Davis & Henderson's (DHIFF) CEO Gerrard Schmid on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: DH Corp. (DHIFF)

Davis & Henderson Corporation (OTC:DHIFF) Q2 2014 Earnings Conference Call July 30, 2014 10:00 AM ET

Executives

Brian Kyle - EVP and CFO

Gerrard Schmid - CEO

Duncan Hannay - President, D&H Canada

Analysts

Stephanie Price - CIBC World Markets

Wayne Johnson - Raymond James & Associates

Graham Ryding - TD Securities

Geoff Kwan - RBC Capital Markets

Operator

Good morning, ladies and gentlemen. Thank you for standing-by. Welcome to the DH Corporation Conference Call for the Second Quarter Ended June 30, 2014. I’d like to remind everyone that this conference call is being recorded today, July 30, 2014 at 10 AM Eastern Time.

I will now turn the call over to Mr. Brian Kyle, Chief Financial Officer of D&H. Please go ahead, Mr. Kyle.

Brian Kyle

Good morning and thank you all for attending. I’m joined today by Gerrard Schmid, Chief Executive Officer of D&H as well as Karen Weaver, who will be transitioning into the role of CFO of D&H in September.

Before we begin, I’d like to advise you that the statements that follow include forward-looking information within the meaning of applicable security laws. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the business or developments in D&H’s industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements.

Information about the factors that could cause actual results to differ materially from anticipated results or performance can be found in our Annual Information Form available on SEDAR, and in the press release announcing the results of the second quarter. As a reminder, we will use several non-IFRS measures in our presentation, including adjusted revenue, EBITDA, adjusted EBITDA, adjusted net income, among others. These terms are described within our MD&A, where you will also see reconciliations to revenue and net income.

Now, over to Gerrard.

Gerrard Schmid

Thank you, Brian and good morning ladies and gentlemen. I’d like to start by welcoming Karen. I appreciate you joining us today. In case you missed her -- appointed earlier this month, Karen will bring over 30 years of experience to D&H serving market leaders, such as First Capital Realty, where she was Executive Vice President and Chief Financial Officer and at Brookfield Properties, Canadian operations, where she served as VP and CFO. Karen is a CPA with public company experience in both Canada and the U.S. and we look forward to her leadership and her contributions on future conference calls.

D&H continued to drive forward with our growth agenda during the second quarter and delivered positive financial performance that reflected accretion created by the acquisition of HFS and more generally our leadership positions in the North American FinTech markets.

Looking at some financial highlights. Second quarter adjusted revenue was 48% higher than last year. This reflected strong acquisition-led growth in our U.S. segments as well as organic growth in two of our three Canadian segment service areas. Year-over-year growth in adjusted EBITDA was just over 59%, again outpaced the rate of top-line growth and led to adjusted EBITDA margin of 31.8%, up 220 basis points from last year. Adjusted EBITDA grew for both U.S. and Canadian segments.

Adjusted net income per share increased over 10% compared to last year as we continue achieve positive accretion from the HFS acquisition. As a result of strong cash generation, we were able to increase capital reinvestment levels compared to a year ago in supportive of growth funded our quarterly dividend of $26 million or $0.32 per share and made a voluntary net debt repayment of $5 million.

Since acquiring HFS last August, D&H has repaid a cumulative $40 million in debt, putting us well on-track towards our 2015 goal of reducing our leverage ratio to below 2.5 times on a foreign exchange normalized basis, assuming no acquisitions in the meantime. Again this quarter, we are pleased to note the strong level of revenue diversification both by geography and by products.

Our U.S. segments accounted for 42% of adjusted revenue versus just 14% a year ago and from a service area perspective, we continue to show a much better balance with banking technology solutions representing about 48% of consolidated revenue with the other 52% split fairly evenly between payment solutions and lending processing solutions.

With those high level highlights, let’s move to segment performance. Looking at our Canadian segment, banking technology solutions revenues was a growth leader in the quarter with revenue up 3.3% year-over-year. This reflected higher professional services fees earned in connection with our mortgage origination business and seasonally strong Canadian housing market activity. You will recall that for the past several quarters, results in the service area have been impacted by some pricing modifications. The vast majority of these are now behind us and we are enjoying the benefit of strong customer relationships as a result.

