Good day, ladies and gentlemen, welcome to Calian's Second Quarter Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Kevin Ford, Chief Executive Officer. Please go ahead, Sir.
Thank you, David. Good morning, everyone. Good morning, ladies and gentlemen. With me this morning is Patrick Houston, our CFO. We'd like to welcome you to Calian's Second Quarter 2020 Conference Call. To start off, I'd like to thank all of the frontline health and essential service workers for their dedication and courage during this extraordinary time. Frontline health workers, Canadian Armed Forces members, and other essential service professionals, including our own dedicated staff at Calian, are out there serving those in need and, as a result, encountering exposure risk every day. From all of us at Calian, I want to express that we recognize and deeply appreciate your service. Through this crisis, Calian has remained resilient. We've activated our own emergency management expertise internally to ensure we are responding appropriately in our crisis management.
As a result, our experienced executive and management teams have been deeply engaged on a daily basis, ensuring leaders are well-briefed and that we are taking necessary action to respond to this unprecedented global challenge. While we have experienced some impacts on the company, overall, I am very proud of our second quarter results. We posted a quarterly revenue record of CAD 104 million, representing the first time we've exceeded CAD 100 million in a quarter. It was also our seventh consecutive quarter in which we recorded our highest ever revenue. We also reported our 74th consecutive profitable quarter. Overall, the quarter reflected the essential nature of our services to customers. Even in this turbulent environment, our continued focus has been growing our business organically and through acquisitions and doing this while continuing to deliver consistent profitability.
The Advanced Technologies segment posted very positive organic revenue growth of 60% compared to the same period a year earlier. This included top-line contributions from our new ground systems project and the newly launched mobile wireless product. Health revenues rose 16% from a year earlier as we closed the acquisition of Allphase/Alio and continued to grow organically. Information technology posted 7% revenue growth on stronger solution sales from our cybersecurity practice. The Learning segment had a slight decline due to some delays in major training exercises related to COVID-19 and the pace of new business. I would like to thank our dedicated team at Calian for their efforts during this unprecedented time. From my perspective, they truly are the stars who have been carrying Calian through this very challenging business environment. I will now ask Patrick to review the quarterly numbers. Over to you, Patrick.
Thank you, Kevin. It's exciting to post another record quarter with the results reflecting continued revenue and earnings growth. Second quarter revenue increased 25% year-over-year, while EBITDA was up 55%. The company's essential services and the stability of our diversified business was evident in the quarter as Advanced Technologies, Health, and IT posted solid revenue and EBITDA growth compared to the prior year quarter. We continue to believe that Calian's diversified, profitable growth engine is one of the company's unique strengths. During the month of March, as the government implemented stay-at-home orders and other physical distancing measures, the company experienced a reduction in revenue of CAD 1.2 million. Please see our MD&A for further discussion of the impact of COVID-19 in the quarter.
Going forward, we currently anticipate measures to be in place until at least early June and, as a result, anticipate a further revenue impact of CAD 6 million-CAD 8 million in the current fiscal year. Consolidated gross margin in the quarter was 22.5%, an improvement from 21.7% in the second quarter of the prior year, largely due to contributions from our acquisitions and an increase in new business at higher margin profiles. Operating expenses in the second quarter were CAD 13.3 million. This compares to CAD 11.6 million in the same quarter of the previous year, a 15% increase. The increase was the result of costs from our recent acquisitions as well as increased resources as we continue to invest in our business development and delivery engines to support the company's growth.
Adjusted EBITDA for the quarter was CAD 10.2 million, an increase of 55% from CAD 6.6 million in the same quarter of the previous year. Adjusted EBITDA in Q2 included a favorable impact of CAD 0.8 million from the adoption of IFRS 16. Growth on a pro forma basis year-over-year was 40%. Please see our financial statements and MD&A for a reconciliation of the impact of this accounting change. Net profit in the second quarter was CAD 5.3 million, an increase of 36% from CAD 3.9 million in the same period of the prior year. Adjusted net profit in the second quarter was CAD 6.8 million, an increase of 51%. Working capital in the quarter increased by CAD 11.8 million.
