Q2/Q3 2024 Earnings Call Roundup: Tech and Real Estate Firms Show Mixed Results

Asure Software, Inc. (ASUR) Q2 2024 Earnings Call Transcript

Patrick McKillop - Vice President, Investor Relations Pat Goepel - Chairman & Chief Executive Officer John Pence - Chief Financial Officer Eyal Goldstein - President & Chief Revenue Officer Good afternoon, and welcome to Asure's Second Quarter 2024 Earnings Conference Call. Joining us today -- on today's call are Chairman and CEO, Pat Goepel; Chief Financial Officer, John Pence; and Vice President of Investor Relations, Patrick McKillop. Following the prepared remarks, there will be a question-and-answer session for the analysts and investor. I would now like to turn the call over to your host, Patrick McKillop, for introductory remarks. Please go ahead. Patrick McKillop Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure's second quarter 2024 earnings results call. Following the close of the market, we released our financial results. The earnings release is available on the SEC's website and our Investor Relations website at investor.asuresoftware.com, where you can also find the investor presentation. During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items. A description and timing of these items along with the reconciliation of non-GAAP measures to their most comparable GAAP measures can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events, and as such, involve some risks. We use words such as expects, believes and may to indicate forward-looking statements, and we encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. I will hand the call over to Pat in a moment, but I just wanted to take a moment to remind folks of our upcoming Investor Relations activities. On September 12, we will be hosting one-on-one meetings at the Barrington Fall Conference, which is being held virtually. Also, the team will have a member attending the Lake Street Conference in New York that same day. We are planning on some non-deal roadshows for September and October. Also in November, we are hosting one-on-one meetings at the Needham SaaS Conference, which is being held virtually. We anticipate more conference participation during the fall months based on last year's schedule and look forward to connecting with all of you soon. Investor outreach is very important to Asure, and I would like to thank all those that assist us in our efforts to connect with investors. Finally, I would like to remind everyone that this call is being recorded, and it will be made available for replay via a link available on the Investor Relations section of our website. With that, I would now like to turn the call over to Pat Goepel, Chairman and CEO. Pat? Pat Goepel Thank you, Patrick, and welcome, everyone, to Asure Software's second quarter 2024 earnings results call. I am joined on this call by our CFO, John Pence, and we will provide a business update for our second quarter 2024 results as well as our outlook for the rest of 2024. Following our remarks, we will be available to answer your questions. Our second quarter revenues were very solid, coming in at $28 million, and our reoccurring revenues were up 18% during the quarter, which is a nice improvement. Our revenues were driven by strong contributions from our Asure Marketplace offering, Payroll Tax Management and interest earned from funds held for clients, which we refer to as float. During Q2, we are pleased to see our organic growth rates increased to 7% from 3.5% during Q1, and we believe that we will deliver double-digit growth in the back half of 2024. In 2023, you may recall, we raised money to make acquisitions, improve our technology, roll over ERTC revenues and deliver double-digit growth. We have executed this plan very well in the first half of 2024. We remain excited about the opportunities that lie ahead for our business and are very pleased with the continued momentum of our Payroll Tax Management business, as evidenced by the recent deal we announced with Vensure. Our deal with Vensure, the largest privately held organization in the HR technology and service sector, for our Payroll Tax Management solution will deliver comprehensive payroll tax management for PrismHR clients and Vensure's internal operation. This is a significant win for our payroll tax solution. And coupled with the wins in the enterprise space with providers of Workday and SAP clients, we expect that over time, as this business grows, it will contribute to growing our float balances as well. Our pipeline for this solution remains robust, and we look forward to potentially announcing more deals in the future. We have also recently formed a partnership with MyHRScreens, a premier provider of background screening services. This collaboration aims to expand access to a comprehensive background screening solutions for small and midsized businesses, facilitating a safer and more efficient hiring process. Additionally, in July, we acquired an applicant tracking system technology company, which enhances Asure's product suite for small and medium-sized businesses. This highly rated applicant tracking system features an automated, simple, all-in-one hiring tool, which includes services such as job ad writing powered by AI, automated interview scheduling and auto submission to major job posting sites. The technology has good growth and creates a very good cross-sell opportunity for us, plus it is complementary to our existing HR Compliance solution. Our portfolio of products and partnerships continues to grow in addition to others previously announced like HRlogics for tax credit and proactive health management program for health management tools and services. These partnerships are great additions that really enable Asure to offer more solutions in addition to our payroll processing for small and medium-sized businesses. Our sales teams now have a broader product offering in their arsenal to help win new business as well as upsell existing clients. Strategic sales initiatives such as bundling our payroll services with our 401(k) offering allow us to continue to win new clients, and they continue to see positive results. The need for small businesses to offer 401(k) plans is driven by many states mandating such plans as there is funding available to small businesses to set up these plans through tax credits from the SECURE 2.0 Act from the U.S. government. Asure has the expertise to help small businesses navigate this process successfully. Our sales efforts during the second quarter resulted in a 131% increase in new bookings versus the prior year. We continue to work on expanding our sales force headcount, which we are projecting to go to about 130 reps by year-end 2024. Also, we continue to make use of digital marketing efforts to support the sales team with sales leads and help increase productivity. Based on our current business trends, we're updating our full year 2024 revenue guide to a range of $123 million to $129 million, and we still expect adjusted EBITDA margins of between 20% and 21%. The forward guidance range of 2024 is a result of variability of timing of closing and implementing both large enterprise arrangements and anticipated acquisition. Our guidance in 2024 implies a very healthy double-digit growth rate if we exclude ERTC from 2023 revenues for comparison. Now, I'd like to hand it off to John to discuss our financial results in more detail as well as our quarter three guidance. John? John Pence Thanks, Pat. As Patrick mentioned at the beginning of this call, several of the financial figures discussed today are given on a non-GAAP or adjusted basis. You will find a description of these GAAP to non-GAAP reconciliations in the earnings release that was made available earlier today. The reconciliations themselves are included in our most recent investor presentation posted in the Investor Relations section of our website at investor.asuresoftware.com. Now on to the second quarter results. Second quarter revenues were $28 million, down $2.4 million or 8% year-over-year, owing to a $6.5 million reduction in ERTC revenue. However, excluding ERTC, total revenues were up 18% from prior year. Recurring revenues for the second quarter grew 18% versus the prior year to $27.1 million. Recurring revenues accounted for 96% of our total revenues in the quarter. Second quarter recurring revenues grew on the strength of increased revenue from our Payroll Tax Management solutions and increased float revenues with an average client balance of approximately $220 million throughout the quarter, combined with revenues from new customers obtained through acquisitions. Net loss for the second quarter was $4.4 million versus a net loss of $3.8 million during the prior year. Gross margins for the second quarter decreased to 67% from 72% in the prior year. Non-GAAP gross margins in the second quarter decreased to 73% from 77% in the prior year. The decrease in gross margins for the second quarter is primarily attributable to the decrease in total revenue. We continue to believe there is substantial margin upside over the longer term as the business scales. EBITDA for the second quarter was $1.3 million, down from $3.3 million in the prior year. Adjusted EBITDA for the second quarter decreased to $4.1 million from $6.1 million in the prior year, consistent with the decrease in revenues. And our adjusted EBITDA margin was 15% in the quarter compared with 20% in the prior year. We ended the second quarter with cash and cash equivalents of $21 million, and we have debt of $6 million. Now in terms of guidance for the third quarter of 2024, we are guiding third quarter revenues to be in the range of $30 million to $33 million. And adjusted EBITDA for the third quarter is anticipated to be between $6 million and $7 million. We are updating our 2024 guidance to be in the range of $123 million to $129 million with full year adjusted EBITDA margins of between 20% to 21%. As Pat mentioned in his comments earlier, the expanded guidance range figures for 2024 is the result of variability in the timing of closing, recognition of revenue from and implementing both large enterprise arrangements and anticipated acquisitions into our organization. Organic growth improved nicely from 3.5% in Q1 to 7% in Q2, and we expect to deliver double digits in the back half of this year. We feel good about how we have executed our acquisition strategy with $15 million in annual recurring revenue being acquired so far over the last 10 months. And the average prices being paid has been consistent with our model, coming in at between 2x and 3x revenues. We continue to assume a combination of organic and inorganic growth in our current year guidance. The outlook for the core products, we believe, remains robust, as evidenced by the strong increases in recurring revenue in the last two quarters. Our recurring revenue as a percentage of revenue this quarter was 96% versus 75% in last year's second quarter, which is very impressive improvement as we are replacing onetime ERTC revenue with high-value recurring revenue. In conclusion, we are optimistic about the remainder of 2024. We believe we have executed well against our plans as we move past ERTC. The ERTC headwinds will die down as we go through the back half of 2024 and enter 2025. Our focus remains on growing the business and delivering compelling solutions to our customers. With that, I will turn the call back to Pat for closing remarks. Pat Goepel Thanks, John. We are pleased to have delivered solid results in the second quarter of 2024. Our second quarter was very active with our recurring revenues growing 18% year-over-year plus the combination of completing acquisitions and launching more products as we build Asure to be in a strong position for future success. Our focus on growing the business, improving our technology and offering more products will be a continuous effort, and we feel that we have made excellent progress in the first half of 2024. Over the last few quarters, we've announced multiple partnerships to be able to offer more valuable services to our clients in addition to our payroll services. Small and medium-sized business owners need assistance with more than just payroll. Our ability to offer products to help them uncover tax credits that they may be eligible for, proactive health management programs, which again aid in lowering health care premiums. MyHRScreens, for example, which can aid them in performing preemployment background check, and an applicant tracking technology to aid them in their hiring practices are all very important tools that these business owners need to succeed. Our HR Compliance offering is another example where we can help small business owners navigate all the complex laws regarding employment such as minimum wage laws, which have grown exponentially over the years. Harassment training and family leave act are also difficult for small business owners to manage. The growth of Asure Marketplace is expected to continue, and our recent momentum with Payroll Tax Management has also a great potential, as evidenced by our recent deal with Vensure. The pipeline for Payroll Tax Management is robust, and we believe we will potentially announce more deals in the future. In summary, we're very pleased to have delivered another solid performance in Q2 against the backdrop of some unfavorable year-over-year comparisons due to ERTC. We believe we're executing extremely well on the plan we have laid out previously, which have included raising capital to make acquisitions, improve our technology and grow double digits, and we've done exactly that. Over the last 10 months, we've made nine acquisitions, which bring in approximately $15 million in annual reoccurring revenue, improved our technology with the recent launch of best-in-class employee self-service, role-based identity access and more. Our recurring revenues grew at double-digit rate of 18% in this quarter, and we believe that there will be more double-digit growth in the future. Recurring revenue as percentage of our revenues has increased from 75% in last year's second quarter to 96% in this quarter, which is a very impressive stat as we're replacing onetime ERTC revenue with more valuable reoccurring revenue. Our backlog balances have more than doubled versus last year as we continue to bring on new clients, both large and small. We look forward to providing more detail on our 2025 outlook when we issued guidance during our next earnings release in November. The headwinds from ERTC are now starting to dissipate, and we look forward to the remainder of 2024 and continue to deliver positive results. We will continue to provide innovative human capital management solutions that help small businesses thrive, human capital management providers grow their base and large enterprises streamline tax compliance. Thank you for listening to our prepared remarks. So with that, I'll send the call back to the operator for the question-and-answer session. Operator? [Operator Instructions] Our first question comes from Joshua Reilly with Needham & Company. Joshua Reilly Nice job on the quarter here. So maybe just starting off, if we look at the wider range of guidance for 2024 revenue, can we just review your thoughts on what's different this quarter versus the prior quarter, whether it's changed assumptions around M&A, float income or the macro? And what is this comment around timing of large enterprise deals? I assume that refers to some payroll tax opportunities. Pat Goepel Yes, Josh, thanks for the question. First of all, John Pence, myself and Eyal Goldstein, our President, are available for questions. But just on that, Josh, first of all, we feel really good about what we did in the first half of the year. As we look in the second half, and primarily, it's around the enterprise deals and tax, we won a bunch. And some of them have phased installs. Some of them have start dates that could push a month or a quarter, so lining those up sometimes are difficult. And then we've had -- even in the second quarter, we had a large successful deal that started a month later. So when we're looking at that, we just want to give ourselves enough flexibility. It's not a question of if. It's a question of when. And we feel really good about sales, really good about the backlog. We just want to make sure we land -- we stick to landing on some of these enterprise deals that are relatively new to us. And I'll give you some color. We won a large manufacturing company, 30,000 employees, et cetera, and it was full start in January. It's probably going to start here on August 1st. That's one example. Another one, we have a new partnership with one of the enterprise ERP systems, and it's over 250,000 employees. And it's supposed to start the back half of the year, could have slipped to January. It's not a question that's selling it. It's a question of installing it. So for those reasons and then even acquisitions by nature, sometimes it's when you convert some of the revenue in some phases. So again, it's not a question of if. It's a question of when. We want to make sure we give ourselves some flexibility. And I would say what's different than last quarter, not much and just that we continue to execute on the plan. Joshua Reilly Got it. And if you look at that $15 million in ARR now that you've acquired, I guess that's in the last 12 months versus year-to-date. Is that consistent with what you would have expected entering the year? And does that -- is the amount of revenue you're actually going to recognize from those acquisitions in the current calendar year pretty consistent with what you expected entering the year? John Pence Yes, I think so. And just to be clear, that's 10 months. So it's kind of October of last year through July or through yesterday. So it gives you some sense as to the timing. And yes, it is pretty consistent with what we were expecting. And we've still got some more, I think, in the pipeline that we're hoping to close in the next few months. But yes, it's pretty consistent with what we were hoping for, if not a little bit more. Our next question comes from Bryan Bergin with TD Cowen. Jared Levine This is Jared on for Bryan. I was just wondering if you could comment on the demand environment relative to prior quarters, maybe compare across your offerings or how the top-of-funnel activity is looking year-over-year. Pat Goepel Yes. No, I appreciate it. I think demand environment is very strong, both on the small business marketplace as well as some of the tax opportunities, et cetera. I might get Eyal into the conversation here. Eyal, do you want to talk a little bit about the sales demand environment? Eyal Goldstein Sure. So yes, Jared, we're seeing consistent strong demand across the business. Small business, both in our direct and our reseller channel, continues to be really strong. In fact, we've seen an uptick in new payroll customers that we're bringing on. So that's really healthy. Our tax business that Pat has been mentioning and John's been mentioning is -- we're seeing much higher increased activity there. And so I would say that one has gone up significantly from a pipeline perspective. But overall, very strong and across all the different businesses. Our next question comes from Eric Martinuzzi with Lake Street Capital. Eric Martinuzzi Looking for a little more color on the applicant tracking company that you acquired in July. Just what did we pay for that? So kind of what would the pro forma cash balance be for the month ending July? And then what could we expect to revenue contribution there? John Pence Yes. I mean I think we're going to talk about kind of acquisitions in aggregate. I believe there is some subsequent event disclosure in the Q on that one just in terms of -- because just of the size and the materiality of it. But in general, really obviously, don't want to talk about third quarter since we're just talking about second quarter right now. But I think you can get some color with respect to the purchase price on that one. And again, we want to try to talk about the acquisitions in aggregate just because we've got some that are -- lots of different multiples, lots of different structures, but I'm trying to give some sense as the relative size of the overall portfolio of acquisitions. Pat Goepel And then just on the applicant tracking company. First of all, we were attracted to that business. It's a technology that we didn't have in-house. We feel it's an easy -- we go to market with three value propositions, basically access to capital, compliance and access to people. We've been looking for the right company, and the culture around that is really strong. We're not telegraphing the name of that quite yet just as we're in the process of working through all the client notifications, et cetera. But feel really good about the business scalability of it. And then we also think there's a tremendous opportunity to cross-sell because as we look at our small business owners, what they need is access to people. We allow for kind of personalized websites around the people, job board integration, et cetera. We think this will be an area of business that will double here in a very short order. And so we feel really good about that. Any other thoughts or follow-ups, Eric? Eric Martinuzzi Yes, separate topic here. You talked about the good pipeline here and some large enterprise arrangements that may slip a little bit to the right. But what about the installed base, specifically the churn of your existing customers in Q2 versus prior quarters? Pat Goepel Yes. All in, we're about 90% or 91% on retention. That's pretty consistent with where we've been. So we don't feel good about that. As far as kind of the customer base buying, we're somewhere around a 50-50 split. In some quarters, we've been as high as 70% new logos, 30% base sales. So obviously, the cross-sell demand is pretty strong. And some of it is just we're coming out with more and more products as technology -- we improve the technology and go to market with more products. So it's -- happy customers buy more, and we feel like we're in a pretty good shape here as we enter into the second half. Our next question comes from Jeff Van Rhee with Craig Hallum Capital Group. Jeff Van Rhee So a couple for me. Just on the acquisition front, first of all, applicant tracking bringing in some incremental capabilities looks like a nice fit. In terms of the pipeline and what you look at acquiring the rest of the year, is it predominantly resellers? Or are you seeing other technologies? Just kind of the mix of acquisitions to come. Pat Goepel Yes, almost all will be resellers. We have one -- kind of one more product capability at some point in time here. But if I were to look at the rest of the year, I think the resellers will probably be more dominant. Jeff Van Rhee Okay. And then on the acquisitions, not to split hairs here, but the 10-month time line, I mean, the way we built the model, at least for us, you're, call it, seven months in on a seven-month period. Where are you on the 10 to 15? Are we talking like $12 million? Or can you dial it in a little closer? John Pence Yes. I think it's about right. I think there was three or so we did in the fourth quarter of last year. So I think that's fair. But again, I'm trying to -- it gets a little hard to parse this because when you think about -- we did give organic versus inorganic growth stats for second quarter. So I think it was seven organic, 11 inorganic. And then again, in our guide for the third and fourth, we're pretty consistent in terms of our messaging here. I think it's going to be a similar type of complement of both organic and inorganic in the third and fourth quarter. So just trying to give directions. I mean it's hard to kind of nail these things to the percentage. But I think directionally, that's what you'll see for