Dye & Durham Ltd

TSX:DND

Earnings Call Transcript 2021-Q3

[Operator]

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

[Ross Marshall]

Thank you, and good morning, everyone. Welcome to Dye & Durham's Fiscal 2021 Third 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 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 that 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. 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.To access the presentation that accompanies today's call, please visit our website at dyeanddurham.com/invest (sic) [ dyedurham.com/invest ] and download the Q3 webcast slides.Joining us on the call today are Matt Proud, Chief Executive Officer; and Avjit Kamboj, Chief Financial Officer. I'll now turn the call over to Mr. Proud for his opening remarks.

[Matthew Proud, CEO & Director]

Thank you, Ross, and good morning, everyone. We're pleased to be here with you today to review recent developments as well as our financial and operating results for the third quarter.Overall, it was a tremendous quarter. We made significant process (sic) [ progress ] on the integration and realization of synergies from recent acquisitions. And in addition to this, the markets that we serve were resilient as economic transaction levels were stronger than anticipated. These factors resulted in revenue of $68.9 million and adjusted EBITDA of $37.6 million for the third quarter. We're pleased to report that our adjusted EBITDA was 25% greater than the quarterly guidance we previously provided.As many of you know, over the last few quarters, management has significantly scaled the company. To put the size of this scale in perspective, in the third quarter, we generated more adjusted -- we generated an adjusted EBITDA of 120% more than the previous quarter, 267% more than the same quarter last year and more adjusted EBITDA in the quarter than we did all of last fiscal year.Planned geographical expansion was also a key milestone for the quarter. We entered the Australian market with the acquisition of SAI Global's Property Division, and shortly thereafter announced the bolt-on acquisition of an in-market competitor, GlobalX. Together, these businesses will provide us with a meaningful Australian platform, financial scale in that market and allow for significant synergy opportunities in fiscal 2022. We currently anticipate closing the GlobalX acquisition towards the end of the current quarter we're in, pending regulatory approval.Now to manage this scale, we've significantly expanded our management capability throughout the organization as well as strengthened our integration team, which now consists of over 10 dedicated people globally in our integration management office, with specialists in various functional areas. We've created a very low-risk repeatable integration process that allows us to integrate the businesses we acquire with a high degree of velocity.The result of our efficient integration process is clearly evident in the third quarter financial results. For example, for the due process in SAI Global's Property Division acquisitions, we were able to integrate critical operational elements of the business rapidly, resulting in our ability to capture significant synergies in the third quarter, despite only closing these acquisitions a couple of months ago. This performance is directly attributed to our strategy of acquiring, integrating and operating businesses in our sector to drive EBITDA. We've been doing this by significantly expanding the value proposition of our software platform as we unite other key parts of the software ecosystem around our customers.As we discussed at our recent Investor Day on April 20 this year, we've named our strategy Build to a Billion as we plan to scale Dye & Durham to $1 billion of adjusted EBITDA. It's worth noting, in the quarter, we also significantly strengthened our balance sheet and enhanced -- and ended the quarter with a very strong financial position. We currently have access to over $1 billion in capital, which puts us in a very strong position to continue to execute on our Build to a Billion strategy.For those of you that have the presentation open, if you turn to Slide 4 for a second, in February this year, we reported our second quarter 2021 financial results. We provided a corporate update. We provided financial guidance forecast for the year ended June 30, 2022. This guidance was $200 million of adjusted EBITDA and $340 million of revenue. Given how much the business has scaled over the last few quarters, we believe providing a financial bridge to our June 30, 2022, adjusted EBITDA financial guidance of $200 million will be helpful for people.The annuity-like nature of our revenue and relatively fixed nature of our cost base provides for an immense amount of predictability to forecast both revenue and EBITDA and adjusted EBITDA with a high degree of precision. Furthermore, our products are used for a wide array of underlying transactions across major Western English-speaking economies. There is not a lot of high degree of seasonality or cyclicality in our business as a result. What this all means is, by annualizing the third quarter 2021 financial results, we get a more realistic view of the true run rate adjusted EBITDA of our business.As you can see from the chart on this slide, there remains a $50 million or 25% variance to bridge the gap between where we were at, at the end of last quarter and the $200 million of adjusted EBITDA guidance we provided. We are confident that because of, one, the even stronger financial results we are seeing so far in the fourth quarter, that's the current quarter, compared to last, the one that we're talking about today, the inclusion of EBITDA from the GlobalX business when the acquisition closes towards the end of the current quarter, and three, marginal organic growth, we will be at a run rate of $200 million of adjusted EBITDA relatively quickly.To be clear, we do not require any further acquisitions to meet this $200 million of adjusted EBITDA target. And the target is still 5 quarters away based on the current business forecasts. I hope people find this helpful in bridging from where we are today to our guidance.Now I will turn the call over to Avjit Kamboj, our CFO.

