DATA Communications Management Corp. (DCM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I'd like to call this Annual and Special Meeting of DATA Communications Management Corp. to order. My name is Kingsley Ward, and I am Chair of the Board of Directors of DATA. It is my pleasure to welcome you to today's meeting. I would like to start by acknowledging the extraordinary circumstances being faced by all communities around the world as a result of the ongoing coronavirus outbreak. It is as a result of this crisis that we are conducting today's meeting remotely as a quasi-hybrid meeting. This format has provided all shareholders with the opportunity to vote their shares in advance of the meeting by submitting a completed form of proxy or voting instruction form and allows those present in person at the meeting today to vote on the applicable resolutions. [Operator Instructions] We will endeavor to answer your questions once the formal portion of the meeting is over. Please submit your questions in advance, if possible. With the consent [Audio Gap] I will serve as Chair of this Meeting and now call the meeting to order. Our Chief Financial Officer, James Lorimer, is also in attendance today and will act as secretary of the meeting. I have appointed Amy Kam and Connor Brazeau of Computershare Investor Services, Inc. to act as scrutineers. Computershare has deposited with me a statutory declaration confirming the sending of the notice of this meeting to each shareholder entitled to vote at the meeting, to each director and to the auditors of the corporation. The notice calling this meeting requires that shareholders intending to vote by proxy must have deposited their proxies with Computershare no later than 10 a.m. Eastern Standard time on June 24, 2020. The proxies so deposited are in the custody of the scrutineers and reflected in the preliminary scrutineers' report. The scrutineers have confirmed that these proxies represent approximately 26.6 million common shares of the corporation or roughly 62% of the outstanding common shares. The scrutineers have also confirmed that a quorum is present and the preliminary scrutineers' report will be kept with the records of this meeting, and a final scrutineers' report will be available after the conclusion of this meeting. As a result -- sorry, as the notice of the meeting [ has been ] given, as required, and a quorum is present today, I declare that the meeting has been regularly called and is properly constituted for the transaction of business. The agenda for motions with respect to the business that is to be dealt with at this meeting is contained in the notice of meeting you received prior to this meeting. A number of shareholders or proxy holders present have agreed to assist with the presentation of the motions. At the conclusion of the formal part of the meeting, the corporation's President, Michael Coté, will give his remarks about DATA's business, following which there will be an opportunity for you to ask questions. [Operator Instructions] After taking into consideration the results of the reports on proxies, the Board of Directors of the corporation has elected to revoke the preference share resolution accordingly, and we'll dispense with calling a vote on this matter at the meeting. Taking the revocation of the preferred share resolution into account, there are 4 matters set out in the notice of meeting to be voted on by shareholders. Unless there is an objection, I will dispense with the reading of the notice. The appointment of auditors will be voted on by a show of hands unless it is determined that a ballot is appropriate. The balance of the matters will be voted on by a ballot. I should make it clear at this point that only registered shareholders who have not previously voted by proxy or duly appointed proxy holders are permitted to fill out a ballot on these votes. If you are a proxy holder, ballots for each matter to be voted on are available at the back of the table, and those ballots will be used to conduct the votes on those matters. Please fill out the information requested in the ballot forms and cast your votes as each matter is put to a vote. Upon completion of the meeting, please place your completed ballots in the box labeled Completed Ballots in order to have the ballots reviewed and reported by the scrutineers. If you are a nonregistered shareholder, you will have already had the opportunity to cast your vote on the matters to be considered at today's meeting by providing voting instructions to your intermediary. Provided you comply with all the voting instructions in the materials sent to you by your intermediary, the votes on those matters have already been received and will be counted by the scrutineers. In order to expedite the voting process, the results of the votes to be conducted by ballot will be publicly announced following the meeting once the scrutineers have received and tabulated the results. I am tabling at this meeting the 2019 consolidated financial statements of the corporation. The financial statements are available on SEDAR. On behalf of the Board of Directors, I now place before the meeting the consolidated financial statements of the corporation and report of the auditors on those statements for the year ended December 31, 2019. The first item of business is the appointment of auditors. I believe that James Lorimer has a motion in connection with this matter.