the balance of the year, too. Pat Goepel Yes, Jeff, maybe -- and John and I were talking about it ahead of the call. But we did 18% or so third quarter to low and the high imply a 23% year-over-year improvement to a 35%. Fourth quarter, if -- the guide implies a 32% to 44% on the low and the high. And I would say we're right on pace on acquisitions. The turn from ERTC to organic growth, as expected, it might be 1% or 2% lower coming out of the gate, but we feel really good about where we are. And then the backlog is more than doubled. So as we slot that in, the organic growth would definitely be over double digits here. So our plan is going pretty close to expected. Jeff Van Rhee Yes. Okay. Helpful. And then two last quick ones, if I could sneak them in. John, on the W-2 revenue, can you just remind me what that was in Q1? And then second, around the rev rec for the Vensure deal. Just as an example, what would a deal like that -- how would that play out from a rev rec standpoint? Are we talking falls in one quarter period, like ratable over time? Just refresh me on how the deals like that -- because they tend to be larger, obviously, how is that going to play in rev rec? John Pence Yes. At a high level, it's a multiyear deal. There's some upfront cash component. But what will happen is, despite the upfront cash, we'll amortize some of that upfront cash payment over the life of the agreement. So it gets more blended in even though the cash flows might not exactly match up. So we get some cash upfront. That then ultimately amortizes in as we provide the service. To your question on W-2s, for the first quarter, it's about $5 million. Our next question comes from Vincent Colicchio with Barrington Research. Vincent Colicchio Yes. Pat, the bookings growth number you cited, was that adjusted for ERTC bookings in the year ago period? John Pence It was. The other thing, I guess, we got to be clear to -- back to that comment that Jeff just had, there is some kind of onetime money in that, that will get amortized into revenue. But we still have to pay commissions on the fact that the cash is coming in earlier. So anyway, so it's a number that has both recurring as well as some onetime revenue in it, but it does have the ERTC out to answer your question best. Vincent Colicchio And then a macro question. So if you look at your client base, are they expanding at a healthy clip, a modest clip or not at all? Pat Goepel On the client base, and I'll let Eyal answer a couple of questions here. But on the client base in general, I think the client headcount, if you will, is about flat. So we're not seeing appreciable growth. There's still more jobs in people, especially in the areas of, let's say, the trade organizations and restaurants and stuff like that. What we are seeing though is cross-sell opportunities. And some of it's our capability, and some of it's the client buying patterns that they want to buy more. Eyal, anything else on your end? Eyal Goldstein Yes. I would just say another big thing we're seeing, especially with the acquisition of the recruiting piece, is customers are looking for ways to find more employees. So there definitely are open positions. They're looking to grow. It's not massive like what it was, but there is a need to find good candidates and a healthy amount of candidates across our customer base right now. Our next question is from Greg Gibas with Northland Securities. Greg Gibas Regarding the doubling of your backlog year-over-year, great to see that. Wanted to kind of dive in a little deeper on kind of the drivers there. Would you say it's mostly just improving demand for products? Would you say there's kind of better go-to-market approach? And is there any impact just from longer implementation or time to deploy for some of your larger enterprise-type clients? Pat Goepel Yes, Greg. I think that's a thoughtful question. And I think, first of all, on tax, we're winning more in the enterprise space, which is very positive. Some of these pursuits are longer-term deals, too. And so for example, something like 37% as a backlog is in the year kind of, if you will, revenue. And then you have multiyear deals as well. So some of it is a little bit of a demand environment based on newer products that we're offering and being very aggressive. We have integration opportunities that we previously announced with Workday and SAP. And we have another one here that we haven't announced yet that you'll recognize that name as well as an integration opportunity. So we're pretty excited about that. That's driving some of the backlog. And then some of the things that we've talked about on other conference calls, 401(k) and the integration of payroll, that's happening right now. Some of it is because some of these products are relatively new. Book-to-bill is probably longer than I would like at this point in time. And in fact, we're on some calls today even that we're driving those book-to-bill numbers down in the second half and next year. And some of it is just we're brand new in offering some of these services. So there's a little combination of book-to-bill elongating a bit in some of the new products, but the bulk of it is really tax filing and our presence in the enterprise marketplace that's driving it. Greg Gibas Great. That's helpful, Pat. And if I could just clarify, too, on your comments on kind of organic growth in the back half. I guess what's implied in guidance? Did you kind of say that roughly equal contributions from organic versus growth from acquisition? John Pence Yes, that's what -- I mean to say that it's been kind of our consistent message. It's hard to predict exactly. It's going to be 50-50, but it will be a healthy combination of both. Pat Goepel Yes. And Greg, what I would say just in general, all along, if you think about it, we had onetime revenue last year kind of attributed to ERTC. When we built the plan, the big theme here was we're replacing repetitive revenue -- or excuse me, replacing non-repetitive revenue with repetitive revenue. The first quarter, we had about 3.5% organic growth. This quarter, now it's 7%. But if you look at what we started, let's say, in May and June and even July, we had a really good -- payroll units were at a very strong July. So the organic engine is building momentum. I mentioned the low end guidance of 23% in third quarter, fourth quarter between 32% and 44%. We kind of did an implied guidance of half of it being organic, half of it being inorganic. We won't get it all perfect, but you could see it's an accelerating business story. And that's really, to me, the story that I want investors and yourself to take away from. Our next question is from Robert Galvin with Stifel. Robert Galvin This is Rob on for Brad. I was wondering if the updated FY '24 guide factors in any assumptions on rate cuts in the back half of the year for the float interest or if this assumes rates remain consistent to that? John Pence Yes. We priced in -- we have our long-term portfolio managed by Goldman Sachs. And so we had a call with them. I guess it was last week, ahead of our Board meeting. And we do that quarterly. When we kind of took their advice, what they're predicting is kind of a quarter in September and a quarter in December. So we kind of ran that through our model, and that's kind of implicit in the guide. So it's not a huge impact to us, but we did factor in two cuts and one in September and one in December. [Operator Instructions] There are no further questions. At this time, I'd like to turn the call back over to management for closing comments. Pat Goepel Yes. And I won't speak too long here, but pack up a little here. I really feel good about the momentum of the business. I think we were thinking about last year in the third, fourth quarter, and how we've grown past ERTC and some questions around that. We've outlined a plan and we've executed to the plan. We feel really good about that. In some cases, we're even ahead of plan and ahead of the sales adoption as we get the book-to-bill, the increasing level of growth. We start to lap compares. We think that will pop out. We have 2025 guidance coming up. We'll do that as usual in the November call. But we're a company on the move. We appreciate your interest and appreciate you taking time today. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Técnicas Reunidas, S.A. (TNISF) Q2 2024 Earnings Call Transcript

Mick Pickup - Barclays Ignacio Doménech - JB Capital Robert Jackson - Bank of Santander Kevin Roger - Kepler Cheuvreux Baptiste Lebacq - Oddo Good morning, everyone and welcome to TR's 2024 First Half Results Presentation. It will be conducted by our Chairman, Juan Lladó; and our CEO, Eduardo San Miguel. It will last approximately 25 minutes. And you will be able to post your questions after the final remarks. Hi, hello, everyone. Today, Eduardo and myself, as usually, will walk you through this presentation. First of all, I'll go through the main highlights of the first semester of 2024. And these highlights will include our main economic figures for the period; and very important, our strategic pillars for the upcoming years, in fact a quick review of our SALTA strategy that we have celebrated a few weeks ago in Abu Dhabi. And then afterwards, Eduardo will follow up with TR business performance during this first half of the year, which will include the commercial achievements as well as always, our financial results for the period. And then as usual as well, I will wrap up with our guidance for the year 2024 and how I see or how we see the upcoming semester. So let us start with the main highlights for the period. As I said before and you all know, TR held its Capital Markets Day in Abu Dhabi, where we shared our new strategy for the upcoming years that we have called SALTA. SALTA is [indiscernible] by TR to achieve our new medium- and long-term financial goals, financial goals that I'd like to start with a number which imply doubling to 8% or 2028 operating margins. And to achieve this goal, our SALTA strategy is based in seven very important pillars, seven key pillars, that I do believe is important enough that I'll walk you through now in this webcast. The first one is service contracts, and it's creation. It's a very specific unit to boost our engineering and project management service business. Our engineering business is already very good. Our customers call us and hire us to deliver and to service them the quality of engineering that we do for our own EPC projects, constructible process engineering. So now we're focusing on the business units to deliver that engineering to them, together with all those fit and competitive fits that are multiplying every month, as you have noticed. The second pillar is extremely important and is very linked to the first one is North America. We are already expanding our presence in the region and capturing the potential of the local market. The market there is booming. And we will leverage our Houston office that we've already there to strengthen our relationship of our customers today and the new customers that as you have seen, they are awarding jobs already. And the third one and very much linked to the number one and two is decarbonization, with a very special focus and we're very good at it. You have to remember that we're a process engineering company, so we focus on hydrogen and its derivatives. Carbon capture, we are already delivering jobs for main customers. Sustainable fuels, you have already seen that we're working on the jobs on front end design and the tail design. And decarbonization of other industries that we have already announced that we're working, especially in the steel industry, in the main plants in Europe. Having these three very important key pillars means that we are abandoning EPC? The answer is no. The answer is we are, in our strategy, strengthening our local presence, not only in the U.S., which is very much focused on services and decarbonizations, but in Europe and in the Middle East. We have to be closer and we've organizing ourselves to be much closer to our customers and we are organizing ourselves in execution units. We're not abandoning EPC. We're improving our EPC capacity. And we are improving our EPC capacities with the fifth pillar here that is very important to stress. And the first example is with alliances with the best partners. And that implies our alliance with Sinopec that you have seen already that, since we announced our strategy and our alliances, we have already been awarded two very big jobs, two very important jobs that means derisking and best managing our business and continue with our EPC business in a better way, in a better derisked way, with a strong alliance. If you have seen us with the strong alliances in Abu Dhabi, you have seen us with strong alliances in Poland. You have seen us with strong alliances with Sinopec in Saudi Arabia with Aramco. And all those five pillars here, they have to be a strengthened with quality. And what is the quality? That's the sixth pillar here, which means digitalization. We will keep increasing efficiency and productivity through innovation in digital tools and artificial intelligence. We are already doing so. And we are already doing so and sharing that know-how with our customers, which in some cases, they are helping us to develop our digital tools. So we're working together with them. And those are prime customers, the ones I'm talking about. That's key to the success of the previous panel. And none of this will make sense, and that means the seventh pillar, without the best talent. The quality of engineering of TR. The quality of our engineers, we have a very good reputation, is very high, while we have to improve it. And we have to increase the numbers. And we have to maintain and improve our internal personalized programs to the objectives, to train and retain and have the best career path for our young and sometimes even senior engineers. So those - I'd like to use this slide. We've talked about everything, but it's very important that we follow the seven pillars, which I think will translate, and that's in 2028, as I said before and I'd like to repeat myself, in an EBIT margin which will be very close to the 8% target. And if we move in this slide, if we focus on the right hand side, 2023 is where we are today; and mid-2024, 2023. Let's compare where we are to where we want to be. We see that our ambition is to have €5 billion of turnover. You might think that that's very low. It is not very low. This €5 billion composed of slightly, the €4.5 billion on EPC, but very much derisked EPC, digitalized EPC, with alliance EPC close to the customers' EPC and improved margins of EPC. And together with our service business, our engineering business - together with our engineering business and with the objective of having a turnover of €500 million, [indiscernible] we ended up having - and that is very solid €5 billion turnover, but a very solid €5 billion turnover, with 30% of it thanks to the track and services will imply just fully derisked service, value-added business. So, by 2028, we will enjoy not only a better margin, we will not only be doubling our margin to 8%, but we'll have a much stronger and healthier business. So this is the important message that I wanted to highlight in my introduction, which is a very fast summary of the 2 days we had spent together in Abu Dhabi. So I'll now just move into the financial figures for the first two quarters of the year. The order intake, including the awards recently announced, stands at €1.4 billion. At this point of the year and considering the biddings we are working with our customers, we are doing early works, we are selected bidder in some cases. I do think - we all think it wouldn't be a big challenge to replace 2024 sales to renew upcoming awards. So I'll see afterwards, we'll keep our guidance. Our revenue in these first 6 months of the year is €2.1 billion, and an EBIT of €84 million; and very important, a solid 4% margin, 4% of those revenues and important as well, a net cash position that we have closed the semester with €318 million level, which shows a solid guarantee of business. And this is my introduction, SALTA strategy and key figures. And now Eduardo will continue with our commercial performance and, as always, the financial figures for the first half of the year. Let's move now to the business performance. On the commercial side, I can assure you TR's activity has been very intense this quarter. As we explained at our Capital Markets Day, TR's pipeline is extraordinary. And we are being very, very selective with the opportunities we have in front of us. However, as we have highlighted in other occasions, it will depend on the decision and schedules of our clients. The good news in this scenario is that even before announcing the award, we are often requested by our clients to start mobilizing the project task force and schedule the kickoff meetings or other initial activities. This is the case for the projects listed on this slide. First, we have been selected by a large chemical client for a €100 million service project in North America. This is an extremely important milestone for SALTA strategy since it is a major service contract. It is in the petchem sector and it is in the United States. And second, as announced last week, Saudi Aramco has sent a Letter of Intent to the JV, Tecnicas Reunidas and Sinopec, for the potential development of 3 gas compression plants at Jafurah. In this case, the share of TR amounts to more than €1.2 billion. All in all, the order intake of the period resulted in €1.4 billion, and the backlog moved close to €11 billion. Finally, let me remind you the new project awarded by RWE, announced at the beginning of June that has not been included in the backlog, as it is the case with the other 2 projects awarded last year by the same client. I will elaborate about this award later. Now let me give you some details regarding the new projects. Let's start with the one in the U.S. As I said before, we can consider this project as the first key milestone achieved by our new strategy SALTA, as it scores in two of our main pillars: Services and North America. Unfortunately, we cannot yet disclose the name of the client, but it is a large petrochemical plant in the United States. The client has decided to start with the early engineering and project execution services, while the environmental permit is granted. We expect the contract signature will take place in the upcoming months. The total value of the contract amounts to €100 million for the time being, as additional services, as construction and supervision could be awarded at a later stage. The works will require more than 1 million hours of engineering. The second milestone on the commercial front is Saudi Arabia. In this case, Aramco signed a Letter of Intent in favor of the joint venture formed by Tecnicas Reunidas and the Chinese group Sinopec for the development of 3 gas compression plants at Jafurah, the largest unconventional gas field in Kingdom of Saudi Arabia. The Letter of Intent also relates to potential works to install a 230 kilowatt power connection at the gas plant substation area and to upgrade the water pump system. The total value of the project is estimated at more than $2.2 billion, with a split 60% TR and 40% for Sinopec. Its execution will require more than 400 engineers, many of them specialized in chemical processes. We don't want to miss the focus on our strategy of consolidating a solid service-only unit. Our customers continue to entrust TR with key engineering services required to shape their future investments. Besides the major petrochemical services awarded in North America, in the first 6 months of 2024, we have added 17 new awards. Half of them related to low-carbon technologies. The total order intake of track and services business unit in the first half of the year stand at €142 million compared to €103 million in the same period last year. We continue to see a growing demand for engineering services related to energy transition. In this regard, we are gradually adapting the size of our human resources to capture this opportunity since it entails a company profile with more secure margins. Before closing this chapter of our business performance, I wish to share with you a couple of relevant news which reconfirms that TR is recognized by its clients as a key technological contractor. First, track has entered into a key agreement with IGNIS, a leading global energy company. Through this agreement, TR will provide engineering services for green ammonia projects in Spain, from the feasibility study to the fit stage, including the evaluation and selection of technologies. The potential final investment of all these projects could exceed €5 billion. And second, at the beginning of June, RWE, the largest German power producer, awarded to the consortium of Técnicas Reunidas and Ansaldo the construction of a large 800 megawatts hydrogen-ready combined-cycle plant. This project is not included in our backlog since the final investment decision by the client is still pending. This will happen once the hydrogen grid connection, the regulatory framework and the economic viability are closed. Let's move now to the financial figures for the first half of the year. In terms of sales, TR surpassed again the €1 billion level on a quarterly basis, reaching €1.1 billion in the second quarter of 2024. This implies a 9% growth compared to the previous quarter. EBIT reached €44 million in the second quarter, with a 4% margin over sales in the first half of the year, in-line with our guidance for the year. And at the bottom line, the net profit stood at €22 million in the second quarter of the year and €42 million for the first 6 months. Moving now to the net cash position of the period. As you can see in the slide, to June 30, figure stands at a solid €318 million. It is also important to remark that, in those first 6 months of the year, TR has reduced its gross debt in €63 million, which includes the repayment to SEPI of €33 million of the ordinary loan. Everything, very much aligned with TR's goal of reducing our total gross debt. Saying so, I give the floor back to Juan for the final part of today's presentation. Juan Lladó Hi, hello, everyone, again. The 2024 guidance considers the level of around €4.5 billion of sales and our focus is to reach a solid 4% EBIT margin for the year. However, this message with this guidance, it's important to underline the term quality, the quality of the guidance, the quality of our numbers today. Quality because first, we've been very selective, as we have said before, in choosing our project and customers, which translates in a solid backlog profit-wise. Quality because our service contract starts to gain more and more relevance in our business. This is a transformation of a company which will deliver in the future more value to shareholders. And quality, and that's the third point, because our operations are very much focused on the cash execution strategy, which is allowing us and will allow us, as planned, to reduce our debt to the desired levels and, therefore, having a much healthier balance sheet. I feel very comfortable that our SALTA strategy is starting to pay off. And we are already scoring in several of the seven very important pillars. I am convinced to be in the right path. And with this guidance and this message, we're done. And we're all very happy to answer any questions that you may want to address. Thank you very much. Thank you. [Operator Instructions] Our first question comes from the line of Mick Pickup from Barclays. Go ahead, please. Mick Pickup Hi, everybody. it's great to say how easy a quarter is when things are going well. A couple of questions, if I may. Can I just talk about the engineering services contract? Obviously €100 million is a big number. Can you just talk about how long that extends for? And how it will impact your working capital for the year as you may get paid after reimbursable on that contract? So just how does that impact your working capital outlook for the year? And can you talk about any other projects that you're seeing coming down the pipeline on that? Obviously you've got an ambitious target in engineering services, so just this being the start, but what's next? Sorry for being greedy. Juan Lladó Hello. Hi, Mick, this is Juan. Never on the bench, we are always working. Okay, okay. Let me answer you the question. If it's not fully completed, Eduardo will improve my answer. How long is it, this contract? It is very similar. We're doing the same contract with INEOS. You have to remember that we started 2 years ago INEOS with a big engineering job, which was [indiscernible] services, which - pure engineering. And the pure engineering of a job is usually [indiscernible] you should be around 90% of engineering, but they have to be continue doing a small piece of engineering through the life of the job, which is 4 years. Obviously, now we've been hired. And we have to focus because, as the customer said, we want the quality of the engineering. We want you to focus on [indiscernible] Hamafis services. And then we'll see how we expand because it's going to be our engineering to support us with construction and supervision, with supervision of models, with other scope. But the focus now and where the customer has asked us to focus is, we want your Madrid engineering, and we'll deploy our team to support you here in Madrid. So this is what we have to focus. I mean let's focus on the next 2 years, obviously with the perspective that, as we do the engineering, we'll have to support the customer to supervise in the United States, Gulf of Mexico, where construction is never easy to support them, with the quality of our engineering on the construction. And obviously, as we do engineering, we have to support them on procurement and activate and expedite procurement and travel with them in procurement. But now the budget that we have announced is the pure [indiscernible] engineering. So we're going to be the customer's engineering overall. And this is pure cost-plus. So working capital, we'll start getting paid with small advance payment and as we start to incur man-hours, get paid. So we have - our working capital has no cost of working capital. I mean, you will not see big cash increases, but you would not be - need for cash in the market. It's pure cost-plus. Just about other projects of the scope, obviously, you just started the engineering services business. This is a major milestone. What else is in the pipeline? Juan Lladó Very important. I mean, we're already working in early works and proceeds in fits with customers. And those are - I'm talking the U.S. already. And with the expectations and the mutual agreements that if the project moves forward and we perform with them, we will continue from [indiscernible] to fit and to [indiscernible] to detailed engineering and then construction and supervision. So I mean, that's why our expectations are very positive. At the same time, with other customers, we're signing framework agreements. And framework agreements mean that we're starting with them at the very early stage of jobs and we move forward with the front end. And once front end is finished and if they've got the final investment decision, the likelihood of continuing with them is very high. So the level of agreements with the customers, old customers and new customers, in terms of service that we're seeing today, we have never seen it before. And that's why our strategy is good. It looks beautiful to grow and it is necessary to deliver. I mean we have very much to focus on services if we want to be successful when we start with a customer. And with that customer, that translates into a full job. So it requires focus, quality and resources. And that's our objective. I might add something. And in the Middle East - in the biggest country in the Middle East - I don't want to name customers, the number of investments that are coming up are huge. They're huge in petrochemical. And we both, contractors and customers, are exploring and we're engaging with them very early because the traditional way of going to the market, getting a front-end design, making a bid, asking contractors to validate this front-end design in order to sign an EPC is becoming; due to the volume, quality of the investments - step-up investments, which is new petrochemical, very different - very difficult to isolate as an EPC, is translating in very early engagements with those customers in order to develop with them from the very beginning the large investments. And we'll see how a lot of the investments, whether it continues as service, as EP-Cm or EPC. That's something that we will have to explore together with our customers. But the early engagement, developing the jobs with our customers, a year ago, we were talking as something that we were starting to see. Now, it's a full reality. Thank you. Our next question comes from the line of Ignacio Doménech from JB Capital. Go ahead please. Ignacio Doménech Hi. Thank you for the presentation. Thank you for taking my questions. I have three. The first one is on the backlog. I will appreciate if you can give us the breakdown on the current status of the value, okay? I would assume a large portion is in engineering or early stages, but just to have a rough reference. Then the second question is on industry capacity, okay? Some of your peers have mentioned that they are suffering of shortages with manpower, so I just wanted to get your view on this, and perhaps, how do you protect it, maybe some of the agreement with Sinopec? And my last question is on Algeria, if you can provide an update regarding the existing dispute with Sonatrach from Touat Gas. And what is the latest status from the Hassi [ph] project? Thank you. Eduardo San Miguel Ignacio, it's Eduardo San Miguel. Thank you for your questions. I was trying to make a quick number regarding the first question, but it is not easy to give you a quick answer. But my feeling, every project awarded in the last eight months should be in the engineering phase, so give or take, this should be around €3 billion or €4 billion. So, it's 35% of the backlog in the pure engineering phase. I would say another third will be in the procurement, but maybe a bit more, 40% is procurement phase. And projects under construction would be no more than 25% because we are finishing projects that were launched before COVID, but very few launches after COVID. So, that's my guess, 35%, 40%, 25%. That's my split. Regarding shortages in the manpower, well, we have been talking about this topic quite a lot because I think we have done a great job during the COVID because we were able to retain the core engineering capacity of the company. So, we are not missing this kind of professionals, but it is a fact that, if we want to grow, we need - I don't want to call it less-value added engineering, but let's say, more simple engineering. And that's where we really need to grow. For this purpose, we basically opened a number of branches around the world. The main one is in India. And today, we have in India 1,500 professionals already working there. So, we have found a way to grow fast if needed. So, it's a fact that there is scarcity, but we have solutions. And also I would like to mention the alliance with Sinopec. One of the reasons we are together with Sinopec working around the world, basically has to do with this difficulty. I don't want to say the resources coming from Sinopec have no limit. They obviously have a limit, but they have the capacity to add the people we need to those projects where we have some difficulties. So, I think we have done the home-works correctly. And I do not really believe that manpower is bottleneck for the growth of Técnicas Reunidas. I don't see a problem in this part of the business. Regarding Hassi, I will allow Juan to answer you this question. Juan Lladó Okay. I think everybody knows that we had had and we continue having and we worked on having a very good relationship despite issues and problems, company-to-company, with Sonatrach, and we have done so. And we have been announcing quarter-after-quarter that we have been working and exploring with them different ways to re-launch the Hassi refinery. And even Sonatrach has made it public as well that they were exploring ways, as it is important for them to re-launch the refinery. And I have to say that we are doing so, and we are positive about it. That's one thing, good relationship and positive in re-launching Hassi. In Touat, let me tell you that, despite why I might feel positive, relationship, all those things, when we have a litigation, it's not prudent and it's not correct to answer anything and to make any comment in public. And so I think with those two - I think that, I have answered your questions. Thank you. Our next question comes from the line of Robert Jackson from Bank of Santander. Go ahead please. Robert Jackson Hi. Good afternoon gentlemen. Just a couple of questions. First of all, related to the alternative sectors such as the, you mentioned, steel sector. Can you give us some light on progress in that sector? And there has been talk of some, I would say, delays in terms of the investments in this sector in terms of decarbonization. Can you give us - I mean what your thoughts on what you are seeing in terms of the - what you are doing and the potential there in that sector? And secondly, in North America, your exposure to the carbon capture and hydrogen sectors, can you give us any visibility you are seeing there regarding the pipeline and the outlook, whether you are working with large infrastructure funds which have the financing to support those projects. Basically just give us some visibility, more visibility on those segments? Those are my two main questions. Thank you. Eduardo San Miguel Hi Robert. Thank you for questions. Regarding the steel and decarbonization, I had a call a couple of days ago with the CEO of one of the company, one of our clients that is working with us. And the good news is that we are clearly moving to the next stage. I mean those projects have several windows. You need to jump from one window to the next one to achieve certain milestones, and we are in this situation. So, I don't have the feeling that there are delays. We are moving ahead as expected, but it is a fact that there are periods where everyone was talking about immediate actions, immediate opportunities to come. We have seen some slowing down little by little. It's a fact. Things are not moving as fast as probably we expected, but I don't have the feeling that that's a problem for us because the opportunities are still there. We see new clients. You have been talking about steel. Well, let's talk about steel. We see new clients of the steel sector coming to Técnicas Reunidas and asking us to render service in the short future, because they want to invest. The only problem is that they still have to decide technologies. They are waiting the subsidies to be granted. There are a number of issues that are delaying a bit the decisions, but the opportunity clearly is there. And what can I say you is that the existing projects are on its way. Everything moves as expected, so I feel comfortable. Regarding the U.S., well, the feeling in the U.S., everything that has to do with blue ammonia is massive and it is happening. It takes time to reach the final decision, investments of the clients because they need to compose their full business plans. They need to assure that they will have a bi-level of takers. They need to understand deeply the costs. And many of those new investments, the cost is not that easy to define because of new technologies. It is taking time, but the appetite is still there. Again my message is, we feel comfortable, but we see how everything is a bit more - moving in a bit more slower than expected, but I would never say we are negative, just the opposite. We see lots of opportunities. We are signing many early engagements, many framework agreements with many players in the United States that are willing to construct blue ammonia projects, so everything is moving, probably not as fast as expected, but everything is moving. That's my conclusion. Robert Jackson Okay. And what about in the Middle East, where there is probably more access to financing and less issues on regulation? Can you give us any visibility there in terms of the energy transition and projects you could be - you have in your pipeline in that market from existing clients? Eduardo San Miguel Robert, you understand the joke. I don't want to be a hero [ph]... There are many big players we are working with in the States. And for them, the priority is not the financing, it's to complete their business plan. That's priority for them. So, I don't really believe financing is, again, the bottleneck, but also what we have seen and that's why we have some alliances with banks like European Bank of Investment. I mean the idea is, we want to support our clients because, from time-to-time, they need some support in structuring their financials of their projects, but we also have players in this market that are willing to invest in this sector. So, we need to work as dealers from time-to-time, trying to connect financial people with industrialists. And that's the reason why - one of the reasons why track exists, because we realized that there was a big niche, there was a good opportunity of doing business because of having this ability to link those two parts of the business. Thank you. Our next question comes from the line of Kevin Roger from Kepler Cheuvreux. Please go ahead. Kevin Roger Yes. Good afternoon. Thanks for taking the question. I have just one on my side, after this question, please. I was wondering if you can comment a bit the EBIT margin by division that you have seen in H1 and notably, if you can comment why the petrochemical EBIT margin is so high at 25% for the H1. And on the refining side, why we have moved back into negative territory with minus 1% EBIT margin? If we can have some color on those division and notably, just to be sure to understand the potential impact of these petrochemical services engineering contract, if we should then expect basically this division, petrochemical to be again sound in the next 18 months, driven by those type of contracts, please. Eduardo San Miguel Kevin, regarding the refining margin, the answer is very - we are about to deliver some projects. We are in the last stages, and when you are in the last stages, you always invest in the projects because you want to be on time. So, we are spending money just for the sake of doing everything on time as expected by the clients, so it has a cost and it is impacting the results. Regarding the petchem, I don't have so many projects in the petchem. So, for me, it's a bit difficult to give you explanations, because it's very easy to identify what is happening in very specific projects. But last year, if I am not wrong, the petchem was - margin was around 15%, I think. So, it's bigger, but there is not a huge difference. But we expect this year to - this margin should be solidly above this 20%. That's what we expect from the year. [Operator Instructions] We have our next question coming from the line of Baptiste Lebacq from Oddo. Go ahead please. Baptiste Lebacq Yes. Good afternoon. Thanks for taking my question. Just one question from my side, it's regarding the net financial charges, which were impacted by hyperinflation by €6.6 million in the first half, mainly due to Argentina and Turkey. Can you give us an idea of your backlog in these two countries? And can we have, let's say, an idea of the calendar of the projects which are in the backlog in these two countries? Thanks a lot. Eduardo San Miguel Hi Baptiste. Sorry, I was having the numbers, yes, there is minus €6 million because of the hyperinflation. It has to do with two countries, with Turkey and with Argentina. In both cases, we are in the very last stages, very, very last stages of construction. So, we have this impact now, but we should not expect very significant extra costs because of this reason in the forthcoming months. So, this is impacted, but we should not expect something additional relevant. Thank you. There seems to be no further questions at this time. I would now like to turn the call back over to management for final closing comments. Juan Lladó Okay. Thank you. We are done. Thank you very much for listening to us. Thank you very much for the questions. And then we will see each other or talk to each other again in the presentation of the third quarter. Thanks again and have a good summer.

Exco Technologies Limited (EXCOF) Q3 2024 Earnings Call Transcript

Exco Technologies Limited (OTCPK:EXCOF) Q3 2024 Earnings Conference Call August 1, 2024 10:00 AM ET Company Participants Darren Kirk - President & Chief Executive Officer Matthew Posno - Chief Financial Officer Conference Call Participants David Ocampo - Cormark Securities Nick Corcoran - Acumen Capital Operator Good day, and thank you for standing by. Welcome to the Exco Technologies Limited Third Quarter Results 2024 Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Darren Kirk, President and Chief Executive Officer. Please go ahead. Darren Kirk Thank you, Kevin and good morning, all participants. Welcome to Exco Technologies fiscal 2024 third quarter conference call. I will lead off with an operations overview. Matthew Posno, our CFO will then review the financial aspects of the quarter, before we open the call for questions. Before I begin, I'd like to point out that the cautionary note in yesterday's news release and on Page 2 of the presentation that we have posted to our website are applicable to this discussion today. Overall, we had another solid quarter, chalking up our seventh consecutive quarter of year-over-year growth in EBITDA and EPS. As well, I'm very happy to point out that we saw a notable uptick in our Casting and Extrusion segment EBITDA margin, which rose to almost 18%. This segment margin has much more upside from our current investment initiatives and as we focus our efforts on filling these capacities, improving our efficiencies and achieving our fiscal 2026 targets. Free cash flow was also much stronger this quarter, as our earnings continue to improve and CapEx came in a little lighter. We continue to tightly assess our capital spending and now expect annual spending will come in around $36 million this year. Beyond our financial results, we made great progress at pushing the pace of innovation across the company again this quarter. It is truly exciting to see all the innovation happening across Exco and the tremendous potential that will clearly be unleashed through the use of AI and machine learning. We are already literally taking hundreds of hours out of jobs with these technologies across design, programming and machining functions. We also continue to make meaningful progress at scaling up our greenfield plants, further integrated Halex into Exco extrusion die operations and maximizing the benefits of our enhanced heat treatment equipment. Jumping into market conditions and first looking at our Automotive Solutions segment, vehicle production volumes in North America and Europe were roughly flat on a combined basis, with North America a little higher, in Europe a little lower. Vehicle sales also remained decent ending the quarter with a US seasonally annual adjusted rate of about 15.5 million units. Volumes would likely have been a bit better than this if not for the large cyber incident that impacted thousands of dealerships in the month of June. While elevated interest rates and continuing high average transaction prices are certainly headwinds, there remains pent-up demand at the consumer level, while dealer inventories continue to be replenished. OEM incentives are clearly picking up and interest rates are starting to head lower. Compared to the flattish OEM production this quarter, our segment revenues modestly underperformed overall market conditions, dropping 4%. This was due to customer-driven program launch delays, unfavorable vehicle mix in our general program launch cadence with some programs ending before new programs launched later this year. Looking forward, vehicle production volumes are widely expected to be flat to slightly down in the second half of calendar 2024, which includes expectations of more pronounced summer shutdowns this year. Looking now a little further, vehicle production volumes are expected to remain relatively stable in 2025, as pent-up consumer demand is satisfied. As we've long demonstrated, we would expect our revenues to comfortably exceed the industry rate of growth over time, representing content per vehicle growth of between 5% to 10%. In this regard, our launch pipeline, quoting activity and new product development remains very robust. On the cost side, margins were squeezed during the quarter by modestly weaker volumes, unfavorable vehicle mix and higher labor costs, particularly in Mexico. Labor costs in Mexico have increased significantly in the past several years and we are working to offset the pressures through various measures. These measures include implementing automation and trimming headcount, where possible, exiting less profitable programs, pushing off cost downs and of course, targeting price increases. As some of our older tighter price margin programs roll off and newer programs with more favorable economics ramp up, we expect our segment margins will begin to recover. Turning to our Casting and Extrusion segment and starting with die cast, demand in that end market remained very firm for new molds, rebuilds, shot-in tooling and, of course, our leading 3D metal printing business. While EV adoption has clearly slowed, it is important to note that our business is relatively agnostic to powertrain architecture. To the EV revolution slow further or shift toward hybrid vehicles as appears to be the case, we remain confident in the trend towards aluminum and that demand for our products will continue to grow strongly in the years ahead. Demand for consumable extrusion tooling remained strong across most regions and end markets, during the quarter while extruders continued to be somewhat sluggish overall due to weak demand in the building and construction end markets, this end market improved this quarter and certain other markets such as automotive, and green energy applications continued to show good growth. Capital equipment sales within the extrusion end market also remained decent as extruders continued to focus on enhancing their productivity and efficiency through the cycle a sweet spot for our Castool operations. Margins in our Castool Extrusion segment improved over the prior year and sequentially, as we benefited from higher demand for extrusion dies a more favorable pricing environment in the die cast market, but also much improved productivity across the segment. We are clearly seeing the benefit of our various capital investment initiatives. We remain confident in our expectations for higher segment margins through our outlook period of 2026, as our greenfield investments continue to season our recent capacity additions are utilized and various efficiency initiatives continue to take hold. That concludes my prepared remarks. I want to thank all of my Exco teammates for their tremendous efforts, their drive to push innovation through our organization and their focus on working safely always. I will now pass the call to Matthew to discuss the financial highlights. Matthew Posno Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the third quarter ended June 30 were $161.8 