Archer-Daniels-Midland Q2 2024 Earnings Call Transcript

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August 8, 2024

There are 5 speakers on the call.

Operator

Good day, and welcome to the Priority Technology Holdings Second Quarter 2024 Earnings Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Chris Kettman. Please go ahead.

Speaker 1

Good morning, and thank you for joining us. With me today are Tom Priory, Chairman and Chief Executive Officer of Priority Technology Holdings and Tim O'Leary, Chief Financial Officer. Before giving our prepared remarks, I would like to remind all participants that our comments today will include forward looking statements, which involve a number of risks and uncertainties that may cause actual results to differ materially from our forward looking statements. The company undertakes no obligation to update or revise the forward looking statements, whether as a result of new information, future events or otherwise. We provide a detailed discussion of the various risk factors in our SEC filings, and we encourage you to review these filings.

Speaker 1

Additionally, we may refer to non GAAP measures, including but not limited to EBITDA and adjusted EBITDA during the call. Reconciliations of our non GAAP performance and liquidity measures to the appropriate GAAP measures can be found in our press release and SEC filings available in the Investors section of our website. With that, I would like to turn the call over to our Chairman and CEO, Tom Priore.

Speaker 2

Thank you, Chris, and thanks to everyone for joining us for our Q2 2024 earnings call. I'd like to start today by highlighting the positive trends we continue to see throughout Priority and then Tim and I will provide an update on important developments within each segment and the broader enterprise. As you saw in this morning's press release, in the Q2, we again reported record financial results by capitalizing on our leading unified commerce platform that delivers elegant product solutions across our segments and dedicated customer service that is committed to our partners' success. Building on the positive momentum we saw to start the year, we delivered exceptional results in SMB Acquiring, B2B Payables and Enterprise Payments in the Q2. Our unified commerce vision continues to resonate with customers, combining payments and banking functionality on a single platform, accelerated by the strength of our diverse business lines that we're positioned to benefit from historically elevated interest rates and to perform in a variety of macroeconomic environments, including the one we're experiencing today.

Speaker 2

Total customer accounts operating on our Commerce platform exceed 1,000,000. As we process nearly 125,000,000,000 dollars in annual transaction volume during the prior 12 months, while administrating over $1,000,000,000 in average daily deposits during the quarter. Slide 4 highlights our consistent financial performance during the Q2. Revenue of $219,900,000 increased by over 21% from the prior year. This led to a 22% increase in adjusted gross profit to $81,700,000 and a 25% improvement in adjusted EBITDA to 51,600,000 dollars Adjusted gross profit margin of 37.2 percent increased 40 basis points from the prior year quarter, highlighting the strong and improving operating leverage of our organization.

Speaker 2

Encouragingly, our purely organic growth trends are equally strong, posting a top line revenue increase of 17.5% and bottom line improvement in adjusted EBITDA of 25.7% during Q2, which Tim will speak to in greater detail during his remarks. As you can see from our strong Q2 results, combined with the increase of our full year EBITDA guidance, we continue to expect that the robust growth and margin trends in our business channels will deliver full year revenue of $875,000,000 to $883,000,000 an increase of approximately 16% over 2023 and generate full year adjusted EBITDA of $196,000,000 to $200,000,000 a 16% to 19% increase over 2023. Our guidance is informed by our year to date performance highlighted on Slide 5, reflecting 16% revenue growth to $425,600,000 that drove 22% adjusted gross profit expansion to $158,200,000 and 24% improvement in adjusted EBITDA to 97,900,000 dollars Year to date organic growth is consistent with Q2 at 17% revenue growth and 27% EBITDA growth. Our growing partner base continues to see value in our product and technology offering and our diverse sales channels remain consistent with strong performance. Now for those of you who are new to the company, Slide 6 highlights the market orientation of our proprietary unified commerce platform.