Mr. Chair, I am a proxy holder, and I move that PricewaterhouseCoopers, LLP be and they are hereby appointed auditors of the corporation to hold office until the close of the next annual meeting of shareholders or until their successors are appointed and the Board of Directors be and it is hereby authorized to fix their remuneration.

Mr. Chair, I'm a proxy holder, and I second the motion.

Thank you. All in favor, signify by raising your hand. [Voting]

Contrary? [Voting]

I declare the motion carried. The next item of business is the election of 7 directors. Each director is to be elected to hold office for a term commencing at the close of this meeting and ending at the close of the next annual meeting of shareholders or until his or her successor is elected or appointed. I now declare the meeting open for director nominations. James, would you please present this motion?

Mr. Chair, I am a proxy holder, and I nominate each of the following: William Albino, Michael G. Sifton, J.R. Kingsley Ward, James J. Murray, Gregory J. Cochrane, Merri L. Jones and Derek J. Watchorn, for election as directors of the corporation to serve until the close of the next annual meeting of shareholders or until their successors are elected or appointed.

Before I ask whether there are any further nominations, I wish to note that the corporation has adopted a majority voting policy applicable to uncontested director elections. Among other things, this policy enables shareholders to vote separately for each director nominee at meetings of shareholders where directors are being elected. In addition, pursuant to the corporation's advance notice bylaw, only persons nominated in accordance with the procedures set out in the bylaw will be eligible for election to the Board of Directors. The corporation did not receive any notice of any director nomination containing the information prescribed by the corporation's bylaws prior to the deadline of 5:00 on May 27, 2020. Are there any further nominations at this point? Okay. I will now entertain a motion respecting the election of each of these directors. James, can you please present the motion?

Mr. Chair, I'm a proxy holder, and I move that William Albino, Michael G. Sifton, J.R. Kingsley Ward, James J. Murray, Gregory J. Cochrane, Merri L. Jones and Derek J. Watchorn, be elected as a director of the corporation to hold office until the close of the next annual meeting of shareholders or until his or her successor is elected or appointed.

Mr. Chair, I am a proxy holder, and I second the motion.

Thanks, Mike. We will conduct the vote on this matter by way of ballot. [Voting]

The next item of business is to consider a resolution approving and reconfirming the corporation's long-term incentive plan. Pursuant to the policies of the Toronto Stock Exchange, the long-term incentive plan must be approved and reconfirmed by shareholders every 3 years. The full text of the long-term incentive plan resolution and a copy of the plan are set out in Appendix A to the management information circular for this meeting. The long-term incentive plan resolution must be passed by a greater -- by greater than 50% of the votes cast by shareholders present in person or represented by proxy at this meeting. I believe that James has a motion in regards to this matter.

Mr. Chair, I move that the long-term incentive plan resolution set out in Appendix A to the management [Audio Gap] dated May 19, 2020, be approved.

Mr. Chair, I am a proxy holder, and I second this motion.

Thanks, Mike. Any discussion? If there is no additional discussion, we will conduct the vote on this matter by way of ballot. [Voting]

The last item of business is to consider a resolution approving and reconfirming the corporation's shareholder rights plan. Pursuant to the terms of the shareholder rights plan, the plan must be approved and reconfirmed by shareholders at every third annual meeting of the company's shareholders. The full text of the shareholder rights plan resolution is set out in Appendix B to the management information circular. The shareholder rights plan resolution must be passed by greater than 50% of the votes cast by shareholders present in person or represented by proxy at this meeting. James, we'll go to you again for a motion.

Mr. Chair, I am a proxy holder, and I move that the shareholder rights plan resolution set out in Appendix B to the management information circular of the corporation dated May 19, 2020, be approved.

