Data Communications Management Corp.

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Data Communications Management Corporation first quarter 2022 financial results conference call. My name is James Larmer, the CFO of DCM, and I'm pleased to be hosting today's call. Joining me on the call today is Richard Kellum, our president and CEO. Following our prepared remarks, we'll be monitoring a moderating Q&A session As a reminder, this conference call is being broadcast live and recorded. We'd also like to remind everyone that Richard and I can be available after the call for any follow-up questions that you may have. Before we begin, I'll remind everyone that we will be referring 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 CDAR. We have posted a brief message from Richard, along with a summary of our results and key initiatives for the quarter on our website in the form of an infographic. Our detailed information is also available on our website and CDAR. 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. I'll now turn the call over to Richard.

Thank you, James. Good morning. And for our, I know we've got some international folks on the call today. So good afternoon and good evening. I want to start off our presentation today on quarter one with this theme that you've heard me refer to before, which is our relentless focus to build both a better and a bigger business. And you'll see that coming through clearly in our quarter one in our quarter one results so so again you know it's a journey we started just uh over a year ago i joined uh may may 8th of 2021 and um then we put this theme in place and again you'll see the results uh on that on that better and bigger business through the quarter i also want to remind all of our shareholders that we put a clear five year plan in place so worked hard on that in the first quarter of me joining the company, and that called for a revenue growth of 5%. To get us back north of 300 million in revenue, gross margin of 35 to 40% SG&A between 18 and 20, which would spin out an adjusted EBITDA of 18 to 22%. A clear five year strategy. We've got 1415 change management projects that lead us to deliberate against the strategy over the next four to five years, and we'll see how we're performing against that in our first quarter of 2022. I want to start with this word, which I think is a really important one, which is a word we say called momentum, and I I referred to this at at our year end. that we had very good momentum in the second half of 2021 and momentum builds momentum. So we fully expected that momentum to carry into quarter one and into 2022 performance. And you're going to see that in the results today. So we've got very good momentum in our business right now. And I'll talk to that as I flip through the slide deck today. So I'm going to first talk about bigger business, then I'll talk about what we're doing to build a better business and some of the results around better business. So I'm very pleased to say, very happy to report that our revenue continued that solid momentum and we achieved 11.1% growth in quarter one 2021. In fact, it's the best growth rate we've had in 17 quarters. So you know, congrats to the DCM team for working hard to deliver this accelerated growth. And we've got, as you'll see later in the deck, some very solid client momentum right now. So on the rev side, you know, just shy of 70 million in revenue, which is our highest quarter since Q1 2021. And that of course is a pre-pandemic quarter, okay? So we're kind of back to those pre-pandemic levels on the quarter. Really solid growth at 11.1%. Our gross profit also was very solid at an 8.1% growth. Just over 20 million in gross profit versus close to 19 million a year ago, 18.8 million a year ago. And the highest gross profit we've had since quarter one 2020, since that pre-pandemic quarter. So very solid gross profit delivery as well. And we'll talk a little bit more detail on that later. So very pleased with the revenue growth as well as continuing to drive profitability of our business. Our net income, which we haven't necessarily reported on a lot in the past, but I do want to draw this out because it's an important line item. And as James knows, I'm a net income fan. We had very incredible growth on net income this quarter at 111% growth versus the same quarter a year ago. And we put 3.7 million of net income onto the books versus 1.8 million a year ago. And it is our first quarter in the last eight quarters where we didn't have any government subsidies I don't want to get into a ton of details. James will talk it later, but we had some government subsidies in quarter one last year in that comparable quarter, about $1.9 million in government subsidies. So, you know, a $3.7 million net income, 111% growth, including or comparing against the subsidies we had a year ago is a very, very significant delivery. So really pleased with the net income delivery we've had this quarter. Moving down to EBITDA, you can see Our EBITDA is up 28.9%. So very positive delivery on EBITDA. And that's a 9.4 million versus seven three year ago. Remember the year ago number also has 1.9 million in wage subsidy. So considerably higher if we netted out that wage subsidy and James will share those numbers with you later. And it's the best clean, we call it clean non-adjusted results in 10 years. This is an important one for all of us at DCM. We've gone through a pretty heavy lift on restructuring over the last couple of years. We'll talk that later in the deck. And now it's time to deliver momentum against that restructuring we put in place. And you've seen that in our clean EBITDA results here at 9.4 mil or 28.9%. So very pleased with the EBITDA delivery this quarter. And from a new business perspective, We delivered over $12 million in new business. Not all of that in the quarter. A lot of it will carry through the subsequent quarters. And we've got new business through basically every vertical. So a lot of diversification in the new business. And 100% of that new business is what we call tech-enabled. So clients that are using our DCM Flex