Avante Logixx Inc

XTSX:XX

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Avante Logixx Q1 F '21 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, August 27, 2020. I would now like to turn the conference over to Craig Campbell. Please go ahead.

[Craig Bradley Campbell, CEO & Director]

During today's conference call, management will be making forward-looking statements that constitute future-oriented financial information, as such term is defined in securities regulation. Listeners to this call should read the company's forward-looking disclaimers contained with each -- within each of the filings related to this fiscal period. Good morning, everybody. It's Craig Campbell, CEO of Avante Logixx. I want to welcome fellow shareholders to our earnings call for first quarter fiscal 2021. I'm joined today by Steve Rotz, the company's Chief Financial Officer. Today, we will provide an update on the continued strengthening of Avante Logixx and its resiliency in the face of COVID, our focus on execution and our strategic priorities, and we will review financial results for the first quarter ended June 30, 2020. During our first quarter, as compared to our most recent Q4, Q1 revenues increased by 5.7%. Gross margin increased from 19.2% to 23.6%, and adjusted EBITDA swung from a loss of $458,000 last quarter to a profit of $756,000. Q1 shows the strengths of our business, our strategy and the industry as we continue to execute on our strategy of building a diversified one-stop shop security solutions provider across the ultra high net worth residential security space and our national enterprise commercial accounts. In 2018, I laid out a clear vision forward for Avante with the goal to grow both acquisitively and organically. Since then, we have made 5 acquisitions, grown our revenue from $22 million to a pro forma in excess of $75 million, expanded the team to be able to manage that scale and implemented new enterprise systems. We are now seeing the fruits of our labor over the last 2 years. During last year's Q3, we completed our largest acquisition to date with the addition of A.S.A.P. Secured. During Q4 and this year's Q1, we have made significant progress towards the realization of the acquired synergies and expanding our customer relationships. Earlier this month, we announced the sale of our 70% interest in City Wide Locks with a target close of September 30. We now have 2 exceptional platforms to focus on, as we grow both organically and acquisitively, a national infrastructure and footprint and a widening opportunity. We continue to benefit from organic growth, highlighted by our sequential growth this quarter. We have the right teams in place, continue to integrate and have solid and improving MIS platform, and we reiterate our confidence that we will continue to see increased earnings in our coming quarters. Our portfolio is strong, backed by exceptional brands, a great team and a solid base of recurring revenues. This is proven through our relative resiliency during the COVID-19 pandemic. In Q2 and future quarters to follow, you can expect continued and focused execution around the strategic priorities of our XX 2.0 strategy. We intend to focus on 2 prongs of our strategy, which is to build and generate cash. We will strengthen our competitive advantage with our investments in business systems and the significant work that has been completed on several IT-related initiatives. Over the next 6 to 9 months, management will focus intensely on organic growth initiatives and integration activities. We are always receptive to acquisitions that are accretive to shareholders and that further our long-term strategy. But currently, we will not be overtly seeking such opportunities until we find a new normal. We now have sufficient scale in place to achieve what we set out to do and we will focus on achieving our goals over the coming months. Within Logixx Security platform, we will focus on continuing to win new customers and executing on our cross-selling opportunities. The team will continue converting customers to technology-enabled and managed security programs and services. Expect to see positive traction in subsequent quarters. Within Avante Security, we continue to make it easier for customers to interact with us by continuing the gradual implementation of customer payment portals and contact centers now fully underway. We will upgrade and standardize technologies for our customers, and we will work to add new customers to this business by improving the density within our areas of specialty and by improving and raising our existing customers' ARPU by a combination of price increases and new additional services to be bundled. I'd now like to turn the presentation over to Steve to discuss our Q1 financial performance.

[Stephen David Rotz, Chief Financial Officer]