Mr. Chair, I am a shareholder, and I second this motion.

Thank you. Any discussion? If there is no additional discussion, we will conduct the vote on this matter by way of ballot. [Voting]

As I have indicated earlier, the corporation will publicly announce the results of each of the votes held today following the conclusion of this meeting. If there is no further business to be brought before this meeting, I would ask James for a motion to terminate the formal portion of the meeting.

Mr. Chair, I'm a proxy holder, and I move that this meeting be terminated.

Mr. Chair, I'm a proxy holder, and I second this motion.

All in favor, please signify by raising your hand. [Voting]

Contrary? [Voting]

None. Great. Thank you. I declare this meeting terminated. I will now ask Michael Coté to make a few remarks about DATA's business. [Operator Instructions] We will endeavor to answer your questions once Michael is finished providing an update on the company's business. Over to you, Michael.

Good morning. On behalf of the Board, our executive and the rest of the management team and all those who contribute to the success of DCM, I'd like to welcome you to, dare I say, the informal portion of our 2020 AGM, as virtual as it may be. We are hosting a virtual AGM today given that our world has changed in unpredictable ways since the COVID-19 outbreak and lockdown back in mid-March. I thank each of you who are so willingly adapting to this year's format. To begin, I wanted to pause to recognize this moment in time, to pause and acknowledge where we stand in June of 2020 and the devastation of the COVID-19 pandemic. So much has changed in the last 4 months. Our economy is in a state of turmoil. Our industry and our customers face new challenges on a daily basis. And in the end, the people around us are bearing the brunt of this pandemic: our coworkers, our neighbors, our friends and, of course, our families. Our last report, just under 15% of Canadians are out of work, and more than 8,000 Canadians have died as a result of this crisis. I open with this acknowledgment of the turmoil we are all facing because I believe how we respond during times of crisis defines the strength and character of the individual and ultimately, our organization. While the spring of 2020 has seen global instances of personal and corporate upheaval, this crisis is just a moment in time. DCM has been in business for more than 60 years, and we've weathered many difficult periods during that time. I can say with confidence that during my time here, when we face challenges, we've learned from them. We've made the necessary adjustments and continue to focus on building the best DCM possible. What we discovered about ourselves back in 2018, together with our willingness to fight through a challenging 2019, prepared us to handle this first quarter of 2020. You can't plan for something exactly like this. You can only respond. Having planned for and been through so many other different challenges, our response as a business to this latest challenge presented by the COVID-19 pandemic has reaffirmed that DCM was indeed prepared. As much as your company made progress in 2018, recording year-over-year improvements in revenue of 11.5%, adjusted EBITDA of over 38%, 2019 can, at best, be characterized as progress interrupted, owing overwhelmingly to the challenges associated with the launch of our ERP system in June of this past year. I have no doubt what we learned about ourselves in both 2018 and 2019, in good times and not so good times, contributed much to our 2020 first quarter results and has set us back on a path, a return to progress, even if that path or return to progress may not present itself as a neat-straight line for the remainder of the year. What we achieved in 2018 and what we discovered about ourselves and our willingness to fight through a challenge in 2019 has prepared us to handle 2020. Our response as a business to this latest challenge presented by COVID-19 has reaffirmed to our leadership team that DCM, your company, is poised for future success. What we learned about ourselves yesterday has contributed to our stability today and has set us on a path for success tomorrow. That is my theme: yesterday, today, and tomorrow, our journey to becoming the best we can be. And we know we can and will become much better. We owe that to you. When I joined DCM just under 3 years ago, I was up for the challenge. I was energized to be part of a team that would transition DCM from a legacy print business into a solutions-focused organization that fulfilled the business and marketing services needs of Canada's biggest and best brands. Our responsibility was and is to serve a customer base that includes all the leading financial service providers in the country: the #1 retail brands in the country; the #1 supply chain and logistics networks in the country; most of Canada's leading health care networks and health care service providers; and many of our federal, provincial and municipal government departments and agencies. It didn't take me long to recognize that when you stop and consider that customer list, financial institutions, retail, supply chain, health care and government services, you realize that DCM plays a role in the lives of every Canadian. As the politicians say, from coast-to-coast-to-coast. It is a responsibility we take very seriously. In fact, year-to-date 2020, through trying times, our 30 largest customers have shown year-over-year revenue improvement of a little over 5%. Our core business, the majority of our business, has remained strong even during trying times, even after a challenging 2019. Prior to my arrival, DCM made the very difficult decision to overhaul our 6 outdated, no longer supported legacy ERP platforms. We had to do this. If we didn't act, we would have shirked our responsibility to serve our customers and ignore the long-term effects on our business if these key customer relationships were put at risk owing to a failure of any one of our then 6 largely unsupported