Data Communications Management Corp

TSX:DCM

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to DATA Communications' Earnings Call for Q4 2020 Results.[Operator Instructions] Please be advised that today's call is being recorded. I would now like to turn the conference over to James Lorimer, Chief Financial Officer. You may go ahead.

[James E. Lorimer, CFO & Corporate Secretary]

Thank you, Michelle, and good morning, everyone. And thank you for joining us today for our Fourth Quarter and Fiscal Year 2020 Conference Call. Speaking on the call this morning will be Richard Kellam, our new President and Chief Executive Officer; and myself, James Lorimer, CFO.Also joining us on the call today is Greg Cochrane, our former President and CEO, who has moved on to a position on the Board as Vice Chair, following Richard's recent appointment.The prepared remarks on today's call will be followed with a question-and-answer period. We'd also like to 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 added a brief video introduction from Richard, along with a summary of our results and key initiatives for 2021 on our website. Our detailed information will be published on our website and SEDAR. You can also follow us on LinkedIn to review some of our business insights on relevant market trends and customer case studies. And with that, I'd like to welcome Richard Kellam to his first call as President and CEO.

[Richard Clarence Kellam, President & CEO]

Thank you, James, and good morning, everyone. I'll keep my comments brief, but I'd like to focus on 3 key themes that I've observed in my first 10 days in the job.First, talent at DCM. I've been really fortunate in my career to have worked with some incredible teams, both in Toronto, where I'm actually from. And also in Europe, Asia, the Middle East, United States, where I've spent a big chunk of my career.I've had the opportunity to meet many of the 1,100 people at DCM across all functions and business units across the country. And I must say this is one of the more talented groups of individuals I've had the pleasure of working with. The results in the past year bear witness to what the DCM team has been able to accomplish. In my experience, great teams can accomplish a lot, if they are given responsibility and recognition for achievement. I'm a big proponent of a flat organization where business leaders are empowered to drive results within their teams, work collaboratively with other groups and create opportunities for personal growth for everyone in the organization.As you can see, with some of the recent senior leadership changes we've made, we are opening up opportunities for others to step up and make a difference. Reducing layers and increasing spans of control will continue to be a focus area for me.I've got great confidence that the DCM team are up for this challenge. As shareholders, you can be assured that we have a highly skilled and talented team at DCM and we are charting a very positive path forward.Second, skills of the company are unmatched. Another observation I've met is that DCM has tremendous capabilities. And really, you do not earn the blue-chip client base that DCM has today without adding value, significant value to your clients.We count 70 of the largest 100 enterprises, government agencies and health care providers in the country as our clients. More than 80% of our top clients have been with us for more than 10 years. We have over 90% renewal rate with our clients on contract extension, RFPs and RFQs. If you've been following us for the past couple of years, you've heard about our focus on enterprise clients.More than 80% of our business is with our top 250 clients, and we expect to continue this focus, while providing more value-added solutions for them. I'd like to share my observation of one particular market vertical with you, which is the cannabis sector. Just over 3 years ago, this market didn't exist. Today, it actually represents 5% of our total revenue, our gross margins are north of 35% and we have a 75% share of packaging labels in the Canadian market.Now we didn't earn this market position by putting ink on paper. But actually, we're pretty good at putting ink on paper, by the way. But we won this because we developed a digital solution to help license producers manage their workflows, meet