Deluxe Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 8 speakers on the call.

Operator

Thank you for standing by, and welcome to the Deluxe Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode, and today's call is being recorded. We will begin with opening remarks and introductions. At this time, I would like to turn the conference over to your host, Vice President of Strategy and Investor Relations, Brian Anderson. Please go ahead.

Speaker 1

Thank you, operator, and welcome to the Deluxe Second Quarter 2023 Earnings Call. Joining me on today's call are Barry McCarthy, our President and Chief Executive Officer and Chip Zint, our Chief Financial Officer. At the end of today's prepared remarks, we will take questions. Before we begin and as seen on the current slide, I'd like to remind everyone that comments made today regarding management's intentions, projections, financial estimates or expectations of the company's future strategy or performance and forward looking in nature as defined in the Private Securities Litigation Reform Act of 1995. Additional information about factors that may cause actual results to differ from projections is set forth in the press release we furnished today in our Form 10 ks for the year ended December 31, 2022, and in other company SEC filings.

Speaker 1

On the call today, we will discuss non GAAP financial measures, including comparable adjusted revenue, adjusted and comparable adjusted EBITDA, Adjusted and comparable adjusted EBITDA margin, adjusted EPS and free cash flow. In our press release, Today's presentation and our filings with the SEC, you will find additional disclosures regarding the non GAAP measures, including reconciliations of these measures to the most comparable measures under U. S. GAAP. Within the materials, We are also providing reconciliations of GAAP EPS to adjusted EPS, which may assist with your modeling.

Speaker 1

Now, I'll turn it over to Barry.

Speaker 2

Thanks, Brian, and good morning, everyone. Before we begin, I'd like to introduce Brian Anderson, our new leader of Strategy and Investor Relations. Brian has been with Deluxe for nearly 4 years, serving in a number of important financial, operational and strategic roles. We look forward to leveraging his deep knowledge of Deluxe to further build our IRR program. We're pleased with the 2nd quarter performance overall.

Speaker 2

We've delivered both revenue and adjusted EBITDA dollar growth across all four operating segments, and we are in our 3rd consecutive year of organic revenue growth. We're very pleased to raise both full year 2023 revenue and earnings Based on these results and our momentum, as discussed in the Q1, the company is now positioned to deliver revenue and adjusted EBITDA growth concurrently. Before sharing a few additional recent business highlights, I'd like to start by addressing the broader macroeconomic environment. As a leading merchant processor, We regularly monitor broad consumer confidence and discretionary spending trends. After a slow start to the quarter, Our merchant portfolio performance was roughly in line with card associations and other market reports noting modestly improving consumer sentiment and discretionary spending volumes as the

Speaker 1

quarter unfolded. Importantly,

Speaker 2

we remain confident that our Merchant business can deliver mid single digit revenue growth for the full year, driven by new product features, ongoing pricing actions and a strong pipeline for new accounts and partnerships. Now on to some brief comments on the overall results. For the Q2, total reported revenue increased 1.5% to $572,000,000 This growth rate was impacted by several exits of non strategic businesses throughout 2022. On a comparable adjusted basis, total revenue increased 2.6%. As I mentioned earlier, we're now in our 3rd consecutive year of revenue growth on a comparable adjusted basis.

Speaker 2

Profits once again grew faster than revenue in the quarter and we continue to look for opportunities to drive efficiency and our cost base, while profitably investing for growth. Total adjusted EBITDA margins increased 90 basis points versus the Q2 of 2022. Adjusted EBITDA dollars increased 6.6%, while total comparable adjusted EBITDA dollars increased 7.2% as our operations continue to benefit both from responsible pricing actions and disciplined cost management. While we don't expect our growth rates in the back half to match the second quarter pace, combining our overall first half performance, Trajectory and solid operating plan enable us to lift full year guidance, as I mentioned a moment ago. Chip will discuss in greater detail.

