Data Communications Management Corp

TSX:DCM

Earnings Call Transcript 2017-Q4

[Operator]

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the DATA Communications Management Corp. Q4 and Year-End 2017 Results Conference Call. [Operator Instructions] Michael Sifton, CEO, you may begin your conference.

[Michael G. Sifton, Chief Executive Officer and Director]

Thank you, Sharon. Good morning, and welcome to our 2017 Q4 Investor Call. Today, I am joined by James Lorimer, CFO; and Greg Cochrane, our President. 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 DATA Communications Management annual and quarterly continuous disclosure filings available on SEDAR.Also on today's conference call, all references to DATA Communications Management or DCM will mean its various business divisions.It is our pleasure to report the results of DCM for the fourth quarter and full year 2017. While we continue to experience secular declines in our traditional business communications markets, we believe we have positive actions -- we have taken positive actions to position your company for the coming year, and we are seeing the results of our efforts. DCM completed 2017 with a strong fourth quarter. Revenues were $76.1 million, up 11.6% compared to a year ago. And adjusted EBITDA was $5.6 million, up 154.5% versus a year ago. For the fiscal year ended December 31, 2017, total revenues were $289.5 million, up 4% versus a year ago; and adjusted EBITDA was $16.1 million compared to 11 -- compared to $14.4 million a year ago. This improvement in your business was driven by several initiatives, including the 4 -- the following 4. Number one, sales performance. We benefited from market share wins, including a large North American financial institution. We achieved gains in share of wallet, essentially providing more services and products to our long-standing clients.Number two, margin discipline and cost controls. We undertook a number of initiatives to reduce our product price discounting, with a focus to improve gross margins through cost plus discipline. Number three, acquisitions. The Thistle and Eclipse acquisitions completed in February of 2017 contributed strong results in the year and helped improve our overall gross margins for the company. BOLDER Graphics, acquired in November 2017, chipped in for our last month of the year. BOLDER Graphics provides DCM with a highly complementary large-format capabilities in Western Canada, and we expect a strong performance from the business in 2018.And number four, operational efficiencies, with our focus on the following 5 key areas: the announced and executed move of a Multiple Pakfold from its separate Mississauga, Ontario facility into our Brampton location, we expect to achieve estimated annual savings in excess of $800,000 from this move. The announced and completed move of our Granby, Québec warehousing operations into Drummondville -- into our Drummondville facility; annual associated savings are an estimated $700,000. The announced and completed move of BOLDER Graphics into our Calgary location; annual total savings are estimated at $750,000. The executed strategic selling, general and administration cost reductions; the elimination of approximately 30 personnel will result in an annual estimated savings of $3.5 million. And the implementation of our new ERP, with a target completion before the end of 2018.As a result of all of these initiatives, together with positive revenue trends we are seeing, we are quite encouraged by the momentum we have in the business. The outlook discussion in the management's discussion and analysis of financial conditions and results of operations further describes our outlook and assumptions.Reflecting on how the DCM team has successfully navigated its transformation over the last 3 years, as evidenced by the strong fourth quarter in 2017 and the positive outlook for 2018, I want to announce that I am stepping aside from the CEO role at our annual -- at our AGM in June. I look forward to remaining a Director, subject to shareholders' support, and to continue a significant and supportive -- to be -- continue to be a significant and supportive shareholder.Greg Cochrane will add CEO to his current title of President. I have thoroughly enjoyed working with and learning from Greg since he joined us in November of 2016. During this time, Greg has made many important and transformative moves to propel DCM forward. His leadership, energy and keen customer-first focus is what DCM needs as it continues to move from its strong historical role of being an operations-focused communications provider to becoming more of a marketing communication-focused provider and thought leader.As we approach the succession, I want to share my extreme gratitude to the whole DCM team. The company has made up of a highly talented, diverse and extremely loyal team of individuals, all of whom have made my job enjoyable and successful.The caliber of the DCM team is a direct result of the leadership provided by many employees over the history of DCM. I consider it a once-in-a-lifetime privilege to have spent 3 years working with this talented group. These folks have made my DCM journey a thrill and one I'm immensely proud of.Lastly, I want to take this opportunity to thank you, our shareholders, for your tremendous support and patience as we have wrestled to transition and transform your company into a modern communications corporation with an appropriate capital structure. The journey is not over yet, but I truly now believe we know our destination and we have new sales and we enjoy the wind at our backs.So with that, I'll conclude my comments and ask James to address our financial.

