Avante Logixx Inc

XTSX:XX

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Avante Logixx Q3 Fiscal '21 Earnings Conference Call. [Operator Instructions] This call is being recorded on Friday, February 26, 2021. I would now like to turn the conference over to Steve Rotz. Please go ahead.

[Stephen David Rotz, Chief Financial Officer]

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 to this call should read the company's forward-looking disclaimers contained within 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, Inc.

[Craig Bradley Campbell, CEO & Director]

Thank you, Steve. Good morning, everybody. Welcome fellow shareholders to the Avante Logixx Q3 conference call. It's great to be here today as we report Avante's financial results for the third quarter ending December 31, 2020, and we will provide you an update on the continued focus and execution around our strategic priorities. I'm very pleased to report to you that during the third quarter, as compared to our most recent Q2, revenues increased sequentially by 6.8% to a company-setting record of $25.2 million. We report adjusted EBITDA from continuing operations at $1.63 million during the third quarter. This was similar to Q2 at $1.7 million, a significant improvement to last year's Q3, which had a loss of $0.45 million. We are pleased with these financial results and proud of the entire team that has contributed tirelessly during these challenging times. Q3 really shows the strength of our business, our strategy and the industry as we continue to execute. Consistent with my remarks last quarter, I want to remind our long-term shareholders and inform some of our newer followers that in 2018, I laid out a clear vision forward for Avante, with the goal to grow acquisitively as well as organically and transform from a small regional boutique business into a multi-platform national business. Today, our quarterly revenues are now in excess of the revenues during all of fiscal 2018, the year before I joined the company. Since 2018, we have completed 5 acquisitions, grown revenue by a factor of 4x, expanded the team to better manage scale and transform the company's systems and infrastructure. Our investments in people, process and technology over the last 2-plus years was absolutely fundamental to laying the foundation for today's results and for the future quarters to come. We are now seeing and harvesting the fruits of our labor, and I am here to remind my fellow shareholders that the foundation is in place to continue executing on this vision of becoming a much larger, well-diversified business that owns best-in-class security businesses, delivering long-term value and sustainable, competitive, differentiated advantage. We are focused on building long-term value by investing in this growing, fragmented, but ever-important industry that consistently proves its resiliency. We are doing that by only managing great businesses with empowered and aligned teams of owners, and we are doing it with a long-term vision and disciplined views on capital allocation. During last year's Q3, we completed the largest acquisition in the company's history, with the acquisition of ASAP Secured. Since that acquisition 1 year ago, we have made significant progress towards the realization of the acquired synergies, expanding our customer relationships and increasing our share of wallet by cross-selling existing customers. At the conclusion of Q2 on September 30, we completed the divestiture of our 70% interest in Citywide Locks. Please refer to Slide 11 of the investor deck that shows since Q4 of last year, which was the first full quarter reflecting the ASAP acquisition, that we have consistently grown organically each quarter with an impressive 6.8% delivered in Q3. On Slide 10 of that presentation, you will also see our day 1 revenues after the 5 acquisitions. We have added more than $31 million of incremental revenue since that time. We continue to grow organically. We have great people and teams in place. We continue to operate our business with a continuous improvement approach, driving costs out while enhancing our customers' experience. And we are confident that we will deliver continuously improving results in the coming quarters. I would like to remind you, and call it out, that the pursuit costs absorbed within direct operating expenses remain flat, and at this scale, we are appropriately sized to absorb these costs in pursuit of the larger market opportunities. Such costs include our executive team, our corporate development function and the public company costs associated with our venture listing. Our portfolio is exceptionally strong, backed by exceptional brands and a solid base of reoccurring revenue from high-quality customers. This has been proven through our resiliency during the COVID-19 pandemic and is demonstrated by our financial results achieved during the first 3 quarters of this fiscal year. Lastly, I want to address the issue of alignment and skin in the game. As you would read in the press release and our SEDI filings, I believe the directors and named executive officers of Avante Logixx are one of the more aligned teams on the TSX Venture small-cap arena. So far, during the fiscal year, our named executives and directors have collectively increased our share ownership by 12.5%, and we now own 16.2% of all shares outstanding. Last quarter, we announced the implementation of our executive share ownership guidelines to be achieved over the next 24 months, that is we have alignment and no free riders. In Q4 and future quarters to follow, you can expect continued disciplined and focused execution around our strategic priorities of our XX 2.0 plan. Our focus has been slightly more weighted over the first 9 months of the year to the 2 prongs of our strategy, that is build and generate cash. We are always receptive to acquisitions that are accretive to our shareholders and that further our long-term strategy, and we have seen market conditions improving in this regard. I'll now turn the presentation over to Steve to discuss in detail our Q3 financial performance. Steve?