complex regulatory compliance measures across literally hundreds of SKUs for many of the LPs that we produce. And we supply digitally produced variable printed on-demand labels, purchase and other related products.What I'd like to say is, and the team has heard me say this a couple of times already, we digitally helped these LPs simplify their complexities. We're already supplying labels and workflows to Canadian licensed producers that have operations in Germany, Lithuania, Israel, Australia and Brazil. And we are now also expanding into the U.S. market, which will help drive further growth as the Canadian market also continues to expand and broaden into other applications.We are helping many other clients manage digital workflows, not only in cannabis, but across all sectors. And we will be sharing some of these other success stories with you in the near future.Finally, delivering success in turbulent times. We've had some massive headwinds in the last 2 years with our ERP launch in 2019, which, thankfully, is now behind us, and COVID in this past year. The DCM delivered some strong results in the past year despite these headwinds, and I'm going to share a few highlights with you.Revenue was negatively impacted by COVID and was down about 8% on the year-over-year basis to approximately $260 million. The biggest impact on our business was from physical retail shutdowns and closures of financial services' physical branches. In addition, our more transactional business and marketing communications business, which is more discretionary in nature, was impacted.Nonetheless, revenues from our top 100 clients were up 3% year-over-year. We continue to find ways to support our clients for a very difficult period. Now despite the revenue headwinds, our gross margins actually grew last year through operational efficiencies and really tightly focused mix management. In dollar terms, gross profit was $72.9 million, up 5.3%, and gross margin grew from 24.5% to 28.1% year-over-year.As we navigated through this dynamic market environment in 2020, we also continued to focus on improving productivity, reducing our SG&A expenses by $8.2 million to $58.9 million. We received $10.7 million in wage subsidy grant income, which helped offset the declines experienced in our business from COVID. Adjusted EBITDA was $41.5 million, up more than 100% from $20.1 million in 2019.As a result, we reported net income of $11.5 million compared with a net loss of $14 million last year. Adjusted net income, backing out restructuring fees, was $14.2 million compared to a net loss of $7.4 million in 2019.As a result, adjusted net income per share was $0.32 compared to a net loss of $0.34 per share last year. More importantly and most importantly, we paid down more than $31 million in senior debt between the end of 2019 and the end of 2020. Almost incredibly, our revolving line of credit, which combined -- which climbed to almost $42 million in April last year, is currently around $1 million.We made tremendous strides in our working capital improvement initiatives, which James is going to talk more about. While it's early in the year, and I will refrain from formal guidance, we have recently renewed or extended a number of important client contracts. In most cases, these provide for comparable workflows to past years, and we also won back some wallet share from a competitor. These renewals support our client confidence and our abilities.Given the dynamics of the current environment, however, the work may flow differently in 2021 than it did in 2020. While the impact for COVID seems to be subsiding, we remain vigilant in terms of when normal will happen. We had a strong first quarter last year, which was only marginally impacted by COVID. While we believe we are well positioned to capitalize on a potential bounce back in our business segments that have been impacted in the last year, we will be accelerating organizational and operational effectiveness initiatives.And so you can expect continued focus on gross margin and SG&A improvements. We are also relentlessly focused on driving digital innovation by leveraging our digital platform for direct to print and workflow management applications. I'm going to turn the call back over to James, and then I'll come back with some closing comments. Thank you.

