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spk00: Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Data Communications Management Corp First Quarter 2023 Financial Results Conference Call. My name is James Lorimer, CFO of DCM, and I'm pleased to be hosting today's call. Joining me on the call today is Richard Kellam, our CEO and President. Following our prepared remarks, we will be moderating a question and answer session. As a reminder, this conference call is being recorded live and broadcast live. We'd also like to remind everyone that Richard and I can be available for calls afterwards if anyone has any follow-up questions. I'd like to 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. have posted a brief video 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 presentation today will also be added to our website for your reference along with a post view recording and transcript our detailed information is also available on our website and cdar please follow us on linkedin to keep up to date with other business developments and i'll now turn the call over to richard
spk02: Thank you, James, and good morning and good afternoon, good evening. I see there's some international investors on the call today or shareholders. So good afternoon, good evening to you and good morning to everyone. Here's what we want to accomplish on the call today. I want to take you through an update on our quarter, obviously, then talk a little bit about how we are becoming bigger and better together with the recent close of our transaction acquiring our donnelly canada or more canada corp and then we'll turn it over to any uh questions that uh that attendees will have for today okay so uh first off uh looking at our 2023 results i'm going to break this into uh our theme of of bigger and better business and I'll start off with the bigger side. Happy to report that we had a very, very positive quarter in terms of growth. Growth just under 10% at 9.8% versus a year ago. And to remind shareholders that was off of an 11.1% growth on the quarter last year. So good positive momentum at the start of the year. Great revenue quarter at 76.1 million up from 69.3 million a year ago. That growth of $6.8 million came from a combination of what we call expansion revenues, so growing revenue with existing clients, as well as new business development. We brought in several new logos and lots of new logos that we have the opportunity to land and expand, as we call. So lots of good kind of positive opportunities moving forward to expand that revenue. So really good, solid growth in the quarter. really pleased with the success that our commercial teams are having with our whole client or customer leadership agenda. Looking at that revenue momentum, you can see on this chart, we look at a three-year kind of time horizon, and you can see how we built that over three years. We've actually had six, this is our sixth consecutive quarter of year-over-year growth, so you can certainly see that we've got positive momentum in our business now and you know, if you look at this chart, anybody, uh, you know, it's kind of dialed into our call here, you know, from a, or, or on the, on the team's call, you can see that, uh, that, uh, that 76 one actually is higher than our quarter four and quarter four is generally our strongest quarter. So after a great start in quarter one, 2022 and great momentum, uh, also, uh, please report that our gross profit is growing faster than revenue, which is always positive. That means your gross margin is improving. And as I said to the team, gross margin is our best friend. And you can see our gross margin as a percent of revenue is 31.1%. And we're up a full 3.3 million in gross profit versus a year ago. So continued relentless focus on driving a better business and a bigger business and playing in the right margin pools in the category. You know, not all margin pools are treated equal and certainly the team has done a fantastic job at really kind of driving that margin agenda. And that 31-1 is actually one of our highest quarters ever. So we're certainly very pleased with the progress we're making on that, on that gross margin agenda. Okay, so very, very solid. And you can see the growth that we're achieving on gross profit and gross margin quarter on quarter. And this chart kind of illustrates the progress we've made over the last three years from 18.8 in 2021 up to 23.6 in 2022. So 4.8 million increase over the course of two years on that quarter. uh now uh i'm gonna sort of unpack this the only i'd say i'll call this a positive headwind we experienced in our business was we had to do a mark to market adjustment in our long-term rsus and dsus so there was a non-cash impact of 4.5 million in our ebitda to adjust for that significant appreciation and share value why i call this a positive headwind is We're certainly all shareholders, and we've all benefited from an increase in that share price. At this time in the quarter, it was a 63.4% increase in share price, and that obviously had an impact on that long-term comp, so it's a positive headwind. It's a non-cash accrual, as said, related to that long-term incentive comp. taking that into consideration and adjusting for that as well as, and James will talk to you in a minute, adjusting for what was a planned, very well-planned and very well-architected acquisition costs. Our adjusted EBITDA was up 30.1% of the quarter, so really, really solid progress. You can see that's 12.3 million. also really uh you know positive is as a percent of revenue we're up north of 16 percent we uh we gave some guidance that we saw a path to north of 14. you can see we're at this 16.2 percent of revenue once we adjust for those one time uh that one-time impact of mark to market and the um and of course the acquisition expenses so great positive um Momentum on EBITDA as well, obviously driven through or driven by accelerated revenue and improvement in gross margin, and then obviously operating pretty tightly from an SG&A perspective, which we'll see in a minute. If you look at our adjusted EBITDA progress over the last three years as well, you can see it's certainly very positive at the 12.3 versus 9.4 a year ago.