Speaker 2

Now for the segment revenue highlights. As a reminder, our payment segment is structured with 2 distinct sets of attractive offerings. Our merchant services business helps Small to midsized businesses except credit card and debit cards. Our treasury management suite of Solutions helps enterprises and midsized businesses manage their receivables and payables more efficiently. Overall, payments revenue grew approximately 2% from the Q2 of 2022, slower than our long term expectation.

Speaker 2

Merchant services revenue increased just over 1%, mainly due to the early softness in processing volumes within discretionary spending categories as mentioned earlier. The trends we've seen in our merchant business are broadly in line with what we've seen from industry wide data. We expect spending to stabilize and we remain pleased with our partner development and overall sales pipeline activities. Treasury Management grew 2.5% as improvements in software revenues were partially offset by softness in lockbox volume and we expect to continue for another quarter or 2. During the quarter, our sales team signed BankUnited, a Florida based leading financial institution with over $37,000,000,000 in assets to our deluxe payment exchange disbursements platform.

Speaker 2

This solution will help BankUnited drive a strong B2B payments offering to its customer base and drive future growth. Moving on to our data segments. We are particularly pleased with our standout performance of the segment. On a comparable adjusted basis, revenue in the data segment increased a strong 8.4%. The data driven marketing or DDM business posted record revenue and adjusted EBITDA during the quarter.

Speaker 2

As we've discussed previously, we're working diligently to expand this business beyond its strong FI relationships. We focused on new and less interest rate sensitive industry verticals. And this quarter, we signed 3 new smart home brands as part of our 20 new logo wins during the quarter. In addition, we saw increased demand for our marketing services in support of banks, attracting low cost deposits. Specifically, we delivered a suite of campaigns for our top 10 FI, helping drive aggressive consumer and business deposit gathering.

Speaker 2

Finally, we closed on the sale of our North American web hosting as of June 29. The Q2 data segment financials are reflective of these results through the closing date as we continue to reshape and simplify our portfolio over time. Shifting now to our Print businesses, comprised of our promotional solutions and check segments. Combined, the Print businesses delivered a blended comparable adjusted revenue growth of 1% and EBITDA margins of 31% in the first half. Promotional Solutions had another solid quarter, improving comparable adjusted revenue 2.2 percent along with significantly improved margins, which Chip will discuss in a moment.

Speaker 2

Finally, our check business increased 1.4% year over year, better than our long term expectations of mid single digit revenue declines. As we discussed on the last call, our first quarter results were impacted by our ERP system upgrade. Our production caught up and we shipped the carryover Q1 order backlog in addition to normal orders, helping to deliver this performance. For the first half, check revenue was down 1.6% year over year, still better than our long term expectations. Small business demand remained durable and we benefited from our previous price actions.

Speaker 2

We held margins as expected in the mid-40s. Now on to the organization. We recently made some adjustments to our leadership team, realigning existing leaders from our Merchant and Data businesses into roles reporting directly to me. These moves are fully aligned with our core strategic priorities and will allow for greater focus on the most critical growth platforms for the company. In summary, we're now confident in our ability to deliver sustainable positive operating leverage over the long term, with some periods stronger than others.

Speaker 2

We're very pleased our performance is enabling us to raise our full year guidance to reflect our momentum. Before passing this over to Chip, who will provide more details on our financial performance, capital allocation priorities and guidance, Let me once again thank my fellow Deluxeers for their continued dedication to both our customers and our company's success, enabling these strong second quarter and first half results.

Speaker 3

Thank you, Barry, and good morning, everyone. Let's first go through the consolidated highlights for the quarter. On a reported basis, revenue increased 1.5% year over year, while total comparable adjusted revenue increased 2.6 percent to $571,700,000 We reported 2nd quarter GAAP net income of $16,400,000 or $0.37 per diluted share, down from $22,100,000 or $0.50 per share in the Q2 of 2022. Adjusted EBITDA came in at $108,400,000 up 6.6% on a reported basis, Up 7.2% on a comparable adjusted basis from last year. Comparable adjusted EBITDA margins were 19%, up 90 basis points year over year.