Looking ahead, the service area remains sensitive to the impact of Canadian housing and mortgage market activity which is seasonal and cyclical and we are aware and some industry analysts expect the markets to enter a moderating phase in the latter half of 2014. To offset a soft landing scenario, we continue to work on the products and product extensions so that we can better address the various areas that backup the lending value chain and support organic growth in this service area.

Second quarter growth was also registered in lending processing solutions, where revenues increased $800,000 or 1% year-over-year. As in the first quarter, revenue growth in the services area by lower professional services fees in the student loan program. This was expected and will continue as we enter the RP period this summer. Among the positives and in order of magnitude, year-over-year growth in the service area reflected higher transaction volumes in recovery services, higher volumes in the student loan program and higher average order values in registration services.

On the topic of recovery services, you will recall that revenue performance is countercyclical driven by loan delinquencies and defaults. This quarter default rates remained pretty much unchanged which means higher fee revenue instead from growth in our customers’ loan portfolios which can also be said of registration services.

Recover cost at the services area also benefits in the second quarter from the seasonal increase in automotive sales and leasing. The outlier in the Canadian segment in the quarter was Payment Solutions with revenue off by 3% or $2.4 million year-over-year. This reflected a combination of one less business day in our check program and timing of revenue within our enhancement services. We continue to focus on building enhancement services as an offset to lower check orders. And while we have work to do on this front and scale to gain before the category becomes more material to our business, we remain positive about its potential and believe our prospects are strong.

So, although we saw growth in two of three cleaning service areas, overall segment revenue of about a $169 million was lower than a year ago by less than 1% or about a $1 million. We more than made up for this with growth in our U.S. segment. U.S. segment’s adjusted revenue for the quarter was just over $123 million or 352% ahead of last year. Normalizing for FX, our U.S. segment revenue was still up 313%. Our U.S. segment is comprised of two service areas lending solutions which in the quarter accounted for about 55% of adjusted revenue and enterprise solutions at about 45%. Keeping each in turn, adjusted revenue for lending solutions grew 201% year-over-year or almost $45 million.

This reflected the addition of HFS revenues. Our point of sales and LOS service areas delivered relatively steady performance despite experiencing as expected lower consumer refinancing activity compared to a year ago. As a reminder, about 50% to 60% of U.S. segment lending solutions revenues come from recurring subscription fees which are generally market resilient. And most the remainder comes from software and associated professional services which can be variable due to timing and post contract maintenance. Less than 5% comes from transaction based revenues which are sensitive to changes in market conditions.

Revenue in enterprise solutions in the U.S. segment amounted to $55 million the second quarter, up 51 million from a year ago on account of HFS and company share. Revenue contributors in this category encompass core processing systems including contact management, financial accounting and payment solutions and number of channel solutions related to self-service, business intelligence and branch automation and our CP cloud based infrastructure technology. In terms of cross-selling and customer activity for our U.S. segment, we are progressing on plan with growth in our solutions per customer ratio and we have improved our penetration rates between our products.

For example, we now have over 500 customers who are using both our LaserPro and point of sales technologies, up from about 440 at the time of acquisition. Customer cross-usage of LaserPro and LOS has also grown nicely. As these highlights show, D&H has find success with our process and sales synergies. And while we have work ahead of us to realize the full potential, the opportunity is definitely there. I want more to say about our go forward agenda later in this call. It’s now time to hear from Brian. Over to you Brian.

Brian Kyle

Thanks. As Gerrard said, the results of the quarter continue to reflect the addition of an accretion delivered by HFS. Additionally, we benefited from the translation of U.S. results into Canadian dollars. Normalizing for FX, adjusted revenue were ahead of last year by about 43% versus 48% as reported. On a sequential basis compared to quarter one, we saw seasonal pick up in market activity levels in our Canadian segment both in the housing and auto sectors. As a result, revenue was 12% higher sequentially in our Canadian segment compared to quarter one. As a reminder, seasonality make sequentially comparisons less meaningful in both our Canadian and U.S. segments and this will be the case going forward as the third quarter typically show strength in Canada relative to the first quarter before trailing off in the fourth quarter. And the fourth quarter shows strength relative to other quarters for HFS with some variation depending on the timing of product sales.