legacy systems. Ask anyone who's been through an ERP implementation. Anyone. They will tell you, it can be all-consuming, and it's never easy. In 2019, the planning and prep for our ERP launch had been underway for well over 3 years, many months of late nights, many hours reviewing decades of outdated systems and processes. And in April of 2019, I was appointed President of DCM. The ERP team was in the final stages of riding our business, having completed several successful prelaunches of the system, each of which indicated a successful launch awaited. I knew we had the makings of a great business. We had made meaningful progress in 2018, but we had to get our house in order to solidify our foundation, to ensure future success tomorrow. In June of 2019, our ERP went live. From that moment on, ERP was the overriding story of 2019. And its impact is reflected in our 2019 financial performance, interrupting the meaningful progress made in 2018. There is more to it than the numbers. ERP took a toll on our people, but I will tell you, having seen it firsthand, they refused to give up. We also refuse to give up on our customers. And we forged some powerful relationships with our customers, who learned to trust us to deliver on our promise to be there for them even during the most trying of times. So how did we do it? Transparency and open lines of communication. As and when required, there were daily top-to-top calls with our key customers. People worked through the night. Pizza went into the rooms, empty boxes came out. Our team went without holidays to ensure we met the needs of our customers. We were far from perfect, but our customers knew we had their best interest at heart, and we would not give up until we made it right. As President, I had the opportunity to engage with our customers and engage at every level within our organization as we look to solve the daily challenges of ERP. There were some good days and, candidly, quite a few dark days. When I look back to this period of time, what resonates with me most are the people here at DCM, who stood their ground, dug in and did the work that needed to be done. We have good people who are committed to our customers, to each other and to DCM. That's what I'll take away from the ERP journey in 2019. And that's what resonates most with me from our shared yesterday of 2019. We earned our customers' trust day by day, and we intend to keep doing just that. That bond of trust cemented in 2019 has served us very well during these first 2 quarters of 2020. So where are we today? As I mentioned, year-to-date, our revenue with our top 30 customers is up year-over-year by a little over 5%. Our labels business continues to grow with particular strength in the cannabis segment of the market. And we see our marketing-oriented solutions business showing meaningful signs of recovery having been unduly impacted by the COVID-19 pandemic. We also see ourselves in position to reduce our aggregate debt by approximately 25% this year when compared to where it stood at the beginning of the year. And we are doing this having reduced cost of goods sold and SG&A by approximately $20 million annualized over the past 12 months. That will pay off. We will operate more efficiently. Today, we are emerging from the first quarter of 2020 with numbers that are better than Q1 2019, and that's the only quarter in 2019 that was not adversely affected by our ERP launch. And our first quarter of 2020 also shows significant progress, particularly when compared to the immediately preceding quarter being the fourth quarter of 2019. As the numbers always do, they speak for themselves. Q1 2020 represents our return to progress, as you can see from the comparative tables on the screen. First quarter highlights on a reported basis compared to Q1 2019. Revenue is comparable. Cost of sales, $55.8 million compared to $57.8 million, a reduction of minus 3.5%. Gross margin percentage of 28% compared to 26.4% or about 160 basis point improvement. Adjusted EBITDA of $10.5 million compared to just under $8 million, a 33% improvement. And net income of $2.2 million compared to a slight net loss. And with respect to the first quarter highlights compared to Q4 2019, a revenue improvement of 8%. Cost of sales, a slight increase, owing to greater volume. GM percentage of 28% compared to 24.5%, a 350 basis point improvement. Adjusted EBITDA, as I said, of $10.8 million compared to $5.5 million, a near 100% improvement. And net income of $2.2 million compared to a considerable net loss in the fourth quarter of 2019. As much as our trajectory is positive, given these uncertain and unprecedented times, we do not, however, expect our return to progress to present itself as a neat-straight line for the remainder of the year. We will, however, ensure for the balance of 2020 that your company will remain flexible and able to adapt to the uncertainty of the economy and the changing needs of our clients. This is where we are today. So how did we get here? The tough work on fixing our systems and processes is largely behind us. Our system works. I know it works because we just put it through the ultimate test. The impact of COVID-19 was unprecedented on our customers, and we have succeeded in serving their needs on every front. As much of the country and many industries went into forced lockdown seemingly overnight, DCM responded whenever and wherever our customers needed us. Daily news reports from our federal, provincial and municipal leaders spoke often and earnestly about the need to support our essential services: financial services, supply chain and logistics and our health care networks and first responders. Our essential service providers, trusted by all Canadians, needed someone they could trust, trust to ensure a level of uninterrupted service, notwithstanding the pandemic. DCM answered the call. We never closed. We never missed a customer deliverable. We never lost sight of the role we play in the lives of everyday Canadians. Overnight, our customers' needs shifted