Speaker 3

2nd quarter adjusted diluted EPS came in at $0.93 down from $0.99 in last year's 2nd quarter. This decrease was primarily driven by an $0.18 impact from higher interest expense, partially offset by improved operational performance. Now turning to our segment details, starting with our growth businesses, payments and data. Payments grew 2nd quarter revenue 1.9% year over year to $174,400,000 with merchant services growing 1.3% and the balance of the payments business increasing 2.5%. Growth for the merchant business reflected some softer consumer discretionary spending levels discussed previously.

Speaker 3

Growth for the balance of the payment segment, including our up 40 basis points from the prior year. Operational improvements across our lockbox sites, as we indicated during last quarter's call, drove 2nd quarter margin improvement for the treasury management business, while merchant services margins were modestly challenged due to the volume softness noted previously. For 2023, we continue to expect to see mid single digit payments revenue growth and adjusted EBITDA margins in the lowtomid20% range. On a reported basis, Data's revenue increased 5.1 percent from the Q2 of 2022 to $72,100,000 Comparable adjusted revenue increased 8.4% year over year, driven by strong data driven marketing results. As Barry mentioned, the Deluxe web hosting business has now been fully divested as of June 29.

Speaker 3

Data's adjusted EBITDA margins in the quarter decreased 80 basis year over year to 24.7 percent. On a comparable adjusted basis, EBITDA margins declined 120 basis points. For the second half of twenty twenty three, inclusive of the sale of the web hosting business, we expect data adjusted EBITDA margins

Speaker 1

in the mid to high teens.

Speaker 3

For the full year, we continue to expect low single digit revenue growth on a comparable adjusted basis. We also expect to see blended adjusted EBITDA margins in the low to mid-twenty percent range for the full year. Turning now to our Print businesses, Promo and Chex. Promotional Solutions 2nd quarter revenue was $138,800,000 flat with last year on a reported basis. Promo's comparable adjusted revenue increased 2.2%, driven by new sales wins, pricing actions and adjusting for $3,500,000 of divested revenue from multiple 2022 business exits.

Speaker 3

Promo's adjusted EBITDA margin increased 480 basis points year over year to 15.3% as we return to mid teens levels following last year's challenging Q2. As a reminder, Through a combination of pricing actions, improvements in operations, supply chain and cost structure, the business has stabilized significantly over the last few quarters. For 2023, we continue to expect to see low single digit comparable adjusted revenue growth and adjusted EBITDA margins in

Speaker 1

the mid teens.

Speaker 3

Chegg's 2nd quarter revenue increased 1.4% from last year to $186,400,000 benefiting from some timing impacts relating to the catch up of with ERP related issues. Checks also benefit from resilient demand and the continued positive impact of responsible price actions. 2nd quarter adjusted EBITDA margins were a solid 44.8%, essentially flat year over year. On a year to date basis, Chex revenue is down 1.6% year over year with margins at 43.9%. For 2023, We now expect low to mid single digit revenue declines and adjusted EBITDA margins in the mid-forty percent range, consistent with our long term expectations.

Speaker 3

Turning now to our balance sheet and cash flow.

Speaker 1

We ended the quarter with

Speaker 3

a net debt level of $1,630,000,000 down from $1,660,000,000 compared to the Q1. Our net debt to adjusted EBITDA ratio was 3.8 times at the end of the quarter, down from 4 times at the end of the Q1, and our long term strategic target remains approximately 3 times. I would also like to mention that in the Q2, we completed an additional 3 year floating to fixed interest rate swap at a fixed interest rate of 4.25 percent beginning on June 20, 2023. This swap carried an initial notional amount of approximately $300,000,000 The swap will amortize over a 3 year life, making about 75% of our total debt fixed rate. By increasing our fixed Debt ratio, we are now better insulated against ongoing variability from potential rate hikes, including the one announced last week.