This was a result of ongoing implementation of our large ground system project and the impact of the change in the U.S. to Canadian dollar foreign exchange rate at the end of the month of March. The impact of overall business growth was offset by better-than-expected collections and prudent cash management. With respect to our large ground system project, working capital demand on the project in the quarter was CAD 9.5 million. We expect to have additional usage in Q3 before seeing improvements by the end of the fiscal year, about CAD 5 million from our current position. The cash and cash equivalents balance ended at approximately CAD 33 million. During the quarter, we repaid our credit facility balance of CAD 26 million, and we will continue to maintain our CAD 60 million credit facility with RBC for future use.
Finally, we're pleased to announce the completion of our public offering this quarter, in which we issued 1.56 million shares for net proceeds of just approximately CAD 66 million. This has significantly strengthened our balance sheet and will provide liquidity going forward to execute our profitable growth strategy. Post-transaction, we now have approximately 9.6 million shares outstanding, and our weighted average shares outstanding for this fiscal year will be approximately 9.1 million. 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 it back over to Kevin.
Thank you, Patrick. Overall, I was happy to see Calian's growth strategy continue through the quarter, despite the challenging and extraordinary business environment across the global economy. In speaking to our investors, I use the phrase often, "Stability through diversity, growth through innovation." From my perspective, we're continuing to demonstrate the value in our four-piston engine. During the quarter, on January 31st, we announced the acquisition of health services company, Allphase Clinical Research Services and Alio Health Services, based in Ottawa. The company served the pharmaceutical and medical device industry and the broader health sector with clinical trial services, specialty medication support, community care, and other services, all enabled by an innovative healthcare delivery software management application. This acquisition supports all four pillars of our growth framework and specifically diversifies our customer base into pharmaceuticals, home care, and hospitals, and supports Calian's innovation agenda with software-enabled services.
Congratulations to our health team for closing this exciting acquisition, and again, a warm welcome to the Allphase/Alio teams to Calian. In a challenging environment, we continue to win new business and renew contracts. Calian posted strong contract signings of CAD 140 million in the quarter, increasing our overall contract backlog. These included wins in our Advanced Technologies segment for the provision and installation of ground systems in the European market, increased contract backlog in health due to numerous wins as demand for our health services remained very strong. The Allphase/Alio acquisition also added to our contract backlog. For the IT segment, we continue to see demand in cybersecurity services and increased demand for IT consulting with a major defense contractor. In learning, we are seeing increased demand for emergency management support services across First Nations, provincial, municipal, and critical infrastructure organizations.
The first pillar of Calian's growth framework is customer retention. Post Q2, we were pleased to announce the successful recompete for a contract from the Department of National Defense to provide training services for the Canadian Forces School of Aerospace Technology and Engineering. With two optional extension periods of two years each, the aggregate contract value over the six-year period is approximately CAD 54 million. We continue to work on a daily basis to adjust the delivery of products and services for our customers, despite a rapidly evolving environment, both within Canada and internationally. The criticality of what we do has meant that we have seen excellent collaboration and support from our customers, which we greatly appreciate. Our management team will continue to adjust as needed to ensure the continued operation of all four segments while focusing on the safety of our employees.
In closing, I am pleased with the continued execution of our strategy in the quarter. Continued investment in research and development and M&A will be critical to our growth and continued push into new markets. With a solid cash position and access to our debt facility, we have the liquidity we need to carry us through the short term and balance sheet and cash flows to support Calian's continued innovation and long-term profitable growth objectives. Lastly, while the traditional markets in which Calian operates are managing through this pandemic, management expects organic revenue and earnings growth opportunities in most or all of our segments 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, customer utilization of existing contracting vehicles, and any impacts from the COVID-19, specifically government regulations related to physical distancing, stay-at-home orders, and broader global travel restrictions. Based on currently available information and our assessment of the marketplace, we have maintained our previously issued guidance but have adjusted the per-share numbers, which have been impacted by the issuance of shares in our previously mentioned public offering. We expect revenues for fiscal 2020 to be in the range of CAD 380 million-CAD 410 million, EBITDA per share in the range of CAD 3.77-CAD 4.03, and adjusted net profit in the range of CAD 2.21-CAD 2.48 per share. Please see our press release and MD&A for a complete reconciliation of the issuance of shares and the impact on our guidance.
