DATA Communications Management Corp. (DCM) Earnings Call Transcript

Good morning, ladies and gentlemen. And again, apologies for the delay. Thanks for standing by, and welcome to our Second Quarter 2022 Financial Results Conference Call. I'm James Lorimer, and you've previously met Richard Kellam, who will be doing most of the presentation today. Following our prepared remarks, we will be moderating a Q&A session. As a reminder, this conference call is being broadcast live and recorded. We would 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 SEDAR. We have posted a brief message from Richard along with a summary of our results and key initiatives for the past quarter on our website in the form of an infographic and a video. Our detailed information is also available on our website and SEDAR. You can also follow us live on LinkedIn to keep up with some of our exciting commercial insights on relevant market trends and customer case studies. I will now turn the call over to Richard.

Thanks, James. The deck I'm going to review today is up on our website, including an infographic as well that gives the full kind of color on the results in the quarter. We talk about how we're continuing to build a better and bigger business here. And we certainly have a fantastic momentum in our business right now. I've used this word over the last three or four quarters that momentum builds momentum, and we're certainly building momentum as you'll see in our quarter 2 results. I'm going to start off with talking about how we're building a bigger business and the results around bigger. First, from a revenue standpoint, we are very pleased on our revenue performance this quarter, up 23.4% versus quarter 2 last year. So certainly, one of our best quarters in many years. And that brings us to $68.1 million on the quarter versus $55 million a year ago. So up close to $13 million versus prior year. So a very good revenue performance in the quarter and some great client momentum that's delivering that revenue performance. From a gross profit standpoint, you can see that our gross profit actually grew faster than revenue, which means that our gross margin has improved, and that's despite some of the raw material inflation we're experiencing. So the team has done a fantastic job to manage that inflation and continue to drive value for the product that we're bringing to our clients. Our total gross profit was $20.4 million on the quarter versus 15 a years ago. And as I said, 30% of revenue, so exactly on target. And we're well north. We're $4.6 million up versus prior year. So again, despite some of the raw material inflation and headwinds we've experienced, the team has done a great job to ensure that we're getting fair value for that inflation. We've had some very good new business wins on a year-to-date basis. I think last quarter, we reported $10 million or $11 million in new business growth. Year-to-date, we're north of $22 million across multiple verticals, and 100% of that new business is what we call tech-enabled. So we're winning, not because we're great printers. Of course, we do that well, but we're winning from the technology and the value we bring to clients in terms of helping them simplify complex workflows. So some great success in terms of new business. And we expect that new business win [ visit momentum ] rather to continue through the balance of the year. The team has done a fantastic job continuing to build a growth muscle. So very pleased with the new business wins. Very happy to report as well that our tech-enabled subscription service fees are at $2.4 million on the quarter, up $3.5 million year-to-date. And you can see we had a big acceleration on the quarter at 112% growth versus a year ago. And this is really just as a result of getting very intentional and accelerating our monetization of our digital services with clients. So we expect this to continue, obviously, as we continue to focus on this area. So really good progress from a digital acceleration and subscription service perspective. On the better business side...

Thanks, Richard.

