Dye & Durham Limited (DND) Earnings Call Transcript & Summary

Good afternoon. My name is Ina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dye & Durham conference call. And I would now like to turn the call over to Ross Marshall, Investor Relations on behalf of Dye & Durham. Mr. Marshall, you may begin your conference.

Thank you, Ina, and good afternoon. Before we start, we'd like to remind you all that amounts discussed on this today's call are denominated in Canadian dollars, unless otherwise indicated. Please note that statements made during this call may include forward-looking statements and information and future-orientated financial information regarding Dye & Durham and its business and disclosure regarding possible events, conditions or results that are based on information currently available to management, which indicate management's expectation of future growth, results of operations, business performance and business prospects and opportunities. Such statements are made as of this date hereof, and Dye & Durham assumes no obligation to update or revise them to reflect events, disclosures or circumstances, except as required by applicable securities laws. Such statements involve significant risks and uncertainties and are not a guarantee of future performance or results. Given these risks and uncertainties, one should not place undue reliance on these statements and information. A number of these risks or uncertainties could cause actual results to differ materially from the forward-looking information discussed today. Certain material factors and assumptions were applied in drawing the conclusion or making a forecast or projection contained in the forward-looking information. Please refer to the forward-looking statements and future-orientated financial information sections of our public filings without limitation, our MD&A, annual information form and our press release issued today. For additional information about material factors and assumptions that were applied in the forward-looking information and could cause results to differ materially from this forward-looking information. Joining us on the call today are Matt Proud, Dye & Durham, Chief Executive Officer; and Frank Di Liso, Dye & Durham, Chief Financial Officer. A question-and-answer session will follow the formal remarks for research analysts. I'll now turn the call over to Matt for his opening remarks. Matt?

Thanks, Ross, and good afternoon, everyone. This morning, we announced a series of actions to improve our balance sheet flexibility and somewhat reduced debt. The outcome is relatively straightforward, but how we get there is complicated. So we wanted to address it directly with everybody. In the aggregate, Dye & Durham is successfully extending the maturity of a portion of our convertible debentures by 2.5 years on favorable terms for increased yield-to-maturity of 2.4%. This is the right move for the company and its shareholders. We're reducing the 2026 convertible debentures balance by $95 million to $250 million and reducing our overall convertible debt by $10 million with the issuance of $85 million of new convertible debentures. These actions provide us with increased flexibility to further optimize our balance sheet in the future, and they are an initial step forward in deleveraging the balance sheet and improving our long-term capital structure. The refinancing of our $95 million of 2026 unsecured convertible debentures is primarily funded with new 2028 unsecured convertible debentures and cash on hand. It's important to note, while we're buying a 16.9% yield-to-maturity and selling at a 19.3% yield-to-maturity. This represents an increase of 2.4% in our subordinated cost of capital. We wouldn't undertake this transaction. It will just one sided, and we were issuing up 19.3% a paper. It has to be looked at in the aggregate. We believe it's important to recognize both sides of the trade, again, rather than just focusing on one. The full details can be found in the press release we issued this morning and more details will be available in the circular we expect to file next week, subject to regulatory requirements. We expect the transaction to close around November 28. The refinancing results in a normalized -- in a nominal interest -- increase in interest and a decrease in convertible debt outstanding, the 2026 convertible debentures have a 3.75% interest rate while the new 2028 ones have a 6.5% rate. Our cash interest increased by just under $2 million. The new annualized interest paid on the blended debenture is 4.45% or $14.9 million annual cash interest a year compared to $12.9 million previously. We view this as nominal given the benefits of the 2.5 years of extended maturity and the $10 million reduction in convertible debt. Slide 7 of the presentation provides a side-by-side comparison of the particulars of the old versus the new debentures. Again, we're buying at 16.9% yield-to-maturity and selling at 19.3%. The strike price on the new debt is $40, which is beneficial to equity holders. Keep in mind, the original $345 million of convertible debenture due March 1, 2026, has a springing maturity, which allows the senior debt to mature on September 1, 2025. While this transaction -- this is the one, which is still 2 years away, this transaction addresses $95 million of the $345 million, which the company must address by September 1, 2024, to avoid the senior and convertible debenture becoming current. This is a positive outcome and an initial step forward to optimize our capital structure, which we'll continue to address moving forward. As we are entering the market with a substantial issuer bid, for transparency, we confirm this afternoon in the press release that our first quarter fiscal 2024 financial results are in line with expectations and will be available to discuss those results during the upcoming earnings call in late November -- in late October. With that, I'll turn it back to the operator for Q&A, and Frank and I are both available for your questions. Operator?

[Operator Instructions] And your first question comes from the line of Mr. Rob Young from Canaccord Genuity.

Maybe first question just be on the last statement you made there. You said that the Q1 financial performance was in line with expectations. Can you elaborate like what expectations, is that consensus expectations, your management expectations, ARR targets? Just maybe if you can give a little more color around what expectations are in that context?

Yes. Thanks, Rob. Good question. At the last earnings call, we were asked what -- how management is feeling about Q1 results. And we said they would roughly be in line with Q4 results. And we still -- and so our expectations, they will still be in line with Q4 results. So Q1 will similar to Q4.

Okay. Got it. And then going forward, capital deployment priority, I think you said in the prepared remarks that today's action is an initial step. And you've also said that deleveraging is the keys to cash going forward. So I mean, there's a lot of other uses of the capital you've talked about. Can you talk about what the priorities are? Are you going to maybe look at buybacks, given where the stock is? Do you have any planned M&A in the near term, tuck-in or otherwise internal investment competing for cash flow? Like how much of the cash flow is going to be earmarked for deleveraging? Maybe if you can talk about capital allocation.

Yes. So a few things. There's various ways to delever. You can grow and delever that way from a ratio perspective. You can use the cash you generate to pay down debt. And those are the 2 kind of primary ways you can do that. Look, we're focused on growing the business, Rob. And as we grow the business, we'll actually delever it. But we've heard kind of the [indiscernible] the market that they want us to pay down debt. And we hear you, and we've demonstrated that by our commitment today. We also paid down debt in Q1 with the proceeds from the TMG divestiture. And over time, we're going to delever through a combination of those 2 drivers to a debt-to-EBITDA like leverage ratio below 4x been factoring in both any convertible debt that gets way out of the money and the senior debt. But I think it doesn't happen overnight. And so I hope that answers your question.

Okay. Last question is high level. Like you noted that a complex release since I was hoping you could highlight what's the key benefit in management's view of the actions today? Is it the flexibility you get? Is it the $10 million reduction in debt and the deleveraging that implies? Like, what is the key benefit you're getting? And then I'll pass the line.

The key benefit is we're terming out $95 million in debt for 2.5 years. It would take an aggregate in a pretty good package for the company. It's an increased yield-to-maturity of 2.5%, I'm sorry 2.4%. This is a strong trade in our view. It is complex. When you look at an aggregate, it's good for the company. As I mentioned, 2 years out, there is a springing maturity of the seniors. So getting this convert -- getting rid of this convert in advance of that is important. So this is the first step in a series of actions, we believe to do that.

And your next question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

Most of my questions have been asked. I think I just have one, which is how did you come up with the $95 million number? Why not more? Why not less? Was that just a function of your sense of, I guess, the market conditions and where maybe [indiscernible] as far as refinancing? Or just any color on that would be helpful.