[Stephen David Rotz, Chief Financial Officer]

Thank you, Craig, and good morning, fellow shareholders. Third quarter December 31, 2020, interim financial statements and MD&A are filed on SEDAR. A reminder that our fiscal year-end is March 31. In terms of background, we operate through 2 platforms, consisting of Logixx Security and Avante Security. Logixx Security service -- serves enterprise customers across Canada, while Avante Security services residential customers in Toronto and Muskoka. As mentioned during last quarter's call, we sold Citywide on September 30, which was the last day of Q2. Citywide's financial results are treated as discontinued in accordance with IFRS 5. This means its revenues and expenses are removed from prior quarterly results to provide more meaningful comparative performance. A good portion of year-over-year comparisons for our third quarter are explained by last December's ASAP acquisition. So I will focus my remarks on Q3 sequential comparisons versus Q2, except as it relates to Avante Security, which does not have acquisition-related impacts. And I will refer to our quarterly performance in context of continuing operations, that is without Citywide. Let's begin with a few key financial highlights for Q3. Cash flow from operations before working capital was $1.2 million during Q3 and $3.5 million for the year-to-date period. Adjusted EBITDA was $1.63 million during Q3, a positive swing of $2 million versus last year's Q3. Organic revenue growth was strong within our Logixx Security business. Blended gross margins during Q3 were 22.2%, in line with recent trends since the acquisition of ASAP. Direct OpEx decreased by $154,000 and continued its positive trend versus revenue, down to 15.4% from 17.1% last quarter and 24.3% in Q3 last year. And once again, we reduced senior-funded debt during the quarter. Turning first to the income statement. Total revenue during Q3 was $25.2 million versus $23.6 million in Q2. Within Note 6 of the financial statements, we disclose 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 different business units and services. We are pleased with record revenues this quarter. Similar to last quarter, Q3 benefited from COVID-19 specials that offset a reduction in regular revenues. However, in a COVID-free world, we anticipate those regular revenues would return and some so-called COVID specials might remain. With the acquisition of ASAP last December and the sale of Citywide on September 30, our largest platform is Logixx Security. It represented 83% of consolidated Q3 revenues. Logixx Security grew sequential revenues by 9% or $1.9 million during Q3. It benefited from additional work from existing customers, which trend began late Q1. This 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 138%. But if we pro forma ASAP's acquired revenues into the prior year, we still see a solid year-over-year growth during Q3 of 49%. On a sequential basis, Avante Security's revenues was slightly down by $126,000 or 2.8%. This was mainly due to electronic services, which represent installation that, in Q2, reflected pent-up demand when COVID-19 prevented access to buildings during Q1. However, Avante Security had 12.5% growth in year-over-year revenues. This was an increase of $480,000, reflecting revenue growth across all 3 of its business lines, being protective services, monitoring and managed services and electronic services. RMR means recurring monthly revenue. In the MD&A, we split out our disclosure of RMR into 2 layers: recurring monthly revenues and contractual recurring revenues. We grew total recurring and contractual revenues by -- to $17.2 million during Q3 versus $15.4 million during Q2. Compared to a year ago, the recurring revenue increased by $277,000 or 14.4%. Contractual revenues grew sequentially year-over-year, but in part, this was due to the timing of the ASAP acquisition. Sequential contractual revenue grew by $1.76 million or 13.2%. We are focused on continuing compounding of both recurring and contractual revenue -- contractual recurring revenues over the coming quarters and years. Our blended gross margin was 22.2% during Q3 versus 24.5% during Q2. The sequential change in gross margin was entirely due to Logixx Security, which saw a decline to 18.2% in Q3 versus 20.6% in Q2. Our third quarter margins absorb seasonal costs such as stat holiday pay, overtime and subcontractor costs, but margins were in line with our expectations. Avante Security's gross margins remain consistent, with a slight uptick from 40.9% to 41.2%. This business experiences quarterly variances in gross margins often based on electronic services revenue. During Q1, our plans to implement higher-margin services within both 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. During late Q1 and into Q2, we saw technology implementation orders, and