Data Communications Management Corp

TSX:DCM

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the DCM Second Quarter Earnings Conference Call. [Operator Instructions] James Lorimer, you may begin your conference.

[James E. Lorimer, CFO & Corporate Secretary]

Thanks, Stephanie. 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, and additional information about the applicable risk factors and assumptions are contained in DCM's annual and quarterly continuous disclosure filings available on SEDAR.Also in today's conference call, all references to DATA Communication's management and DCM will mean its various business divisions.I'd now like to introduce Greg Cochrane, President and CEO of DCM.

[Gregory J. Cochrane, President, CEO & Director]

Thank you, James. Shareholders, good morning, and thank you for joining the call. I'll provide an overview of the following: our second quarter 2018 and first half 2018 financial results; our second quarter initiatives and drivers for our business; lastly, our management outlook for the balance of 2018.Our second quarter. Revenues for the quarter were $78.2 million compared to $73.1 million in the second quarter of 2017, an increase of $5.1 million or 7%. And excluding the effects of adopting IFRS 15 for the quarter ended June 30, 2018, revenues were $3.9 million or 5.3% higher than the same period last year.Total revenues benefited from the acquisition of BOLDER Graphics in November of '17 and the acquisition of the Perennial Group partway through the quarter in May 2018. Our core DCM business, that excludes all the acquisitions we made since February of '17, generated $65.3 million of revenue compared to $62.2 million in the prior year's period.Adjusted EBITDA was $4.1 million versus $4.3 million in the second quarter of 2017. Now excluding the effects of adopting IFRS 9 and 15, adjusted EBITDA was $4.6 million or 6% of revenues for the quarter ended June 30, 2018.Let's look at our 6 months 2018 financial results to June 30. Revenues for the first 6 months of '18 were $166.7 million compared to $143.2 million in the first half of '17, an increase of $23.5 million or 16.4%. Excluding the effects of adopting IFRS 15 for the first 6 months ended June 30, 2018, revenues were $18.5 million or 12.9% higher than the same period last year.Our core DCM business, again excluding all our acquisitions since February '17, generated revenue of $141.7 million compared to $127.8 million last year, an increase of $13.9 million or 10.9%. Adjusted EBITDA was $10.4 million compared to $7.2 million in the first half of 2017. Excluding the effects of adopting IFRS 9 and 15, adjusted EBITDA was $9.9 million or 6.1% of revenues for the first 6 months ended June 30 of this year.Let's look at our second quarter initiatives and drivers for the business. I will start with sales. Our core DCM business continued to be buoyed by increase wallet share from existing clients and the continued successful onboarding of our recent financial services client. Our sales pipeline continues to be robust. The pipeline of new customer revenue has been strengthened by our engagement in the licensed cannabis industry. DCM has been awarded multiyear contracts with several leading licensed producers to provide Health Canada-compliant packaging labels for a variety of cannabis products. We expect to see revenue in this emerging market generated in the third and fourth quarters as these producers come to market.Operations. Coupled with our cannabis producer wins, we have quickly augmented our manufacturing platform to accommodate the strong demand we are anticipating in the packaging label business. To that end, we have secured the first Gallus Heidelberg Labelfire 340 hybrid digital inkjet flexographic label press in the Canadian market. If you can say that without reading it, you're a better man than I am. This edition is specifically designed to provide variable, on-demand, short and long-run label production and is in alignment with our already strong label production capabilities. This will allow us to pursue new prime label market opportunities in the wine and spirits businesses.Our reputation for quality in working with exacting regulatory compliance standards, supported by our proprietary workflow platforms, are in great, great part the reasons why our company is winning in the market. Recently, all 4 of our major production centers received their ISO 9000 2015 certifications, and our Six Sigma scores for quality are industry-leading.Lastly, we have had successful tests of our ERP project and our focus is still on a fourth quarter implementation target.Let's now turn to margin and cost discipline. You'll hear it in my voice, I am totally disappointed with our gross margin attainment in the second quarter. While we made improvements in the first quarter of '18, our second quarter margins slipped almost a full percentage point versus a year ago. Now in great part, this can attributed to product mix in the second quarter and to a lesser extent, the impact of paper and other raw material price increases that are being experienced industry-wide. But the most significant challenge to improving our gross margins is related to a certain contracted business that we secured in 2016 and '17 at lower margins.While most of our contracts allow us to pass raw material and CPI increases along to our customers, certain of these agreements have limitations in their early term that limits this ability. Nonetheless, we plan to effect price increases as contract terms allow us. And longer term, we expect to achieve higher margins with these customers. On the plus side, we continue to see gross margin improvements on non-contracted business. And as well, we expect significantly improved margins in our packaging label business and other newly contracted business in the second half of the year, which is typically our strongest part of our annual revenues.Outlook for the balance of '18. We continue to maintain our guidance for 2018, and we are buoyed by continued revenue growth and expanding opportunities we have with our existing customers. We recently took over the capital markets print production for a major financial customer. And in June, we opened offices in Manhattan and downtown Chicago to serve their needs. In addition, we expanded our Chicago presence by hiring 2 senior sales leaders who are just some of the talented new team members we've added across the business in the first half of this year.Lastly, our recent acquisition of Perennial is bearing fruit as the business recently won a major branding initiative from a new DCM client. We expect this relationship to be a harbinger of our growth in marketing services.I'm going to pass things back to James. James?

