Dye & Durham Ltd

TSX:DND

Earnings Call Transcript 2022-Q4

[Operator]

Good evening. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Dye & Durham Fourth Quarter and Fiscal Year-End 2022 Earnings Call. And I would like to turn the call over to Ross Marshall, Investor Relations on behalf of Dye & Durham. Mr. Marshall, you may begin the conference.

[Ross Marshall]

Thank you, operator, and good afternoon, everyone. Welcome to the Dye & Durham Fourth Quarter and Fiscal 2022 Year-end 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-orientated 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 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.

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 release issued today for additional information.

Joining us on the call today are Matt Proud, Dye & Durham's Chief Executive Officer; and Frank Di Liso, Dye & Durham's Chief Financial Officer. A question-and-answer session will follow the formal remarks for research analysts.

I now turn the call over to Matthew for his opening remarks. Matt?

[Matthew Proud, executive]

Thanks, Ross, and good evening, everyone. Today, we'll be reviewing recent developments at Dye & Durham and summarizing our financial and operating results for our fourth quarter and year-end of fiscal 2022 for the period ending June 30, 2022. However, before we begin, we're joined today by our most recent addition to our senior management team, Frank Di Liso, Chief Financial Officer at Dye & Durham.

I'll be conducting the call today, but Frank is here and all for any questions after the formal remarks, and he'll be an active presenter on future calls. We continue to execute our strategy of disciplined capital allocation to build a business of scale through acquisitions and investments in our existing platform. These acquisitions and investments drive enhancements and new capabilities of the platform that improve efficiency and productivity of our customers.

The business is dramatically larger today than it was at the time of IPO 24 months ago. In the fiscal year 2022, we generated revenue of $475 million and adjusted EBITDA of $276 million (sic) [ $267 million ]. During the fourth quarter of fiscal '22, we generated $130 million of revenue, up 54% from the same period in the prior year, and we delivered adjusted EBITDA of $75 million, up 53% from the same period in the prior year.

We continue to consistently deliver adjusted EBITDA margins above 50% with this strong growth. We're building a global leader in the B2B software and services space that supports legal and business professionals. We built a highly reliable business and resilient business that generates digital infrastructure cash flows. The annuity-like nature of our revenue and relatively fixed cost of our base -- of our cost base provides for a tremendous level of predictability in our revenue as well as our adjusted EBITDA.

It also allows us to drive the high EBITDA margins we do because revenue can scale dramatically without a corresponding cost increase. We intend to continue to expand our market reach by entering adjacent ecosystems in Canada, the U.K. and Australia through acquisitions.

Our capital allocation strategy is clearly working. In just 2 years, we've scaled the business eightfold. We deployed a total of $1.74 billion in capital with an average purchase price of 16.2x EBITDA that we've compressed to approximately 6.7x in a rapid time frame. We continue to see new opportunities, which would extend our reach in the ecosystems in and around our core business and help us diversify into other professional and legal workflow markets.

Last week, we announced negotiations with the Link Group ended [ without ] an agreement to complete the acquisition. It was a difficult decision for all parties given the time put into the transaction, again, on all -- from all parties. But from our perspective, the economics simply did not work for Dye & Durham If we had to carry the legacy liability of up to AUD 600 million related to Link's Fund Solutions business and the [ Woodford ] issue.

In our view, we put forth a structure to address this legacy liability in a fair way for Link shareholders, but it simply wasn't fair to Dye & Durham shareholders for them to own that liability moving forward.

Again, this is disappointing as Link had some very attractive businesses and assets like corporate markets and PEXA that we would have enjoyed to have ownership over. We are moving forward with our strategy to continue to diversify our core business with new acquisitions that address workflow and efficiency needs of professionals and legal markets. As of June 30 this year, we have available liquidity of approximately $500 million for new acquisitions.

This liquidity consists of cash, the revolving credit facility and the delayed draw term loan. Our leverage ratio on a net basis is currently 2.6x as of the end of fiscal '22, again, that's June 30 or 2.3x for the fourth quarter annualized, which we believe provides sufficient headroom with our strong free cash flow conversion of 50-plus percent.

We intend to continue to deploy that capital towards new acquisitions. We've demonstrated through multiple market cycles that we're able to manage the business, and we continue to execute our strategy of scaling through acquisitions.

We've rapidly built a business that generates strong top line growth within an industry that provide stable cash flow and a healthy margin profile. We look forward to updating you on our progress as we move forward. With that, I'll turn it to the operator for Q&A.

[Operator]

[Operator Instructions]

And your first question will be from Robert Young at Canaccord Genuity.

[Robert Young, analyst]

The first question I would ask -- would like to ask is around the guidance you've given in the past around fiscal '23 EBITDA. Are you still targeting greater than $350 million of EBITDA for 2023? I'm sorry if I missed that, I didn't see any of the materials that you released.

