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 Zedcor Inc. Third Quarter of 2025 Financial Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Amin Ladha, Chief Financial Officer. Please go ahead.

Thank you, Joe. Good morning, everyone. Thank you all for joining us today. Joining me on our call today, we have Zedcor President and CEO, Todd Ziniuk. Last night, after markets closed, Zedcor issued a news release announcing our financial results for the 3 and 9 months ended September 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 performance statements includes statements of forward-looking information within the meaning of applicable securities law. These statements are made under the safe harbor provisions 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 as it appears appended on our news release. Please review our press release and Zedcor's reports filed on SEDAR+ for various factors that could cause actual results to differ materially from these projections. We use terms such as gross profit, gross margins and adjusted EBITDA on this conference call, which are non-IFRS and non-GAAP measures. For more information on how we define these terms, please refer to the definitions set out in the MD&A. 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 could use to fund working capital requirements, fund future growth initiatives and surface future interest and principal debt repayments. Adjusted EBITDA should not be construed as an alternative to net income and determined in accordance with IFRS. Please note that all financial information is provided in Canadian dollars unless otherwise noted. Following the prepared remarks by Todd and I, we will conduct a Q&A session, during which questions will be taken from our analysts. Now moving on to a review of the company's financial performance for Q3. Some highlights for the third quarter include record revenues of $16 million. This exceeded our previous high just set last quarter by $2.5 million and is an increase of 75% year-over-year. Our recurring revenues for Q3 2025 remained steady. We also had record adjusted EBITDA of $5.7 million for Q3 2025. This was a 68% increase year-over-year and the EBITDA margins 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 Q3 2025, our tower production count grew by 469 towers, which was over 36 per week on average. We have met our previous goal of 30 to 35 towers produced per week and have the optionality to manufacture more than 40 units per week, currently with the ability to ramp up based on customer demand. For year-to-date highlights, revenue for the 9-month period ended September 30, 2025, was $41 million. This compares to $22.7 million for the 9 months ended September 30, 2024. This was an increase of 81%. Adjusted EBITDA increased to $14.8 million or 36% of revenues versus $8 million and 35% of revenues for Q3 2024. The revenues and EBITDA have increased, but we have also had other major accomplishments, including significant U.S. expansion, both within Texas and the Southern U.S. Tower fleet was more than 2,350 at the quarter end, which is an increase of 1,200 year-over-year. Diving into the income statement a bit more for the 3 and 9 months ended September 30. Revenues increased 75% year-over-year and 18% quarter-over-quarter. The U.S. revenues continue to grow, but we are also seeing growth in Canada as well. Gross margins increased to $10.2 million or 64% of revenues. This continues to be steady, but there might be a reduction in some upcoming quarters as we ramp up hiring and training for expanding the U.S. monitoring center in order to maintain customer service levels. Adjusted EBITDA increased to $5.7 million, which was 36% of revenues. This was also steady in Q3, but could see some decrease as we continue to expand in the U.S. and add salespeople in key regions. We hired a number of key people in these key sales regions toward the end of Q3 and into early Q4. We have nearly doubled the size of our U.S. sales team, and we'll continue to invest in expansion at the local level in order to maintain our industry-leading service levels. We also achieved production capacity of 40 towers a week in Q3, which is proving to be absorbed directly by market demand. We also continue to see demand for our wall-mounted ZBox unit. This isn't contributing significantly to revenues yet, but we are seeing demand for this unit as well without much sales and marketing focus. We have had significant customer wins in both the U.S. and Canada, and this has been across a few different verticals. Moving on to a discussion of the balance sheet. We exited Q3 with a cash balance of $1.5 million. Subsequent to the end of the quarter, we expanded and extended our current banking facility to a $50 million revolver with a $25 million accordion. This provides additional liquidity for continued growth and reduced interest rates. We had net debt of just under $22.7 million, and our net debt to last 12 months EBITDA is 1.21. This will increase over time as we deploy capital, but will be offset by growing LTM EBITDA as we saw this quarter. Due to the new financing, our new facility does not have any principal repayment requirements. We have only interest payments monthly. This frees up about $1 million quarterly and $4 million annually in free cash to invest back into the business. PP&E increased by -- increased to $78.2 million due to continued investment in the company's growing fleet of security towers, portion of that increase is sitting in 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 unnecessary capital isn't tied up. A review of our cash flow statement for Q3. Adjusted operating cash flow increased 71% year-over-year to $5.1 million, demonstrating the growing cash flow generation capacity of the business. Capital expenditures in Q3 2025 increased quarter-over-quarter as our manufacturing capabilities are streamlined. We've staffed up our team and established our processes, and this is reflected in the weekly production counts. Maintenance CapEx continues to represent a small portion of the total CapEx. During the quarter, we repaid $1.9 million of debt and finance leases. I will now hand over the call to Todd Ziniuk, who will provide us with an operations update and some insights into our go-forward strategy.

