Data Communications Management Corp

TSX:DCM

Earnings Call Transcript 2021-Q3

[Shelly Anwyll]

Good morning, everyone, and thank you for joining us for our Data Communications Management Corporation's Third Quarter 2021 Financial Results Conference Call. My name is Shelly Anwyll. I'm the Senior Vice President for Emerging Markets and [indiscernible] our assembled digital growth for DCM. I'm pleased to be hosting today's call. Joining me today is Richard Kellam, our President and Chief Executive Officer; and James Lorimer, our Chief Financial Officer. Following the prepared remarks today from James and Richard, I will be moderating the questions-and-answer session. As a reminder, this conference call is being broadcast live and record reports. I would now like to turn the call over to James. Please go ahead, James.

[James E. Lorimer, CFO & Corporate Secretary]

Thank you, Shelly, and good morning, everyone, and thank you for joining us today for our third quarter of fiscal 2021 conference call. We'd like to also remind everyone that Richard and I can be available after the call for any follow-up questions that you might have. Before we begin, I'll remind everyone that we will refer to forward-looking information on today's call. This information is subject to certain risks and uncertainties as outlined in the forward-looking information disclosure in our press release and more fully within our public disclosure filings on SEDAR. We have posted a brief video message [indiscernible], along with a summary of our results and key initiatives for 2021 on our website in the form of an infographic. These are also available on LinkedIn. Our detailed information will be published on our website and SEDAR. You can also follow us on LinkedIn to keep up-to-date with some of our business insights on relevant market trends and customer case studies. We recently announced our first ever Investor Day, which will be held on December 1, 2021. Shareholders are welcome to attend either in person or virtually. We have 2 keynote speakers that will be providing their perspectives on the importance of marketing technology. And Richard, myself, Shelly, and other senior management representatives will provide some outlook on the business and our tech-enabled strategy. Details on how to RSVP to the Investor Day can be found on our website. We really hope you can attend. I'll now turn the call over to Richard.

[Richard Clarence Kellam, President, CEO & Director]

