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

Good morning, ladies and gentlemen, and thank you for standing by, and welcome to the DATA Communications Management Corp. Second Quarter Fiscal 2024 Financial Results Conference Call. My name is James Lorimer, the CFO of DCM, and I'm pleased to be hosting today's call. Joining me on the call today is Richard Kellam, our President and CEO. Following our prepared remarks, we will be moderating a Q&A session. As a reminder, this conference call 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 may have. Before we begin, 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 will also be referring to certain non-IFRS measures and accounting measures, which are more fully defined in our public disclosure records as well. We have posted a brief message from Richard, along with a summary of our results and key initiatives for the quarter and the coming year on our website in the form of an infographic. Our detailed information is also available on our website at 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 to anybody joining us from other time zones or overseas. Thank you for joining us today. We're super excited to talk about our quarter. Today's agenda. I'm going to quickly look at highlights of the quarter and the first half. We'll talk about some balance of the year priorities, and we'll turn it over to the attendees to ask any questions. So looking at highlights for the first quarter and first half. We call it we've been executing our game plan one quarter at a time, and we've made some tremendous progress, tremendous progress, especially around integration, execution. We've advanced our consolidation planning and systems migration. We successfully completed the integration or consolidation of our Thistle facility that was in Dawn Mills here in Toronto into our Bond facility about what, James, about 7 or 8 kilometers down the road, right? That was completed in June. I was actually out at the facility a couple of weeks ago, and things are going fantastic there. Our Trenton and Brampton consolidation is on path to be completed before year-end. And our Fergus into Drummondville consolidation is also due to be completed by year-end. We've also accelerated our capital investment. We'll talk a little bit about it later. Synergies are ahead of plan. As presented last quarter, we're targeting CAD 30 million to CAD 35 million versus our original plan of CAD 20 million to CAD 25 million, so certainly on track for solid synergy delivery. They're actually going to be ahead of schedule. So originally, we were planning completion of our synergy work by mid-2025. That will happen by end of 2024. And then our cost of integration is tracking at 1x the synergies anticipated, which is a best-in-class return. So very good progress on our integration effectiveness. Focusing on profitable growth. It's been a key theme for us through the year. Really driving transitioning from low client -- low-margin clients to high-margin clients, improving work around which we call strategic revenue management. So that's really kind of optimization client by client. We've secured a lot of new logo wins in the first half of the year. We'll talk about that in a minute. And our gross margin or gross profit is certainly moving in a very favorable direction which we'll get into in a couple of minutes here. So very good progress in terms of building our growth platform. In terms of new business development, we've secured 30 new client wins in the first half of the year, roughly CAD 4.2 million in revenue. Now that CAD 4.2 million revenue gives us a lot of opportunities to what we call land and expand. So we'll see that expand over time. And our wins, our client wins, some of them across multiple verticals, some significant wins in government, in loyalty, in grocery, health care and utilities. And one maybe honorable mention here is automotive, which has typically been an underserved vertical for us. We've really moved into strength in that vertical, and we've picked up a few large automotive clients and they're very well set for success over time. So we're really understanding how to win in that automotive vertical. From an expansion revenue standpoint, as we call it, or wallet share increase we've generated CAD 19.2 million, not a lot of flows in the quarter. Obviously, that flows into quarter 3 and quarter 4, but some good expansion revenue. And to remind shareholders when we talk about expansion revenue, that's new services we're bringing to existing clients, right, and new product and new sales we're bringing to existing clients. And again, you'll see that's across multiple verticals from government transportation, lottery, retail, finance, health care. So good diversification in that wallet share expansion as well. We're also making a fantastic pace on contract renewals. We have 100% of the contracts that came up for renewals so far this year. We have renewed and retained. On the government side, CAD 12 million of revenues through the next 1 to 5 years. That's across 2 clients in government, so 100% retention there. On health care, we renewed 2 client contracts, terms between 1 and 3 years, about CAD 9 million in revenue over that time frame. From a financial standpoint, we've retained 4 clients across that different FIs, notably 1 large bank. We attained a secured retention between 2 and 3 years. And then transportation, really, that's a courier, 2 clients. One is a large kind of courier and a large airline and those contracts have been retained as well. So 100% retention, team's doing a fantastic job of continuing to add value within our existing client base, and that's certainly been reflected in the contract renewals. From a revenue perspective, on the quarter, we're up 5.7%, about CAD 126 million and a lot of positivity reflected from the MCC acquisition. Looking