For the past few reporting periods, year-over-year comparisons have also been less meaningful but will normalize in quarter four where we are comparing for the first time to a year ago a quarter that includes a full contribution from HFS which was acquired on August 16th, midway through quarter three of 2013.

With that overview, I will move to consolidated EBITDA which increased about $35 million or 67% compared to last year, most of the increase was due to U.S. segment performance. Our Canadian segment EBITDA was up 3.6%, a healthy increase given the slightly lower revenues compared to a year ago.

On a consolidated basis, EBITDA margin was 30.7%, 4 percentage points higher than a year ago for reasons I will describe momentarily. Second quarter EBITDA includes $3.4 million of acquisition accounting adjustments to fair value of the deferred revenues and deferred costs associated with HFS and acquisition related and other charges of $1.8 million consisting of business integration expenses and retention and incentive costs.

You will not that acquisition related expenses dropped by 1.7 million between quarters one and two reflecting timing of expense recognition. Excluding these items that are not indicative of normal course operations, total adjusted EBITDA increased over 59% year-over-year or by 53% normalizing for foreign exchange.

Consolidated adjusted EBITDA margin for the quarter was also higher at 31.8% compared to 29.6% a year ago. Sequential growth in margin compared to quarter one was on account of seasonally higher revenue and product mix changes. Our ongoing target is to achieve 30% plus consolidated margins, a goal that requires us to maintain focus on cost effectiveness.

Looking at segment performance, adjusted EBITDA grew $1.7 million or 3.65 in Canadian segment, compared to a year ago primarily due to higher management fees charges for the U.S. segment for work performed, lower consulting fees and benefits from cost savings initiatives implemented in recent periods.

Compared to quarter one, adjusted EBITDA for Canadian segment also benefitted from higher mortgage origination fees on stronger market activity. As Gerard mentioned, pricing in and the service area has now been stabilized.

Adjusted EBITDA margin for the Canadian segment increased to 28.9% from 27.7% in quarter two of 2013 and from 22.6% in the first quarter of this year. For our U.S. segment, second quarter adjusted EBITDA increased $32.9 million. Adjusted EBITDA margin was 35.8% compared to 41.2% in quarter two a year ago.

As we’ve discussed previously, HFS margins are lower than our SaaS-based offering, which comprise the majority of our U.S. business in the competitive period last y ear. Given our much more expanded U.S. product mix, we consider current U.S. segment margins to be strong and of course look to capitalize on additional operating leverage as we grow.

Due to the inclusion of HFS, expenses in the U.S. segment were predictably higher than a year ago, but we are pleased to note that employee compensation and benefit expenses another operating expenses benefited from cost synergies realized between our other SaaS businesses and HFS during the quarter.

If you recall that we use foreign exchange contracts to minimize volatility on the repatriation of cash flow from our U.S. businesses. Since quarter one, we have added to our foreign exchange forward contracts and now have in aggregate $3 million of forwards in place.

In the quarter, amortization of acquisition intangibles was 28.3 million, 17.3 million above last year’s quarter two level as a result of the HFS acquisition. Also due to the HFS acquisition, consolidated depreciation of capital assets and amortization of non-acquisition intangibles increased year-over-year by $3.9 million to 10.6 million.

You will note this quarter that we have divested some non-strategic assets and recognized a gain on the sale of about a $1 million. This relates to assets acquired as part of the result of acquisition. The impact on revenue and EBITDA from divested assets is immaterial. Moving on, interest expense was 15 million in the second quarter, down slightly from quarter one and up 10.5 million from a year ago. The year-over-year increase was due to incremental debt financing to fund the HFS acquisition.

It also reflected a non-cash interest charge of $1.4 million related to accretion expense on the convertible debentures and amortization of deferred financing charges incurred in connection with our financing arrangements. Unrealized gains related to a fair value changes on derivative instruments amounted to $300,000 this quarter and 1.2 million in the same period of 2013. At the tax level, we made a $17.6 million installment payment in the quarter against our 2014 tax liability. Tax installments will continue throughout 2014.

