Good day, ladies and gentlemen, welcome to the Calian's fourth quarter results conference call. As a reminder, this conference is being recorded. I would like to turn today's conference over to Mr. Kevin Ford, Chief Executive Officer of Calian Group. Please go ahead.
Thank you, Kerry. Good morning, ladies and gentlemen. With me today is Patrick Houston, our CFO. We'd like to welcome you to Calian's fourth quarter and fiscal year 2019 conference call. I'm very happy with our annual results. We again posted record revenues with annual revenue of CAD 343 million and revenues of CAD 90.9 million for Q4, crossing the CAD 90 million quarterly revenue mark for the first time in company history. This also is the company's 72nd consecutive profitable quarter. Our results demonstrate the strength of our diversification and the impacts of our growth framework. More importantly, they highlight the strength and dedication of the more than 3,000 people at Calian who continue to be the engine that drives our growth. I want to thank them for their incredible efforts. Calian's acquisitive and organic growth strategy, the investments in our innovation agenda, combined with solid financial management, is working.
We have closed nine acquisitions in the past eight years, including two in the 2019 fiscal year, while achieving positive organic growth and a continued profitability. I'm equally proud that our total shareholder return in 2019 was 21%. With this financial growth, we're also evolving the company. That is why, with these results, we've announced a change to our operating segments. The new reporting segmentation announced yesterday is an important development for our shareholders as we shift away from the two divisional construct, which I believe we had outgrown. Going forward, we will report in four operating segments. First, Advanced Technologies, which encompasses our legacy Systems Engineering division, IntraGrain, SatService, and a portion of engineering service that resided in our legacy BTS division, and the remaining BTS services have been split into the Health, Learning, and Information Technology segments.
This new segmentation better reflects our diverse services and markets, and I am proud to say that our new segmented view shows growth across all four of our lines of business. I will now ask Patrick to review the quarterly and full-year numbers. Over to you, Patrick.
Thank you, Kevin. We finished the 2019 fiscal year with record results, achieving 12% revenue growth and 7% EBITDA growth year-over-year. For the fourth quarter of 2019, consolidated revenues were up 16% from the prior year. We also finished the year with a backlog of over CAD 1.3 billion, which is higher than what we started the year with. This demonstrates our ability to both retain and diversify our customer base. I'm very happy to present shareholders with the new four-segment view of Calian's operations. These four segments help simplify the company for shareholders and provide them with a clear lens into our diverse business. You can find further information, discussion, and a view of current year and prior year performance of these four segments in our 2019 financial statement in MD&A. All of the four segments drove Calian's record year with positive revenues and earnings contributions.
Advanced Technologies' 2019 revenue was CAD 109 million, up 11% from the previous year. Health revenues were CAD 115 million, up 16% from 2018. Learning ended the year at CAD 63 million, up 3% from the previous year, and IT revenues were CAD 54.5 million, up 22% from 2018. We continue to believe that Calian's diversified, profitable growth engine is one of the company's unique strengths. Gross margin for the year on a consolidated basis was 21.8%. This is an increase from 21% in the previous year. Our focus continues to be the introduction of products and services into new markets in order to increase our gross margins. Operating expenses were up year-over-year as a result of acquisitions and investments in capacity and innovation, the expensing of share-based compensations, and certain one-time costs related to current year acquisitions.
Selling and marketing, administration, and facility expenses have increased as we scale the overall business and enter new markets. We continue to manage operating expenses while ensuring we invest where required to position the company for long-term profitable growth. Adjusted net profit per share for the year, which removes non-cash charges related to acquisitions, was CAD 2.43 per share. This is an increase of 7% compared to last year's adjusted EPS of CAD 2.27. Please see our reconciliation of adjusted EPS in our press release in MD&A. Earnings per share for the year were CAD 2.55 per share, up approximately 23% from the previous year. This increase was partly due to a one-time gain of CAD 5.2 million related to earn-outs payable for our recent acquisitions of SatService and IntraGrain. I'll remind people we structure our earn-outs based on EBITDA growth from the company's trailing historical performance.