David, with that, I'd like to now open the call to questions.
Thank you. Ladies and gentlemen, at this time, the floor is open for questions. If you would like to ask a question, you may do so now by pressing star one. If you are using a speakerphone, please make sure your mute function is disabled to allow your signal to reach our equipment. Again, press star one to ask a question now. Our first question comes from Doug Taylor with Canaccord Genuity.
Yeah, thank you. Good morning, Kevin, Patrick. You maintained your revenue and EBITDA guidance, which is certainly saying something in these markets, and that's despite your projected impact from COVID. I guess I just want to ask, is there a particular area of outperformance, be it Advanced Technologies or otherwise, that's offsetting that the impact that you spoke about? Or is it just that you feel like your guidance range is wide enough that you can swallow that impact within the originally established range?
Yeah, Doug. Thanks for the question. I think what we're seeing is, as Patrick mentioned, we've been able to quantify the impact of COVID-19, both in the context of our recent quarter and projecting forward. We're working with a management team to literally almost person by person, project by project, identify the impacts. We feel the range of the impacts right now based on what we know today and our estimations of the timeline are correct. What we're seeing in offsets is just the increased demand on health services, for example. Some of our other projects in our IT group have weathered the storm very well in the context of staying able to continue working. Our Advanced Technologies segment as well, with the projects pretty well all deemed essential, we're available to maintain our schedules and also ideally hope to improve even our schedule implementation.
It's really a mix of a few things that are allowing us to hold our guidance despite the COVID-19 impact. Even though there is challenges out there, we do see some opportunities for us as well, just by the nature of our services.
Okay. Appreciate the guidance on the future COVID-19 impact in the coming quarters. We had talked on a previous call about that sort of being a CAD 3 million-CAD 4 million a month range while the restrictions were in place. That appears consistent with the number you provided or reiterated today. I thought I would ask if that amount of impact is front-end loaded to April, and if, for example, the restrictions were to last longer than the June 1 date that you are talking about here, whether the impact on future months would actually be less than the range I just kind of talked about?
I think certainly, I think your point is most of the impact is going to be at the beginning of Q3 here, and it's going to start tapering off. I think if it does get extended, obviously we will continue to see some impact. I think, perhaps on a decreasing rate because we'll be able to get some portion of the services going again. We're seeing customers are still working with us to try to get either partial return so that they don't lose the capacity completely. I think the longer that goes, I think we continue to see more of that. I think there'll be an impact, just on a decreasing rate.
That's exactly what I was looking for. Thank you. Last question from me. I'll pass along. M&A in this environment, I can appreciate that everyone is kind of hoarding their cash and liquidity right now. You guys have never been ones to rush these things, but can you comment on how the environment looks for potentially additional M&A right now, both your appetite and pricing and things like that? That would be helpful. Thank you, Kevin.
Yeah. I think for us, to be honest with you, the focus hasn't changed. Clearly our COVID-19 impact and response has been a daily call with the team, with regard to managing that and managing operations. Balancing that out has been our continued focus on growth. We continue with research and development projects. We continue with our M&A platform as far as looking for opportunities aligned to our four segments and our strategies. I would say, Doug, that that element of our business hasn't changed. The thing you have to consider is just the ability to do proper due diligence in a COVID-19 world. We're adjusting to that with regard to our discussions with our board, discussions with our staff. Right now, it's full steam ahead.
We want to not only come out of COVID-19 with good results, I want to come out of stronger than ever with us ready to go and not taking a step back in our growth posture. We see opportunities across the segments just by the diverse nature. There's a lot of questions out there on valuation right now. The one thing I would say I have noticed is that companies that are serving essential services or are managing through this very well, I don't think there's a big valuation impact. I think what we're seeing obviously is companies that are maybe more affected than others, that maybe the valuation question could come into play in the short term.
We're seeing a real mixed bag right now on valuation, to be honest with you, and I think it really depends on the company's customer segments and their deemed "essential services" that they're providing.
That's good color. Thank you. I'll pass along.
Thanks, Doug. Yeah. Thanks, Doug.
Thank you. Our next question comes from Deepak Kaushal with Stifel.