Moving to the bottom line, adjusted net income per share in the second quarter was $0.6369, 10% higher than a year ago and 32% higher than immediately preceding first quarter of 2014. Year-over-year growth reflected accretion from the HFS acquisition and sequential bottom-line growth reflected seasonality and other factors discussed today including product mix and price stabilization and Canadian banking technology solutions service area. Overall, we remain confident that we can achieve our plan of high single-digit accretion at the adjusted net income per share level in 2014. D&H also remains well positioned to support our current dividend going forward and with the addition of strong cash flows at HFS to reduce our debt to EBITDA ratio. As Gerrard mentioned, we repaid another $5 million in net debt in the second quarter, following a $5 million repayment in quarter one.

Our debt to EBITDA ratio after removing the impact of non-cash foreign exchange fluctuations was 2.75 times at June 30th compared to 3.05 when we closed the HFS acquisition. Assuming no other acquisitions or other investment opportunities, we continue to expect our debt to EBITDA ratio to be below 2.5 times in 2015 on a foreign exchange normalized basis. Our long-term debt before unamortized deferred financing fees was $926 million compared to $960 million at March 31st. We also have $230 million of convertible debentures outstanding but originated as part of the funding of the HFS acquisition in 2013.

The average effective interest rate on our total indebtedness including convertible debentures at June 30th was 4.7% compared to 4.8% at year end 2013. At quarter end, we have swaps in place with fixed fee interest rate on 78% of our dent compared to the 75% at year end. A portion of these interest rate swaps have been designated as cash flow hedges for hedge accounting purposes. Overall, with strong cash generation and access to unused committed and uncommitted credit facility, we have a good level of flexibility to fund our business and support our growth strategy. In terms of capital expenditures, we allocated just over $13 million in the second quarter. This is about 6 million above the amount spent last year and reflects the addition of HFS and our plan to emphasize growth reinvestment with short and medium term payback parameters.

Our budget plan for the entire fiscal year is to spend approximately $50 million to $55 million although we continue to be open to longer term growth opportunities that may include the requirement for some upfront cash investment. Accordingly, we are prepared to adjust our capital budget if need to be. To summarize D&H performance, performed well in the second quarter across the variety of key financial metrics. Reduced debt reinvested for growth and paid dividends at the prescribed and attractive rate of $0.32 per share or $1.28 annualized. Call back over to Gerrard now.

Gerrard Schmid

Thank you, Brian. As you know this will be Brian’s final conference call with us as he begin the next phase of his career in September. I am grateful to Brian for his service to D&H and for helping this summer with count transition. Looking ahead the key items on our agenda remain unchanged. Grow by cross-selling our expanded product suites to existing customers as well as banks and credit unions not yet served by D&H. Innovate to expand our FinTech suite and extend the functionality of our existing products across the customer value chain. The strategy we have chosen to support the substantial new capital. Integrate our technology and business platforms, which is also receiving strong capital spending support and over time acquire new assets that complement or expand our leadership positions. And partner with third-parties that can increase our competitive edge and value proposition.

As you heard on our last quarterly call, we recently achieved full integration of our sales force and retirable legacy brands in favor of D&H. That said our integration remains as expected a work in progress. Although not feasible to the outside world, we are now integrating our customer relationship managing platforms to ensure seamless coordination of our customer sales and marketing efforts. This initiative is important to our integrated cross-selling efforts that will make a difference to our success rate. At the same time, we are engaged on a product-by-product basis with technology efforts that will improve efficiencies, accelerate deployment and adds a value proposition. These are significant refinements and we are progressing on plan.

We are also gearing up as we speak for our annual customer conference call connections 2014 which will be held this year in Orlando, August the 25th to 28th. This is our first fall opportunity to engage with customers on mass in the U.S. since we unified our brand. 1,500 customer attendees will be able to choose from nearly 250 educational sessions, hearing about new D&H solutions, meet our technology experts as well as industry thought leaders and our strategic partners, receive hands on training in pre-conference workshops and gain practical knowledge so that can deployed immediately. This is a great opportunity to showcase all that we have to offer at D&H as a FinTech market leader and to support our future sales activities and organic growth.

in terms of acquisitions, the recent repayment of debt and the level of integration achieved certain mean we have more management and financial capacity to execute that we have had in recent periods.

That said, while we continue to look at possible candidates, we also continue to exercise discipline regarding valuation and strategic fit and those factors will act as usual as governors on this part of our growth strategy.

To-date in 2014, we’ve made solid progress on our strategic agenda. And as I’ve said before, we have more to do fulfill our ambitions. In this regard, we are challenging ourselves in many ways to be better, faster and more efficient for our customers and shareholders.