Thank you, James. And good morning to everyone. And also, given we've got some people joining from Europe and Asia, good afternoon, and good evening. So we are very pleased with our performance we delivered in the third quarter of this year. Our revenue was CAD 56.9 million and was up 3.1% compared to the second quarter. And notably, for the first time in 11 quarters, our revenue is pretty much in line with the prior year. And given we are a marketing communication service business, consumer movements are extremely important to, obviously, our business. And what we're seeing and starting to see in this last quarter, especially towards the end of the quarter, as consumer movements are starting to get back to pre-pandemic levels. We're certainly seeing that in our headquarters in downtown Toronto here. We're seeing a lot more people downtown. So that's obviously positively contributing to our revenue, and we expect that to continue through the balance of the year. Our relentless focus on building a better business continues to deliver very strong gross margin improvements. Our gross margin on the quarter was north of 30%, and our gross profit was CAD 17.2 million, and that's up CAD 0.5 million over last year. We continue to focus on operational excellence, on some factory consolidation, on client mix and revenue management, and that's really what's contributing to these gross margin results. So the team is very focused on continuing to drive this better business, and we're seeing that in the results. And of note, this is the second quarter this year, that gross margin is 30% or north of 30%. And we had one such quarter last year, which we believe was the first quarter where gross margin was north of 30% since we became a public company in 2004. So some really good progress here on gross margin, as you can see in the chart on the web link here.We're also very pleased with the continued progress we're making on overheads. Our SG&A is CAD 11.9 million on the quarter or 20.9% of revenue and is CAD 1.4 million lower than last year. Our headcount continues to remain at just slightly less than 950 associates, and we're down from approximately 1,100, so about a 12% reduction from December of 2020. So we're -- I've talked about our reduction in layers and increases in spend and responsibility and that’s certainly playing through in our SG&A delivery. So we delivered adjusted EBITDA of CAD 9.4 million or 16.6% of revenue compared to CAD 10.2 million or 17.7% of revenue in quarter 3 2020. However, if we adjust for government grants, which we really need to look at, right, where you need to net this out, our adjusted EBITDA was CAD 9.2 million and up 25% versus the same quarter a year ago, where we delivered CAD 7.4 million. So last year, at this time, in quarter 3, we received CAD 2.8 million worth of government subsidies. And this year, it was less than CAD 200,000, right? So a 25% growth in EBITDA once we net out the adjustments on the government subsidies. A very, very strong quarter from an EBITDA status.Now, our commitment to paying down debt continues. Total debt at the end of September was CAD 36.3 million, down almost CAD 12 million, so CAD 11.9 million or 25% compared to the end of 2020 and down another CAD 2.8 million if we compare it to the end of the last quarter, so compared to the end of the second quarter. Now, we also have some great news on some refi that James will share with you in a couple of minutes. Our client conversations regarding our tech-enabled capabilities have amplified quite considerably. And I want to highlight a few. So first, our tech-enabled revenue penetration is up 3% as a percentage of our total revenue compared to last year. We strengthened our financial service practice with a tech-enabled win, and we secured a pretty sizable client that has over 1,000 branches across Canada, and we're going to manage that workflow through that network. We also recently secured a tech win with a new cannabis client in the U.S. So this multistate operator is licensing our Flex platform to manage their packaging and marketing workflow and also to maintain the regulatory compliance and simplify the complexity of their workflow. And in addition, we're also in the final stages of implementing assemble and it's our end-to-end marketing workflow and digital asset management solution with a leading Canadian retailer. So some very good progress and some good commercial success as we continue to move on this digital first strategy. So pleased with some of these early wins we're securing. And I can tell you, there's a lot of very solid activities in our funnel moving forward here. Our team has also been active on other noncommercial, but really important initiatives, and that includes our ESG strategy. We have a very clear ESG strategy that our shareholders will hear a lot more about as we progress through next quarter. But I just want to unpack or talk about 1 particular effort that we announced last week. And that is the combination of currently working with the Forest Stewardship Council. And for those who don't know, the Forest Stewardship Council is a company or an organization that ensures the materials used in our [indiscernible] process are from ports that are being managed in a way that preserves biological diversity and benefits the lives of local people and workers, while also ensuring it sustains economic liability. We've been a solid partner of FSC for many years. So I'm happy to announce that in addition to continued support with FSC, we're excited to be now a partner or in partnership with Print Relief and essentially, where every tree that we use in our paper production is going to be measured and it's going to be reforested. So Print Relief has worked closely with industry experts in print and forestry, developed standards and technology for measuring, and offsetting, and verifying. And successful reforestation of paper consumption. So these partnerships, the FSC partnership and the Print Relief partnership continue to reinforce our ongoing commitment to maintaining a healthy planet for future. So expect to hear a lot more about our ESG strategy and plans moving forward. But we're really happy with this FSC and now this new Print Relief certified reforestation program.So turning to the great work our operations team is doing. The consolidation of our Mississauga plant into the Brampton plant, which we announced some time ago, will be completed. It is on track for year-end. And we previously announced that we were going to save CAD 1 million on that consolidation, and we're on track to deliver that. So in addition, we're also taking the opportunity to upgrade some of our digital print capabilities, and we're installing a new Canon digital inkjet technology into our Brampton facility. And along with the other operational efficiencies we've already announced, this initiative alone will save another CAD 1 million in operating expenses. So we're very pleased with this new technology we're installing. And these digital print capabilities will also provide some pretty significant competitive advantage for us in the future. And finally, with our new hybrid work model, we obviously learned a lot like most companies during the pandemic, and we've introduced a hybrid work model. We expect to realize more than CAD 800,000 in savings through some office consolidation. We're consolidating our downtown sales office and our marketing strategy, creative group office, which used to be out in the [ Tobiko ] to a new downtown office on Adelaide, actually, we're sitting in it right now. And we'll be hosting our Investor Day conference here at our new facility. So pretty sizable savings as a result of this office consolidation and this new hybrid work model. So like many manufacturers as well, we're also experiencing some headwinds in supply chain. And a lot of that obviously is due, it's all due to the reopening of the economy. A lot of pressure on supply chain. We're experiencing some raw material shortages and some production delays as a result. But what I can tell you is our team, certainly a highly skilled team, is relentlessly focused on managing through this. We've done very well to manage through it on the last quarter. We're expecting we'll continue to manage through it effectively in the next quarter as well. And we're certain we're not going to face any disruptions. But of course, we're all experiencing some of these challenges in supply chain and raw material shortages right now. But again, we are very focused, and we've got some good plans to continue to manage through that in quarter 4. So I'm now going to turn it back to James to give a few more details financially on the quarter. Thank you.

