Zedcor Inc. (ZDCAF) Earnings Call Transcript & Summary

Thank you for standing by. My name is Joe Diaz, and I will be the conference call operator. Welcome to the Zedcor Inc. Second Quarter 2025 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Amin Ladha, Chief Financial Officer. Please go ahead.

Thank you, good morning, everyone. Thank you all for joining us today. Joining me on our call today, we have our President and CEO, Todd Ziniuk. Last night, after market closed, we issued a news release announcing our financial results for the 3 and 6 months ended June 2025. This news release will be available on our website under the Investor Relations tab and is filed on our SEDAR profile. Please note a portion of today's call other than historical financial performance, include statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provision of those laws. Forward-looking statements that are based on management's current views and assumptions. This discussion is qualified in its entirety by the cautionary note regarding forward-looking statements that is appended to our news release. Please review our press release and our reports filed on SEDAR+ for various factors that could cause actual results to differ materially from the projections. We use terms such as gross profit, gross margin and adjusted EBITDA on this conference call which are all non-IFRS and non-GAAP measures. For more information on how we define these terms, please refer to the definition set out in our management discussion and analysis. In addition, reconciliations between any adjusted EBITDA and net income is included in the MD&A, an important non-GAAP measure that we use is adjusted EBITDA. The company believes that adjusted EBITDA is a meaningful financial metric as it measures cash generated from operations, which the company can use to fund working capital requirements, fund future growth initiatives and service future interest and principal debt repayments. Adjusted EBITDA should not be construed as an alternative to net income determined in accordance with IFRS. Please note that all financial information is provided in Canadian dollars unless otherwise stated. Following the prepared remarks by Todd and I, we will conduct a Q&A session during which questions will be taken from our analysts. And now moving on to a review of our financial performance for the second quarter of 2025. Some highlights for the second quarter include record revenues of $13.5 million in Q2. This exceeded our previous high set just last quarter by $2.1 million and is an increase of 84% year-over-year. Our recurring revenue for Q2, 2025 remains steady, and our revenue streams are becoming more and more predictable as we expand in the U.S. and Canada away from project work. We also had record adjusted EBITDA of $4.9 million for Q2 2025. This was an 83% increase year-over-year and the EBITDA margin remained strong at 36% for the quarter. Our tower count and customer base continues to grow. More importantly, our weekly tower production, which is a key metric for us continues to increase. During Q2, 2025, our tower production count grew by 316 towers, which is over 24 towers per week, and we have met our previous goals of 20 to 25 towers produced per week and we have the optionality to increase that based on demand. For our year-to-date highlights, revenue for the 6-month period ended June 30, 2025 was $25 million, this compares to $13.5 million for the 6 months ended June 30, 2024. This was an increase of 85%. Adjusted EBITDA increased to $9 million or 34% of revenues versus $4.6 million and 34% of revenues in Q2, 2024. The revenues and EBITDA have increased, but we have also had some other major accomplishments, including significant U.S. expansion, both within Texas and the Southern U.S. Our tower fleet was 1,882 towers at the quarter end. This was an increase of 879 towers year-over-year. Diving into the income statement a bit more for the 3 and 6 months ended June 30, revenues increased 84% year-over-year and 18% quarter-over-quarter. The U.S. revenues continue to grow, but we are also seeing strong demand and growth in Canada, and we will continue to allocate capital there as necessary. Gross margin increased to $8.5 million or 63% of revenues. This continues to be steady, but there might be some slight reductions in the upcoming quarters as we ramp-up hiring and training for expanding the U.S. monitoring center. Adjusted EBITDA increased to $4.9 million, which was 36% of revenues. We continue to invest in the sales team and expanding our geographical footprint in the U.S. This was steady quarter-over-quarter, but it could fluctuate as we will pursue growth over time. We continue to see strong demand for our wall-mounted Zbox as well. This isn't contributing significant revenues yet, but we are seeing strong demand for this unit, and we'll continue to increase production as we expand and see the demand continue. We have significant customer wins in the U.S. and Canada. This has been across a few different verticals, including residential construction and the logistics industries. For a discussion of the balance sheet, we exited Q2 with a cash balance of $6.4 million. We have $10 million of borrowing room in our current banking facility. We also talked with our lending partners on getting that increased as our business and financial metrics have changed significantly, since we expanded the facility just 8 months ago. We had net debt of just over $12.1 million after factoring in $18.6 million of total debt. Our net debt and trailing 12-month EBITDA is 0.74x. This will increase over time as we deploy capital, but will be offset by growing EBITDA. $1 million of the debt is expected to come due in the next quarter, and that will be retired from free cash flow. PP&E increased to $62.7 million due to continued investments in growing the company's fleet of security towers. A portion of that increase is sitting under assets under construction as we purchased a number of longer lead components in order to ramp-up growth and meet our production targets. We try to keep this around 4 to 6 weeks of production, but are managing AUC actively so that we don't have a necessary capital tied up. A review of our cash flow statement for Q2, 2025. Adjusted operating cash flow increased 103% year-over-year to $4.4 million, demonstrating growing cash flow generation capacity of the business. Capital expenditures in Q2, 2025 increased quarter-over-quarter as our manufacturing capabilities are streamlined. We staffed up our team and establish our processes. Maintenance CapEx continues to represent a small percentage of total CapEx and during the quarter, we repaid $1.6 million of debt and finance leases. I will now hand over the call to Todd, our CEO, who will provide you with an operations update and some insights into our go-forward strategy.