In terms of our outlook, I want to attempt to repeat the detailed review we provided in our MD&A but what I would say is that the key drivers of business performance have not changed since we last spoke at the end of April. Economic growth while modest in the first part of 2014 is providing a constructive backdrop for customer spending.

We are seeing broad interest in our FinTech solutions among the thousands of banks and credit unions that make up our target market. The sale cycle well along is expected and we continue to face volatility in certain parts of our business that we are better able to address as a result of geographic and product diversification.

In closing our second quarter results were solid and on track with our agenda. That now concludes our prepared remarks and with the operator’s assistance, we’d like to invite some questions, operator?

Question-and-Answer Session

Operator

Thank you, sir. We will now take questions from the telephone lines. (Operator Instructions) Your first question is from the line of Stephanie Price from CIBC. Your line is open.

Stephanie Price - CIBC World Markets

Just on the integration costs, Brian, maybe you could talk about how we should think about those costs in the balance of the year. I think in the past you said maybe 3 million a quarter, is that kind of where we should be thinking a slope?

Brian Kyle

What I think is it’s going to continue to evolve, Stephanie. We have a lot of initiatives that we’re working on from network consolidation through to off-shoring, on-shoring, reallocating workforce. So I think it’s really a stay tune and see where those costs are going to land. I know it’s difficult but most of those costs gain as you can appreciate are going to be in period costs that will limit the amount of provision that we can set up under IFRS.

Stephanie Price - CIBC World Markets

Okay. And then Gerard when you were talking about sort of your key items, you mentioned in expanding the process suite. Can you elaborate on that a little bit and talk about some of the initiatives that are underway right now?

Gerrard Schmid

Yes, Stephanie, I will give higher view on that. You will recall that last quarter we gave some visibility to our payment manager platform whereby we are introducing an automated pre-authorized payment environment to Canadian banks. That launched with one of the Canadian banks last quarter and we continue to see very solid interest from banks in that regard. We see multiple vectors of innovation that going to emerge from that platform so that would be one example. Another area would be around our digital channels. In the U.S., we are looking at pocketing opportunities with select companies that we will further reinforce a combination of our value proposition and there that we offer a broader range of physical and mobile banking platforms.

Stephanie Price - CIBC World Markets

Hey, great. And then just in terms of payment solution revenue a bit later than I think we were expecting. Can you talk about how we should think about the rest of the year it sounded like part of it might have been timing related, how should we think about the rest of the year here?

Gerrard Schmid

Yes, so as it relates to payment solutions, you are right that it was the weaker of the Canadian segment’s being down 3% on the quarter. I would remind everyone that the primary driver of that was twofold. First of all a one less business day which we often see quarter-over-quarter. So I don’t attribute that to a weakness in check volumes with more simply to stay a timing issue. Now on the enhancement services front, it related to a certain timing issues with enhancement services but it doesn’t impact the underlying perspective that we have that through a combination of our efforts within the check business as well as growth in enhancement services that we will continue to see ongoing strength in that category. So I wouldn’t use this quarter as a indication of any degradation in our confidence in that business.

Operator

Your next question is from the line of Wayne Johnson from Raymond James. Your line is open.

Wayne Johnson - Raymond James & Associates

So my question is on the HFS side. If you could talk a little bit about the pipeline in the sales cycle that you are seeing at HFS, how does that compare to a year ago when you made the initial acquisition and if you could give a little color on how we should think about the remainder of the year for that segment? Thank you.

Gerard Schmid

Good morning, Wayne. So as I said in the couple of prior quarters, I am going to hold off providing quarter over quarter insights around our pipeline. Yes, I think that as we get close towards Q4, I will be in a position to shed a bit more light on it. I will keep my comments a little bit high level for now. What I would say is if you think back to the two segments that we have in the U.S., for enterprise solutions which involves our channel and core banking side. We are seeing some ongoing strength in our sales activities there in particular in the credit union space where customers are looking at us as a core banking provider as well as employee services. So, I think that one is moderating but healthy. The real strength of us on the lending solutions side where we have seen solid cross-sell efforts across LaserPro and our LOS and POS side, and ongoing strengthening of our pipeline and sales activities so when I take at over the next couple of quarters, we anticipate ongoing strength in our lending business in particular.