million, a decrease of $2.8 million or 2%. Foreign exchange rate changes increased sales approximately $1.9 million in the quarter. Consolidated net income for the third quarter was $8.2 million or earnings of $0.21 per share compared to $6.3 million or $0.16 per share in the same quarter last year. This is an increase of $1.9 million or 30%. Effective income tax rate was 27% in the current quarter compared to 26% in the prior year quarter. The income tax rate in the current -- in the quarter was impacted by non-deductible losses geographical distribution and foreign rate differentials. The Automotive Solutions segment reported sales of $82.9 million in the third quarter a decrease of $3 million from the prior year quarter. Foreign exchange rate changes increased segment sales $1.1 million in the quarter. The sales decrease was driven by customer delays in certain program launches, unfavorable vehicle mix and slightly lower blended vehicle production volumes in North America and Europe compared to the prior year quarter. Third quarter pre-tax income in the Automotive Solutions segment was $8.1 million which is a decrease of $800,000 from the prior year quarter. Variances and period profitability were due to lower sales, product mix shifts, higher raw material pricing rising labor costs and foreign exchange movements. Labor costs in Mexico have been materially challenged -- challenging in recent years and we're seeing added pressure in fiscal 2024 given the rise in wages. Vehicle production volumes however, remained relatively stable which has led to improvements in labor scheduling and reduced expedited shipping costs to partially offset these other costs. As well, pricing action and efficiency initiatives continue to temper inflationary pressures. The Casting and Extrusion segment reported sales of $78.9 million for the third quarter, an increase of $0.5 million from the same period last year. Demand for extrusion tooling remains strong in both North America and Europe. High interest rate negative -- high interest rates negatively influenced the building construction and recreational vehicle extrusion end markets in prior quarters, but the construction end market improved more recently while demand was in the automotive market gained momentum and sustainable energy end markets were strong. Management continued to develop its Castool greenfield locations in Morocco and Mexico which provide the opportunity to gain market share in Europe and Latin America. In the die-cast tooling market demand and order flow for new molds associated with consumable tooling and rebuild work remained firm during the quarter, and demand for Exco's additive 3D printed tooling grew strongly as customers focus on greater efficiency in all large mold size segments. Sales in the quarter were also aided by price increases which were implemented to protect margins from higher input costs. The Casting and Extrusion segment reported a $7.1 million of pretax profit in the third quarter, an increase of $3.1 million or 77% from the same quarter last year. The pre-tax profit margin, pre-tax improvement is due to higher sales volumes within the extrusion end markets, program pricing improvements, favorable product mix and efficiency initiatives across the segment, as well volumes at Castool heat treatment operation continue to increase providing savings and improved production quality, while efficiency initiatives at Halex are being realized. Offsetting these cost improvements were ongoing start-up costs at Castool's greenfield operations and a $700,000 increase in segment depreciation for the quarter associated with recent capital expenditures. Management remains focused on reducing its overall cost structure and improving manufacturing efficiencies and expect such activity together with the sales efforts should lead to improved segment profitability over time. Exco generated cash from operating activities of $22.7 million during the quarter and $15.9 million of free cash flow after $4.7 million in maintenance fixed asset additions. This free cash flow together with the company's cash balances was used to fund fixed assets for growth initiatives of $3.2 million, paid $4.1 million in dividends and $1 million to repurchase shares under a normal course issuer bid. Exco ended the quarter with $20 million in cash, $107 million in bank and long-term debt and $44 million available in its credit facility. Exco's financial position remains strong as such the company's balance sheet and availability on the existing credit facility provide continued support for our strategic initiatives. Our strong financial position combined with the free cash flow creates a foundation for management to pursue high-value growth capital expenditures, dividends and other opportunities that may arise. That concludes my comments. We can now transition to the Q&A portion of the call. Kevin? Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question comes from David Ocampo with Cormark Securities. Your line is open. David Ocampo Thanks. Good morning, everyone. Darren Kirk Hi, David. Matthew Posno Hi, David. David Ocampo My first question is probably for Darren. I mean, if we think about the Castool Moroccan facility it's been open since I think November 2021, so obviously a few years there. But it does sound like performance is still not at levels that you would like. So I was just curious if that time line is consistent with your expectations and probably most importantly what else needs to happen at the facility for you guys to get your desired returns on capital. Darren Kirk Sure. Yeah, I think it's a fair comment that that facility is behind our expectations in terms of ramp-up. We continue to make progress there. It's generally hanging around in EBITDA breakeven on a quarterly basis now. But the sales are -- and the orders are starting to come up. And so while it's -- there's all kinds of hurdles when you're starting a new plant in Morocco and shipping into Europe, we've overcome a lot of those in the past quarter. And we do expect that the performance is going to continue to improve very soon. But you're absolutely correct that it is behind schedule, but there's no -- we certainly see a path to achieving our objectives for that plant. It's just been a little more protracted. David Ocampo Okay. That makes sense. And then I was just hoping you could speak a little bit about your ongoing discussions with customers as it relates to giga-presses especially in the context of slowing EV demand. And just out of curiosity is this something that could also be used by traditionalized customers? Or all discussions right now related to EV? Darren Kirk Yeah, it's a good question. So far I have not seen application of giga-presses for anything but EVs and so to the extent that EVs have been pushed out the demand for giga tooling is pushed out. I still believe that, it's pushed out and not canceled. I mean, we're probably looking at a 12- to 18-month delay here maybe 24 months. But we still have very active discussions with customers about interest in moving forward with EVs and giga tooling. And so while I have not seen any application for giga tooling outside of the EV market there's nothing that would prohibit OEs from using that technology for hybrid or even gas powertrain architecture. It's the cheapest path for an OE, when they're kind of tweaking an existing platform is to stick with their existing process. But to the extent that, new platforms are developed that you may see giga castings and tooling being used for those applications. David Ocampo Okay. That makes sense. And is there any risk to your '26 targets just given that this has been pushed out to the right by call it 12 to 18 months? Darren Kirk At this point, we don't think so. Casting is kind of like 15% to 17% of our overall revenues. It is a higher growth part of the market. And while we are seeing a delay in EVs and giga there's a lot more activity going on for casting demands for both gas and hybrids, because to the extent that they're not selling EVs, they're going to be selling other powertrain platforms. And so there is a pretty good offset there, and so I think, given all of that we don't see a risk at this point in our 2026 targets. David Ocampo Okay. And then just last one here for Matt. If I look at CapEx for the first three quarters it's around $22 million to $23 million. It does imply that there's going to be some big CapEx spending in Q4, against I think your previous guidance of $40 million. Curious, if that still holds or if some of these capital projects have also been pushed to the right. Matthew Posno So we've been doing a couple of things. We started talking about at the end of last quarter where we took our guidance from almost $48 million to $40 million. We think our CapEx will land somewhere close to $36 million for this fiscal year. That's a combination of a couple of things. One is, we are trying to evaluate our programs and making sure that we're getting the best return on investment on the equipment we're purchasing. And also, some of these products they take 12 to 18 months to actually get delivered to us depending on the size and the complexity of it. So there have been a couple of delays in timing. So the way we see it is we were kind of saying around $40 million this year and maybe a little less next year. Over the next two years, it will probably be pretty consistent in the total the absolute amount but we think this year it will be closer to about $36 million. David Ocampo Okay. That's it for me. Thanks a lot, guys. Darren Kirk Okay. Thanks, David. Operator Our next question comes from Nick Corcoran with Acumen Capital. Your line is open. Nick Corcoran Just a couple of questions from me. The first is in terms of margins how much more room do you think they have to move up? Darren Kirk And sorry I just kind of missed part of that. Nick Corcoran Margins in terms of margins moving up how much room we may have? Darren Kirk Yes. I think you got to take it segment by segment. We are kind of running north of 12% or so in our Automotive Solutions segment with a target of 15%. And we certainly expect to get that 15% by 2026. It's been soft as we kind of been suffering through the inflationary effects of labor and raw materials relative to older price programs. And as those programs roll off and new programs with more favorable economics roll on that will help the margin. I would certainly expect that to be the case beginning in 2025 and that should be boosted further by the fact that most of -- a good piece of the growth that we have is from our accessory products, and they tend to have a bit of a higher margin associated with them. So, that's the path and I would expect to see that start to gain traction in 2025. In terms of the Casting and Extrusion segment, this quarter, I mentioned has had a pretty good uptick in that segment margin closing in on 18% versus a 20% target. And I think as we continue to season our greenfields, and we continue to get the benefits of some of this CapEx that we've been spending that we feel very comfortable that that 2026 target of 20% is going to hold as well. Nick Corcoran Great. That's helpful. And then maybe just a bigger picture from -- a bigger picture question for me. There's been a lot of negative segment from OEMs. I'm just wondering if you've seen any indication of supply chains that any of the OEMs whether in North America or in Europe are starting to slow down production? Darren Kirk We listened to the OE calls last week like most people in this sector, and it was, I'd say, a little more difficult moment than it has been for some period of time. There is -- if I just start with the IHS numbers, they don't look too bad kind of slightly down for the second half of 2024. I do expect that summer shutdowns this year will be a little more pronounced than they have been in recent years. I don't have greater visibility at this point than kind of the industry-level comments that I've just relayed, but there is likely to be some pullback in OE volumes. But our offset is always that we aim to grow our content per vehicle and have a long track record of growing our content per vehicle in kind of the range of 5% to 10%. And we certainly expect that to be the case going forward. It won't necessarily be true every quarter as was the case this quarter. But by and large through the cycle that's what we expect to achieve. Nick Corcoran Thanks. Those were my questions. I'll pass along. Darren Kirk Thanks, Nick. Operator [Operator Instructions] And I'm not showing any further questions at this time. I'd like to turn the call back over to Darren for any closing remarks. Darren Kirk Okay. Well, thanks everyone for joining us on the call. We look forward to speaking to you all once we publish our fiscal 2024 year-end results. So, take care. Operator Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Altigen Communications, Inc. (ATGN) Q3 2024 Earnings Call Transcript

Carolyn David - Vice President of Finance Jerry Fleming - President & Chief Executive Officer Joe Hamblin - Chief Digital & Transformation Officer Greetings. Welcome to Altigen Technologies Third Quarter Fiscal Year 2024 Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host Carolyn David, VP of Finance at Altigen Technologies. You may begin. Carolyn David Thanks, Paul. Good afternoon, everyone and welcome to Altigen Technologies earnings call for the third quarter fiscal 2024. Joining me on the call today is Jerry Fleming, President and Chief Executive Officer; Joe Hamblin, Chief Digital & Transformation Officer; and I'm Carolyn David, Vice President of Finance. Earlier today, we issued an earnings release reporting financial results for the period ended June 30, 2024. This release can be found on our IR website at www.altigen.com. We have also arranged a replay of this call which may be accessed by phone. This replay will be available approximately one hour after the call's completion and remain in effect for 90 days. This call can also be accessed from the Investor Relations section of our website. Before we begin our formal remarks, we need to remind everyone that today's call may contain forward-looking information regarding future events and future financial performance of the company. We wish to caution you that such statements are just predictions and actual results may differ materially due to certain risks and uncertainties that may pertain to our business. We refer you to the financial disclosures filed periodically by the company with the OTCQB over-the-counter market, specifically the company's audited annual report for the fiscal year ended September 30, 2023, as well as the Safe Harbor Statement in the press release the company issued today. These documents contain important risk factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. Altigen assumes no obligation to revise any forward-looking information contained in today's call. In addition, during today's call, we will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to or a replacement for the comparable GAAP measures. However, we believe these measures will help investors gain a more complete understanding of results. A reconciliation of GAAP to non-GAAP measures and additional disclosures regarding these measures are included in today's press release. With that, I'll now turn the call over to Jerry for opening remarks. Jerry? Jerry Fleming Thanks, Carolyn and good afternoon, everyone. Thank you for joining us for today's call. I'm pleased to share our third quarter fiscal results, as well as to provide you with an update on our business progress. After my overview, Joe Hamblin, our Chief Digital & Transformation Officer will expand upon our business execution strategies and operational excellence initiatives. Carolyn will then present an in-depth review of our third quarter financials. Earlier today, we announced our fiscal Q3 2024 revenue of $3.3 million, which was approximately 2% lower compared to our prior quarter, generally due to a decline in our legacy business. On a positive note, our third quarter operating income was $68,000 compared to a loss of $241,000 in our fiscal second quarter. The reduction of just over $300,000 in operating expenses is a direct result of our operational excellence initiatives. On our last call, we committed to achieving profitability by our fiscal 2024 year-end. I'm happy to report that we accomplished this objective one quarter earlier. I'll now turn to a discussion of our business transformation initiatives. First, revenues from our legacy on-premises PBX business declined quarter-over-quarter as expected, since we no longer provide enhancements to our on-premises PBX systems, as we have a new cloud-based unified communications platform. Many of these customers have therefore, chosen not to renew their software maintenance contracts. We've also had a few customers elect not to renew their contracts for the cloud version of MaxCS, also based on our legacy PBX platform, which is admittedly lacking modern unified communications functionality. These issues are resulting from the fact that our new MaxCloud UCaaS or Unified communications platform has taken longer than expected to get to full release date, due to a few nagging technical issues. Those issues have now been addressed and as a result, we are finally beginning to see some traction with MaxCloud. Although the MaxCloud revenues have not yet fully replaced, the decline we've experienced in our legacy PBX revenues, we are confident that this will soon change going forward. These same issues have also impacted the time lines for Fiserv to begin migrating their legacy MaxCS customers to the new MaxCloud UC platform. But with those issues now behind us, Fiserv has committed to begin their customer migrations from our legacy MaxCS to the new MaxCloud UC platform, which will generate additional MaxCloud incremental monthly revenues. As I mentioned on our last quarter's call, Fiserv is still on track to launch our groundbreaking new conversational AI IVR solution in October. This new solution includes significant enhancements and functionality along with higher pricing, which therefore will also begin to contribute to new incremental monthly cloud revenues. Shifting to Altigen's solutions for Microsoft Teams. That business has been fairly flat in the last few quarters, as we have not yet been able to introduce a viable contact center solution for Microsoft Teams. However, just last month we were able to introduce our new CoreEngage for Teams' Contact Center platform. We've already signed contracts with several customers and have quite a few pilots taking place now, with new prospective customers. Early indications are that this will prove to be a very successful commercial endeavor for us. Our consulting services business has continued to grow, primarily as a result of the expansion of our business with the Connecticut Department of Transportation. In addition to that, we are gearing up to go after new customer logos, principally focused on AI and digital transformation services. I'd also want to clarify, the role our consulting services business has in our overall business strategic planning. I'll start with a brief background. We initially acquired ZAACT Consulting in May 2022 to increase our Microsoft technical expertise to extend our capabilities to deliver custom communications solutions and to drive Altigen software sales into ZAACT's customer base. While the acquisition certainly improved our Microsoft technical expertise, it had also set us back as many of the companies ZAACT represented as ongoing customers that either ceased doing business or were in the process of doing so, at the time of the acquisition. The result was as reported in prior quarters, a much lower-than-anticipated contribution from the ZAACT Services Group. However, when we brought in Sharique Shaikh to run the ZAACT Consulting division in November of 2023, along with the signing of a major contract extension with the Connecticut Department of Transportation in December of 2023, that situation began to change. Today, our consulting services business is not only thriving under Sharique's leadership, but we are also now converging the technical resources on the consulting services team, with the Altigen software solutions team. This is particularly evident in our AI initiatives, in which companies first want customer solutions built for their unique needs, then want Altigen to enhance and maintain those solutions in a monthly recurring managed services revenue model. And we're set up to do just that. With that, I'll now hand the call to Joe Hamblin to provide additional color on both our software solutions and consulting services, lines of business. Joe? Joe Hamblin Thank you, Jerry. Good afternoon, everyone. A quick recap. During our second quarter earnings call, I outlined three key operational initiatives that we were going to be focused on that it helped enable our company to scale and compete in years to come. Those are operational efficiencies, financial stewardship and product delivery. So in the operational efficiencies area, we made significant progress to enhance that area. We completed our back-end automation for our legacy products. Allowing our existing customers and partners to streamline their account management access. Additionally, we rolled out an enterprise billing center that enables these customers to access their online billing information, much or easily and readily available to them. The team has also laid the foundation for the first phase of our solutions delivery portal by updating our product catalog, and mapping out our end-to-end business processes so we can begin the automation process that allows us to scale rapidly. This will allow us to automate product ordering in Phase 1, which we will release at the end of August and then we will quickly move into Phase 2, which will focus on the product provisioning piece allowing customers to come in and access our site with a very wizard simple-to-use friendly user interface that allows them to provision themselves. On the financial stewardship front, we continue to drive costs out of our business. As I mentioned last earnings call, we reduced our operating expense by $250,000 on an annualized basis through headcount, data center and associated licensing consolidations and the migration to the lower -- and migrations to a lower-cost underlying SIP carrier. As Jerry noted earlier, we actually realized $300,000 from those efforts. During our fiscal third quarter performance, we achieved an estimated annualized savings of another $590,000. These savings stemmed from the completion of our hosted data center modernization and consolidation effort and the migration of SIP services over to our new provider's platform. Keep in mind, we've only one-third complete on that. We'll finish up the other two-third of that migration by the end of this fiscal first quarter -- by the end of our first fiscal quarter. And I want to just note having a strong financial stewardship will remain as a core part of our company DNA as we continue to transform our business and we start to grow. Now, let's talk about product delivery. The third pillar is a key pillar in the product delivery space. As both Jerry and I have discussed on previous calls, improving the delivery of new products and services essential for us achieving our financial performance goals and driving new incremental revenue streams. This begins with growing our customers and revenue with our MaxCloud UC platform. Well, MaxCloud is GA for both Altigen and Fiserv customers, we needed to enhance our UC client with some critical modern workplace capabilities before we could scale out to the market, with a true launch. These enhancements are nearing completion and will complete and clear our quality assurance process in time for the