[James E. Lorimer, CFO & Corporate Secretary]

Thanks, Greg. I'm going to talk about some more details in our future results. I'm going to briefly refresh on the Perennial acquisition, which we made in early May. I'm going to talk about our cash flow from operations and success we've had in paying down debt and our promissory notes for the acquisitions we've made. Greg has already talked about our revenue growth, and so I'll focus on some of the below-the-line numbers.Gross profit in the second quarter was $18.6 million or 23.8% of sales compared to $18 million last year and 24.6%. Year-to-date, our gross profit as a percentage of revenue is consistent with last year at 24%. And for the first half, the gross profit dollar amount was about $40.1 million. SG&A in the first, sorry, in the second quarter was approximately $17.8 million or 22.7% of sales compared to $15.7 million last quarter or 21.5% of sales. This quarter's results were impacted by $800,000 of onetime business reorganization expenses that we did not classify as restructuring expenses under IFRS, but we believe are onetime and nonrecurring.For the year-to-date, our SG&A expenses were approximately $25.4 million or 21.2% of sales. And for the first half last year, we're approximately $30.7 million or 21.5% of sales. The increase in SG&A certainly reflects the acquisitions that we've made on a year-over-year basis would be related to the acquisition of BOLDER in late 2017 and Perennial in the partway through this quarter.I'll now turn onto a brief refresh on the Perennial acquisition. We acquired 100% of the outstanding shares of the Perennial Group of Companies on May 8. In its fiscal year ended July 31, 2017, the Perennial Group generated approximately $7 million in revenue. The acquisition of Perennial has added a new suite of services, including business and brand strategy, consumer insights, environmental and graphic design, and communications, retail, operations design and strategy. At the end of our remarks, Greg will elaborate on one of our recent wins.Perennial was acquired for a total purchase price of approximately $12.5 million, including a positive working capital adjustment of $1.2 million and we issued 1.4 million shares to the vendors of Perennial. Vendors of Perennial are now approximately the third largest shareholder in DCM.We also issued a vendor take-back note in the total amount of $2.5 million, which is payable as to $1 million on the first anniversary of the closing date, $1 million on the second anniversary and the balance of $0.5 million on the third anniversary of closing.In conjunction with the Perennial acquisition, you will recall that we brought Crown Capital in for a $12 million, 5-year term facility, which gives us nice term on the facility. The principal is repayable at 5 years and the interest is approximately, well, it is 10% per year over that period.Now I would like to just highlight our cash flow from operations. For the second quarter of 2018, we generated cash flow from operations after changes in working capital, contributions to pension plans, provisions paid and income taxes of $5.8 million, which compares to $3.9 million last year. In the first half of this year, cash flow from operations were approximately $11.9 million compared to $2.3 million for the first half last year. Through the first half of this year, we spent approximately $1.3 million on CapEx related to various, mostly maintenance work on our equipment. And we've invested approximately $2.5 million in our ERP project.For the balance of the year, we expect our CapEx is substantially completed, and that total should be about $1.5 million for the balance of the year. And our balance of intangible assets related to the ERP project is expected to be about $3 million in total with a target completion date in the fourth quarter of this year.In the first half of this year, we have paid down a number of components of our senior debt. In June, we repaid our bridging facility short-term facility that we had put in place about a year ago. That was approximately $3.5 million. In total, we have paid approximately $2.6 million in principal on our various integrated private debt facilities, being IPD 3, IPD 4 and IPD 5. And our revolving credit facility has been paid down by approximately $1.7 million over the year. That facility, as you know, fluctuates with our working capital needs. We will obviously continue to pay down our fixed principal payments with IPD through the balance of the year.In terms of payments on promissory notes. Through the first 6 months of this year, we paid approximately $3.4 million of payments related to the acquisitions of Eclipse, Thistle and BOLDER, while we added $2.5 million of vendor take back notes related to the Perennial acquisition. Those $2.5 million total payments are payable over the next 3 years.With that, I'd like to turn the call back to Greg.

