DATA Group Ltd. (DGPIF) Q4 2014 Earnings Conference Call March 5, 2015 11:00 AM ET
Executives
Michael Suksi - President and CEO
Paul O'Shea - CFO and Corporate Secretary
Analysts
Rob Borda - Rob Borda Consulting
Kevin Tracy - Oberon Asset Management
Operator
Good morning. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the DATA Group Limited Fourth Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].
I will now turn the call over to Michael Suksi, President and CEO. You may begin your conference.
Michael Suksi
Thanks Mike. Good morning, everyone and thank you for joining us to review the Data Group's financial results for the full year and the fourth quarter of 2014. Paul O'Shea, our Chief Financial Officer is with me. Before we begin, I'll remind you that our remarks and our answers to your questions today may contain forward-looking information. This information by its nature is subject to risk and uncertainties that may cause actual events or results to differ materially from any conclusion, forecast, or projection contained in our remarks or answers.
Certain material factors or assumptions were applied in drawing the conclusions, forecasts or projections included in our remarks and answers and additional information about the applicable risks factors and assumptions are contained in the DATA Group's annual and quarterly continuous disclosure filings which are available on SEDAR. Also, in today's conference call all references to the DATA Group will mean its various business divisions and affiliated entities. All right, let's get started.
Data Group earned net income of $4,479,000 or $0.19 per share in the year end of December 31, 2014 and this is versus a loss in the previous year. I'm particularly encouraged by our results in the second half of 2014. As revenue increased by 1.4% and adjusted EBITDA stabilized compared to the same period in 2013.
During the year Data Group repaid $6.5 million of debt bringing total indebtedness to $90.1 million. Also during the fourth quarter, we extended the term of our senior debt credit facilities to August 31, 2016. One of our key goals in 2014 was to stabilize our revenue and position ourselves for longer term revenue growth. This is something I've been talking to you about for some time.
During 2014, Data Group had sales of $313 million, a 1.2% decline from 2013. This $313 million included strong growth from our US customers. During the second half of 2014, as I mentioned overall revenue grew 1.5% compared to the same period in 2013. So we are seeing signs of stability and potential growth. We will continue with our plans to add new sales talent, win market share in our traditional print business, invest in the key growth areas we have identified; which are labels, marketing print and associated digital communication. We will bundle our digital services with our print offerings and we'll continue to focus on our targeted expansion in the United States.
In the fourth quarter, we made a number of investments in this regard, highlighted by new sales leadership in Western Canada, the creation of a dedicated, new marketing function and a decision to upgrade our print capability at our new Calgary facility that will come on-line in early 2015.
We are reducing our cost as well to balance productive capacity with demand in declining markets while investing selectively in growth areas. When we started the restructuring process in 2013, we had a target to take out 35% of our manufacturing floor space and 20% of our headcount at all levels. We are well advanced in achieving these targets.
By the middle of 2015, we will have reduced our manufacturing floor space by 26% and we will achieve our headcount reduction target of 20%. While doing this, we have successfully sublet three of the existing facilities for which we had ongoing lease commitments. Now I mentioned a moment ago, we have achieved one of our targets. I want to be clear, we are continuing with these initiatives and look forward to reporting further progress and reporting on that in the future.
Last fall we announced plans for the consolidation of four existing manufacturing locations in Western Canada into one new, modern print and marketing communications center located in Calgary, Alberta. We are on schedule to finish this project by the end of the Q1, 2015 as originally planned and previously communicated. Since last fall, we have identified further savings opportunities; we expect to act on in the first half of 2015. These will come from the reorganization of several locations from process improvements and from strategic sourcing initiatives.
If I include the Western Canadian consolidations that were previously announced. We anticipate annual savings of between $9 million and $11 million as a result of these actions, with associated restructuring charges in the first half of 2015 of between $5 million and $6 million. I'll note the majority of these actions and associated restricting charges will take place in the Q1, 2015.
Our industry has seen wholesale changes over the last number of years, mostly due to rapid technological advances. Our competitive environment has become even more challenging as our industry transforms to more digital forms of communications and adapts to new client demands for blended print and digital solutions.
The DATA Group has responded with a transformational plan that establishes clear goals, all of which aim to enhance shareholder value. As I've just described for the past few minutes. Our transformational plan is showing results in the three key areas we have targeted which are debt reduction, revenue stabilization and then growth and cost reduction.