fiscal New Year. Additionally, we are targeting the introduction of a new MaxCloud, CCaaS platform enabling customers to add omni-channel capabilities to support their business needs. More details on this will be shared soon. In parallel, we will launch CoreEngage for Teams Contact Center. As Jerry mentioned, we already have signed contracts with several customers and have numerous pilots underway. CoreEngage for Teams Contact Center will support our customers throughout the entire team's journey from PBX migration services to Teams direct trunk routing, using our best-in-class SIP services to Microsoft Teams call queues, and finally to our full omnichannel contact center solution including reporting and call recording. Let's talk about Fiserv's progress real quick. Again as Jerry mentioned, MaxCloud UC migrations are starting this quarter. We've already have our user ID validation and biometrics fraud detection currently in preview, with our initial POC customers. IVR our natural speech recognition tool will be delivered in October as promised. And also in the first quarter of the fiscal New Year we will deliver IVR text to speech during the first quarter. And then finally, let's touch briefly on the Altigen Technologies consulting services. I really this team has really performed well and continues to grow. Again thanks to Sharique's leadership and that whole team coming together. High level this team works directly with customer business units to design develop and deliver business process and system solutions. We continue to see quarter-over-quarter revenue growth. And our goal as Jerry stated, will be over the next two quarters is to attract new customers and enter into new engagements. So to summarize, our transformation process is well underway. We continue to improve our performance every day. From my vantage point the headwinds, we have faced are beginning to fade. However, we still have a lot of work to do. The team is motivated. We're engaged and we're very focused. So glad to take any questions you might have after we're done here. But with that, I'm going to turn it over to Carolyn for the financial review. Carolyn? Carolyn David Great. Thank you, Joe. I will now present the key financial highlights for Q3 FY 2024. Keeping in mind, these comparisons are on a year-over-year basis unless otherwise noted. For our fiscal third quarter results, we reported total revenue of $3.3 million compared to $3.4 million for Q3 2023. Total cloud services revenue for Q3 was approximately $1.7 million down 13% from $2 million in the same period last year. Meanwhile, our services revenue increased by roughly 25% to $1.2 million from $1 million in the prior year quarter. Gross margin for the quarter was 61% compared to 63% in the same period last year, reflecting a decrease of approximately 200 basis points year-over-year. This decline was mainly due to a shift in our revenue mix towards higher professional services. On both a GAAP and a non-GAAP basis we reduced our operating expenses in Q3 to $1.9 million, an improvement of roughly 15% year-over-year. This decrease was mostly due to lower headcount-related expenses. GAAP net income for Q3 was $62,000 or $0.00 per diluted share. This compares to GAAP net loss of $183,000 or negative $0.01 per diluted share a year ago. On a non-GAAP basis net income was approximately $200,000 or $0.01 per diluted share compared to non-GAAP net income of $40,000 or breakeven EPS in the same quarter last year. As noted, this increase in net income was primarily due to the aforementioned reduction in our OpEx. Moving to liquidity. We ended Q3 with approximately $2 million in cash and cash equivalents up 23% compared to the preceding quarter. Our working capital increased to $2 million from $1.8 million in the previous quarter representing an 11% increase. In closing we are pleased with our Q3 results which are in line with our expectations and we look forward to updating you on our progress in our next call. Now let me turn the call over back to Jerry for closing remarks. Jerry? Joe Hamblin And Jerry's line is still connected. Jerry, please check your mute button? Jerry Fleming Okay. Thank you. Thanks Carolyn. Sorry for the delay. To summarize we are making progress with sustainable business initiatives. We first showed up and are now growing our consulting services business. We've also made great strides toward achieving our operational excellence objectives with demonstrated tangible financial results. Our next major milestone which we've been working on for some time is to improve our ability to monetize our software. Achieving this objective has actually proven to be a difficult task primarily due to the fact that Altigen had to go through our own digital transformation process. This process involved not only transforming our legacy on-premises hardware and software products to modern cloud-native all software solutions, but also required us to transform the entire company from business systems to infrastructure to personnel. And as you've heard from Joe Hamblin this has been his number one objective and he's made great progress in that regard. Today we are on the cusp of realizing the returns from the investments we've made in our key business initiatives and fully expect the financial results to follow soon. So with that I'll ask the operator to open the call up for questions. Certainly. [Operator Instructions] The first question is coming from Mark Gomes from Pipeline. Mark, your line is live. Mark Gomes Congratulations on reattaining profitability. Do you expect to maintain profitability? One question. The other is when do you think we can expect to start seeing the top-line resume sequential growth? Thanks. Jerry Fleming Yes. Thanks, Mark. Yes, we do expect those impact -- expect the savings to continue as we're actually doing a much better job of streamlining operational expenses. Yes, the top-line as you know I've been actually promising we're going to be growing top-line for a little while now and I think we've overcome. And I really think we've overcome these various hurdles and challenges and just one more thing objection so we can start kicking in some real business here. One of the keys obviously as Fiserv with some of the new products that they're going to be launching, but it's not -- we're not just a Fiserv company. It's also my commentary about having a team's contact center product that we can count on that people like and will pay for is also going to be very significant. So Mark I expect here pretty soon this quarter next quarter we're going to start seeing -- I can't say how big it's going to get but I do expect to start seeing tangible incremental revenue increases on a quarter-over-quarter basis very soon. Mark Gomes Okay. And then just kind of looking at you guys have made substantial investments in R&D for a company our size over the last few years. So as you go into monetization kind of what kind of scale of revenues do you think you might be able to achieve with the products that you have kind of ready or near ready to go? Are we still in some of the -- somewhat you presented in the investor presentation several months back? Jerry Fleming Right. Okay. Yes, thanks for referencing that Mark because it's a tough one without giving a forecast, but those numbers stand with us. And what we talked about was at the Planet MicroCap Conference. We expect it to be within five years between $40 million and $60 million with $50 million at our midpoint. We showed the various categories we expect to generate that revenue and it's Fiserv is a chunk of that. We didn't really count on a whole lot from our UCaaS platform because it's a very crowded market and the remainder made up was made up with our team solutions which we feel darn good about now as well as our AI solutions. So right at this point yes, I think hard to say we're on track because it's just a couple of months later but we think we're going to achieve those numbers. Thank you. [Operator Instructions] The next question is coming from Maj Soueidan from Geoinvesting. Maj, your line is live. Maj Soueidan Thanks. I just have one question. You've talked about this switch to a new SIP provider. Can you give us an idea how much you're going to save on that? And has that even kicked in yet? Is that part of the your kind of operational excellence numbers you've given in terms of how much money you're going to be saving moving forward? Yes Maj. Yes. So Maj some of those numbers are baked in. We're only about 1/3 way through that migration. And it's a two-pronged play. One is it is a cost-cutting effort for me. But in addition it's also a wholesale SIP trunk play for me. So it will help us on top line growth but it also helps me on the bottom line expenses. And again we've I can give you some ballpark numbers here, but roughly we've probably taken out -- if you look at my run rates I'm going to be somewhere in the neighborhood of $64,000 is what it was costing me in January and now I've gotten that down to $29,000 and I'm about one-third of the way through so. And there were no other questions from the lines at this time. I would now like to hand the call over to Jerry Fleming for closing remarks. Jerry Fleming Yes. Thank you and thank you everyone for participating. And I can tell you guys short term we've been focused on let's get our house in order, right? Long term yes we're absolutely focused on top-line revenue growth that has been happening. While we're working on the short-term initiatives that have made improvements in our financial results but we are 100% focused on increasing this top line revenue and driving shareholder value and look forward to reporting on our next call our progress in that area. Thank you very much. Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Elme Communities (ELME) Q2 2024 Earnings Call Transcript

Cooper Clark - Wells Fargo Anthony Paolone - JPMorgan Michael Gorman - BTIG Ann Chan - Green Street Greetings, and welcome to the Elme Communities Second Quarter 2024 Earnings Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Amy Hopkins, Vice President, Investor Relations. Amy, please go ahead. Amy Hopkins Good morning, and thank you for joining our second quarter earnings call. Today's event is being webcast with a slide presentation that is available on the Investors section of our website and will be available on our webcast replay. Statements made during this call may constitute forward-looking statements that involve known and unknown risks and uncertainties which may cause actual results to differ materially, and we undertake no duty to update them as actual events unfold. We refer to certain of these risks in our SEC filings. Reconciliations of the GAAP and non-GAAP financial measures discussed on this call are available in our most recent earnings press release and financial supplement, which was distributed yesterday and can be found on the Investors page of our website. And with that, I'll turn the call over to our President and CEO, Paul McDermott. Paul McDermott Thanks, Amy, and good morning, everyone. Presenting on the call with me today are Tiffany Butcher, our Chief Operating Officer; and Steve Freishtat, our Chief Financial Officer. Tiffany will provide an update on our operating trends and initiatives, and Steve will cover our balance sheet and outlook. Grant Montgomery, our Head of Research, is here to answer market-level questions during Q&A. I'll start today's call with a brief market-level overview. The Washington Metro is a top-performing apartment market this year, and the region remains one of the best-positioned apartment markets nationally. Across our submarkets, deliveries have peaked and net inventory ratios have normalized in the low single digits. Our Washington Metro portfolio, which comprises over 75% of our homes, is benefiting from strong, stable demand, allowing us to drive occupancy above our targeted level for the year. We believe we are positioned to capture growth in the second half of the year that will set us up well heading into 2025. Turning to Atlanta. Absorption rates are accelerating and the supply overhang continues to decline. In Elme submarkets, absorption is now nearly 60% higher than the pre-pandemic period. Our operating fundamentals are showing stability with modest improvement supported by strong retention and renewal rates. Tiffany will provide more details in her remarks. While supply remains elevated, it is not expected to increase materially above the current levels in any of our submarkets, and we expect the overall level of demand relative to supply to continue to improve through 2025. Moreover, units under construction and new starts have declined significantly, pointing to better conditions in 2025 and highly favorable supply/demand dynamics forecasted for 2026 and 2027. Our residents' financial health also remains solid. The rent-to-income ratio for new leases was 23% on average in the second quarter compared to 24% a year ago, reflecting a positive credit trend relative to rental rate growth. Employment trends remain stronger for middle-income wage earners relative to high-wage earners, and the composition of job growth is shifting in favor of non-cyclical industries, which are two favorable trends for Elme. As of the second quarter, government was our largest industry exposure in the Washington Metro and healthcare was our largest industry exposure in the Atlanta Metro. Affordability and relative value remain critical to our strategy and our rent levels are several hundred dollars below both Class A rents and the cost to own a home in our markets. Move-outs to purchase homes comprised just 8% of second quarter move-outs, well below the historical level in the mid-teens. Additionally, our retention rates remained historically high, averaging 65% year-to-date as our value-oriented resident base tends to be stickier with an average tenure of about 2.7 years. As we move forward, our focus on maintaining rent levels that are affordable for the largest and most underserved segments of the rental market, combined with our efforts to enhance the Class B living experience, should continue to attract strong and steady demand from value-conscious renters. And with that, I'll turn it to Tiffany to discuss our operating trends and growth initiatives. Tiffany Butcher Thanks, Paul. The positive momentum we began to experience in April has continued and blended lease rate growth and occupancy improved sequentially during the second quarter across both the Washington and Atlanta metros. Effective blended lease rate growth increased to 3.2% for our same-store portfolio during the second quarter, comprised of renewal lease rate growth of 5.4% and new lease rate growth of 0.2%. New lease rate growth increased to 0.4% in July, showing continued improvement. Renewal lease rate growth was 4.6% in July and we're signing renewals at an average rate of 4% for August and September lease expirations, reflecting gradual moderation in renewal rates through year-end, which is in line with our expectations. Same-store resident retention remains very strong at 65% during the quarter, highlighting the longer-term nature of our resident base and our heightened focus on customer service excellence as part of our 2024 platform initiatives. Moving on to occupancy. Same-store average occupancy increased sequentially to 94.6% and ending occupancy increased to 95.5% in the second quarter, driven by strong demand in the Washington Metro, offset in part by the impact of new supply and the timing of evictions in our Atlanta portfolio. Through July, same-store occupancy has averaged 95.3%, representing a 70 basis point increase relative to second quarter. The demand patterns that we're seeing in Northern Virginia, where the majority of our Washington Metro communities are located, are exceptional, and occupancy averaged 96.1% for our Washington Metro communities during the quarter, increasing to an average level of 96.6% in June and 96.7% in July, which is above the upper end of our targeted range, allowing us to continue to push rents during the busiest leasing months. In Atlanta, while the market is experiencing an unprecedented level of new supply, market demand is improving and Atlanta occupancy averaged 89.5% during the quarter, increasing to 90.6% in July. Additionally, we have 24 homes, or just over 1% of our Atlanta portfolio, that are temporarily out of service due to a fire which detracted from our occupancy improvement. Although the timing of evictions could continue to pressure occupancy, we're seeing stable demand patterns and we're focused on driving higher occupancy over the second half of the year. Turning to bad debt. Reducing bad debt is a top priority and the proactive steps that we have taken are delivering better credit performance overall. We expect to benefit from lower year-over-year bad debt in the second half of this year and even more so into 2025 as higher credit standards and credit protections at the front end of the leasing process and normalizing eviction delays at the back end drive credit performance to a more normalized level. Turning to renovations. During the second quarter, we generated an average ROI of approximately 17% on 150 home renovations. We now expect to complete approximately 475 full renovations and over 100 home upgrades this year. Looking forward, renovations continue to be a key growth driver for Elme. Our identified renovation pipeline of nearly 3,300 homes represents over 35% of our portfolio, which is more than enough runway to deliver renovation-led value creation for the foreseeable future. Our operational initiatives remain on track as we elevate our platform to new levels of success. We're pleased to report that in June, we successfully launched our shared services department known as Elme Resident Services, focused on streamlining community operations and enhancing process efficiencies across resident account management, collections, and renewals. We're excited to welcome our shared services team into their new roles within Elme. This launch was supported by the successful rollout of several new technologies, including an AI platform that saves team members time by managing electronic communication with current residents, automating payment and collection efforts, and entering service requests. We're already beginning to see an increase in resident engagement with this new tool. We're also implementing new software to manage balances after move-out, reducing the amount of time our team spends attempting to collect and track payments from former residents. Lastly, we've partnered with a provider of flexible payment options to give our residents the ability to choose when they pay during the month while we receive cash from the provider when rent is due. With all of these tools as part of our program and a strong team in place, we are confident in our ability to achieve our multi-year goals related to this effort. This successful launch of Elme Resident Services is a key milestone to achieving the $1.7 million to $1.9 million of additional NOI and FFO from operational initiatives in 2024, which aligns with our 2023 to 2025 upside target of $4.25 million to $4.75 million. Beyond the initiatives that comprise our 2023 to 2025 upside target, we're also rolling out managed Wi-Fi across our portfolio in phases, starting with approximately 2,000 homes in Phase I, which are scheduled for installation during the fourth quarter. And with that, I'll turn it over to Steve to cover our 2024 outlook and balance sheet. Steven Freishtat Thanks, Tiffany. Starting with guidance. We are tightening our 2024 core FFO per share guidance range to $0.91 to $0.95, maintaining our midpoint of $0.93. We are tightening the range and raising the midpoint of our same-store multifamily NOI growth assumption, which is now expected to range from 0.75% to 1.75% in 2024, due to stronger-than-expected performance in our Washington Metro portfolio. We now expect interest expense for the year to range from $37.5 million to $38.25 million. While we expect fewer rate cuts in 2024 than our outlook going into the year, our continued focus on managing our cash and debt balance as well as successful execution of our new revolving credit facility has helped us stay within our initial range, though, at a slightly higher midpoint. Turning to our balance sheet. Annualized net debt to adjusted EBITDA was 5.6 times at quarter end, in line with our targeted range, and we continue to expect our leverage ratio to finish this year in the mid-5 times range. As previously discussed, subsequent to quarter end, we entered into a new four-year $500 million revolving credit facility to replace the prior facility, which had been due to mature in August 2025. The new facility has two six-month extension options and an accordion feature that allows us to increase the aggregate facility to $1 billion. Our liquidity position remains strong with over $320 million available on our new revolving credit facility as of August 1. With no secured debt and the only maturity prior to 2028 being the $125 million term loan, our balance sheet remains in excellent shape. To conclude, our second quarter performance reflects continued strength in the Washington Metro and improving trends in our Atlanta portfolio. Our renovations continue to yield very strong returns with plenty of runway ahead. Additionally, our operational initiatives are on track and the successful launch of our shared services department represents our latest platform enhancement. Looking forward, we are still in the early innings with our operational initiatives and we are setting the stage for further ROI-driven initiatives in 2025. Thank you. At this time, we will be conducting our question-and-answer session. [Operator Instructions] Thank you. Our first question is coming from Cooper Clark with Wells Fargo. Your line is live. Cooper Clark Great. Thank you for taking the question. Wondering if you could walk through bad debt in the quarter for the whole portfolio in Atlanta specifically. I'm wondering if you still think Atlanta bad debt could get to that 3% to 4% range by the end of the fourth quarter and that full-year '24 average of 5% to 6%. Tiffany Butcher Cooper, this is Tiffany Butcher. Sure. Happy to answer that question. I would start off by saying in the second quarter, we saw improvement in our bad debt across both of our markets, both here in the Washington, D.C. area as well as in our Atlanta portfolio. We are now -- in the DMV or in the Washington Metro portfolio, we are now below 1% of bad debt. So we are definitely in the normalized range for bad debt here in the Washington Metro area. In our Atlanta portfolio, we've continued to see improvement over where we were for the full-year of 2023, an improvement over where we were in the first quarter of '24. So in terms of our bad debt as a percentage of revenue, we are currently in the second quarter about 6.6% in our Atlanta portfolio, which is obviously -- continues to be above historical norms. But we have seen stability in that number. What I would say is the most recent trend that is impacting our bad debt is that we are now starting to see positive momentum in some of our Atlanta communities and counties for implementing House Bill 1203, which is the bill in Georgia that allows landlords to hire off-duty officers to execute evictions. And that's going to be a significant improvement in Atlanta over the back half of the year because it has continued to be a challenge to gain possessions of homes, given the level of backlog there is in the sheriff's offices in many of the Atlanta counties. So we look forward to being able to take possession of those units and then be able to turn them and ultimately release them to rent-paying tenants. And that's going to be very helpful in terms of getting us to that reduced level of