Dye & Durham Ltd

TSX:DND

Earnings Call Transcript 2021-Q1

[Operator]

Good morning. My name is Pam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dye & Durham's First Quarter Fiscal 2021 Results Conference Call. [Operator Instructions]I'd now like to turn the conference over to Adam Peeler, Investor Relations on behalf of Dye & Durham. Mr. Peeler, you may begin your conference.

[Adam Peeler]

Thank you, Pam, and good morning, everyone. Welcome to Dye & Durham's first quarter results conference call.Before we start, we'd like to remind you that all amounts discussed on this call are denominated in Canadian dollars, unless otherwise indicated.Please note that statements made during this call may include forward-looking statements and information and future-oriented financial information regarding Dye & Durham and its business and disclosure regarding possible events, conditions or results that are based on information currently available to management, which indicate management's expectation of future growth, results of operations, business performance and business prospects and opportunities. Such statements are made up as of this date hereof, and Dye & Durham assumes no obligation to update or revise them to reflect events, disclosures or circumstances, except as required by applicable securities laws. Such statements involve significant risks and uncertainties and are not a guarantee of future performance or results.A number of these risks and uncertainties could cause results to differ materially from the results discussed today. Given these risks and uncertainties, one should not place undue reliance on these statements 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 us on the call today are Matt Proud, Dye & Durham's Chief Executive Officer; and Jae Cornelssen, Dye & Durham's Chief Financial Officer. I'll now turn the call over to Matt for opening remarks. Matt?

[Matthew Proud, CEO & Director]

Thank you, Adam, and good morning, everyone. We're pleased to be here with you today to review recent developments at Dye & Durham as well as our financial and operating results for the 3 months ended September 30, 2020.In the company's first quarter of 2021, we generated revenue of $21.9 million and adjusted EBITDA of $12.5 million, both of which exceeded our expectations. Revenue for the quarter was 29% higher and adjusted EBITDA 41% higher when compared to the 3 months ended September 30, 2019. We attribute this increase in financial performance to Dye & Durham continuing to deliver on its strategy of acquiring, integrating and operating businesses in our sector to drive EBITDA.In addition to delivering strong financial results in our first quarter, we executed on our M&A strategy, and we also strengthened our capital structure. Specifically, on September 23, we acquired a business called Property Information Exchange, or as we refer to it as PIE, for $53 million. PIE is a leading in-market, cloud-based real estate due diligence platform. The integration of PIE is proceeding as anticipated, and this includes the near-term achievement of significant synergies.We also entered into a new credit facility for $140 million revolving term loan facility with an additional uncommitted accordion of up to $25 million. This gives us an aggregate total of $165 million of credit capacity. The interest rate under our new credit facility is expected to be approximately 3% versus our old prior credit facility, which carried an interest rate of 8.5%. We believe this lower interest rate is expected to significantly improve the company's levered free cash flow. Also, on September 30, we closed a $50 million bought deal private placement.This morning, as a demonstration of our strong confidence in the cash flows the business produces, the company announced that our Board of Directors declared a quarterly dividend of $0.01875 per share, which represents $0.075 annually. This declaration of dividend is consistent with the disclosure put forth during our IPO process.Now as we move into the second quarter, we continue to see the business performing very well on all fronts. As such, this morning, we announced fiscal '20 -- 2021 Q2 revenue guidance of $27 million to $29 million. I'm excited to say that at the midpoint of this range, this represents revenue growth of 64% compared to the prior year period.Dye & Durham's core business model is to acquire, integrate and operate businesses in our space. Because our acquisition pipeline has never been more robust, we've actually expanded our M&A team to support the increased velocity of our pipeline. At present, we are evaluating multiple prospects, and these prospects could really move the needle on our targeted EBITDA for growth. However, it's important to keep in mind, every acquisition involves 2 parties. And as such, there can be no certainty that we'll come to a successful transaction on any potential acquisition. However, we've clearly demonstrated a track record of successful execution on this front. And never has the opportunity in front of the company been so great.We believe that these developments, coupled with our strong first quarter financial results, demonstrate our consistent performance and put us in a very, very good position to continue building Dye & Durham for the remainder of fiscal 2021 and beyond.

[Adam Peeler]

Operator, we'll now open the call to questions.

[Operator]

[Operator Instructions] Your first question comes from Robert Young with Canaccord Genuity.

[Robert Young, Director]

Maybe I'll start on the M&A pipeline you were just talking about. You said it's never been more robust. So is there some precision we can put around that? Ignoring PIE, would you say that the pipeline has grown? Or is it relatively the same as the pipeline at the time of the IPO?

[Matthew Proud, CEO & Director]

So I mean, based on my comment on increased velocity, I think you can take away from that, that it has grown because it has, due to the growth in the pipeline, in the number of potential opportunities in front of us. Again, they're potential. We've actually increased the size of our M&A function to help deal with some of this volume and velocity.