[Gregory J. Cochrane, President, CEO & Director]

Thanks, James. This morning, we issued a joint press release with Aphria. Let me just give you a little bit of the highlight of that. Perennial/DCM and Aphria are pleased to announce that they've signed a letter of intent to form a joint venture to collaborate on the development of new products, brands and product categories that will drive the evolution of the Canadian adult use cannabis market. It is expected that a definitive agreement formalizing the joint venture will be finalized within the next coming weeks.Folks, this is, as they often say in theater, and now for something totally different, this is what we have been working towards with the acquisition of Perennial. As many of you know, my background is more marketing services and I see the opportunity of our business moving into a business where we can add thought leadership and customer insights to the 70 of the 100 largest corporations here in Canada that we call customers.For 25 years, Perennial has been doing that with the likes of Loblaw, World Bank, MetroLink, Home Depot. And one of the most interesting things is that, Chris Lund, who is the CEO and was the sole owner of Perennial, he's had such a relationship with senior executives across this country in developing long-term branding and positioning for their businesses and he's almost at a point where he's agnostic, whether it be retail, financial services, transportation, pharma, whatever. The other thing, however, that when we purchased Perennial that we knew of was that Perennial also has had its own brands and it developed its own brands in the cosmetics, water -- the water business, restaurant business as well as food products. And that was, in part, the entrepreneurial steam and stamina of an individual who built out some pretty damn successful products that were sold eventually to some of the national and international brands.So for us, this is early days. But it is a harbinger of where we think we can take part of our business. And I think it's important that Aphria also has the trust and confidence in us and Perennial to secure this joint venture. Right from the top down, Vic Neufeld, the CEO and myself, have a wonderful understanding that we're going to make this work.So with that, I think I'm going to pause. Thank you for your listening and we'll open it up for questions.

[Operator]

[Operator Instructions] Your first question comes from Scott Nirenberski with Muskoka Capital. [Operator Instructions] Your first question comes from Ed Sollbach with Spartan.

[Edward Sollbach, Associate Portfolio Manager MM Fund]

Could you give me some color on the different business lines you acquired, specifically Thistle and the one you acquired, just for comparison, the one you just closed on?

[Gregory J. Cochrane, President, CEO & Director]

Let me qualify the question, see if I understood this. You would like color on the business, Thistle versus the business we just closed on, which is Perennial?

[Edward Sollbach, Associate Portfolio Manager MM Fund]

Perennial, yes, sorry. No, I just wanted some color on the acquisitions. I mean, you made so many acquisitions over the last couple of years. It's hard to keep track of how they're turning out and what -- you got the large format and everything. So if you could just give some color on those acquisitions and how the different business lines are doing. When you report it's all like one, -- it's all in one bucket really, so...