these began to be implemented during Q2. As Q3 came to a close, we had similar lockdown conditions in parts of the country that stalled installation of technology. We expect to see continued slowdown of installations during Q4, but significant effort is underway to deliver more of these revenues as fiscal 2022 begins in April. These revenues have experienced a delay and do not represent lost opportunities. Such installations are 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 reduction in total expense. As we noted during our last call, given the delay to budget approval during COVID-19, we accrued 6 months of variable employment compensation within Q2's OpEx, where this quarter only reflects 3 months. We implemented salary and director fee cuts in early April. These cuts were unwound in early October, i.e., the first day of Q3. There were a number of other small additional costs that, in aggregate, negatively impacted sequential comparisons relating to Board consultants, additional Board members, incremental costs associated with our Avante Security customer portal and accounting for the PSU granted during Q3. Combined, these pluses and minuses led to a slightly lower operating expense during Q2 versus Q3. As mentioned during prior calls, we recorded a restructuring charge of $0.8 million during the end of last year. This has led to improved OpEx throughout this fiscal year. Direct expenses, combined with growth in revenues, resulted in adjusted OpEx as a percent of revenue declining to 15.4% during Q3 versus 17.1% during Q2 and 24.3% during last year's third quarter. If you look all the way back to Q1 of fiscal 2020, the percentage was 27.2%. This explains why our adjusted EBITDA is showing significant year-over-year improvement as growing revenue and related margins are falling to the bottom line. We anticipate that Q4 direct operating expenses will be similar to the levels seen in Q3. Improved revenues with lower margins but lower operating expenses led to essentially flat earnings on a sequential basis. Adjusted EBITDA during Q3 was $1.63 million versus Q2 of $1.72 million. Compared to the prior year's Q3 loss of $0.45 million, we showed a $2 million year-over-year improvement during Q3. Most importantly, the company continues to generate positive cash flow from operations before working capital of $1.2 million during the third quarter. This represents 3 straight quarters of positive cash flow from operations, with $3.5 million generated over the first 9 months of this year. Now looking at the balance sheet. Accounts receivable is an area of focus for companies in our industry. We experienced an uptick in revenues during late Q1 and through to the end of Q3, leading to increased AR. However, as shown in Note 7 of the financial statements, the aging profile of trade receivables showed dramatic improvement during the year-to-date, and much of this improvement occurred during Q3. Our DSO has also improved over each of the last 3 quarters. So we are pleased with both customer collections and the high quality of our receivables. 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 $7.8 million as of quarter-end versus $8.2 million at September 30 and $9.2 million at March 31. Senior-funded debt declined during the most recent quarter by $0.4 million and by $1.4 million year-to-date. This was due to cash flow from operations, combined with the sale of Citywide, which provided proceeds on sale and some debt positioned by the purchases. Our $7.8 million of senior-funded debt is small in context of trade accounts receivables of $17.8 million and inventory of $1.8 million. Also, EBITDA and cash flow trends over the last 2 quarters, on an annualized basis, are almost equal to the senior-funded debt. 15 months ago, we issued $8.26 million of subordinated convertible debentures. These notes have an interest rate of 7% and maturity date of November 27, 2024, and a conversion right to common shares for the holder at $1.56 per share. On the balance sheet, the total liability is reported under IFRS as $8.32 million, that is the IFRS reported liability now exceeds the actual liability. The difference between IFRS and the face value of $8.26 million will emerge as the maturity date approaches, but the quarterly fluctuations under IFRS can be very wide every quarter. This quarter's IFRS loss was $1.4 million. Within adjusted EBITDA, we smooth out the quarterly mark-to-market of the related conversion right that we required to include in the income statement for IFRS purposes. This quarterly hypothetical loss or gain is reflected within reported EBITDA each quarter, which is why we really need to use adjusted EBITDA to measure quarterly financial performance. At the end of Q3, we were in compliance with the financial covenants in respect to this debenture. I'll now turn the call back over to Craig.