[Robert Young, Director]

Okay. That's great to hear. And then you are careful not to set expectations around timing there, but is it potential to see some additional M&A in the fiscal 2021?

[Matthew Proud, CEO & Director]

I mean, Rob, M&A is our core business model. You see it every year from us. This is part of an ordinary course of business for us. So I wouldn't be surprised by that, if I were you. But again, there's always 2 parties. We can't commit to anything. I hope that answers your question.

[Robert Young, Director]

How about I pivot a little bit onto the synergies that you're talking about? You said that PIE had potentially a quick execution on synergies. Maybe if you give a little more context around that. I mean you'd said that it was a direct in-market competitor, and that might be the expectation. Is there -- was there good synergies in the quarter? Because it closed pretty close to the end.

[Matthew Proud, CEO & Director]

No. So within our financial results, I believe there was 5 or 6 days of financial performance. So I mean, there really is hardly any financial performance from PIE factored into our financials, which shows the strength of our core business as well. You'll see PIE in Q2, which, obviously, the quarter ending for us at the end of December.Look, I think if you just look at our industry, though, Rob, and how we grow and how we realize synergies in the near term, look, we have revenue synergies that we're able to execute on right away due to the transactional nature of these businesses. And by right away, I mean, within the first month or 2 after buying a business.And then in addition to that, we have cost synergies that we're -- when we concluded these acquisitions, we're very confident and we do a lot of diligence, and we execute right away. As such, you see these synergies falling to EBITDA quickly after close.

[Robert Young, Director]

Okay. And part of the reason I was asking, it looked as though the U.K. business contribution was stronger than I was expecting. And so that would suggest maybe Stanley Davis, the synergies there, were better than I had expected. Maybe if you could talk a little bit about the synergies you saw there.

[Matthew Proud, CEO & Director]

Without getting into specific details of particular businesses we have bought, I'll just tell you, across the board, our core business is performing very well, and that includes the U.K.

[Robert Young, Director]

Okay. Okay. Last question for me. Maybe in Canada, the litigation solutions business was pretty heavily impacted by COVID. How has that gotten back on track? Is -- have you seen any pent-up demand flow through there? Was it better than expected? Or is that still an area that needs to get better?

[Matthew Proud, CEO & Director]

It was a bit soft. I wouldn't say it came back as strong as I thought. It's definitely back from, call it, the depths of COVID in Q4, the Q ending June 30. But again, we have a very diversified business that covers many aspects of general economy. And as you've seen, the economy improved dramatically over the last many months. Our business is performing well.

[Robert Young, Director]

Okay. Congrats on a strong quarter. I'll pass the line.

[Matthew Proud, CEO & Director]

Thanks, Rob.

[Operator]

[Operator Instructions] Your next question comes from Paul Steep with Scotia Capital.

[Paul Steep, Analyst]

Matthew, could you talk a little bit about, if you think on the M&A side of things, if you would look outside of your core legal vertical, would you look to move into areas such as financial services or ancillary services in that area? And then I've got one quick follow-up.

[Matthew Proud, CEO & Director]

So we have and continue to explore areas that are adjacent to what we do. And in particular, the services that you mentioned do intersect with our core competencies. If you look at what Dye & Durham does, in many cases, it's information services meeting workflow software. And that's the need and the needs that we focus on. So you do see many banks, many financial service institutions that require these types of services for many, many different transaction types. And so yes, we, from time to time, do look at companies as potential targets that would cover the space.

[Paul Steep, Analyst]

Great. And then the second one would just be on the dividend policy. You gave us a rundown there. Can you just recap maybe both dividend policy and debt policy? I don't know if you actually formalized it at the Board level in terms of specific payout ratio or a specific leverage level, but maybe just where the Board came down to and management's comfort on setting the level, which seems sustainable.

[Matthew Proud, CEO & Director]

Yes. So on the dividend policy, I mean, look, we committed to paying a dividend at IPO of $0.075 annually per share. And it was very, very important to us to do what we said we're going to do. So that's why you saw the Board declare the quarterly dividend of $0.01875 per share this -- for this quarter.On the debt side, we don't have a formal debt policy that we make public. Look, we've given a lot of guidance on how we view debt. And for the right acquisition, we will flex our balance sheet a bit because -- provided we can delever very quickly because that could be very accretive to the shareholders of Dye & Durham. Today, debt is a very inexpensive form of capital when compared to equity. However, it really depends on what we're doing at the time and why we may or may not need to flex our balance sheet.The business also produces and is anticipated to produce a lot of free cash flow that we can deploy to fund our strategy.

[Operator]

Your next question comes from Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos, VP & Analyst]

You provided revenue guidance for next quarter. Just curious as to why you didn't provide EBITDA guidance. Is that because there's some moving parts in terms of the timing of synergies? And just more broadly, how should we think about how margins might trend in the near term?

