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Data Communications Management Corp
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Good morning. My name is Chantel, and I will be your conference operator today. At this time I would like to welcome everyone to DATA Communications Investor Call for Q1 Results. [Operator Instructions]Michael Sifton, CEO, you may begin your conference.
Thank you, Chantel. Good morning, and welcome to our first quarter 2018 investor call. Today, I'm joined by Greg Cochrane, our President and incoming CEO; as well as James Lorimer, our CFO.Before we begin, I'll remind you that our remarks and our answers to your questions today may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause actual events or results to differ materially from any conclusion, forecast or projection contained in our remarks or answers.Certain material factors or assumptions were applied in drawing the conclusions, forecasts or projections included in our remarks and answers. Additional information about the applicable risk factors and assumptions are contained in DATA Communications Management's annual and quarterly continuous disclosure filings available on SEDAR.Also on today's conference call, all references to DATA Communications Management will mean it's various business divisions. On with the call.With this being my last quarterly call, it is a somewhat bittersweet occasion. As I've considered my commentary, I've oscillated between melancholy and excitement. Over the course of the last 3 years, we've traveled many difficult and treacherous miles. The good ship DATA Group Inc., which was what we were known by back then, that I boarded in April of 2015 is a very different ship than the sleek, modern, agile ship we now call DATA Communications Management Corp. or just DCM.Three years ago, we said we would build on the robust history and legacy of DATA and evolve it to be a focused, optimized and agile organization. After a couple of months, we added [ United ] to illustrate our desire to pull our team together as we endured tumultuous restructuring times.As you can see in our Q1 2018 report, DCM has started to enjoy the benefits of all the difficult initiatives we undertook over the last 3 years.Equally, we are starting to see the profound impact Greg, Greg Cochrane, is having on the organization with his customer-first focus, boundless energy, enthusiasm and exceptional communication skills and deep service industry experience. Without a doubt, Greg was the right addition to the team at the right time, and he continues to lead and transform DCM to ensure a bright future.Ladies and gentlemen, with this as my introduction, I'll step aside and let Greg review Q1 and some of the exciting developments. Greg, over to you.
Thanks, Mike, and good morning, fellow shareholders. I want to provide an overview of 3 things: our first quarter 2018 financial results; our first quarter initiatives and drivers for our business; and lastly, our management outlook for the balance of 2018.Our first quarter. Revenues for the quarter were $88.5 million compared to $70.1 million in the first quarter of 2017, which is an increase of $18.4 million or 26.2%. Excluding the effects of adopting IFRS 15, for the 3 months ended March 31, 2018, revenues would have been $14.6 million or 20.8% higher than the same period last year.Total revenues benefited from the acquisitions of Eclipse and Thistle, which were added midway through the first quarter of '17, and BOLDER Graphics out in Calgary added in the fourth quarter of '17. Our core DCM business, which excludes the three 2017 acquisitions, generated $76.4 million of revenue compared to $65.6 million in the prior year's period.Adjusted EBITDA was $6.4 million versus $2.9 million in the first quarter of 2017 or an increase of 118%. Excluding the effects of adopting IFRS 9 and 15, adjusted EBITDA was $5.3 million for the 3 months ended March 31, 2018, a $2.4 million increase over the prior year.Now I will turn to the first quarter initiatives and drivers for the business. First, I always like to start with sales performance. Our core DCM business was strong as we realized increased revenues, onboarding a new financial services client and realized increased spend with existing clients.We also benefited from a onetime increase in volume from a long-standing customer, which generated approximately $8.9 million higher revenue levels than we experienced in 2017. Our 2017 acquisitions performed well and helped enhance the overall value of our offering.Operations. We successfully integrated our Multiple Pakfold business into our Brampton, Ontario facility as well as the BOLDER Graphics acquisition into our Calgary, Alberta, plant. Our immediate focus is on plant and integration efficiencies. Each of our facility leaders has been charged with the responsibility of measured savings for 2018. We continue with the implementation of our ERP project and are focused on our fourth quarter implementation target.Margin and cost discipline. We are seeing improvements in our cost plus discipline with gross margins improving on noncontracted business compared to a year ago. Part of that improvement performance is attributable to a concentrated effort to move smaller volume clients to our customer service personnel, thereby improving service at a lower cost to serve.We experienced some weaker margins than expected in the first quarter of '18 due to the BOLDER Graphics and Multiple Pakfold transitions together with higher paper content levels as a result of higher thermal roll product sales as well as higher than normal use of outside services to meet customer demand. We expect these to normalize in the second quarter of 2018.So our outlook for the balance. We recently announced the acquisition of the Perennial Group along with a $12 million credit facility with Crown Capital, of which $3.5 million of that was used to repay short-term debt. Perennial highlights the strategic shift we are making with DCM and bolsters our credibility in the retail sector, which we see as a key vertical market for our company. With encouraging signs like growth from existing customers, the addition of new customers, improvements in key growth segments like labels and large formats, we will maintain the 2018 guidance we issued in February. We are buoyed by our first quarter results and look forward to a strong 2018.Now for a full description of our financial results for the first quarter of 2018, please refer to our unaudited consolidated financial statements for the 3 months ended March 31, 2018, and related management's discussion and analysis, copies of which are available at www.sedar.com.I thank you very much, and I'll turn things over to James Lorimer.