Speaker 3

Free cash flow, defined as cash provided by operating activities less capital expenditures, was $23,700,000 which compares to $13,500,000 in Q2 of 2022. On a year to date basis, we remain slightly behind our plan, but the Q2 represented a significant improvement from the Q1 and prior year. Our Board approved a regular quarterly dividend of $0.30 per share on all outstanding shares. The dividend will be payable on September 5, 2023, to all shareholders of record as of market closing on August 21, 2023. To reiterate my comments from the last call around capital allocation, We are responsibly investing the significant free cash flow generated by our core print businesses into our payments and data businesses that we believe can generate more robust growth over time.

Speaker 3

Our priorities for capital allocation are clear: reducing our debt and net leverage to a level below 3 times, funding high return internal investments and paying our dividend. We facilitate a rigorous annual planning process, ensuring all investments have a compelling business case and target returns above a 15% hurdle rate. We return value to shareholders through our dividend, which is currently $0.30 per share per quarter and equates to a very attractive roughly 7% yield. We continue to review the dividend with our Board and our current focus is to grow out of that high yield through improving business performance. Importantly, we remain focused on further accelerating our rate of debt pay down through continued improved EBITDA and free cash flow generation so that we can get back below 3 times levered.

Speaker 3

As an example, the completion of our previously referenced ERP upgrade will serve as a foundation for continued operational efficiency and unlock new opportunities to further improve our cost structure. Turning now to guidance. Today, we are raising our full year 2023 Thank you. Thank you. Thank you.

Speaker 3

Thank you. Our next question comes from the line of David. Thank you. Good morning, everyone. As detailed further within today's press release, we are increasing our guidance now expecting revenue of $2,180,000,000 to $2,220,000,000 Adjusted EBITDA of $400,000,000 to $415,000,000 adjusted EPS of $3.10 to 3 $0.40 and free cash flow of $80,000,000 to $100,000,000 which is unchanged from our previous guidance.

Speaker 3

We are raising our guidance based off our strong start to the year and continued progress in yielding operational efficiencies. On a comparable adjusted basis, we see 2023 revenue growing between 0% 2% and comparable adjusted EBITDA between negative 1% to positive 3% growth. Adjusted EPS, while a substantial improvement from our original guidance, Still expected to decline year over year due to the full year impact of rising interest rates, incremental depreciation and amortization and an estimated $0.15 impact from the recently closed divestiture. We remain confident in our full year free cash flow guide and believe it remains prudent to hold the prior range based on our year to date results. Also, in order to assist with your modeling, our guidance assumes the following: interest expense of $120,000,000 to $125,000,000 an adjusted tax rate of 26 percent depreciation and amortization of $165,000,000 of which acquisition and amortization is Approximately $75,000,000 an average outstanding share count of 43,700,000 shares and capital expenditures of approximately $100,000,000 Among other things, this guidance is subject to prevailing macroeconomic conditions, including consumer spending, interest rates, labor supply issues, inflation and the impact of divestitures.

Speaker 3

To summarize, we are encouraged with our 2nd quarter results and believe we have solid momentum heading into the second half of the year. In addition to continued revenue growth, our laser focus on increasing operational efficiencies will help us grow EBITDA, continue to improve free cash flow, to pay down debt and further lower our leverage ratio. Operator, we are now ready to take questions.

Operator

Thank you. Your first question is from the line of Lance Bintinez with TD Cowen.

Speaker 4

Hey, guys. Thanks for taking my questions. Congratulations on the nice quarter. I had 3 questions, if I can squeeze them all in. The first And I know Barry, you talked about merchant services, merchant acquisition being somewhat influenced by the underlying consumer sentiment and consumer spending and the like.