Thank you, Craig, and good morning, everyone. June 30, 2020 interim financial statements and MD&A are filed on SEDAR. Year-over-year comparisons for our first quarter are largely explained by last December's ASAP acquisition, so I will focus my remarks on Q1 sequential comparisons versus Q4. We have enhanced the level of disclosures in our quarterly reporting. AR aging was added to our Q4 report, and segment reporting was added this quarter along with providing revenue split information within divisions. As of Q1, Avante Logixx operates through 3 platforms, consisting of Logixx Security, Avante Security and 70% owned City Wide Locksmiths. With the anticipated sale of City Wide at the end of Q1, we can now focus our efforts on 2 core divisions. Turning first to the income statement. Sequentially, we showed improvement in quarterly revenue, gross margin percentage and direct operating expenditures. I am also pleased to report that we achieved the Q1 guidance provided to you last month when we reported Q4. Q1 revenue was at the midpoint of our range, gross profit margin percentage was at the upper end of our range and Q3 operating expenses were lower than Q4 operating expenses. Total revenue for Q1 was $19.4 million versus $18.4 million in Q4. Within Note 6 of the financial statements, we disclosed the revenue split by service type within each division. This allows you to see why our gross margins evolve quarter-to-quarter, depending on the relative concentration of high-margin services. We experienced both negative and positive impacts on sequential revenues due to COVID-19, but we are pleased with our revenue results for the quarter. With the acquisition of ASAP last December, our largest platform is Logixx Security, representing 75% of Q1 revenue versus 19% for Avante Security and 6% for City Wide. Logixx Security grew sequential revenues by $1.1 million during Q1, despite the negative impacts of COVID-19. It benefited from additional work from existing customers, especially towards the end of the quarter. Avante Security showed a minor decline in revenue sequentially. However, Avante Security had a more significant year-over-year decline, COVID-19 restricted access to homes for installations and new equipment. Some Protective Service customers within Avante Security did not require our services this year, some of which was customer-specific and some was COVID related. We expect to see an uptick in this service type for Avante Security during the second quarter. For City Wide, COVID-19 forced the closure of its retail location for much of Q1. However, the sequential revenue decline was only $116,000, which speaks well of the entire team at City Wide. RMR means recurring monthly revenue, and we have 2 sources of RMR at Avante: recurring monitoring and response services; and recurring contractual protective services. We grew total RMR to $15.6 million during Q1 versus $14.7 million during Q4, that is 80.4% of our revenue is now RMR as of Q1, leading to stability and predictability. However, we will actively pursue the less predictable installation revenue as these contracts generally also lead to more RMR dollars in subsequent quarters. Our installation revenues were delayed by COVID, as I said earlier, but our order backlog is currently strong. Our blended gross margin was 23.6% during Q1 versus 19.2% during Q4. Sequentially and year-over-year, we experienced stronger gross margin percentages within all 3 divisions. Since acquiring ASAP last December, Logixx Security is well positioned to build off its national base to implement additional higher-margin services. As we cross-sell these higher-margin services, we expect to see improved total margins in future quarters. During Q1, implementation revenues were stalled due to COVID-19. A decline in this type of revenue would normally lead to lower gross margin percentages. However, within Logixx Security, Q1 margin percentages actually improved sequentially and year-over-year, even with a higher proportion of Protective Service revenues. This was because Logixx Security clients requested several one-off additional services related to COVID-19. This may not continue once these customers return to normal operations in future quarters, but, historically, the security industry has experienced major shifts of Protection Services after macro global events and finds a new normal, which has contributed to industry growth over the decades. Avante Security had 43.9% margins in Q1 versus 32.3% in Q4 and 40.4% during the prior year's first quarter. These sequential and year-over-year improvements were impacted by sales mix, as the decline in Protective Services revenue led to higher concentration of Monitoring & Managed Service revenues, but sequential margin improvement was due -- also due to the inventory adjustment taken in Q4, as discussed during our last call. Absent that adjustment, the prior quarter's gross margin would have been 37% rather than the reported 32.3%. Our plans to implement higher-margin services within both Logixx Security and Avante Security were negatively impacted by COVID-19, as I mentioned, as customers were not willing to allow our technicians into buildings to install new equipment and some suppliers were challenged to deliver hardware. But we are now seeing technology implementation orders, the benefit of which we expect to see in revenues as the remainder of fiscal 2021 unfolds. I caution that these implementation revenues are lumpy and challenging to predict as of timing, but they are important to our long-term strategy of increasing gross margin percentages during implementation and RMR dollars after installation. The first quarter also benefited from reduced operating expenses from integration activities and salary cuts. As mentioned during our last conference call, we recorded a restructuring charge of $0.8 million during the end of Q4 and we implemented salary and Director fee cuts in early April. Combined with these cuts, we are now starting to see the benefits of scale. Adjusted OpEx as a percent of revenue was 19.5% during Q1 versus 21.7% during Q4 and 28.4% during last year's first quarter. During our last conference call, I was asked about City Wide benefiting from the federal government's Canada emergency wage subsidy. In Note 17d, we disclosed that City Wide received grants of $125,400 during Q1. This was recorded as a reduction to employee compensation, 25% of which to cost of goods sold and 75% of which to admin expenses. As noted during our last conference call, our focus over the balance of this fiscal year is on organic growth and managing operating expenses. This should gradually improve our direct operating expense percentage as fiscal 2021 progresses. During Q1, we completed several projects that will improve our operations going forward. These include the legal amalgamation of ASAP into Logixx Security, migrating ASAP's whole general ledger into our ERP platform, implementing a new payroll and scheduling system within Logixx Security and testing of a new customer payment portal within Avante Security. Since quarter end, that portal has now moved into full production and will be migrated methodically across Avante Security's customer base over the next year. More recently, we have implemented cost savings for telephones, consolidated 2 dispatch centers into 1, and we are working on decommissioning some old software. We have 1 more inherited general ledger that will move to our new platform sometime in late 2020 or early 2021, and we are developing plans to identify further cost savings. These relatively modest changes on an individual basis will have lasting benefits to our operating expenses and gross margins going forward. Improved revenues, margins and operating expenses led to improved earnings. Adjusted EBITDA during Q1 was positive $756,000 versus Q4 of negative $458,000, representing a positive sequential swing of $1.2 million. The company also generated positive cash flow from operations of $270,000 during the first quarter as compared to a use of funds last year. Now looking at the balance sheet. Total assets decreased to $48.1 million at the end of Q1, a decline of $1 million since our most recent year-end. Ignoring a small ups and downs. This net decline was entirely attributable to amortization of intangible assets arising from prior acquisitions. The name change to Logixx Security and the significant allocation of ASAP's purchase price to intangibles contributed to this fast amortization. Accounts receivable is an area of focus for management. At June 30, 2020, total AR was unchanged at $16.5 million. However, trade receivables increased by $751,000 during the quarter. Some of this is related to slow paying by customers as a result of COVID-19 and IT challenges that 1 large customer experienced, but we also experienced an uptick in revenues during late Q1, leading to increased AR as corporate customers pay based on agreed payment terms. As shown in Note 7 of the financial statements, the aging profile of trade receivables improved during Q1. Collections since quarter end have been very strong during both July and August and our aging continues to show improvement since quarter end. Non-trade receivables improved during Q1 after collecting the purchase price adjustment from the ASAP vendors during the month of June. Now looking at the company's financing arrangements. Senior debt, ignoring IFRS property lease liabilities, was $9.4 million as of quarter end versus $8.1 million as at March 31. Most of this increase in senior debt was used to reduce accounts payable during the quarter. Senior debt remains fairly small in context of our RMR of more than $15.6 million per quarter. This level of senior debt is also small in context of accounts receivable of $16.5 million and inventory of $2.1 million. Over the coming months, we will seek to increase and amend senior debt arrangements to support our organic and strategic growth plans. At the end of Q1, our bank waived compliance with its related financial covenants. I will now turn the call back over to Craig.