Thank you, Amin. As everybody saw, obviously, we had a great quarter. We're very excited about where the business is headed. We see strong opportunities, both Canada and U.S. Despite the cost of the growth in the U.S. expansion, we still maintain, like Amin said, over a 35% EBITDA margin. I think our management team does a great job of running the cost, keeping costs in line as fast as we're growing. We're being very successful and fairly methodical on how we're growing and opening up our different locations. The biggest thing I talk about all the time is our platform. Our platform is creating one thing for Zedcor, the ability to give service to our clients and the ability to move fast, get the towers out to our clients pretty much within 24 hours. It's a big value add for a client. A lot of these people, different clients are in a situation they need coverage right away. They can't afford to wait weeks. So that's the one big thing that cuts us apart. And then it's a cost savings thing for our clients. A lot of places we're placing guards or they have nothing, and we're actually holding back with the shrinkage is on a normal job site where they had just a fence lock and key and the clients are starting to see more and more value, obviously, in the tower service, mobile security. Obviously, Zedcor's product is bar none. It's right at the top. And we run the top cameras in the world, and we're seeing big benefit from, obviously, the strength of our product as well. I can't say enough about the platform, but the platform for us ties into a couple of different things, our branch model, our monitoring is all in-house. Like Amin said, we're going to be in Q1 opening Houston. We're quite excited about it. We're going to be starting to train people here late December, early January, probably be fully live by mid-February and March 1. Another thing that we're quite proud of is we brought the customer tower down a fairly significant percent, close to 8%, 10%. We're right on target with '25. We said we built 1,200 to 1,400 towers. It's going to be on the high side. It will be the 1,400-ish by the year-end. 2026, the goal is 1,800 to 2,000 towers. The demand is not stopping. I think for competitive reasons, I'm not going to get too deep into our pipeline, but our pipeline is strengthening every day. And it's also the quality of our clients are strengthening. A lot of these newer clients coming on, these towers are there for a long term, different plays that know that there -- it's not for construction. It's the retail space. We're very excited about that side of the business. We know that there's a bunch of good wins coming -- going to be coming from that. And it's going to help with us having the platform to service these clients. And we're really, really excited about that side of the business. I don't want to dive into too much more. I think everything we've talked about on every call is we're right on track. I think I mean, you'd agree that things are right where we thought they would be, and they continue to be. And the growth is there. We haven't scratched the surface nor has any competitor in this space scratched the surface. It's a very large white space. We know that. I think the whole industry knows that it's -- the world is evolving to technology, and we're quite excited to be part of it. I think we're going to open it up, Amin, for questions.

Yes, for sure. I'll hand the call back to Joe for questions from the analysts.

Thank you, Amin. We will now take questions from analysts on the -- we have Doug Taylor from Canaccord.

Good morning and congratulations on another strong quarter against what are pretty lofty expectations set for your company. I'd like to start with a question on what you just finished with, which is these large potential retail customer opportunities. You've had some of these in the pipeline and you've been talking to them for some time, and taking time to close these. Is there -- from your perspective, is there anything that you need to do with respect to your platform and development that is a gating factor in the timetable for announcing some of these? Or is this continue to be a near-term potential catalyst for even more accelerated tower growth?

For the near term is relative. We found in the retail space, they kind of move at their own pace. They have multiple layers to go through, different RFPs. Now we're running into Black Friday, Christmas time, and they seem to not make a good decision at that point. So I think we've had to be patient as well and kind of work through their process. And obviously, given the size of the customers we're at the table with, we can't really -- we don't want to push too hard and kind of offend them or lose that opportunity. So we're working more off their timetable. What we've learned that's kind of interesting is they're using a competitor, but I think they're either looking for expanding or replacing. I think it's more on the expanding line, which is interesting. So that's about as much insight as we have at this time. And I think once we get once we get some deals in place, we'll definitely let everybody know.

I think you referenced earlier in the slide deck still above 90% utilization rate for your existing fleet, which is very robust. Also, I think understood from your language that you now see your ability to supply and your ability to place these towers in the market as being stabilized or reaching some sort of equilibrium. Is that a fair assessment? And how would you describe the current state of your tower inventory at the branch level?

Yes. We're trying to get it -- it's a good question, Doug. We're trying to get it to the point where the branches have towers. They got inventory. And obviously, as you build this platform, it's going to give you more inventory and you go to work for some of these retail chains or even these mid-enterprise customers that are in multiple states or big construction companies in multiple states, it gives us the ability to move fast. I think we're obviously moving forward here building towers quicker every week, more every week. We're starting to get it to a point. We kind of want to get it, honestly, around that 85% to 90% utilization to give us the ability to move faster. And plus we can -- I think you agree with this, build towers quicker if required. We're in a good position that way on the manufacturing side.