Speaker 4

But I was wondering if there was anything else There to call out because the numbers did seem a touch soft. And then could you just clarify, I think you said you'd expect to get back to Mid single digit revenue growth in that line, but I was it in by the second half or by the end of the year? What was the sort of the time

Speaker 2

So let me just give you a little more color commentary there. Our acquisition of new merchants and our activations in that business are solid and continue to be solid, and very pleased with how we're developing partners. What we saw at the beginning of the second quarter There was just a softness in discretionary spending categories that improved modestly as the quarter unfolded. And that's exactly the same pattern that we've seen in lots of economic forecasts. It's also in the card association's data.

Speaker 2

So, what and then as far as the year goes along. We believe that we're going to be able to deliver the full year mid single digit growth for the entire year because we're just pretty confident of the portfolio, its ability to perform. And even though there was that April, 1st part of the quarter softness, we've seen some improvement and feel good about how the full year will play out.

Speaker 4

Great. No, that's actually super helpful. I appreciate the clarification. And then sort of somewhat related on the data solutions, where the revenue growth was actually was quite robust. I would have expected that to more closely match the performance In merchant acquisition because both would seem to be driven by consumer spending and sentiment to a certain extent.

Speaker 4

But could you help me untangle the drivers there? And what was it that Enable data solutions to kind of chug through whatever slowness we might have had in the early part of the quarter?

Speaker 2

Appreciate the question. And I think it really highlights, Lance, the success we've had in expanding across and into new markets verticals. So as we mentioned in our comments, we were able to secure and win some business in categories that are not interest rate sensitive at all. We also had significant wins in some more traditional financial institution channels. But we also had a really nice win with a top 10 FI, who launched a program to gain new gather new deposits both for business and consumer accounts.

Speaker 2

And I think it just goes to show that this business and how we've diversified the business really allows us to pivot to whatever the market need is at that moment in time. And we've been able to capitalize on that. Banks are looking for gathering deposits, so we are able to shift to help banks do that. At the same time, we're able to expand into new market verticals to provide us different avenues of growth. And we think it just really It shows that the investment and our commitment to that space is producing results, and we're proud of that.

Speaker 4

Great. Okay. And the last one for me is actually on the balance sheet. Nice job there. Could you remind us Do you have a target for how quickly and I apologize if you said this on the call and I missed it, but how quickly you expect to De lever over time.

Speaker 4

I think at one point you had talked about a half a turn a year, but I don't know if that's still current or if I'm recollecting that correctly.

Speaker 3

Hey, good morning, Lance. So you're right, the half a turn a year was our original going out guidance when we did the First American deal a little over 2 years ago. Obviously, interest rate environment has changed, the economic conditions have changed a bit. So we've had to step back from that just a bit. Right now, as we look at the trajectory of the business, projections for free cash flow, we think we can get near that 3 times point sometime in 2025.

Speaker 3

So still a little bit of ways to go, but we remain committed to that and see progress in the horizon to get us back down there.

Speaker 4

Great. Thanks so much guys. Appreciate it.

Operator

Your next question is from the line of Charles Grozer with JCS Securities.

Speaker 5

Hi, good morning. I'm just hoping we could just talk a little bit more about the guidance and it's a pretty good Range there and just some of the assumptions and confidence you have behind the numbers, both the low end and the high end of the ranges there, just maybe Give a little more color on to what you're assuming in that those numbers. Thanks.

Speaker 3

Great. Thanks, Charlie. So first of all, we're very pleased with the first half performance. As we look at the first half, whether it was getting through the ERP related issues in the Q1, recovering on those in the Q2, we just feel really good about what we delivered and where we And against our internal plan. As we look ahead, we see continued momentum and we feel really good about the guide for the full year.

Speaker 3

It is important to note there's a couple of dynamics inside of our year to date performance that we need to just anchor you on to make sure it's very clear on what the second half should look like. So you think about the Q2 and you think of EBITDA of $108,000,000 there's really 2 caveats inside of that, that I want to make sure are clear. So we had roughly $4,000,000 of Carryforward EBITDA from the Q1 related to the ERP delay that landed in the Q2, that's now cleared itself on a year to date basis and wouldn't repeat going forward. We also nearly had the full web hosting business for the whole quarter, which is about another $4,000,000 we've given us. So on a run rate basis, while we're pleased with the 108,000,000 delivered in the Q2.