from the routine of business-as-usual to mission-critical. To ensure the safety of our employees, their families and the communities they live in, we instituted new social distancing and hygiene protocol. We worked with our suppliers and key supporters in the marketplace to secure scarce raw materials needed to manufacture the products required by Canada's leading essential service providers. When we called our key vendors, some had actually shut their doors. But when we reached out, they answered the call by ramping back up to ensure DCM continue to serve the needs of Canadians, as we have for over 60 years. As I sit here today, I'm still overwhelmed by the numbers, the sheer scale and breadth of DCM's response to COVID-19 and the network of essential services we enable. On behalf of the Ontario provincial government, we helped issue over 7 million COVID-19-related checks. For our food retailers, we supplied over 7 million home delivery forms and support documents. For our leading logistics organizations like Canada Post, FedEx and Purolator, we provided over 3 million support documents. For our leading pharmacies, we provided over 10 million prescription labels. DCM led the way with the development of in-store and in-branch signage to reassure and enforce protocols for social distancing and safety. For our frontline health care workers, we provided hundreds of thousands of critical COVID support documents, including custom admission forms, support material for pediatric and adult assessment, surgical flow sheets, code blue resuscitation records, diagnostic imaging records, surgical consent forms and patient wristbands. And it's worth noting many of these requests came in marked urgent and required same-day turnaround, and we delivered. On day 1 of the lockdown, our digital deployment of the targeted communication campaigns went into overdrive. Big brands realized that in times of upheaval, a clear, dependable, incredible flow of information is key to maintaining relationships with their customers. DCM's digital group provided that uninterrupted flow of information. Our digital team generated and managed hundreds of national, regional postal-code-targeted campaigns on behalf of the biggest brands in this country. Each brand required unique messaging to carefully position how they responded to the crisis. Thousands of individual communications were issued. And in the weeks that followed the initial lockdown, we managed multiple campaigns consisting of hundreds of thousands of communications for many of the country's leading brands to their wide and varied customer base. We were quick to respond on the physical product side of the business as well. We began sourcing product for our customers and develop unique solutions in-house at DCM. We developed a consumer-friendly solution to avoid contact with keypads required for digital payment. To date, we have shipped just under 40,000 of our proprietary clean screens to major retailers across Canada. We secured numerous critical products for our customers, including PPE-related solutions. And when it came time to reopen our stores, restaurants and other nonessential businesses, we developed and manufactured thoughtful queuing solutions and enhanced the customer experience for the public as well as the business operator. Most recently, DCM was awarded the opportunity to help launch the POST Promise. P-O-S-T, POST being an acronym for People Outside Safely Together, a public-private sector initiative in collaboration with all 3 levels of government designed to help Canadians confidently and safely take their first steps back into public spaces, stores and the workplace itself. We are currently in the process of manufacturing and distributing thousands of these POST Promise kits nationwide. This is just a partial list of our overall response to the needs of our customers and Canadians. Revenue to date for the various products and services related to DCM's COVID-19 response, almost all of which falls outside of Q1 2020, approximate $7 million. That's the number. But once again, that's not the whole story. We must also recognize the extraordinary efforts of our people. I can't say it enough. Our team at DCM has never wavered in their commitment to the role we play as the manufacturing and technology provider supporting the brands that everyday Canadians depend on. When COVID-19 struck, we answered the call. We never closed. We never missed a customer deliverable. To this team at DCM, I thank you for your ongoing commitment to each other, to our customers and to the communities we live, work and play in. This is where we are today. Our systems are working as planned. And our people are focused on the task at hand to make DCM the best it can be. So where are we headed tomorrow? Our return to progress in the first quarter of 2020 and for the balance of the year has your company focused on 5 business priorities: our core enterprise customers; further improving gross margins; reducing SG&A; improving working capital and paying down debt, which we intend to reduce by up to 25% this year; along with digital innovation to support the future growth and better meet our core customers' evolving needs. One final point to leave you with before we take questions. In December of 2019, we announced a rights offering. And by the time of its closing in January of 2020, we were well oversubscribed. Your Board of Directors, your executive team and other insiders, purchased more than half of the just under $5 million worth of shares issued during the rights offering. Consider that for a moment. When the people closest to DCM were given the opportunity to take a stand, double down and declare their commitment to DCM, they spoke as one with a clear voice. We believe in DCM. We believe in where we're headed. We believe in the DCM of tomorrow. As President, I can assure you, I will never waver in my commitment to you, our shareholders. We are committed to making DCM the best it can be. With that, we would be happy to entertain questions.