Speaker 2

It's purpose built to collect store, lend and send money, combining elegant payments and banking functionality to monetize the commerce networks we serve. Our customers and current market conditions reinforce our belief that systems facilitating payments and banking solutions to distribute funds in multiparty environments will be critical as businesses put greater demands on software and payment solution providers to accelerate cash flow optimize working capital. We remain committed to meeting our customers where they are by refining the experience for our partners to make working with Priority seamless and easy. Our financial performance demonstrates that partners consistently choose the unified commerce applications in acquiring payables and banking that best fit their businesses to accelerate cash flow and optimize their working capital. We are incredibly focused on the continued innovation of our SaaS, payments and banking suite of services that are powered by Priority's accelerated commerce engine and are eager to meet the evolving needs of our growing portfolio of customers and enterprise partners.

Speaker 2

At this point, I'd like to hand it over to Tim, who will provide further insights into our segment level performance during the quarter along with current trends in each that factored into our confidence to deliver on our strong guidance for the full year 2024. Thank you, Tom, and good morning, everyone. As I review the 2nd quarter results, please refer to the supplemental slides or the MD and A for further details. Our MD and A is included in the Form 10 Q that was filed with the SEC this morning and provides a discussion of our comparative second quarter results. A link to that filing can also be found on our website.

Speaker 2

Consistent with the Q1, our strong financial performance in the 2nd quarter was driven by the diverse and countercyclical mix of our business segments along with continued growth in our higher margin operating segments. The highly recurring nature of our business model also remains strong with almost 59% of adjusted gross profit in Q2 coming from monthly fees or revenues that are not dependent on transactions or bank card volume. I'd also highlight our organic growth rates, which continue to outperform compared to many industry competitors. If you adjust for the impact of plastic, which was not part of our financial results in Q2 of last year, as well as for the impact of the large reseller that we've discussed on prior calls, Priority had year over year organic growth in Q2 of 17.5% for revenue, 18.9% for adjusted gross profit and 25.7% for adjusted EBITDA. When you combine those industry leading organic growth rates with a scaled business that produces a high level of recurring gross profit, you can easily understand why we're excited about our business the value that we believe has been built at priority.

Speaker 2

Before moving to the segment level financial results, I want to take a minute to discuss a change in our reporting metrics for this quarter and going forward. Historically, we provided revenue, adjusted gross profit and operating income at the segment level. As you'll note in today's presentation, we still provide revenue and adjusted gross profit, but now report adjusted EBITDA at the segment level instead of operating income. We've made this change because the business continues to evolve and we want to ensure that the greatest possible transparency into our core results. In that regard, as we continue to implement a shared services operating model in our business along with managing a single unified commerce engine across our payments infrastructure, the allocation of certain operating and technology costs becomes less identifiable.

Speaker 2

So we will report those costs in corporate with only direct costs for each segment having an impact on its adjusted EBITDA results. We've included reconciliations in the earnings release to help you compare current quarter results to historical quarterly results on a comparable basis. With that explanation, I'll now move to the segment level results for the SMB segment on Slide 8. SMB generated Q2 revenue of 155,100,000 dollars which is $7,200,000 or 4.8 percent higher than the prior year's Q2. As discussed on prior calls, a large reselling partner started to diversify their processing activity in Q2 of 2023 and concluded that effort in Q4 of last year.

Speaker 2

The year over year impact of that ended this quarter and was just over $8,000,000 of revenue, which is down from the $21,000,000 headwind that we saw in Q1. Do not expect future impacts from this reseller on a comparative basis. And excluding its impact this quarter, the SMB business experienced 12.2 percent organic revenue growth on a year over year basis. Bank card dollar volume in SMB was $15,800,000,000 for the quarter, which increased 4.6 percent from $15,100,000,000 in the comparable quarter last year. As an additional point to emphasize the strength of organic sales in the S and P segment, if you adjust for the impact of the aforementioned reseller, bank card dollar volume increased 9% in the quarter compared to the prior year.

Speaker 2

From a merchant standpoint, we averaged 179,000 accounts during the quarter, higher than 177,000 average in Q1 of this year, while new monthly boards averaged 3,900 during the quarter, which is consistent with the comparable quarter of last year. Adjusted gross profit in SMB for the 2nd quarter was $35,600,000 which is up 1% from last year's 2nd quarter, but a $3,700,000 or 11.8 percent increase from Q1 of this year. Gross margins of 23% in the quarter were down from 23.9% in last year's Q2, but up over 80 basis points sequentially from Q1 of this year. Lastly for SMB, quarterly adjusted EBITDA of $28,600,000 was up slightly from the prior year's Q2 and is up $3,600,000 or 14.3 percent sequentially from Q1 of this year as we continue to manage operating expenses within our business, which results in a strong flow through of incremental adjusted gross profit to adjusted EBITDA. Moving to B2B, revenue of $21,900,000 was an increase of $18,900,000 from the prior year.