bad debt by year-end. So I think with the implementation of House Bill 1203 along with additional efforts that we're making internally in terms of streamlining the collections process and improving our credit screening with the implementation of our new ERS team, those are the major factors that are going to help us get to that lower level of bad debt by year-end. Cooper Clark Okay. Thank you. That's super helpful. And I guess just switching over to the updated NOI guidance. It seems that it's mostly expense-driven. Wondering how same-store revenue shaping up relative to expectations assumed in guidance. Clearly, some D.C. strength year-to-date on the top-line. Paul McDermott Yeah, Cooper. So, I mean, if we look at it, so -- right, the NOI, we tightened -- slightly raised at the midpoint -- to the midpoint at about 1.25%. Looking at the expense growth, we do see expense growth in the 5% to 6% range for this year. That is lower than what we initially forecasted coming into the year. And that's helped out by a couple of things. One is taxes, where we've just seen assessments not come in as high as we initially thought. And the second one is lower payroll. We're really starting to see the effects of the operational initiatives and the operational upside that we have out there really start to take effect. And so we're starting to see that savings take place. On the revenue side, we're seeing and we're expecting revenue to be in the 2.5% to 3% range for '24. And that's really driven, I think, by the bad debt in Atlanta that Tiffany was just talking about that we're seeing that trend in the right direction. We're just not seeing it move as quickly as we initially had thought when we came into the year. Thank you. [Operator Instructions] Our next question is coming from Anthony Paolone with JPMorgan. Your line is live. Anthony Paolone Thanks. Good morning. In Atlanta, where do you think occupancy finishes off the year in terms of how you're seeing things now? Tiffany Butcher Hi, Tony. It's Tiffany again. In Atlanta, we're seeing occupancy trends into the low 90%. And our guidance assumes that occupancy remains at that, kind of low 90s% range through year-end, as we continue to see kind of gradual improvement in the supply/demand dynamics in the Atlanta market. We've continued to see solid retention, which is also helping that occupancy trend, but it's just going to be a gradual improvement. And we are continuing to adjust our pricing revenue strategy to maintain occupancy in that range through year-end. Anthony Paolone Okay. Thanks. And then just shifting to maybe investments in capital markets. Can you talk about -- maybe just update us on how much you're spending in the returns you're getting on full renovations and also just maybe some discussion about, where you're seeing sort of Class B cap rates in your markets? Tiffany Butcher I can start off by talking about the renovations and I can turn it over to Paul to talk about the capital markets. So to say in terms of renovation, we have increased the number of renovations that we're doing for the year. We're now projecting over 475 full home renovations and over 100 partial renovations or home upgrades through the remainder of the year. We're continuing to see, upper teens returns. So, we averaged a 17% ROI on our renovations for the quarter and year-to-date. So that continues to remain a very good investment source for us, as well as we're investing in our managed Wi-Fi. I mentioned in my prepared remarks that we are launching a Phase I of over, 2,000 units of managed Wi-Fi that will be installed in the fourth quarter, which also have very strong returns. And Paul, I'll turn it over to you to talk about capital markets. Paul McDermott Thanks, Tiffany. Tony, just in terms of, what we're seeing out there looking at the transactions market, I mean, first off, from a macro standpoint year-over-year, it's been pretty flat. And when we look at potential sellers right now that we've talked to approach, they're facing rate cut prospects plus an election. And a lot of them are being advised, in many cases, just a hold and they're probably questioning why go to the market. The real sellers that we are seeing, remain folks with debt maturities, redemptions, or operators with some type of profit left in the promote. But that has not really helped, really accelerate and expand the volume. We talked to a lot of investment sales folks over the last quarter. They're expecting -- they say their pipelines are up for the second half of the year, but it's all -- I think it's fraught with a lot of contingencies. From a buying standpoint, institutional capital, PE shops, family offices are all in the fray. I think the only people we're really seeing on the sidelines are the Odysseys. I think the thesis right now for a lot of the new LP capital coming in is that they're buying below replacement cost. And they're underwriting flat to negative residual in the first two years with a recovery in, years three through five. And that's very consistent with what, from an institutional perspective, we're seeing, even our own observations on our portfolio, the improvement runway of years '26, '27 to '28. But particularly in the value-add space, we're seeing that work, that renovation work, on new acquisitions being pushed to years two and three, and that's really contingent on the supply and demand dynamics in the respective markets. I'd say what we've seen in terms of cap rates, the core cap rate, folks that are really, really pushing -- we're seeing those cap rates in the 4.5% to 5% range. The core plus cap rates in the 5% to 5.5% range. And obviously, that can vary by submarket to submarket. And then the value-add space, we're seeing those cap rates probably trade between 5.5% and 6%, Tony. And just from a lending standpoint, on who's out there, the really top quality that 40% to 50% LTV, we're still seeing the insurance companies be aggressive there. But Fannie and Freddie, we know, I believe, are behind their goals as of 2Q, and they're probably going to get a little bit more aggressive on some of the rate buy-downs. We're seeing spreads at probably 150 over, and you can buy that down to the 120s, and you can end up, on, let's say, a five-year deal and a 5.25% with a full-term IO. So if we do see product coming to the market, we do expect the agencies to be a bit more aggressive in the second half, but it's really just about getting deals back to the table, given the potential for, obviously, the September rate cuts and an election coming in November. [Operator Instructions] Thank you. We have a question from Michael Gorman with BTIG. Your line is live. Michael Gorman Yeah. Thanks. Good morning. Maybe just a bit more of a strategic question as we tie together what you're seeing in the markets and fundamentally. And then just, Paul, some of your commentary there about the investment market and transaction markets. Are you seeing anything in some of your potential target markets as you track them, not only from a deal perspective, but from an operating perspective that maybe has caused you to change how you're thinking about potential expansion markets just due to how they've behaved in the current cycle or how they're managing to go through the current supply cycle that we're seeing now? Paul McDermott Michael, I would say that it's really just -- from an underwriting standpoint, we obviously are applying just based on our portfolio experience. We're applying a lot more scrutiny on the going in rental rates. How much diminution we would probably see in that year one? I think most of the markets we're looking at that second year is probably flat. And then we are looking at positive spreads in that, that third year. And what that's done strategically, as I said earlier, Michael, is really probably might have pushed back the timing of some of the renovations in our portfolio. I think as you know, we have over 3,000 units to renovate. We're obviously monitoring those. And then any new acquisitions that would all be part of our going in strategy in terms of when we feel like we can get in there operationally and create future value. Thank you. Our next question is coming from Ann Chan with Green Street. Your line is live. Ann Chan Hi, good morning. Thanks for your time. Going to your guidance, could you share what kind of changes to supply and demand assumptions are baked into the new guidance, if any? Tiffany Butcher Yeah. So I would say in terms of what we're seeing that is driving our guidance is stronger-than-expected performance in the Washington, D.C. market, and Grant can talk a little bit about the supply/demand dynamics that are impacting that. But just kind of from an operating perspective, we have continued to see, strength in our new leasing both in the second quarter as new lease rate growth slipped from negative in the first quarter to positive in the second quarter, and we have continued to see increasing strength in that in the month of July as we're in our peak leasing season. We've also continued to see occupancy increase significantly as there is a strong and robust demand for our product here in the Washington, D.C. area, and Grant can talk a little bit more about the demand drivers for that. But we have continued to see from first quarter to second quarter to the month of July, the occupancy continued to improve in our portfolio. And as we mentioned in our prepared remarks, the DMV had same-store occupancy at 96.1% in the second quarter and 96.7%. So incredibly strong occupancy, driven by the high demand and lower supply environment here in Washington. Grant, do you want to comment a little bit on that? Grant Montgomery Sure. Ann, this is Grant. When we look at -- from a supply standpoint, our submarkets are performing really well and actually are set to moving in a better direction even over the next quarters than where they are currently. Over the first quarter -- second quarter, the net inventory ratio of deliveries is about 2.5%, which is well below the U.S. level and the Sunbelt. And over the next four quarters, that's expected to decline even further to just 2.3% on average. But we are in markets where that is significantly even lower than that. So for example, in Northern Virginia, where over 60% of our homes are located, net inventory ratio is down to about 1.7% over the next four quarters. So that's really driving the tightness on the supply side. From the demand side, we continue to see solid job growth across both markets, particularly again in our Northern Virginia market, where we have 1.6% employment growth, and even further detail there, we're really seeing strong demand in industries that particularly drive demand for our communities. We're seeing job growth, in particular strength in education and health, construction, and local government, all of which are up over anywhere from 2% to 6% year-over-year growth. So we really see it on both sides, a tight supply in our core market tightening across our entire portfolio and continued strong job growth, in particular growth in industries that create demand for the types of homes that we provide our residents. Ann Chan Great. Thank you. And just wondering if you could also give a breakdown of the 1.3% blended rate expected for the rest of this year -- for this year? Tiffany Butcher Sure. We can absolutely walk through that. So in terms of where we're expecting for the full-year to be in terms of blended lease rate growth, we're expecting kind of new rate to be in the negative 1% to positive 1% range for the full-year. We're expecting renewal rates to be in the 3.5% to 4.5% range for the full-year. And we're expecting, therefore, the blends to be in the 1.5% to 2.5% for the full-year. Thank you. Our next question is coming from Cooper Clark with Wells Fargo. Your line is live. Cooper Clark Hey, thanks for taking the follow-up. I just wanted to circle back on, Paul, some of your comments around pricing. Given your implied cap rate today and some of the pricing commentary, wondering if you thought about picking up capital recycling, specifically out of your Maryland portfolio or maybe some of your district assets. Wondering if that's something you're looking at as we kind of move through the rest of the year here? Paul McDermott Cooper, we always are looking at our portfolio, and we're looking at recycling. I think, as you know, we have the Watergate, which is definitely a recycling candidate. And we're watching the D.C. market slowly but steadily improve. And I think we've -- we'll have some positive things to talk about the Watergate going forward. We are -- have at our disposal, I believe -- outside of a, a good balance sheet with optionality and liquidity, we do have the assets that you mentioned to look at as recycling candidates. And I wouldn't say that that is, at the top of our list right now. I think we've got a lot of very proactive initiatives to drive value for the shareholders. But we will -- as we progress throughout the balance of the year, we will look at those assets. That's really going to depend on market conditions right now. And we don't have plans to actually do any recycling from now through December. But in terms of just preserving optionality, we would probably move forward with the guidance that we've provided to you, Cooper. Cooper Clark Okay. Great. And then I guess just one for Steve. You've talked about potentially doing something on the unsecured side if pricing gets closer to 6%. Wondering where you're seeing pricing today in the unsecured market and thoughts around raising any incremental debt for the right acquisition opportunity as opposed to using the capacity on your LLC? Steven Freishtat Yeah. So, Cooper, thanks for the question. Yeah, very timely, given the movements in the 10-year. So I'd say, given a lot of the movements in the last week or so, if we were to do new unsecured debt, it would probably be in the high-5s% and then secured debt maybe a little bit inside of that. So we're definitely -- rates are much more attractive than they were when we were coming into the year. We certainly have -- we just redid our credit facility, of course, so that pushed out our maturity until '28, but we do have a balance there that we could certainly look to term out, at the right time. And as far as acquisitions go, we feel like we've created a balance sheet that creates a lot of optionality. So there are a lot of different ways we could go with that. I would say that from a leverage perspective, again we're right where we want to be right in line with our, our leverage governors. And so if we do find an opportunity out there, I'd say it's probably on what Paul just spoke about a moment ago. Capital recycling and recycling assets is probably our top choice right now of being able to finance an opportunity if we were to find something. Thank you. If there are no further questions, I'd like to turn the floor back over to management for any closing comments. Paul McDermott Thank you. Again, I'd like to thank everyone for your time and interest today. And I look forward to keeping you updated on our progress and speaking with many of you again in the very near future. Thank you. Thank you. This does conclude today's call. You may disconnect your lines at this time, and have a wonderful day, and we thank you for your participation.

Earnings call: Real Matters sees revenue growth and market share gains By Investing.com

Real Matters Inc. (TSX: REAL), a leading network management services provider for the mortgage and insurance industries, reported a solid performance in its third quarter of 2024 earnings. The company announced a 17% sequential increase in consolidated revenues to $49.5 million and an 8% rise year-over-year. The growth was primarily driven by strong operating leverage in its U.S. appraisal and Canadian segments, leading to a positive consolidated adjusted EBITDA of $1.7 million for the quarter. Despite a year-over-year decline in U.S. mortgage origination volumes and revenues in the U.S. title segment, Real Matters maintained its top position on lender scorecards and captured market share gains with key U.S. appraisal clients. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights In conclusion, Real Matters is navigating the challenges of the mortgage market with strategic initiatives and technological advancements. The company's focus on its target operating model and market share growth, coupled with its investments in cloud technology and AI, positions it to capitalize on future market rebounds. Full transcript - None (RLLMF) Q3 2024: Operator: Good morning, ladies and gentlemen, and welcome to Real Matters Q3 2024 earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Thursday, August 1, 2024. I would now like to turn the conference over to Lyne Beauregard, Vice President of Investor Relations and Corporate Communications. Please go ahead. Lyne Beauregard: Thank you, operator, and good morning, everyone. Welcome to Real Matters Financial Results Conference Call for the third quarter ended June 30, 2024. With me today are Real Matters Chief Executive Officer Brian Lang and Chief Financial Officer Rodrigo Pinto. This morning, before market opened, we issued a news release announcing our results for the three and nine months ended June 30, 2024. The release, accompanying slide presentation, as well as the financial statements and MD&A are posted in the investor section of our website at RealMatters.com. During the call, we may make certain forward-looking statements which reflect the current expectations of management with respect to our business and the industry in which we operate. However, there are a number of risks and uncertainties and other factors that could cause our results to differ materially from our expectations. Please see the slide entitled, cautionary note regarding forward-looking information in the accompanying slide presentation for more details. You can also find additional information about these risks in the risk factors section of the company's annual information form for the year ended September 30, 2023, which is available on SEDAR+ and in the investor section of our website. As a reminder, we refer to non-GAAP measures in our slide presentation, including net revenue, net revenue margins, adjusted EBITDA, and adjusted EBITDA margins. Non-GAAP measures are described in our MD&A for the three and nine months ended June 30, 2024, where you will also find reconciliations to the nearest IFRS measures. With that, I'll turn the call over to Brian. Brian? Brian Lang: Thank you, Lynn. Good morning, everyone, and thank you for joining us on the call today. I'll kick things off by going over the business highlights of the quarter. Rodrigo will then follow up with a brief discussion of the financial highlights, and we'll then update you on our target operating model before we take questions. We delivered solid performance in the third quarter. Consolidated revenues increased 17% sequentially to $49.5 million due to growth in all three segments, and third quarter consolidated revenues were up 8% year-over-year. We delivered positive consolidated adjusted EBITDA of $1.7 million in Q3, mainly due to continued strong operating leverage in our U.S. appraisal and Canadian segments. The spread between the 30-year fixed rate mortgage and the 10-year treasury yield widened by approximately 10 basis points sequentially, and the U.S. 30-year fixed rate mortgage was range-bound at around 7%, which continued to weigh on refinance volumes. This combined with other lingering macro market factors muted some of the seasonal purchase origination volumes we tend to see at this time of the year. We estimate that third quarter U.S. mortgage market origination volumes increased 25% quarter-over-quarter, however, they were down 3% year-over-year, bottom bouncing in this historically low mortgage origination market. Notwithstanding external market forces, we continued to focus on our core operations in the quarter, driving performance, efficiency, and delivering strong operating leverage. Third quarter U.S. appraisal mortgage origination revenues were up 15% quarter-over-quarter due to the seasonality of purchase transactions. We posted year-over-year market share increases with four of our top U.S. appraisal clients and we maintained our top position on lender scorecards. U.S. appraisal net revenue margins held strong at 27.6%, down modestly from the record we posted in the second quarter, and net revenue was up 12% quarter-over-quarter, mainly due to a seasonal increase in our purchase origination revenues. With the increase in volumes on our platform and relatively flat operating expenses, we continued to see strong operating leverage in the business and increased our U.S. appraisal adjusted EBITDA 25% quarter-over-quarter to $5.5 million. Third quarter U.S. title segment revenues were up 5% quarter-over-quarter as a slight decline in refinance origination revenues was offset by an increase in REO and home equity revenues. With the change in our revenue mix, net revenue margins were down 40 basis points sequentially and we posted an adjusted EBITDA loss of $1.9 million compared with a loss of $1.7 million in the second quarter, principally due to a one-off expense recovery that benefited us in the second quarter. We launched in two channels with one new client and U.S. title in the third quarter. We continue to progress our discussions with lenders and advance the pipeline with a view of launching new title clients onto our platform. The RFP cycle is active and moving forward. As most lenders look toward the increasing probability of lower rates and higher refinance volumes in 2025, we are well-positioned to help them address that market opportunity. Today, 14% of outstanding mortgages have an interest rate above 6%, 24% of outstanding mortgages have an interest rate above 5% and the inventory of mortgages being written at higher rates continues to climb, growing the pool of potential future refinance candidates. In Canada, revenues were up 30% quarter-over-quarter in line with stronger spring market activity. We hit record, near record, net revenue margins of 19% in Canada in the third quarter and net revenue was up 31% sequentially. That combined with a stable cost base resulted in strong operating leverage and we increased adjusted EBITDA by 46% quarter-over-quarter to $1.3 million. With that, I'll hand it over to Rodrigo. Rodrigo? Rodrigo Pinto Thank you, Brian, and good morning, everyone. Our third quarter results benefited from a seasonal uptick in purchase volumes. However, U.S. mortgage market conditions did not change dramatically in the third quarter and volumes remain well below pre-pandemic norms. As Brian discussed, we continue to firmly believe that the market will recover and so we remain focused on the things we can control, ensuring that we do what's necessary to grow our client base and our market share, managing our operating efficiency to drive margin expansion while maintaining a strong balance sheet. Turning to our third quarter financial performance, I'll start with our U.S. appraisal segment where we recorded revenues of $37.5 million, up 12% from the same period last year due to an increase in our market share with our clients. We outperformed the market in the third quarter. Our purchase origination revenues were up 9% year-over-year compared with an estimated addressable market decrease of 4%. And our refinance origination revenues were up to 23% compared with an estimated addressable market decrease of 11%. Home equity revenues were up 10% year-over-year and accounted for 23% of the segment's revenue because of solid market share growth. U.S. appraisal net revenue was $10.3 million for the third quarter, up from $9.2 million in Q3 23. We continue to see solid net revenue margins in the third quarter with an increase of 10 