And having that ability to move quick and kind of have some units sitting in inventory that's helped to keep the customer service levels and led to win work like if a big customer wants to move quick, we want to be able to show them that we can move quick.

We also have our steel providers, Doug, that have inventory as well. So they're building up their inventory for what I phone and say, "Hey, I need more." It's not a wait. They have it. We're kind of all working together on that. So when the time comes, we can step on it harder, right?

Okay. So generally in a healthier place...

[indiscernible] a healthier place to answer the question, yes.

Okay. And then last question for me. I mean it doesn't take much extrapolation to see that even continuing at your current pace or the pace you had in Q3 would put you through the top end of the guidance numbers, which we're looking at in front of us right now with respect to tower fleet size by year-end. Is there something seasonal we should think about now given the changes to your geography, but also your end customers and the way they want to take towers on into the holidays, for example, with retail or anything else we should consider there?

I think the only real seasonal stuff we see, honestly, throughout the company is out of Calgary. We work for [ NMAX ] and [ Volker ] up there. They have a couple of months shut down, but it's all dependent on weather. And they don't fully shut down, they pull back a few towers, nothing that really affects the bottom line and it's right back, if not more, towers go out. It's -- I don't think we're seeing a whole bunch of seasonal. Right, Amin?

No, on the retail space, it seems like they stop making decisions around the holidays, but they don't stop working necessarily. So once we're in, those towers would obviously keep working.

Next question comes from Kyle McPhee from Cormark Securities.

First on me, just on this topic of the enterprise clients and the national clients. Can you shed some light on just how intense the process is to get on the vendor list of some of these major clients you're going after here? I mean what goes into the audit process? And are you getting the sense that Zedcor stands out as a rare player in the service niche that actually has the scale and sophistication and internal monitoring function to win this type of big business? Is your early scale proving to be a competitive advantage here?

Each kind of retailer is a bit different. Like we've worked for national accounts before, and they haven't necessarily been as stringent as some of the retailers, but some of the retailers were at the table with like Home Depot Canada didn't have a ton of onboarding requirements, but some of the American retailers have some more. So it's really unique. I think it's not necessarily an onboarding thing. It's more just kind of moving -- they make decisions at their own pace, if that helps, Kyle. We have the sophistication, and I think we're probably one of the only few players in the space that can offer that service level platform, which is important for them, being kind of spread across the country, being able to respond to issues, service the equipment. That's important to them, and that's kind of the feedback we've gotten is what they're looking for. The in-house monitoring helps as well, having it not overseas. So I don't think it's necessarily our issues. It might be just the way they do business.

Got it. Okay. And just it looks like Zedcor experienced pretty good cost leverage in Q3. Your gross margin percentage was up. Your G&A percentage of revenue was down, all great to see as you grow. Do you expect this trend to hold near term? Or should we expect a pause here for margin expansion or even a kind of minor reversal in the typical range we've seen in the past as you get into another round of growth spend for headcount expansion, regional expansion? Just give us a preview of how the growth spend cadence is playing out through Q4 and near term.

It's going to be a bit choppy, to be totally honest. We were quite excited and we've kind of talked about it before as we see those economies of scale, the per unit operating cost of these units, SG&A, operating expenses, everything is going to go lower as we build scale and as we build the branches, and you can kind of see that in Canada, which is our "mature market." The U.S., as we get good people, as we expand in new regions, we're not going to slow the growth down necessarily. But it's definitely trending downward. I don't know if it's going to happen in the next quarter or if it's going to take a bit longer than that.

Third question comes from Richard Tse from National Bank.

Can you maybe talk about the competitive landscape a little bit? I guess, specifically, I'm kind of wondering of your new wins, can you maybe talk about the mix between greenfield opportunities and those from competitive displacements?

The new ones, some of them like one of the kind of larger stores that we've gotten had nothing. They were using your traditional kind of security guards, the rolling car and guarding a car that would drive by 3, 4 times a night, and they were getting vandalism, graffiti on their building, just people doing drugs in their parking lots. So that wasn't working for them. I think they did a bit of a competitive process, and we came out ahead on that. So that was one example. One of the kind of other vertical wins that we've had, they did displace a competitor. So it's a mix of either competitors or a mix of traditional security guards.

25% competitor.

Yes, it's more so traditional security guards, 1/3, I would say. Yes, 1/3 offsetting kind of a competitor and 2/3 offsetting security guards or nothing.

Okay. So 1/3 like a direct competitor, 2/3 old school security.

Approximately. Yes.

And 1/3 people shifting and realizing the value of technology and cameras now that they can be monitored, Richard.

Right. Okay. And then your sales force, what's the mix in terms of numbers between Canada and U.S.?

We've got about -- we got 24 salespeople in the U.S. right now. We've got 7 going to 8 in Canada. And then we've got a corporate sales team made up of about 4 people, actually 5 right away, and they're working U.S. and Canada, Richard.

Okay. And what's the target for the U.S. sales force here in the next 12 months?