Avante Logixx Inc

XTSX:XX

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Avante Logixx Q2 F '21 Earnings Call. [Operator Instructions] This call is being recorded on November 26, 2020. I would now like to turn the conference over to management. Please go ahead.

[Unknown Executive]

Thank you. 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 regulations. Listeners of this call should read the company's forward-looking disclaimers contained with each of the filings related to this fiscal period. We have posted an Investor Relations presentation to our website. We encourage you to review this now at avantelogixx.com under the Shareholders tab. I will now turn the call over to Craig Campbell, CEO of Avante Logixx.

[Craig Bradley Campbell, CEO & Director]

Good morning. Welcome to all shareholders to the Avante Logixx earnings call for our second quarter of fiscal '21. I'm joined today by Steve Rotz, the company's CFO; and today, we are pleased to be providing you an update on the continued strengthening of Avante Logix, our focus on execution and our strategic priorities and review of a financials results for the second quarter ended September 30, 2020. All amounts discussed during the call reflects City Wide as a discontinued operation, as Steve will describe in more detail later in the call. I'm very pleased and proud to be on the call today to report to you that during the second quarter as compared to our most recent Q1, revenues have increased sequentially by 29.7% to $23.6 million. Gross margins increased from 22.7% to 24.5%, and adjusted EBITDA from continuing operations improved by $1.1 million to reach $1.7 million. If we include City Wide, total adjusted EBITDA was $2.2 million versus last quarter at $0.8 million. We are proud of these financial results and the entire team that contributed during these challenging times. Q2 shows the strength of our business, our strategy and the industry as we continue to execute. In 2018, I laid out a clear vision forward for Avante, with a goal to grow from a small regional boutique to a national business capable of absorbing both organic and acquisitive growth. The quarterly revenues this quarter are now in excess in a single quarter of the revenues during all of fiscal 2018, the year before I joined. Since 2018, we've made 5 acquisitions, growing revenue by a factor of 4x, expanded the team to better manage scale and implemented new enterprise resource systems. Our investments in people, process and technologies over the last 2 years was absolutely fundamental to laying the foundation for today's results and for future quarters to come. We're now seeing the fruits of our labor over the last 2 years and are pleased that the results have caught up to and provide demonstrable evidence of our efforts. During last year's Q3, we completed our largest acquisition to date with the acquisition of ASAP secured. Since that acquisition 1 year ago, we have made significant progress towards the realization of acquired synergies and expanding our customer relationships through increased penetration of wallet and cross-selling opportunities. On September 30, we closed the sale and divestiture of our 70% interest in City Wide. We now have 2 exceptional platforms to grow both organically and acquisitively, and we now have a national infrastructure with widening opportunities. Slide 11 of our investor deck will show you that since Q4 of last year, which was the first full quarter reflecting our ASAP acquisition, we have grown organically 6.9% during our Q1 and 29.7% during our Q2. On Slide 10 of that same presentation, I will call you to an exhibit to demonstrate that based off of our day 1 revenues of each of the 5 acquisitions that together with those day 1 revenues, we have added more than $24.8 million in incremental revenue. We continue to benefit from organic growth, as I've just mentioned. We have the right teams in place, and we continue to integrate and work towards a solid and improving ERP platform, and we are confident of seeing increased earnings in the coming quarters. You will also notice that the pursuit cost as contained within direct operating expenses remained flat. And at this scale, we are appropriately sized to absorb these costs in pursuit of our larger market opportunities. Our portfolio is exceptionally strong, backed by great brands and a solid base of recurring revenue from high-quality customers. This has been proven through our resiliency during the COVID-19 pandemic. And as demonstrated by our financial results achieved during the first and second quarters of this year. Lastly, I want to address the issue of alignment and something that has been fundamental to me in this story from the beginning, and that is of the skin in the game. As you would read in the press release and study filings released last May, I believe that our directors and senior management of Avante are one of the more aligned teams that you will find in the TSX venture small-cap arena. Not only do we have a pre-existing stake of 15.7%, 28.6% if you include the founder of the business, a stake that we increased by over 8.5% during this quarter, we also announced the implementation of executive share ownership guidelines to be achieved over the next 24 months. That is to say the team here is aligned, and there are no free riders. In Q3 and future quarters to follow, you can expect continued and focused execution around our strategic priorities of XX 2.0. We will continue our intense focus on organic growth initiatives and integration activities. We intend to focus on the 2 prongs of our strategy that is build and generate cash. We are always receptive to acquisitions that are accretive to the shareholders and that further our long-term strategy. But irrespective of those opportunities and uncertainties in today's M&A marketplace, we are very confident that we now have sufficient scale in place to continue to deliver predictable and sustainable earnings, just as we set out to do. I'll now turn the presentation back to Steve to discuss in more detail our Q2 financial performance. Steve?