at revenues by reported segment. We've been breaking this up for the last couple of quarters for shareholders. You see our product sales, about CAD 110 million, up 1.3% versus a year ago. Our technology services, CAD 4.4 million of revenue. You can see that's up significantly. I'll talk about that in a minute, 111% increase. Our freight team has done a great job making sure we're recovering and generating revenue from freight. It's about CAD 4 million, up 14%. Warehousing up 73%. So again, we're generating a lot of revenue from warehousing and kitting and fulfillment from a client perspective. That's CAD 4.4 million. Our tech-enabled hardware, so think of that as some of the digital displays that we're selling as well as some of the purchases and scanners that we're reselling for health care. That's up 32% on the quarter. And our marketing services, again, pretty strong, the value we're bringing to clients for some creative and development work and strategy work, about 16% growth. So solid growth across all of our 6 segments. Notably, in the Technology Services segment, as I said, CAD 4.4 million in revenue, up 111%. And maybe James you can just jump to the next slide. We're happy to announce that we have just launched ASMBL. I'm sure shareholders saw the press release the other day. We've actually been working on this platform for the last couple of years and really kind of full-time development over the last 11 or 12 months. It's now live in market. It's our first pure-play SaaS product that we have moving out of DCM here into the marketplace. It's a fully AI-enabled product extremely user-friendly with [ HA UX ]. We have a very unique route to market because we're talking to 400 of the largest enterprise clients in Canada with 63 or 64 of our sales reps. So certainly, we'll leverage that route to market. And we've got a strong integration story with our DCM Flex platform, and we've got a fantastic kind of onboarding and support model. So we're very excited to get this to market, and we're already active. We launched a couple of weeks ago. We're always active with a lot of demos set up with clients. And it is a very highly competitive product to what other DAMs are out there from a market perspective, okay? And the AI is incredible that we've incorporated in the platform. So really pleased with the team and really excited about the future of that platform. From a tech-enabled service win, so think of this as our DCM Flex platform, which does a whole lot of things, kind of workflow automation and customized or personalized communication. A lot of recent customer wins. The team is doing a fantastic job, customer wins across alternative lenders. We picked up a large bank, one of the largest banks here in Canada that will be now using a platform for all their workflow. Again, automotive. Those automotive wins I talked about from a new client perspective. Those are all tech-enabled. We picked up 2 providers of loyalty services, one a retailer and one, a pure loyalty provider. We picked up a couple of airlines as well, actually one airline and one airport that's using our platform for all of their workflow and a couple of new clients in health care, one notably that's using the platform for email communication, customized and personalized email communication distribution. So a lot of good wins. Some of these obviously wins will generate revenue for the Flex platform, but also downstream revenue for print and email distribution. In fact, in total, it's about CAD 6.5 million of revenue that this technology enables across these 6 verticals that we secured wins in. So very good momentum. I'm pleased with the progress the team is making here and great support from the clients. Once we get this in front of clients and they understand the power of Flex. It's a pretty compelling sales shall we say. Year-to-date revenues are up 30.7% over a year ago by CAD 255 million. So we're CAD 60 million and up over the same period a year ago. Gross profit, I'd like to say to James, it's always easy math here, my simple marketing math. If gross profit is growing faster than revenue, then you know your gross margin is really in the right direction. That's certainly our strategy. So as I said, revenue growing 5.7%, gross profit growing 7.2%, about CAD 34 million on the quarter. And you can see our gross margin at 27.3%, up 0.4% versus a year ago. So well on track to get back up into that 30% level, which is where we were prior to transacting prior to acquiring MCC. Year-to-date, we're up 28.4% in gross profit. You can see our gross margins at 28.1%. It's obviously down versus a year ago, and that's really strictly due to the overlap of not having MCC in our world, so a higher margin in that first half last year and now obviously consolidating a lower-margin business into our work. So you'll see that correct itself as we move through quarter 3 and quarter 4 now that we're fully one company in those quarters, okay? So that was exactly the plan. In fact, we're ahead of what we planned from a gross margin perspective, okay, overall in the math. Adjusted EBITDA, very strong at up 22%, just under CAD 17 million, up CAD 3.1 million over a year ago. And you can see that we're 13.4% on our path to 14, which we kind of stated is our 5-year goal. So well on track to deliver that, up from 11.6% in the quarter last year. And on the half, we're up close to 34%, about CAD 35 million or CAD 36 million in growth -- or CAD 36 million in total rather, CAD 26 million or CAD 27 million in growth. And you can see, I talk about that 14.5%. We're 13.9%. So we're approaching that 14 zone, which we're very comfortable in crossing that in the next couple of quarters, okay? So very good progress on our year-to-date adjusted EBITDA as well. Now I'll turn it over to James to talk about our onetime restructuring and some of our debt as well.

