Calian Group Ltd

TSX:CGY

Earnings Call Transcript 2018-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Calian's Fourth 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, sir.

[Kevin Ford, President, CEO & Director]

Thank you, Travis, and good afternoon, ladies and gentlemen. With me today is Jacqueline Gauthier, our CFO. And we'd like to welcome you to Calian's fourth quarter 2018 conference call. First and foremost, I want to congratulate our staff for their efforts and thank our customers for their support this year. We have reached new milestones in the company's history. First, we crossed $300 million in consolidated full year revenues for the first time. Second, our BTS division also set a record with $228 million in revenue for the first time exceeding $200 million. Over the year, satellite communication product sales were up approximately 30% and our satellite software engineering services grew more than 25%. We signed our largest ever ground systems contract at our SED division, and we saw double-digit sales growth in all of our BTS service lines. These results demonstrate that our organic and acquisitive growth strategies are effective. I'm very happy to report that our 4-pillar growth strategy, as reflected in our fourth quarter and full year results, is on track. While improving top and bottom line results, it's important to highlight that we continue to invest in research and development within our service lines with emphasis on our communication systems and products. I'm excited about our progress in this area as these investments represent approximately $3 million to $4 million per year over the past 2 years and are critical as we advance our service line evolution growth pillar. I would like to ask Jacqueline now to review the full -- the quarterly and full year numbers. Jacqueline?

[Jacqueline Gauthier, CFO & Corporate Secretary]

Thank you, Kevin. We completed the year with strong results, achieving record revenues exceeding the previous year by 11% and EBITDA by 7%. The excellent gain achieved in each of our service lines provides us with the ability to reinvest profits for future growth. Net profit for the year was $2.08 per share, up 2% from the prior year, impacted by the amortization of intangibles and the higher effective tax rate. The general business environment in 2018 reflects continued strong demand with our government customers, which primarily benefited the BTS division. SED also benefited from high levels of activity with many of its recurring customers and continue to push technology advancements targeting new markets. The company's healthy backlog, its acquisition strategy and the win of several contracts in new market segments during 2018 were instrumental in the success this year. For the fourth quarter, revenues were up 9% from the prior year. SED revenue saw a decrease in the quarter as several ground system projects were completed in early 2018 and new ones did not ramp up as quickly as expected. Product sales continue to provide solid recurring revenues, and SED's other business units continue to be busy in a range of activities. BTS revenues increased by 19%. The acquisitions for the quarter and year-to-date account for 4% of this growth, with the remainder achieved through organic growth. All service lines showed significant increase in demand for their services with existing customers and saw the benefits of various new wins.Gross margin for the year is up, indicating our efforts to drive towards higher margin business. For the quarter, the margin is similar to the prior year, with mix always playing a part in our overall margin achievements. For SED, gross margin in the quarter reflects solid execution across all business units, impacted by customer-driven development projects that, until fully developed, result in lower margins. Although the mix of revenues plays a significant role in the margins ultimately realized, product sales and excellent project execution helped the division maintain a solid level of margin. Gross margin in BTS has again improved over prior periods. The inclusion of ISR, Secure Tech and Priority One account for a portion of these improvements, with the remaining uplift being attributed to solid execution on existing contracts. The division continues to evolve its service offerings with a goal to increase gross margins realized in the longer term. Operating expenses increased in absolute dollars due to the inclusion of operating costs related to the 2017 and 2018 acquisitions, continued focus on selling and marketing efforts and service line evolution capabilities, improvements and expansion of our facilities, the expensing of share-based compensation as well as certain onetime costs. As a percentage of sales, cost increased slightly above the 11% target due to the need to invest in the evolution of the company's service lines. Overall, these investments better position us for improvements in future profitability and long-term growth. Our cash position remains stable near $20 million. However, the recent IntraGrain acquisition will result in lower cash position in 2019. 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 the call back over to Kevin.

[Kevin Ford, President, CEO & Director]

