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. First Quarter 2023 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, our CEO and President. Following our prepared remarks, we will be moderating a question-and-answer session. As a reminder, this conference call is being recorded live and broadcast live. We'd also like to remind everyone that Richard and I can be available for calls afterwards if anyone has any follow-up questions. I'd like to remind everyone that we will be referring 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 for the quarter on our website in the form of infographic. Our presentation today will also be added to our website for your reference along with the post-view recording and transcript. Our detailed information is also available on our website and SEDAR. Please follow us on LinkedIn to keep up to date with other business developments. And I'll now turn the call over to Richard.

Thank you, James, and good morning, and good afternoon, good evening. I see there's some international investors on the call today or shareholders. So good afternoon, good evening and good morning to everyone. Here's what we want to accomplish on the call today. I want to take you through an update on our quarter obviously, and talk a little bit about how we are becoming bigger and better together with the recent close of our transaction acquiring our Donnelley Canada or Moore Canada Corp. And then we'll turn it over to any questions that attendees will have for today. Okay. So first off, looking at our 2023 results, and I'm going to break this into our theme of bigger and better business, and I'll start off with the bigger side. Happy to report that we had a very, very positive quarter in terms of growth, growth just under 10% at 9.8% versus a year ago. And to remind shareholders that was off of an 11.1% growth on the quarter last year. So good positive momentum at the start of the year. Great revenue quarter at $76.1 million, up from $69.3 million a year ago. That growth of $6.8 million came from a combination of what we call expansion revenues, so growing revenue with existing clients, as well as new business development. We brought in several new logos and lots of new logos that we have the opportunity to land and expand as we call it. So lots of good kind of positive opportunities moving forward to expand that revenue. So really good, solid growth in the quarter, really pleased with the success that our commercial teams are having with our whole client or customer leadership agenda. Looking at that revenue momentum. You can see on this chart, we look at a 3-year kind of time arise, and you can see how we built that over 3 years. We've actually had 6 -- this is our sixth consecutive quarter of year-over-year growth. So you can certainly see that we've got positive momentum in our business now. And if you look at this chart, everybody has kind of dialed into our call here from a -- or on the Team's call you can see that $76.1 million actually is higher than our quarter 4 and quarter 4 is generally our strongest quarter. So off to a great start in quarter 1, 2022 (sic) [ 2023 ] and great momentum. Also pleased to report that our gross profit is growing faster than revenue, which is always positive. That means your gross margin is improving. And as I said to the team, gross margin is our best friend. And you can see our gross margin as a percent of revenue is 31.1% and we're up a full $3.3 million in gross profit versus a year ago. So continued relentless focus on driving a better business and a bigger business and playing in the right margin pools in the category, not all margin pools are treated equal, and certainly the team has done a fantastic job at really kind of driving that margin agenda. And that 31.1% is actually one of our highest quarters ever. So we're certainly very pleased with the progress we're making on that gross margin agenda, okay? So very solid. And you can see the growth that we're achieving on gross profit and gross margin quarter-on-quarter. And this chart kind of illustrates the progress we've made over the last 3 years from $18.8 million in 2021 up to $23.6 million in 2022. So a $4.8 million increase over the course of 2 years on that quarter. Now, I'm going to sort of unpack this. The only, I'd say, I'll call this a positive headwind we experienced in our business was we had to do a mark-to-market adjustment in our long-term RSUs and DSUs. So there was a noncash impact of $4.5 million in EBITDA to adjust for that significant appreciation in share value. Why I call it as a positive headwind is we're certainly all shareholders, and we've all benefited from an increase in that share price. At this time in the quarter, it was a 63.4% increase in share price, and that obviously had an impact on that long-term comp. So it's a positive headwind. It's a noncash accrual, as I said, related to that long-term incentive comp. Taking that into consideration and adjusting for that as well as -- and James will talk to you in a minute -- adjusting for what was a planned, very well planned and very well architected acquisition costs. Our adjusted EBITDA was up 30.1% in the quarter, so really, really solid progress. You can see that's $12.3 million. And also really positive is, as a percent of revenue, we're up north of 16%. We gave some guidance that we saw a path to north of 14%, you see we're at the 16.2% of revenue once we adjust for those that onetime impact of mark-to-market and of course, the acquisition expenses. So great positive momentum on EBITDA as well, obviously driven through or driven by accelerated revenue and improvement in gross margin and then obviously operating pretty tightly from an SG&A perspective. Let's just see in a minute. If you look at our adjusted EBITDA progress over the last 3 years as well, you can see it's certainly very positive at the $12.3 million versus a $9.4 million a year ago. And James, do you want to talk to this chart?

