Calian Group Ltd

TSX:CGY

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to Calian's Second Quarter Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Kevin Ford, Chief Executive Officer. Please go ahead.

[Kevin Ford, President, CEO & Director]

Thank you, Paula, and good afternoon, ladies and gentlemen. With me today is Patrick Houston, our CFO. And I'm also happy to have joined us this quarter, Patrick Thera, President of our SED Systems Division. We'd like to welcome you all to Calian's Second Quarter 2019 Conference Call. I was very happy with our results this quarter as they demonstrate the impacts of our growth strategy. We again posted Calian's largest quarterly revenues in the company's history, reported solid organic revenue growth and won key contracts with existing customers. The broader team continues to execute our growth plan with innovation and global market opportunities in mind, as demonstrated in our recent announcements. First, we announced the acquisition of Germany-based SatService, a solid player in the European market for satellite communication systems. Effective April 1, this is our first major international acquisition. SatService will support the expansion of our Systems Engineering Division into the European market with turnkey satellite solutions as well as products. The company offers us a geographic footprint in Europe and a talented team to help offer our combined products and solutions into new markets. The purchase price is approximately EUR 6.5 million in closing, plus 2 additional payments in September 2019 and December 2020 based on EBITDA performance. Second, in support of our innovation agenda, our Saskatoon-based Systems Engineering Division recently announced their newer line of carbon fiber antenna products. I'm very excited about these higher-performance satellite ground system antennas, which are the direct result of several years of R&D work at SED. This type of innovation supports the service line evolution pillar of our growth framework. And frankly, it is critical to protect our competitiveness going forward. Now as we go to market with our satellite solutions, we can offer satellite ground systems that are not only less expensive and faster to install but they also offer higher performance in the industry's more commonly used higher frequency ranges. This is an excellent example of our innovation agenda at work. I'd also like to acknowledge that this is Patrick Houston's first conference call as Calian's CFO. We are very happy to have him on board as we tap into his valued experience not only in finance but also in technology, innovation and global growth, who's also happy that as part of his transition, our former CEO, Jacqueline Gauthier, has been able to continue to Calian to support transition and our strategic growth objectives. And with that, I'd like to ask Patrick now to review the quarterly numbers. Over to you, Patrick.

[Patrick Houston, CFO & Corporate Secretary]

Thank you, Kevin. I'm happy to report that Calian's profitable growth agenda continued this quarter. For the second quarter of 2019, revenue set a quarterly record of $83.4 million, up 7.8% from prior year's $77 million. In fact, with today's results, we have now reported record revenues for 3 consecutive quarters. The general business environment in 2019 remained strong for both divisions. With a healthy backlog, strong customer retention and support from our recent acquisitions, we remain on track for a positive year. Strong revenue growth at the BTS division supported Q2 revenue expansion of 14% from the same quarter in the previous year. This was largely driven by double-digit organic growth in our health business. SED reported a slower quarter compared to the same period in the prior year due to ramp-up of existing ground system projects. Both divisions had an excellent quarter for customer retention, with new contract signings and extensions totaling $82 million. This reflected business with existing customers across all our service lines. These contract wins are a strong signal that our customer retention efforts are working and that our clients trust us to deliver. Gross margin continues to show an overall positive trend with improvement this quarter from both divisions compared to the same period in the prior year. On a consolidated basis, EBITDA was $6.6 million in the quarter, down slightly from Q2 in the previous year. This was largely a result of onetime costs of $0.6 million to support the acquisition of SatService. Operating expenses are up on a year-to-date basis when compared to the prior year. This is due to the acquisition of IntraGrain, investments in our growth agenda and onetime costs related to the acquisition of SatService. We continue to manage operating expenses while ensuring we invest where required to put the company in position to grow its revenue and EBITDA in coming quarters. Net profit for the quarter was $3.9 million or $0.50 per share basic, consistent with the $3.9 million or $0.51 in Q2 of the prior year. On a year-to-date basis, net profit was $7.2 million or $0.93 per share, down 11% from $8.1 million or $1.05 per share in the same period a year earlier. This is a result of increased amortization of intangibles and accretion expense from our acquisitions.Earnings per share in the same quarter -- in the quarter was $0.50, down slightly from $0.51 in the prior year. On a year-to-date basis, EPS was $0.93 compared to $1.05 at the same point in the prior year. Our net cash position was $27.8 million at the end of the quarter, which included an additional draw on our line of credit to fund the SatService acquisition, which happened shortly after quarter end. Cash position in the near-term will be impacted by additional working capital requirements at SED and remaining earnout payments due on our recent acquisitions. We continue to maintain our dividend currently at $0.28 per share. Overall, our outlook remains positive for the year. We continue to expect strong performance from both divisions in the remainder of this year with contributions from recent acquisitions: IntraGrain and SatService. 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. And with that, I'll turn it now back over to Kevin.

