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

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Data Communications Management Corp. Fiscal 2021 and Fourth Quarter 2021 Financial Results Conference Call. My name is James Lorimer, CFO of DCM, and I'm pleased to be hosting today's call. Joining me on the call today is Richard Kellam, President and Chief Executive Officer. Following our prepared remarks, we will be moderating a Q&A session. As a reminder, this conference is being broadcast live and recorded. We'd also like to remind everyone that Richard and I can be available after the call for any follow-up questions that you might have. Before we begin, I'll remind everyone that we will refer to forward-looking information on today's call. This information is subject to certain risks and uncertainties as outlined in the forward-looking information disclosure in our press release and more fully within our public disclosure filings on SEDAR. We have posted a brief video message from Richard along with a summary of our results and key initiatives from 2021 on our website in the form of an infographic. Our detailed information will be published on our website and SEDAR. You can also follow us on LinkedIn to keep up to date with some of our business insights on relevant market trends and customer case studies. I'll now turn the call over to Richard.

Thank you, James. Appreciate it. And James, just flip to the next slide, if you don't mind. Good morning, everybody. And I do see a few people from other time zones. So good afternoon, good evening as well. So I joined DCM on the 8th of March 2021, so just over a year ago. And since joining, we have clarified our strategy and aligned that strategy across the entire enterprise and been working as a team to build both a better and a bigger business. I'm going to start off today's call by talking a little bit about strategy and just sort of reminding and refreshing that for our shareholders today. James? So we put the strategy in place, I guess, about 1 quarter into my joining DCM and very clear that we want to move from a conventional print company into more of a tech-enabled marketing workflow organization and also standing up our digital asset management platform, which I'll talk a little bit about today as well; move from what we call a print-first company to a digital-first company. Not to say we're not going to do print because there's a lot of high-margin opportunities for us to drive -- to build the business and drive cash flow to fund our digital journey. But very much focused on enabling that print for our DCMFlex platform. So tech-enabling that workflow and then standing up this digital asset management solution we call ASMBL. And we put clear 5-year financial objectives in place as well. As you see in this slide, our targets are to get revenue moving at north of 5%, and that will get us up over $300 million in the next 4 to 5 years. We can see a clear path to 35% to 40% gross margin as we lean in heavily on that tech workflow and digital asset management solutioning. Our SG&A, we're going to operate at 0 overhead growth, and that will get us in the 18% to 20% SG&A range. And we see a clear path to adjusted EBITDA of somewhere between 18% to 22% and likely towards the higher end of that range. So we put those 5-year goals in place, and we now have very active and detailed programs -- change management programs to deliver these objectives. And moving on to the better and bigger business strategy, I'm going to start today's call with taking our shareholders through what we've done to build a better business. So first, we've had some significant headcount reduction and productivity improvements. If you look at this chart, you can see that our headcount in 2021 is down to 922 from 1,433 in 2018. So that's a 14.5% reduction in headcount this year versus a year ago and almost a 35% reduction since 2018. So we have been very focused at driving productivity improvements here. And you can see that on the right-hand side of the chart, that our revenue per employee has gone up quite significantly, 6% increase versus the prior year and almost a 25% increase since 2017. The second theme, if you will, in terms of building a better business was the leadership team optimization. So as soon as I came into the company, in fact it was planned before joining, I eliminated 2 complete levels of leadership, eliminated 6 senior-level positions, broadened the span of responsibility across the enterprise, so created a lot more span of responsibility, and also accelerated decision-making. And I'm really pleased with the way decision-making is now flowing through the organization. So much more agile in our decision-making process as a result of leaving out some of the layers and driving accountability and responsibility. The third theme or third thing we did to drive a better business is factory consolidation and operational efficiencies. On the factory consolidation side, previously announced Brampton consolidation is complete and was complete on time and on budget. That facility has been closed in Mississauga and consolidated into Brampton. That will deliver $1.8 million in savings. The team did a fantastic job at managing a lot of complexity in that consolidation. We also moved our Edmonton facility into Calgary, and that consolidation is complete. It was complete by summer, and that will deliver close to $800,000 in savings. And we've also cleaned up some of the digital inkjet capabilities we had and invested in some new technology with Canon. And that's a $1 million savings in operational expense as well. So some very good progress there. The fourth area of opportunity that we delivered is around office consolidation. And that consolidation is due to the hybrid work model. We consolidated 2 facilities into 1. That will save us $800,000 a year in rent. And the math on what I previously presented a couple of slides ago on leadership optimization and other headcount savings will deliver in total about $11.4 million, $3.9 million on leadership and $6.7 million on headcount savings. So some good productivity opportunities there as well delivered in 2021, which will carry through into 2022. The fifth area is on debt reduction and refinancing. You can see on this slide that our debt has been reduced by 23% versus