[Avjit Kamboj, Chief Financial Officer]

Thank you, Matt, and good morning, everyone. Total revenue for the third quarter grew to $68.9 million, an increase of $52 million or 4x the revenue from the prior year. Of the $52 million growth in revenue, approximately 42% was from organic initiatives, which includes revenue synergies actioned post acquisition. The remainder was inorganic from businesses we acquired. We acquired approximately $30 million of revenue from the business -- acquisitions we made over the last 12 months. When combining this acquired revenue with our existing revenue, we managed to grow the combined revenue by 46% or $22 million.During the quarter, we also significantly diversified our revenue geographically to where Canada now represents 58% of our consolidated revenue compared to 94% in the comparable period last year, with U.K. representing 25% and Australia with the remaining 17%. Australia's share of the revenue is expected to grow further on closing of the GlobalX acquisition.Adjusted EBITDA for the quarter was $37.6 million, resulting in 267% increase compared to Q3 in fiscal 2020. The primary drivers of EBITDA growth outside of organic growth is our strategy of acquiring and integrating businesses in our market and by doing so improving the margins of these businesses. Q3 was no exception to this, as through our integration process, we drove significant adjusted EBITDA.Total operating costs, which includes direct cost, technology and operations, general and administrative and sales and marketing were $31.3 million for the quarter. The primary driver for the increase in these costs are costs from the businesses we acquired and our significant investment in human capital to increase the bench strength of our team and expand our management teams, enabling us to execute on our strategy. Because we operate Software-as-a-Service model, this allows us to drive significant operating leverage both in our current business and as we scale. This is evidenced by the fact that we grew the revenue 4x year-over-year and our adjusted EBITDA margin was 55% for the current quarter, which remains within our target operating model of 50% to 60%.Finance costs for the quarter were $26 million, primarily due to the issuance of convertible debentures during the quarter. IFRS accounting rules require us to mark-to-market or fair value our convertible debentures each quarter, resulting in noncash gain/loss fluctuations in our finance costs, which was $6.9 million this quarter. Additionally, onetime transaction costs of $11 million associated with the issuance of convertible debentures were also fully expensed during the quarter in accordance with the IFRS accounting requirements.In the third quarter, as we look to execute our strategy to build to $1 billion, we set out to strengthen our balance sheet. To do that, we increased the company's total borrowing capacity to $700 million, comprised of a term loan facility of $245 million and a revolving facility of $455 million and raised $545 million in equity and convertible debentures. As of March 31, 2021, we had total cash of $539 million and debt of $245 million. As Matt mentioned earlier, this puts us in a position where we have access to over $1 billion in capital comprised of cash on hand and amounts available under our current credit facility of $455 million to execute against strategic opportunities in our acquisition pipeline.As we mentioned at our recent Investor Day, we have approximately $500 million of pre-synergy acquisition opportunities in the pipeline that our M&A team is currently working very hard on executing. For the fourth quarter, we expect our financial results will continue to accelerate given a resilient market and sizable synergies being realized earlier than expected from the recent acquisition. This will significantly close the remaining gap to us, achieving our $200 million of adjusted EBITDA from a run rate perspective.We believe that our strong financial momentum and acquisition strategy and now our fortified balance sheet sets the stage for us to build this company to $1 billion of adjusted EBITDA.With that, I will turn it over to the operator now to take some questions. Operator?