Thank you, Amin. Good morning, everyone. As you see from the numbers, we had another great quarter, strong quarter. Despite the growth in Canada and the U.S. that we can continue to see, we managed to maintain a 35% EBITDA level, which we take a lot of time on cost and keep the guardrails on the growth to the right pace to make sure that we can maintain these EBITDA levels. The biggest thing that makes Zedcor a lot different than anybody else is, obviously, we've got a great product. But one thing really driving our success is the fact of our service and our whole platform that we've built out to be able to service our clients. It's 1 thing to have a great product, but if you don't have the service in the area where the equipment is working, that's where you can possibly fail. And we've done a great job with our coverage, strategically putting our branches where our towers are. That obviously continues to grow. Obviously, 1 of the biggest things that we replace, like we've talked about before as well as the guards on sites, as everybody knows, it's harder and harder to find people nowadays. So the quality of people, some of the guards that are out there are the greatest as well, and it's a cost savings for our clients. It's a large cost savings compared to our boots on the ground or a guard sitting in a vehicle on the job site. So very cost effective. Clients are seeing that more and more. They're starting to see a lot of our competitors in the space, they don't have monitoring now that they see with the monitoring what Zedcor can do with the Live Verified monitoring and the fact that it's all in-house. The clients once they get a taste of that, it really starts to grow internally inside of every customer we have. So we're seeing a huge success with that. Growth updates Canada and the U.S. both continue to grow. In Canada, we're actually seeing quite a bit of growth across the whole country, a lot in Ontario. We're starting to slowly move into Montreal as well or Quebec, sorry. We're seeing growth there. We've hired a salesperson in Quebec, which is working out quite well. On the U.S. side, we've -- total branches right now, we're running 13 between Canada, 6 are Canada we'll probably be opening up another 1 in London, Ontario, probably Q1. And then we've got the 7 in the U.S. we'll be looking to actually double that through 2026. We're going to be looking at strategically, where our branches are going to be placed from now. To the end of the year, we have lined up opening a couple more before the end of the year. A lot of this is customer-driven. We've got quite a few towers working in areas that were branches aren't set up. So obviously, that's going to drive some of our decisions. Also, the demand is still there. We don't have a big inventory sitting in any of these branches. It's very strategic as the towers are built, they're built. We decide where they send them, we can send them in truckload to 20, truckloads to 10, whoever needs the next is that's kind of what we're doing between the platform of the 13 branches. So -- as of right now, we're right on track with our goals for 2025, the 1,200 to 1,400 towers. I think we're going to be on the higher side of that, closer to 1,400. We've secured a new building as well. As far as our manufacturing goes, right now, we operate about 20,000 square feet. We're going to be into 27,000 square feet of shop space, the 17,000 square feet of an attached office to the exact -- or the same building, sorry, which is going to be good. We're going to have the whole team under 1 roof. I think that's going to help a lot of efficiencies as well. As of right now, we're building anywhere from 42 to 45 towers a week. The plans to get to 50 by September. So we're right on track with that. We've reached quite a few different goals. And as far as our manufacturing sites went. Early on, a lot of people heard me talk about where we would complete all of our packages. Everything will be built by Friday and waiting for more packages to come Monday. We've got it now where we have about 60 to 70 unbuilt towers. So we have 1 week of cycle always ahead which gives us the ability if we had to step it up and build more, we have that ability to do that. And we're quite excited where the manufacturing site has gone. The tower prices when we first got into this, close to CAD 34,000. We've got them closer to about CAD 28,500 per tower. So we've seen a lot of efficiencies, haven't been affected at all by any tariffs, which is a good thing, even on our steel prices, our steel provider, now that we're [ PO-ing ] quite a few more towers at the time. It's -- these actually come down in prices, the steel and painting component side of it. So we're excited about that, and it continues to grow. And we have the ability. A lot of people ask you can build 50 towers in that facility. We could probably actually get closer if we had to build 100 to 150 a week. It's just a matter of getting everything in place, adding people and continuing on with that. I don't have a whole bunch more to add. I think we can open it up for me for questions.