Thanks, Greg. DCM adopted 2 new accounting standards effective January 1, 2018: IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers.As permitted by the transition provisions of IFRS 9 and IFRS 15, we elected not to restate comparative period results. Accordingly, all prior years' comparative period information is presented in accordance with our previous accounting policies as set out in our 2017 annual report.We applied IFRS 9 and 15 from January 1, 2018, retrospectively and changed our accounting policies with a cumulative effect of initially applying these new standards at January 1, 2018. Accordingly, a number of opening adjustments were applied to our balance sheet to reflect these new standards and are more fully described in the notes to our financial statements for the first quarter.IFRS 9 Financial Instruments includes revised guidance on the classification and measurement of financial instruments, impairment of financial assets and the new general hedge accounting model. This particular standard did not have a material impact on our financials.IFRS 15 Revenue from Contracts with Customers, under this new rule, DCM recognizes revenue when control of goods or services has been transferred. Revenue as measured at the amount of consideration to which DCM expects to be entitled to, net of incentives given to our customers, including volume-based incentives and cash discounts.Three of the key impacts here that I'd like to highlight are as follows: previously under the former revenue recognition rules, we identified that the risks and rewards of ownership of product that was manufactured by us or purchased from third-party vendors at the customer's request and stored on their behalf in our warehouse did not transfer until such time as the product was shipped from our warehouse. Under IFRS 15, we have identified that product revenue should be recognized upon the completion of production by us or upon the production -- sorry, upon the purchase and induction of product from third-party vendors into our warehouses as that is when control of the product is determined to have been transferred to the customer, and we have right to payment.Secondly, under IFRS 15, revenue is recognized over the periods that warehousing services are provided to the customer. Previously, under the former revenue recognition rules, revenue related to warehousing services that were bundled with the overall selling price of the product were recognized upon shipment of the product to the customer and nonbundled warehousing services were recognized over the service period.Third key different element is that DCM serves as a principal when contracting freight services that it provides to our customers as that represents the primary -- the customer represents the primary obliger in these arrangements. Previously, we have recorded freight revenue net of related costs. Under IFRS 15, an adjustment was made to present freight revenue on a gross basis. Accordingly, in the first quarter, approximately $2 million of additional revenue was recorded and the $2 million corresponding cost was charged to cost of sales. As a result, gross margin is the same.Management is of the view that these changes represent a more accurate reflection of the economics and how we conduct business with our customers, especially given, one, all product orders are customized based on specifications preapproved by the customer; two, the product is segregated and maintained solely for the customer who placed the order; and three, we have a right to payment for the performance obligations that have been satisfied.The opening balance sheet adjustments as of January 1 are described in more detail in our financial statements. The key elements that were impacted were: trade receivables, increased by approximately $28.7 million; finished goods inventories were reduced by approximately $25.6 million; deferred income tax assets were reduced by $3 million; and deferred revenue was reduced by $9.4 million. Accordingly, a deficit -- our shareholders' deficit was reduced by approximately $8.7 million, and we ended the quarter with a positive net book value of approximately $5.1 million.The impacts of IFRS 15 on revenues were to increase revenue in the quarter by approximately $3.8 million, cost of sales increased by approximately $2.6 million, gross profit increased by approximately $1.3 million, with the result that net income increased by approximately $850,000.With that overview, I'd like to turn it back to Mike.
Operator?
[Operator Instructions] There are no questions at this time. I'll now turn the call back over to the presenters.
Thank you very much, fellow shareholders, for joining our first quarter Q&A, which, obviously, are none and our first quarter results. We do have one question.
Your first question comes from the line of Ed Sollbach with Spartan.