Speaker 2

Plastic, which joined Priority in Q3 of last year, contributed $17,800,000 of the increase during the quarter, while CPX grew by $1,400,000 or 49% on a year over year basis. Those increases were partially offset by a $200,000 reduction in the remainder of the B2B business. Adjusted gross profit in B2B increased to $5,600,000 from $2,300,000 in Q2 of 2023 as a result of the plastic acquisition combined with over 25% growth in gross profit for the CPX business unit. For the quarter, gross margins were 25.4% or 3.6% lower compared to 29% in the Q1 of 2024. The lower margins in Q2 were the result of changes in mix of business and the timing of certain incentive fees in Q1 of this year, which flowed through at a high margin and did not have a comparative benefit in Q2.

Speaker 2

As a reminder, the sequential comparison is a more relevant metric until Q4 of this year given the year over year comparison of margins is impacted by the timing of the Plastics acquisition and Plastics GAAP reporting requirements for revenue recognition, which was discussed on prior earnings calls. The B2B segment had 1 point $5,000,000 of adjusted EBITDA in the quarter compared to $600,000 in Q2 of last year. On a year over year basis, the growth was largely related to plastic, but also included 17% growth in CPX's adjusted EBITDA. Moving to the Enterprise segment, Q2 revenue of $43,700,000 was an increase of $12,200,000 or 38.9 percent from $31,400,000 in the prior year. Favorable trends from the past several quarters in new monthly enrollments and billed clients combined with an increase in the number of Passport program managers, growth in deposit balances and the stable interest rate environment all contributed to strong revenue growth.

Speaker 2

As a reminder, there is a countercyclical aspect to portions of the Enterprise segment that should continue to benefit us if the economy does end up having more of a hard landing. As a result of the strong revenue growth, adjusted gross profit for the Enterprise segment increased by 38 percent to $40,600,000 while adjusted gross profit margins were 92.9% in the quarter compared to 93.3 percent in the Q2 of 2023. Adjusted EBITDA for the quarter was $37,200,000 which is up 45% from $25,700,000 in last year's Q2. Moving to consolidated operating expenses, salaries and benefits of $22,100,000 increased by $3,000,000 or 16% compared to Q2 of last year, which is largely due to the addition of plastic in Q3 of 2023. However, on a sequential quarterly basis, salary and benefits remained flat due to our continued focus on expense discipline.

Speaker 2

We finished the quarter with approximately 9.90 employees, which is compared to approximately 980 at the end of Q1, 2024 and 9.30 at the end of Q2 of last year. SG and A of $11,200,000 increased by less than $450,000 from $10,800,000 in Q2 of 2023 and was relatively flat with the $11,000,000 in the Q1 of this year. Depreciation and amortization of $15,200,000 for the quarter decreased by $2,700,000 from last year, but is comparable to D and A in Q1 of this year is consistent with our quarterly expectations for the balance of this year. Moving to the next slide, adjusted EBITDA for the quarter was $51,600,000 which is another new quarterly record for Priority and was an increase of almost 26% from $41,100,000 in Q2 of 2023 and an 11% sequential increase from $46,300,000 in Q1 of this year. Interest expense of $21,700,000 for the quarter increased $3,900,000 from Q2 2023 levels as a result of acquisition related debt increases during Q3 of last year, combined with the broader recapitalization we closed in Q2 of this year.

Speaker 2

As seen on Page 13 and discussed on our Q1 earnings call, we refinanced our debt during the quarter on more favorable terms and also upsized the credit facilities with the excess proceeds used for a partial redemption of our preferred stock. The new credit facilities consist of a $70,000,000 revolving credit facility and an $835,000,000 term loan with pricing that is 100 basis points lower than our previous rate. Proceeds from the new term loan were used to refinance the prior senior debt, pay related fees and expenses and redeem $170,000,000 of the preferred stock, including $3,700,000 of accrued but unpaid dividends. The net impact of the refinancing results in over $6,000,000 of annualized free cash flow improvement as we lowered the cash dividends on the preferred stock and pay a lower interest rate on the debt, but pay that lower rate on a larger quantum of debt. Further, the related reduction in dividends on the preferred stock results in a $22,000,000 annualized increase in net income available to common shareholders.