The payments are made only once they achieve a minimum of 75% of that growth target. We believe this allows us to stay fiscally prudent while paying for strong growth. We continue to expect positive contributions from these acquisitions in the upcoming year. Our cash position remains stable at CAD 17 million. This decreased slightly from the previous year due to our two acquisitions, as well as working capital requirements, as the company continues to increase revenues overall and we deliver larger multi-year customer contracts. Our line of credit stood at CAD 13 million at the end of the year. I'd like to note that effective October 1st, 2019, we have adopted IFRS 16, which impacts how we account for our operating leases going forward.
These accounting changes will modestly impact our guidance for fiscal year 2020. We expect the impact of capitalizing our leases to be an increase in EBITDA of approximately CAD 2.9 million next year and a decrease in net income of CAD 0.2 million. We provided a full reconciliation of this change in our financial statements in MD&A. Please note that certain information discussed today is forward-looking and subject to important risks and uncertainties. The results predicted in these statements may be materially different from actual results. I'll now turn the call back over to Kevin.
Thanks, Patrick. The 2019 fiscal year has been exciting for Calian on many fronts. We finished with record revenues and EBITDA, executed two acquisitions, launched innovative products, strengthened our global presence, retained our key customers, and gained new customers across all of our lines of business. The two acquisitions closed for Advanced Technologies to support the segment's customer diversification and service line evolution objectives. Regina, Saskatchewan-based IntraGrain Technologies has enabled our push into the ag tech market, leveraging complementary capabilities for the segment. The acquisition of SatService, based in Germany, provides Calian with a foothold in Europe and supports the company's expansion in the European market with turnkey satellite solutions as well as products. As I set a profitable revenue growth target of 10% or higher, I was pleased to see Advanced Technologies' growth at 11%, Health at 16%, and Information Technology at 22%.
Our Learning segment focused on customer retention, re-winning two large contracts this year that added over CAD 200 million to our contracted backlog, while still growing at 3% in a year. Across the four segments, the company continues to invest in innovation. The Advanced Technology segment continues to develop its new line of carbon fiber antennas and Remote PHY cable technologies, as well as strengthening our communications products and software engineering offerings. In Q4, the Learning segment launched Calian MaestroEDE, an innovative exercise management software solution designed to fulfill complex training objectives. While these initiatives all require investment, we view them as critical to unlocking innovation and supporting Calian's long-term growth. Looking forward, we continue to see positive momentum on Calian's growth path as we execute organic and acquisitive growth strategies.
Leveraging our strong backlog investments in innovation and a dedicated employee base, I believe we're well-positioned to continue the execution of our growth plan. At this time, I'd like to inform all of our shareholders and analysts that we'll be holding our AGM and Annual Investor Day the morning of February 6, 2020, in Toronto, and you may contact Calian Investor Relations for more information. Lastly, the traditional markets in which Calian operates are stable, and management expects organic revenue growth and earnings growth in most or all of its 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, as well as customer utilization of existing contract vehicles.
Based on currently available information and our assessment of the marketplace, we expect revenues for fiscal 2020 to be in the range of CAD 365 million-CAD 395 million, EBITDA per share in the range of CAD 4-CAD 4.30, adjusted net profit in the range of CAD 2.35-CAD 2.65 per share. Kerry I'd like to now open the call to questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please be sure that your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask an audio question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. All right, our first question will be from Doug Taylor with Canaccord Genuity.
Thank you. Good morning, Kevin, Patrick. I appreciate the added segmentation, very helpful in helping us see the underlying drivers of your business. I want to start with a couple questions on that. As we work that into our models, is there anything you can provide us either quantitatively or by way of directionality about how those segments build up to that annual guidance you provided? Perhaps, you could frame that with respect to your 5% organic growth plus 5% acquisitive growth type target that you have for your business line.
Yeah. Hi, Doug. I think this year, we had a great performance in terms of all of them growing. I think we're still expecting that for next year, but I think the leader in leading the pack is going to be Advanced Technologies. They've got a strong year. Obviously, we have that big project that we're doing on the ground systems, as well as they have IntraGrain and SatService as growth drivers, as well as some of these new products. I think Advanced Technologies will be the most aggressive grower for next year, but we still expect all those segments to be above this year.
You mentioned the large ground systems business. Obviously, it was lumpy towards the end of this fiscal year. As we enter fiscal 2020, can you update us on where we are with respect to the backlog and ramp-up of that new business and the key contract that you have starting off there?