[Stephen David Rotz, Chief Financial Officer]

Thank you, Craig, and good morning, everyone. Second quarter September 30, 2020, interim financial statements and MD&A are filed on SEDAR. A reminder that our fiscal year-end is March 31. The company operates through 2 platforms, consisting of Logixx Security and Avante Security. Logixx Security serve enterprise customers across Canada, while Avante Security services residential customers in Toronto and Muskoka. As mentioned by Craig, we sold City Wide on September 30. City Wide's financial results are treated as discontinued in accordance with IFRS 5. This means its revenues and expenses are removed from prior and current year results. We have shown adjusted EBITDA, both before and after City Wide's earnings so that you can evaluate past performance and better predict future earnings. Year-over-year comparisons for our second quarter are largely explained by last December's ASAP acquisition. So I will focus my remarks on Q2 sequential comparisons versus Q1, except as it relates to Avante Security, which does not have acquisition-related impacts. And I will refer to performance in context of continuing operations, that is without City Wide. But I'll begin with some key financial highlights for Q2. Cash flow from operations before working capital was $1.4 million during Q2 and $1.6 million for the year-to-date period. Adjusted EBITDA from continuing operations was $1.7 million during Q2, an increase of $1.1 million versus Q1. Organic revenue growth was strong within our Logixx Security business. Blended gross margins improved from 22.7% in Q1 to 24.5% during Q2, and direct OpEx continues its positive trend versus revenue, down to 17.1%. And we reduced senior debt during the second quarter. Turning first to the income statement. Total revenue during Q2 was $23.6 million versus $18.2 million in Q1. Within Note 6 of the financial statements, we disclosed the revenue split by service type within each platform. This allows you to see why our gross margins evolve quarter-to-quarter, depending on the relative concentration of higher margin services. We are pleased with our revenue results for the quarter. With the acquisition of ASAP last December and the sale of City Wide on September 30, our largest platform is Logixx Security. It now represents 81% of Q2 revenue versus 19% for Avante Security. Logixx Security grew sequential revenue by 30.5% or $4.5 million during Q2. It benefited from additional work from existing customers, which trend began late in Q1. This was due to a combination of new -- and this growth was due to a combination of new customer wins, cross-selling efforts leading to increased share of wallet with our customers as well as new temporary and permanent work arising from COVID-19. Under IFRS reporting, Logixx Security's year-over-year revenue growth was 243%. But if we pro forma ASAP results into the prior year, we still estimate a solid growth of 62% year-over-year. Avante Security improved revenues by $0.7 million during Q2, a 20% improvement sequentially over Q1. This was mainly due to electronic services, which represents installations, with the increase reflecting pent-up demand when COVID-19 prevented access to buildings during Q1. However, Avante Security had a minor year-over-year decline in revenues of $0.2 million due to the discontinuation of the Home Automation business unit last March. Turning to RMR, which means recurring monthly revenue. In the MD&A, we split our disclosure of RMR into 2 layers, recurring monthly revenues and contractual revenues. We grew total recurring and contractual revenues to $19.0 million during Q2 versus $15.6 million during Q1. We are focused on generating RMR dollars. We are pleased that 80.6% of revenue was recurring and contractual, but the percentage of total revenue will be distorted by our success in generating less predictable installation revenues that should lead to more recurring monitor revenues in subsequent quarters. So we want you to focus on our ability to compound those dollars consistently, quarter-over-quarter and year-over-year. Our blended gross margin was 24.5% during Q2 versus 22.7% during Q1. The quarter's margins are the strongest that we have had for several quarters as the company benefited from additional service requests from customers. Some of these one-off services may not continue when the COVID-19 pandemic ends but it's hard to know whether or not these extra services will become permanent. The sequential improvement in margin was entirely due to Logixx Security, which improved its gross margins from 17.0% to 20.6%. Avante Security had a sequential decline of its margins from 43.9% down to 40.8%. This business has quarterly variances in gross margins. As Q2 margins were in line with historical ranges and were impacted by high electronic service revenues in the quarter. During Q1, our plans to implement higher-margin services within both Logixx -- Logixx Security and Avante Security were negatively impacted by COVID-19. Customers were not willing to allow our technicians into buildings to install new equipment. But during late Q1 and into Q2, we saw technology implementation orders. The benefits of these began to be implemented during Q2, and we expect to see more of these revenues as the remainder of fiscal 2021 unfolds. We also saw continued orders as the second quarter ended, but I caution that these implementation revenues are lumpy, and it is challenging to predict quarterly timing of when they will be recorded. But they're important to our long-term strategy of increasing gross margin dollars during implementation and RMR dollars after installation. In terms of direct operating expenses, we saw a slight uptick in total expense. It should be noted that COVID-19 impacted this year's budgeting and goal setting that aligns with executive compensation. These goals and targets were board accrued during Q2. And so we accrued 6 months of variable employee compensation within the second quarter, given the strength of our financial performance to date. As mentioned during prior conference calls, we recorded a restructuring charge of $0.8 million during the end of last year, and we implemented salary and director fee cuts in April. These cuts were unwound in early October, i.e., after Q2. Combined, these efforts contained our direct operating expenses during Q2. Adjusted OpEx as a percent of revenue was 17.1% during Q2 versus 19.1% during Q1 and 27.7% during last year's first quarter. Improved revenues, margins and control of our operating expenses led to improved earnings. Adjusted EBITDA during Q2 was $1.7 million versus $1.6 million, representing a sequential improvement of $1.1 million. It was also 3.3x better than the prior year. Most importantly, the company generated positive cash flow from operations before working capital of $1.4 million during the second quarter. Net working capital provided an additional $1.4 million during the second quarter. Now looking at the balance sheet. Total assets decreased to $45.4 million at the end of Q2. This represents a decline of $3.7 million since our recent year-end and $2.7 million decline during the second quarter. These net declines are largely attributable to heavy amortization of intangible assets arising from prior acquisitions. Intangible amortization expense for IFRS purposes will decline dramatically next fiscal year. Note that City Wide was sold in the last business day of Q2. The cash proceeds of $1.8 million are reflected in the ending cash balance. And the $450,000 VTB is within our current and noncurrent assets. Accounts receivable is an area of focus for management. Trade and accounts -- and accrued trade receivables increased by $1.7 million during the first half of fiscal 2021, of which $1.2 million occurred during Q2. We experienced an uptick in revenues during late Q1 and throughout Q2, 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 continued to improve during Q2. Our DSO also improved over each of the last 2 quarters. Using quarterly revenues up to the balance sheet, estimated average daily revenues improved as DSO improved from 84 days at March 31, down to 81 days of June and 67 days of September 30. Now looking at the company's financing arrangements. Senior funded debt includes bank debt, vehicle loans and the note due to the vendors of ASAP. The total was $8.2 million as of the quarter end, versus $10.5 million at June 30 and $9.2 million at March 31. Senior funded debt declined during the most recent quarter by $2.2 million due to cash flow from operations, reduced net working capital and the sale of City Wide which have some vehicle liabilities. Senior funded debt remains small in context of our annual recurring revenue of more than $60 million. And is small in context of trade accounts receivables, $17.5 million and inventory of $1.6 million and our continuing improvement in adjusted EBITDA. We recently executed an amended agreement dated November 20 to increase the revolver by $2 million to a new limit of $5 million. In summary, we are comfortable with our liquidity and are now well positioned for the future. A year ago, we issued $8.3 million of subordinated convertible debentures. These notes have an interest rate of 7% and maturity date of November 27, 2024, and a conversion rate in the to common shares for the holder at $1.56 per share. On the balance sheet, the total liability is reported under IFRS at $6.8 million, and the difference between IFRS and the face value of 8.3 will merge as the maturity date approaches. Within adjusted EBITDA, we smoothed out the quarterly mark-to-market of the related conversion rate that we are required to include in the income statement for IFRS purposes. At the end of Q2, we are in compliance with the financial covenants in respect to this debenture. I will now turn the call back to Craig.