I know it's been a lot of work and effort in the last few years. Especially for Michael, it's been long time coming. But it looks like things are coming together finally. I had a question about taxes. Where do you see -- James, where do see taxes going forward? I know you had a fairly significant tax expense this quarter? What -- how do you stand in terms of tax loss carryforwards, et cetera?
Yes. Thanks, Ed. We still have approximately $8 million to $8.5 million of tax losses available -- sorry, I stand corrected. We've used our tax losses up. Our effective tax rate is approximately 26.5% and so I would use that for your modeling purposes.
So how did you use up the tax losses, because you haven't been profitable for a long time?
There is a number of adjustments with IFRS 15 to our opening balance sheet, and the kind of summary of all those changes are that the tax losses effectively got gobbled up.
Okay. But they're still there tax-wise, right?
Sorry, what do you mean they're still there?
Like from Canada's point of view, you have the tax losses, right? I mean, I'm not talking accounting-wise, but I'm talking from revenue Canada, are you paying taxes in the future, or you still have those $8.5 million or?
Yes. We'll get a little bit of shelter of that in 2018, Ed. But we expect that we'll use those up in 2018.
Oh, you expect to use them up, okay.
Yes, yes.
Okay. But how big are the tax losses that you have?
Just a second, Ed. I'm just confirming my numbers. I'll get back to you later on that, Ed, if that's okay?
Okay. Okay, sure. And I know there's so many moving parts in terms of acquisitions and is there any way you can put a number on the revenue in terms of organic growth? Because you've got 26% and then 20% with -- out of IFRS, and then you got the acquisitions like -- where does the business stand in terms of -- without the acquisitions or is that possible?
Ed, we reported our core DCM business without the 3 acquisitions that we made in '17. Generated a little over $76 million of revenue compared to $65.6 million in the same quarter last year. So we're up $10.8 million. And of that $10.8 million, $8.9 million of that was with one significant customer. So you can kind of do the math, excluding that customer, our core business was up about $2 million versus a year ago.
Okay. So there is still growth, which -- that's a big change.
Yes.
Right. And that -- but that one customer, you're implying that won't be repeated that work? Or how does that stand?
Ed, it's a long-standing customer, we've had as a customer for many years. There were some onetime kind of, I'd say, an unusual revenue piece this quarter that we wouldn't expect to continue next year. But certainly, it's a long-standing customer, and we expect the customer to remain with us for some time.
Okay. And does any of that bleed into Q2 from this customer?
No. I think it's all done in the first quarter. If there was any hangover, it may be 100-or-so in the second quarter, but it's all done.
Michael, all the best in your future endeavors. Job well done, and I think you're handing over the good ship in good hands.
Thank you. I appreciate your comments.
Your next question comes from the line of [ Michael Domet ] with -- who is a private investor.
First question. Just your views on the 2018 guidance. So obviously a good quarter, good start to the year and the completion of the Perennial Group acquisition as well, which flows in Q2. So just with the good start and with the acquisition, how should we think about your guidance overall?
Before answering, could you just clarify what the question is?
Sure. I mean, so the guidance is unchanged?
Right.
Supposedly a positive Q1 and an acquisition should have been positive for that guidance. So the question is, I mean, how do you feel about the guidance left unchanged?
I feel very good because we gave you a range, we gave all of our investors a range. And so for me, I'm absolutely buoyed by the first quarter. But if you ever play any competitive sports, it's first quarter, there's four quarters. Or I like to say I'm on about the fifth hole, and I haven't made a bogey yet. So still a long way to go. We've quite a bit of wind in our sails with some of our existing customers and quite excited about that. So personally, I'm very comfortable with our guidance for the balance of the year.
Okay. Perfect. And we just -- to give you guys a chance to talk about the Perennial Group acquisition on the call. It seems like a great fit there. I believe you guys have worked together previously as well. So just thoughts on the outlook of the combined potential would be great as well.