[Gregory J. Cochrane, President, CEO & Director]

Yes, thank you. It's a good question. Let me frame it by starting back where I think everyone would be interested in, is what's our strategy. And the strategy was quite simple, that we deal with 70 of the 100 largest corporations in Canada, and we deal with them either on an enterprise basis, say, the banks. But we have many, many retailers as well who buy certain products, et cetera, from us. Part of our strategy was to bolster and build our enterprise type business. But the other side of it, our retail business, we've kind of looked and said, we're not in the product business. We're trying to be in the solutions business. But to do that, you need really 2 or 3 things. One, you need size and scope. So from any retailers, physical presence, stores are still an important part, and that's why you need to have certain products, i.e. large-format, lithography, et cetera, to meet their needs. And then the other side of what retail is experiencing is thought leadership. Where are we going? What's the store of the future look like? So that kind of sets up the journey. And so the journey began with Eclipse and Thistle. Eclipse is arguably, I guess, Eastern Canada's largest or second-largest big format business. Their major customers consist of all the outdoor advertisers, many of the retailers that you see in malls, et cetera. And we didn't have that capability here in the East. We have the capability in Western Canada, but not here. So that was a natural if we are going to live to our strategy. Thistle is a classic lithographer. We were outsourcing here in Eastern Canada, I'll just say it, $4 million or $5 million of lithography to our second-tier suppliers. It was a natural fit to bring them into the house with their book of business as well. Our third acquisition in November was BOLDER Graphics out West. They had a good, robust client list. But more importantly, they had equipment we wanted, and it was an easy transition into our Calgary facility, which went incredibly smooth. The last acquisition, which is Perennial, is obviously, there's no metal on the floor. And what it is, is world-class thought leadership dealing with major corporations, but more importantly, allowing us at DCM to enhance our position with our existing retail customers. We count most of major retailers as customers, but we're not at a level where -- we're not in the C level. We aren't providing them thought leadership and ideas of where their customers are going. We're providing labels and packaging and posters, all wonderful, but not a hell lot of value-add there. So I hope that answers your question. How are they all doing? They're all doing very well. Thistle is having a bang-up year. It's been a great year. Eclipse is having a good year. Retail is gearing up for fourth quarter. We absorbed totally BOLDER into our Calgary outfit, and so we look at those numbers as holistic. And Perennial, as I just indicated, it got long-term contracts with their client list, and we just recently won a major branding exercise, which is usually a harbinger for longer-term relationships. So I hope I answered your question.

[Edward Sollbach, Associate Portfolio Manager MM Fund]

So it seems to me, Perennial specifically is the one that really ties it all together. They are a C-suite, so they should help you sell more of your other services. Is that the way to look at it?

[Gregory J. Cochrane, President, CEO & Director]

Yes, you're right. We test drove Perennial for over a year because we outsourced our marketing services capability effective January 2017 and we brought Perennial inside DCM. So we basically terminated our marketing group, brought them in and said, could you run this for us and show us how we can get into thought leadership and have different discussions with our client base. But to do that, you've got to have something to sell, right? And this company has been built on fabulous expertise in executing our customers' needs. But as we know, we've been squeezed by price. We're being squeezed certainly by suppliers, especially the paper folks. So you need to change and go where the value-add is, and that's still idea generation. But I'll remind you of one thing. It's wonderful to have the ideas. But at the end of the day, the client turns to you and say, "Can you execute this?" And that's where we have national scope and size to say, "Yes, we can handle this."

[Edward Sollbach, Associate Portfolio Manager MM Fund]

Okay. And just one more question. I'm late to the call, but can you give some color on what you do in the cannabis sector? Who would you be working with?