Oh, hey, good morning, guys. Thanks for taking my questions. Kevin, this has been a burning question on my mind for you guys and now we know a little more about the environment with COVID, but you guys employ internal experts on healthcare and emergency response. I'm just curious what they're telling you and your board about COVID that's ahead of what we hear maybe in the mainstream or ahead of the curve, and how Calian might be able to take advantage of this insight, not just for the business, but to benefit all of your stakeholders, including some of your customers.
Yeah. Thanks, Deepak. I think what's happening for Calian is the fact we have those emergency management and health professionals, as you said, engaged. I think where it's really helped us is just on our response protocol. We have, earlier as I mentioned, a daily call at 10:00 A.M. every morning with a formal briefing to all of our management team across the country and in some case the globe with regard to latest statistics, rates by province, rates by our operating regions, impacts with regards to whether it's in Saskatoon or in Ottawa. I think the one thing we're seeing is our ability to digest, ingest information, look at the trends, and then actually respond proactively has been very helpful for Calian.
We are now finalizing our recovery protocols, leveraging the same technology, the same methodology that we'd use for our customers with regard to how do you now plan the recovery. That's been very, very helpful for us, I think, just to keep our arms around the response to this. As far as, do we have any secret sauce or crystal ball with regard to COVID? I would say I'm not convinced we're any better off than any other company, other than our ability to ingest this information around multiple sources. For us right now, our estimates and our guidance are based on what we're seeing in the context of the numbers, what we're seeing as context of the provincial and federal reaction with regard to reducing some of the restrictions.
Some of our customer input with regard to, for example, whether it's at national defense or whatever, our ability to either work remotely or get back to work at the office in any case that way. I don't think we have a crystal ball, Deepak, but I think what we're doing is we're doing really well with ingesting information and making informed decisions about where and how we continue to operate and maintain our growth profile in this environment.
Okay. That's helpful. In terms of the benefits or the opportunities that you're seeing with COVID-19, I was wondering if you can just give a little bit more specific color on what the nature of those are. I know you talked about a bit of that in healthcare and some more demand and the IT side of things, but are you seeing specific, for example, opportunities related to telehealth or on the IT side in terms of work from home? What kind of commentary can you give us in terms of pipeline for that side of the business?
Yeah, I think for me on the opportunity side, if you look at our Advanced Technologies group, it's interesting. A good part of our funnel right now and sales funnel continues to be very active. That gets back to that critical infrastructure communication support we're providing, whether it's in SATCOM, mobile environments, defense. IntraGrain right now has very, very strong demand with regards to the farming season coming. We've got our SatService group in Germany that continues to expand its customer base. I think that's more of a business as usual, but we don't see a huge impact right now in COVID-19. If anything, we're seeing just increased demand for what I call that critical infrastructure or critical components to some of these sectors. In our health business, for sure, we're seeing increased demand in certain areas, in certain pockets, Northern nursing, for example, in Nunavut.
We've gone from a couple to many nursing support in Nunavut. We've actually worked in the oil and gas sector in certain areas for things like travel screening. We're also working with organizations on the setup of mobile hospitals, and that to us is brand new for us, right? I think that we're frankly just with regard to government response. We're seeing impact there on the positive side. Just again, more and more support for the health business. On the learning side with emergency management, again, these opportunities aren't necessarily as large, but they're definitely in demand. As I mentioned there, First Nations, critical infrastructure organizations, provincial municipal organizations are asking us to help them support not only the COVID response, but you have to also consider we're getting a fire and flooding season now in the majority of these areas.
A lot of these folks will certainly get overwhelmed by the amount of activity they're having to deal with. In our IT services, it's basically been business as usual, but our continued focus on cyber and cyber products is really paying off as we target and continue to invest in the sales engineers. Not necessarily COVID related, it's just an impact I think we're seeing on our previous investments we've made in cyber. Long answer to your question, but I hope I covered it.
No, that's very helpful. If I can ask just one follow-up to that, and I'll pass the line. You have good strength and opportunity in all four of these divisions. When you think of capital allocation, what do you expect to see the most over the next 12 - 18 months? I'll pass the line. Thanks again.
