Calian Group Ltd

TSX:CGY

Earnings Call Transcript 2020-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to Calian's First Quarter 2020 Financial Results Conference Call. As a reminder, this call is being recorded. It is now my pleasure to turn the conference over to Mr. Kevin Ford, Chief Executive Officer. Sir, please begin.

[Kevin Ford, President, CEO & Director]

Thank you, Chelsea, and good afternoon, ladies and gentlemen. With me today is Patrick Houston, our CFO, and we'd like to welcome you to Calian's First Quarter 2020 Conference Call. I'm very happy with our first quarter results. We again posted a quarterly revenue record of $99.2 million, up from Q4's quarterly record of $90.9 million. While posting our sixth consecutive quarter of record revenue growth, we also reported our 73rd consecutive profitable quarter. The results reflect our continued focus on profitable growth as we successfully execute our organic and acquisitive growth strategy. I once again would like to thank our dedicated team at Calian, all of our staff, employees, for their efforts, that is very much appreciated. I'll now ask Patrick to review the quarterly numbers, and I'll provide some comments at the end. So over to you, Patrick.

[Patrick Houston, CFO & Corporate Secretary]

Thank you, Kevin. It's exciting to again post record quarterly results, reflecting our continued revenue and earnings growth. First quarter revenue gained 24% year-over-year, while EBITDA growth was 47%. The stability of our diversified business was evident in the quarter as Advanced Technologies, Health and IT posted solid revenue and EBITDA growth compared to the prior year's first quarter. We continue to believe that Calian's diversified profitable growth engine is one of the company's unique strength. Consolidated gross margins in the quarter were 20.4% compared to 21% in the Q1 of the previous year. The slight decrease was due to project mix in the quarter. Our focus continues to be the introduction of existing and new products and services into new markets in order to increase our margins. Operating expenses in the quarter were $11.8 million. This compares to $11.2 million in the same quarter of the previous year, a 6% increase. We continue to invest in capabilities to help our growth agenda. This includes augmenting our sales and marketing capabilities, building capacity in our innovation agenda and strengthening business support to integrate recent acquisitions. Adjusted EBITDA for the quarter was $8.4 million or $1 per share basic and $1.03 per share diluted. This increased from $5.7 million or $0.73 per share in the same quarter of the previous year. Adjusted EBITDA in Q1 included a favorable impact of $0.7 million from the adoption of IFRS 16. You can see our reconciliation in the financial statements and MD&A explaining the change in the accounting. Net profit for the first quarter was $4.3 million or $0.55 per share. This was up from $3.4 million or $0.43 per share in the same period of the prior year. Working capital in the quarter increased by $21 million. This was the result of growth of our business and progress made in our large ground system project. Working capital demand on the large ground system projects in the quarter was approximately $16 million. We expect an additional $6 million of working capital demand in Q2 as we reach the peak demand for that project. Our cash balance ended at approximately $14 million. And subsequent to quarter end, we expanded our credit facility with RBC from $40 million to $60 million.Finally, please note that certain information discussed today is forward-looking and subject to important risks and uncertainties. The results predicted in these statements may be materially different from actual results. I'll now turn it back over to Kevin for his comments.

[Kevin Ford, President, CEO & Director]

