Data Communications Management Corp.

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Data Communications Management Corp second quarter 2023 financial results conference call. I'm James Larmour, 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 will be moderating a Q&A session. As a reminder, this conference 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 you might have. Before we begin, I'd like to remind everyone that we will be referring to forward looking information as well as non IFRS measures 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 from last night, and more fully within our public disclosure filings on CDAR. We 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. This presentation 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 also follow us on LinkedIn to keep up to date with other business developments. I'd now like to turn the call over to Richard.

Thank you, James, and good morning and good afternoon, good evening for anybody joining us in other time zones. We had a very exciting third quarter. Looking forward to unpacking that quarter with shareholders today. Here's what we want to do from an objective standpoint. We're going to first start off with an update on our merger integration, and then we'll talk about our consolidated results on Q3 and year-to-date, and then we'll turn it over for any Q&A. So first with the merger integration, It's progressing very, very well and ahead of target and pretty much on schedule. We talked to shareholders many times about our focus areas, those being operational, organizational, procurement, and revenue. And originally we put a target to the street of 25 to $30 million. We're happy today, very happy to be revising that target to between 30 and $35 million in annual savings. So we're certainly off to an incredible start, identified a lot of opportunities across these four areas, which I'll talk about in a minute. And I will say, and you'll see it later in the deck that to date, We have generated $17.5 million in annualized synergies that will flow through in 2024. So about 53% of that midpoint target of 30 to 35. We'll talk about that in a little bit more detail when we get into the deck. So off to a very good start. Here are some details in and across each of the areas, starting with the operational initiatives. We will be consolidating and optimizing our operational facilities from 14 plants to 10. That consolidation is already announced across our network. That will increase our average revenue per plant to north of 45%, so 45% increase. The first plant that we are consolidating is Edmonton. And we've moved very quickly on that into our Calgary facility. And that's all happening in December of this year. Three other consolidations are going to happen over the course of the next 18 to 24 months. Obviously, we need to ensure that we're protecting client experience. And of that 17.5 million, 18% of it is coming from operational initiatives. So roughly 3.75 million of that 17.5 million that we've already secured to date. Obviously, much more will flow through as we consolidate the other three facilities over time, over the next 18 to 24 months. So great progress from an operational perspective. Moving on to organization. Happy to report that our sales, or we call it our commercial team, is now fully integrated. So now one team that's responsible for client leadership. We've optimized our spans and layers across all functions. We've completed payroll integration from four payroll systems to one. So fantastic effort from our HR team to deliver that payroll integration process. We're in the process of benefit alignment. The annualized impact on organizational initiatives is roughly 9 million. It will flow through in 2024. So 51% of that 17.5 million 2024 savings are coming from the organizational initiatives that we have already implemented and executed. So great progress from our teams here. On the procurement side, again, great momentum. We've optimized our vendor base. We've leveraged our scale. We've centralized purchasing and outsourcing. We've delivered or will deliver $4.7 million in annualized savings in 2024, and that's 27% of that $17.5 million. And then on the revenue side, see the growth in issues that we're delivering. Our priority focus has really been on commercial momentum or growth right from the day we closed this deal. We have very, very strong collaboration and cross-selling across the business. And we've already delivered some sizable new business wins across retail, healthcare, QSR, manufacturing, and transportation. Just over $18 million in new business wins since we closed the transaction. So very proud of the progress we're making from a commercial leadership perspective. Okay, so our integration initiatives are very much on track. And as I said, you know, fantastic plans to deliver the 30 to 35 million of which 17.5 million is already initiated and will flow through in 2024. Okay. All the others are going to happen, obviously, over the course of the next 18 to 24 months as we've communicated several times to shareholders. So great progress and great team that's working to deliver these initiatives. Now I'll move on to talk about the quarter, and I'm going to start off with what we're doing to build a better business. So I'm going to start off with SG&A. You can see that our SG&A