[Operator]

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

[Robert Young, Director]

The EBITDA that you reported for the quarter is quite a bit ahead of your $30 million guidance. I was wondering if you could just talk about what the drivers of that upside. Was it organic growth? A better mortgage origination market? Or would it be lower-than-expected churn in Ontario? Or is there anything -- any color you can provide on the performance there?

[Matthew Proud, CEO & Director]

Rob, good question. It was a mix. I think, first and foremost, the markets we serve are very robust right now, and that helps. There's also the organic initiatives, which, in our case, often come through revenue synergies from acquisitions that happened, I would say, somewhat ahead of schedule, again, due to us, I would say, again, being ahead of schedule on our integration process with some of the recent acquisitions. And those would be the 2 main drivers of the increase. I would add that churn remains very, very low. You mentioned a price increase. We do increase prices from time to time, but we continue to see very low churn due to just the highly embedded nature of these products that we provide in the market.

[Robert Young, Director]

Okay. And then in the release, I think Avjit also mentioned that you're expecting the current quarter to be even stronger. Is there any context around that given that the integration happened faster than you expected in the Q3? Are you expecting the Q4 to grow on the top and the bottom line? Are you expecting strength in revenue and EBITDA? Any color there given that you pulled in some of the integration?

[Matthew Proud, CEO & Director]

Yes. Look, we're not giving precise guidance on where we're going to be in the current quarter. All I can say is that we do anticipate an acceleration in adjusted EBITDA from where we are today. And you know what our target operating model is from a margin perspective. So that should be able to give you some kind of insight. So all in all, our EBITDA will be above where it is today as we believe it's going to significantly accelerate. Avjit, do you want to add anything there?

[Avjit Kamboj, Chief Financial Officer]

Yes. Thanks, Matt. Rob, the only thing I would add to what Matt just said is some certain synergies that we executed in the quarter in Q3 were done partly through the quarter, so they automatically flow into a full quarter of synergies in the fourth quarter. That will drive higher revenues and higher EBITDA.

[Robert Young, Director]

Okay. Maybe just to put a finer point on that. What was the actual date of the changes in the due process pricing?

[Matthew Proud, CEO & Director]

It was in mid-January.

[Avjit Kamboj, Chief Financial Officer]

That's right.

[Robert Young, Director]

Okay. And then last question for me would just be around the pipeline of actionable targets you've got in your M&A pipe. You've said $500 million in pre-synergy EBITDA. It's a pretty large number. It's hard to put arms around that. I was wondering if you can maybe pull that in to frame it a little bit more around the opportunity over maybe the next 12 months or something that just might be a little more near term in nature. And then I'll pass the line.

[Matthew Proud, CEO & Director]

Rob, we obviously can't comment on specific opportunities we're working on. We have been pretty transparent that we are looking for larger, more transformative acquisitions that help us continue to scale the business, as there is some opportunities that are quite strategic and will really help us work towards building that $1 billion EBITDA business [indiscernible].

[Operator]

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

[Thanos Moschopoulos, VP & Analyst]

I appreciate you just said you can't comment on specific opportunities. Maybe I'll just ask anyway. There's been media reports about you looking at PEXA. Anything you want to say regarding that or no?

[Matthew Proud, CEO & Director]

Look, again, I can't comment on specific acquisitions. So no, I can't. Look, PEXA is a great business and part of the ecosystem, I can tell you that -- that we serve. But that's all I can say at this point.

[Thanos Moschopoulos, VP & Analyst]

Fair enough. In terms of the acquisitions that you're integrating, where specifically are you focusing integration efforts now? I mean, sort of what remains to be integrated as you look at maybe the technology platforms, the back-end stuff. What inning are you in as far as capturing that?

[Matthew Proud, CEO & Director]

Yes. Look, I mean, we do a lot of the heavy lifting upfront. So operationally, a lot of the integration has happened. I mean, by way of example, financial systems are, for the most part, now on our ERP. There is still some cleanup we're doing with other kind of back-end systems. Some of this stuff just takes longer. In some cases, these are carve-outs from other businesses. So there is still some work to be done. But overall, I think the message is we're ahead of schedule on the integration process. And that's led us to -- you can see it in the financial results as it flows through.

