Decisive Dividend Corporation (DEDVF) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. My name is Sergio, and I will be your conference operator today. At this time, I would like to welcome everyone to the Decisive Dividend Corporation Second Quarter 2025 Results Conference Call. [Operator Instructions] We remind you that today's remarks may include forward-looking statements and non-IFRS financial measures that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the applicable sections of Decisive Dividends new release and MD&A, which are on their website and have been filed on SEDAR. I would now like to turn the conference over to Jeff Schellenberg, Chief Financial Officer. and Rick Torriero, Chief Financial Officer. Please go ahead.

Thank you, operator. Hello, and good morning, everyone. This is Jeff Schellenberg. I want to welcome everyone to our Q2 2025 earnings conference call. We are very pleased with the operating results in Q1 -- Q2 2025, which was the strongest second quarter in Decisive's history and marked the third consecutive quarter in which a quarterly record for both revenue and adjusted EBITDA was achieved. The $36.3 million in consolidated sales in Q2 2025 were 26% higher than Q2 2024 and generated $5.3 million in adjusted EBITDA, which was 56% higher than in Q2 of last year. That brought first half 2025 sales to $75.4 million, which was 30% higher than the first half of 2024 and drove a 67% increase in adjusted EBITDA to $12.3 million for the first half of the year. These increases in the first half of the year came from across the portfolio with each business vertical realizing sales and adjusted EBITDA increases versus the same period last year. The hearth businesses, Blaze King and ACR realized an 11% increase in sales compared to the first half of 2024 on stronger order levels despite the first half of the year capturing the majority of their typically lower seasonal period. The agricultural businesses, , Slimline's Orchard and Vineyard Sprayer product and IHT generated 59% higher sales in the first half of the year, driven by strong order activity at IHT. The Industrial Products businesses, which includes Northside, Hawk, Capital I and Slimline's evaporators, had an aggregate 28% increase in sales over the first half of 2024, while our merchandising business, Marketing Impact, realized a 10% increase in sales compared to the first half of 2024. Lastly, our group of wear-part businesses, Unicast, Procore Techbelt, achieved a 61% increase in wear-parts sales over the first half of 2024. The improvement in sales and adjusted EBITDA in the first half of the year resulted in a 129% improvement in free cash flow less maintenance CapEx expenditures compared to the first half of 2024, which is our key metric in measuring our dividend payout ratio. This significant improvement drove the trailing 12-month dividend payout ratio down to 74% from 96% at the end of 2024 and demonstrates the strength in the free cash flow generation capabilities of our business and the sustainability of the current dividend level. The strong first half operating metrics also greatly improved our leverage ratio from 3.1x at December 31 to 2.6x at June 30, which, combined with the increase in the maximum debt-to-EBITDA ratio to 3.5x, bolsters our capacity under our credit facilities. Strong demand levels for the group's hearth, agricultural, wear-part, merchandising and certain industrial products has current overall order backlog is 40% higher compared to this time last year. And that, combined with the new products that will be introduced this year, is expected to drive results in the remainder of 2025. However, as we noted on our May conference call, with over 50% of our overall sales being made into the U.S., the impact of U.S. trade policy on the U.S. economy and our U.S. customers is important to our outlook. Recently, certain commercial vehicle and oil and gas customers have signaled demand declines for the second half of 2025 as U.S. economic conditions have negatively impacted their businesses directly. These same customers have noted that they expect to see a rebound in activity levels in 2026, and the 2025 demand declines should be mitigated by the previously noted strength in performance across the other parts of our business. But depending on actual U.S. economic activity levels in the remainder of 2025, they may impact sales and profitability over the next 2 quarters. We have an excellent group of subsidiary presidents that remain keenly focused on their activity levels, customer sentiment and cost structures, and they are all working to make their businesses stronger even through uncertainty. Chris Goodchild, who recently joined as COO of Decisive, is working closely with our subsidiary management to provide another layer of support and expertise in these business growth efforts. On the acquisition front, the 2 small tuck-in acquisitions for Techbelt we announced last month will add additional capabilities to Techbelt's product and service offerings and support future operating results for that business. Further, the acquisition of Venger Group by Marketing Impact announced this morning will add a U.S.-based business into our merchandising vertical, expanding this vertical's reach to a loyal U.S. customer base that currently utilizes Venger services. This business will be overseen by the President of Marketing Impact, Mark Gosselin, who will be focused on expanding Venger's business in the U.S., selling Marketing Impacts products into these U.S.-based customers and opening the door for provision of similar services of Venger to Marketing Impacts customers in Canada. These acquisitions are aligned with our focus of acquiring within the industry verticals we have already invested in, which should accelerate integration and enhance post-acquisition performance. We are encouraged by the record financial performance over the last 3 quarters, supporting strengthening of our balance sheet, along with the continued strong flow of deal opportunities we see within our existing 5 focused business verticals and within the parameters of the types of businesses we are looking for. These factors support further M&A activity, and we look forward to providing further update on that to our shareholders as our M&A program unfolds. With that, I'll now open up the call for questions.