Speaker 3

We're really more on a trajectory of closer to 100 give or take. And so you need to think of that as the launching point for the second The year, we feel good about our guidance. We continue to work on operational improvements to improve the cost structure and drive EBITDA and free cash flow. And of course, we continue to monitor the broader macroeconomic conditions and continue to think it's wise to have a range on the revenue side. We're pleased with the way we've driven sales pipeline, the levers at our disposal.

Speaker 3

Barry mentioned our confidence in merchant, but there's more volatility there. And so we maintain A bit of a range on the revenue outcome and hopefully when we get to the Q4, we can tighten that range a bit.

Speaker 5

That's very helpful. Thank you very much on that. And then Looking at on the cost side, some of the efforts you've been doing for years now just to make your business more efficient and more healthy You know, fiscally, can you talk a little bit more about some of the ongoing cost reduction efforts that are still on the plate?

Speaker 3

Sure. So you'll recall we talked about site closures and consolidations on the Q1 call. So we continue to focus on the lockbox operations specifically, which includes a function of consolidating actual real estate site locations, getting more efficient and automated on how work gets done and managing our labor force with external partners. In addition, we continue to look at the production footprint. We announced the closure of a production site in the Q2.

Speaker 3

So we continue to look at operations and fulfillment to shut that down. We also completed the ERP, which I know we've talked about for a long We've now turned the chapter when it comes to infrastructure related technology spend. And so now we really have to think about go forward. It's really about looking For other opportunities and initiatives to take costs out of the business and do it with an eye on high return projects. We will continue to spend in the right areas to Get costs out of business, but it has to end the solid business case behind it and attractive returns and you should expect to us continue to look at that, whether that's more process automation,

Operator

Your next question is from the line of David Silver with CLK.

Speaker 6

Hi, this is Thomas Stinson from CL King. I'm filling in for David today. So I have two questions. My first question, in regards to the updated full year financial guidance you provided, could you highlight the main incremental drivers for revenue as well as adjusted EBITDA? In particular, will data solutions continue to record the fastest growth among your segments?

Speaker 6

And what are the prospects for an acceleration in payments growth?

Speaker 3

Okay. So a lot there. We'll try to unpack that. I'm going to first start with the data side. So as Barry mentioned, Very, very pleased with what they delivered in the Q2.

Speaker 3

Given the divestiture of the web hosting business, there's a few pieces of dynamic I think it's clear that we need to lay out. So first of all, on a year to date basis or rolling 6 month basis, the overall segment was up 1% year over year. Sorry, it was up 1% on a rolling 6 month basis, it's up 6%. The reason it's up 1% on a roll on that basis Externally reported is because of the declines inside the web hosting portfolio. We mentioned in the Q1 call, it had declined 8% and it actually further declined more in the 2nd quarter.

Speaker 3

So When you really take a step back and you look at the DDM specific part of that portfolio, it's right along that mid single digits rolling 6 month Average and we believe that that's the way it will batch for the second half of the year as well as the full year. When you blend it all together because of the declining piece The web hosting portfolio from the first half of the year, that's where you get to our full year guide of low single digits. So data we think can continue to do what it's going to do. That business can be a little seasonal and have been stronger periods and weaker periods, but we continue to see really good momentum and a good feeling for that business and important to look at it over a rolling basis just to see how that overall trajectory On the full year, I think we've delivered a solid first half and so we feel great about The guide and what we've got to go, as I said before, we got to maintain a higher range. We see a lot of area of opportunity.

Speaker 3

We do expect check to return to secular decline. That's important. Had a very strong second quarter, whether it was fulfilling the backlog from ERP or even Having enough efficiencies to even pull forward some production, but we definitely see that being a return to secular declines. And Barry, you want to talk about any of the levers from a payments perspective that you see?