James? Thanks, Richard. We had about CAD 1.3 million of restructuring and onetime charges in the quarter. As we've noted before, most of our heavy restructuring charges were taken in 2023. And so we see kind of similar levels going forward in Q3 and Q4, but most of the significant charges are now nicely behind us. Year-to-date, certainly down considerably versus last year. And just to remind everyone that in the fourth quarter, we did take charges for Fergus and Trenton. And those will be closed later this year. The reason we took the charges in the fourth quarter last year was because with our contracts and union agreements, we substantially were able to determine what the cost of closing those facilities will be. And of course, we're pleased to announce that we do expect those to be fully completed by the end of this year. And we've already been advancing workflow out of those plants to the Brampton and Drummondville plants, which are going to be receiving that work. Net income, CAD 4 million, which was up from a negative, a net loss last year EPS as well, CAD 0.07 versus a negative CAD 0.06 loss last year. Year-to-date, we're up about CAD 200,000. So adjusted net income was about CAD 4 million and adjusted EPS is about CAD 0.07. The one line item that's making a little bit of noise is the fair value adjustment for our long-term compensation. And we've seen some share price decreases this year where -- so that's been actually a benefit to us from a P&L perspective. Last year, we saw some significant increases in our share price. So that was kind of a larger expense last year. Year-to-date income, net income, CAD 5.5 million, up from a significant loss about that amount last year and EPS up to CAD 0.10 versus negative CAD 0.11 last year. You don't see as much in kind of the adjusted net income because we're tax affecting that net fair value gain and loss. But certainly, with restructuring and onetime charges behind us, you should start to see net income and adjusted net income more closely aligned going forward. From a synergies perspective, we're maintaining our target of CAD 30 million to CAD 35 million in annualized synergies. We do expect to have most of our major consolidation and initiatives completed by the end of this year. So we expect to pretty much fully complete those synergies. The big contributors are going to be the ultimate final closures of our Fergus and Trenton facilities later this year. Net debt, we're pleased to continue to pay down net debt even since the first quarter despite some increased investment in plant and equipment and capital equipment. Our net debt was down a little over CAD 3 million compared to the quarter. And since the acquisition, we're down CAD 70 million or almost 48%. So we're continuing to focus on paying down debt. Our Fiera private debt, CAD 50 million facility, which we put in place for the acquisition is now amortizing. So we are seeing kind of regular monthly payments on that as well as the other Fiera piece that we have in place, which was about CAD 7 million at the end of the quarter. So continued path there to paying down debt through free cash flow. Do you want to talk about SG&A, Richard?