For 2015, DATA Group expects to report higher net income and continued reductions in total indebtedness. To support this, our revenue growth and cost reduction strategies will continue. The associated restructuring expenses will be more than offset by efficiency gains. Management has set the following financial targets for 2015.
Net income of at least $6 million. Debt reduction of at least $10 million. Revenue equal to or better than 2014 and lastly, return on Shareholders' equity of at least 25% after taxes. I'll now turn it over to Paul to go over the specific financial results for the fourth quarter and full year of 2014.
Paul O'Shea
Thanks, Michael. For the quarter ended December 31, 2014, the Data Group reported revenue of $80.4 million, a decrease of $1.8 million or 2.2% compared with the same period in 2013. For the year ended December 31, 2014 Data Group recorded revenues of $317 million, a decrease of $3.8 million or 1.2% compared with the same period in 2013.
The decrease in revenues occurred primarily in the first quarter, second quarter and fourth quarters and was primarily due to orders from existing customers for print-related products and services which did not repeat in 2014, aggressive pricing by DATA Group's competitors supplying similar products and services, technological change and a change in product mix.
Third quarter revenues increased as a result of an increase in sales to existing customers, an improvement in product mix and price increases passed through to customers for increased material costs. For the quarter ended December 31, 2014 cost of revenues increased to $6.16 million from $61.3 million for the same period in 2013. Gross profit for the quarter ended December 31, 2014 was $18.7 million, which represented a decrease of $2.1 million or 10.3% from $20.9 million in the same period in 2013.
Gross profit as a percentage of revenues decreased to 23.3% for the quarter ended December 31, 2014 compared to 25.4% for the same period in 2013. For the year ended December 31, 2014, cost of revenues increased to $238.6 million from $236.9 million for the same period in 2013. Gross profit for the year ended was $74.6 million, which represented a decrease of $5.5 million or 6.8% from $80.1 million for the same period in 2013.
Gross profit as a percentage of revenues decreased to 23.8% for the year ended December 31, 2014 compared to 25.3% for the same period in 2013. The decrease in gross profit was attributable to lower revenues and the impact of competitive pricing and changes in product mix. The decrease in gross profit was partially offset by cost savings. These cost savings included headcount reductions, the closure of certain manufacturing locations and the renegotiation of agreements for a number of raw material input costs.
Selling, general and administrative expenses for the quarter ended December 31, 2014 decreased $500,000 or 3.2% to $13.7 million compared to $14.2 million in the same period in 2013. As a percentage of revenues, these costs were 17.1% of revenues for the quarter compared to 17.3% in 2013. SG&A expenses for the year ended December 31, decreased $2.8 million or 4.6% to $57.1 million compared to $59.8 million for the same period of 2013.
As a percentage of revenues, these costs were 18.2% versus 18.9% in 2013. The decrease in SG&A expenses for the quarter ended and year ended was attributable to the benefits realized from cost saving initiatives implemented in 2013 and 2014 which included simplifying DATA Group's organizational structure and centralizing a number of functions.
For the quarter ended December 31, 2014, adjusted EBITDA was $6.2 million or 7.7% of revenues. Adjusted EBITDA for the quarter ended December 31, decreased $1.9 million or 23% from the same period in the prior year and the adjusted EBITDA margin for the quarter, as a percentage of revenues, decreased from 9.8% 7.7%.
For the year ended December 31, adjusted EBITDA was $22.5 million or 7.2% of revenues. Adjusted EBITDA for the year ended December 31, 2014 decreased $3.1 million or 12.1% from the same period in the prior year and the adjusted EBITDA margin for the year, as a percentage of revenues, decreased from 8.1% in 2013 to 7.2% in 2014.
I'll now turn it back to Michael for some closing remarks.
Michael Suksi
Thanks very much, Paul. During 2014, our transformational plan showed a number of positive trends. During 2015, we intend to intensify, I underline intensify our focus and accelerate our results regarding our key goals of cost reduction, debt reduction and revenue growth. We will do this with a sense of urgency well also being mindful of maintaining the operational business stability; put in other words operational excellence at meeting our customer's service level expectation that is a pre-condition to maintaining our value customer relationships.
I'd like to thank you for joining us today and I turn it back to Mike to open it up for any questions.
Question-and-Answer Session
Operator
[Operator Instructions] your first question is from the line of Rob Borda with Rob Borda Consulting
Michael Suksi
Good morning.