[Matthew Proud, CEO & Director]

Look, I -- we're always cautious with guidance. We have a lot of confidence in the numbers we provided as our business -- our core business is very much annuity-like in many situations, so we have great visibility on where we're going to end up.In regards to EBITDA, we gave guidance and continue to give guidance in many of our public disclosure documents that we anticipate the EBITDA margin to be between 50% and 60%, and I don't see anything changing there.

[Thanos Moschopoulos, VP & Analyst]

I guess, on a near-term basis, though, I mean, as you have a full quarter of PIE next quarter and as you're still capturing synergies there on the cost side anyway, might it be fair to expect a bit of margin compression relative to what we saw in Q1?

[Matthew Proud, CEO & Director]

So can you please ask that question again? It wasn't a clear line.

[Thanos Moschopoulos, VP & Analyst]

Yes. Sorry. Just yes, so next quarter, you're going to have a full quarter of PIE. And so just given that and given that you're still in the process of capturing the cost synergies there, presumably, might it be fair to expect a bit of margin compression relative to the margin levels we saw in the September quarter?

[Matthew Proud, CEO & Director]

I think the best insight I can give you is it will be between 50% and 60%. It could be a little amount. We -- as I said, we have executed on many synergies earlier than anticipated or on track as we thought we would. And we will continue throughout the year to execute on more synergies as we bring these 2 in-market competitors together, but I'm very confident that you'll see the EBITDA between 50% and 60%.

[Thanos Moschopoulos, VP & Analyst]

And then finally, with respect to the Canadian business, outside of litigation solutions, how do transaction volumes in the rest of the Canadian business look like relative to pre-COVID levels? Or are they kind of consistent to what they were before COVID? Or is there still some headwinds there from the pandemic?

[Matthew Proud, CEO & Director]

No. I mean as I mentioned, the business continues to perform well on all fronts. Aside from the small amount of softening we mentioned, and we talked about it on the litigation front, the real estate business in Canada continues to do well as with business law solutions. And business law solutions, as I mentioned in the past, is often driven by GDP. And with increased GDP in Canada, the business is doing well.

[Operator]

Your next question comes from Stephen Boland with Raymond James.

[Stephen Boland, MD & Equity Research Analyst]

First question, maybe you can just drill down maybe into the U.K. a little bit in terms of the integration and some of the synergies. Is the plan in the U.K. now to run this whole country or region in -- under one platform, management, sales, marketing, development or any other aspects of that business? Is that the plan going forward?

[Matthew Proud, CEO & Director]

So we have -- I mean, we have a common set of technologies that we use to manage the business, and that enables us to scale in the way that we have. By way of example, we use a single customer support application, a single development support application, one accounting system across the company. When we buy companies, we put them on our accounting system, et cetera. And this enables us to scale.When you look at the U.K., in particular like England and Wales, we always have these common sets of technology. But because we bought 2 in-market competitors, we will also have 2 operational applications that over a period of time will come together into one. And that will enable us to generate more synergies than we typically would do if it was not an in-market competitor. As such, we think the PIE application -- the PIE acquisition will be highly synergistic over the foreseeable future.

[Stephen Boland, MD & Equity Research Analyst]

Okay. That's good color. And then the second question is when I look at your service offerings by jurisdiction, whether it's business law, whether it's real estate conveyance, a lot of boxes have been ticked. So maybe you could just talk about what you're looking for in terms of acquisitions, whether it's Canada or the U.K. region, that you're mentioning. Is it just a combination of customer lists? Or is it extra geography? What fills in those boxes for you, Matt, at this point?

[Matthew Proud, CEO & Director]

It's both and it's also, from time to time, technology. We operate in the platform business, which also can be referred to as a network business, and owning more pieces of that network makes it easier for our customers to transact. And that's what we want to be. We want to make it so easy for them to do their job that they would never leave. And we've been very successful in doing that in each jurisdiction we operate when you segment it by product line. And that flows up into the acquisition pipeline. We are consolidating our industry, and that's what we're looking at when we do this.

[Stephen Boland, MD & Equity Research Analyst]

Okay. I know, in the past, in our conversations, you talked about possibly expanding outside of Canada and the U.K., in perhaps other Commonwealth countries. Is your focus right now that there's just so much pipeline in these 2 regions, that that's kind of where your focus is right now?

[Matthew Proud, CEO & Director]

I would say the majority of our focus is there. We are looking at other places, though. We've looked in Australia. We've looked in the U.S. in the past and we continue to. I would say the U.S. is not on the near-term radar, but other jurisdictions may be.

[Operator]

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

[Adam Peeler]

Great. Thank you, Pam, and thank you, everyone, today for your participation. This concludes our first quarter call.

[Operator]

Ladies and gentlemen, this concludes[Audio Gap]