Mike, Perennial is in the business of thought leadership. And it goes beyond just retail customers. Their customer base is currently the largest financial services company in Canada, the world's largest beverage brand, you think about that. They're doing more than just providing, what I'd say, helping them sell more at retail. They're providing thought leadership. They're providing go-to-market strategies. And so you may or may not remember, we kind of -- not kind of, we outsourced our marketing services last year to Perennial. And part of that was a little bit of, what I call, test-before-you-buy. And given our strategy is pivoting towards thought leadership with a number of our customers. Perennial just adds that solid dimension. I'm going to give you a -- I won't tell you the customer, but Friday, this is a long-standing customer where we literally have been doing posters and a couple of mailers. And we were at the top of the house in front of them. They have over 1,000 retail locations, and we're talking about the pain points of what their business is and providing them ideas of how to grow their business, how to dive into their customer base and all the data they have. Those are totally different discussions than we've had 18 months ago where it was, "Hi, we can print that for cheaper than anyone else." And I'm not trying to be flippant, and I'm just saying those are the discussions we're having. And you'll see them, Mike, in our first quarter results. We're growing our base business with our existing customers, all right? And what we're doing is, we're getting beyond the procurement silo into their marketing and into their operational sides of their business. You can only do that when you come to them with ideas of how to grow their business. So you can tell, I'm like coming right out of my shoes, I'm very excited about this for our entire business. Hopefully, that answers it, Mike.
It does perfectly.
[Operator Instructions] Your next question comes from the line of Ed Sollbach with Spartan.
Just because I remember in Q4 you gave some of that color in terms of what was going on in your individual units, and that was really useful. Is there any way you can just talk about some of the exciting stuff you're doing with customers? Because I know the business has changed a lot. And what's going on beyond just the top line? We get a number, and it's -- but I know there is a lot of different things that are going into that number and kind of what kind of stuff you see happening through the rest of the year?
I'm just arranging my thoughts for you, Ed, without giving away customer names, et cetera. I'll give you one example. There is a major -- I'll pick on this retailer, and we've done work with them for years, doing their pricing labels on their shelves, et cetera. They are trying to put together -- they have 3 very large divisions in Canada, and they're trying to put together a comprehensive program for their dealers, whereby they can have a single loyalty program, a single go-to-market retail strategy, and we're at the top level. We've had this customer for probably 10-plus years, and we've been in the procurement box. We're now at the CMO box. I'm sure procurement is at the table obviously. But the CMO box is saying "give us some ideas of how to do this because you do this with these other customers." I'll give you another one, a financial services customer. This financial services customer is looking to outsource nonstrategic, non-best in-house activities. They're in the business of providing financial services, not print production or on-demand capabilities. And this financial services company is outsourcing its in-house work to us and we are going to be running that. Again, another conversation we never would have had the capability of 18 months ago. Hopefully, that gives you a little color. And it's a different sale, Ed. It's a totally different sale. It's needs-based versus, "Hi, I've got a machine here that does great labels."
Right. So is that -- so first of all, what is CMO box and..?
Chief Marketing Officer, sorry.
Okay. So you do the marketing?
We're having conversations with the Chief Marketing Officer about how...
Okay, you're talking -- okay, right. And what is it that -- what has changed at DCM that now you can have those conversations? Is it Perennial Group? Or what is the change that you can target at that higher level?
People, quite frankly. We have brought in over the past 18 to 24 months, some very, very strong capable people. One of them that I have to say just delighted, has fit in so well and adding value, is Mike Coté who's our Chief Commercial Officer. He brings a level of professionalism and training that he is basically upgrading the capabilities of our entire sales group. So.
Okay. And this changes you're talking about that pre-Perennial, is that, right?
Those were the pre-Perennial. Perennial, we in-housed Perennial into our marketing group last year, but they really were in the execution mode. We'd already kind of baked our '17 marketing plans. '18, they have the opportunity of providing input as to where we should go. And the other side of it, Ed, was we, as a corporation, made a decision and that decision was to focus on our enterprise type customers, and our retail-oriented type customers.
Right. So those capabilities will only be enhanced with Perennial, is that the takeaway?
Yes, yes.
There are no further questions at this time. I will now turn the call back over to the presenters.
Great. Well, thank you. I'll pick it up from here. Ladies and gentlemen, your leadership team has done a masterful job of delivering your company to where it is today. I'm so honored to have been a member of their team and to have been part of DCM's transformation. Before I sign off, I want to thank all the DCMers for their good nature, loyalty and support and individual contributions to our transformation; to our financial partners who have stood strong with us even during our darkest days; and, of course, to you, our shareholders, for your investment dollars and your considerable patience as we have bounced around in rough seas heading towards this destination.Transformations are not for the faint of heart. But I truly believe we've been through the worst. It is now time for me to officially and fully pass the helm to Greg, step away from the bridge and if you, our shareholders, support my nomination to remain on the board, then I will continue my involvement with the organization. I look forward to my continued a strong relationship with Greg and the very, very talented leadership team.Lastly, as a significant shareholder myself, I wish all of us well in the next leg of our journey. And with that, Chantel, I think that ends our call today. Thank you very much to everybody.
This concludes today's conference call. You may now disconnect.