Yeah. We still expect a strong year next year, probably an increase of about CAD 20 million over this year's revenue for that project. Continuing on in the following year, we'll still have probably CAD 15 million-CAD 20 million that will go into the following year. It's still a lot of work to go. Progress has been good so far, and we're getting into delivery stages now, so I think we're still pretty positive on a strong year.
The EBITDA guidance that you provided, just to be crystal clear, that is based on the new accounting standard, so with the benefit of the near CAD 3 million from the leases, correct?
That is correct. Yeah.
Okay. First of all, can you help us with the lease benefit, where do you expect that to fall within the segmentation, or is that going to be largely corporate? Any help there would be good.
Yeah. The reduction in expenses of CAD 2.9 will be across mostly in the Advanced Technologies group, because they have the most expensive facilities. The facilities lie in each of the segments. That'll be the biggest reduction. You'll see we'll break up the amortization and expense down below the line.
Okay.
CAD 2.9, probably about CAD 2.5 of it is in Advanced Technologies.
That's very helpful. If I back out the impact of that accounting change, it seems to me that the EBITDA guidance suggests roughly static margins across corporate-wide. Is that consistent with how you view the individual units, or are you expecting there to be some winners and losers with respect to your margin profile of your business this year relative to last year?
I think we're seeing some improvements. The large ground system projects generally have lower margins. That's pulling it down a bit. I think we are expecting some improvements minus that project. Obviously, a lot of this innovation we're doing is in new products. We're hoping to start phasing in towards the end of the year. To the extent we're able to do that, I think we can continue to improve the margins. Certainly, that is a focus.
Yeah, it's Kevin. With regard to our innovation agenda across all the segments, the goal is to continue to increase margins. If you look at the announcement I talked about in our Learning segment with our MaestroEDE product. As we transition from services to products to solutions, the whole spirit of that is, number one, to make sure our customers are getting a full solution offering in each of our segments, but as well that we bring more technology in there to drive margins. My expectation is we're going to continue to push margins forward. Definitely in our Advanced Technologies group, we expect more over the longer term as we invest in more products right across IntraGrain, SatService, and our legacy SED division. It's definitely a goal, Doug, I don't think you're going to see major jumps.
You'll see incremental growth over the next few years here.
Fantastic. I'll pass the line. Thank you.
Thanks, Doug. Appreciate the comments.
Thank you. Our next question will be from Benoit Poirier with Desjardins Capital Markets.
Hey, good morning, Patrick and Kevin, congrats for the level of disclosure and the new segmented information. Very appreciated. Just to come back on the big satellite contract, the ground system contract, just want to get some color about the ramp-up right now. You mentioned that there will be about CAD 20 million incremental revenues in FY 2020. What will be the backlog following FY 2020? Is there another CAD 15 million-CAD 20 million, or the contract will be mostly completed?
Yeah, I think in that range, CAD 15 million-CAD 20 million, depending on the exact timing. That's likely what would go into the following year to finish it off.
Okay. Perfect. This amount, if you add up CAD 20 million in fiscal 2020, could you remind me what was the contribution in fiscal 2019, Patrick, with respect to that satellite contract?
Approximately around CAD 20 million.
Okay, perfect. Okay. That's very good color. Could you provide now some color about the working cap and free cash flow looking at the fiscal 2020? If you look at working cap, there was some consumption fiscal 2020 and about CAD 8.5 million. I would just be curious to know a little bit more as you still add more revenues from this contract in fiscal 2020.
On working cap, we have a couple of things going. Obviously this contract is not as flat on working capital, it's a bit heavier upfront. I think those start to reverse kind of in the second half of this year. We'll probably see a bit of pressure in the first two quarters, it starts to unwind in the second half. I think that's one factor. I mean, the overall business is just growing everywhere, that's just going to lead us to have more working capital in terms of accounts receivable. CapEx, we expect next year to be fairly flat to this year. We've got a few investments we're making in IT systems and things like that, it should be consistent with this year.
Okay, perfect. Would it be fair to say that the working capital consumption should be similar to fiscal 2019, CAD 8.5 million? Would you expect an improvement or a decrease versus last year, Patrick?