[Craig Bradley Campbell, CEO & Director]

Thanks, Steve, a job well done. And on behalf of Steve and I, I want to thank and acknowledge the thousands of team members on the front line and in our back office that continue to work tirelessly in delivering our customers their security and their peace of mind. During late June to end of July, we will report the financial results for the full fiscal year ending March 31, 2021. While we are not providing formal guidance in respect to Q4, 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 we'll benefit from some temporary opportunities. We know that we have a resilient business in a resilient industry. This, coupled with the amazing and dedicated team, leaves no doubt in my mind that we will continue to demonstrate strong performance over both the short and long term. In summary, we remain confident in the momentum and resiliency of our business, notwithstanding today's challenging times caused by COVID-19. With that, I will conclude our formal remarks. And Joanna, Steve and I would be pleased to address any questions at this time.

[Operator]

[Operator Instructions] First question comes from Doug Taylor at Canaccord Genuity.

[Douglas Taylor, Director]

You mentioned at several points during your prepared remarks there, both the temporary impacts, either negative or positive, in your results and the very strong organic growth that you've shown. I'm wondering if you can help us sort of think about whether COVID, I mean, Q3 versus Q2, had a net positive impact on the organic growth or negative. Just help us kind of navigate how we should read the strong sequential organic growth.

[Craig Bradley Campbell, CEO & Director]

Great. Well, thanks, Doug. So as I tried to frame in our last conference call, the interesting thing about sort of these global macro events, and I addressed the issues and the experiences from post-9/11 and other -- in 2008, other sort of big times, we are no doubt helping more than hurting. So in the instance of COVID -- and we're exposed commercially to many industries, including the airlines, large industrial, retail. So you can see in the numbers that, by all accounts, COVID has not only provided us increased revenue because large corporations have increased requirements, whether they have furloughed a property or stood operations down, they still require their security during those times. In some cases, it's a requirement to opening -- they require extra technology or extra human capital to be compliant. So all said, we have seen a sort of single-digit decline in what we would refer to as our permanent pre-COVID work. That's a result of, as an example, some retailers being closed, some operations going from a full complement to a half complement, as an example. Yet, at the same time, we have seen increases in other areas. That said, during the period -- and I believe, last quarter, I tried it guide you to sort of a 10% sort of icing on the cake that COVID had provided over our Q2. I think that would remain pretty consistent here in Q3. And so the key sort of challenge for us as a management team is watching for when is that going to wind down. Certainly, Q3, the second lockdown in December impacted our -- sort of what I would refer to as our December revenues. And December is very typically a strong month for our commercial security require -- customers' requirements. And so despite being impacted negatively in December, you can see that the numbers have borne up positively for us on the overall quarter. So as I say, it remains a challenge for us to say, okay, when is this going to end? And then when it does end, how much of the new requirements remain permanent? So as an example, the access and egress requirements and temperature screening, et cetera. What I would do is I would tell you that in watching some of our competitors' revenue, some of our competitors' revenue have seen big, big jumps. And that is as a result of, in the U.S., these mass vaccination centers and things like that. The revenue we are seeing is not from that type of work. We are not doing -- and if any, we're doing very little sort of long-term care or health care-related work. This is corporate Canada, and the top corporations in Canada doing their work every day. So I feel very good about where we are. And as I say, based on my sort of 20 years in the industry, when this does come to an end, we will still have a net positive gain as far as security requirements going forward.