[Craig Bradley Campbell, CEO & Director]

Thanks, Steve. So last November, we issued $8.3 million of subordinated convertible debentures from a total of an $18 million facility and a conversion right to common shares for the holder of $1.56 per share. This capital had been earmarked for acquisitive growth opportunities. We had the right to draw an additional $9.7 million prior to August 27, 2020. After considering pros and cons, and not having an immediate use of capital, management elected not to burden the balance sheet with an additional debt instrument. It is our belief that with continued improving bottom line results that, when we do have a use of proceeds, we will have an opportunity to, again, explore equity alternatives. As mentioned last call, during the very early days of COVID-19, we took additional steps to preserve employment of our workforce and cash flow. As of the first payroll period in April, salary cuts were implemented, cascading from a 4% reduction in frontline and management to a 20% reduction for senior executives. As the world has settled in and we are confident in our results, in late August, we intend to begin to unwind these reductions starting first with our frontline team and deferring senior and higher paid executives until we review after we report Q2. We ensured that our company was well positioned financially during this crisis. We implemented hiring freeze and a moratorium on discretionary expenses. Significant work by the operations team ensured that we were able to continue providing seamless and high-quality service to all of our customers. We transitioned to work from home for many of the nonfrontline staff and ensured that constant communication with customers occurred. And I again want to thank all of the staff for the tremendous job that they have done. In late November, we will report our Q2 ending September 30, 2020. While we are not providing forward guidance, we want to strongly reiterate our confidence in the momentum of our businesses, notwithstanding today's challenging times by COVID-19. In closing, we are builders focused on long-term value creation and we are aligned shareholders. We look forward to our AGM that will take place in September virtually, and we look forward to welcoming and hearing from all shareholders at that time. This concludes our formal remarks. And Colin, Steve and I would now be pleased to address any questions and turn the call back to you.