spk00: And James, you just want to talk to this chart? Yeah, just another presentation of some of the information that Richard previously described. You can see the performance on a comparable dollar basis compared to last year in the first quarter, breaking out the mark to market adjustments and the $6.1 million of acquisition and integration costs, which we had planned for. Richard will talk as we talk a little bit more about the acquisition of More Canada in a few minutes, how well prepared we are for closing and how prepared we were literally on day one for closing. So we're very well prepared for the integration and we're making great progress on that. EBITDA as a percentage of revenue, you can see 16.2% when we adjust for the one-time acquisition and integration costs, as well as the Mark to market adjustment. I would also point out the cash flow from operations was very strong in the quarter. We generated $6.3 million of cash from operations compared to $4.7 million last year. OK, thank you James.
spk02: So certainly a lot of progress in terms of building a bigger business. Now I'm going to talk about some of the key metrics around the better business that we have built and continue to build as well. From an SG&A perspective, SG&A was up slightly over a year ago at 5.2%. But the key metric we look at is how we're operating relative to revenue. And if you look at the far right-hand side here, we're 18.7% of revenue versus 19.7% a year ago. So this is actually what we call NOG, which is negative overhead growth. And it puts us in the range. We put the five-year plan out there, said that we want to be between 18 and 20% of SG&A. And I think at the time we were around 23 or 24. You can see we're 18.7 now on the quarter. So we're right kind of in that range, in the midpoint of that range. So very happy with the progress we're making in terms of kind of managing our costs and investing where those investments matter. So good progress in terms of managing SG&A and as I said, operating at negative overhead growth as a percentage of revenue. And this chart kind of illustrates that as well. If you look at our head count, we're pretty much flat at 916. I have said many a times pre-acquisition that we had the perfect footprint and now it was the need or the opportunity to grow off that footprint. We had zero restructuring expenses in 2022. And actually, we've had, other than the deal restructuring expenses, or the deal costs, rather, there's no restructuring either in the first quarter. But if you look at the right-hand side of this chart, what we're proud of is the revenue we're generating per headcount. You see that continues to improve. We're at $306,000 per associate now, up 2% versus a year ago, and up significantly, 49%, almost 50% since 2017. And This will continue to be a focus of our organization, our entire team, as we work the integration process with the acquisition as well. And we'll see these numbers improve considerably. Also, I've talked to shareholders about the progress we're making on our ESG strategy and ESG initiatives. You know, it's sort of in our better business theme. We put some targets to street around waste reduction, sustainability, footprint, carbon footprint reduction, renewable energy, lots of work happening on social and governance as well. So a lot of momentum over the last couple of years and And this momentum continues to accelerate as we move quarter through quarter. And maybe just to highlight one area that we're very proud of, we're proud of all this stuff, by the way, but one area that we're particularly proud of is the progress we're making on reforestation. And we have used, since we signed on to this program, which was the end of 2021, so we're just kind of a year and a quarter into it, uh we've actually uh reforested 812 000 trees and a hundred percent of our clients paper use is is uh is reforested and um and you maybe first i think i mentioned cheryl was a couple times before but maybe just remind them we actually flow this credit directly through to our clients so clients can get the benefit of the credit in their esg efforts or their sustainability efforts. And it's proven to be very, very favorable from a client standpoint. And we actually had our first client cross 100,000 trees reforested since the program began. And we actually gave a nice little award to that client of Friday last week. And they were certainly very, very happy, very proud of what they've accomplished and what we've helped them accomplish in terms of reforesting 100% of their pay-per-use. So a great program, fully committed to it and great you know, a great client momentum around this program as well. Other next area that we're building a better business in is digital. We've talked a lot about our digital acceleration, and we've got kind of five platforms that we bring to clients. Our FlexEnable platform, which is a workflow optimization platform, And then we've got four others that are more in the kind of pure ARR space. Just launched our personal video platform, and that's off to a good start. We've got a couple of key clients that we're working on some customized and personalized videos for. And you can see on the chart some of the other activities of the other platforms. The one we're really going to be putting a lot of energy behind, of course, is the digital asset management solutioning platform called Assemble. But if you look at the right side, right inside of this chart, early days, we're just kind of starting our digital journey. We can see we had 27% growth on the quarter, 1.5 million in revenue. You know, you can, you guys can straight line that to understand what that could look like on the year, but we certainly plan to progress well beyond, well beyond that straight line. So lots happening from a digital acceleration with our DCM digital team. I want to remind, you know, remind shareholders that, you know, we love print and we love digital and we want to be a, you know, our strategy is very clear, a digital, you know, a digital first company that does print versus a print first company that does digital. So they work very synergistically together, but really good progress in terms of building a better business and really getting very intentional and delivering success under our DCM digital team.