[Operator Instructions] Your first question comes from Russell Stanley from Beacon Securities.

Congrats on an excellent quarter. Maybe just following up first on the signaling you're getting from the commercial vehicle and oil and gas customers around some caution there. Maybe can you elaborate, I guess, on what might be underlying their expectations for recovery in fiscal '26?

Yes. Yes, I think what we're seeing, there's kind of a few different stories in that front. I think on the heavy commercial vehicle front, I think they see dynamics that are causing them to pull back on production levels with some increases in inventory levels, driving what their communication is to us around demand levels for our products. I think what they've also signaled though is an expectation of strength in the U.S. economy on the back of some of the policy initiatives that have been undertaken, which drives their expectation of stronger performance in 2026. With respect to the oil and gas customers and the impact on them, I think there's a bit of a different story on both of those fronts, too, actually, because I think what we see from the one customer is we've been supporting them on a fairly new product development initiative that we've been building components and assemblies for. And that, as they've rolled some of this out, there's been some tweaking to the product, which then has paused initial demand with order levels expected to take off again in 2026 at levels that are still undetermined, but they've been pretty clear about the type of program they're looking to unfold in 2026 around that and getting back to building new product there. Otherwise, I think it's a question of operating activity levels across the various basins that the other customer relates to. And so that's maybe a little less clear and shifting some products around in terms of where they're manufacturing them. What we're seeing and encouraged about on that front is that there are other opportunities to work for that customer as well to do the other work for them, which we're kind of leaning into. So kind of a few different stories around that front, but that gives us some encouragement around what we're seeing that there could be more of a deferral than lost revenue. It's just a matter of timing.

That's helpful. And then maybe on gross margins, it looks like some nice improvement there year-over-year coming from both segments and primarily around product mix. I'm wondering if you can elaborate on what you're seeing there, where that improvement is really coming from and whether this trend should continue in H2…

Yes. I mean in terms of product mix, we see a business like IHT contributing considerably more than they did last year, and that's a higher-margin product than some of the other ones in that segment, the finished products segment. You also have a business like Unicast that's seeing strong performance and has really strong margins in that business. And really that, again, is part of that product mix change versus last year. If you look at it really on a sequential quarter basis, pretty similar. We've kind of had that 38%, 37% range in margins over the last few quarters here. And so encouraged by the -- despite some changes ups and downs between the businesses, a strong margin profile this quarter.

Great. Maybe one more for me, and I'll get back in the queue, just around this morning's acquisition. Can you elaborate, I guess, on what the strategy is for monetizing that cross-selling opportunity? It seems like there's a lot to do on both sides of the border. I just want to clarify, is there no customer overlap? Is this greenfield territory on both sides?

Yes. I think -- great question, Russell. For the most part, it is a greenfield opportunity. We do some work for some of the U.S.-based clients that are in the portfolio of Venger’s client list, but they operate at much greater scale with those customers than we do currently. And so we see tremendous opportunity. I think what consistent with what we're doing, marketing impact has products that solve certain challenges for our customers, specifically in our merchandising part of that business, it's around labor challenges. We have pusher products and other types of shelf management systems that reduce the need for labor to walk around the store and front product as an example, that manages inventory control to ensure that it's items are loaded into these merchandising systems in a first out, first in, first out basis, so that there's less aged inventory and waste. And so -- and all of that supports one of the biggest challenges for the grocer customer is a labor challenge. And Venger does the same thing. It does contract refurbishment services or provides contract refurbishment services in stores, grocers specifically. And dealing with the challenges they have in finding labor to do that type of work, we're able to take that off their hands, but also to refurbish the store and improve the look and feel of the store in a way that significantly reduces the cost of having to replace assets, we can refurbish them. And so I think that labor challenge is consistent across the group. What we have now is a group that provides products that do that and labor that provides it and with a lack of overlap in terms of us providing the products to vendors' customers or the services to marketing impact customers. So we also think there's tremendous growth for Venger in terms of just the existing services it offers in the U.S. And so we're excited to lean in and build the group of salespeople that are driving that business going forward. And so we see -- we're really excited about the organic growth opportunities that business provides for us as well, plus the cross-selling opportunities. So we think it's a great fit. It broadens our -- we're very aisle focused in terms of what marketing impact provides currently. This broadens it to a much broader base across the store, which we think is important as we look at that merchandising segment and the opportunities that are in there.