From a capital allocation perspective, as far as what do I expect to see the most, well, to be honest with you, I'm still really excited about all four segments, and I'm not sure I have a preferred segment per se. Definitely our Advanced Technologies with our ground system, large ground system project and some of the new wins, and some of the product development we're doing, we're still going to continue to invest capital there. Our health business, we've just acquired Alio/Allphase. It was a multimillion-dollar investment to diversify and bring a software platform into health. Now it's about integration and working with that team to enter new markets.
For learning, really, we're focusing on more M&A support to learning, I would say, in both geographic distribution and targeting Europe for sure, as well as bringing a new capability for learning in areas such as virtual reality, those type of things. In our IT business, it's really a matter of working with Sandy, our leader there, on what we call our cyber footprint. As you know, the journey of our cyber business right now is coming out of Ottawa. We've invested now in new headcounts in the Toronto marketplace, and we're looking at other geographic opportunities from an M&A perspective, as well as potential cloud opportunities. All four have capital opportunities. As Patrick mentioned, we're strong financially. I think I'm confident in our ability to still invest in all four, and we continue to assess the best opportunities as they come forward.
Okay. Thank you again, and stay safe, guys.
Yeah. Thanks, Deepak. Appreciate that.
Thank you. Our next question comes from Benoit Poirier with the Desjardins Capital Markets.
Good morning, Kevin. Good morning, Patrick. Congratulations for this very strong result. Just to clarify with respect to the COVID-19 impact, Patrick, you previously mentioned in the former call that you were expecting about CAD 7 million-CAD 8 million in Q2 and Q3. You just talk about the CAD 6 million-CAD 8 million. Is it incremental to the former number, or it's basically the new kind of impact that compares to the previous one?
Yeah. It's not on top. This is the total impact, so CAD 6 million-CAD 8 million, and we had about CAD 1.2 million this quarter. That's the total impact. Obviously, we've extended the timing. If you think back to our previous call, we were hoping at that time that things would be back to normal now. It's taken longer. At the same time, we've done a bit better in terms of getting some people back to work.
Okay.
That's why the numbers stayed fairly the same. It's just a bit longer, but we've done better than we were hoping.
Maybe a little bit skewed more toward Q3, right?
Correct. We're hoping the majority of it should be Q3, and then Q4 should be hopefully back to normal.
Okay. That's perfect. Just in terms of contract signings, you were able to put out a book-to-bill ratio of 1.3 in the quarter. You were very successful in announcing another satellite ground system contract recently. Could you talk about the bidding pipeline, what you would expect in terms of booking for the next quarter to come, and talk more specifically about the other opportunities you see for satellite ground systems?
Yeah. Okay. Go ahead, Patrick. Yeah.
If you want me to jump in.
Okay.
I'll say that, I mean, they're generally pretty long cycles on some of these larger deals as people look at their network needs and CapEx. We're really glad to win that transaction earlier this quarter, and our work is probably gonna start in Q4 and go into the following year. It's a good project. We're still seeing lots of activity on RFPs coming out, and our teams are certainly submitting them and we're competing aggressively for those deals. We haven't seen a tremendous reduction in the short term on the amount of RFPs. We just need to see them come to conclusion and whether we can successfully win them or not. In the short term, I think we're pleased to see that the volume of RFPs is still there.
Okay. Now with respect to the latest two acquisitions in Ottawa, could you talk a little bit, still early, but about the integration and the opportunity to extend those platforms organically outside Ottawa?
Yeah, I'll take that. Benoit, first and foremost, we're excited with the Allphase because of the diversification. Even though it's Ottawa based, they do serve national customers for sure. I'm working with Gordon and Jeff, who's the CEO of those companies. We're working on now just integration for our playbook with regards to the back office integration and those type things. What I'm really excited about is just the market reaction to this has been very strong, and we've already seen the integration work for us in the context of responding to some of the increased demand from COVID-19. We think there's diversification opportunities right out of the blocks, as they brought in a whole new customer set to Calian in the pharma area, for example, home care, which was new to us.