[Craig Bradley Campbell, CEO & Director]

Thank you, Steve. As mentioned last call, during the very early days of COVID, we took additional steps to preserve employment of our workforce and our cash flow. As of the first payroll period in April, salary and Director fee cuts were implemented. In late August, we began unwinding these reductions starting first with our frontline employees. These cuts for higher paid employee segments were unwound as of early October. We ensured that our company was well positioned financially during the crisis. We implemented hiring freezes, moratorium on expenses, significant work by the operations teams ensure that we are able to continue providing exceptional service to all of our customers and their requirements. We transitioned seamlessly to work from home for many of our non frontline staff and ensured that constant communication with customers occur. And I want to, again, make a special thank you to all the tireless and dedicated staff for their tremendous job that they have done. In late February, we will report financial results for the third quarter ending December 31. We are not providing formal guidance in respect to Q3. But with the shutdowns happening in real-time around us, I thought I would comment to say nobody wants to see the second wave of shutdowns and COVID-19 impacts that are affecting this country, its businesses and its families. However, based on what is known today, we are extremely well positioned to navigate these times of volatility. We know that we will have some temporary revenue impacts. And at the same time, we are confident we will have benefit from some temporary opportunities. We know that we have a resilient business and a resilient industry. And this, coupled with an amazing and dedicated team, leaves me no doubt in my mind that we will continue to demonstrate strong performance over both the short and the long term. In summary, we remain confident that in the momentum and the resiliency of our business, notwithstanding today's challenging times caused by COVID-19. This will conclude our formal remarks and call. Steve and I will be pleased to address any questions at this time.