a year ago, we're down to $37 million, and 50 -- almost 54% since 2019. And we look back to when we went -- to when we IPO-ed. This is the lowest debt we've had as a company since we IPO-ed in 2004. And you'll see a little later on what our debt repayment schedule looks like, but we're going to continue to aggressively pay down this debt. But great progress in 2021. And as previously announced, we did refinance a significant portion of our debt, which will save us $1.5 million in interest savings through 2022 and onwards. Okay. So a little summary -- and James is going to get into a little bit more detail, but a little summary of our savings initiatives. And James will talk to our restructuring expenses, but we did have $9.7 million in restructuring expenses in 2021, and those will yield, as you can see on this chart, and deliver $14 million in savings. So a very good return on investment. And you'll hear from James as we get into the financial portion of this deck that we are anticipating or planning very little, very, very little, I'll repeat that, restructuring in 2022. The restructuring that we needed to do has been done in 2021, and there is very little, if any, in 2022. And then finally, other key initiatives that we delivered in 2021 to build a better business. A lot of work on associate engagement, driving -- understanding the engagement level of our associate base, building competency and skill development. A lot of work on client engagement. We went and listened to our clients and created a whole strategy around listening and acting on that listening. We've got a very clear ESG strategy now. Maybe 1 example would be PrintReleaf, where we are putting -- 100% of the paper that we're using in our production is actually going back into the ground so it's reforested. We've got 18 clients who have signed on to PrintReleaf. And with those clients, they can exactly see, based on their individual paper use, what is being reforested on behalf of that client. So some very good client momentum on our ESG strategy, particularly with that PrintReleaf initiative. We've also leaned in heavy to our business intelligence/analytic tools, pulling fantastic information on our ERP. And then, of course, we've continued to accelerate our digital capabilities and converting a lot of conventional print to DCMFlex. And then we've got a clear product development road map with some clear client opportunities we'll discuss when we talk about a better business. So those are the key initiatives, -- James, flip to the next slide -- the key 6 things that we've done in 2021 to build a better business since I joined on March 8. Now I'd like to talk about the bigger business. So I'm happy to report that we've stabilized revenue in second half of 2021. So if you look at this next slide, sort of from where I started to where we ended, you can see that in the first half of the year, our revenues were -- continue to be quite impacted by some of that lockdowns that we were experiencing across the country. And our total revenue was down close to 17%. A completely different story in the second half of the year as we worked to build this bigger business. You can see we almost stabilized revenue on that third quarter and delivered positive revenue growth in quarter 4. So a very different story from first half to second half. If you look a little -- if you'll dig a little deeper and look at our core business strength -- so this is the -- this is all the business that we're putting through our factories. And to me, this is the most important metric because this is a -- this is how well we're sweating our assets across the country. Again, a very different story across two halves. Our core revenue or our core business revenue, as I said, flat in the second -- our total business, flat in the second half; our core business up 10.3%. And you can see how that played out in quarter 3 and quarter 4. Core business up 7.7% in quarter 3 and 13% in quarter 4. Again, this is all the business that we run through our factories, okay? So very solid indication of health of our business when you see that core business returning to 13% growth in the final quarter. And then we've had some significant new business wins and -- across a multiple number of verticals. So happy to see the business wins that we've secured in 2021. And we've got some continued wins that we're delivering in 2022 as well. Okay? Having a look at gross profit. Our gross profit, also very much a story of 2 halves. You can see the first half down on gross profit and second half up quite significantly, 10.2%. And obviously, that's due to both a return of positive revenue flow and also that strength in our core business, right, if we're running our factories hard. Remember, I said our core business is up 13% in quarter 4 versus a year ago. And you could see our gross profit, at $17.7 million, were up 18% versus year ago, again due to the strength of that core business and that return to positive revenue flow. So gross profit, very similar, obviously, to our revenue. A story of 2 halves. We had some challenges in the first and a return to real positive flow in the second. Okay? And then just talking a little bit about digital acceleration and our digital-first strategy. I'm really actually very pleased with the progress we're making on this strategy, leveraging our 40 years of workflow and DAM expertise, converting conventional print workflows to DCMFlex. We've got a lot of conversions that we delivered in 2021 and onward through 2022. We've -- we continue to build the skill and capability of our commercial team with what we call a digital acceleration program. And looking at our pipeline of digital asset management solutioning, we've got over $10 million of tech services in that pipeline across 50 clients. And our plan is to continue to accelerate the conversion of those pipeline opportunities. So lots of conversations from where we were on the 8th of March, when I started, to where we are today. A complete, different company in terms of where we're going with this digital strategy and accelerating with -- that with clients. Okay? So James, I think the next slide is the final one. So that's what we've done to build a bigger business as well as a better business. I'm going to turn it over to James to go through our financial results.