[Matthew Proud, executive]

So we've not provided any information disclosure that changes that number. Again, the drivers that really go into that are real estate market -- real estate transactions times price. We've done a good job of managing through a deterioration in market transactions with an increase of price per unit, plus EBITDA we buy and synergies we realize the business we buy from the capital we have available. So at this point, we've not changed that number.

[Robert Young, analyst]

Okay. Second question for me would be around the $500 million of liquidity that you highlighted. Is that sufficient for your near-term plans? Maybe if you can just talk about how you feel about adding additional debt or capital in this market and what the potential uses of that capital would be? Is it entirely for M&A? Or are there some other things you might consider? Can you talk a little bit about that?

[Matthew Proud, executive]

Look, I mean, we have a very strong business. The ability to add -- today, we're only 2.3x levered on a run rate basis, which we think is pretty reflective of what you call kind of pro forma EBITDA. So there is ability to move that up if you had an attractive acquisition. Again, for businesses like ours, that's acceptable leverage profile. So we could add to that if we needed. But without adding to that, we still have $500 million of capital available before we had to go to market to add debt if we choose.

To your second point of your question, I would say that the primary use of our capital today is for acquisitions, but it might not be the only use.

[Robert Young, analyst]

Okay. And maybe another way to look at that question would be, are you looking at smaller acquisitions? Like what would be the preferred size of acquisition?

[Matthew Proud, executive]

It really depends on a few factors. I mean size isn't the only thing we look at, obviously, having to do a lot of small ones, creates more -- often creates more work, in many cases, more risk. So we're looking at -- if I look at our pipeline, there's various size of acquisitions in there, ranging from small to larger ones.

Again, we're targeting our return number, which is a 5-year return on capital. As you've seen, we're currently -- if you look at from the time of IPO sitting at just under 7x with obviously 3 years to go to hit that 5-year return on capital. So we're feeling pretty good about hitting those numbers.

[Robert Young, analyst]

Maybe just on that last bit. Last question for me would be around the data you shared that the acquisitions that yielded 6.7x post-synergy multiple of EBITDA, the target is 5x. And so is there -- implied in that is -- are you saying that there is still opportunity for another 2 turns of EBITDA within that $1.7 billion of past acquisitions?

[Matthew Proud, executive]

Yes. So we're [indiscernible] -- yes, that's correct, [ I'm saying ].

[Robert Young, analyst]

Which of the acquisitions would have the most remaining synergies to access? And then I'll pass the line.

[Matthew Proud, executive]

That's not disclosure [ we ] provide.

[Operator]

Next question will be from Thanos Moschopoulos at BMO Capital Markets.

[Thanos Moschopoulos, analyst]

Obviously, from a macro perspective, there's lots of challenges and lots of noise in transaction volumes. But just if we think about the upcoming quarter, is it safe to assume that your revenue and EBITDA should be up sequentially just given the mix of seasonality versus synergies that you're capturing from existing businesses versus the pricing dynamic? Is that a fair assumption?

[Matthew Proud, executive]

I'm not -- we're not providing guidance on our current quarter. So [indiscernible] with that question.

[Thanos Moschopoulos, analyst]

Okay. Fair enough. And in terms of the TM Group sale and the update there as far as what we should be thinking about in terms of timing?

[Matthew Proud, executive]

So we'll be making a decision quite quickly on what we're going to do. I'd call it a near-term decision. There's a process that we go through that with the CMA. They've reached their conclusion and now we're considering our -- what we do.

[Thanos Moschopoulos, analyst]

Okay. From an M&A perspective, you talked about focus on your core geographies. Now with Link, we saw you obviously being interested in an asset that with us taking into a new market, so as you look at your M&A pipeline, I mean, should we be thinking -- is it more weighted towards things that are adjacent to your existing markets? Or could there be things like Link that would take you into markets that are maybe a little bit different?

[Matthew Proud, executive]

It's both. I mean we always consider diversification when we look at acquisition opportunities. I mean, I think what you saw in Link that we like was it had -- there was assets they had that were directly tied to our core business as well as assets that diversified in similar industries, so we kind of check 2 boxes for us. But to answer your question is both.

[Operator]

Next question will be from Stephen Boland at Raymond James.

[Stephen Boland, analyst]

Thanks, Matt. First question is just about Australia. I presume now that what pass off the table that you'll be retaining those operations? And maybe you could just talk about how they're performing, the employees there, the staff were under I guess, thinking that they were going to be sold. So how is morale or the operations? Was there any disruption during this process with Link?

[Matthew Proud, executive]

Yes. No, good question. So yes, we will be keeping our Australian business. Look, it's something we have to manage through. Obviously, it creates uncertainty when you have an employee base that are they staying? Are they going? There's regulatory uncertainty around that. So through constant communication, more executives being in front of employee base in Australia in person, we're managing through that.