platform to enable their workflow. So very on-strategy new business delivery. and a lot more new business in the top of the funnel that will flow through this year as well. So very solid new business delivery. And we've got a fantastic commercial team of just over 60 people out in the field that are out supporting our clients out there. And we've got very good momentum from a new client perspective. Looking at our DCM Flex platform, which is our workflow optimization platform, We have 32% of that revenue, of that $69 or $70 million in revenue that's flowing through our DCM Flex platform. So it's optimized by our workflow platform. And we'll see that number change considerably as we progress through the year. We've got a lot of opportunities with clients to move them onto our Flex platform to automate that workflow. So again, we'll see that revenue continue to increase through DCM Flex. I've said this many times. There are more clients that are unaware of our digital capabilities than are aware of our capabilities. And our commercial team, our sales team is out there actively communicating the benefits of workflow optimization using Flex. And we'll see that number continue to increase. The benefit, obviously, of a client using Flex is the simplification, right? Simplifying complexity. and they get great value in that complexity simplification. The benefit to us at DCM is the retention, the stickiness, the loyalty when we're embedded in our client's digital stack. I'm also happy to report that we have over $10 million in pipeline opportunities for our digital asset management solution called Assemble. And we're working those pipeline opportunities through the funnel. for investors that were paying attention to a news release that we put out about three or four weeks ago. We actually hired a senior vice president of digital. His name is Steve Livingstone, and he's got 25 years of software sales experience. So it was a buy, if you will. We bought the talent to help us continue to move these opportunities through our funnel. and continue to work with our excellent commercial team, those 60 commercial leaders we have across the business to continue to identify new opportunities and move those opportunities through our sales funnel. So some really good progress on our pace to digital asset management solutioning with clients. So now I want to flip over to what we're doing and the results that we've delivered on a better business. So having a look first at our SG&A, our SG&A was down 8.5%. So we are operating at NOG, negative overhead growth. Our plan was ZOG, zero overhead growth. So we've actually over delivered on the quarter. That's about $1.3 million in savings. And you can see that we're in the range of that five-year plan. So we're in the range for revenue and we're in the range for SG&A at 19.7% of revenue. And we will continue our cost control focus. You know, we did a heavy lift last year and we'll continue to ensure that we're operating at that ZOG, that zero overhead growth through 2022. This is a pretty cool chart that I like to present, you know, often and you saw it in, if you were attending our year end results, So I've just repurposed it and I've added Q2. You can see that our head count is 916 in Q2, down from 922. But if you look back historically, we're at a peak of 1433. So a significant reduction in head count. We really feel that we're at the right level right now. Of course, with the great resignation, we'll continue to take advantage of attrition, but we'll level out in that kind of 900 level. which I think is the perfect, fully optimized level for us here, given the workflow and given the business we run. But more importantly, if you look at the productivity per employee, as we grow revenue and operate at Zog, you'll see that productivity per employee increase, and we're up to 264,000 per employee. In fact, the highest we've had, you know, I think since we went public back in early 2000. pleased with the productivity per employee and pleased with the zero overhead growth that we're delivering as well. A very important one for us and a commitment we've made to the street is that we will keep our restructuring at zero. And you can see that in the quarter, we actually delivered zero restructuring versus 3.4 million a year ago. And again, we did a heavy lift last year, as you'll see in the next slide. And we don't anticipate any restructuring for the balance of the year. As I said, we're optimized from a people standpoint, and we're fully optimized from a factory footprint. So we're holding to that commitment of zero restructuring so that clean EBITDA, right, and clean net income. So having a look at our debt, our debt was down 7.7% in the quarter, so good progress. It's about $2.9 million reduction. And we're down to 34.2 million on a rolling TTM trailing 12 months. And we will continuously be relentlessly focused on paying down debt. As you see in the next slide, Our path, our glide path is to pay down $12 to $13 million this year. And you can see that we're on track to be zero debt by 2026. So great progress over the last couple of years. We'll continue to accelerate that progress with our free cash flow working to pay down that debt to be debt-free by 2026. So some very good progress on that. on a debt repayment perspective. I'm also really happy to report that we've got a very clear environmental, social and governance strategy. I'm not gonna talk the social and governance side today. I'm happy to take any questions on that. And I can certainly talk that in our next quarterly. But from an environmental standpoint, we made a commitment back in the end of October last year, to reforest 100% of our paper use with a partnership at a company called Print Relief. And you can see on this slide that we used 17,200,000 pounds of paper between October and the end of March, the end of Q1. And we have reforested 100% of that usage. It's the equivalent of 207,334 trees. Our clients love this, by the way. We've got many clients that have direct identification to the amount of paper they're using and the amount of paper we are replanting on their