[James E. Lorimer, Chief Financial Officer and Corporate Secretary]

Thanks, Mike. As Mike noted, we recorded revenues of $76.1 million in the quarter, which was up 11.6% over the prior year period. This increase in revenues was largely due to inclusion of the financial results for Eclipse, Thistle and BOLDER and also some new customer wins.The increase in revenue was partially offset by lower revenues in our core business due to lower volumes and pricing pressures from certain customers who reduced their overall spend, particularly in the financial services sector and nonrecurring work and the timing of certain orders related to forms for certain government agencies and labels for a major retailer.For the year ended December 31, 2017, we reported revenues of $289.5 million, which was up 4% compared to last year. This was largely due to the additions of the revenues from Eclipse, Thistle and BOLDER and also from new customer wins in our core business. This was partially offset throughout the year by lower volumes and pricing pressures from certain customers and was also due to nonrecurring work and the timing of orders in the forms and labels business from which we benefited last year, resulting in an overall increase in revenues compared to last year.In the fourth quarter, we reported gross profit of $18.4 million, which was 24.1% of revenues, which was improved from $13.2 million last year, which was 19.4% of revenue.SG&A expenses were a little bit higher due to the inclusion of Thistle and Eclipse over the year, coming in at $15.3 million or 20% of revenue, compared to $13.4 million last year or 19.6% of revenue.For the year, gross profit increased to $69.4 million or 24% of revenue compared to 22% -- or 22.7% of revenue last year. And SG&A expenses were $61.4 million or 21% of revenue compared to 20% last year. As Mike said, adjusted EBITDA was stronger this year -- or this past quarter, at $5.6 million or 7.4% of revenue compared to $2.2 million in the fourth quarter last year, which was only 3.3% of revenue. For the year, adjusted EBITDA was $16.1 million or 5.6% of revenue compared to $14.4 million last year, which was 5.2% of revenue. On an adjusted net income basis, we reported adjusted net income of $1.5 million in the fourth quarter and adjusted EPS of $0.08 compared to a breakeven last year. For the fourth -- or for the full year, we reported adjusted net income of $2.5 million compared to $2.9 million last year and adjusted EPS of $0.15 compared to $0.26 last year.In 2017, we were successful in deleveraging our balance sheet by raising additional equity. We raised approximately $8.1 million in a private placement of rights offering in the middle of 2017, which helped pay out our 6% convertible debentures, which were approximately $11.5 million, including principal and interest.We also repaid about $12.5 million of fixed-term debt payments during the year. In 2017, we expect to pay down $13 million of fixed debt, which included -- includes principal payments on our senior debt, subordinated debt and promissory note payments relating to our acquisitions. We're committed to deleveraging our capital structure with a long-term net debt-to-adjusted-EBITDA range between 1 and 2x. We are reconfirming our previously announced guidance for 2018, which includes revenues in the range of $295 million to $310 million, which would represent growth of between 2% and 7% from what we completed in 2017. And we're also confirming our adjusted EBITDA target between $22 million and $25 million, which would be an increase from the $16.1 million we reported in 2017.We've included more details and key assumptions on our guidance in our management discussion and analysis, which will be filed in full on SEDAR and available in the next day or 2.

[Michael G. Sifton, Chief Executive Officer and Director]

Thank you, James. Sharon, maybe we can turn to questions.

[Operator]

[Operator Instructions] Your first question comes from Scott Nirenberski from Muskoka Capital.

[Scott Nirenberski]

I had a few questions on your sales and kind of maybe -- I don't know if Greg's there, priorities on sales. It looked to me like, when you look at Q4 and you look at current momentum that even the core DATA actually did may be better than I would have thought. So I guess, the first question is, is macro better, is it industry consolidation, is it also maybe the new large customer that started to come into play? And the reason I asked about macro is just that, in the last couple of weeks, if you look at Quad/Graphics and you look at RR Donnelley, they've gone from disappointing last year to actually beating numbers and actually having fairly good outlooks, just like yourselves. So just trying to understand that. And I think even RR Donnelley earlier this week said they were growing in Canada as well.

[Michael G. Sifton, Chief Executive Officer and Director]

Scott, thank you for your question. I will turn that over to Greg.