[Operator]

The next question comes from Nick Corcoran at Acumen Capital.

[Nick Corcoran, Equity Research Analyst]

My first question just has to do with kind of competitive front. Are there any competitive wins that you can speak to in the quarter?

[Craig Bradley Campbell, CEO & Director]

So Nick, thanks for being on the call. As you know, we don't -- we try to remain quite -- our customers don't like us talking about who our customers are. But what I could tell you is, for sure, there are some good wins that are, again, the permanent, regular, normal course of business. In our commercial side, we onboarded a national financial institution. We also picked up a good-sized permanent contract with a large property manager in Ontario. And then in our residential and high-net worth family business, we continue to see volumes of new accounts and sort of new customers that, really, you would just think as normal course. COVID has not affected the new onboarding of residential customers. So very pleased on both of those metrics.

[Nick Corcoran, Equity Research Analyst]

Great. That's good color. And then just looking at the margins, they were down -- gross margin was down slightly quarter-over-quarter. Is this a normalized run rate? Or was the quarter impacted by lower installations?

[Craig Bradley Campbell, CEO & Director]

No. So I think Q3 -- the Q2 gross margins were definitely an all-time high for the company, and I would say that was positively affected by some of that special work that just came at a slight premium to our normal rate. And then the other piece that affected us in Q3 is this seasonal sort of -- we ended up with an extra stat holiday in December. And so surprisingly enough, when you have a payroll of 1,600 or 1,700 people, paying them that extra day has almost a full percentage point impact on the gross margin in the Logixx business. So Logixx, as a trend gross margin, I think this quarter is more representative of run rate predictable margins, but they're definitely in line with our expectations. And what I would say to you is that you see in our Logixx business that our gross margins are ahead of where you might benchmark us against industry peers.

[Nick Corcoran, Equity Research Analyst]

Great. Then the last question for me is, can you give any update on the M&A pipeline and what you're seeing?

[Craig Bradley Campbell, CEO & Director]

Sorry, did you say M&A pipeline, Nick?

[Nick Corcoran, Equity Research Analyst]

Yes.

[Craig Bradley Campbell, CEO & Director]

Yes. So as mentioned in previous periods, we -- over the -- as COVID hit, we got much more focused internally, making sure we're doing all the right things for the business, and really had hoped that both the market conditions would show us some opportunities. So we had our fingers crossed that we might see some competitors with good businesses in a bit of distress, et cetera. What we didn't see was expectations on selling prices come down. So what I tried to allude to in my remarks is that as we've come out of Q3 and are starting our Q4, we actually have seen some inbound opportunities that are attractive, and we are analyzing and assessing those opportunities as we speak. And we'll have more to talk about as future quarters unfold in that regard.

[Operator]

There are no further questions. You may proceed.

[Craig Bradley Campbell, CEO & Director]

Okay. Well, thank you, Nick and Doug, for all your questions. And thank you to all the shareholders on the line. We look forward to being back to you in a few short months with our full fiscal year results, and we thank you very much for your continued interest. And again, I would appreciate you visiting our website under the Shareholder tab to see our most up-to-date Investor Relations materials, which speaks much more to our longer-term strategy and focus. And thank you, and wishing everybody healthy and happy times ahead.

[Operator]

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