Yes, sure. SG&A, you can see in the slide here, we're just under CAD 24 million. So we're operating at negative overhead growth because you can see we're at CAD 25.4 million over a year ago, which was on plan. And we're at the 19% range. We'll see that as we continue to operate at negative overhead growth, and we continue to grow our revenues to see that number decline that percentage of revenue come down over time as well. So exactly what we planned. Our year-to-date, we're at CAD 49.2 million. Obviously, we're up over a year ago, and that's just the effect of the timing of the acquisition, right? We didn't have MCC in our world in the comparative period. Now we do. But you can see that the percentage is up slightly as well as a result of that. And again, if you look at that quarterly trend, you'll see it kind of normalize in quarter 3 and quarter 4 as we are now fully one company, so just some noise in comparables versus a year ago. But overall, great improvement in driving that negative overhead growth agenda. And you can see that on the next slide, if you look at our head count, our head count has gone down from, call it, roughly 1,900 to 1,673. We'll see that decrease as we close a couple of more facilities. And you can see our productivity per associate or revenue per associate has improved up to just under CAD 304,000 per associate. Again, you'll see both these heading in the right direction as we get into quarter 3 and quarter 4 as well. So great improvement from an SG&A perspective. Want to talk to capital, James?

Yes. Capital investment, the first half of this year has been a big focus on integration planning and readiness for some of the big moves that are happening this year. As we previously noted, the Thistle and Bond closure happened, and so a significant piece of the PP&E investment so far was related to that closure. We upgraded the facility and most of those PP&E investments are related to either preparing facilities with electrical or HVAC or otherwise. We've also been making equipment investments. You'll see on our cash flow statement. Year-to-date, we're about CAD 6.9 million of capital investment. We do see that kind of tapering off through the balance of the year. We still probably have a couple of million dollars of capital investment on the PP&E side. There's about CAD 6.5 million of I guess the technical term is kind of construction and process for equipment that we ultimately plan to lease. But given some of the timing of the equipment, we had advanced deposits, we will be getting that capital back from the leasing companies and actually received some of it already in July. As that equipment gets refinanced, we intend to lease a lot of that kind of new capital that's sitting in the kind of a, let's call it, a temporary holding account for now, but it will ultimately flow into lease liabilities as we install that equipment.

Yes. And I'd just add that I've been around the network with -- and have a look at the new capital that we're investing in. We have really built a world-class factory world-class network here that is going to allow us to grow quite significantly off of this new platform. So really proud of the team in terms of what they've accomplished in terms of the consolidation, new capital and new capital deployment, and it's going to be fantastic for our clients in the market here. So congrats on the team for a lot of hard work, but again, we've really optimized the network very effectively. Just having a look at our sustainability efforts here, as shareholders know, we reforest 100% of the paper that we use on behalf of clients. So think of it every 83 pounds of paper we use in client workflow, we put a tree in the ground for that client, and the client takes advantage of that credit in their ESG efforts. So you can see on the quarter, we reforested 244,000 trees and happy to announce already a little celebration in September that we've actually crossed 2 million trees since we commenced the program kind of mid- to late 2022. Looking at the balance of the year priorities before we turn it over to Q&A. Any shareholders joining us. This page should look familiar and intentionally familiar because our priorities haven't changed. We're driving hard on the MCC integration. Quarter 3 and quarter 4 will be the first full quarters that we're fully integrated as one company. A lot of harmonization, obviously, in back office and I already referenced the plant consolidations, which will be complete by year-end. So thanks to the entire team for all the work, the heavy lifting and work that's happening here. We're running a business as we integrate a business. We're building a bigger business as we build a better business at the same time. So some great work happening across the organization. We're relentlessly focused on improving gross margin and getting to pre-acquisition levels. That's through what we call our strategic revenue management process, driving those lower overheads and operating costs. We already talked about the capital, which is going to significantly improve our productivity and effectiveness, which obviously flows directly into gross margin and then driving hard on the operational efficiencies. And again, a ton of work across the network. We've obviously built a perfect platform for growth, and we're seeing that in new business development. So as we're building a better business, we're not forgetting about going out and winning new business and securing business in the market. The 30 new clients kind of speak to that. We've built a real solid growth muscle and our 63, 64 frontline salespeople, all of our sales leaders wake up every morning and they dream about growth. And I can tell you that the conversations are fantastic. We see a very bright future, lots of opportunities in the marketplace, lots of opportunities around cross-selling and upselling. I talked about some vertical focus. I said automotive, but there's other verticals as well that we're penetrating. And then great pace on our digital acceleration and really pleased with the progress we're making on Flex. And again, the launch of ASMBL, which we'll see great results as we move through quarter 3, quarter 4 and into next year. And then we're generating -- we want to continue to focus on generating higher levels of free cash flow. And as we get through all this restructuring work we'll certainly see that into 2025, right. So 2025 will be a very clean year as our restructuring will be behind us, our capital will be deployed, and our platform for growth will have been built. It's already been built today, and we'll enter into a highly productive year as we move forward in 2025. So that's our focus for this year. Lots of heavy lifting. The team has done a fantastic job, maybe a big shout out, thanks to the entire team. We couldn't be here without everybody working and heading in the right direction here. So congrats and thank you for all your hard efforts. So with that, we'll turn it over to any Q&A that our investors have here.