[Operator]

[Operator Instructions] Okay. So your first question comes from Nick Corcoran of Acumen Capital.

[Nick Corcoran, Equity Research Analyst]

And congratulations on a great quarter.

[Craig Bradley Campbell, CEO & Director]

Thanks.

[Nick Corcoran, Equity Research Analyst]

So just my first question is on gross margin. Were there any onetime items that you might call out that might have helped gross margin? And how should we think about that going forward?

[Craig Bradley Campbell, CEO & Director]

I wouldn't say that there's any specific onetime. The -- certainly, some of the work that we have taken on in light of COVID has been slightly higher margin, so we have been able to achieve, what I would call, our book price and continue to benefit from strong margins as well as being compensated for any overtime historically in the Protective Services space on sort of longer-term contractual work overtime as a responsibility of the service provider. And in these times, certainly, we've mitigated any sort of overtime in the staffing side as a result of customer demands. But generally speaking, nothing onetime, and we should continue to experience strong gross margins, both because of our operating efficiencies at scale as well as a currently strong and positive market momentum.

[Nick Corcoran, Equity Research Analyst]

Great. And then just maybe moving on to maybe some competitive wins that you've experienced through COVID. Are there any large national accounts that you've potentially won doing COVID work? And is there potential to convert that to long-term contracts when things normalize?

[Craig Bradley Campbell, CEO & Director]

Yes, absolutely. So Nick, as you know, we, in many cases, keep the customer list close to the chest for discretion to our customers. We are winning. We have seen -- and I think what Steve was trying to allude to is we've certainly seen some additional services or things implemented as companies have reopened. And so whether there's additional safety measures that customer -- companies are now under pressure to provide their stakeholders, et cetera, we're definitely feeling positive tailwinds on that. And where -- I guess the comment that Steve made is that in my experience, over 25 years in this business, we've been rocked by other macro events, 9/11 would be an example of something that fundamentally changed the landscape for security services. And while some of it will naturally peel back as the time settle in, it has contributed to the rising tide of the industry, where, over the decades, year over year over year, the industry grows in size. So I wouldn't single out any single customer. As we said, we've been both positively affected and negatively impacted. So we have customers that are still operating at a reduced capacity or have cut costs in light of their business environment, and we've also seen customers increase their requirements of us, both in the Protective Services and the technology. And we continue to experience the overall net effect of that rising tide.

[Operator]

Your next question comes from Doug Taylor of Canaccord Genuity.

[Douglas Taylor, Director]

Craig and Steve, I'd like to start off talking about organic growth. You didn't provide that number explicitly this quarter. It appears it was positive for the Logixx segment. Could you confirm that? And I mean, I just want to understand the time table for getting back to organic growth and your expectations for the Avante side of the business as well.

[Stephen David Rotz, Chief Financial Officer]

I'll jump in, then Craig can add to it. But that's why I focused on sequential. Therefore, the change year over -- quarter-over-quarter sequentially is organic. And it's easier to calculate and there's no ambiguity. As you know, the challenge of calculating organic growth is challenging, so I think the focus on sequential is clearly the way to go and it's easier to explain. Logixx Security, entirely organic. Clearly, there was no acquisitions during the quarter or the prior quarter. Secondly, Avante Security, I went through a little bit of detail there. We did have sequential downward growth in Protective Services, which we are seeing coming back into this quarter, and we're optimistic that the year-over-year change in Avante Security will show nice growth as we get into the balance of the year.

[Douglas Taylor, Director]

So just to -- I mean, usually, we look at year-over-year just because it helps us understand or look past any seasonality. With the current mix and moving City Wide out of the portfolio, do you expect there to be significant seasonality?