Yes. Just another presentation of some of the information that Richard previously described. You can see the performance on a comparable dollar basis compared to last year in the first quarter. breaking out the mark-to-market adjustments and the $6.1 million of acquisition and integration costs, which we had planned for. And Richard will talk as we talked a little bit more about the acquisition of North Canada in a few minutes, how well prepared we are for closing and how prepared we were literally on day 1 for closing. So we're very well prepared for the integration, and we're making great progress on that. EBITDA as a percentage of revenue, you can see 16.2% when we adjust for the onetime acquisition and integration costs as well as the mark-to-market adjustment I would also point out the cash flow from operations was very strong. In the quarter, we generated $6.3 million of cash from operations compared to $4.7 million last year.

Okay. Thank you, James. So certainly, a lot of progress in terms of building a bigger business. Now I'm going to talk about some of the key metrics around the better business that we have built and continue to build as well. From an SG&A perspective, SG&A was up slightly over a year ago at 5.2%. But the key metric we look at is how we're operating relative to revenue. And if you look at the far right-hand side here, we are 18.7% of revenue versus 19.7% a year ago. So this is actually what we call NOG, which is negative overhead growth. And it puts us in the range. We put the 5-year plan out there said that we want to be between 18% and 20% of SG&A. And I think at that time, we will run 23% or 24%. You see we're 18.7% now in the quarter. So we're right kind of in that range, in the midpoint of that range. So very happy with the progress we're making in terms of kind of managing our costs and investing where those investments matter. So good progress in terms of managing SG&A and as I said, operating at negative overhead growth as a percentage of revenue. And this chart kind of illustrates that as well. If you look at our headcount, we're pretty much flat at 916. I have said many of times pre-acquisition that we had the perfect footprint and that was the need or the opportunity to grow off of that footprint. We had 0 restructuring expenses in 2022. And actually, we've had other than the deal restructuring expenses or the deal costs, rather, there's no restructuring either in the first quarter. But if you look at the right-hand side of this chart, what we're proud of is the revenue we have generated per headcount, and you see that continues to improve. We're at $306,000 per associate now, up 2% versus a year ago and up significantly 49%, almost 50% since 2017. And this will continue to be a focus of our organization, our entire team as we work the integration process with the acquisition as well. And we'll see these numbers improve considerably. Also, I've talked to shareholders about the progress we're making on our ESG strategy and ESG initiatives. It's sort of in our better business team. We put some targets to street around waste reduction, sustainability footprint, our carbon footprint reduction, renewable energy, lots of work happening on social and governance as well. So a lot of momentum over the last a couple of years, and this momentum continues to accelerate as we move quarter through quarter. And maybe just to highlight one area that we're very proud of. We're proud of all this stuff, by the way, but one area that we're particularly proud of is the progress we're making on reforestation. And we have used -- since we signed on to this program, which was the end of 2021, so we're just kind of 1 year and a quarter into it. We've actually reforested 812,000 trees and 100% of our clients' paper use is reforested. And -- maybe first I think I mentioned the shareholders a couple of times before, but maybe just remind them, we actually flow this credit directly through to our clients. So clients can get the benefit of the credit in their ESG efforts or their sustainability efforts, and it's proven to be very, very favorable from a client standpoint. And we actually had our first client cross 100,000 trees reforested since the program began, and we actually gave a nice little award to that client of Friday last week, and they were certainly very happy, very proud of what they've accomplished and what we've helped them accomplish in terms of reforesting 100% of their paper use. So a great program, fully committed to it and great client momentum around this program as well. Other next area that we're building a better business in is digital. We've talked a lot about our digital acceleration. And we've got kind of 5 platforms that we bring to clients, our FLEX-enabled platform, which is a workflow optimization platform. And then we've got 4 others that are more in the kind of pure ARR space. We just launched our personal video platform, and that's off to a good start. We've got a couple of key clients that we're working on some customized and personalized videos for. And you can see on the chart some of the other activities to the other platforms. The one we're really going to be putting a lot of energy behind, of course, is the digital asset management solution platform called ASMBL. But if you look at the right-hand side of this chart, early days, we're just kind of starting our digital journey. You can see we had 27% growth in the quarter, $1.5 million of revenue. You can you guys can straight line that to understand what that could look like on the year, but we certainly plan to progress well beyond that straight line. So lots happening from a digital acceleration with our DCM digital team. I want to remind shareholders that we love print and we love digital, and we want to be a -- our strategy is very clear, a digital-first company that does print versus a print first company that does digital, so they work out very synergistically together. But really good progress in terms of building a better business and really getting very intentional and delivering success under our DCM Digital team. Just want to talk debt reduction, James?