[Gregory J. Cochrane, President, CEO & Director]

Well, let's look at what the -- cannabis business. We have been fortunate to secure some major contracts with the majority of the large producers and second-tier producers in that space. One of the interesting things that has come out of this and the reason why we're winning is because they require uninterrupted service supply and most importantly, regulatory compliance. There is a lot of compliance and Health Canada needs for recreational cannabis labels. Because of our long-standing history in working with financial services companies, government, we're used to that. And we have portal, electronic portals that can handle that type of demand. And I think the other side of it is, they're faced with a unique situation, and the situation is this. October 17, it's like the Kentucky Derby. They're off and running. Many -- most of these producers have multiple products, multiple strains, multiple sizes. They have no idea necessarily what their volumes are going to be. And so they turn to us because we can work with them on a variable on-demand supply situation. It would be simple to say, "Well, listen, why don't we just print 2 million labels of everything, of every strain, every product, every size and just keep it in your warehouse?" We presented them a different view, and that different view is a dynamic, just-in-time presentation for their label needs. So we're quite excited about that and we pressed the buttons, if you will, in terms of getting the machinery that is basically nonexistent here in Canada, up in here to meet that need.

[Edward Sollbach, Associate Portfolio Manager MM Fund]

And that's specifically for recreational, not for the medical side?

[Gregory J. Cochrane, President, CEO & Director]

Right now, yes.

[Edward Sollbach, Associate Portfolio Manager MM Fund]

So you're not really going to see it in the income statement until October, I guess?

[Gregory J. Cochrane, President, CEO & Director]

Yes, we're going to be looking at, and I think I said in my comments that we're going to start to see revenue in the third and fourth quarter of this year.

[Operator]

Your next question comes from Michael Lang with Invatron.

[Michael Lang, Sales Director]

I have 2 questions. You talked about being disappointed in the margins. And what is your plan to get margins up in the near term with your large base of clients, particularly when their strategy is what I'd call a procurement-based strategy trying to drive margins down to control their costs? So that's question one. Maybe you can address that, and then I have a second question.

[Gregory J. Cochrane, President, CEO & Director]

Okay. Thanks, Mike. We have a very specific plan. So it's basically 3 prongs. The first is that our senior leadership team, which includes Alan Roberts, our Head of Operations; Mike Coté, our Chief Commercial Officer and myself, we are visiting our top 30 clients. Where we have contracts, where we are allowed price increases, et cetera, we will take those and inform them. For those that we don't, you know what, our customers are pretty savvy. Our competitors, the Donnelly, the Supreme, Acess, whatever, they're all experiencing the same thing, and that is dramatic paper price increases as well as we're starting to see increases, inflationary increases in transportation and some of our other raw materials. So number one, we're going to our clients and to inform them. These are the discussions that you have to have at the top level, right? Because we're in a business to make margin, and this business, I believe, has been run for 50-some years to the top line. I'm interested in margin. Number two, we're sitting down with 19 of our top suppliers in the next 3 to 4 weeks. I don't think we've had a relationship with all of them at the senior level. Mike, I have to share something with you. I received a letter from our second largest supplier dated July 13 and was addressed, dear valued customer, your paper price increase is going up 8%, August 13. If you have any questions, please see our sales representative. Signed by the Vice President of Sales. I can't wait to meet that customer because I obviously am going to be a valued client. And I'm looking at, look, this is an oligopoly in many respects and we have to deal with this. But folks, I cannot pass, I can't pass 8% and 10% price increases. Our customers know that. The third thing that we're doing is, we're looking at SG&A costs below the line, when I talk about gross margin. I'm also looking at efficiencies in all our plants. We recently have brought in a very senior individual to look at every cost inside our plant, what we can do better, how we can negotiate better with any of our secondary and tertiary suppliers. So it's a 3-pronged approach, Mike. Will it change overnight? No. But the other side of it is, our non-contracted business, we are really experiencing price discipline and margin discipline. We have a mechanism in place whereby discounting is heavily reduced. In fact, in that contract -- non-contracted business, I think we're seeing a full 7 to 8, full point improvement versus a year ago under our non-contracted pricing. Quite frankly, Mike, we have thousands of customers, but we have a group of customers that constitutes most of our business. For those smaller customers, we're happy to do their work, but we need to get paid for it. And we, unfortunately, over the years, treated 33,000 plus customers all the same. That's changed. And we've -- I think we also said that for many of our smaller customers, we changed the service model to deal with our excellent customer service folks rather than a direct sales rep. So I hope I answered that first question.