Thank you, Patrick. So I just want to echo Patrick's comments; and again, talk about the fact that I was pleased with the results in the quarter: Advanced Technology posting very positive organic revenue growth, 68% from the same period earlier, obviously strong contributions from our large ground systems project and the new mobile wireless products that we've now gone live with for Tier 1 North American mobile provider. Our Health revenues rising 10% from a year earlier, as demand increased on our clinician services and psychological assessment services. IT similarly posted 9% revenue growth on stronger sales focus for our cybersecurity practice. And Learning revenues declined slightly, reflecting generally a pace of demand on our core training contracts and focus on securing new business going forward. Post the Q1 quarter end, on January 31, we announced the acquisition of health services companies Allphase Clinical Research Services Inc. and Alio Health Services Inc., which is an exciting announcement for our Health segment in support of our growth objectives. The company served the pharmaceutical and medical device industry and the broader health care sector with clinical trial services, specialty medication support, community care and other services, all enabled by an innovative health care delivery management software application. This acquisition supports all 4 pillars of our growth framework and specifically helps diversify our customer base in the pharmaceuticals, home care and hospitals, and supports Calian's innovation agenda with services enabled by software. Continued investment in R&D, M&A and our own internal innovation will be critical to our long-term profitable growth and continued push into global markets. Our recent filing of a shelf prospectus is an important step in providing flexibility as we continue on our growth agenda. In closing, I am pleased to see the Calian growth story continue in Q1 following a record performance in fiscal year 2019. We've received very, very positive feedback regarding the reporting aligned to the 4 segments, which we introduced at the end of our 2019 Q4 and full year results. The 4 segments of Advanced Technologies, Health, Learning and Information Technology are highlighting our focus going forward and have helped simplify the company for our shareholders. Our focus within these segments continues to be on acquisitive and organic growth, innovation and global markets. I look forward to talking to our shareholders and analysts tomorrow about Calian's diverse business and growth achievements at our AGM and Annual Investor Day, being held tomorrow, February 6, at the TMX Broadcast Centre in Toronto, starting at 9:45. And if you're available, please attend. Lastly, the traditional markets in which Calian operates are stable, and management expects organic revenue and earnings growth in most or all of our segments through the successful execution of our growth strategy. However, I must caution that revenues realized are ultimately dependent on the extent and timing of future contract awards as well as customer utilization of existing contract vehicles. Based on currently available information and our assessment of the marketplace, we expect revenues for fiscal 2020 to be in the range of $380 million to $410 million, EBITDA per share in the range -- or adjusted EBITDA per share in the range of $4.25 to $4.55 and adjusted net profit in the range of $2.50 to $2.80 per share. So with that, Chelsea, I'd like to now open the call up to questions.

[Operator]

[Operator Instructions] Our first question will come from Jean Lavoie with Desjardins.

[Jean-Francois Lavoie]

Congratulations for the strong quarter. I just wanted to start with the guidance. I just wanted to make sure that the increase to the guidance was mostly driven by recent acquisition announced on Friday last week.

[Patrick Houston, CFO & Corporate Secretary]

Yes. So we increased revenue guidance by about $15 million at the bottom and top, Jean-Francois. About 3/4 of that was related to the acquisition and then about 1/4 is just continued pace of our existing business. We saw a strong Q1, and we're expecting that to continue throughout the year.

[Jean-Francois Lavoie]

Okay. So it's on the revenue line, but also probably on the EBITDA and the adjusted EPS as well?

[Patrick Houston, CFO & Corporate Secretary]

Yes, it was similarly down to 3 -- 3 kind of moved up together. So we're just expecting continued performance of our existing business as well as the impact of the new acquisition.

[Jean-Francois Lavoie]

Okay, perfect. And when we talk about these acquisitions, how should we be thinking, Patrick, in terms of amortization of intangibles and also goodwill for those 2 acquisitions in the future?

[Patrick Houston, CFO & Corporate Secretary]

Yes, we just closed the deal last week. So we haven't had the opportunity to do the valuation and, at the same point, have the auditors go through it. So I have to defer to next quarter. And at that point, I can give you some more color. But I would expect it to be similar to our prior acquisitions in terms of ratios of intangibles and goodwill as an initial kind of point.

[Jean-Francois Lavoie]

Okay. No, that's good color. And when we look at Advanced Technologies, I mean, the growth was very impressive at about 64%, with only about 7% coming from M&A. So I was curious if you could talk a bit about the key driver of this organic growth. I know there's probably a lot that come from the large satellite contract, but I just wanted to have your view on this one.