Thanks, Richard. I'd like to start with the 2021 P&L compared to 2020. And the story really on this page is gross profit. And our relentless focus on improving margins really paid off in 2021 with a 29.5% gross margin despite a fair bit of decline in revenue. And Richard, I think, did a really good job talking about that story of kind of 2 halves and how we entered -- or we exited 2021 with some really good momentum. SG&A is in line with 2020, but there are actually some kind of onetime noncash charges, in aggregate about $3.5 million, in 2021 largely related to mark-to-market adjustments, noncash items for RSU and DSU expenses. So if you were to normalize that, SG&A would be almost $3.6 million, actually less than it was in 2021. Restructuring expenses, Richard talked about earlier, and I'll talk a little bit more about that. But really, the difference in the kind of bottom line, if you look at an adjusted income or an adjusted net income or even adjusted EBITDA, is really the difference in restructuring expenses and grant income. And our grant income, we'll show you on the next slide. Here, you can see how our EBITDA compared to last year. So we did $33.3 million of EBITDA in 2021 compared to $41.5 million a year ago. You can see the big difference in the wage subsidy payments, and we really received very modest levels of wage subsidies in the second half of 2021. So if you adjust our business for that, you can see all the heavy operational improvements and other initiatives we've been working on have really done a good job in kind of what we've called the CEWS adjusted EBITDA. So that's really just taking adjusted EBITDA and deducting grant income that we receive from the government. And if you look at the EBITDA on that basis as a percent of revenue, it's 12.2%, which is up compared to 11.9% of revenue. We had strong cash flow from operations. That had continued. In 2020, we benefited from the significant working capital improvements that we made throughout the year. And about $16 million of that in the cash from operations in 2020 was from our working capital improvements. The difference in 2021 was about $7 million. And again, kind of the other difference here would be the provisions that we took in last year. And as Richard said, with our restructuring charges really behind us, we believe that should continue to boost our cash from operations going forward. We continue to have a strong free cash flow from conversion rate close to 90%. If we look at the 2 halves, revenue was essentially flat between the first half and second half of 2021. Gross profit improved a little bit, but you can see that we are consistently in that 29.5% to almost 30% range. And as we talked about earlier, our long-term objectives are to grow gross profit to between 35% and 40%. So we're certainly making some progress in the past year. And if we keep doing that every year, that 35% is certainly well within range. You can see in the second half there were some kind of extraneous SG&A expenses. Those are largely where the mark-to-market expenses hit us in the year as our share price performed quite well in the second half of the year. Again, if we look at CEWS adjusted EBITDA, so this is adjusted EBITDA deducting grant income, you can see a real strong performance in the second half of the year at about $16.5 million. That's up almost 33% from the first half of the year. So when Richard talks about momentum, it's not only on the kind of business side, but it's also in the kind of free cash proxy on the bottom line. We had a really solid fourth quarter, and we're really pleased with how we exited the year. As Richard said, the year-over-year growth in revenue was the first we've had in over 3 years. So that's something we're really proud of. Gross profit was strong. Again, you see that significant improvement in gross profit margin compared to last year. SG&A, I mentioned some of the mark-to-market charges and other expenses that were kind of onetime nonrecurring. And so if you look at kind of CEWS adjusted EBITDA here, although adjusted EBITDA was comparable because of those noncash charges, if you adjust for the CEWS and CERS income, adjusted EBITDA was actually up almost 30% compared to last year. So here's -- just kind of repositioning some of the quarterly revenue bars here from what Richard showed you earlier. But what you see here is 2 successive quarters of revenue growth, Q3 over Q2 and Q4 over Q3. This sets us up really well going into the first quarter of '22. The first quarter is historically our strongest quarter. Likewise, with gross profit and our relentless focus on driving gross profit and gross margin, you can see that, that's similarly tracked with the increasing revenue. So restructuring. We had some minor charges for some facility closures in the end of the year. We talked about the headcount reductions that we made throughout the year to really kind of optimize our business, and we believe we've got a strong payback on that. But I want to really emphasize here and put us -- just one slide together that says our restructuring charges are largely done, we don't see any facility closures or headcount reductions, we think we're really positioned now nicely for recovery as consumer movements return to kind of more normal levels. Here's a snapshot of our maturity profile on our debt. And we're really proud of how much debt we've paid down over the past 2 years. This just shows our term debt and our term maturities. At the end of the year, we had about $34 million of term debt. Based on our current maturities, we'll pay down about $12.7 million this year in term debt, and we'll also pay down another $11.8 million in 2023. So over the next 2 years, you should see almost $25 million of debt repayment. This does exclude our revolving credit facility. We closed the year with about $3 million drawn on that. But we also had a cash balance of almost $1 million. So our working capital will certainly fluctuate a little bit with our needs. And you might see that grow a little bit, but we think our revolving line of credit will be pretty consistent throughout the balance of this year. And now I'd like to turn it back over to Richard.