[Operator]

[Operator Instructions] Your first question comes from Doug Taylor from Canaccord Genuity.

[Douglas Taylor, Director]

Obviously, this is a very strong quarter for profitability. And I think the primary question investors are going to want to ask and understand here is that aside from City Wide, and you mentioned qualitatively a number of puts and takes, but are there any elements of this quarterly performance that you don't think should be assumed as repeatable and that we shouldn't use the $1.7 million in EBITDA in the quarter as a new baseline going forward?

[Craig Bradley Campbell, CEO & Director]

Thanks, Doug. Well, so definitely, what I would say is -- and having not had the Toronto peal shutdown starting last Friday, I probably would have had a different answer for you. So certainly, within the Q2 run rate, we definitely have an element of revenue that is COVID related sort of did not preexist with those customers. So what I should say, all of our COVID work is being done for existing customers that were in our portfolio of customers prior to the pandemic. Within those customers, we do see increased requirements and that is for increased activities, temperature screening, access control, contact tracing, et cetera. As well in some of our customers, their businesses are thriving. We've made comments about our contracts screening air cargo. While passenger flights are down, cargo continues and is on an upswing. So that is just a factor of their business. And I think a factor that will trend continue for the long term. So what we do know is there are some lifts and all of those lifts offset over Q1 and Q2 any contraction where some of our customers had to close their doors or became. So without giving guidance, what I'd like to say is this quarter and going into it now, I think the no knowns are better understood. The unknown, unknowns are better understood. And I'm quite confident that we will receive more helps and hurts and that you will continue to see strong resilient performance out of our business.

[Douglas Taylor, Director]

Okay. So the -- I mean, the revenue growth sequentially was very strong. And I wonder if we could just tease out, I mean, what was what you'd call COVID, return to work or businesses opening up with some of the things that you mentioned, like temperature screening, access control. And what was new customer adds and things that we should think of as additive to your revenue base for the long term, irrespective of COVID?

[Craig Bradley Campbell, CEO & Director]

Yes, Doug, I probably don't have perhaps the right quantifiable numbers or quantitative illustrations for you on that. What I can tell you is that we are comfortable with the numbers of increased requirements. We do understand where some of that work has been done at a premium rate, therefore, the premium margin and explains some part of the sequential improvement quarter-over-quarter in the gross margin line. And I think the anecdote that I probably should have said in your last question is that we see a lot more of this work being the new normal. So in the sense of it going away, we don't know that, that we have more reasons to believe that this is the new normal and it will continue than we do have demonstration that it's going to contract. But certainly, I would be comfortable to say that we, on our base hours per week are certainly seeing something in the 10% to 15% range going back to our run rate in Q4 that has been increased demand to COVID. And now the great debate will be how much of that continues. And what I can tell you since the shutdown on Friday, in Ontario, to our customer order book, Wednesday morning, we are seeing very minor, low single-digit contraction of revenue in real time. So we're not seeing big -- and again, we aren't heavily -- while we have a retail component, much of our commercial customers are large industrials, large nonretail businesses that rely on us 24 hours a day, 7 days a week throughout the year.

[Douglas Taylor, Director]

Okay. And so -- and just looking past COVID, I mean, in terms of attracting new customers to the Logixx platform that you've built with all the acquisitions that you've done in terms of new national accounts, that was part of your growth strategy. I mean, any update there on successes in penetrating new customers? Or has this not been the market to be able to do that in as customers are distracted with some of these other issues.

[Craig Bradley Campbell, CEO & Director]

No, Doug, as I mentioned on the call, in the investor deck, we've tried to illustrate just that was to say that the base of business, if you took 2018 run rate and then added in the trailing 12-month revenue of each of the acquisitions at day 1, they all been acquired on the same-day, we have added 24 -- so I believe the number was $69 million of ASI revenue plus acquired revenue. Day using Q2 annualized, we have added $24.8 million in revenue to that -- that base of business. So we are buying, we are cross selling, we are upselling. So I have numerous demonstrations of customers that were a part of the Intelligarde acquisition that was only in Toronto that we've taken that customer now national once we added ASA. ASAP customers that were only procuring protective services work are now electronic security and monitor managing services customers. So super proud of the team and super proud of what's going on in that organic bucket.