Speaker 2

So in the payments business, in the merchant business, As I said earlier, we feel great about our merchant acquisition, our activation, which is about new merchants. And we think that as spending consumer spending normalizes again, we'll return to more normal volumes, which will be helpful for us. And similarly, in our B2B payment space, we've got a number of plays, including products that will be introduced later in the year that we think will help us bring additional revenue and get us to back to what we consider a more normal growth path in that business. So we feel pretty great about the blend for the year, feel great about payments. The data business, of course, is terrific.

Speaker 2

Although that business can be slightly more lumpy, we feel very great about that business overall and feel great about our guys for the rest of the year.

Speaker 6

Okay. Thank you. And I actually have one more question, sorry. First American, so it's been about 2 years since obviously your biggest acquisition to date in First American. So how is that asset performing compared to your expectations?

Speaker 6

And what is your plan for growing that asset over the next 12

Speaker 2

months? So overall, we are very, very pleased with that acquisition. It's the largest we've ever undertaken in the company's history. We actually also believe it's the most successful. Let me just give you a couple of examples there.

Speaker 2

When we acquired the business, it was a low single digit revenue grower. We think that we had made it a sustainable mid single digit Revenue grower, very pleased by that. We think there's additional upside potential there. We've done it by unleashing and bringing the great distribution that Deluxe has into financial institutions. We have 4,000 bank partners.

Speaker 2

We have millions of small business customers. And as a result, the profile of the partnership wins within First American has expanded, to larger scale banks. I think it's Over a 50% increase in the average size of the bank that we are now targeting and we are winning, as well as the number of wins in banks overall are up significantly, I think over well over 15% increase in the bank win rate as well. So we feel great about it. We think that there's continued future upside.

Speaker 2

And as far as where we go next, I think you'll continue to see us invest in higher growth segments and market verticals, where we think we have a right to win, we've got great distribution, and existing relationships.

Speaker 6

Perfect. Thank you so much.

Operator

Your next question is from the line of Marc Riddick with Sidoti.

Speaker 4

Hey, good morning, everyone.

Speaker 5

So I wanted to actually that kind

Speaker 7

of dovetails into one of the areas I was Going to ask about and that was around what you're looking at as far as the acquisition pipeline and maybe how you're sort of feeling about Potential add ons and maybe the valuation that maybe you're seeing out there. And then I have a couple of follow ups after that.

Speaker 2

Appreciate the question, Mark. Let me just start by being really, really clear. Our primary focus today Is debt reduction and improving our leverage ratio. The way we're going to do that is by growing our business faster than We've grown it before and doing a better job on the cost side, and those things we think will deliver great shareholder value. Now, also note, and I think you're alluding to the fact that when we bought First American, we were really clear that we were buying a platform for future growth that had Capability to bolt on acquisitions.

Speaker 2

We fundamentally still believe that is true, and we believe we will Absolutely, move in that direction at the appropriate time, but our immediate priority is to improve the leverage ratio and do that through improving our operations. And that's also why we're really pleased with what happened in the second quarter and in the whole first half and what we're able to forecast for the full year. I think it's showing our focus there is yielding benefit.

Speaker 7

Excellent. And so why don't you talk a little bit about now that we have a little more time and a little more distance from the From going live with the ERP, I was wondering if you could talk about maybe some additional learnings benefits or some things that maybe that you've gleaned from the last time you spoke. Thanks.

Speaker 2

So I'll just remind We started the ERP program because we had systems that really needed to be modernized. They were quite antiquated. But that is all now behind us, and it gives us the opportunity to do more things around efficiency. It gives us better insight into what's happening in our business and it also allows us to streamline not just our technology platforms, but gives us opportunity to dig deeper into What our retail prices are, what our costing is, what happens in our supply chain, it really opens the door for us to consider multiple facets that we had a hard time getting deep enough visibility into, and we're pleased that we're going to see that visibility and starting to take action on that. We think that will continue to yield results over time.