Wayne Johnson - Raymond James & Associates

That’s helpful. I appreciate the color, just one quick follow-up. So, if the enterprise side is moderating, what do you think the reason for that is? Is it environmental is there any additional color on that?

Gerard Schmid

Depending on what your references around environmental, Wayne, I would simply reiterate what I have said before, the sales cycle on core banking remain the longest of all of our sales cycles. The competitive environment there is certainly intense with hand-to-hand combat being fought every day where we win some where we lose some, so I don’t describe this to a long-term change in the environment, more just it’s a long slog in an area that once you win a contract, attractive, but it’s not where we seek to focus our efforts to achieve long-term growth.

Wayne Johnson - Raymond James & Associates

And switching topic here if I may, so how should we think about the RFP process for the check business in Canada pardon me on the student side any update on that?

Gerard Schmid

Certainly, I am glad you said student lending not checks because I was scratching my head there. On the student lending front, there has been no material change to what we have articulated in the prior quarters but just as a reminder for everyone. We expect to receive the RFP this week in fact and we will have somewhere between 60 to 90 days to respond to the RFP. Given that it is a government contract, it is a public process and we expect other participants to participate in the lot of new process. Our understanding is that the government will make the decision by the midpoint of next year at the earliest. But I will remind everyone that the most turning part to that is that the new contract terms will not come into effect any earlier than likely April 2017 and quite possibly later than that.

The other thing I would say is that we feel confident about our abilities to compete very effectively in that RFP process and we enjoy a very solid operational performance levels as relate to the existing contract. And from a technology capability perspective especially in light of our additional U.S. asset we believe we can bring a compelling technology solution to bear by the RFP, so get in to in that regard.

Operator

Your next question is from the line of Graham Ryding from TD Securities. Your line is open.

Graham Ryding - TD Securities

Thank you. Could you maybe just expand a little bit on where in particular you are looking to create tighter linkages between your existing product suites?

Gerard Schmid

Good morning, Graham, certainly. I think the most obvious starting point would be around U.S. lending assets, if you think about the composition of what we have been building through acquisition and organic growth. We have market leadership positions in the point of sale which is the starting point of the lending value chain. We have very solid software-as-a-service loan origination platform which is one step further downstream the lending value chain. So, we now have a very strong product called LaserPro which is further downstream, so part of our goal is to integrate those technology assets to create a more straight through processing environment for our customers which certainly reduces operational errors on their front and creates a much more compelling value proposition. So the best starting point for us to be think about trying to give more tightly our lending assets.

Graham Ryding - TD Securities

Okay, great. I guess just a couple of quick financial questions. If I adjust for the depreciating U.S. dollar in Q2, it looks to me like U.S. based revenue would have been up quarter-over-quarter, am I looking at that correctly?

Gerard Schmid

Correct.

Graham Ryding - TD Securities

And then when you refer to your accretion year-over-year on adjusted net income of 10%. What will that look like if you adjust for FX?

Gerard Schmid

We haven’t calculated that but I mean it’s not a difficult calculation I just don’t have it in front of me, Graham.

Graham Ryding - TD Securities

Okay, I can take a step once if you have it on top of your head. And then I guess my last question which is feedback to Gerrard or Duncan, I don’t know if he is there. In the Canadian division, how do you rank your priorities over the near-term? And then you have got several initiatives that you are looking at and then over the longer term, medium to longer term where do you see the most potential to offset potential revenue and cash flow declining in the check area.

Brian Kyle

Yes. So Graham I would say that in the immediate near term from a go forward growth perspective obviously doing a great job around a few lending RFPs very, very important to us but that’s more of a defense today looking forward from a growth perspective, growing our payment manager revenues as well as enhancement services are very near term opportunities. And as I said in my prepared remarks, we continue to feel pretty bullish about our opportunities in that category.

As I look a little bit more over the medium term within our collection management services are there are some very interesting ways for us to continue to grow and in reference to some of the accelerated or higher levels of capital spend a lot of it is going into that particular are to. So those will probably be the two areas that make up our short term and medium-term growth in Canada.

Operator

(Operator Instructions) Graham Ryding from TD Securities, your line is open.