[Michael Lang, Sales Director]

[indiscernible] I'm intrigued by the business of -- this cannabis business. So that's -- it's an interesting pivot. The road for companies like you is scattered with disaster for those who have just tried to continue to integrate more services a.k.a. digital onto their platform versus those who have gone out and found growth, whereby you can bring your services to enhance that growth. I mean, that's an interesting strategy, one which led Pepsi to surpass Coca-Cola, et cetera. Because my gut is, and I'd like you to elaborate on this that while Perennial maybe 2% to 3% of your current revenue, doubling and tripling that with the strategy with a margin that's 2 or 3x your current business really makes this company pretty interesting. So how big do you think this play can be? And how rapidly do you think you can get your arms around it?

[Gregory J. Cochrane, President, CEO & Director]

So let me play back, I think, the question that I heard. Are you talking about the cannabis business or are you talking about the Perennial play?

[Michael Lang, Sales Director]

I think it's the Perennial-Aphria play, which is probably the start of other opportunities that currently manifesting itself in this cannabis opportunity.

[Gregory J. Cochrane, President, CEO & Director]

Okay, got it. Perennial has had multiple decades of experience building out products and building out JVs with other areas beyond cannabis, obviously. So we are working to find those other JVs as well. I view the JV with Aphria as being an important part for expanding brands and sharing in those brands' revenue. I see Perennial doing that in a whole bunch of other areas that aren't related to the cannabis business. One of the things that I want to get into is, I want to be in the revenue-generation business. Right now, I feel like the catcher. And if we can have even a portion of our business that we're generating our own revenue through brands that are Perennial-infused, I'll say, I think so much the better. As for the size of the price, Mike, I have no idea right now. And I know you're an entrepreneur and I know this is a public company, we're not betting the ranch on this. This is just an offshoot of the purchase of Perennial. Perennial was designed to help us grow our business with our retail customers and provide a point of view and thought leadership. This is just an additional thing that's happening. So it's very early days. That may not be the answer you want, but it's all I can give you.

[Michael Lang, Sales Director]

No, I guess, it's an exciting pivot. So as I say, this next call, let's see how successful you are.

[Operator]

Your next question comes from Scott Nirenberski with Muskoka Capital.

[Scott Nirenberski]

A couple of quick questions on the margins. Did you guys see any front-loading in front of, obviously, the price increases, does that drive some of the mix that you're talking about that negatively impacted margins given that you know that there's obviously increases coming down for paper and transportation and so forth?

[James E. Lorimer, CFO & Corporate Secretary]

Yes, I think we did see a little bit of that, Scott, particularly 1 or 2 customers in kind of the thermal paper business. In the labels business, we had a couple of customers that just due to their own kind of internal launches, where we're running heavier this year than they had last year. And so kind of, collectively, thermal paper and some of that lower-margin label work contributed to a little bit of that decline.

[Scott Nirenberski]

Okay, okay, great. And then on the contracts. I understand you're kind of limited initially in the early part of the contract. You did make reference to the fact that those were things that were done a while back in '16 and early '17. Are those types of things you would do again? Obviously, nobody likes lower margins. But I'm just curious if when you look back on those are things that you -- or you restructured contracts going forward in a different way to try to give yourself a little more flexibility on this kind of thing?

[James E. Lorimer, CFO & Corporate Secretary]

Sure. I think maybe just a little bit of history is probably helpful to kind of show where we were in '16 and '17. And certainly, in '16, we're kind of emerging from a pretty radical restructuring that we started in '15 and carried through '16. And so we're in survival mode in '16 and the early part of '17. And as we've talked about to investors on a number of meetings, there were 3 or 4 kind of big contracts that we negotiated through that period. The good thing is that we're successful in renegotiating major contracts. The unfortunate part, we had to give up significant margin in doing that. And to be honest, we didn't really have a lot of...