[Gregory J. Cochrane, President]

Scott, it's Greg. A couple of things. One, our focus is really on our top customers. And one of the things that we're doing with them is that we are increasing our share of wallet inside our major customers. So the decline -- the steady decline in our core business will continue. But we've really set a mandate in 2017. And now it's become the mantra of going forward is, let's totally embrace our core customers and show them the other offerings that we can provide them. So we still look at a decline in the core business going forward. It's your call versus my call as to what percent that is. We've taken a stab at it based on our history, and also what our customers are telling us to, where they are going. So I hope that answered the question.

[Scott Nirenberski]

Okay, great. And on the new large win you had in the -- you announced in the fourth quarter. Has that kicked in at all really at this point, or is it still just about to start?

[Michael G. Sifton, Chief Executive Officer and Director]

It has. We didn't see -- we didn't get much benefit in Q4, but they've certainly hit the ground running hard as of Jan 1.

[Scott Nirenberski]

Got it. Because it seems like versus last year, we obviously had a tough year relative to the goals you had set. With that large customer just alone coming into the fold, that would mitigate a chunk of certainly the -- just the organic decline in the business. So provides a positive backdrop on everything in addition to obviously the new acquisitions that you did last year.

[Michael G. Sifton, Chief Executive Officer and Director]

Yes.

[Scott Nirenberski]

And then, on the acquisitions themselves, I think at one point, you had mentioned in the past that there is an opportunity to recapture some sales that would -- you'd normally have large contracts, you didn't have the capability to outsource it to other printers effectively, but with the acquisition that you did last year, there is actually an opportunity to recapture some of that and obviously the margin would go with that. Can you maybe update us a little bit on that?

[Gregory J. Cochrane, President]

It's Greg. Yes, we can. So we -- in the east part of our business, the Eastern Canada part of our business, we did not have classic lithography. We have fairly substantial plant and equipment out west, but we didn't have it here in the east. And we were outsourcing to second parties most of that -- or in fact, all of it, to second and third parties. With the acquisition of Thistle, we can now bring a good chunk of that in and obviously capture that. The other thing is, with our acquisition of Eclipse, it really gives us a leg up in the large-format business, which is a growing area for print production. And we had a limited capability in that, but we now have the ability to go after much larger retail-type customers who use that type of format. So those are 2 good things, and we are working feverishly to provide those options now to our core customers.

[Scott Nirenberski]

Great, great. And then, on the cost side of the business, obviously you've done a heck of a lot of heavy lifting and you get things like you announced, I think, in the fourth quarter, which literally provide almost a step function up in profitability if you're talking about having that come into the first quarter, $4 million, $5 million. I mean, that's like almost an entire year of EBITDA right there with those types of action. I guess, my question is, are there more things like that or pretty much at this point, it's really about fine-tuning the business and executing on incremental -- more incremental kinds of cost reductions as well as obviously the implementation of your ERP this year to take more cost out of the business?

[Michael G. Sifton, Chief Executive Officer and Director]

I think you've just described it, it could be more incremental. ERP will present some opportunities. But I think I'd be remiss to not give kudos to Alan Roberts, our Vice President Operations -- Senior Vice President Operations. He has done an outstanding job of rationalizing the business, not only to take out costs, but to make it work better. Those are -- you've got to always -- when you make these changes, you've got to do -- you've got to make sure you fulfill the second part of that mandate. And that's what he's done. And then, of course, then we saw the SG&A savings, which are -- again, kudos go to the various heads of the different areas.

[Scott Nirenberski]

Okay. That's great. And I assume then, obviously, ERP is going pretty much as you have planned it and it will really make itself, I guess, known in the back half of the year. Is that right or...

[Michael G. Sifton, Chief Executive Officer and Director]

Yes, we're looking to see it go live in the second half of the year. The actual completion date, you never quite know. But we've got a time line we're working towards, and we expect to have it fully functioning this year.

[Scott Nirenberski]

Okay, great. And then, maybe another question for Greg, because he's running a lot of it for the past year-plus. On the sales force, in terms of comp structure and people that you have onboard and people you'd like to get onboard, can you kind of just maybe give us an update of sort of where things stand on that. Are you pretty much -- your policies and everything are in place? Or are there any -- I know you've made some changes in the past. But are there -- should we be thinking about anything that's happening this year coming?