spk00: You just want to talk debt reduction, James? Sure. As everyone knows, debt reduction has been a real primary focus of ours over the past several years. At the end of the first quarter, our debt was down to about $22.5 million. down 17% compared to year-end, so continued progress there. And being in that position, as we've talked about before, really put us in a great position to be able to make the acquisition that we recently closed on. So we'll talk a little bit more about what our debt looks like in a few slides, pro forma at the transaction.
spk02: Okay, thank you, James. right now we'll talk a little bit about more canada corporation the reason we're calling more canada corporation is this is the legal entity that we acquired our donnelly canada's legal entity is more canada corporation so you'll see us referring to mcc or more canada corp and james just want to talk about performance on mcc in the quarter surely mcc continued to have very strong uh
spk00: momentum in the quarter. Their revenue was up more than 10% and their operating income and other metrics were also very positive. You know, really nice to see this momentum going into the deal. I will point out during the first quarter we were competitors. Now that we're collaborators, we're really excited about the opportunities to grow the combined business. We will be reporting in the second quarter a consolidated picture, and the reporting for Moore Canada will be effective April 24th. So we'll have basically two months plus a week of their numbers when we report the second quarter, and that's expected to be in early August.
spk02: Yeah, so maybe I'll just kind of amplify this a little bit. And in addition to what James said, A great start for the RRD Canadian organization or More Canada Corp in quarter one, growing at 10%. You know, we showed you our numbers growing at 10%. And remember, we were competitors in that quarter. And now we are collaborators and we kicked off a really accelerated move from competitors to collaborative ways of working sort of immediately upon close. So imagine the opportunities now moving forward. So after great start. So now we'll talk about the new DCM and and the better and bigger theme as a better and bigger company here and a little bit about kind of where we are on the post merger integration process. So we this is this is this is how we communicate how we are better together as two companies and we communicate this both internally and externally to clients. You know, one, eight key areas. One is around our expanded product offerings. This is a very nice kind of complimentary deal that brings more services and more product into our clients. Obviously, the superior service we can bring to clients, the incredible execution capabilities we now have together, the speed to market that we can deliver on those new products. We certainly have exceptional client leadership, and especially at the enterprise level. We've talked a lot about our top 250. You're going to be hearing a lot more about our top 400. We now have 400 enterprise clients who represent a significant percent of revenue. Our people, we've got exceptional people across our new co, the new company, post the acquisition. We've got some incredible innovation, not just in digital, but also some other product innovation. that we're bringing to clients as well, and innovation that's kind of Horizon 2 and Horizon 3 in the pipeline. And then, of course, we've got even more scale or greater scale to invest. So eight key areas why this is a great deal, why we're better together, and how we communicate this across to our clients. And lots of work happening post-merger on all of these areas. And I can tell you that we've come together very, very fast as an organization. We work Very well prepared for day one, thanks to all the work we were doing with Boston Consulting Group to help us get prepared, as well as how well our teams have kind of leaned into the program or to the acquisition. We've gone through this with shareholders and investors in the past, but worth kind of repeating, and I'll just kind of unpack this very quickly. The final purchase price was $130.8 million. The original number was $123 million. So it was just kind of working capital adjustments that took the price up. That was mostly around kind of inventory and payables and receivables. So the way to think about it is $100 million. million for the business and 30 million for three owned facilities. And I'm sure most of our shareholders know that three owned facilities came with the deal. The revenue, the performer revenues were about 520. I think they're around 525 to be exact. Expected synergies, we've communicated in the range of 25 to 30. In fact, we've got a very detailed program to deliver the 25. and opportunities to expand up to 30 and maybe even beyond that. So we're certainly well prepared. And those will be delivered over the next 18 to 24 months. The transaction was fully funded. We closed on the 24th of April. And also important for shareholders to know that those three owned facilities, we've already sold one of them. It's a facility out in Oshawa. And the net proceeds are $23 million. And that will close soon, certainly before the end of the quarter. And those proceeds will go directly into that $30 million debt facility that we have. So immediately into that debt stack. So happy to get that property