[Kevin Ford, President, CEO & Director]

Thanks, Patrick. I believe Calian is at a pivot point in the company's history. While our investments remain prudent, it is important to acknowledge the advancements we are making in R&D, innovation and other areas of the company in support of our long-term growth. Our M&A agenda also continues to be a focus as we integrate recent acquisitions and continue to proactively search for companies that support our growth objectives as we look to diversify our customer base, evolve our services and continue our pivot further into solutions. While the Calian story is one about growth, I would not want us to overshadow our stability. Today, we reported Calian's 70th consecutive profitable quarter. That's over 17 years that this company has been profitable. This journey would not be possible without the dedicated work of our staff. So I'd like to extend a thank you and acknowledgment for all their collective efforts. With their continued support, I am confident we will continue to make progress against all elements of our 4-pillar growth framework. As Patrick stated, we continue to demonstrate great positive results in our customer retention with $82 million in newer and renewed business primarily with existing customers this quarter. At Calian, we take pride in our service delivery. And across our pipeline of new business, it has been consistent with consistent customer sat. We are now celebrating 1 year since the initial implementation of our health care provider requirement contract with the Department of National Defence, the RCMP and Veterans Affairs Canada. We won in 2017 with our business partner, Bayshore HealthCare, our single largest contract is running strong and has a full term of 12 years, including optional extensions. It is a testament to our commitment to exceptional service delivery in what I believe drives our customer retention results. In closing, with strong cash flows, continued focus on our innovation agenda and our dedicated employee base, I'm excited about this company's potential. Overall, this quarter was a solid demonstration of the [ execution ] of our growth plan as it captured all elements of our focus areas: Continued organic growth, launching new innovative products and closing our first international acquisition. This is the type of Calian that I want the investing public to know about. We're providing solutions, we're developing products, we're positioning in global markets, we're innovative and growing organically as well through acquisitions. Looking forward, the traditional markets in which Calian operates are stable, and management expects organic revenue and earnings growth on most or all of its service lines through the successful execution of our growth strategy. However, we must caution that revenues realized are ultimately dependent on the expense and timing of future contract awards as well as customer utilization of existing contracting vehicles. Based on currently available information and our assessment of the marketplace, we expect revenues through fiscal 2019 to be in the range of $330 million to $360 million, EBITDA per share in the range of $3.60 to $3.90 and net profit in the range of $2.05 to $2.35 per share. We are reducing EPS range by $0.05 mainly due to the increase in accretion expense related to our acquisitions of SatService and IntraGrain. Paula, I'd like now to open the call up for questions.

[Operator]

[Operator Instructions] We'll first go to Benoit Poirier with Desjardins Capital Markets.

[Benoit Poirier]

Looking back at -- and specifically for SED, gentlemen, could you provide some more color about the unfavorable timing for project completion and the revenue mix?

[Kevin Ford, President, CEO & Director]

I think right now, what we're dealing with, Benoit, is, as we reported, we have the largest ground system contract to ever sign last year, other product developments. So really, we're just doing a ramp-up in the implementation of those projects. So not necessarily unfavorable, more just a timing issue. And as you see with our guidance, we believe that Q3 and Q4 are going to be much stronger from an SED perspective as these projects ramp up.

[Benoit Poirier]

Okay. And mostly, if we look at Q3 and Q4, Kevin, is it fair to say that it will be mostly linear between Q3 and Q4? Or even greater skewed toward Q4 in terms of contribution from this ground system contract?