Thank you, Jacqueline. We continue to execute against our M&A agenda. We spent the good part of last year continuing to evolve our M&A processes and develop the playbook to ensure we focus on companies that align to our financial, strategic and culture-fitted criteria. In fiscal 2018, we closed 2 strategic acquisitions, Secure Technologies and Priority One. And subsequent to year-end, we were very pleased to close our purchase of IntraGrain Technologies, our first acquisition for the SED division. Based in Regina, Saskatchewan, IntraGrain is the maker of innovation award-winning BIN-SENSE grain storage solution. The technology combines Internet of Things connectivity with bin sensors to protect grain quality and eliminate the risk of stored grain spoilage. IntraGrain will report into Calian's Saskatoon-based Systems Engineering Division, a manufacturing partner to IntraGrain for 5 years. Kyle Folk, IntraGrain CEO and 2017 enterprise -- Entrepreneur of the Year in Manufacturing for the Prairie Region, will join Calian to support our innovation agenda with an initial focus on AgTech strategy development and implementation. As you can see, our recent acquisitions are aligned with expansion into growth markets. The Secure Tech acquisition, for example, strengthened our footprint and capabilities in the cybersecurity market. The North American cybersecurity market is projected to grow at approximately 16% per year through 2020. With IntraGrain, Calian's Systems Engineering Division is expanding into the high-growth AgTech market. IntraGrain's products have tremendous potential in global markets. And demand for AgTech, also known as smart agriculture, is increasing as global population growth creates upward pressure on food production and farmland yields. The global market for AgTech is projected to expand at a compound annual growth rate of approximately 13% through 2025 according to Zion Market Research. IntraGrain also recently launched its Fuel Lock solution that provides the digital locking of on-site fuel pumps with a keypad PIN. This solution can track employee PIN and fuel usage via a mobile app and is applicable to a number of sectors beyond agriculture, including construction and energy. With this acquisition, we look forward to leveraging our very complementary skills and manufacturing capabilities in Saskatchewan. With IntraGrain's excellent margin profile and annual revenues approximately $8 million, we expect this acquisition to be EBITDA-accretive from day 1. This is a very exciting acquisition that, within our 4-pillar growth strategy, aligns with the service line evolution and customer diversification pillars. IntraGrain's leading solutions and staff will strengthen our innovation agenda at Calian and provide additional exposure to AgTech and ancillary markets, with excellent potential in domestic U.S. and global markets. A few closing comments. I'm cognizant that Calian has been caught up in the recent market volatility. But frankly, I trust that investors see the opportunity that Calian represents. In one company, you get access to an organization that's been in existence for over 36 years, has now 68 consecutive profitable quarters, over $1 billion in contracted backlog, positive increasing cash flows, pays a solid dividend, has a strong financial foundation and provides investors access to 5 very distinct businesses with a proven track record of domestic and global delivery. These results are fueled by a very talented, passionate team committed to successful customer delivery and our own growth objectives. I want to be very clear that I'm very positive in Calian's long-term growth prospects and the company, I believe, is uniquely positioned to leverage a strong financial position for continued investment in both organic and acquisitive growth. As recently announced, I am back in the office full-time and looking forward to working with the Calian team on our strategic growth objectives.Traditional markets in which Calian operates are stable, and management expects organic revenue and earnings growth in most or all of our service lines through the successful execution of our growth strategy. However, we must caution that revenues realized are ultimately dependent on the extent 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 for fiscal 2019 to be in the range of $300 million -- sorry, $330 million to $360 million, EBITDA per share in the range of $3.60 to $3.90 and net profit in the range of $2.10 to $2.40 per share. So with that, Travis, I'd like to now open the call to questions.

[Operator]

[Operator Instructions] Our first question comes from Benoit Poirier.

[Benoit Poirier]

Congratulations for the results and the latest M&A. Just related to IntraGrain. Would it be possible, Kevin, to provide some background on the rationale, whether it was an existing customer of SED? And what about the growth opportunities of IntraGrain going forward?

[Kevin Ford, President, CEO & Director]

Yes, I'm happy to answer that. So IntraGrain was a customer in the sense that we have been manufacturing components for the BIN-SENSE monitor and the Fuel Lock product, specifically with our board capability out of our SE Division in Saskatoon. So we have known them in that context as a customer and, through the last couple of years, got to realize the great innovation opportunity they represent to Calian working with them initially. And then we had the discussion about the acquisition. So yes, they were a customer. And from my viewpoint, really happy to have them now part of the Calian family. With regard to the growth opportunities, any market research we did prior to this acquisition would indicate the AgTech, smart agriculture or whatever you want to call it is double-digit growth with increased demand globally for food production. So that was exciting to us as we look to diversify our customer base. And with SED right now, we have really 3 strong pillars right now with our satellite communications, aerospace and defense, agriculture and now even looking at cable. So it made sense from my viewpoint to get into that segment with a company that we've worked with before that has good double-digit growth potential globally, if you look at the market sizing, and from my viewpoint, leverages the core competencies that we really have in Saskatchewan already with our engineering and manufacturing capability in Saskatoon. So with an office now in Regina and Saskatoon, we think there are some synergies as well just on other markets we can go out globally. But we will definitely focus on AgTech and make sure we come out of the blocks with IntraGrain.

[Benoit Poirier]

Okay, perfect. That's great color. And if we look specifically at SED, obviously, there was kind of the lower contribution, given some contracts were near completion. However, you're ramping up the -- currently ramping up the big satellite contract. So I'm just wondering, when we look at your overall revenue guidance for next year, $330 million to $360 million, what would be the split between BTS and SED? And what should we expect in terms of ramp-up for the big satellite contract?