behalf. So we drill this right down to individual clients. It's not just at a macro DCM level. And we've got great momentum with our clients on this, specifically sustainability or environmental strategy. So more to report on this as we continue to reforest. From a productivity standpoint, as I talked earlier, you know, the restructuring we did, we're very happy with the footprint we have now. You know, we put on the board that we would commit to $14 million in annualized savings. We continue to deliver against that commitment. And you see that in our results this quarter. You'll see that as we progress through the year. You know, it was a heavy lift last year. We took our Mississauga plant. We put it into our Brenton plant. We took our Edmonton plant. We consolidated into our Calgary plant. We took 26,000 square feet of office space at our Wellington and Etobicoke facility, and we moved it into the facility I'm sitting in right now, actually in Adelaide, which is just around 8,000 square feet. We did a lot of consolidation on some older digital printing equipment into some new, highly productive, very effective new technology, new digital. And we've gone from what I call multi-layer, so several layers in an organization and fewer spans, so fewer reports per layer to a principle of fewer layers and larger spans. And I'll give you an example of myself. There used to be, and shareholders know this, there used to be a couple of layers. We optimized that to one. We had an average span of control of three and a half or four across those two layers. And I now have 19 reports. So we've carried that through the entire organization, pushing accountability and responsibility into the teams, and it's working very well. We're making decisions a lot smarter and a lot quicker. And as I said earlier, our footprint is fully optimized for the future. We've got the perfect footprint. So hence the fact that we do not need to do any restructuring, okay? So I'm now going to turn it over to James for a little bit more color, a little bit more detail on the financials.

Thanks, Richard. We've got a summary of our financial results here. And as Richard has talked about some of the percentage changes, I'll just talk a little bit about the dollar changes. You know, revenues in the quarter were up $6.9 million compared to last year. And we're really seeing strength across our whole business. And we're really seeing a nice recovery as we kind of exit the kind of COVID world. And, you know, retail is now open. And I'd say particularly, you know, from a vertical market, we're seeing good strength in healthcare, financial services, retail, as those are some of the markets that have really, really, you know, gotten more activity. Gross profit was up $1.5 million compared to last year, and gross margin was a little lighter compared to last year. Really, the key reasons there, a little bit of mix, and I'd say we had more higher paper content or kind of longer-run jobs this quarter compared to last year, and so the mix was a little bit different. And we also started to see some price increases on the cost side in February and March. We expect to get those margins back as we get through the year and as we pass those prices on to our clients. in line with last year, but we think there's certainly opportunity to recover that through the balance of the year. SG&A was down $1.3 million compared to last year. And again, that's really just kind of the relentless focus on overhead and cost reductions wherever we can. Restructuring, I think we're really pleased with this number. We had a big number in aggregate last year, but certainly in the first quarter last year, $3.4 million. So We're pleased to report a nice clean EBITDA of $9.4 million. Also included last year in EBITDA were $1.9 million of grant income related to wage subsidy and rent subsidy programs. So if you back that out, it's even a better achievement. If we look at adjusted EBITDA, in line with last year, about $200,000 ahead of last year. But really, again, you know, two things that are impacting that. We had a million five of other income, which actually was in EBITDA last year, but not in adjusted EBITDA. And that million five was kind of one-time income from the exit of an option we had to buy a business and a couple hundred thousand dollars from settlement of litigation. So in that adjusted EBITDA last year, there were 1.9 million dollars of wage subsidy income so we had our last kind of little bit of income that we received from that program in q4 we didn't have any this year and and that program is essentially done from our perspective uh but it certainly was uh you know beneficial to get us through last year and the and the prior year um if we go on to the next slide got a summary here of quarterly revenue And the first quarter is typically our strongest quarter, but you can see the momentum that was really starting to build really in kind of Q3 and then through Q4 and into the first quarter. We are seeing continued strength in our business. So we expect that we should be able to exceed Q2 nicely when that comes out. Gross profit, you can also see the momentum carried through there. Again, starting in Q3 through Q4 and then into Q1, we expect to get those margins back as we get through the year. And we do expect to exit the year in the kind of 31% gross margin range. Richard talked earlier about our commitment to clean EBITDA. You can see that bounced around a little bit last year, but we think we're on a good path here and with no restructuring and no other kind of one-time charges expected this year, we expect to be focusing more on clean EBITDA and it should equal adjusted EBITDA for us for the balance of the year. Here's a summary of our adjusted EBITDA and you can see on a trailing basis, We're still kind of in line with what we did last year, but there were some anomalies in our business last year. We certainly had some kind of government grant income that we won't be seeing this year, and that helped bolster our EBITDA, so our true adjusted EBITDA going forward, we've got good confidence in the direction that's heading.