The better business side -- I just wanted to advance the slides. Our SG&A is down 3.8%. So very good continued kind of focus on cost control at $13.8 million versus $14.3 million a year ago, and we're exactly at 20.2% of revenue. So we're right in the range we put to the discrete several months ago. And our SG&A, despite the higher revenues, as I said, the team has done a fantastic job at controlling costs and maximizing productivity per associate as you'll see in a minute. This slide here. If you look at our employee productivity, our employee account is 919 in the quarter. If you look at the slide on the right-hand side, our productivity or revenue per employee is now at $277.6 our plan is to get that north of 300,000. And that's well up over the last 5 years, up 35%. So certainly, we're doing a lot more with less. And the team has done a fantastic job to deliver this growth with the reduced headcount and more productivity and efficiency. So real good progress on employee productivity. Restructuring, we made a commitment at the beginning of the year, very clear to the Street that we will have zero restructuring in 2022. Restructuring is behind us. We have absolutely perfect footprint. We've got the perfect size of the organization to grow off of. And we're happy to say that we still have a zero restructuring in the quarter and zero restructuring year-to-date. We had about $900,000 in restructuring a year ago. So that's net favorable. And we will continue to commit to zero restructuring in the year. As I said, we've got a perfect footprint and we've got a perfect-size organization for us to accelerate growth. And you saw that growth delivery, that revenue delivery in the second quarter as well as the first quarter, 11% in the first quarter, 23.4% in the second quarter. We're very happy to report that our EBITDA -- now this is clean EBITDA, not adjusted because we have zero restructuring, is up 48.7% versus a year ago. And that's a full $9.5 million versus $6.4 million a year ago. So really good progress as we focus on building a bigger and a better business in delivering this through to EBITDA. So good solid EBITDA delivery. And looking at net income, what can I say, very, very positive results on net income as a result of how we're deploying our resources and how we're focusing those resources. 490% growth in net income, $3.8 million this year on quarter 2 versus $600,000 a year ago. And year-to-date, net income is about $7.5 million. So good -- very good progress on net income as well. And just finally, the progress we're making on ESG. We have a very active program for our entire enterprise. 16 ESG committee members, a lot of activity on environment, social and governance. A couple of highlights on the environmental side. We committed to replant 100% of our paper use since we entered into this program in November of last year. We've used 27 million pounds of paper, which equates to 332,000 trees, and we have replanted 332,796 trees. So full reforestation for every bit of paper that we use. I'm real happy with that progress. And lots of progress on the social side and governance side as well. Okay. So over to James for a little bit more detail on our financials.

Thanks, Richard. Richard spoke mostly about our kind of second quarter comparison to second quarter last year. So I'm going to talk a little bit more about the first half comparison to last year. As you can see here, our revenues of $137.4 million are up almost $20 million compared to the same period last year. And if you'll recall from our year-end report, we talked about how we had kind of 3 halves of revenue that were flattish around $118 million. If you look at the last half of 2020 and then the first half of '21 and the second half of '21, they're both -- all 3 of those periods were about $118 million. So really showing kind of accelerated growth here. We're also pleased with gross profit. As Richard mentioned, despite headwinds year-to-date, we're sitting at about 29.7% gross margin. And that's crept up a little bit from the end of the first quarter, and that's really as we're getting pricing pass-through to our clients, we're starting to creep that margin up. So we continue to be optimistic that we can continue to grow gross margin through the balance of the year. SG&A, again, a good story here, $27.4 million, which has improved by almost $2 million compared to last year. Year-to-date, we had $4.3 million of restructuring expenses last year, and we're committed to continuing to have zero expenses through the balance of the year. EBITDA year-to-date is 18.9%, and really pleased that, again, we can report clean EBITDA results getting close to 14% of revenue. We've set out kind of long-term objectives, which I think most of our shareholders are familiar with, growing ultimately EBITDA into the kind of 18% to 22% range over the next 5 years. So starting to kind of continue to kind of work that way. I think that it's important to say, we also had significant wage subsidy expenses or income last year, and we, of course, have not received any this year. A couple of charts here just to kind of put this into perspective on a quarterly basis. Just this chart here shows comparable strength compared to last year. I think what's also important to point out is that Q2 is typically our weakest kind of seasonally adjusted period. And as you can see, graphically, we're only off about $1.2 million compared to the first quarter. So we think our momentum is going to continue through the balance of the year, and we should be able to continue the pace ahead of what we did last year. Gross profit is kind of mirroring that trend and certainly pleased on lower levels of revenue in the second quarter compared to the first quarter that our gross profit is actually [ marching ahead ]. So a positive trend there again. Here's a chart that shows EBITDA. And we actually had kind of decent Q3, Q4 last year on an adjusted basis. But if you strip out the restructuring expenses, we really had $6.4 million and $5 million of clean EBITDA. We are certainly pacing ahead of where we did last year, as you can see through the first 2 quarters. Here's a chart that shows adjusted EBITDA, and most analysts and others kind of look at us on an adjusted basis. So we're about $35.5 million of adjusted EBITDA on a trailing basis. And we think that certainly will -- as we kind of get the benefit of lower restructuring expenses, going forward, that will certainly help free up some free cash flow to continue our efforts to pay down debt. This chart is just a brief summary to kind of separate out our term debt and our revolving credit facility. Term debt is down 17.4% from the end of the year, so we continue to advance that. We're about halfway through the year, and we've told shareholders that our fixed-term debt is going to be in that kind of $12.5 million to $13 million in aggregate that will be repaid through the balance of the year. So we -- but we're about halfway through that. Our revolving credit facility did grow. But as we've talked about, that's because of the really kind of unusual markets we're in. And we've got significant safety stock to meet our anticipated production needs through the balance of the year. So we do see that coming down by the end of the year.