[Operator Instructions] And I have a question from Max Ingram.

So just a couple for me. First one was, it sounds like you're expecting incremental year-over-year growth in Q3, Q4. If I'm thinking about the timing of MCC, this implies a return to organic growth. So I guess my question is, I'm thinking about that correctly. And maybe you can touch on what's driving the visibility you have? Because based on my calc, I think organic growth was still negative this quarter.

Great question. And you're absolutely right. Your count is correct. Negative growth -- sorry, organic growth was negative on the quarter, positive, obviously, overall with integration. But that was planned, Max, given all the integration work that we're completing. We just brought 2 sales forces together. We've moved books of business across our teams. We're going through a massive ERP implementation, MCC and SAP and DCM legacy D365. So you can imagine we're working through 2 systems to bring those together. Those are kind of planned programs. And you are correct, we are anticipating organic growth in quarter 3 and quarter 4. Now that we've kind of settled down a lot of the integration work or teams, all the books have transferred across to the 63 or 64 front-line salespeople. And we're seeing lots of opportunities with existing and new businesses as we move into the next couple of quarters. I will remind you as well that quarter 4 will be on a softer comp. I mean quarter 4, we were pretty active bringing teams together as well. So we're up against -- we had -- underlying costs were a little stronger in quarter 1 and quarter 2 and a little softer in quarter 3 and quarter 4. So we have that kind of tailwind as well to our advantage. So a combination of work that's completed, what we can see in our funnel at this point from existing client workflow and new business development and then some of the softer comps, we're expecting positive organic growth in 3 and 4.

That's helpful. And then my next question is also sort of related to demand. I know that you guys have been focusing on the higher-margin business, which has caused some customers to fall off, which makes sense. And then there's also some deferral in projects to later quarters. So my question is, do you see anything outside of these 2 dynamics? Like any comments about softening of the demand? Or is demand still strong and it's just these 2 factors at play?

Yes. No, it's a great question. Overall, we see demand is still strong. We have a couple of anomalies with a couple with a couple of large FIs that actually reduced some of their workflow this year. When I say reduced workflow, think of kind of personalized direct mail campaigns, 2 fewer campaigns, which were sizable campaigns. We think that's just timing. We don't think it's anything underlying from a market standpoint. It's just sometimes you experience those year-on-year. You may have a couple of programs in the prior year that don't repeat this year. So we don't think that's anything due to demand. It's just sort of program timing with clients. And you always have moves between clients. One year, a program may run next year, it may not, et cetera. But what I can tell you, Max, is and I referenced it earlier, we see continued opportunities in the market. And that's why we stay growth obsessed and bring and hunt for new clients. We've got a very focused strategic leadership model that all of our client perhaps work on, if you will, and identify opportunities in the marketplace to secure wins. So if there are any clients where we're seeing some work move between years or programs that may not be repeating, we certainly look to offset that with new business development and expect our revenue between clients as well. But a long way answer to your question, we're not seeing any significant headwinds from a marketing, planning, marketing budget and marketing execution perspective.

We have a question from Noel Atkinson. Sorry Noel, I'm having a problem getting you in here.

As you wait for Noel to come in, I think there's one other question that I didn't answer of Max. So just reflecting on this. We have intentionally walked away from some business where we've worked to improve the margin and clients have gone elsewhere, and that's okay for us. That was planned, not significant. And we think we've got most of that cleaned up at this point. So we won't see that in our numbers in quarter 3 and quarter 4 as well. So most of that work, again, has already been completed. At least, the sizable clients that were legacy clients that needed to be margin improved, shall we say.