Graham Ryding - TD Securities

I did want to harden your time but given there is nobody else. One more question just on as you look at deleveraging towards your target of below 2.5 times debt-to-EBITDA. Given at that point you will have some leverage on your balance sheet, what should we be thinking of in terms of deal size capacity for future acquisitions?

Brian Kyle

Yes, that’s a tougher one to answer Graham but let me try to answer through two lenses. Clearly if I look at thinking today this quarter end, in prior quarters we thought about it through the lens with more product tuck under acquisitions, both from a management capacity perspective as well as from a financial capacitive perspective. So deal size is probably sub-100 million dollars of the same quantum.

Yes, as we move through the 2.5 times barrier, our capacity for a larger deal certainly increases. I am not going to put a limit on that because it’s a function of opportunity and how we are thinking about it, clearly we’ve demonstrated willingness to the move of modesty about three times for the right sort of transaction I wouldn’t say that our appetite is materially moved off that for that right sort of transaction, once we are below that 2.5 times range.

Operator

The next question is from line of Geoff Kwan from RBC Capital Markets. Your line is open.

Geoff Kwan - RBC Capital Markets

My first question was just around some of the cost savings that you talked about and whether or not just a little bit coming from the [indiscernible] but generally speaking it’s what you have been doing over the last couple of years. Have we kind of seen the fully effects of those, are there still some potential upside to come from, from expense side of the business?

Gerard Schmid

So, Geoff, given that you’ve covered us for some time, you will know that we have been considering ourselves pretty disciplined skews of our expense base and ongoing efficiency management is just part of what we do. So I wouldn’t say that we’ve run out of runway in that regard, we quite frankly are just kicking off the next wave of our programs in that regard. So I’d expect you to continue to see some of those efficiencies leak into our P&L of our future quarters. The nature of how we achieve those is certainly evolving. In prior years, we’ve looked at real estate consolidations, data center consolidations, process effectiveness opportunities and as we look forward, some of the uncertainty is still there. And as we think about bringing our process excellence capabilities to bear on HFS, that’s certainly true. But the nature of them is changing but not the quantum of the opportunity.

Geoff Kwan - RBC Capital Markets

Okay. In terms of looking with the balance sheet where it’s at and maybe doing some bolt on acquisitions kind of what you’ve done historically. How is the landscape today whether or not at the Canada and the U.S., are prices reasonable, is it the matter of coming down your price or funding the right type of company or asset?

Gerard Schmid

So Geoff for us, it’s only the matter of price on the right asset. I don’t think that those both are independent or a function of where we are at in the economic cycle. I’d say for this particular quarter we are careful around valuation ranges, there are some great assets out there would make sense for us to consider and others that quite frankly are perhaps a bit lofty in our estimation. But at the heart of it, we will continue to look for the right acquisitions that complement our product set. That’s the most natural strategic fit for us to take great product that might be available to distribute through our much broader customer base.

Geoff Kwan - RBC Capital Markets

Okay. So if I summarize that you are seeing, it sounds like you have a kind of less of companies or assets you find attractive it’s maybe just a matter of time or a matter of price, is that the fair way to characterize it.

Gerard Schmid

That is and that’s been a pretty consistent theme of how we’ve managed our M&A pipeline over the years Geoff. So I wouldn’t say that there is anything unique about that statement for this particular quarter.

Geoff Kwan - RBC Capital Markets

Okay. Final question I had was if I remember correctly, I think you had shut down your plants in Edmonton on the checking side of the business. Does that then would that have a slightly my guess is positive impact for the margins on that part of the business or shall we thinking about it in other way?

Gerard Schmid

I think the way to think about that is clearly we have several different drivers impacting the margins in our check business. One of them being volume declines, one of them being the efficiency programs that we undertake, so from my perspective, the best way to think about it is, those are the initiatives we have to take to hold our margins steady in that category. So, I wouldn’t look for margin expansion there.

Geoff Kwan - RBC Capital Markets

Okay, so it’s more, as you mentioned, holding margins that you supposed to little bit of uptick then.

Gerard Schmid

That’s right.

Operator

(Operator Instructions)

Gerard Schmid

It sounds like we have probably reached the end of our questions. So, with that I will bring the call to a close, thank you for participating today. We look forward to reporting our third quarter results and hosting our next formal call in late October. Bye for now.

Operator

And ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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