[James E. Lorimer, CFO & Corporate Secretary]

Thanks, Richard. Richard provided some color on our P&L and outlook and some updates on some of our commercial activities. I'd like to provide some additional color on our progress regarding free cash flow, outstanding debt, including our refinancing, and some other P&L items as so. Free cash flow continued to be strong in the quarter. Year-to-date, we have generated CAD 20.7 million of cash flow from operations. Our healthy free cash flow has been a big contributor to our continued reductions in data expanding. Our total debt, including promissory notes, which have previously been fully repaid, is down about 25% year-to-date and 54% since the end of 2019. On the topic of debt, we recently announced a significant refinancing, approximately CAD 21.4 million, up 12% in term debt with crown credit partners, which has been due to mature in May of 2023, is being refinanced through the support of both an amended bank credit facility, which has provided an additional CAD 10 million term facility and a new CAD 11 million term facility, which will be provided by [ Fiera Private ]. As a result, we expect to realize interest savings of approximately CAD 1.5 million through 2022, with the coupon on the new debt being approximately half of the debt that's being refinanced. We also extended the term of our ABL facility with a Canadian bank and the [ Fiera ] private debt loan is the fourth loan that we have with FPD, and it's actually at rates slower than the prior 3 loans.We're very pleased with the support that our senior lenders have provided to us. We're focused on continuing to pay down debt and targeting leverage below 1x debt-to-EBITDA in the near term. Our working capital remains strong, and we had excess availability under our revolving line of credit of over CAD 18 million at the end of the quarter, which was CAD 5.7 million of the CAD 12.7 million of availability we reported at the end of Q2. In addition, our revolving line of credit was undrawn at the end of Q3. Here's a few more details on our free cash flow conversion ratio, which you can see, remains very healthy and in excess of 90%. We currently expect to finish the year at approximately CAD 2 million of CapEx as we complete the consolidation of our Mississauga and Brampton factories. We're finalizing our budget plans for fiscal 2022, and we'll be reporting back later, but you can expect our capital focus to be on building out our digital asset management and marketing technology platforms, and also upgrading some of our digital credit equipment. We received a total of CAD 200,000 of government grant income in the quarter, most of which was from the rent subsidy program. This compares to CAD 2.8 million last year, which was mostly from the wage subsidy program. Year-to-date, we received CAD 4.5 million in grant income compared to CAD 8.9 million last year, and we only expect to claim modest levels of grant income for the balance of the year and none in 2022. We continue to be focused on generating strong free cash flow over the balance of the year and continuing to focus our commercialization efforts on large enterprise clients and tech-enabled penetration. We believe the continued improvement in consumer movements will benefit us in Q4 and certainly in 2022. I'll now turn the call back to Richard for some concluding remarks.