Sure. As everyone knows, debt reduction has been a real primary focus of us of ours over the past several years. At the end of the first quarter, our debt was down to about $22.5 million, down 17% compared to year-end, so continued progress there. And being in that position, as we've talked about before, really put us in a great position to be able to make the acquisition that we recently closed on. So we'll talk a little bit more about what debt looks like in a few slides pro forma the transaction.

Thank you, James. All right. Now we'll talk a little bit about Moore Canada Corporation. The reason we're calling Moore Canada Corporation is this is the legal entity that we acquired are our Donnelley Canada's legal entity is Moore Canada Corporation. So you'll see us referring to MCC or Moore Canada Corp. And James, do you just want to talk about performance on MCC in the quarter?

Sure. MCC continued to have very strong momentum in the quarter. Their revenue was up more than 10% and their operating income and other metrics were also very positive. Really nice to see this momentum going into the deal. I will point out, during the first quarter, we were competitors. Now that we're collaborators, we're really excited about the opportunities to grow the combined business. We will be reporting in the second quarter a consolidated picture and the reporting for Moore Canada will be effective April 24. So we'll have basically 2 months plus a week of their numbers when we report the second quarter, and that's expected to be in early August.

Yes. So maybe I'll just kind of amplify this a little bit in addition to what James said. A great start for the RRD Canadian organization or Moore Canada Corp in quarter 1, growing at 10%. We showed you our numbers growing at 10%. And remember, we were competitors in that quarter. And now we are collaborators, and we kicked off a really accelerated move from competitors to collaborative ways of working sort of immediately upon close. So imagine the opportunity is now moving forward. So off to a great start. So now we'll talk about the new DCM and the better and bigger theme as a better and bigger company here and a little bit about kind of where we are on the post-merger integration process. So we -- this is how we communicate, how we are better together as 2 companies, and we communicate this both internally and externally to clients. One -- 8 key areas. One is around our expanded product offerings. This is a very nice kind of complementary deal that brings more services and more product into our clients. Obviously, the superior service we can bring to clients. The incredible execution capabilities we now have together. The speed to market that we can deliver on those new products. We certainly have exceptional client leadership especially at the enterprise level. We've talked a lot about our top 250, you're going to be hearing a lot more about our top 400. We now have 400 enterprise clients that represent a significant percent of revenue. Our people, we got exceptional people across our [indiscernible] , the new company post the acquisition. We've got some incredible innovation, not just in digital, but also some other product innovation that we're bringing to clients as well. An innovation that's kind of horizon 2 and horizon 3 in the pipeline. And then, of course, we've got even more scaled or greater scale to invest. So 8 key areas, why this is a great deal, why we're better together and how we communicate this across to our clients. And lots of work happening post merger on all of these areas. And I can tell you that we come together very, very fast as organization. We were very well prepared for day 1, thanks to all the work we were doing with our -- with Boston Consulting Group to help us get prepared as well as how well our teams have kind of leaned in to the program or into the acquisition. We've gone through this with shareholders and investors in the past, but worth kind of repeating and I'll just kind of unpack this very quickly. The final purchase price was $130.8 million. The original number was $123 million. So it's just kind of working capital adjustments that took the price up. That was mostly around kind of inventory and payables and receivables. So the way to think about it is $100 million for the business and $30 million for 3 owned facilities, and I'm sure most of our shareholders know that 3 owned facilities came with the deal. The revenue -- the pro forma revenues were about $520 million. I think they're around $525 million to the exact expected synergies. We've communicated in the range of $25 million to $30 million. In fact, we've got a very detailed program to deliver the $25 and opportunities to expand up to $30 million and maybe even beyond that. So we're certainly well prepared and those will be delivered over the next 18 to 24 months. The transaction was fully funded. We closed on the 24th of April and also important for shareholders to know that those 3 owned facilities, we've already sold 1 of them. It's a facility at Oshawa and the net proceeds are $23 million, and that will close