Speaker 2

As we move through the back half of the year, we will continue to evaluate our capital structure while seeking ways to further optimize our balance sheet and cost of capital. From a liquidity standpoint, we ended the quarter with all $70,000,000 of borrowing capacity available under our new revolving facility and $34,600,000 of unrestricted cash on the balance sheet. For the LTM period ended June 30, adjusted EBITDA of 187,500,000 represents over $10,000,000 of sequential quarterly growth from $177,000,000 at the end of Q1. Preferred stock on our balance sheet totaled $105,700,000 at June 30, net of $5,900,000 on accretive discounts and issuance costs. The 2nd quarter preferred dividend of $8,400,000 included $5,100,000 paid in cash and $3,400,000 of a PIK component.

Speaker 2

As I mentioned earlier, dollars 3,700,000 of the dividend was accrued and paid in conjunction with the May refinancing. It's important to note that the refinancing closed mid quarter, so the go forward dividend on the lower amount of preferred stock will be closer to $4,800,000 in Q3 with increases from there based on the PIK component. Before turning the call back over to Tom for his closing comments, I'd like to further address our revised financial guidance for the full year. As Tom noted in his opening remarks, we have narrowed our revenue and adjusted gross profit full year guidance to the low end of the range that we originally established in our earnings call in March of this year. However, we are raising our adjusted EBITDA guidance to a new range of $196,000,000 to $200,000,000 I'm sure everyone has already done the quick math to figure out that if we just repeat the first half of the year in Q3 and Q4, we'll meet the new adjusted EBITDA guidance.

Speaker 2

However, there are a couple of factors that will result in increased operating expenses in Q3 and Q4. First, we became an accelerated filer at the end of the second quarter based on our public float calculation. So we will incur increased expenses related to SOX 404 compliance. In addition, we continue to migrate certain platforms to the cloud, which will convert certain CapEx items to OpEx, but will have minimal impact on our net cash flow. Those combined expenses will both accelerate in the back half of this year and apply some pressure to adjusted EBITDA, which is why you aren't seeing an even higher range for our revised full year guidance.

Speaker 2

To be clear though, we are going to continue to maintain our expense discipline and focus on generating a high flow through from gross profit to the bottom line. With that, I'll now turn the call back over to Tom for his closing comments. Thank you, Tim. Now that we're a little more than halfway through the year, I'd like to take a minute to highlight where Priority is in its journey. Everything we did over the past several years from accelerating our investment in our unified commerce payments and banking infrastructure to our focus on building countercyclical business lines to our acquisition of Plastiq a year ago was done with intention and purpose to provide our customers with an elegantly delivered experience combining acquiring payables and banking solutions on a single platform.

Speaker 2

Our financial and operating results demonstrate that we've continued to execute with exceptional consistency and a forward looking vision that resonates with the constituents we serve. Our tech enabled service platform is delivering on the promise of a financial tool set that can accelerate cash flow and optimize working capital for our partners. The success of our capabilities and style of engagement is evident not only in our organic growth numbers and improving margins that have meaningfully outpaced our peers for several quarters now, but also when talking to our customers and partners. Let me offer some current examples of the unique advantage of our platform that elegantly delivers suite of embedded payments and banking solutions, which can be smoothly adopted within our customer networks. Since launching plastic bill payment in late January with our acquiring partners, run rate processing volumes continue to pick up steam having grown quarter over quarter by 200%.

Speaker 2

Additionally, Q2 downloads across our POS suite continue to represent approximately 20% of total new processing activity. And we continue to activate new distributors with 35 new resellers executing contracts during the quarter. And the growing penetration of our POS tools will increase our mix of recurring SaaS revenue, improve merchant loyalty and continue to open additional paths for banking and payables product adoption that increase margin per merchant. As previously mentioned, our banking solution suite now maintains over $1,000,000,000 in average daily balances. Importantly, approximately 25% have been driven by unifying our technology and shared service operations to execute our unified commerce vision across our acquiring payables and enterprise business segments, which delivered 50% quarter over quarter growth in the number of account holders.