All right. So looking at all those numbers, for those that are looking at the screen and those not, we've got a chart here that looks at performance on quarter 2, year-to-date performance and trailing 12 months. First, on the revenue side, as I mentioned, 23.4% growth in revenue on the quarter. So fantastic growth and great success. And as I said, fantastic client momentum, 16.8% on the year so far, halfway through the year and 8.4% on a TTM, a trailing 12-month basis. That puts us at $255 million on a trailing 12 months. So up from $235 million and change at the end of the year. So great progress on revenue. On the earnings or gross profit side, rather, we talked about 29% growth in gross profit. So love seeing where gross profit is actually ahead of revenue growth. So that obviously leads to a higher gross margin. Our gross profit on a year-to-date basis, 17.4% growth versus -- and annualized from a TTM perspective, 8.7% growth. Okay? So all of those kind of ahead of revenue growth. Net income, I already referenced, 490%, 212% on a year-to-date basis and up 324% on a TTM. And finally, EBITDA, I already referenced the 48.7% growth in EBITDA in the quarter, so very solid growth. And as I said, that's clean EBITDA. That's what we're committed to this year. 38% growth -- I just lost a slide. 38.1% growth on a year-to-date basis and just north of 20% -- 20.8% from a trailing 12 months. So very positive momentum through the first half of 2022, and we are expecting that momentum to continue for the balance of the year, just given the client momentum that we've got and the excellence we're delivering out in the -- well through the entire enterprise. So big thanks to the entire DCM team for delivering these results, and we look forward to the second half of the year.

So thanks, everyone, for your patience today. We will now turn it over for questions.

[Operator Instructions]

There's one hand. That's James from dial-in.

Yes, thanks. I have a question from phone number ending 2793.

It's George dialing in on behalf of Noel. Congrats on another great quarter, guys. Just a few questions here. In relation to raw materials and supply chain challenges, related challenges, to what extent were you guys able to pass through the input cost increases to customers in the second quarter? And how do you expect this dynamic to evolve in the second half of the year?

Yes. No, great question. And just given the competitive nature of the industry, I'm not going to talk too much about pricing. But if you look at our gross margin growth or gross profit growth relative to our revenue growth, you can see, that actually was quite favorable. And given the significant increases in raw materials, obviously, we've had to push hard to get pricing through. A majority of our contracts or a high percentage of our contracts actually have raw material index pricing built into them. Now some of that pricing obviously lags the increase in raw materials. But I can tell you, the team has done a remarkable job, ensuring we're getting a return on the value of [ rate declines ]. So that kind of implies that we are and we have been very successful in ensuring that we're getting pricing through. And yes, look, we -- it's a volatile and dynamic market. And I can tell you that our commercial team knows how to manage well and navigate well through this dynamic market. And you're seeing that in the results. So we're expecting and super confident that if there is more pricing that needs to be taken, we can certainly achieve that. Now I think there's a second bit of your question. When are we expecting some normalization in the market? We're actually forecasting that in kind of into the early part of 2023. We expect the market to still be pretty challenged in 2022. But the supply curve and the demand curve will kind of equalize, we believe, kind of in the early part of next year, end of this year but probably likely into the early part of next year.

Okay. Got it. Got it. And are you guys seeing any major changes or trends in size or velocity of customer orders due to concerns about inflation and general economic conditions at all?

Go ahead, James.