[Patrick Houston, CFO & Corporate Secretary]

Yes. I think it will be continued ramp-up. So we'll see some growth again in Q3 and then growth again in Q4. But this depends also on the timing of these projects. But certainly, that's what we're seeing right now.

[Kevin Ford, President, CEO & Director]

Yes. Based on information we have right now, Benoit, and the project schedules where they are, not just on that -- not just on that ground system project, but as you can imagine, we are running numerous projects at any given time at Calian. Based on the information we have today, we expect, again, strong trajectory for Q3 and Q4, balanced in some ways but I think stronger Q4, frankly, if you look at our information we have today.

[Benoit Poirier]

Perfect. And to come back on SatService. Is there any seasonality in SatService that we should take into account?

[Patrick Joseph Thera, VP & GM of Systems Engineering Division]

Yes. Benoit, this is Pat Thera here. They tend to have a lot of smaller contracts. So -- and they're spread throughout the year. They're involved in the satellite communication industry. So seasonality is not really a factor in anything that they're doing.

[Benoit Poirier]

Okay. Okay. That's great. Great color. And with respect to IntraGrain, given that you're well advanced, could you talk a little bit about the integration, also about the potential to expand the business outside of Western Canada? I know that it's a core focus. So if you could provide some color, that would be great.

[Kevin Ford, President, CEO & Director]

Yes. So I'll add some comments, and then I'll get Pat to comment as well. So from our perspective, the reason we acquired IntraGrain was obviously not -- as you know, Benoit, it wasn't just to focus on Western Canada but also the global opportunity. The solutions that they build and manufacture are relevant to -- and also not, frankly, just in the agriculture industry but also in other ancillary industries. So we were briefed, again, from Kyle Folk, the President of IntraGrain, literally yesterday at the Board with regard to the opportunities and where things are positioning. And so we're very confident that the opportunity base for IntraGrain is wider than Western Canada and with continued focus on our marketing plans that we can expand not only domestically but potentially globally. And Pat, I don't know if you have any additional comments on that.

[Patrick Joseph Thera, VP & GM of Systems Engineering Division]

Yes. Certainly, they're focused on keeping their customers, their current customer base in Western Canada, satisfied and supplied with product. And they do that a lot through distributor network that they're connected with. But they've also been beefing up their resources to market their products into other regions, other agricultural regions as well as other industries. So the primary focus is certainly on fulfilling what their promises are right to date. But they have also had a lot of increasing focus on other areas and regions.

[Benoit Poirier]

Okay. That's great color. And last for me. Could you talk a little bit about the additional investment that was required with respect to -- I know that you've invested a little bit more over the last year. It paid off in terms of bringing growth to -- on the top. But is there any granularity you could provide and whether those investments are sustainable going forward?

[Kevin Ford, President, CEO & Director]

So from my perspective, absolutely sustainable. Again, we're generating -- if you look at our financials, we continue to be positive in the sense of the cash we're generating. And what we're doing, Benoit, we're being very prudent on our organic research engine with regard to where we're investing and obviously continue to ensure that we're finding good things appropriately. As I stated many times, we've invested in Calian as a company for many years, but it's just not until recently we actually started pulling some of those elements in talking about R&D. And I thought it was an important element if I just didn't believe that the markets, in many ways, viewed us as innovative. Our recent announcement around carbon fiber was a result of 4 years of hard work that the SED team and research and development and partners and literally millions of dollars of investment that we've made into this. And I don't see that slowing down, frankly. If anything, I believe -- again, going through my reviews with the business, there is a lot of new ideas out there in this company that we will continue to foster and fund as we look at new innovations for Calian moving forward. So from my viewpoint, I don't see this slowing down. I don't see any impediments to our continued investment in this area, and I think it's critical for our long-term growth that we do so. So my team has full support to bring this forward so we can continue to innovate like we just announced with our carbon fiber antenna.

[Operator]

[Operator Instructions] Moving on, we'll go to Deepak Kaushal, GMP Securities.

[Deepak Kaushal, Director and Technology & Communications Analyst]

I'm going to follow up on SED. Kevin, you mentioned the new carbon fiber antennas. I'm trying to get a better sense of the opportunity with that technology innovation. Can this drive an upgrade cycle through the ground system plant that's already installed throughout the world? Or is this really just an opportunity to get you further ahead on the newer stellites that are getting launched, the higher frequency ones?