[Gregory J. Cochrane, President]

Scott, I'll answer it in -- with 3 bullets. The first one is compensation for the sales force. We dramatically altered the compensation, I guess, policy, if you will, to focus more on gross margin versus focusing on top line. In many cases, this business is almost a race to the bottom. And that's not the business we want to be in anymore. We want to be profitable for our shareholders, of which sitting around this table are significant shareholdings. And secondly, it allows us then to do other things. And so the compensation system is now fully in place, and it is being driven on gross margin. And all of the sudden, Scott, behaviors change. And so that's a good positive. That's number one. Number two, the hiring of Mike Coté. I have certain skills. Mike is just a fabulous [ 2-pack ], if you will. He brings the wealth and experience from Purolator, a $1.7 billion type business and bringing some of the process and structure that we need in here. And I think that's important, and it's -- he's raising the bar in terms of what we expect from our sales force and sales leaders. Third thing. We basically looked at our client list and then said, look, we have a couple hundred customers that we should embrace and ask for more business and do more with them. And so as such, we've aligned our sales force around our top customers and our top industries. There is -- we've signaled this. We are looking for complicated customer businesses where we can solve many of their off and online communication and data needs. That's number one. Number two, we've made the investment in Eclipse and BOLDER and Thistle to some degree, because we're signaling that retail is an important growing area in our business, all right. So when you get that type of alignment and get that focus, usually good things will happen, because we stopped doing things that we shouldn't be making, a, any money on; and b, they won't amount to a lot. We have well over 3,000 customers. I'm going to say to you that, Scott, a couple thousand of them that's -- they are in the quote business. Well, I'm not in the quote business. We are not doing that. We can't be a national leader by doing that. So I hope I answered your question. It's a long answer.

[Scott Nirenberski]

No. It's actually really helpful. It provides color around how you're going to execute this year. Very helpful. And obviously, the composition of the sales force, maybe you could talk a little bit about how that's changed since you've been onboard over the last couple of years. And I know it's a never-ending, right, process and you can always do better. So just curious to get your perspective on it.

[Gregory J. Cochrane, President]

Composition of the sales force, I think, funny Scott. I used to play golf with a couple of salespeople. I didn't realize that they worked at DATA, but they were always available Wednesday afternoons. We had a standing time at [ Weston ] at 1:08 on Wednesday afternoon. I can't make that up, by the way. And so we had transactional salespeople. What we are doing is we've honed the best out of that. We are going through what I call a regrooving. And especially when the compensation is now focused on gross margin versus top line sale, I think that gets a behavior trait. But the most important thing, the way we're going to be successful is attracting what I call people that can sell -- the word is holistically. They can sell enterprise platform. They can sell a communication solution versus, "hi, I can get the best price for this label for you, sir. " So that's the art of the change. And that's really with bringing Mike in and stepping up some of our leadership with Jim Ferreira, who heads up our enterprise group, which includes most of our banks and large clients. We're stepping that up. And the good news is, we actually have people that want to be part of this. I couldn't say that 2 years ago. Mike is doing a lot of things to keep us going to get to this point. Unfortunate that Mike was successful in this and allows us to build the business differently. We're 59 years. As my father used to say, you're in your 60th year. We're 60 years. That's pretty damn good. But you need to change.

[Scott Nirenberski]

Yes. And the enterprise sales folks that you're getting, are they -- is it directly out of the existing marketing communications industry? Or is it actually you're getting people that have sold other things into enterprise, whether it's different forms of IT? Or maybe could talk a little bit about that.

[Gregory J. Cochrane, President]

Well, it's interesting. Most of these people are coming from -- not coming from the print production business. They're coming -- they're either coming from the communication side or they're coming from software companies. It's just a different mix of people. And you can do all the predictive HR analytics you want to say, here's what the best salesperson looks like, but boy, to hire someone in the enterprise level -- xerox did this years ago; IBM has done this years ago. We're really in this industry waking up to the fact that we don't want to be in the quote and hope business. We want to be in solutions business, because it's sticky and we can provide our platforms -- our electronic platforms to help our customers. That gets to be really sticky and important for our customers. We want to be their partner, not the supplier.

[Scott Nirenberski]

Yes. And on that note, and you look at the breadth of the product offering, which is obviously changing from traditional print to also the online channels. Maybe you could talk about sort of how you see that rolling out additional services and things like that, that might be higher margin than traditional business over the year?

[Gregory J. Cochrane, President]

We're talking, Scott, basically what we're doing online?