sold. And that's an important property in our network as well out in Oshawa. So we're leasing that back. And then, of course, from a financing standpoint, Bank of Montreal, a great lending partner, stepped up and with a $90 million expended revolver, we also got the $30 million term loan facility, the one I'm referencing for real estate. Again, 23 of that 30 will be gone very shortly. And then Fiera Debt, who's been a great partner of ours for a number of years, kind of helped us with the deal, the financing. Leverage 3.25, deleveraging very quickly to 2.65 after those sale and leasebacks are completed. Okay, so I just want to remind shareholders of the deal and how it was structured. And I can tell you, we're off to a great and incredible start with the new team. We've also been working on updating our five-year plan because, of course, shareholders may remember that we put a five-year plan in place about a year and a half ago, so about four or five months after I joined. And obviously, we blew through that pretty quickly, so we needed to revise the five-year plan. And these are just some key metrics on it. We'll be going through a lot more details with shareholders. But we see a path to north of 5% growth. Remember our last five-year plan, we said between five and 10. So we're kind of still holding that range. North of 14% adjusted EBITDA. Within that time, that five-year horizon will certainly be less than one times debt to EBITDA. And we see a real acceleration in our MarTech growth at north of 60% over that five-year horizon with some of the new platforms that we've stood up and the bets we're making in the market. And of course, the opportunities we have with existing those 400 enterprise clients now. And all that Martech businesses is high gross margin. I will say, I said earlier that we're now thinking like a digital company that has print, not a printing company that has digital. Now, that's not to say print is bad. We love print. We wouldn't have done this acquisition if we didn't love print. But really enabling that print with digital technology or digital solutions allows us to deliver even more value, help simplify complexity for clients, deliver more value for clients. And then, you know, obviously the more we're embedded in clients' digital stacks, the more value we're delivering to that client and the higher level of retention. So it's a perfect, what we call kind of virtuous circle. You know, the print market is a $10 billion marketing in Canada alone. And depending on what data you look at is growing from, you know, from two, 3%, and lots of opportunities for us to expand our presence and business in that market and do that with technology to enable that workflow. Okay. So that's our strategy. A clear five-year plan, lots of working behind this, but clear commitment to drive accelerated growth over the next five years with real positive EBITDA progression as well. Okay. So those are the key areas we want to take you through, how we did in the quarter, how we're performing from a bigger business, from a better business, a little bit on where we are. post-closure of the deal. And I can tell you, we just hit the treetops for the meeting today, but we are very, very well planned and the teams have come together extremely well. I've done a lot of deals in my time and I'd say this is sort of the best execution that we have orchestrated and I've certainly seen a great start and very good momentum in our business overall. So I want to turn it over to any Q&As now.
spk00: Thanks, Richard. We'll now take questions from the audience. If you have a question and you're accessing the call directly through Teams, you can use the raise your hand feature and we will queue up questions. Alternatively, you can also use the chat feature in Teams and we will respond to chat questions as well. If you have dialed in, you can press star five to raise or lower your hand and pressing star six will mute or unmute your microphone and we'll let you into the call. Please introduce yourself once you're invited into the session.
spk04: Thanks. I have a question from, phone number ends 0469. Go ahead, please.
spk03: It's Chris Thompson calling from eResearch. How are you guys doing today? All right, Chris. Hi, Chris. All good. I just wondered, moving forward, looking at your your your going forward, are you are you looking to see that that's going to be sort of like the new normal with your expenses? Or is this just a one time sort of adjustment?
spk00: Yeah, but from a G&A perspective, on our own, we'd see that run rate being fairly steady, adjusting for that $4.5 million that we talked about earlier of non-cash adjustments. Other than that, our SG&A on a standalone basis should be pretty consistent. We will be reporting consolidated numbers for the combined company in early July once we file a business acquisition report. And at that point, that'll have the pro forma numbers for Moore Canada Corporation on a standalone basis. They currently report under US GAAP and we'll be converting that to IFRS. And then we'll be also providing pro forma statements that reconcile as if the two businesses had operated together in 2022 and updated kind of Q1 numbers on a pro forma basis as well.
spk03: So will that be, you're saying that's July, so that'll be Q3 will be the first time you'll be presenting the combined company, so Q2 will still be separate?