[Richard Clarence Kellam, President, CEO & Director]

Thank you, James. So those that are on the WebEx or the Team's link, you're looking at a slide that says print first, digital first. We laid this strategy out to our shareholders and to our entire enterprise about 4 months ago. And we've been very focused on this journey to continue to evolve from a print first company to a digital-first company with our tech-enabled marketing workflow and our digital asset management platform called Assemble. As I mentioned earlier, we have secured some new wins. We've got some very good momentum. We've got the commercial team, we call it the commercial team, our sales team, our client team that is extremely focused on driving penetration of our DCM Flex platform with existing clients. 250 clients represent 93% of our revenue and I can tell you that we have 250 conversations happening, as well as building out this digital asset management, which is more of a SaaS pure-play solution for us. James, if you don't mind just slipping to the next slide, for those that are on the link here. So we did say that our current penetration, we call it digital-first workflow. It's just over 30% of our total revenue. Our objective is to drive that to north of 45% in 2022 and upwards of 75% by 2025. I can tell you that we're on track to deliver against that objective through to the balance of this year and well positioned to continue to accelerate in 2022. So it's the right commercial leadership on the strategy and some really good kind of client momentum. On our digital asset management solutioning, as I referenced earlier, we've just stood up digital asset management solution for a large Canadian retailer. And we've got many more active conversations that are happening among our enterprise clients to help them on their digital asset management solutioning. We are on track to deliver what we expect in 2020 and off to a good start, obviously, as we get ready for 2022, and our longer-term plans through 2025. So some really good momentum as an organization, really proud of the team, actually, the momentum that we have as we continue this journey from a print first organization to a digital-first organization. Now, James, if you don't mind us the next slide. We're entering the fourth quarter of the year with some really good momentum in our business and the whole team is really driving hard to finish strongly. As I mentioned earlier in the call, we are seeing consumer movements return back to some level of normalcy. And that obviously has a good benefit to our business. We are going to continuously focus on talent, on business intelligence. We talked about the ERP, a platform that we introduced a couple of years ago. We are extracting great BI or business intelligence from that platform today and using it, obviously, to drive effective decision making. We're seeing a lot of that, obviously, in our mix and our margin. I talked about operational excellence. I think it's well kind of embedded through our enterprise and our operations team is doing a fantastic job to drive that OpEx through the entire kind of supply chain journey. Our client engagement, we just recently did a -- we call it a voice of the client. So we went out and asked our clients, our customers, what we were doing and how we were doing it. We actually came out very strong. And we're using that voice of the client to continue to drive engagement. And importantly, as I discussed earlier, this technology-enabled services again, some really solid momentum, and we're seeing some great progress. So I can tell you that our team is -- I probably use this word too often, my wife told me, relentlessly committed, but we are relentlessly committed to building both a bigger and a better business. So on that, I will turn it back to Shelly.

[Shelly Anwyll]

Great. Thank you, Richard. So we would now like to take questions from the audience. [Operator Instructions]

[Chris Thompson, President & Director of Equity Research]

Can you hear me?

[Richard Clarence Kellam, President, CEO & Director]

Yes, we can.

[Chris Thompson, President & Director of Equity Research]

It's Chris Thompson from eResearch. I had 3 questions and I'll ask them either 1 and get back in queue or maybe I can just do all 3 at once. On your revenue side of things, how much you think it was impacted versus [indiscernible]?

[James E. Lorimer, CFO & Corporate Secretary]

Good question, Chris. We're still seeing some impacts from COVID, but we are starting to see a little bit of a balance [indiscernible], as Richard talked about. Certainly, in the third quarter, we did see a positive return of consumer movements and particularly as kind of Ontario and Quebec started to open up, and some of the other provinces had kind of gone earlier, if you will. And so just being in the downtown core, there's -- certainly more people are returning to work and that's helping to drive some decision-making in some marketing spend. And so we certainly started to benefit from that, and we think that continues through Q4 and into the next year.

[Chris Thompson, President & Director of Equity Research]

Okay. And in your supply chain situation, it's all in the news now, how much is that going to impact your costs over the next couple of quarters or maybe even in the next year?

[James E. Lorimer, CFO & Corporate Secretary]

Sure. We've certainly started to see some price increases. Really, all our raw materials, paper, in particular. We've also increased prices with regards to freight. We've been pretty fortunate in that -- back in 2018, when we saw very aggressive price increases in the paper market. Since that time, we've been able to amend a lot of our contracts. And so we are able to, in many cases, pass those increases on at a better clip than we were able to in 2018. About 2/3 of our business is under contract. Most of our contracts have price pass-through increases and certainly for material price increases. And it varies by contract. It could be once a year, it could be as much as quarterly. So I think third quarter was probably a pretty good indication where gross margin of 30% and despite some of those price increases, we're holding our margins pretty well.