[Scott Nirenberski]

Yes.

[Gregory J. Cochrane, President]

Okay. So there are certain things I can't say, okay? So let's just say this: We currently have electronic portals for our major customers, and they are using those, because what is does is it simplifies their lives inside their organizations. We have caught a lot of wind in our sales with this type of presentation to our customers. It's basically tell us more how you can, a, improve our processes; b, save us money; and c, provide us more services. So we're upgrading those, okay? And we are asking our customers, it's a really simple thing, what else would you like us to do? So they're asking us to do things, and we're in the process of upgrading certain ones. I can't go further than that, Scott. I think things will evolve and you'll see.

[Michael G. Sifton, Chief Executive Officer and Director]

Scott, thank you for all those questions. It's been great to have the opportunity for Greg to speak and present where we're going. And you get a flavor for all -- some of the dynamic changes that Greg has been bringing into the business.

[Scott Nirenberski]

Yes -- no, definitely. I did have a couple of others. Just one simple one is, you retired $13 million of debt. Obviously, your interest expense should go down. Can you talk maybe or James could talk a little bit about what the -- sort of how we should think about the impact of that on interest expense savings?

[Michael G. Sifton, Chief Executive Officer and Director]

Yes, we'll let James address that one.

[James E. Lorimer, Chief Financial Officer and Corporate Secretary]

Sure. Of that amount of debt, Scott, approximately $4.5 million relates to promissory notes on the Eclipse and Thistle and BOLDER transactions. Most of those promissory notes do not have interest. There's a little bit of interest on the BOLDER, but it's pretty nominal. And we've already repaid the first Eclipse payment, which was $2.3 million due in February. The subordinated debt, that's the bridging finance facility, and that matures in June of this year. That's about $3.5 million and the interest rate, I think, is in the 13.5% range. That's due to be retired by the end of June. And then the principal payments, that all relates to our fixed-rate debt with Integrated Asset Management [indiscernible] private debt. Most of that is at 6.95%. And there is a small chunk of that is about 6.1%.

[Scott Nirenberski]

Okay. What was the principal on the 13.5%? I am sorry, I missed that.

[James E. Lorimer, Chief Financial Officer and Corporate Secretary]

That's the $3.5 million bridging finance fee. Yes. And then -- so that's really the $13 million that we paid down this year really relates to fixed-term debt. Of course, we have our ABL facility, our working capital line that will fluctuate based on working capital requirements. But we expect that, that will be managed well as we generate free cash flow.

[Scott Nirenberski]

Got it, okay. And then, just the last question is -- I mean, you guys, with your guidance and that, I don't know many companies that are -- that have gone from shrinking to growing, improving margins and trade at like a 40% free cash flow yield. So what is the thoughts on IR efforts and kind of being more, I don't know if the word aggressive is the right word, but communicative about the good news and the heavy lifting that you've done and positioning for growth and create profitability?

[Michael G. Sifton, Chief Executive Officer and Director]

Well, Scott, I think you've been exposed to James and I for quite some time now. You know about our characters. We believe in putting our heads down, achieving results and then communicating them. We're not promotional in really any way. We believe in getting the work done. And that's what the organization has done. We're incredibly proud of the work the organization has done. We are -- we've also -- we also realized we've been in a penalty box, because we haven't been able to achieve what we said we're going to -- or hoping to achieve. So that being said, we now -- we believe 2017, certainly the latter part of the year, was a real turning point for this organization. We now are quite confident going out and telling the market what we have. And I think you're going to see more from us on that in the coming months. And certainly today is a start. Thank you for that. And to your point about the repayment of our -- of principal. We've really enjoyed our very strong relationship with our bank, with our term lender and with our short-term lender. All 3 of them have been very supportive. And we just can't say enough for the way they've embraced us and the sort of trajectory that we've been on. They have helped us turn the corner. So they played a very important role for us. And I think we've returned that support with the way we've been able to repay them.Sharon, are there any other questions?

[Operator]

[Operator Instructions] We do not have any questions over the phone line at this time. I will turn the call over to the presenters.

[Michael G. Sifton, Chief Executive Officer and Director]

Thank you again, Sharon. Thank you to those of you on the line. And we look forward to bringing Q1 results to you and -- which we believe will be a positive, you'll receive positively as well. I'll be on that call as well. Maybe Greg will lead that one. We'll decide. Until then, take care.

[Operator]

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