Thanks, James. I'll just give a quick summary before we turn it over to any questions. James, just flip to the next slide. So look, hopefully, it's clear that we have a very clear strategy. As I said, I joined on the 8th of March, worked through the first quarter to get that strategy in place. Strategy is very clear across the entire enterprise, and we've got some great momentum against that. We will continue to build a better and bigger business. We are fully relentlessly committed to that, right? We're always looking for opportunities to better it and make it bigger at the same time. Our core business, as I said earlier, is very strong. To me, a clear indicator of strength in the business is when your core is strong. And then, we're certainly well positioned for digital business acceleration and business growth. And we've really read those conversations with clients, and I'm super pleased with the funnel that we currently have sitting in front of us that we'll see acceleration through. So one thing I know in my 36, almost 37 years in business is when we have a strong exit, which we did in 2021, you saw those numbers, we've had good momentum in the second half of the year and especially the fourth quarter and especially in our core business, that likely means that we'll have a good start in 2022, and we're certainly seeing that as we progress into this quarter. So some very good momentum. Very pleased with the team and the progress that we're making as a business, progress we're making as a united team. So that concludes our call, and I'll turn it over for any questions. And James here is going to sort of queue up how to ask the questions here, right?

[Operator Instructions] Let's figure it out. (416) 574-0469. [Operator Instructions]

It's Chris Thompson from eResearch. I was just wondering if you can just comment on the overall market you see for 2022 with your clients since we've already sort of come through a couple of months. I know myself, I'm not as active going into stores, looking at brochures, et cetera. As well as, there's a lot of conversation around the supply chain and how that's impacting business either getting supplies and/or getting stuff out the door. So I wonder if you can just comment on how that's impacting your business so far this year.

Yes. Answering the first bit of your question, we're actually seeing an uptick, so an improvement in overall kind of workflow as a result of more movement -- more consumer movement in the economy. So we're seeing that positive strength. And then from a material standpoint, yes, I mean, like most businesses, there's certainly been an impact in raw material -- in access to raw materials. But a couple of things, Chris. I'm happy to report that it has not impacted our business at all. We've got arguably one of the best purchasing teams that has scoured the earth for paper to be able to flow that paper through our production. So yes, not impacted, but a lot of sweat equity going into procuring. There is an impact on pricing. So the materials that we're buying are obviously more expensive. Good news is we've got raw material indexes built into most of our client contracts. And where we don't have a raw material index, we've taken a general price increase on those raw materials. But again, hopefully, that's clear. Everybody is experiencing challenges securing paper. I'd say we're probably one of the better out there -- suppliers out there in terms of procurement. And we -- honestly, we picked up some business because some of our competitors haven't been able to get the access to the supply that they need. So all good on our side, and we're working to make sure that we're getting -- any inflation in the raw materials is being passed through.

And can I just ask one other question regarding your cash flow and allocation between paying down your debt versus growing the business with your digital-first strategy versus any potential M&A?

Sure. Chris, our primary focus right now is continuing to pay down debt while, at the same point, investing in our digital technology. We'll certainly look at M&A, I'd say, very opportunistically. And it would be -- if we look at M&A, it's going to be something that's probably maybe a small kind of strategic kind of technology or technology services company. From a paying down debt, we want to continue to pay down debt over the next year or 2. And we think with our free cash flow, that certainly gives us some nice flexibility as we kind of look ahead from that point. CapEx is going to be fairly modest this year, something in the range of kind of $1.5 million to $2 million. But it's more investing in some of our kind of digital capabilities and digital equipment rather than any of our kind of legacy, more kind of forms and label presses. Our focus is really going to be on our -- any kind of digital capabilities. We have a question from (416) 343-3352.