[Douglas Taylor, Director]

And so what you're saying there is that of that $25 million in organic new business you've added, a reasonable proportion of that is not related to COVID. This is just expansion of your business? Okay. That's fantastic. That's what I was looking for. And I appreciate the color, great quarter, and I'll pass the line.

[Operator]

Your next question comes from Nick Corcoran from Acumen.

[Nick Corcoran, Equity Research Analyst]

Congratulations on the great quarter.

[Craig Bradley Campbell, CEO & Director]

Thanks, Nick.

[Nick Corcoran, Equity Research Analyst]

So a couple of motions with the Toronto and Telaria shutdown, do you expect that have any impact on your installations for the remainder of the quarter?

[Craig Bradley Campbell, CEO & Director]

Well, certainly, it's -- if it is -- so yes. What our experience was in Q1, as Covid happened is that our order book continued to get filled. We closed orders. We got go aheads. But the balance of WIP and sort of projects that were in backlog increased during that time. Historically, with or without COVID, December is a month that becomes a month that we don't get a lot of the implementation revenue done because Christmas holidays and people are just shutting down. Leading into last Friday, everything was really running on smooth rails. So how that now translates into the implementation revenue for the rest of the year. As I say, we don't see a big impact as of Wednesday morning on our billable contractual revenue. And so December historically would also be a month where we do have increased demand from customers. Some of our retail customers would be asking us for specials around the Christmas shopping season, the boxing week all that kind of thing. So we're sort of muting our expectations on that. And -- but certainly, not worried about any massive gaps between now and the end of the year.

[Nick Corcoran, Equity Research Analyst]

Great. That's good color. And then just on your retail customers, can you maybe comment on what the impact over the last week has been on the lockdown on their demand for your services?

[Craig Bradley Campbell, CEO & Director]

Yes. So as I mentioned, transparently on Friday evening, trying to finalize Q2 packages and audit packages, et cetera, was when the announcement was made. Had that little built, here we go again. Our COVID business continuity plan was immediately on to the call. By Wednesday morning, having been in touch with all of our customers, as I mentioned just previously, we did see some customers say, okay, we got to cut some coverage. That is in the low single-digit percentage range, and that is for the fourth week of November. So we've had 2 very positive months leading already into the quarter. And so as I say, there is there's minor contraction, and we're confident that there will also be increased requirements that it would be our hope would offset any contraction in the short term.

[Nick Corcoran, Equity Research Analyst]

Great. That's good color. And then the last question for me. I think on the last call, you said that in the short term, your focus would be more on organic growth. Have you reopened look -- or restarted looking at the M&A pipeline?

[Craig Bradley Campbell, CEO & Director]

Well, the answer there, Nick, is that we're never not looking at our pipeline. I mean, that is a core part of our strategy. I think what we are seeing right now #1 is we haven't had a stock that's in a position to be used accretively so the things that we do like would have been dilutive to shareholders. Had we been able to transact in a stock-for-stock position. Some of the higher quality businesses that we are in constant communication with and track on the some of them are in the implementation sort of side of things, the integration side. We've put a pause on those simply because there -- our insight into their future earnings is obviously requiring a lot more scrutiny. However, on the protective services side, there have been a couple of accretive opportunities or interesting opportunities that we just haven't been moving forward with as a result of, one, there's a small value gap between expectations as many of you on the call would know the Guard, G4s, Allied Universal, 3-way love triangle is taking place. And the toughest part about acquiring and consolidating in this industry is you have well-established valuations for these multibillion-dollar multinationals and Garda at 13x EBITDA valuation. You're talking to some great entrepreneur in some part of this country, and he can't figure out why his $20 million business isn't also worth 13x. And so we struggle with this sort of value gap of expectations. And in the meantime, right now, the capital is better deployed internally. But certainly hoping that the results will solve that problem. And as a mentor once said to me, you take care of the results, the results will take care of the stock price.

[Operator]

[Operator Instructions] It appears there are no further questions. Please proceed.

[Craig Bradley Campbell, CEO & Director]

Well, listen, again, to conclude, thank you, everybody. For those of you that appreciate U.S. Thanksgiving, I wish you a happy Thanksgiving. And with that, we look forward to being back to speak to you in mid-February. And have a safe and healthy time in between.

[Operator]

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