basis points year-over-year to 27.6%, which is at the upper end of our target operating model range. Third quarter U.S. appraisal operating expenses increased 10% year-over-year to $4.8 million, we posted U.S. appraisal adjusted EBITDA of $5.5 million, up 15% from the third quarter of fiscal 2023. And adjusted EBITDA margins increased to 53.2% from the 52% we posted in the third quarter last year as a result of increased net revenue partially offset by slight increase in operating expenses. Turning to our U.S. title segment, third quarter revenues declined $500,000 year-over-year to $2.1 million. On a year-over-year basis, refinance origination revenues were down by 200,000 or 23% compared to a market decline of 5%. U.S. title net revenue was $0.9 million, down 21% from the third quarter last year, and net revenue margins decreased to 43.6% from 45.2% due to a change in revenue mix. U.S. title operating expenses were relatively flat year-over-year, and we recorded an adjusted EBITDA loss of $1.9 million for the U.S. title segment compared with a loss of $1.6 million in the third quarter of fiscal 2023, principally due to lower net revenue margins. In Canada, third quarter revenues were flat year-over-year at $9.9 million as lower market volumes in appraisal and lower insurance inspection revenues were offset by a year-over-year market share gains with two of our largest appraisal clients. Net revenue was up 7% to $1.9 million, and as Brian mentioned earlier, we posted near record net revenue margins of 19% in the third quarter as we continue to leverage our platform. Canadian adjusted EBITDA was $1.3 million on par with the third quarter of 2023. In total, third quarter consolidated net revenue increased 8% year-over-year to $13.1 million, mainly from improvements in U.S. appraisal. Consolidated operating expenses were up 11% year-over-year to $11.9 million in the third quarter. We recorded consolidated adjusted EBITDA of $1.7 million in line with our results in the third quarter of 2023. Our cash position decreased in the third quarter due to the timing of collections. We received a client payment of $5 million two days after quarter end, which will be a source of cash in Q4 this year. Our balance sheet remains strong with no debt and cash of $41.4 million at June 30th, 2024. With that, I'll turn it back over to Brian. Brian? Brian Lang: Thank you, Rodrigo. Our business delivered solid performance in the third quarter. Revenues were up quarter-over-quarter in all three segments. We benefited from mild seasonal market tailwinds. Market share gains helped bolster our results, and we outperformed the market on a year-over-year basis. We continued to leverage our network to improve year-over-year net revenue margins in U.S. appraisal in Canada. And these more mature businesses delivered strong operating leverage, which allowed us to increase our adjusted EBITDA in these segments. Our strategy has been to position our business to thrive in the peaks and to withstand valleys of the cyclical mortgage market. We've been successful in growing the business through a number of these cycles since the company was founded 20 years ago. What remains outside our control is the inherent uncertainty in calling interest rates and corresponding mortgage market volumes during any given period. As we outlined in our news release, we are establishing a simplified target operating model that is not time-bound, with the same net revenue and adjusted EBITDA margin target ranges that were outlined in our fiscal 2025 targets, contingent on our mortgage origination volumes, irrespective of market size or market share. Under the target operating model, our U.S. appraisal segment has the potential to deliver $50 to $65 million in adjusted EBITDA, and our U.S. title business could generate $30 to $45 million of adjusted EBITDA. To be clear, our target operating model is not a terminal value of what we can achieve, but simply a reflection of the profitability of our business at higher volumes with scale. There is no prescribed limit to the amount of market share we can win within our clients or in the market. We remain confident that the U.S. mortgage origination market represents a significant growth opportunity for our business and our operations are well-positioned for a market recovery. We look forward to leveraging our model to continue to demonstrate the thru-cycle earnings potential of our business in line with our focus on scale and market share growth. We will continue to focus on our model, delivering industry-leading performance and aggressively pursuing market share and new clients, particularly in our title business. We will also continue to make decisions that support the long-term success of our company and creating value for all of our shareholders. With that, operator, we'd like to open it up for questions now. Operator: Thank you. And ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions]. And your first question comes from the line of Gavin Fairweather with Cormark Securities. Please go ahead. Gavin Fairweather: Hey, good morning. Maybe just starting on the appraisal business, the share gains and market performance have continued to impress here. If you look at the share that you've won lately with some of your bigger customers, curious if you got the full benefit of that in Q3 or is some of that going to flow into Q4? Maybe we can just discuss any visibility you have on additional share awards in Q4 and beyond? Brian Lang: Yes, great question, Gavin. Thanks for that. So we did have some strong market share wins. As I mentioned, four of our top customers we gained market share with. And so Gavin, just depends on when we're granted the market share within the quarter as to how much of it's represented in the quarter. But some of it, of course, was in quarter wins. So you should see some of that happened in this quarter, but we will see that, of course, roll into the upcoming quarters. Gavin Fairweather: Okay, great to hear. And then just secondly on the title units in your target model, I guess if we assume a more normalized kind of market backdrop. I'm curious how many tier ones you think you'll need to kind of get live and reaching decent share to achieve that kind of level of volume? Brian Lang: Thanks again, Gavin. So the way that we've taken a look at the model, which we did, as you remember, back in 2020, looking out to 2025 and the target that we had, we really had a handful of those top tier ones that we currently have on our appraisal business. So that's the way we looked at it. And they come in, of course, at different times throughout the model. But that's really when we land at sort of the point for us anyways, back in 2020 of 2025, we had a majority of them on the platform, but not all of them. Gavin Fairweather: Okay, that's helpful. And then maybe just last, I think it's been a couple quarters since we checked in on kind of purchase title, I know that you're doing some piloting work and there is some volume that's kind of running through the platform. And I know, one of the challenges has been that a lot of the title orders within the banks are kind of decentralized and managed at the bank level. Is there any kind of update that you could provide on that initiative? Are you seeing any changes to how the banks are managing things internally? Brian Lang: Sure. Well, that's a good question. Fairly technical, Gavin, but it's a really good question in that there is a real focus right now with lenders on the U.S., a lot of it driven sort of from the top down to look at the more underserved communities within the U.S. And so to your point, they are trying to centralize a good portion of that purchase market, especially focused on the underserved because they feel they can drive the costs down to a degree for that underserved community. So, as you mentioned, there is a pilot that's ongoing right now in the U.S. around centralizing purchase title. It's sort of been our strategy was to work with lenders and sort of get ahead of it within the mortgage process so that we could over the long-term start centralizing more of that purchase market. Operator: And your next question comes from the line of Martin Toner with ATV Capital Markets. Please go ahead. Martin Toner: Thanks for taking my question. Can you talk, tell us a little bit about the lender you want in title? Brian Lang: Sure. I mean, as you know, Gavin, we are continually moving the sales pipeline along. And so, we're very focused on the top tier, the Tier 1s. And so we've talked about RFPs this year when it comes to breaking in and moving some of that Tier 1 pipeline along. But at the same time, the sales team continues to stay focused on Tier 2s to 4s as it makes sense. And so within this market, we brought in a player that's in that Tier 2 to 4 range. And with someone that we think over the long term, there's definitely some significant upside. But in the current market, we're going to get a small but reasonable amount of new orders. Martin Toner: Thank you. Can you give us any more color on the possible timing of Tier 1s? I mean, are there active RFPs out there? If not, when might they happen? Brian Lang: Yes. So the update on that is that there are a couple of RFPs in the market with Tier 1s. And they're both in progress. So that, frankly, from our standpoint, is a real positive. And we think that there's a chance that that will help, again, unlock more of those over the next couple of quarters. But as far as timing goes, Martin, we'll have to see. They are RFPs. But as I say, they're active and they are progressing well. Martin Toner: Okay, that's super. Can you talk a little bit to, and you've talked about this before, I just wanted you to kind of remind everyone about how much capacity you think you currently have given the rationalization of the cost base over the last couple of years? Rodrigo Pinto: Thanks, Martin. Yes. So again, same story. We appraise, though we see 30% to 40% capacity in the system today. And title, we expect to see three to four times the capacity of the volumes we are seeing today. Martin Toner: Okay, super. And I noticed that in the Target (NYSE:TGT) Operating Model, you didn't include anything for corporate costs in EBITDA numbers. I'm assuming those numbers are before corporate cost? Brian Lang: They are. So the idea was, Martin, with the operating model, was to focus on the two main drivers of the long-term EBITDA opportunity within the organization. So U.S. appraisal and U.S. title. And those EBITDAs that flow through the margins in the business, those are sort of standalone for both of those segments. So because Canada is such a steady, robust business, and frankly, there's very little deviation, it just sort of grows incrementally every year. We've kept that out. And then as you mentioned, corporate costs right now, that would be an incremental if you were going to get down to our consolidated adjusted EBITDA. Operator: And your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Please go ahead. Thanos Moschopoulos: Hi, good morning. Brian, how do you see the waiver dynamic evolving next time the cycle gets going? So if we were to look at what happened last cycle, would that perhaps be representative or might not that be a good indicator given unique circumstances, such as COVID happening at the time and so forth? Brian Lang: Yes, good question, Thanos. And again, a little bit of a technical question, i.e., last time that we saw the waiver rates go up, Thanos, I think it was a reaction to the overwhelming amount of volume that came in so quickly and so significantly. So as we talked about way back when, the lenders were in a bit of a bind just because there's no way they could upgrade their operational business to deal with that type of demand in the market. So frankly, the supply just wasn't there with those big lenders. So the GSE step in. They take some of that pressure off of the lenders. And hence, we saw the rates spike up fairly quickly. And then over time, as the volume started to run off, not surprisingly, the waiver rates slowly reduced over time. So I think it totally depends on what happens in the market over the next quarters/years, as far as refinance volume building up over that time. If it's a slow build, our view would be that it might be a very slow waiver increment, if any. But if there is a significant spike in the market, then no doubt we'll see something at least along the lines of the GSE stepping in to help out. Thanos Moschopoulos: Okay, great. And then in terms of the HELOC-driven revenue, how do we think about that as rates come down? It's also a function of, I guess, what happens with housing prices, is it not? Or what would be your expectation for HELOC volumes with rates coming down? Brian Lang: Yes. So again, HELOC is not a sensitive, Thanos, to interest rates as originations. To your point, it depends how much equity borrowers have in their houses. So house price or house price appreciation will impact volumes. So it's not that correlated to interest rates. And unfortunately, it's a market that you don't have a lot of public available information out there also to estimate. So it's very hard to give you a number and how you would behave with moving mortgage rates. Operator: And your next question comes from the line of Rob Young with Canaccord Genuity. Please go ahead. Robert Young: Hi, good morning. First one for me is maybe a simplification. I think you've already answered a little bit of this, but the spreads remain high against the 10-year for, I mean, the 30-year mortgage rates are kind of flat, you've noted. But my sense is that the Tier 1 customers in appraisal may be getting a little more aggressive. And so I was wondering if you could just dig into that dynamic a little bit. Are you seeing the Tier 1 customers getting more aggressive, engaging more in this market, or is it still flat? Just a little more there would be very helpful. Brian Lang: Sure. Good question, Rob. So if we take a look at the quarterly reporting from the big banks in the U.S., the big lenders, I think you'll see that the folks like the Wells, the Chases, the U.S. Bank, the Bank of America, the big players, you will see that they had very significantly up quarters. So it's a point in time for me. It's one quarter. It's not a trend line yet. We hope that that continues over the upcoming quarters. But it looks like, Rob, at least in Q3 of this -- our Q3 of this year, that there's definitely been some progress made by Tier 1s in reclaiming some of that market share. So as I say, we've got to see what happens over the upcoming quarters, but definitely there's some progress from our standpoint in movement towards more Tier 1 volume. Robert Young: Okay, that's great. And I guess maybe a bit of confusion might be around just why the spreads haven't come down. If they are seeing more success, is that just something that happens over a longer period? Is it something that doesn't show up in the way the spreads are calculated? Or anything there that you can help to my understanding of why the spreads haven't started to come in if they're getting more aggressive? Brian Lang: Yes, no, I think it comes down to market certainty versus uncertainty, Rob. And so, even the Fed's announcement yesterday, I think, again, should start giving people more comfort that it looks like inflation slowly coming down, things are starting to square up for a potential cut. And it definitely looks like that's the type of language that they're coming out with. So again, Rob, I think that sort of puts a little bit of a tailwind behind the Tier 1s, so they can start thinking about, okay, maybe this is the right time for us to start wading back into the market. So again, what we'll have to see is, you know, it's going to be a very busy fall season in the U.S. market, both sort of economically, financially, and politically. So I think that it'll be very interesting to watch. But right now, as I say, it was a good quarter for the Tier 1s. Robert Young: Okay, great. Thanks. Appreciate that. I know that's a hard question to answer. Maybe next question would be just to try to put a little bit of context into the volume targets you've given in the -- the change in the way you're looking at the targets. Is there a way to put that into context for investors around? Is that a good year or bad year or middle year? I know there's already some -- you already addressed this a little bit on the call, but I was trying to get a sense of how that maps to the previous market share targets. If there's a way to think of that, is it consistent with the previous market share targets? Or is it dependent on, like, how do we think about that as looking forward if the market is correcting higher or I'm just trying to get a sense of how to normalize? Brian Lang: Sure. I mean, to be quite honest, Rob, it's fairly straightforward for us. We went back to the 2020 Investor Day presentation, looked at what we laid out in 2025, both from a total addressable market and market share targets that we laid out. And we frankly just did the math on that. And as you remember, we set what we thought it was going to be 2025, a what we call normalized market, i.e. if we look at the average the last 10 years, average the last 20 years below that, but what we thought was a reasonable market. And we just applied the share that we thought we would gain across both the appraisal and title businesses. And those were the units. So they're not terminal units. Those are just units on a sort of a hypothetical, what we would think of as a more normalized market. And so, we'll see that when the market comes through and when we hit some of the market share targets. Robert Young: Okay, thanks. I'll pass the line. Operator: Thank you. [Operator Instructions] And your next question comes from the line of Richard Tse with the National Bank Financial. Please go ahead. Richard Tse: Yes, thank you. Just wondering you maybe comment a little bit about the competitive environment and specifically or particularly kind of interested in sort of companies like UWM who seem to be kind of aggressive here in the market these days? Rodrigo Pinto: Sure. So Richard, if we take a look at the market, we've talked a little bit in the past around the Tier 1s and their position in the market versus some of the non-bank lenders. And I think you know across our portfolio, we've had a real focus on making sure that we're diversified. And so for us, where we sit right now, our revenue is more or less split between the two of them. So depending on the dynamics that are going on, we've kind of tried to take a lot of that out of the mix for us in particular. Your comment on United Wholesale is right. They have been picking up some market share through this downturn. And as we've mentioned, I think in some past calls, a lot of what happens in a downturn like this is it becomes very price sensitive. And so, there's a lot of sort of under bidding from a price standpoint. And so I think United Wholesale has benefited a little bit from that. As you know, one of our biggest players in this space is Rocket, which is sort of a head-to-head competitor with United Wholesale. But that's what I think we've seen, Richard. The Tier 1s have given up a little bit of share in a market like this that's so price sensitive to some of the bigger non-bank lenders. And I think our view is over the upcoming quarter's years, I think we should see a little bit of that move back in the direction of some of the banks versus the non-banks longer term. Richard Tse: Okay. And then I think most of the consensus can probably agree that it's just really a timing thing before things begin to normalize. But as you think about this business strategically, I'm not sure at a board level, just the executive team, what are you doing in the background? Are you doing anything in the background to sort of, I guess, I don't know if future proof is the right word, but potentially open up new markets or drive other efficiencies beyond everything we're doing now is just kind of waiting? Are there other things that are kind of at work here that we should be aware of that you may be pursuing? Brian Lang: I'd say, Richard, what we've done in the past few years and that we are doing definitely today is, especially as the market has -- the volume has dropped and the market has suffered a little bit from a volume standpoint, is within the mix of products that we look at with customers, we have expanded those. So, as you've seen from our results, you've seen some good results on HELOC and REO. In a normalized market, those are things we don't actually spend much time talking about, but we are winning customers in some of those spaces. And on the title side of the business, we're winning customers in those spaces, frankly, because we want to get them into the origination channel. So I think the team has been very flexible in trying to find opportunities where we can, all with the long-term concept of, of course, getting them into the origination channels. But I think the team's done a good job, both on appraisal and title, to make sure that we're covering the right products that our customers want with that long-term focus on origination. So I would say that's sort of the answer around the core business, Richard. What we laid out in 2020, again, was some work around data. That's something that, of course, we keep our eye on. It's the third leg of the stool. There is some work that goes on in the background around that. And that's something that we look at out in the future. But that's really the core focus, I think, for the business right now, Richard, is to make sure that we are deep in our customers, we're continuing to drive the performance that we are, stay at the top of their scorecard. And as you mentioned, when the market starts rebounding back, we plan to take advantage of all of them. Richard Tse: Okay. And then, finally with respect to the topic everyone's sort of talking about these days, Gen AI and these Lames. What do you see, or is there an opportunity for Real Matters, whether it be from kind of incorporating into your product, or using it to sort of gain further operating leverage in the business? Brian Lang: Yes, great, great question, Richard. So, I would start with the first thing that we have done, which we have now completed for both the U.S. and appraisal and U.S. title businesses, is moving those businesses into the cloud, which may sound like maybe not necessarily a very difficult first step, but for us, with all the Tier 1s that we have, and all the regulatory and compliance type work that we need to do to get on there, I think we are at the front edge of that in the appraisal and title space, getting both the businesses set up completely on the cloud. Because once we're on the cloud, we have access to quite a few AI capabilities with both the likes of Google and Microsoft. So, our team has been doing proof-of-concepts this past year, where there's, I think, a significant amount of leverage, Richard, both for the operations of the business, but also for us to be able to do things somewhat differently than what we've done in the past. And longer term, of course, this impacts our data play and how we look at our data play longer term, because it gives us a much more, I would say, interesting view on our data, and it actually provides capabilities that would fast track some of the things that we've been thinking of doing in that space. So, lots of opportunity in the core business. We're already starting to use some of it in the proof-of-concept work that we're doing to kind of run the operations of the business, but also as we look longer term, there's some opportunity with our data play. Operator: Thank you. And those are all the questions that we have. Thank you all for joining. This concludes today's conference. You may now disconnect.