It's Noel Atkinson from Clarus. Can you folks hear me? .

Yes.

Okay. Great. So Richard and James, well done in Q4. I just want to follow up on a couple of other questions here. The DAM and the tech services pipeline seems to be growing pretty rapidly here. Is your sales force primarily targeting the existing DCM clients? And then secondly, what's your thoughts on expected sales cycle length for a new order in that sector?

Yes. So Noel, great question. Our focus -- our primary focus right now is on existing clients. We have 250 enterprise clients. So it's about having conversations with those clients. And a lot of clients don't even understand they've got a problem in digital asset management solutioning. So discovering the problem and helping them with a solution. So finding the right people to have the right conversations with among our 250 clients, that's where our focus is right now. We'll move beyond that, obviously, but there's so much opportunity in that existing client base. And that is one of our key competitive differences. On the cycle time, because our strategy is large enterprise, okay, it's, on average, about a 180-day sales cycle from start to standing up a solution. So we're kind of in those early conversations right now. If we were -- eventually, we'll move to our small and medium-sized -- we have over 2,500 clients in the small- and medium-sized area as well. That sales cycle is much shorter and much less kind of managed service is required. But our large, complex, big organizations, longer sales cycle and a lot of managed services, obviously, to -- for them -- for us to stand it up for them to be successful, okay, because -- again, just given the amount of complexity.

Okay. Great. Then next, you mentioned $14.7 million annualized cost savings from the restructuring activities in 2021. .

Yes.

Of that -- has that all been recognized now as of Q4? Is it all flowing through the Q4 G&A? Or do you expect to see some incremental G&A or even OpEx improvements there in '22?

Yes. Good question, Noel. A lot of those changes were made kind of throughout the year. Our Edmonton facility was closed in June, and so we probably recognized about half of those savings in the year, and we'll -- the -- so I think the run rate that you saw in kind of Q3 and Q4 for Edmonton would be in line. Our Mississauga facility was closed at the end of December. And so that kind of $1.8 million of kind of annualized savings, we haven't yet seen in -- through Q4. Some of the other restructuring -- I'd say some of the kind of lumpier restructuring expenses from a headcount perspective were done in kind of Q2 -- I guess a little bit of Q1 and then kind of Q2, Q3. So it'd be pretty good as you're getting into Q4 as kind of a run rate for those. So really, really probably the biggest impact we're going to see is from the Ambassador, Mississauga facility closure. And that'll be -- should help us on the gross margin line because that's all kind of gross profit-related savings.

Okay. Great. And then just one more from me. You folks make a pretty big priority in -- at least in the corporate presentations about DCMFlex, and I just wondered if you could talk about any sort of significant customer wins you've had in -- you had in Q4 or anything you've had so far in Q1.

Yes. Noel, I can't name the customer, obviously, given confidentiality in the nondisclosure agreements we have. But we've had some significant clients -- existing clients that have moved from kind of managing that business in an analog format to a digital format. And there's been a couple on the financial sector, couple in retail. One particular -- one in -- a big one in [ Laurel ] as an example. So there's been several. And I think I've said this before. Prior to us clarifying our strategy, there were more clients that were unaware of our digital capabilities than were aware of our digital capabilities. The reason we had roughly 30% to 32% penetration of our Flex platform is because those -- we were helping those clients simplify their complexity because there was a need there. But we didn't necessarily talk to the other 70% of clients. So now that we're accelerating those conversations and they understand and they see the value in optimizing their workflow with our platform, we're -- we've increased penetration quite significantly. And we've put a clear target out there that we want to have 75% of that print workflow digitally enabled in the next 5 years, and we're on that glide path to deliver against that now that our clients truly understand our capabilities. So I can't tell you the client names, Noel, given confidentiality, but it's across a few different verticals and big clients.

[Operator Instructions] Yes, it looks, Richard, like we don't have any further questions. Do you want to provide any closing comments?

Yes. I'll just want to say thank you to our shareholders, thank you to the DCM -- all of our DCM team, our DCM associates. I think we're on a great path to success here. We're super excited about continuing this strong delivery through 2022. And as I said, we've got a clear strategy. We've got clear focus on continuing to build a better and a bigger business, and we've got the right team to do it. So thanks for the opportunity to present our results. And I guess it won't be long, right, James, until we're on with quarter 1 results. The -- early May, we're on with quarter 1 results. So thank you, everybody, for dialing in today.

Thanks, everyone.