[Gregory J. Cochrane, President, CEO & Director]

Wiggle room.

[James E. Lorimer, CFO & Corporate Secretary]

Wiggle room. And so we are benefiting from those contracts in the sense that we are gaining market share in each of those opportunities and those customers have stood by us and have been great customers and we've been doing great work for them. For our big enterprise customers, every one of our agreements is different. And we negotiate the best we can. And certainly, in '16 and '17, we couldn't foresee the paper price increases that we're seeing this year and expect through next year. But we're in the discussions with one large customer right now and they've asked us to hold off on paper prices for the next paper prices and we're saying, no, most of our contracts -- and it's -- most of our contracts allow us 30 to 45 days to provide notice to the customer and then pass those increases through to customers, when our suppliers give us increases, they typically give us a similar amount of time before those price increases are put through. We, of course, do our best to negotiate with our large suppliers and often are able to negotiate a better price, least worse, I guess, price increases. So if a vendor says, you were putting 5% across-the-board, we do our best to negotiate on those terms. And because of our buying power, we are the probably second or third largest provider and in some cases, we're the largest customer across Canada for many of these customers. We have significant buying power. So we are able to defer or reduce some of those increases, but we're typically able to pass those increases through, it's just we've got few larger contracts that are now we're kind of getting through that early part of the term. And so this fall and even over the next month, we will be having some of those discussions with those customers. So we're expecting it to be able to pass of those through and certainly longer term, our supply or sorry, our agreements allow us to hold margin. And so we will see a bounce-back in this.

[Scott Nirenberski]

Yes. It's -- I would assume it's not like your competitors aren't seeing the same thing as well, so it's across-the-board.

[Gregory J. Cochrane, President, CEO & Director]

Yes.

[James E. Lorimer, CFO & Corporate Secretary]

Totally.

[Scott Nirenberski]

Yes. A question on the label business. Because I think that's a higher growth business, obviously, for you even without, obviously, the great win you had with -- in the cannabis business. Is the margin structure of the label business kind of, relatively speaking, to the corporate average or even the legacy average, I guess, the core business average, how does it kind of compare that?

[Gregory J. Cochrane, President, CEO & Director]

The label business, Scott, let me dissect this because there's 2 parts to a label business. One is, hi, we produce blank labels with a one-color shot at it and away you go, there's not a lot of margin in that. These types of labels have a much higher margin profile because there's just so much value-add that goes into each one of these and this -- it's important to get this right. Because if we screw up one of these labels, you're talking multiples of market cap that come off some of these companies. So we are allowed to charge more. The other side of this, Scott, is -- it's the platforms that we're working with, think about some of these businesses, they're really new to the business. They have no idea about volume. So a competitor probably convinced them to put a press in their manufacturing facility and they can run labels to their heart's content. It's not really an effective way. And I think what we showed them was something that's different and that's baked into our margin. That value-add of the process, the compliance, the just-in-time deliveries, and the inventory, we're managing all that and we get paid for it. It's one of the things that we -- it was kind of like throwing in the car mats when you buy a car. It's like, don't worry, it's free of charge. No, there's a cost to it. We're -- we have hundreds and hundreds of our customers on our electronic platforms. And only now we're starting to realize and appreciate and tell and inform our customers that they should be paying for these updates, for having the ability to use these platforms. So you asked a simple question about margin, yes, these margins are significantly better than our corporate margins. And I see them as not -- just not ink on paper, but a whole bunch of other things that affect the client's peace of mind, which is the compliant -- the compliance as well as the just-in-time ordering.