[James E. Lorimer, CFO & Corporate Secretary]

Thanks, Richard. Richard provided an overview of our major P&L KPIs in 2020. I'd like to focus more on our balance sheet and our statement of cash flows. We made significant progress improving our working capital and paying down debts in 2020. In late 2019 and early 2020, we received a number of concessions from our 3 senior lenders to assist with the liquidity challenges we are facing. I'm pleased to say we have exceeded the targets we established more than a year ago.Your company's liquidity position and financial results have improved over the past year due to 4 key initiatives. Let me provide a brief overview of each. Firstly, improving margins from cost containment initiatives. We reported record gross margins in the year due to better mix, strategic pricing initiatives, realizing operating improvements through temporary layoffs to adapt to lower volumes, and also from restructuring initiatives we made in late 2019 and continued in 2020.This year, we will close our Mississauga, Ontario plant, which will provide additional opportunities, particularly in 2022, to further reduce our overhead.Secondly, the support of the federal government's Wage Subsidy Program. We received $10.7 million from the CEWS in 2020. These funds helped us substantially maintain our workforce, although we were also able to proactively flex our labor force based on demand by implementing temporary layoffs and becoming more nimble in job sharing in our operations.We will remain nimble in the coming year and strive for continued operating efficiencies to address what's still a very dynamic environment.Thirdly, better matching of the timing of production and invoicing. Probably the biggest paradigm shift for us has been in converting clients from our legacy bar or bill as products are released from the warehouse to a more traditional bill-on-production model.And then we hold those products in the warehouse, until required, and charge monthly warehousing fees. This project kicked off in March last year as COVID was ramping up, and to date, we've received more than $12.3 million from converting clients. We expect to generate another $5 million from additional conversions this year. Fourthly, improvement in aged collections, billing accuracies and cash flow management.These working capital fixes have greatly contributed to a reduction in outstanding credit facility balances. There's a few important things here that I'd like to call out. Better raw materials management, our raw materials inventory at year-end was $4.1 million compared to $8.3 million at the end of 2019. Also, our net trade receivables declined from $86.5 million to $65.3 million. While some of this was certainly related to lower year-over-year revenue volumes, our unbilled receivables declined from $32.4 to $18.9 million.What you're probably asking are unbilled receivables. These are a combination of bar finished goods products, which have not yet been billed and which have historically been in the range of $20 million to $25 million, and it also includes our billing backlog.Our billing backlog has significantly improved as our billing timeliness and accuracy has improved with familiarity and streamlining of our new systems. Also, our true accounts receivable in particular -- and in particular, our aging has improved significantly. At the end of 2019, we had more than $12 million in billed receivables. So true accounts receivable that we have invoiced that were over 90 days past due.At the end of 2020, this was down to $7.4 million, and it's continued to decline. We still have some room to go, but we think we can further reduce this by another $3 million to $4 million over the coming year. As a result of these initiatives, we generated $47.6 million from cash flow from operations last year compared to a use of $800,000 in 2019.The biggest contributors to this improvement were positive net income of $11.5 million and from improvements in working capital of $15.9 million. This really allowed us to tackle our senior debt. At the beginning of 2020, our revolver balance was almost $35 million. And it declined to $5.7 million at year-end. It's now hovering between positive cash and $1 million to $2 million drawn.This line will fluctuate with our working capital needs, but is expected to remain at low levels throughout the year. Our FPD fixed-term facility was about $23.4 million at December 31, 2019. While we deferred some principal payments in 2020, today, the balance is about $19.5 million. With our current principal and interest amortization schedule, we'll repay more than $6 million of principal on our FPD facilities in 2021.Our Crown Capital facility increased to $19 million in 2019 after Crown provided a second tranche of $7 million in August of 2019. While we accrued some interest during the year, the total balance grew a bit and is currently about $20.9 million. We are now making regular quarterly interest payments.Promissory notes. We added $1 million of promissory notes in July '19 to help with our liquidity challenges, but we subsequently repaid about $0.5 million of our perennial promissory notes in 2020. And we expect to repay the balance owing on those of just shy of $1 million in May this year.The bolder graphic promissory notes from our acquisition in 2017 of that business have about $200,000 left, and those will be repaid by the end of Q1 this year. From a CapEx perspective, we put the brakes on in 2020 with COVID uncertainty. Our total CapEx was just shy of $800,000 last year compared to about $3.9 million the year before when we are investing in our ERP system. This year, our planned maintenance and growth CapEx budget is modest, at less than $1.5 million, but we will be investing a similar amount in our digital capabilities.We are sweating the physical assets, as Richard likes to say. Our core business is not capital-intensive and should generate strong free cash flow, allowing us to accelerate investment in our digital workflow capabilities. We are currently evaluating the cost to move our Mississauga site to Brampton, but we believe the annual savings will far exceed the rent savings of $1 million. We'll update you next quarter on our progress there, as we further assess the costs to move and define opportunities for savings going forward.As we mentioned last quarter, we are seeking to make another $8.5 million of cost savings and/or margin improvements this year to normalize for the CEWS grant income that we received last year. We do expect to continue to receive some CEWS funds, but not to the extent we did last year. I'll now turn it back to Richard for some concluding remarks.

[Richard Clarence Kellam, President & CEO]

Okay. Thank you, James. In closing, DCM has continued to rise to the quickly changing needs of our clients, innovating to improve their communications, operations and marketing workflows, while tightening our own processes and increasing efficiencies. Our ongoing focus on digital innovation is helping us provide deeper insights into how to optimize our clients' businesses and help them connect more meaningfully with their customers.I am really proud to be part of this dedicated team, and I look forward to an exciting client-focused future. Operator, we'd now like to open the line for questions.

[Operator]

[Operator Instructions] Seems we have one question now from Mark Lawrence from North Trust Partners.

[Unknown Analyst]

Very good call this morning, and great numbers. James, I was wondering if you could enlighten us as to some of the management changes made last week, is it a plan to more fully integrate their roles across the corporation going forward? Their former roles?

[James E. Lorimer, CFO & Corporate Secretary]

Sure. Maybe I'll let Richard address that, Mark.