[Craig Bradley Campbell, CEO & Director]

No. So no, I think what I'd add, Doug, to Steve's comments, is that the -- if you look in Avante Security at its core sort of competency, the negative decline year-over-year and quarter-over-quarter is really in those ancillary services. So for those investors who have followed Avante for a long time, when Avante was a single platform and it reported on a segment, such as international travel, which is a healthy, high-margin part of our business, clearly, both year-over-year and in this quarter, with nobody traveling, those are the types of places where we're seeing the decline. As far as our total subs, we're experiencing organic growth and continually adding. Attrition is not an issue for this company, and the implementation revenues are the other area that we feel the negative pressure. And while we don't -- we see that work as being delayed and deferred, we definitely see it catching all back up, especially now that people are returning to school and to work and being back to -- some returning to a normal environment. So I think you'll be able now, in our hope by expanding our segmented reporting, is that we can give you that look into the segments in a more entity focused way, so that you can see somewhat of a same-store analogy as to how the top lines of both those businesses are growing.

[Douglas Taylor, Director]

I definitely appreciate the expanded segmentation, so I'm just going to drill down on each of these segments just a little bit further. First of all, on the Avante part, I mean, is what we're seeing in these last couple of quarters a pretty close approximation of what the RMR is? I mean, is there any downside from -- I know you're seeing an uptick in business in Q2. But I mean, is that pretty much the baseline of RMR that we're looking at in the quarters that you've just reported?

[Craig Bradley Campbell, CEO & Director]

Absolutely, Doug.

[Douglas Taylor, Director]

Okay. And then moving on to the Logixx side of the business. I understand that you want to keep the customer list confidential for good reason. But can you maybe talk about where or what segments of the market or real estate or -- that you are seeing the growth? Is it financial institutions, downtown office? Like where are you experiencing that uptick?

[Craig Bradley Campbell, CEO & Director]

Yes. So I guess -- how can I say it? So we are definitely -- so ASAP, when it came in, certainly had a bit more of a, I'll call it, industrial portfolio, so large national customers that would operate across multiple provinces, both in the industrial. And when I say industrial, think manufacturers and -- yes, let's call it, manufacturers. And the second segment was retail that were sort of the heavier weights on that, whereas Intelligarde was largely commercial office building and the like. So we're seeing each of those segments improve. Retail has definitely come back as Q1 finished and is sort of off to a great start in Q2 and that is around increased utilization of services. In our commercial space, we're actually seeing the discussions around how technology needs to augment facilities, so that things and access control is a sort of renewed area of focus for corporate security and risk managers, as you think about reopening facilities and buildings. So generally speaking, we're seeing it across. We have been more and more active in the financial institution space and that's been a plus. And we expect to have some additional positive momentum to be reporting in coming quarters around our sales pipeline and some of our wins.

[Douglas Taylor, Director]

Okay. And then moving down the segmented disclosure that you provided, I want to talk about the corporate overhead. I mean, I guess, a question for Steve. The EBITDA contribution from corporate was positive this quarter. I just want to understand whether that's an aberration of some sort or how we should expect that to trend next to the -- should it be negative than an unregular quarter and take away from the contributions from Avante and Logixx?

[Stephen David Rotz, Chief Financial Officer]

So the corporate really encompasses all our public company costs, be they Directors, be they insurance, head office, audit costs, that sort of thing. That's going to be a fixed and not that any public company has to absorb and so we do that. We then do management fees out to our individual division, so that's why you're seeing a slight recovery there at the corporate level and that might fluctuate over time as we true-up those numbers. But right now, you're seeing us attribute some of that cost -- or most of that cost down into the divisions.

[Douglas Taylor, Director]

So I mean, all that to say, you expect that to be a net negative contributor to adjusted EBITDA going forward on a normal quarter. It's just that there was some recoveries on management overhead this quarter. Is that -- am I understanding that correctly?

[Stephen David Rotz, Chief Financial Officer]

Yes, we basically overabsorbed from the divisions.

[Douglas Taylor, Director]

Okay. And then -- so just to wrap up my line of questioning here. Avante, positive trajectory coming out of the quarter. Logixx showing growth and better momentum exiting the quarter as well, and you expect to hold the line on costs, margins. And so outside of City Wide, which you'll still have for this next quarter, I mean, you'd expect, with all that, that EBITDA would -- trend be improved further from what you just showed for Q1. Is that -- I mean, qualitatively, is that all correct?

[Stephen David Rotz, Chief Financial Officer]

I think your math is accurate.

[Operator]

[Operator Instructions] Okay. So there are no further questions at this time. Please proceed.

[Craig Bradley Campbell, CEO & Director]

Thank you very much, Colin. Again, thank you, fellow shareholders, for joining this call. I look forward to welcoming you at the AGM, and wish everybody continued health and good days until then. Thank you very much for your participation.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.