Mike, we have one question from John Murray. And he asks, how is COVID impacting your business? And are you in a position to provide us any guidance for the balance of the year?

I think you can gather from the remarks that I shared with you, in many ways, carefully said, it has been positive. Our top 30 customers' revenue year-to-date is up 5%. And while we expect dips in revenue and we don't expect to meet straight-line path to recovery with respect to guidance, I would say given the unpredictability and uncertainty of the economy, it would be irresponsible to provide that at this time. But I would say that we -- our trajectory is positive, and we continue to provide solutions that our customers require to help them get through this, and that in itself is positive.

We have an additional question from [ Ivan Pinon ]. And he's asking, can you talk a little bit about how the investment in Perennial is performing? And maybe you can provide a bit of an update on the progress there.

Sure. It's actually been a very good investment for us, and you can't prove it any more. With respect to this $7 million in incremental revenue that we attribute to COVID-19-related solutions, in addition to the work of our sales leaders, the response time and the creativity required to get those products to market seemingly overnight, I can say with confidence, we would not have been in a position to do without the team at Perennial and that investment. It further positions us to grow our marketing, services and solutions business, which we are starting to see signs of pickup today given the impact on it in the first quarter, in particular, through COVID-19.

Thanks, Mike. We have no further questions at this point.

Okay, folks. With no further questions, I'd like to thank Mike for his address, and thank the team for all their extraordinary efforts through some very difficult times. That brings us to a conclusion. Thank you to all our shareholders for your ongoing support. We look forward to seeing you at our next AGM. Stay safe. Bye for now, folks.