And maybe we'll figuring out the audio here for Noel. I have a call from -- it looks like Chris Thompson. Chris, if you're dialing in, you can use *5 to enable your microphone.

James, can you hear me now?

Yes. You're live, Chris.

Just a quick question. On the positive side, just looking at your admin expenses on your expense side. It looks like you've done a good job coming down again quarter-over-quarter. Is that sort of your new benchmark? And I know that you mentioned that the head count will come down probably a little further as the facilities close. So can you just give a little guidance because there was a good incremental change even quarter-over-quarter?

Yes, I'd say from an SG&A perspective, the second quarter is a pretty good run rate to use for the balance of the year, Chris. Most of the kind of additional changes that we'll see through the balance of the year will be more in the cost of goods line as we finish some of the plant closures in Trenton and Fergus. So that will be kind of more an impact that we should start to see through Q3 and particularly kind of Q4 and then really kind of a fully loaded improvement in Q1 of '25.

Okay. So great, because I did notice that there was a slightly lower gross margin this quarter -- quarter-over-quarter, but you think that, that's going to start turning around towards the end of the year?

Yes. A little of the gross margin quarter-over-quarter. Remember, the first quarter is typically very strong, not only for kind of the DCM legacy business, but also its historically been the MCC legacy business strongest quarter from a revenue and a gross margin perspective. And that's because of a lot of the transactional print work that's done in the first quarter relating to year-end statements and tax forms and things like that.

And just -- I don't want to necessarily want to continue to talk about this. But the Q2 of last year was only sort of a 2 month of 3. And so the incremental -- but I think, Richard, you mentioned that you don't really see any headwinds. It's just a matter of some timing and a little bit of a change. But I also did notice that even though your tech-enabled subscription fee is up substantially year-over-year, quarter-over-quarter, it kind of dropped. And I'm just wondering how much of that may have been onetime purchases in Q1 versus other items of a trend?

Yes. Because of the stronger first quarter that MCC typically has, that also has higher programming fees, which fall into that tech services bucket. And so that's why that would typically be stronger in the first quarter as well, Chris. So there are kind of higher programming fees. You'll see a bit of a blip in that line in the fourth quarter as well for work that's gearing up for the first quarter. But then also in the first quarter would be kind of the lump of that programming work that gets done for annual statements.

And then sort of my last question is on the equipment purchases. Q1, you did 2.2% Q2, you did 4.3%. I know you are consolidating buying new equipment, upgrading to help with the gross margins, which is all great. What are you sort of forecasting for the rest of the year similar to Q1, similar to Q2? Or where do you see things hitting in?

Yes. I'd say Q2 was kind of a big quarter because we certainly advanced payments for a number of pieces of equipment and making ready some of the facilities, particularly the bond facility to receive Thistle, but also some other work that was done in Torbram and Drummondville to get ready for the move. So most of that is now behind us. I see it's kind of more second and third quarters should look more like the first quarter or maybe even a little bit lower kind of total kind of purchase of property plant and equipment. And a lot of the equipment that we plan to lease has already been kind of prepayments and advanced payments have already been made. So we're kind of well down that path. Some of that equipment has already been installed in the first and second quarter. Some of that equipment is going to land in -- particularly in Brampton in the third and fourth quarters of this year, some new label equipment and some other kind of related workflow equipment.

Noel, do we want to try again, see if we've got our mic working? Well, apologies for that, Noel. It doesn't appear that we have any other questions? Richard, do you want to have closing remarks?

Thank you, everybody, for joining us today. A solid quarter, looking forward to continuing our integration and acceleration journey in quarter 3 and quarter 4. Again, maybe I'll just close on thanking the entire DCM team for the hard work and delivery on the quarter and look forward to the progress we're going to make through the rest of the year. Thank you, everybody, and thanks to all of our shareholders for continuing to follow our journey. I appreciate it. Thank you, everybody.