[Patrick Houston, CFO & Corporate Secretary]

Yes. So 2 distinct events really. Obviously, progress on our ground system. We said this is going to be the big year for that one, so we're seeing good growth. The other one really is the first shipments of our first wireless product. So we put a press release out announcing that. So we're able to develop this product over the last couple of years. It's being deployed by Tier 1 mobile carrier in North America. So that's really exciting for us as it's our first foray into that space, but again, shows the capability of our advanced technology. So that contributed as well to that organic growth in Q1.

[Jean-Francois Lavoie]

Okay. And would it be fair to assume that about 50% came from the ground system and 50% of the organic growth came from mobile carrier or the mix was a little bit different?

[Patrick Houston, CFO & Corporate Secretary]

More weighted towards the large ground system, but good first quarter on our mobile space. And I think that one is going to continue to pick up pace throughout the year.

[Jean-Francois Lavoie]

Okay. Great. And if we look at the Learning side, I mean the backlog remain extremely solid. But the revenue growth was a little bit impacted by the slowdown in demand, but how should we be thinking about demand or organic growth in the quarters to come for that division?

[Kevin Ford, President, CEO & Director]

Well, right now, what we're trying to do is the -- across each of this 5% organic growth. So we're trying to look at that consistently across each of the segments. So Learning is -- right now, with our key defense contracts, it will move up and down in the quarter depending on demand and scheduling and timing of exercises that we run from the military. We're seeing some good push in our emergency management services. So again, timing of those will affect it. But I think for modeling purposes, keep it in that 3% to 5% range, I think, is realistic organically as we now focus on how do we move that Learning segment up to double-digit growth. But for modeling, I think 3% to 5% should be a way to look at it going forward.

[Jean-Francois Lavoie]

Okay. Perfect. And maybe a last one for me. On the IT side, the margin was very strong at 9.9%. So would it -- so I was wondering, what should we expect going through fiscal '20? Should we expect a similar margin? And also, I was curious to know if you could provide a little bit more color around the business mix of this segment, so product versus services, please.

[Patrick Houston, CFO & Corporate Secretary]

Yes. So we're really pleased with the increase in margin. It's really been a pretty concerted effort between the last couple of years of moving that up in our key group. So really pleased with the progress that Sandra, who's the VP of that group, has really been doing with her team. On some of the product retail, because we don't recognize the full revenue but just the margin, that's helping us increase. So right now, the product sales is still a small portion, but the margins are much higher than our traditional resource-based contracts. So we continue to really look for -- to increase that mix over time. And I think as we do that, the margin will continue. I think in the short term, we're hoping to at least hold the margins you've seen in Q1. But again, objective is to continue to increase that in the future.

[Operator]

[Operator Instructions] And our next question comes from Deepak Kaushal with Stifel. We'll go to the next question we have from Doug Taylor with Canaccord Genuity.

[Douglas Taylor, Director]

The strength in Advanced Technologies and then the recent acquisitions is taking the spotlight off of the IntraGrain and SatService a little bit. But I wonder if you can provide a little bit of an update on how those 2 acquisitions are progressing since last quarter and perhaps comment on how they're tracking towards future earn-out targets.

[Kevin Ford, President, CEO & Director]

Yes. So both -- I just did a review with SatService a few weeks ago and IntraGrain, the same. Both are actually doing very well. In the context of performance, both are seeing orders, they're both coming in from the context of growth that we've seen from last year. As far as our new targets, we're going to get another quarter, and we'll reassess them, Doug, and how we're feeling with that. We're definitely seeing more positive momentum than we did the year before. And despite earn-outs, I am still very confident those 2 companies are great -- both of them are great teams and both of them are doing great things, and they're all profitable. So earn-out aside, we'll see how that plays out, and I'll update that next quarter. But right now, I'm very happy, impressed with what they're both collectively doing, both in the context of new sales and orders as well as progression on integration with our Advanced Technologies group. So still very positive.