[Jacqueline Gauthier, CFO & Corporate Secretary]

So part of the increase, obviously, is the 3 M&A that were done in Q3, Q4 -- or Q3 and then just in November here. So that's a significant portion of the increase. Then you're looking at organic growth in both divisions. SED, obviously, with the large contract and their ability to do a bit more, a bit less may impact the overall revenues. So there's not a significant change in the split between SED and BTS other than those acquisitions.

[Benoit Poirier]

Okay, okay, perfect. And from a margin standpoint, when we look at IntraGrain there, I mean, you have more disclosure in the report, but very, very profitable. So what should we be looking for in terms of EBIT margin for SED going through fiscal '19?

[Jacqueline Gauthier, CFO & Corporate Secretary]

Again, it's too early to say that it's going to be necessarily significantly different in terms of percentage as what we've got for 2018, because a lot of their work is project-based and fixed price. So there's always some uncertainty on the positive and on the negative with the SED. So right now, I would say just slightly up from 2018, just from the positive impact of the IntraGrain. Because obviously, IntraGrain is not that big of an acquisition either.

[Benoit Poirier]

I see. And it must be also impacted by the big satellite contract, right, that brings kind of the lower margin?

[Jacqueline Gauthier, CFO & Corporate Secretary]

Correct.

[Benoit Poirier]

Okay. In terms of working cap, Jacqueline, when we look at the Q -- for the fiscal '18 negative contribution in terms of working cap about $7.6 million. However, as you're ramping up this big satellite contract, what should we expect in terms of working cap for fiscal '19?

[Jacqueline Gauthier, CFO & Corporate Secretary]

Well, we expect the new contract to be in a WIP balance of approximately $10 million to $15 million. Once it's up its high peak, which should be in Q2 of 2019, and it should remain there for about, I'll say, 6 quarters.

[Benoit Poirier]

Okay, perfect. So for the whole year in fiscal '19, it's probably kind of a $10 million, $15 million for the whole year. And after that, probably, there will be some reversal at 1 point?

[Jacqueline Gauthier, CFO & Corporate Secretary]

Correct. So the reversal closer to the end of 2020 and into 2021.

[Operator]

[Operator Instructions] Our next question comes from Edson Lai.

[Edson Lai, Associate]

My first question is related to the acquisition of IntraGrain. I was wondering if you could provide some additional color to the IntraGrain customers and how long those contracts are. Are they existing customers of Calian? And are they larger customers? Are they spread out usually?

[Jacqueline Gauthier, CFO & Corporate Secretary]

So the customers are 2 distributors, 2 local farms. So they actually sell indirectly to the farms themselves.

[Kevin Ford, President, CEO & Director]

So in the context of Calian, it's a net new customer base, which is the exciting part of this. And then the distribution channel is, in some ways, net new to us as well. So we're excited about both of those opportunities.

[Jacqueline Gauthier, CFO & Corporate Secretary]

And currently the customer base is Western Canada mainly. So we're really excited about expanding that to the rest of Canada, the U.S. and internationally.

[Edson Lai, Associate]

Perfect. That's really helpful. And then jumping ship to the emergency management services business. I was wondering what trends you're seeing in the segment, and are most of the opportunities that you're seeing government based?

[Kevin Ford, President, CEO & Director]

I would say -- so the segment itself, when you look at -- if you just -- every day we read the paper, there's another wildfire, there's another tornado, there's another flood, there's another terrorist activity. So as far as the reality of the world we live in right now, the demand for people to be ready for when bad things happen is continuing to increase. And with that, we're seeing 2 things. We're seeing our brand recognition in that segment continue to grow as we continue to develop and also conduct these exercises. And if you look at the customer base right now, I would say my best -- off the top of my head, I'd say right now, about 70% to 80% would be still government-based entities. And then we're into other areas such as nuclear. We're working with a bunch of different indigenous communities as well. So we're starting to see some diversification outside of government as more and more private industry realizes that emergency management exercises are becoming critical elements of the business continuity.

[Operator]

And we have no further questions in the queue at this time.

[Kevin Ford, President, CEO & Director]

Okay. Thanks, Travis. And again, thanks, everyone, for taking the time today for listening on our Q4 and full year results. As I stated, I'm very excited by not only the results, but just the progress we're making on both our strategic and tactical objectives at Calian. Jacqueline and I believe we have a great team here. And we want to reemphasize a story that I had one shareholder reach out to me not that long ago and just talked about innovation and whether I view Calian as an innovative company. And I'm trying to represent both in the context of our product development, our sales, obviously, the $3 million to $4 million we're investing in research and innovation with regard to our products. I fully believe we're an innovative company and there's a lot of good innovation happening here at Calian. And we continue to look forward to talking to our shareholders with regard to the progress we're making on that agenda, whether through organic or M&A means. And I want to congratulate, in closing, my team again at Calian because it's not without a lot of effort this year that this result is generated. So I want to extend my thanks to them as well and again, our customers for their support. So we look forward to giving you our Q1 results in the not-too-distant future, and thank you all for your time today. And with that, Travis, we can close the call.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.