quarters do you see things leveling out here or.
What are you hearing from your vendors and your customers in terms of what their expectations are.
Look I think we're over that.
Was worse.
Worse from a market perspective, then.
Timber.
Hope it would.
It would be the case.
And given the volatility.
We obviously don't control what the market does.
We just we want to prudent.
As such a move that guidance.
Look it's hard to predict the royalty market.
So what are we doing we are doing things like to diversify our revenue to ensure we have less exposure real estate reduce cost there.
This continues form we always look to flex the pricing power, we have in our business.
Through inflationary times to make sure we're all operating with the optimal cost structure and charging the right amount for our products.
So those kind of things we're doing.
Okay.
Second question.
Just in terms of.
I know youre always looking at acquisitions.
Are you seeing multiples come down.
Over the past excluding linked but.
Other acquisitions out there that targets have you seen multiples come down.
From their side.
At all or materially or anything like that.
What we're seeing in the public market.
Meltdown of multiples, obviously, but putting that aside.
Syed.
We are starting to see a softening in multiples there is still a bid ask spread between.
Buyer expectations seller expectation.
But it's starting to move in the favor of blockers and becoming more of a buyer's market.
Absolutely trend we're seeing.
Okay and would those multiples means that youre going to couple of years ago, we were talking about high teen multiples.
These multiples like moving into single digit or 10 times or anything like that like is it is it still kind of.
It's still very too early to put a trend on exactly where it is.
I saw some data recently looked at kind of <unk> in the U S being just under 11 times. So just under 12 times multiple.
It really depends on the business and the various.
Higher quality businesses will demand higher multiples.
But across the board we are seeing it decreasing I would.
Yes put it where you put it in single digits, but it's getting close.
Okay. Thanks.
Thanks, guys.
Yeah.
Your next question comes from Chris <unk> of Russia.
Your next question comes from Kevin Krishna Rodney from Scotiabank, Kevin. Please go ahead.
Hey, there I've just got one question for of course real estate.
<unk> actions and how they are trending is out of your control, but things like pricing and new product intros are within your control can you just talk about.
The opportunities there you are reducing cost and just curious to know whether any of the.
The reduction how to think about the potential impact that might have on your on your growth strategy. I know there is a different product and youre thinking about tell us.
<unk> description.
Product can you just walk us through thoughts there.
Yes look we continue in Canada on our on our workflow software product to introduce subscriptions to help protect them.
Market declines.
Look we would still invest more than anyone else in the industry on R&D.
Merely.
Innovative.
<unk>.
I think this is.
The organization culturally.
We're big believers in doing more with less small lean teams that are highly focused and get a lot done.
Sometimes more so than <unk>.
And then a bigger team that thought leanne.
So harnessing that strength to make sure we prioritize things.
Things are important to our customers into the market.
And put on the backburner and more than a nice to have things.
So it's a philosophy, we've always used and I think it will it will we'll continue to use it almost a lot more through times of austerity.
Okay.
Just maybe looking across all your geographies products or any any shift at all from competitively I know you've got pretty good.
Sure you've got the leading product so.
Likely not but just curious to see interesting anything even just on the on the fringe there popping up.
No not really I mean, it's pretty I mean insurance is very stable.
The business, we're not seeing a lot we haven't really good market position.
Okay very good good luck with everything else pipeline.
Your next question comes from Scott Fletcher from CIBC Scott. Please go ahead.
Good evening, most most of my questions have already been covered off here. So I'll ask maybe.
A question on M&A and if this is.
If this new cut of the linked deal does go through it would seem like you would have to take a sort of a pause. After that is that still is that still your preferred approach to M&A sort of like these bigger deals and then wait to bring tend to wait until leverage comes back down or.
Is it just as well.
Was it just the opportunity that came up.
Look I mean, integrating a small transaction as many.
In many cases.
Just as much work and if you do 10 small ones. It is even more work.
Look as you've seen for us we prefer a bigger chunkier deals where we can have.
I have a clear path to our return multiples.
And obviously, we see that in this transaction.
Yes, I can't really speak of it let's think about it beyond that.
That answers your question.
Okay, that's fair, but like I said, most everything was covered off so thank you.
Okay. That's all the time, we have for questions today, I'll now turn it back to Ralph for closing remarks.
Thanks, everyone for joining today, we look forward to updating you with Diane Dirhams second quarter of fiscal 2023 results in February of 2023, good night.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.