[Patrick Joseph Thera, VP & GM of Systems Engineering Division]

Yes. Deepak, it's Pat Thera here. We look at it primarily as an inflection point to enter into the market for the higher-frequency satellites. So that's our primary focus, is make sure that we can support the Q and V band initiatives with the large aperture antennas going forward. That will help us sustain our relevance in the industry and keep us at the same growth rates and market rates that we have going through time here. In terms of new opportunities for refurbishment, replenishment, other frequency bands, things like that, we're going to kind of take it as it comes. But the cycles on those, on antenna refurbishment or replacement, is very long, like antennas are built to last 15 to 20 years, right? So that cycle just kind of comes very transactional, very piece-by-piece as it comes along, nothing major. So I wouldn't have to see that as being a fundamental growth factor in what we do, although it is an opportunity.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Okay. Okay, great. And Patrick, now that I have you giving some insight, are you seeing anything from a macro perspective in the satellite industry related to these on-again, off-again, on-again, apparently, trade wars? Or anything else in terms of macro that might shift attention or focus on CapEx from some of your traditional customers in the space?

[Patrick Joseph Thera, VP & GM of Systems Engineering Division]

Not -- I haven't seen much from the -- like what you're describing in the trade wars perspective. I mean there's always been competition amongst competing technologies and competing companies depending on where they're located at the world. But I don't see the other factors having any impact to us at this point in time.

[Kevin Ford, President, CEO & Director]

Deepak, I just joined Pat and the team in Washington with one of the recent satellite conferences, and I always attend an open forum they have with the CEOs of the larger satellite operators. And the trend is still very positive. The majority of them were looking at new satellite launches, and they were even looking at new constellations. So I really took away from that conference that I -- as you said, our cooling quick customer base, I didn't really sense any slowing down right now with regard to their ambitions to either launch new satellites, upgrade their networks or be prepared for the next wave of capacity bandwidth that's going to be required to support things like [indiscernible] technology, planes, trains, automobiles, frankly. So I think we have a very positive feel from our conference with regard to plans for the future.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Okay. Excellent. And Kevin, I think earlier you mentioned double-digit -- or you or Patrick, I think, double-digit organic growth in BTS on the health side. I mean you still have quite a diverse health care business. Can you maybe perhaps elaborate on what's driving the growth in particular? Is it Veteran Affairs or RCMP? Is it the core business? Is it privacy or commercial side? Any would be helpful.

[Kevin Ford, President, CEO & Director]

Yes. Yes, good question. I think right now, it's a mix of a few things. Definitely, number one, the new contract with National Defence. As you know, the scope of that contract was expanded into the RCMP and Veterans Affairs, so we're seeing some new opportunity there and working with them on the important health care agenda for all of their departments. So we're seeing some growth there. We are definitely seeing some new customers come to the table with regard to our large national medical practitioners in correction health facilities, fleet services, for example. We had a few entries [ suddenly ] in there, so we're expanding our customer base. And then generally, I would say the -- our marketing efforts have been very strong at figuring out on the psychological health side as well. You may recall -- remember last year, we acquired Priority One Healthcare, which is focused on psychological services, which again is helping to drive our growth as we look at new customer bases in that segment. So it's a combination of those parts, not necessarily one thing. But the sum of the parts is driving that trajectory right now.

[Deepak Kaushal, Director and Technology & Communications Analyst]

And then just -- I just have a question on emergency response planning. Another year has gone by, and we see more flooding in more regions. I'm just trying to understand how these events are impacting that business. Do the cities and governments do what they need to do to be prepared? And what's the gap that you think you need to get to? And how do you get this business line to grow?