[Richard Clarence Kellam, President, CEO & Director]

Yes, Chris, Richard here. As James said, most of our contracts have some form of raw material index built into it. And we started experiencing those price increases, those raw material price increases in quarter 3. And you can see that our margin continued to increase, right? So the team has done a great job to make sure that we've got those indexes built in and flowing through in our price.

[Chris Thompson, President & Director of Equity Research]

Yes. That's a great point. And I did notice the increase in the gross margins. And I'm still looking at the product mix. I'm still seeing that your tech enabled, which is the higher-margin is still emerging. So I guess what you're saying is most of that gross margin was on the ability to pass-through the cost and not the actual product mix.

[Richard Clarence Kellam, President, CEO & Director]

That is correct. That is correct. Yes. Yes. Yes. We call it strategic revenue management, which includes making sure that we're managing any offset in raw material increases.

[Chris Thompson, President & Director of Equity Research]

And 1 last question, and then I'll open -- I'll let up anyone else or the next person. Can you just briefly touch on how you're seeing the U.S. cannabis market as a potential -- you have this 1 win, you still see it as a large potential for you?

[Richard Clarence Kellam, President, CEO & Director]

Yes. Well, we've got Shelly sitting here beside me, so I'll turn that to Shelly who's responsible for that.

[Shelly Anwyll]

Yes. So the market is growing quickly and what's really so DCM apart in the marketplace is our tech-enabled solutions, coupled with the market share that we own in the Canadian landscape based on the work that we've done over the past 3.5 years in the legalization. So working with all the top producers here in Canada who are all trying to enter the U.S. through strategic partnerships and acquisitions. That has helped us to garner conversations, demonstrate our thought leadership and our expectation in this area, and we have several active conversations in the play.

[Richard Clarence Kellam, President, CEO & Director]

Yes. And Chris, Shelly, you actually just got back from a conference in New York, where she was a guest speaker, a very large cannabis industry conference. And I can tell you, we've got some very good momentum and good pace in that market right now.

[Shelly Anwyll]

So if the next caller wants to ask a question.

[Unknown Analyst]

I saw and you guys were kind of talking to in the deck here that you have the Assemble win. What percentage of your clients do you think could currently benefit from the tools the Assemble platform offers?

[Richard Clarence Kellam, President, CEO & Director]

It's an excellent question. As I said, we've got 250 enterprise clients that represent roughly 93% of our revenue. What I can tell you from an industry perspective is there's only 1 in 10 large enterprise that actually have anything that resembles an enterprise digital asset management solution, okay? Many companies are still using SharePoint, or Dropbox, or some other form of sharing files. We all know that in today's world, with the sheer number of digital assets that are being created every day, that SharePoint or Dropbox, or any other solution like that, it's just not going to be effective, right? So only 1 in 10 companies actually have anything that resembles a powerful digital asset management solution. So easy to do the math on our CAD 250 million, right? And calculate how -- what the size of the prize opportunity is. So we see a big opportunity, given the relatively low penetration. I'll remind people on the line that the size of the market, the digital asset management market is north of $5 billion and it's growing at, depending on what research you look at, anywhere from 25% to 35% a year. And that growth is really driven as companies discover the need to more effectively manage their assets. So we see it as a huge opportunity to penetrate our large enterprise clients. And of course, we're active with our commercial teams right now. So hopefully that answers your question.

[Shelly Anwyll]

I think that concludes our question-and-answer portion of today's call. I'd like to thank everyone for joining us and maintaining your interest in DCM. I just want to make a reminder, as James noted earlier, Richard and James will be available after the call for any follow-up questions that you may have. But at this moment, this completes our [indiscernible] call. I hope everyone has a terrific day, and you can disconnect your lines now. Thank you.

[Richard Clarence Kellam, President, CEO & Director]

Thank you, everybody.