soon, certainly before the end of the quarter, and those proceeds will go directly into that $30 million debt facility that we have, so immediately into that debt stack. So happy to get that property sold, and that's an important property in our network as well at Oshawa. So we're leasing that back. And then, of course, from a financing standpoint, Bank of Montreal, great lending partners stepped up and with the $90 million expanded revolver. We also got the $30 million term loan facility, the one I'm referencing for real estate. Again, $23 million of that $30 million will be gone very shortly. And then Fiera Debt, who's been a great partner of ours for a number of years, kind of helped us with the deal of the financing. Leverage of 3.25x, deleveraging very quickly to 2.65x after those sale and leasebacks are completed, okay? So I just want to remind shareholders that sort of the deal and how it was structured and I can tell you we're off to a great -- an incredible start with the new team. We've also been working on updating our 5-year plan because, of course, shareholders remember -- may remember that we put a 5-year plan in place about 1.5 years ago, so about 4 or 5 months after I joined. And obviously, we blew through that pretty quickly. So we needed to revise the 5-year plan. And these are just some key metrics on it. We'll be going through a lot more details with shareholders. But we see a path to north of 5% growth. Remember, our last 5-year plan, we said between 5% and 10%, so we're kind of still holding that range, north of 14% adjusted EBITDA. Within that time, that 5-year horizon will certainly be less than 1x debt to EBITDA. And we see a real acceleration in our Martech growth at north of 60% over that 5-year horizon with some of the new platforms that we've stood up and the bets we're making in the market. And of course, the opportunities we have with existing those 400 enterprise clients now and all that Martech businesses is high gross margin. I will say -- I said earlier that we're now thinking like a digital company that has print, not a printing company that has digital. No, that's not to say print is bad. We love print. We wouldn't have done this acquisition if we didn't love print. But really enabling that print with digital technology or digital solutions, allows us to deliver even more value, help simplify complexity for clients, deliver more value for clients. And then obviously, the more we're embedded in clients' digital stacks the more value we're delivering the client and the higher level of retention. So it's a perfect what we call kind of virtuous circle. The print market is a $10 billion marketing in Canada alone. And depending on what data you look at is growing from 2%, 3% and lots of opportunities for us to expand our presence and business in that market and do that with technology to enable that workflow, okay? So that's our strategy, a clear 5-year plan, lots of working behind this but clear commitment to drive accelerated growth over the next 5 years with real positive EBITDA progression as well, okay? So those are the key areas we want to take you through how, we did in the quarter, how we're performing from a bigger business, from a better business, a little bit on where we are post closure of the deal. And I can tell you, we just hit the tree tops for the meeting today, but we are very, very well planned as the teams that come together extremely well. I've done a lot of deals in my time and I'd say this is sort of the best execution that we have orchestrated and I've certainly seen so a great start and very good momentum in our business overall. So I want to turn it over to any Q&A now.

Thanks, Richard. We'll now take questions from the audience. If you have a question and you're accessing the call directly through teams, you can use the raise your hand feature, and we will queue up questions. Alternatively, you can also use the chat feature in teams, and we will respond to chat questions as well. [Operator Instructions] I have a question from phone number that ends with 0469. Go ahead, please.

It's Chris Thompson calling from eResearch. How you guys doing today? I just wondered, moving forward, looking at your G&A going forward, are you looking to see that, that's going to be sort of like the new normal with your expenses? Or is this just a onetime sort of adjustment?

Yes. But from a G&A perspective, on our own, we see that run rate being fairly steady, adjusting for that $4.5 million that we talked about earlier of noncash adjustments. Other than that, our SG&A on a stand-alone basis should be pretty consistent. We will be reporting consolidated numbers for the combined company in early July once we file a business acquisition report. And at that point, that will have the pro forma numbers for Moore Canada Corporation on a stand-alone basis. They currently report under U.S. GAAP in the -- and we'll be converting that to IFRS. And then we'll be also providing pro forma statements that reconcile as if the 2 businesses had operated together in 2022 and updated kind of Q1 numbers on a pro forma basis as well.