If you can imagine, they now have almost a CAD 400 million company here backing them with regard to our ability to go talk to customers and larger customers with regard to the capability that we can bring collectively. I think it's very positive. The integration's going very well, and as we see more and more of the talent at the companies, we're just so impressed with their capabilities. The next piece obviously is looking at this home software application that they've got and looking at how we scale that as well going forward. We're very excited about it. We think there's lots of integration opportunities as far as the one plus one equals three, and frankly, coming out of the blocks, it's been one of the strongest ones as far as coming out of the blocks quickly.
Okay. That's great color. Last one for me. When we look at Primacy, could you maybe provide some color on how the COVID-19 impacts your contract with Primacy and Loblaw?
Yeah. What we're seeing with that is not huge impact with regard to it. Some clinics had decided to close. I think generally it's business as usual. Just the pace of certain things that maybe have to slow down, whether it's maintenance on a clinic or whatever, just the reality of the-
The restrictions, but we're working a lot collectively to make sure that the program is still running efficiently. I think there's been minor impact, but I don't think it's been in any way what would be deemed as significant on the Primacy network.
Okay. That's great, Poirier, and thanks for the time.
Thanks, Benoit. Appreciate the questions.
Thank you. Our next question comes from Furaz Ahmad with the Laurentian Bank.
Hey, good morning, guys.
Hi, Fauraz.
Just a quick question. Just on the Advanced Technologies segment, you obviously saw some really strong organic growth. Would you be able to break out how much of that was from the new ground system and how much was from the wireless product?
Yeah. Ground system was pretty much consistent from last quarter. That was where we've kind of reached our peak run rate here as we're delivering the project at our peak right now. We did see pretty significant increase on the wireless products, probably about 3x from last quarter. Last quarter, we just started deliveries. Now we've really gotten the supply chain going. We haven't seen any impacts there, which has been good, and been keeping the ship to the customer. It's a really strong growth, and that was one of the reasons why we saw the margins and our EBITDA contribution in Advanced Technologies go up this quarter. Yeah, really positive about that project.
Okay. That's great. On the health side, margins came down a fair bit. I imagine a lot of that is just because of the cost related to the acquisition of Alio and Allphase. Was there another component to it as well? I know you guys mentioned hiring as one.
Yeah, we have been adding some new capacity there. Obviously, we're seeing some opportunity to grow, so we're investing there. Your point's valid on the acquisition. We did have some one-time costs in the quarter as we completed that transaction, so that's in the service line. Otherwise, I think you'll see the margins kind of return back to where they were in the previous quarters, and over the long term, I think probably go up a little bit as Alio and Allphase contribution generate a bit higher margin than our existing business. I think you'll start to see those improvements over the next couple of quarters.
Okay. In terms of Alio and Allphase, I know you guys have only had them for about two months now, and I know, Kevin, you mentioned they're performing relatively well. Is it generally far and above the numbers that you outlined at the time of the acquisition, or is it relatively still in that range?
It's still in the range. I think the expectation that we were, again, with our own due diligence and when we looked at the forecasts and kind of locked in numbers from a growth trajectory of the company, we're seeing it's still in the range. We're seeing the ramp up. We just had a major win, a good-sized win just with the pharma area. We're ramping up as we expected. All the deals that we expected to close are closing, and the team is ramping up well with that. I would say it's in line with our expectations for sure. Again, as I get to know Glenn with Gordon and the team, we just feel pretty excited about the opportunities they're bringing to the table.
Yeah, so far it's right on trajectory that we were expecting as far as the growth opportunities, and the team continues to pursue and close new business, which is exactly the spirit of when we bought them. It's good. It's been excellent so far.
Okay, great. Thanks, guys.
Thank you.
Thank you. Speakers, at this time, we have no other questioners in the queue.
Listen, thanks, everyone. Patrick and I and the team, again, I want to wish everyone, hope everyone can stay safe in these challenging times. We do look forward to giving you updates of our Q2 results coming up in August. Again, my thanks to the Calian team and our extended healthcare team and all of the folks today that are working so hard to try and keep our customers served and as well, helping everyone stay safe. With that, David, we can close the call, and we look forward to giving updates in the next quarter call in August, everyone. Thanks and take care.
Well, thank you, ladies and gentlemen. This concludes Calian's second quarter results conference call. Thank you for your participation. You may now disconnect.