Speaker 2

Lastly, as you may recall, in April, we launched our working capital line of credit offering Priority Capital with our partners at Pipe. Since that time, total advances have grown from $360,000 during our Q1 beta period to nearly $4,000,000 in quarter 2. Our working capital solutions are well positioned to accelerate as we roll out more streamlined integrated solutions for customers to request their advance from within their MX merchant acquiring app and then receive those funds directly into their Passport banking account. The cumulative success of these ongoing initiatives represent continued upside to our projections. I offer these successes to reinforce that Priority's technology and operations are built for the future and executing consistently on our mission to deliver that thriving ecosystem of financial solutions to accelerate cash flow and optimize working capital for businesses.

Speaker 2

We're delivering this message as we broaden the unified commerce conversation and it resonates with current and prospective customers alike. Before wrapping up, I want to thank all of my colleagues at Priority who continue to execute our unified commerce vision and for striving to enhance our industry leading offering every day. Your dedication to continued improvement is clear in everything you do, providing our customers a constant reminder that they made the right choice to partner with Priority. Lastly, we greatly appreciate the ongoing support of our investors and analysts and for those in attendance who are new to Priority for taking the time to participate on today's call. Operator, we'd now like to open the call for questions.

Operator

We will now begin the question and answer Our first question comes from Tim Switzer with KBW. Please go ahead.

Speaker 3

Hey, good morning. Thank you guys for taking my questions.

Speaker 2

Absolutely, Tim. Absolutely, Tim.

Speaker 3

Can we touch on the recapitalization real quick? I believe most of that was accomplished in May. So the full run rate impact, I don't dividend would be around $4,700,000 in Q3. Is that still the right number?

Speaker 2

It is. Yes, I think we're calling it 4.8 at this point based on the final balance on the pref. But on a go forward basis, we should be running at $4,800,000 a quarter total preferred dividend, about $2,000,000 of that's PIK and the other $2,800,000 or so is cash and then obviously that PIK component will grow over time.

Speaker 4

Okay, perfect.

Speaker 3

And then could you guys talk about the expense outlook? You mentioned an acceleration due to a few different items in the back half of this year. What's the pace of that? Should it be like even acceleration in Q3 and Q4? And then what does that mean for 20 25?

Speaker 3

Should there be continued investments on top of those that we should expect? Just would look would like some more color there, please.

Speaker 2

Sure. Yes, I think it will be relatively evenly spread between Q3 and Q4, maybe a sixty-forty split there with heavier balance towards Q4, just given some of the timing of the audit process and some of the SOX 404 aspects of it. And then as you think about next year, that should normalize, right? We're not going to see a further acceleration of those costs going into next year.

Speaker 3

Great. Okay. That's good to hear. If I can get one more too. You kind of mentioned how the enterprise business is a little countercyclical to the macro environment.

Speaker 3

But what kind of impact would you expect to the rest of the business and just the company broadly if we had a bit of an economic slowdown? And then do interest rates factor into that at all one way or the other? Thank you.

Speaker 2

Yes, I can answer those. Maybe I'll go in reverse. So if you think about interest rates, obviously, we benefit on one side with the balances we have and putting those into permissible investments, which are largely earning income at roughly fed funds or so for type rates. And then on the flip side, obviously, we have the interest expense on the debts as well as the cash portion of the preferred dividend. If you look at those balances, almost perfectly hedged right now.

Speaker 2

So if there's a decrease in rates, depending on what the Fed does in the balance of the year, there's almost zero impact on free cash flow. There's a roughly $600,000 per quarter impact to EBITDA for every 25 basis points of rate cuts. But again, 0 impact to cash flow, given we're hedged on the debt side there. And then more broadly, as you think about the economy and going into next year, if there is a hard landing and we start to see some softness, I think we'll see some impact on the SMB side. But I feel like we're able to continue to grow and offset that decline you may see within a broader macro environment because we're continuing to maintain very high retention rates with our existing reselling partners, maintaining good retention rates with our merchants.