spk00: No, so we'll file what's called a business acquisition report. That'll be filed on CDAR in early July. And then starting in Q2, we will be reporting on a consolidated basis. We'll report Q2, I think our plan to report Q2 is around August 10th right now. And that first kind of quarter, including more Canada, will have basically two months plus a week of their results in the quarter. So it won't be a full quarter for them. So we'll do our best to explain what a full quarter would have looked like when we report Q2.
spk02: So, Chris, I just want to build on your question around SG&A as well. We are holding firm with our commitment. The plan we put to the street, the five-year plan, that ranged between 18 and 20. You can see we're 18-7 on the quarter, and we're committed to that range over the course of the next five years.
spk03: Okay. And then for the acquisition costs for this quarter, is that sort of the high-water mark?
spk00: Yes, it is. Acquisition costs should come down quite a bit from there. That was largely due diligence costs and consulting costs kind of in preparation for the integration, which were pretty much peaked in Q1. You saw when we reported Q4, I think we had about 1.8, 1.9 million of deal costs that were in Q4. That'll come down considerably in Q2.
spk03: okay and just the last question i mean you you covered off the tech growth uh it seems to be moving slowly but you know i mean quarter over quarter you know high percentage gains are still a low percentage um just looking at you talked last year a little bit about us growth and i know that this acquisition uh probably put a little bit of a dent in that but are you still looking at um the u.s markets
spk02: Yeah, we're certainly, we are still looking at it. The interesting thing on this acquisition, it came with a business, a business called Annen and Bird, which is a large format printer, part of the Donley Group, part of Moore Canada Corporation. And 75% of the revenue is actually done in the U.S., Chris. So this actually accelerates some of our intentionality for the U.S. marketplace as a result.
spk03: Okay, great. Those are my questions for now. Thanks. Great question. And I look forward to seeing the changes.
spk01: acquisition thank you chris that's chris uh do we have any further q a uh we have someone in the chat line here
spk04: Oh. Right there. Sorry there.
spk00: So we have a question here from one of our long standing shareholders. Great quarter one guys. Any update on the assembled standalone rollout? Yeah, sure.
spk02: So, you know, shareholders, reminding shareholders that we have, we went to market with Assemble, well, about a year, year and a half ago with a white label solution, which we've added some features and functions around. We've actually been quite successful early days with that, with a few key clients. And in fact, we just, We just secured a large client with a new assembly win a couple of weeks ago. We haven't reported on it yet, but we will soon. Well, we've gone to market with a white-labeled, we call it sort of a tech-enabled white-labeled solution that we've added value to. We've also been building our own platform, and we're now in beta. So we've got beta clients as well, beta clients and beta users. and then we'll be launching that in uh august september uh is will be our go live date with our you know kind of fully uh fully built out assemble platform so you'll be hearing a lot more we're actually extremely excited about it uh so it's a fantastic platform that uh that the team has built um we've got a clear unique selling proposition in the marketplace and again you'll be seeing and hearing a lot more about that once we go live but that is you know august september when we go live with our own kind of fully built out assemble platform.
spk00: In the chat, we have a question from Manny. Adding back the acquisition cost of $6.1 million and the $4.5 million non-cash charge, non-GAAP EPS for the quarter is closer to $0.17. I did a little bit of math on that earlier. I got about 12.5 cents on a basic basis and about 11.6 cents on a diluted basis. That's applying a 25% assumed tax rate on the differences. So in our tables in the MD&A, we report adjusted net income of $2.1 million. If we're to tax effect that and adjust for the That adjusted net income includes an adjustment for the $6.1 million of, sorry, $4.5 million of mark-to-market adjustments and $6.1 million of the deal costs. So I get to kind of an adjusted net income of about $5.5 million when that's tax affected. So call it 11.5 to 12.5 cents, either basic or fully diluted.
spk04: Okay, are there any further questions?
spk00: Okay, if there's no further questions, no? Yeah, I don't see any further questions. So thanks everyone for attending our call and thank you for your interest. As a reminder, Richard and I can be available after the call if there's any follow-up questions. Certainly hope everyone enjoys the rest of your day.
spk02: Yeah, I'd just like to say thanks to all of our, all of I'll call it the new DCM associates, right? All of our associates across the company for delivering such a solid quarter. We're making great progress in our business, very pleased with the momentum, and we certainly planning to continue to deliver the momentum as now a bigger and even a better company. So thanks for joining us today and excited to continue to report on progress.
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