[Kevin Ford, President, CEO & Director]

Yes. So I would say interesting question. I was just briefed on this recently. In the end, the team showed me that the map of Canada and where we're actually proactive right now in emergency response exercises that are helping customers, and it's growing. And to your point, it's municipalities. It's organizations that are -- this is now a consistent trend. I think I would take our home base here in the city of Ottawa as a good example. 2 years ago in 2017, we had flooding. We were asked to do a post-review of the response, business response to that. And now we are having flooding again in Ottawa. And one of our thought leaders, Richard Moreau, was actually interviewed a few times with regard to the cities applying the lessons learned from our assignment from 2 years ago. And we were happy to report that they had applied many of their lessons learned that we worked with the city on and their more effective response.So with the increased occurrences now between flooding and fires, the terrorist attacks, we are still, I think, growing the segment not only nationally but also now potential globally with customers coming to us globally on this. So I'm very positive on that segment. And as you said, these customers are now proactively trying to get ahead of an incident and using our emergency management, either our emergency management exercise capability or lessons learned from other areas to apply to make sure they're ready as well. So it is growing. It is growing nationally for sure. And right now we're seeing also international opportunities in that segment because the reality of flooding and terrorist attacks and fires and natural events is not a Canadian-only occurrence as you know.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Got it. Okay. That's helpful. And I have one last question, more of a maintenance admin question for Patrick. On the OpEx line, I know that you had some nonrecurring in there, like $600,000. But is $10 million a quarter generally a reasonable number to think of going forward for the next several quarters?

[Patrick Houston, CFO & Corporate Secretary]

Yes. I think we'll take on a little bit more with SatService as they bring on kind of a holding P&L of their own. So that will be in Q3. But otherwise, I think other than the onetime item, I think we've been consistent between Q1 and Q2. And that's certainly kind of the level, yes, minus onetime items in the near future, yes.

[Operator]

Moving on, we'll go to [ Jeremy Coleman ] with -- a private investor.

[Unknown Attendee]

I just have one question regarding the guidance range which you customarily provide. I compared the sort of gross revenue, EBITDA and net profit per share. Can you -- of the 3 metrics, 2 were unchanged by comparison with Q1, and net profit was the only one that showed a change, a reduction of $0.05 per share. The range between the top and bottom end of the guidance is almost 10% for both the revenue line and the EBITDA line and almost 15% for the net profit line. Is there any chance -- as the company grows, it's gone different paths. Nevertheless, is there any chance that you can tighten the guidance range early in the reporting cycle as you go through the year?

[Patrick Houston, CFO & Corporate Secretary]

Yes. On the change, I mean the reason we changed the EPS and not the other 2 metrics that we report on was as we brought on the 2 acquisitions, there's some accounting expenses there below the line that are noncash that affected the earnings. So although they're contributing positively to revenue and EBITDA, the contribution on an EPS is much smaller because of those charges. So that was the reason we reflected that. And the numbers untightening, obviously, as we get -- we make progress throughout the year, if we could do that, we certainly would. But Kevin's earlier point that you know we have a big second half, that's reflected in the guidance. And although we have a lot of projects going on, we -- it's really a delivery exercise here in the second half as we try to realize that.

[Kevin Ford, President, CEO & Director]

And I would say as well, Jeremy, the other nuance here and why we've left it a bit wider than normal, frankly, at this point in the year is we are going through our first cycle with IntraGrain, SatService as well. So we're trying to be cognizant that these -- not so much for SatService or IntraGrain, are a bit more seasonal in the context of the spring and summer. So I'm trying to keep it a bit wider just as we get through full business cycle with these organizations so I can ensure that as we reflect guidance going forward, that we have the benefit of that experience under our belts because I appreciate your comment. Not only will we be tightening it up right now, but it was a conscious decision for me right now to just let's get through the cycle. Let's make sure we understand the IntraGrain component because this is a high-margin business, so it definitely has an impact on us both on revenues and EBITDA. So I want to leave that a bit wider for another quarter, and then we'll see where we're sitting at the end of Q3. So just bear with me as we get through one full cycle here. But in the same spirit, I totally appreciate your comments. And our goal would be to tighten it as soon as we can so you'd have a good sense where the year is going to play out.

[Operator]

There are no further questions.

[Kevin Ford, President, CEO & Director]

Okay. Well, thank you, Paula. Okay. So I want to thank you all today for joining us on the call. I really do appreciate the questions. It's valuable for us to make sure that it's clear on how the company's performing and any questions you have. So with that, Paula, we'll close out the call. And we all look forward to discussing our next quarter results with you in 3 months' time. So thanks for your time today, everyone, and we'll talk to you again in 3 months -- 3-month period.