[Richard Clarence Kellam, President & CEO]

Yes. Mark, it's a great question. And look, you heard of my read earlier that one of the things I'm going to be very focused on is spans and layers. We made a conscious effort. And you read the announcement a few weeks ago, where we eliminated the President role. So that essentially took one layer out of the organization. The recent moves we made are continue -- are really designed to continue to drive productivity. I will be announcing the new leadership team shortly. They're all internal members of the organization. So there -- talent, we've got an incredible talent pool, and we'll be providing opportunities. So those rules will not be replaced.

[Operator]

[Operator Instructions] Next question is from John Arnaud, private investor.

[Unknown Attendee]

Congrats on a good quarter. Good luck with all the new people and appointments. I just wanted to ask about the marijuana printing business, which you had mentioned earlier, and what kind of growth you see in that area, both, I guess, all around the world, from what it sounds like.

[James E. Lorimer, CFO & Corporate Secretary]

Thanks, John. It's James. That business for us, literally 3 years ago, was modest. It was 0. We made a very small investment in a kind of a digital ink head jet, I think its $300,000 or $400,000. And then I think you would have seen we bought a Gallus press a couple of years ago to really focus on this market. We've got some unique capabilities in the market. We think there's significant opportunities to grow that, both domestically here in Canada.And in the U.S., we recently started a U.S. focused sales initiative. We have a rep that's focused on the U.S. market, and we expect to see some growth there as the U.S. market evolves.

[Operator]

And your next question will come from Kevin Daniels.

[Unknown Analyst]

Again, as everybody else has said, a great job on the numbers. And I actually had a whole sheet of questions to ask, and you actually answered most of them in your presentation. So I can pretty much keep this pretty quick. I guess my question is more or less focused on -- and you a bit touched on it with the cannabis side.But I'm focused on what's the plan for revenue growth, new business development and new sectors to kind of exploit, especially now that you've really regrouped from the ERP issues and now should be able to unlock the full potential and power of what that engine should be able to offer you guys.So I'm just kind of curious about what the growth strategy is. I certainly see the benefit and importance to retaining the customers and clients that you have and customer experiences right up my alley, but just looking more on the growth side.

[James E. Lorimer, CFO & Corporate Secretary]

Thanks, Kevin. From a growth perspective, our focus is going to remain on the same types of vertical markets that we've been in. Big markets for us have been financial services. We continue to be -- have some good success in that market. The retail market has historically been a strong market for us. That is certainly one that has been most impacted over the past year. But as that market begins to kind of open up, hopefully, towards the balance or later in the year, we do expect a rebound there.And that's where a lot of our kind of more transactional business has been impacted. Another sector that we've seen a little bit of slowdown is in the not-for-profit sector. That market has gone fairly quiet over the past year, but we are starting to see some rebounds there.The transportation sector has actually been quite strong for us as parcel delivery and kind of the Amazon type effect has certainly accelerated with the impact of COVID, and we don't see that trend, frankly, changing. It's only going to continue. Cannabis will definitely continue to be a growth market for us. And we're focused on a little bit of international expansion in that cannabis sector, in particular.

[Richard Clarence Kellam, President & CEO]

Yes. And James, I would just add, where we've been very successful in winning new businesses and new business opportunities is where we've being able to help clients simplify their complexity. And cannabis is a great example where we have north of a 75% market share in printed labels here in Canada.It's not, as I said earlier, it's not because of printing. The printing is fantastic, of course, but it's really the digital platform that allows those clients to manage their workflows effectively you think of cannabis, multiple number of SKUs and low runs. And you've got the regulatory and compliance side of that, which needs to be managed very effectively. So we've been very successful through that digital technology we've been bringing into that vertical. And we've got some other successes in other verticals as well, where we help clients simplify that complexity.So we've got a lot of opportunities in the marketplace right now, and I can tell you that our teams are out there kind of actively having conversations with many -- with multiple verticals and multiple clients.

[Operator]

[Operator Instructions] I have no further questions at this time. I'll turn the call back over to the presenters for closing remarks.

[James E. Lorimer, CFO & Corporate Secretary]

Thanks, everyone, for attending our call today. It will be available on Post View. And you may have seen there's a welcome video from Richard on our website, and we look forward to speaking with you over the coming weeks and certainly next quarter. Thank you very much.

[Richard Clarence Kellam, President & CEO]

Thank you, everyone.

[Operator]

Thank you, everyone, for joining us today. This concludes today's conference. You may now disconnect.