Speaker 2

You want to add on that? Mark, I

Speaker 3

would just say we can't underscore just how hard the team worked on this. We have to continue to thank the team for all the work and effort they put into it. It's been a Very busy first half of the year, getting stable and live and we feel great about where we are. We're not in the place anymore where it's about Keeping up with production and being able to fulfill orders, we still have a little bit of work to do to fix every single aspect of the end to end customer experience, whether that's billing or how we internally report things back to the dealer reseller side. We still have a little bit of work to do, but these are small immaterial things in the grand scheme of the company, but important our customer base and we'll continue to focus on that.

Speaker 3

Where you're going to see us focus on is the process underneath. So whether that's the order management systems that are on the front end of the ERP all the way through to how we process things through the system. We can now go do process related work, which doesn't take a heavy technology investment.

Speaker 7

Just revenue for the quarter, at least relative to Where my numbers were, was certainly better than what we were expecting. I was wondering if

Speaker 3

you could talk a little bit

Speaker 7

about various Cost measures, cost controls, anything of that nature that you saw there and how that plays into the full year guide? Thanks.

Speaker 2

Yes. So I can't

Speaker 3

speak exactly to what you had in your model, but just in general, we feel good about the work we've been doing. So year over year, SG and A is Favorable about $4,000,000 which obviously with revenue growth shows operating leverage and what we're doing. And there's no real specific one call out of what's driving that. That's just General cost improvements and focus across the enterprise to take cost out where we can and continue to deliver both the revenue and organic adjusted EBITDA growth.

Speaker 1

Great. Thank you very much.

Operator

We have a follow-up question from the line of Lance

Speaker 4

Hi, guys.

Speaker 6

Just one thing

Speaker 2

that's going to be a

Speaker 4

little bit more pronounced there. As we think about cash flow generation in the back half, anything unusual that we might expect, whether it was on the working capital changes in Current quarter in the first half that won't recur in the second half or perhaps some one time items that will negatively impact Cash flow in the second half, anything there that we can be thinking about?

Speaker 3

Yes. Great question, Lance. Thank you. So first of all, we're very pleased with the Q2 free cash flow. As I said, we're still a little behind our plan on a year to date basis, but Having been negative in the Q1 and to deliver nearly a positive number to offset, it was a great start.

Speaker 3

And so we got there through obviously higher earnings, Improvement in working capital and there's a few items that occur in the Q1 of the year that don't repeat another period. So if you think about the second half versus the first half, You're going to see it in the second half. Those site consolidation efforts and the things around real estate we mentioned, those projects were more front loaded for the year. So that plus the sale of both Web hosting business give us some tailwinds on CapEx second half of the year. Taxes have a bit of a seasonal portion to them, so they'll be lower in the second half of the year.

Speaker 3

We have annual incentive payments that occur in the Q1 that obviously don't repeat in the second half of the year. And then beyond that, we have a lot of people in the second half to deliver our guide, but we continue to focus on all aspects of that, whether that's now that we're live on ERP or through all the support and continuing to be better about collections and management of our DSO. And so if you really think about it to deliver the midpoint of our range for the full year, that's a very impressive second half. And it's the second half we have confidence in And we look forward to delivering.

Speaker 4

Thanks very much.

Operator

At this time, there are no further questions. I will now hand the call back over to Ryan Anderson for any closing remarks.

Speaker 1

Thanks, Tamika. Before we conclude, I'd like to mention that management will be participating in CL King's 21st Annual Best Ideas Conference on September 18th and the Sidoti Virtual Small Cap Conference on September 20th. Thank you again for joining us today, and we look forward to speaking with you in November as we share our Q3 2023

Remove Ads
Powered by Quartr
Earnings Conference Call
Deluxe Q2 2023
00:00 / 00:00
Remove Ads