Yeah. Absolutely.

Thank you, Todd. We will now take questions from analysts only. And the first question comes from Kyle McPhee from Cormark Securities.

Great performance. You're pushing this business forward like clockwork. First question for me on margins. So your EBITDA margin in Canada benefits from density already in place relative to the U.S. Your Canada EBITDA margin was 66% in Q2, so that's much higher than 26% down in the U.S. I assume U.S. margins will catch up to the Canada level over time as you get that U.S. density. But my question is, do you foresee any kind of structural reasons or competitive reasons or client-type reasons, why your U.S. margins won't eventually be able to catch up to the levels we're seeing in Canada?

There could maybe be some competitive reasons, but honestly, they should get there and it will be sooner rather than later, like you said, once you get that density adding 2, 3 locations won't significantly deteriorate that margin. It's just a matter of getting that scale and density. It took about 3 years in Canada to build that up, and it's probably going to happen a bit faster in the U.S.

And I think we'll see it first in Texas, obviously. Like now, Kyle, all of our branches are all staffed up we're not adding any more people right now to the branches. For example, we've got a great study on how the branches have been being built. We've got a great strategic plan for example, you get up to about 200 towers in a branch. That's when you probably add a second service tech or a delivery fellow, right? And so we're seeing that in Texas. And then these other regions will be the same. I think it's -- it will catch up probably quicker than 3 years. I think Texas will mature and it's already maturing, right?

Yes. And we will present it that way just for competitive reasons that we don't have to. But yes, like Texas, like if you look at Phoenix and Las Vegas, they're fully staffed out, but they only have less than 50 towers at those locations. So they don't have the scale yet, but most of the branches in Texas, Denver is getting that scale too. So that will absolutely catch up, Kyle, you're right.

Got it. Great to hear. Okay. And then Canada, again, you're relatively more mature region, but it looks like it's still delivering impressive growth. Your Canada revenue was up 13% quarter-over-quarter in Q2. Is there any sort of quarter-over-quarter seasonal lift or onetime lift in that Canadian revenue performance in Q2 that I should be aware of? Or is this growth in Canada just indicative of having lots of growth runway left in the country. I mean what do you think that medium-term path looks like for growth in Canada? Because this is all helping inform us on how much growth may be left in the U.S.

It's lots of growth. You're actually right, it's probably 10% to 15% kind of quarter-over-quarter. We do see some like seasonality in some regions and kind of that December, January time. It seems like a lot of municipalities don't want to issue permits and construction people don't want to go to work, there's some weather stuff in construction. But a lot of that would be more minimal.

That's more of the road building and stuff.

Yes. That's minimum at this point. And we don't see that -- a lot of the demand from Canada is coming from existing customers. So -- the 10% to 15% is definitely doable.

Our second question comes from John Shao from National Bank.

Todd, could you give us an update on your negotiations with some of the large retailers as well as maybe an update on your SOC 2 audit?