[Thanos Moschopoulos, VP & Analyst]

Okay. The stamp duty holiday in the U.K. is slated to expire in June. Is that something that we should be mindful of as we model the business for later in the year? Or is that something you think you can offset through cross-selling and pricing?

[Matthew Proud, CEO & Director]

Look, we are -- our business is fairly well diversified, our revenue streams are. I mean, Avjit just talked about the net revenue comes from the U.K., which is a minority. And even then, if you look back over the last many years, there are many different things that I've heard over time may cause downward pressure on transactions. Some of them do, some of them don't. There can be some cyclicality around them. Overall, it's nothing we worry about. And to your point, I think we can offset, if there -- should there be any kind of correction with price and revenue synergies.

[Thanos Moschopoulos, VP & Analyst]

Great. And just one last one for Avjit. It seems like R&D capitalization ticked up this quarter. Would that be a good run rate? Or how should we think about that going forward?

[Avjit Kamboj, Chief Financial Officer]

Thanos, that is correct. That is a run rate we're currently looking at, specifically from the acquisitions we've done. As you know, there are large platforms that we acquired as part of these acquisitions, and we continue to develop and expand on those platforms.

[Operator]

Your next question comes from Paul Steep with Scotia Capital.

[Paul Steep, Analyst]

Could you talk a little bit about maybe organic growth in the period, Matt? And just specifically, what the drivers were by geo, whether it was end market robust, volume action or maybe pricing moves on your part?

[Matthew Proud, CEO & Director]

Yes. In the -- so it was both. There we did capture revenue synergies through the acquisitions, that we've sort of touched on already. But overall, markets are robust. I'd say an example is the Australian real estate market remains probably one of the more robust ones that we service. But transaction levels across all our product lines are fairly healthy right now. The economy seems to be firing in all cylinders. And if you look at what we do as a business model, we service these transactions in this economy, and we're clipping a coupon along the way every time a transaction happens, which is leading to some of the performance you're seeing. So it's a combination of both, Paul, to answer your question.

[Paul Steep, Analyst]

Okay. What's the -- can you just remind us where we are today in terms of the mix of real estate versus other transactions or commercial transactions, where we tilted in the quarter?

[Matthew Proud, CEO & Director]

Paul, we're not disclosing that information.

[Paul Steep, Analyst]

So then maybe just what would the max leverage target be overall? Just remind us what your comfort level would be with -- in terms of taking debt up to sort of a maximum. I know you've talked also about quickly scaling it back down, but just where would you go sort of on a pro forma basis at the high end of the range?

[Matthew Proud, CEO & Director]

I think, when you look at D&D, I think it's 3.5, maybe 4, if we had a really fantastic opportunity to quickly deleverage. So I think, at the D&D level, that's what we'd be comfortable with. That said, these businesses, I mean, its annuity-like revenue, high degree of predictability and precision in forecasting. They could handle a significant amount more. But given we're a public company and the markets [ comfort ] with leverage, that's what we think the appropriate amount is.

[Operator]

Your next question comes from Stephen Boland with Raymond James.

[Stephen Boland, MD & Equity Research Analyst]

Matt, just one question. I apologize if you answered this already. Are you finding now that -- it seems to be a very active market in the targets that you're looking at. Are you finding that it's becoming more competitive or the pricing for targets is going up compared to just, say, 6 months ago or 12 months ago? I mean, certainly, you've announced your presence with a number of acquisitions. Has that changed at all, in your opinion, the last little while?

[Matthew Proud, CEO & Director]

Yes. No, it has changed. You've seen an accretion in multiples across the board. There's no question about that. But from our perspective, we're always looking at what we can do with these acquisitions, as we take our software platform and the platform or the capabilities we're acquiring and put them together. We have a unique capability unlike, not all, but a lot of other buyers, to drive real and significant synergies in the near term. So that enables us hypothetically to pay a lot more.Now we don't want to be giving up all our synergies. But we always look at it from what can we do post synergy and what are the real synergies we can execute on, and that's how we drive our decision-making. So overall, well, of course, we've got to pay less for every acquisition. There is market norms and that we have to operate within those constraints.

[Operator]

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

[Matthew Proud, CEO & Director]

Thank you for your time. I appreciate it, and we look forward to talking again next quarter.

[Operator]

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.