[Douglas Taylor, Director]

Okay. The Advanced Technologies and the large ground system build, you provided a lot of color on the working capital impact into Q2. Should we think of Q2 being -- that being consistent with the peak revenue quarter for this particular build? And do you expect to recover any of the working capital you've invested towards the back half of this year or will that be a fiscal 2021 event? And then in relation to that, perhaps you can talk about the prospects of filling the backlog for that type of satellite work behind this large deal?

[Patrick Houston, CFO & Corporate Secretary]

Sure. I mean the revenue and working capital aren't completely linked as we're doing the revenue on the percentage of completion of the entire project, but we have certain payments and milestones that we're expecting from the customers. That's why they're not completely linked. So I think the revenue will be fairly consistent throughout this year. From a working capital, yes, there will be another $6 million in Q2 and then likely flat in Q3. And then Q4 is when it starts to unwind, and that will unwind over another 12 months. After that, it starts coming back in. And then on your second question on backfilling. I mean we've got -- we're working on several requests. There's lots of activity that we're seeing in the ground system business. So we've got some fairly nice projects that we'd like to win, and we're hoping to secure those in the short term. And if we're able to do that, that would contribute to revenue next year, which would help backfill kind of the reduction on this large ground systems. So we're hoping to hear about those in the next quarter.

[Operator]

Our next question comes from Jean Lavoie with Desjardins.

[Jean-Francois Lavoie]

I just wanted to ask 2 small question from a modeling standpoint. So on the R&D front, so you have spent about $3 million to $4 million in the last 2 years on that R&D level. So how should we be thinking for FY '20?

[Patrick Houston, CFO & Corporate Secretary]

Yes. So you saw we've broken out R&D for the first time. So I think, certainly, as we spend more on that, people are getting better visibility. I think for the current year, the Q1 run rate will probably continue for the back -- for the last 3 quarters. So I think that's what you should model in the short term. And I think it accelerates in future years as we start to identify new projects.

[Jean-Francois Lavoie]

Okay. Great. And maybe lastly, on the credit facility. So you mentioned in your opening remarks that you increased it from $40 million to $60 million. So I just wanted to make sure when you look at the increase, should we -- so would it be fair to assume that Calian is still in the lookout for more M&A deals despite the recent transaction announced last week?

[Kevin Ford, President, CEO & Director]

That's correct. From my perspective, as most are aware, we've staffed now a permanent basic M&A office internally, whose job is basically to continue to work with companies out there, whether it's on partnering or M&A opportunities. So yes, we -- the pace of the 10% growth minimum is something I'm very -- is a fair bit modest and we could keep that going. And that will be both through organic and M&A. So we don't want to slow down M&A for sure. But we're also taking our time to make sure we're taking time to integrate the ones we've done. And we're on the lookout for sure. If you really think about our segments right now, we've done 2 in Advanced Technologies over the last year. We've done 1 in the Health segment. Our cyber acquisition that we did in IT services, that's almost 2 years ago now. So I think there's capacity there to look at other opportunities because of the capacity for the management team to integrate. And then our Learning business is also something I'm looking at with priority as we look to bring in more innovation into our learning services practices. So yes, we're not -- we don't think we're slowing down, but in the same spirit, we're making sure, more importantly, that these opportunities are good opportunities for Calian longer term.

[Operator]

[Operator Instructions] And speakers, we have no further questions in the queue at this time.

[Kevin Ford, President, CEO & Director]

Okay. That's great, Chelsea. And I think for most of you on the phone, tomorrow, I'm hoping that I'll be able to say hi in person at our Investor Day and updates. I'm excited about giving an opportunity for other people besides Kevin Ford to speak for a change on the company progress. And I just want to reiterate, to my team, thanks again for a great quarter, and look forward to providing an update for those who are able to attend tomorrow. And if anyone would like any further information, obviously, don't hesitate to reach out. So with that, Chelsea, we'll close off this call, and I look forward to giving everyone an update officially over the next quarter results in a couple of months. And for those attending tomorrow, we'll see you tomorrow.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect. Please enjoy the rest of your day.