as a percent of revenue is down by just over one point at 20.4%. Obviously, the total SG&A is up in value, obviously because of the acquisition, but the percentage is down. So very good progress there. And you'll see on the next slide when we talk about year-to-date, our year-to-date SG&A as a percent of revenue is 19.5%. So, well, you know, in the range that we put to shareholders of 18 to 20. And we certainly see opportunities to continue to progress to the low end of that range. Okay, so really good progress on continuing to build a better business while we build a bigger business at the same time. And then just a quick look at restructuring expenses. Our restructuring expenses on the quarter are $7 million, and that reflects a lot of the announcements that we made in terms of consolidating organizations and operations. And we obviously booked those expenses, the people expenses, once we make the announcement. The cash expenses actually happen later. So those are reflecting in the quarter. $9.7 million in restructuring year-to-date. and exactly what we uh we expected sort of a one-to-one uh a one-to-one payout acquisition expenses were a lot lighter on the corner at 200 000 so most of the expenses that we incurred um you know on the deal costs have been complete and they're behind us and then as i already mentioned in the upfront section uh 17.5 million in annual savings to date from integration initiatives so You know, already well identified and those will flow through as we enter in, well, as we exit out of this year, but importantly, as we enter into 2024. Okay. Also have to report headcount productivity improvements. We've shown this chart to shareholders many times. If we look at the right-hand side of the chart, you can see that our revenue per employee is now north of $300,000, so $306,000 per employee, up 2% over last year and about 36% over the last five or six years. So very good improvement and progress there. And as we continue to deliver our synergies in operation and organization, you'll see that revenue per employee continue to increase as well. so very good momentum there in terms of uh productivity productivity improvements also happy to report that uh we are and have been very active in our esg efforts and one that we are and have been proud of is the uh is the reforestation our environmental reforestation efforts and since we started this program which is little less than two years ago we have uh we have reforested 100 of our paper use so about 90 million pounds of paper that we've used in our workflow for clients and we've reinforced that 100 of that so that's equivalent of just under 1.1 million trees so we we celebrated the uh the cross of one million trees in september and uh And this has been an incredible program for us. You know, we're very committed to deliver a sustainable environment. And it's a great program. And those credits flow through to our clients as well. Okay. And on our DCM digital journey, we have not taken our eye off the ball here at all. In fact, we are all in on our digital efforts. with our DCM Flex platform with a digital asset management solutioning, some of the work we're doing on personalized video, our marketing campaign optimization, and then our OptiChannel platform. And this is the first time we're actually reporting the consolidated DCM digital revenues, and those revenues include software revenues and marketing services or, sorry, digital services revenues, managed services revenues. And you see the chart here, we're actually up over 255% over a year ago. And we're just under $10 million a year today in those software revenues and managed services revenue. So great progress on our DCM digital journey as well. And a lot of exciting stuff that we're working on as we enter into 2024.

James, you want to talk about debt reduction? Sure. We continue to focus on debt reduction. At the end of the third quarter, our total credit facilities sat at about $118 million. These are down a little over 18% since we closed the acquisition, which, as everyone I think will appreciate, was fully financed with debt. Slide here. We talk about kind of net debt. And at the end of the quarter, we had a $22.5 million cash balance. So we ended up with net debt at about $95.5 million. We've been very active through initiatives to complete the sale and leaseback of our Oshawa plant, which was announced last quarter, and through the equity private placement we did back in May to pay down debt. We're also pleased to announce that we have entered into agreements to sell both our Fergus and our Trenton facilities, which are the two remaining owned facilities that we acquired as part of the MCC acquisition. Collectively, those two sales will generate about $15 million in net proceeds. Shareholders will recall when we first did the acquisition, we had allocated about $30 million for the real estate. Once everything is said and done and these transactions close, we'll actually have generated about $38 million. That kind of term loan that was associated with the credit facility will be fully paid down by the end of this year with the sale of our Fergus facility, which is expected to be completed before the end of 2023. And then we'll have some excess cash to apply to our credit facilities when the Trenton facility closes, and that's expected early in 2024. Okay.