Speaker 2

We've seen some impact this year and last year, candidly from same store sales. But as we think about our retention rates and what we can control, those have maintained very steady levels, but you have seen some impact from same store sales. So that could have another impact next year, but I think we'll continue to grow through that.

Speaker 3

Great. Thank you, guys.

Speaker 2

One other point you may just want to take a peek at. If you go look at the volume growth across Mastercard and Visa and then look at our volume growth, you'll see we're winning market share in the acquiring segment relative to total volume. So given the toolset we're rolling out now, we across some new segments in hospitality and salon and construction, we feel pretty optimistic we can continue to grow the market share there, which would of course offset some of the potential recessionary softness in spending if it were to emerge.

Speaker 3

Okay. That's really helpful. Thank you, guys.

Operator

And the next question comes from Jacob Stephen with Lake Street. Please go ahead.

Speaker 4

Hey guys, thanks for taking my questions. Congrats on the quarter. Maybe if you guys could just help us kind of piece out, obviously, you referenced 59% of adjusted gross profit is from recurring sources or non transaction dependent sources. Maybe if you could just kind of help us piece those non transaction dependent fees out of your business, so we can really kind of understand the driving forces between or behind the recurring gross profit growth?

Speaker 2

Sure. Happy to do that. Hey, Jacob. Yes, so if you think about the revenue in our split, obviously, there is transaction volume, right, bank card volumes, right? That's going to be what we consider reoccurring, but it's not in our recurring gross profit numbers that I quoted, right?

Speaker 2

So within the recurring aspect, we have monthly subscription fees and monthly fees that we earn on a regular basis and those are not transaction dependent or volume dependent. We have the income on the permissible investments that's not volume or transaction dependent. And then we have other fees that we generate on a monthly basis from merchants enterprise segment. So there's a number of different aspects of that that are very subscription like as you think about the software we deploy and the way we earn revenue across the business.

Speaker 4

Okay. Got it. That's helpful. And then obviously, it's over a year here since you guys acquired plastic. I'm just curious, do you see any kind of seasonality factoring into the back half of the year with the plastic?

Speaker 2

Not as much seasonality. I think what you do see is that from quarter to quarter you may have some larger enterprise customers come in and contribute some meaningful volume. That volume tends to come through at obviously a little bit lower margin given the scale of those customers. And that's it's a little harder to predict, but I think we continue to expect those types of customers to use the plastic product offering and

Speaker 4

continue to contribute

Speaker 2

in the back half of the year, but not as much seasonality as much as there is maybe some timing differences with some of those larger customers.

Speaker 4

Okay. And obviously, nice to see the progress on the balance sheet in Q2 here. You took out the majority of the preferred, but obviously, the cash balance and revolver, the $70,000,000 revolver isn't quite enough to take out the remaining, but I'm curious how you're thinking about kind of the remaining $106,000,000 of preferred?

Speaker 2

Yes. We'll continue to evaluate the balance sheet. And obviously, we look at a lot of different uses of capital, whether it's thinking about acquisitions to grow inorganically or investing in the business to grow organically. We'll also look at the preferred equities and other use of capital. When we did the recapitalization, we closed at roughly 4.5 times leverage.

Speaker 2

We're already down below 4.25 at the end of this quarter. So we've already seen a quarter turn of deleveraging just intra quarter with EBITDA growth. If you just take the numbers for the balance of the year and if you just assume the midpoint of EBITDA guidance and assume we don't pay down another dollar of debt from here to the end of the year, you'll be closer to 4 times leverage. So you can start to do the math to figure out the capacity you have to address the rest of the balance sheet.

Speaker 4

Okay. Got it. Very helpful. Appreciate it, guys.

Speaker 2

Thanks, Jacob.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Tom Priore for any closing remarks.

Speaker 4

All right. Well, thank you.

Speaker 2

First of all, thanks for some of the questions. And just want to express our appreciation for everyone attending the call and your interest in Priority and the platform we're building for we think is the future of commerce. And we'll get back to executing. So thanks everyone for your time. Hope everyone has a great weekend.

Speaker 2

Enjoy the rest of the summer.

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