So will that be -- you're saying that July so that will be Q3 will be the first time you'll be presenting the combined company, so Q2 will still be separate?

No. So we'll file what's called the business acquisition report. That will be filed on SEDAR in early July. And then starting in Q2, we will be reporting on a consolidated basis. We'll report Q2. I think our plan to report Q2 is around August 10 right now. And that first kind of quarter including Moore Canada, we'll have basically 2 months plus a week of their results in the quarter. So it won't be a full quarter for them. So we'll do our best to explain what a full quarter would have looked like when we report Q2.

Sorry, Chris, I just want to build on your question around SG&A as well. We're holding firm with our commitment. Our -- the plan we put to the street, the 5-year plan, of that range between 18% and 20%. You see we're 18.7% on the quarter, and we're committed to that range over the course of the next 5 years.

Okay. And then for the acquisition cost for this quarter, is this sort of the high watermark?

Yes, it is. The acquisition costs should come down quite a bit from there. That was largely due diligence costs and consulting costs kind of in preparation for the integration, which were pretty much peaked in Q1. You saw when we reported Q4, I think we had about $1.8 million, $1.9 million of deal costs that were in Q4 that will come down considerably in Q2.

Okay. And just the last question. I mean you covered off the tech growth. It seems to be moving slowly. But I mean quarter-over-quarter, high percentage gains, but still a low percentage. Just looking at -- you talked last year a little bit about U.S. growth, and I know that this acquisition probably put a little bit of a dent in that. But are you still looking at the U.S. market?

Yes. We certainly -- we are still looking at it. The interesting thing on this acquisition, it came with a business -- a business called [indiscernible], which is a large-format printer part of the Donnelley Group part of Moore Canada Corporation. And 75% of the revenue is actually done in the U.S., Chris. So this actually accelerates some of our intentionality for the U.S. marketplace as a result. Do we have any further Q&A. We have someone in the chat line here. We have a question here from one of our long-standing shareholders. Great quarter 1 guys. Any update on the ASMBL stand-alone rollout?

Yes, sure. So shareholders, reminding shareholders that we have -- we went to market with ASMBL, well, about 1 year, 1.5 years ago with a white label solution, which we've added some features and functions around. We've actually been quite successful early days with that, with a few key clients. And in fact, we just secured a large client with a new ASMBL win a couple of weeks ago. We haven't reported on it yet, but we will soon. But our -- while we've gone to market with a white label, we call it sort of a tech-enabled white label solution that we've added value to, we've also been building our own platform and we're now in beta. So we've got beta clients as well beta clients and beta users. And then we'll be launching that in August, September is -- will be our go-live date with our kind of fully built out ASMBL platform. So you'll be hearing a lot more. We're actually extremely excited about it. It's a fantastic platform that the team has built. We've got a clear unique selling proposition in the marketplace. And again, we'll be seeing and hearing a lot more about that once we go live, but that is August, September, when we go live with the -- our own kind of fully built-out ASMBL platform.

In the chart, we have a question from Manny. Adding back the acquisition cost of $6.1 million and the $4.5 million noncash charge, non-GAAP EPS for the quarter is closer to $0.17. I did a little bit of math on that earlier. I got about $0.15 on a basic basis and about 11.6% on a diluted basis. that's applying a 25% assumed tax rate on the differences. So in our tables in the MD&A, we report adjusted net income of $2.1 million. If we were to tax effect that and adjust for the -- that adjusted net income includes an adjustment for the $6.1 million of -- sorry, $4.5 million of mark-to-market adjustments and $6.1 million of the deal costs. So I get to kind of an adjusted net income of about $5.5 million when that's tax affected. So call it, $0.115 to $0.125 either basic or fully diluted. Okay. Are there any further questions? No further questions, no? Yes, I don't see any further questions. So thanks, everyone, for attending our call, and thank you for your interest. As a reminder, Richard and I can be available after the call if there's any follow-up questions. Certainly hope everyone enjoys the rest of your day.

Yes. I'd just like to say thanks to all of our -- I'll call it, the new DCM associates, right? All of our associates across the company for delivering such a solid quarter. We're making great progress in our business very pleased with the momentum, and we're certainly planning to continue to deliver the momentum as now a bigger and even a better company. So thanks for joining us today and excited to continue to report on progress.

Thanks, everyone.