[Scott Nirenberski]

And one of these, I think, you kind of alluded to, but obviously, if you're doing -- you put in the press, you don't just do that unless there's a pretty big opportunity, you got the contracts to use the machine because they're not cheap machines to buy, I would imagine. But are there other applications? I think pharma, right? Just classic pharma, both prescription and OTC pharma, where it would seem to me, if you can do it for cannabis then you can probably leverage a lot of that know-how and equipment to do regular pharma. So -- and I don't think you guys have talked about it too much, but I'm just curious about the opportunity in classic pharma, both prescription and over-the-counter.

[Gregory J. Cochrane, President, CEO & Director]

Well, with pharma, there are certain order restrictions, manufacturing requirements or regulations we need. So we aren't there yet in terms of pharma. Where we see an immediate opportunity is in any of the other, what I call, value-add type labels. So think wines and spirits. The wines and spirits business is dominated by a few players. Well, guess what? We want to go after that. We have relationships. Ironically, we have relationships with many of the breweries and some of the wine operators and wine producers here in Canada, but we're supplying them labels for their boxes that ship them out to the LTBO. Well, guess what, I want to do the labels inside the boxes.

[Scott Nirenberski]

Right. Would those be normally the provenance of other large competitors or specialty printers and communications houses?

[Gregory J. Cochrane, President, CEO & Director]

There's a few specialty label providers that are dominating most of the Canadian market. And of course, there's 1 or 2 quite large ones. So we will be in the displacement business, Scott.

[Scott Nirenberski]

Yes, good. Excellent. And then on the customer where you're opening up the offices in Chicago and Manhattan for, that's an existing customer where you're expanding a wallet share, is that right?

[Gregory J. Cochrane, President, CEO & Director]

Yes, that's 100% right.

[Scott Nirenberski]

Okay, got it. And then the other question was, I think you said Perennial had a major win in the quarter. Is that the Aphria win or is that in addition to Aphria?

[Gregory J. Cochrane, President, CEO & Director]

You know what, I can't tell you that. I do -- just -- it's a good-sized win and we look at it as a potential long-term client.

[James E. Lorimer, CFO & Corporate Secretary]

Yes. And I think maybe the important point to add there, Scott, is that it's a mutual client of DCM and Perennial's.

[Gregory J. Cochrane, President, CEO & Director]

Right.

[James E. Lorimer, CFO & Corporate Secretary]

So the cross-selling opportunities between Perennial and DCM are starting to show some early days of success.

[Scott Nirenberski]

Yes, that's great. And then on Aphria, any particular reason why it was a JV as opposed to, and I assume this is like a contractual JV, not necessarily a separate company that's a JV, any particular reason why you did this way, or like structured it as a JV?

[Gregory J. Cochrane, President, CEO & Director]

Yes, and just to be clear, it's -- we signed a letter of intent to create a JV. So we haven't formally created that yet. We're now -- we've been working over the past several weeks on developing what this looks like. And we'll have -- we still got lots of work to do before it can kind of give report back and give you more detailed plans in terms of what it looks like. But the concept is essentially that we would create a separate entity to be the joint venture and we would collectively work essentially Perennial/DCM brings the strategy, design and how to build out a new brand and Aphria of course, brings the critical kind of products and raw materials.

[Scott Nirenberski]

Got it. Okay, great. Okay. And then just the CapEx to support this kind of thing with the Heidelberg, the press and so forth? I don't know if you actually delineated at all inside your overall Capex budget. But if you can give any color on that.

[James E. Lorimer, CFO & Corporate Secretary]

Yes, we've actually leased the Heidelberg press, the Gallus press. And so there's no CapEx associated with that. We were very nominal kind of installation. But -- and you'll see that we brought our CapEx guidance down from $2.5 million to approximately $1.5 million. So we don't see it in a lot of additional CapEx through the balance of this year.

[Scott Nirenberski]

Got it. And that's excluding ERP, right?

[Gregory J. Cochrane, President, CEO & Director]

That's correct, yes.

[Operator]

And there are no further questions at this time.

[Gregory J. Cochrane, President, CEO & Director]

Well, thank you very much, folks. I appreciate you being on the call and we'll get back to business. Have a great day.

[Operator]

Thank you. This concludes today's conference call. You may now disconnect.