Rob Borda
Good morning, gentlemen. How is everybody today?
Michael Suksi
We're fine. Thank you.
Rob Borda
Beautiful. Just a question about revenue. You stated your revenues included strong growth from US customers. My question will be, what percentage of overall revenue is attributed to US customers say in 2013 and 2014? And secondary, it was the gross profit that you're making from those US customers, is that more and less than your annual gross profits which run around 22%, 23%?
Michael Suksi
I'll give you a range on this answer just because for confidential reasons, I don't want to get too specific, but for 2013 our US revenues would have between 1% and 3%, I'll give you that range and for 2014 they increased by approximately in the range of 50%. The margins are so far above average compared to what you see overall for DATA.
Rob Borda
What would be your plans for 2015 for additional US penetration?
Michael Suksi
Well again for competitive reasons, I won't go into specifics, but these strategies that we've outlined in the past has been that we will have quite a targeted focus in terms of how we stand in the US and more specifically what that means is that, our main focus is to focus on taking our very good relationships that we have with the number of Canadian customers. Where those customers also have US operations and therefore there is a natural extension of the Canadian relationship into the US. Which arguably gives us a competitive advantage compared to simply trying to go into the US and find new clients?
So that's the strategy we've been working on for some time and we've had some success, it's slow but steady improvement as I described and our main thrust for us will be to continue with that focus. Secondarily, I'll one other point that is different from what we've talked about in the past for reasons that it will be obvious given the current exchange rate between CAD and US Dollar. We do think there will be some again, selective and not overly material in the overall scheme of things, but there will be some opportunity to go after selected print opportunities in the US taking advantage of the dollar. Of course that means manufacturing product in Canada.
Rob Borda
Fantastic. Thank you very much and have a great remainder in 2015.
Michael Suksi
Thanks for your question.
Operator
[Operator Instructions] the next question is from Kevin Tracy with Oberon Asset Management
Kevin Tracy
Good morning, thanks for taking my questions. First question is on your EBITDA margins. You lost about 100 basis points during the year compared to 2013 given that you expect revenue to be flatter up and you're pushing forward with these cost cutting initiatives. Do you expect to get a good chunk of that back or will pricing declines offset that?
It would seem as though your net income guidance such as margins should improve.
Michael Suksi
The last part of your question you just trailed off, could you just repeat the last frame [ph]?
Kevin Tracy
No I was just saying, your net income guidance for next year, it seems to suggest that those EBITDA margins will improve in 2015.
Michael Suksi
Sure. Yes, well I think you hit the nail in the head. Kevin, even though we've had significant cost reductions at the same time with regards to our EBITDA. The reality of our market place as I alluded to in my comments at high level is that, it's becoming increasingly competitive and there are pricing pressures without question and so there is an offset going on there.
The numbers as you suggested for 2015 indicate that we believe that will grow in regards to the net impact of those two things cost savings on the one hand versus increased price pressures. I do think, there will continue to be increased price pressures, but the numbers that you see in our comments about net income I think you're driving the right conclusion from.
Kevin Tracy
Okay, good and then do you have a budget in terms of what you expect to spend in CapEx in 2015?
Michael Suksi
We do and I would say that it's not materially different from what you've seen already and I don't think, we can go into more detail than that.
Kevin Tracy
Okay and then just a couple quick financial related questions. The first is your, the contributions to your pension plan were down quite sharply in the fourth quarter. Where do you expect those to be in 2015? I know that for regulatory reasons the measurements dates kind of delayed in terms of what you need to contribute, but I guess what would that look like this year.
Paul O'Shea
Yes, we anticipate that will be $1.3 million in contribution.
Kevin Tracy
Okay and then, just related to cash taxes. You had a, I guess we'll see this when the annual report comes out but you had a NOL as of the end of last year and you haven't paid much in cash taxes. Do you expect minimal cash taxes this year as well?
Paul O'Shea
No, we would expect our cash taxes to increase in 2015, as we used up our losses.
Kevin Tracy
All right. Well thanks.
Michael Suksi
Thank you.
Operator
There are no further questions at this time. I will turn the call back over to the presenters.
Michael Suksi
Well thanks for your participation today and for your questions and we certainly look forward to speaking again and updating you on our progress at the end of Q1. Thanks very much. Have a great day.
Operator
This concludes today's conference call. You may now disconnect.
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