Sure. We completed our audit for 1 of our large audit, so cyber audit for 1 of our large retailers. It will be moving forward. We don't have numbers on it yet. We're just in the middle of an RFP with another quite large -- well a very large grocery chain in the United States. And we're also going to be doing an online presentation with 1 of the largest home improvement companies in the U.S. as well. So that side of the business, John, it's a long runway. But something that we're excited about, we're starting to see outside of the retail side, some of these companies that we're starting to work for are taken like 30, 40 towers at a time, and they have the runway to probably get to 200 to 300, if not more. And having that platform, John, that I always talk about, that's an advantage for us because we can service our clients. And 1 of our goals right now, I'll say it again, is to get down to we're going to be within 8 hours or 1 of our towers in North America. We want to have that completed by the end of '26. And it doesn't take a whole bunch more branches in the U.S. to make that happen, and we even want to shrink that further. The cyber audit towards SOC 2. A lot of the stuff that we've done for this 1 retailer has got us probably 65% of the way from the SOC 2, right, Amin.

Yes.

And we're probably about another 6 to 7 months away don't get the SOC 2 compliant. And what SOC2 does for us is it opens up the doors to not so much opens the doors, but it slows -- a lot of this stuff gets slowed down when you're with these retailers or big companies. Once you're SOC 2 compliant, you can go into their office and to show them that you've already got the compliance going and it just speeds everything up, right, instead of having to go through all these audits. Oddly enough, we run our own Internet and still like via a cell or satellite. We're not even on their systems, but a lot of the cyber stuff comes down to, if somebody gets killed their parking lot, something happens. They want to know that their video is secured. It's not going to end up on Facebook or end up on social media. And then -- we're all on their Internet, so they don't have to be worried about us getting credit card information or people being able to get into that part of their business. But it's -- I think, it's something that's going to make Zedcor a lot better. I don't think there's a whole bunch of people in the space doing it either. Amin, if you have anything to add.

Yes, that's going to make us industry-leading for sure. But on the kind of national accounts, the larger accounts, I think, 1 important thing to highlight here is it's not just the retail space, especially in the U.S., like I know everybody gets excited about the big retailers to see them in a parking lot, they're a big name. But there's companies multibillion-dollar market cap companies in the logistics space and homebuilding and they have divisions and like Todd said, they could ramp-up to 200, 300, and we've landed a number of those kind of customers over the last 3 to 6 months. We don't....

And I think John will share a story with you about how is Zedcor service and for everybody that's on the call. And I'm I don't want to say too many clients' names right now on the call. It is a competitive space. We had a company phones and they said, we're not happy with the person we have the provider and James got talking to him and said, "Well, where do you need a tower, he said Oklahoma. How soon could you have on there, James, is like a there tomorrow morning. You guys are serious. James yes." By the end of the call, it was a Wednesday morning. We deployed 17 towers in 5 different states by Sunday evening. The guy was blown away. These guys have about 90 other locations that they're looking at us doing. So it just shows you the service side of the business. So again, if you have a great product, but if you don't have a service, you got nothing. I don't mean to go off on you, John, but if that answers your question.

These are the kind of things that we're not saying a press release.

Again, that's great color. And my other question is, could you maybe give us an update on the local hiring market and whether you're still comfortable finding high-quality talents in the markets you're targeting right now?

As far as the sales side goes, we actually in the U.S. have people phoning us just to come to work here. It's been great. They're been in the industry at 1 point, see what we're doing or they are in the industry. And some of them want to come and join. They see the product, how well it's built. They're starting to see the towers everywhere. Management has been easy to find. And probably 1 of the toughest things to find is the accounting world for Amin's team. They've got -- we've got great people, but we need to build it out. You would want to add to that. Amin.

Yes, everybody seems they're going to want to work from home and well, it's crazy amounts of money. So we're going to have to navigate that accordingly. But I think operationally and sales wise, we've been quite lucky.

On manufacturing side, we've had then we've got a lot of people in our culture, too, John, that have been with us a long time. And it drives referrals, people that we know, it's been good that way, right?

The third question comes from Sean Jack from Raymond James.