Tetragon Financial Group (TGONF) Q2 2024 Earnings Call Transcript

Tetragon Financial Group (OTC:TGONF) Q2 2024 Earnings Conference Call August 1, 2024 10:00 AM ET Company Participants Paddy Dear - Co-Founder Paul Gannon - Chief Financial Officer Steve Prince - Chief Executive Officer-TFG Asset Management Conference Call Participants Operator Good afternoon. Thank you for joining Tetragon's 2024 Half-Yearly Investor Call. You are all in listen-only mode. The call will be accompanied by a live presentation, which can be viewed online by registering at the link provided in the company's conference call press release. This press release can be found on the homepage of the company's website, www.tetragoninv.com. In addition, questions can be submitted online, while watching the presentation. As a reminder, this call is being recorded. I will now turn you over to Paddy Dear to commence the presentation. Paddy Dear As one of the principals and founders of the investment manager of Tetragon Financial Group Limited, I'd like to welcome you to our investor call, which will focus on the company's 2024 first half results. Paul Gannon, our CFO, will review the company's financial performance for the period; Steve Prince and I will talk through some of the detail of the portfolio and performance, and Steve will spend some time discussing the outlook. As usual, we will conclude with questions, both taken electronically via our web-based system at the end of the presentation, as well as those received since the last update. The PDF of the slides are now available to download on our website, and if you're on the webcast, directly from the webcast portal. Before I go into the presentation some reminders. First, Tetragon's shares are subject to restrictions on ownership by US persons and are not intended for European retail investors. These are described on our website. Tetragon anticipates that its typical investors will be institutional and professional investors, who wish to invest for the long term and who have experience in investing in financial markets and collective investment undertakings, who are capable themselves of evaluating the merits and risks of Tetragon shares, and who have sufficient resources both to invest in potentially illiquid securities and to be able to bear any losses which may equal the whole amount invested and that may result from the investment. I would like to remind everyone that the following may contain forward-looking comments, including statements regarding the intentions, beliefs, or current expectations concerning performance and financial condition on the products and markets in which Tetragon invests. Our performance may change materially as a result of various possible events or factors. So, with that, I will pass over to Paul. Paul Gannon Thank you, Paddy. Tetragon continues to focus on three key metrics when assessing how value is being created for and delivered to Tetragon shareholders. Firstly, how value is being created via NAV per share total return. Secondly, how investment returns are contributing to value creation, measured as a return on equity or ROE. And finally, how value is being returned to shareholders through distributions, mainly in the form of dividends, but also in the form of buybacks. The fully diluted NAV per share was $31.50 at 30th June, with a NAV per share total return of 1.9% for the first half. Since its IPO in 2007, Tetragon has achieved an annualized NAV per share total return of 10.3%. For monitoring investment returns, we use an ROE calculation, which was plus 1.3% for H1 2024, and that's net of all fees and expenses. The average ROE achieved since IPO is now at 11%, which is within the target range of 10% to 15%. So, looking at the final key metric, Tetragon declared a dividend of $0.11 for the second quarter, which represents a dividend of $0.22 year to date. Based on the quarter end share price of $10.30, the last four quarters' dividend represents a yield of approximately 4.3%. In addition to this, Tetragon also returned approximately $25 million to shareholders during the first half through a tender offer in April. And we'll reference this again when we go to the next slide, which is the NAV bridge. So, this shows the NAV bridge, which breaks down into its component parts the change in Tetragon's fully diluted NAV per share, which started the year at $31.13 and ended the 30th June at $31.50. Investment income increased NAV per share by $0.82 per share. Operating expenses, management and incentive fees reduced NAV per share by $0.26, with a further $0.14 per share reduction due to interest expense incurred on the revolving credit facility. On the capital side, gross dividends reduced NAV per share by $0.22. There was a net dilution of $0.40 per share, which is labeled in the NAV bridge as other share dilution. This bucket primarily reflects the impact of dilution from stock dividends, plus the additional recognition of equity-based compensation shares. This is offset by share repurchases, which were accretive to NAV per share increasing this number by $0.57. Tetragon repurchased $25 million of its nonvoting shares during H1 2024, with the tender offer being completed in April. Inception to date the company has returned approximately $1.7 billion to investors, through dividends and share repurchases. I will now hand back over to Paddy. Presenter Speech Paddy Dear Thanks, Paul. As on previous calls, before we delve into the details of our performance for the period, I'd like to put the company's performance in the context of the long term. Tetragon began trading in 2005 and became a public company in April 2007, so the fund has 19 years of trading history. This chart shows since IPO, the NAV per share total return which is the thick green line and the share price total return, which is the dashed green line. And the chart also shows the equity indices for the MSCI, ACWI and the FTSE All-Share and lastly, it shows the Tetragon hurdle rate of SOFR plus 2.75%. As you can see in the graph, over the time that Tetragon has been trading as a publicly-listed company our NAV per share total return is 440%. And as Warren Buffett has said, compounding is the eighth wonder of the world. We believe that our somewhat idiosyncratic structure of a listed fund, owning alternative assets and a diversified alternative asset management platform has helped us create hopefully, an alpha-driven ecosystem of ideas, expertise, insights and connections that help us do this. In 2024, as Paul showed, we've made a small positive return year-to-date, but this is somewhat below our long-term target and also below most equity market indices for the year. The main reason for this we believe is, that actually there's been a very narrow universe of growth equity stocks that has driven this year's performance in most equity indices, the Magnificent seven in particular in the US. And while that is or may be fantastic, it's not our focus. We pursue diversification and expect our broader themes to play out over time. And as I've said before, particularly at the end of the year, that's not an excuse, it's merely an observation. So continuing the theme of looking at the longer term, here are some more performance metrics. Our return on equity or investment return target is 10% to 15% over the cycles, and the average return since IPO is 11%. The table also shows that over 40% of the public shares are now owned by the principals of the investment manager and employees of TFG Asset Management. We believe this is very important, as it demonstrates a strong belief in what we do, as well as a strong alignment of interest between the manager, TFG Asset Management employees and Tetragon shareholders. So moving on the next slide, shows the composition of Tetragon's assets. So looking at the breakdown of the $2.8 billion of NAV. These colored discs show the percentage breakdown of our asset classes and strategies as at year-end 2023 on the left, and compares them with the end of half one 2024 on the right. And I would note three changes. Firstly, our exposure to private equity and venture capital is up to 18% from 16% at year-end and that has been driven by performance majority, but plus one or two new investments. Secondly, I would highlight the bank loans are down as an exposure to 6% from 8% at the beginning of the year and this has been driven by good cash receipts from our exposure, and those have not been replaced by new CLOs and we'll come on to that in a bit more detail in a moment, and there have been some losses on some older vintage loans. And the third piece to highlight is, the private equity and asset management companies continues to grow. It has moved up from 44% to 45%, as these businesses continue to grow in the first half and their valuations have increased. So, next, we'll move on to discuss the performance in more detail. The NAV bridge that Paul showed was a high-level overview of NAV per share. This table shows a breakdown of the composition of Tetragon's NAV at the end of 2023 versus the end of the first half of 2024, broken down by those asset classes, and it shows the factors contributing to the changes in NAV. Thus this table shows investment performance plus capital flows and so tying back to the change in NAV. As you can see from the bottom row of the table, the aggregate investment performance labeled gains and losses was a gross profit for the period of plus $73 million. Specifically, TFG Asset Management, which is our private equity holdings in asset management businesses had gains of $92 million. As I mentioned, these management businesses continue to grow and perform well over the first half. Secondly, hedge fund strategies event-driven equities and convertibles and credit lost $2 million in aggregate in the first half. Bank loans through CLOs had a loss of $12 million in the first half. Real estate had a loss of $5 million. Private equity and venture capital had a gain of $29 million, legal assets a gain of $2 million, and other equities and credit loss of $32 million. So now let's get into more detail on each category and we'll start with TFG Asset Management our private equity investments in asset management companies. And for that I'm going to pass over to Steve. Steve Prince Thanks, Paddy. Before I review the performance of TFG Asset Management's constituent businesses, I wanted to take a moment to remind listeners of TFG Asset Management's strategy and key value proposition. We continue to look to add new strategies, and help individuals and teams to create successful asset management businesses by leveraging TFG Asset Management's operating infrastructure and shared strategic direction with Tetragon, who can support asset management businesses through co-investment and working capital. At the same time, we continue to look for creative ways to help our partners grow their existing businesses, which may involve selling partial stakes or whole businesses if we and they believe it may unlock future growth and value. I would now like to move on to the performance of our asset managers during the first half of 2024. Our private equity investments and asset management companies through TFG Asset Management recorded an investment gain of $92 million during the period, driven by investments in Equitix an integrated core infrastructure asset management and primary project platform; and in BGO Tetragon's real estate manager. Some more detail on each investment. Tetragon's investment in Equitix made a gain of $77 million, driven by a combination of: A, higher valuation as the business continued to deliver against its business plan and increase in market multiple from 9.5 times to 10.5 times; and B, dividend income received by Tetragon of $19.2 million. Next, BGO, which is our real estate-focused principal investing lending and advisory firm. During the first half, distributions to Tetragon totaled $9 million reflecting a combination of fixed quarterly contractual payments and variable payments. The valuation of BGO is on a discounted cash flow basis with an assumed exit upon exercise of the call/put in 2026-2027. The gain on the investment was $26 million. Approximately half of that gain was due to the unwinding of the discounted value, which occurs as we get closer to the put/call day as well as a reduction in discount rate. The other half of the gain was due to an increase in the value of expected carried interest in addition to actual payments received from the BGO funds. Tetragon's investment in LCM, which manages bank loan assets through CLOs made a loss of $15 million. This decrease in valuation is reflected by the reduction in LCM's AUM, which decreased by 9% reflecting the amortization of some existing deals. LCM did issue one new deal during the period. TFG Asset Management's other asset managers produced a collective gain of $4 million during the first half of 2024. The other managers include Westbourne River Partners, an alternative asset manager focused on event-driven investing in European small and mid-cap equities; Acasta Partners, an alternative asset manager focused on event-driven investing in European small and mid-cap equities; Acasta Partners an alternative asset manager employing a multidisciplinary approach; Tetragon Credit Partners a structured credit investing business focused on primary CLO control equity; Hawke's Point an asset management business that provides strategic capital to companies in the mining and resource sectors; Banyan Square Partners a private equity firm focused on non-control equity investment opportunities and opportunistic investments in public equity and credit instruments; and Contingency Capital a global asset management business focused on credit-oriented legal assets. Paddy, will now go over our hedge fund investments. Paddy Dear Great. Thanks Steve. Tetragon invests in event-driven equities convertible bonds credit and some other strategies through hedge funds. The majority of these investments are through funds managed by Westbourne River Partners and Acasta Partners both of which are part of TFG Asset Management. Our investment in the Westbourne River European event-driven strategies, recorded a loss of $12.9 million in the first half. The strategy focuses on event-driven investing in European small-cap and mid-cap equities to pursue what it believes are more attractive and less followed opportunities seeking to deliver uncorrelated alpha and the Low Net strategy has targeted net exposure of between 0% to, 30% whereas the Long Bias strategy has targeted net exposure of approximately 75%. Secondly, our investments in Acasta Partners funds, generated a gain of $8.7 million. There were some positive events in a number of credit-focused trades and positive performance from the NAV-per-resources positions and so those benefit both funds year-to-date. Investment in other hedge funds, which includes the Global Equities Fund has a small gain of $1.9 million during the first half and obviously still remains a small portion of the portfolio. Moving now on to bank loans, Tetragon predominantly invests in bank loans through CLOs. And we take the majority of positions in the equity tranches. Tetragon's investment split is shown here between directly-owned U.S. CLOs and funds managed by Tetragon Credit Partners. We continue to view CLOs as attractive vehicles, for obtaining long-term exposure to the leveraged loan asset classes. In aggregate, our bank loan investments recorded a loss of $11.7 million for the first half of 2024 and that was while cash received during the period was approximately $42 million and new investments were merely $4 million. Performance was generally driven by therefore on the positive side, interest rates stayed higher for longer which does increase the cash flows of CLO structures; plus there was a realized gain in an asset sale in TCI III which was above its marked value. And then, on the negative side there have been some realized and unrealized losses in some older vintage loans. On Tetragon Credit Partners TCI II and III are fully invested. TCI IV is currently in its initial investment period and Tetragon has a further $6 million committed, but undrawn to TCI IV. Next slide is on real estate. Tetragon holds most of its investments in real estate, through BGO-managed funds and co-investment vehicles. The majority of these are private equity-style funds concentrating on opportunistic investments, targeting middle market opportunities in the U.S., Europe and in Asia with particular focus on growth sectors such as logistics, data centers, cold storage. These funds in aggregate had a loss of $5 million during the first half and that was mainly from the U.S.-focused funds. The last line on this chart is the, other real estate which is farmland investment in Paraguay which is managed by a specialist third-party manager in South American farmland. And the investment had a small loss which represents the ongoing costs. With that, I'll now hand you back to Steve. Steve Prince Thanks, Paddy. Tetragon's private equity and venture capital investments, was the second largest driver of performance during the period generating gains of $29 million. Investments in this category are split into the following subcategories. First, Tetragon's mining finance investments managed by Hawke's Point, generated a gain of $29 million driven by operational progress at one of its Australian gold project investments, as well as ongoing developmental progress at its Canadian nickel and copper project investment. Second, Banyan Square's portfolio companies achieved solid operating results with a focus on profitability. However, this was offset by weaker macro environment. As a result, the portfolio lost $1.3 million. There are 12 active positions in the fund including positions focused on application software, infrastructure software and cybersecurity. In addition, together with TFG Asset Management Banyan Square Partners began working with WovenLight, a data-driven consulting and software services business in which we made a strategic investment last year. WovenLight may add further investment opportunities for the Banyan Square team. In addition the platform as a whole stands to benefit from the addition of WovenLight's machine learning and AI expertise. The third category is our investments in externally managed private equity funds and co-investment vehicles in Europe and North America. These investments generated losses of $4 million during the period spread across 37 different positions. Lastly, the direct category produced gains of $5 million during the period related to positive performance in our investment in Ripple Labs Inc., driven by the most recent tender offer conducted by the company. In the next slide, there's an overview of our legal assets investments. These investments in legal assets are made through vehicles managed by Contingency Capital. Tetragon has committed capital of $60 million to Contingency Capital Fund I, $38 million of which has been called to date including $6 million during the first half of the year. A gain of $2.2 million was generated from this investment. Fund I is almost fully invested. The performance of the Contingency Capital Fund I portfolio continues to be above underwritten projections and the performance targets and the performance of such portfolio remains uncorrelated to the public equity and debt markets. Contingency Capital held a first close for a new evergreen fund in June and a first close of Fund II in July. Tetragon has committed capital of $10 million to the first close of Fund II. Moving on to other equities and credit, as well as an overview of our cash position. Tetragon makes investments directly on its balance sheet reflecting single strategy ideas. These ideas are either as co-investments alongside our TFG Asset Management managers or they sometimes are idiosyncratic investments. Each of these investments tend to be opportunistic and with a catalyst. Often, the sourcing of these investments has been facilitated by the managers on the TFG Asset Management platform, as well as through third-party managers with whom Tetragon invests. The flexibility to invest in these opportunities is a benefit of Tetragon's structure. This segment generated a loss of $32 million during the first half of 2024. While eight of the 15 positions contributed gains, these gains were outweighed by negative contributions from two positions that had been positive drivers in 2023. The first a biotech company retraced as comparable peers reported mixed trial data and results, which diminished market enthusiasm for autoimmune therapies. The second a leader in AI-assisted workflow automation fell in the second quarter due to a CEO change and market disappointment over a reduction of forward sales guidance. We used this weakness in the stock as an opportunity to materially increase our stake as we see the CEO change as welcome news. Over the first half of 2024, we added four positions and exited three including our sole credit position. Moving on to our cash balance. Tetragon's cash at bank balance was $7 million as of June 30. After adjusting for known accruals and liabilities both short and long dated, Tetragon's net cash balance was negative $365 million. Tetragon has access to a credit facility of $400 million with maturity date in July 2032. As of June 30, $300 million of this facility was drawn and this liability has been incorporated into the net cash balance calculation. Tetragon actively manages its cash levels to cover future commitments and to enable it to capitalize on opportunistic investments and new business opportunities. During the period, Tetragon used cash as follows; $223 million to make investments, $30 million to repurchase its shares, and $11 million to pay dividends. $180 million of cash was received as distributions and proceeds from the sale of investments. Future cash commitments are: $112 million comprising investment commitments, across BGO funds, private equity funds, Tetragon Credit Partners funds, Contingency capital funds and working capital loans to certain TFG Asset Management -- managers. Finally, I'm going to go through a few of our future investment expectations. We expect our allocation of hedge funds to remain stable. We expect to continue to invest in CLOs via various Tetragon Credit Partners vehicles, while at the same time receiving cash back from some of Tetragon Credit Partners' initial funds. So this should be a stable overall allocation. We expect our real estate investments also to be relatively stable because we have commitments to BGO funds, but we also have existing investments that continue to distribute capital. We expect our private equity allocations to keep growing and there are a few additional LP commitments we've yet to fund. As such we expect our Banyan Square allocation to continue to grow. In legal assets, Tetragon will continue funding its commitments to Contingency Capital vehicles. In other equities and credit, we expect to continue to invest in these opportunities, but the timing of these investments is less certain. And lastly, we're hopeful that there will be additional allocations which will make to new asset classes, but there's nothing to report at this time. I'm going to now hand it back to Paddy. Paddy Dear Great. Thanks very much, Steve. I don't actually have any questions in front of me which I'm assuming is not a lack of interest in the first half performance. It's either a technical glitch and if it appears to be then I will come back to everyone individually or Yuko and I and Paul or whoever is the right person. But otherwise I assume August is a quiet month. I also assume that actually the first half there wasn't anything dramatic happening in the first half and possibly it's due to the Olympics. Anyway whichever it is I wish you all a good summer and thank you very much for joining. Operator Thank you. This now concludes today's conference call. You may now disconnect. Question-and-Answer Session End of Q&A