[Stephen Boland, analyst]

Okay. And then just a general one, Matt. When you look at the conveyance market, I presume it's -- I'll say conveyance, but there's the regulators now 2 jurisdictions of kind of, I guess, halted any kind of further consolidation, mentioning certainly TM Group and then the issue with PEXA. Is it fair to say that, that segment of the market, which has been one of your bigger revenue drivers perhaps was shut down? And for the most part, you're going to have to look for complementary businesses to acquire?

[Matthew Proud, executive]

So -- look, no, I wouldn't say a shut down. I think you look at why the Link deal ended up ultimately not proceeding had nothing to do with even our business as a legacy issue -- to do with Link and their Fund Solutions business in the U.K. that could have been solved with dollars at the end of the day. So I don't think that's an accurate analysis to draw. So look, at the end of the day, we have an active pipeline that does a diversified amount of opportunities in there.

And when you look at our strategy of capital allocation and what we're really doing, looking at we've done in the last 2 years is allocating capital and driving return for -- return on it. There's opportunities both within and without -- within and outside of our core, you call conveyancing business.

[Stephen Boland, analyst]

Okay. And maybe just the last one for me is I did notice that the acquisition restructuring expense was elevated this quarter. I presume that will carry on maybe similar to bigger amounts in this quarter as well, just with the -- because Link was still ongoing, and I presume TM Group, is that a fair...?

[Matthew Proud, executive]

Yes, that's right. That's right. There -- there's a lot of costs went into Link -- fortunately didn't happen. It would have been a good opportunity. But for the reasons discussed, it didn't make sense. But yes, this quarter, we'll have a larger-than-normal restructuring on as such.

[Operator]

[Operator Instructions]

Your next question will be from Kevin Krishnaratne at Scotiabank.

[Kevin Krishnaratne, analyst]

Question for you. Can you update us on the amount of recurring revenue in the business? I know you've been putting through some initiatives on a subscription pricing in Canada. Can you give us an update on what that looks like?

[Matthew Proud, executive]

So we don't [ want to report ] our recurring revenue across the business. We have on previous calls talked about the minimum volume contract uptake in Canada, which is currently around 30% of our customers have signed up to it or that they transact -- so that's where we are with that. We anticipate that growing throughout the year. But we don't widely disclose our recurring revenue versus nonrecurring revenue.

[Kevin Krishnaratne, analyst]

Got you. And so yes, maybe just related to that, though, just a question on your pipeline and the composition there. Now if you were able to add Link, that would have added a pretty good base of recurring revenue. And so I'm just curious when you're looking at the pipeline, how those businesses may look if they kind of skew more recurring, they look transactional? I'm just trying to get a view of what the kind of makeup of the revenue profiles might look like for some of your targets you're thinking at -- thinking or looking at.

[Matthew Proud, executive]

Yes. Look, it's both. That's a good question. And look, in today's market, when we look at acquisitions, particularly with exposure to macro factors like real estate transactions, is looking to allocate our capital. More recurring assets are obviously attractive to us when you look at diversification. So it's something that we do focus on when looking to deploy capital.

[Kevin Krishnaratne, analyst]

Right. And do those -- how do those look like on a valuation basis, you've got -- you referenced the 16.2 purchase multiples on average. Are they higher? Or is there some offsetting now just because of the general market softness? Are you seeing pricing coming down? Any commentary on that?

[Matthew Proud, executive]

It really is a mixed bag is the best way to put it. And we see valuations across like -- I mean, across the spectrum. I mean, look, businesses we buy are businesses that make money. We're generally buying [indiscernible] multiple, not a revenue multiple. And so you're seeing things that range from kind of high single digits up into the teens. And again, we're willing to consider it all provided, we see a clear path forward to walking it down to the 5x target. And again, looking at our business today, we are considering revenue diversification more and more.

[Kevin Krishnaratne, analyst]

Got it. Okay. Just one last small one for me then, just on the capability that you got with TELUS Financial and Québec, the mortgage payment, pretty unique, something that's not really, I think, available in the rest of Canada. Any updates there on initiatives there to roll that out and what might be involved in the process?

[Matthew Proud, executive]

Yes. Look, I mean, it's something we are working on across the country rolling that out. It's not a simple thing to do. So we don't have a direct time line to report on right now, but it is something we're actually working on from a product perspective internally.

[Kevin Krishnaratne, analyst]

Right. That would require some incremental investment or resources put towards that and right, and then there'll be some time -- it takes some time to get that done. I guess, trying to understand the amount of work and investment required to get that up and running?

[Matthew Proud, executive]

Yes. I don't have the exact numbers off hand on the investment. And again, we're not commenting on an exact time line right now, but it is something we're actively working on.

[Operator]

[Operator Instructions]

And at this time, Mr. Marshall, we have no further questions. Please proceed.

[Ross Marshall]

Thanks, everyone, for joining us this evening. We'll be reporting our fiscal Q1 results shortly in November, and we look forward to speaking to you then. Good night.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good evening.