That's probably a fair estimate. A lot of it comes down to timing. Right around the end of the year, of course, it could go a couple million either way, but I think that's a safe timing estimate for now.
Okay. That's fair. That's pretty good. I was just curious to know if you saw any impact from the election on your business. Is there something that was either a benefit or some impact on Calian with respect to the election?
Yeah, from my perspective, Benoit, the government is forming, even though what we're seeing in some of our key portfolios is, for example, in defense, Mr. Sajjan is still the minister. Mr. Bains is still there. When you look at some of our key drivers from a government business perspective, at least initially, we're seeing stability in the sense that the ministers that were appointed in those departments are basically the ministers we had prior to the election. As far as the defense agenda with the Strong, Secure, Engaged policy that was put out under Mr. Sajjan's watch, I don't expect there's going to be a major variation for that. In that policy, they had basically committed to increasing defense spending over a period of years.
Again, I don't expect there's going to be a major shift. We are still very busy in our government segment right now and the federal segment for sure, across all of our businesses. Right now, probably early to tell until we get the budget from the government in February, but right now, at least I would say if anything, it looks to be stable coming out of the blocks just by the reality that we're dealing with what seems to be the same ministers in some of our key departments.
Good. That's very good color, Kevin. When we look at the EBITDA margin by operating segment, you mentioned some color about fiscal 2020, but I was just looking at how you were able to improve the margin from 13.3% EBITDA to 16% this year. Just wondering if the 16% kind of the sustainable level right now, Patrick, and you'll build on top of that?
I think what we've just said, the Health team's done really an excellent job is to expand that business. We've gone from about one contract to now we're more than 50 contracts that spans across multiple different customers. We're also bringing in psychological assessments and things like that much higher value, more differentiated products. When we go into these new customers, we work in their environment, really customize the product to their needs. That's allowed us to push those margins up. We expect them to continue to do that. We've been really successful, and I think this year is just a continuation of that.
Perfect. Okay. From a modeling standpoint, what should we expect in terms of corporate costs, but also with respect to the intangible or payout earnings in fiscal 2020? I'm talking here corporate costs about the CAD 4.9 million and basically the adjustment that needs to be made to derive adjusted EPS. What kind of sustainable numbers we could look for?
Yes, again, for the adjusted EPS, I think the amortization of intangibles, this year was about CAD 3.1, probably goes to about CAD 3.8 million next year, accretion is probably flat. Obviously we had the gain this year. Right now, we have the liability on the books for those two companies. We're still planning on them getting close to that earnout, but we'll probably have a better reading on that towards the end of next year as we get closer to those earnouts.
Okay, corporate cost is CAD 4.9 million, kind of a sustainable level going forward, Patrick?
Yeah, I think so. Part of this restructuring is to try to find efficiencies on the corporate side, right? Have like a shared service model that helps each of these segments grow. We're starting to implement that now. Obviously, we've been catching up the last couple of years in terms of investments that just needed to be made to scale this company. I think now we're going into selective investment, but looking for efficiencies as much as we can.
CAD 4.9 likely a good base.
Yeah, there's a few investments we need to make, but I don't think it's a drastic increase.
Okay. Last one for me. When we look at the earnouts, you mentioned some color in the annual report with respect to IntraGrain, SecurTech and SatService, the fact that they were not meeting the EBITDA, the earn out in the first year. Just want to know, does it change the outlook going forward, or were they relatively close to hit the targets? How we should look at the contribution from those three acquisitions, gentlemen?
Yeah, it's Kevin. From my perspective, we're still very positive on all three acquisitions. If I walk through them on the SecurTech, our cyber business continues to grow. The fact now that we can offer products as well as services based on the SecurTech acquisition, is only going to be good for us long term. Still very positive on SecurTech, on their contributions going forward, and I do believe they have every opportunity to make where we want to see them in year two. IntraGrain, what we're seeing with IntraGrain is frankly, when you look at some of the factors that affected IntraGrain this year, the drought and some of the ag tech space, I think we're just seeing the effects of that with regard to maybe a slowdown in orders, but not necessarily something that would indicate that the business is not strong.
It's just some realities that we're dealing with, that we have to deal with some environmental factors now from an AgTech perspective. When there's droughts and things like that, people tend to hold off on buying. We're just dealing with some of those realities. If you still look at their contribution to the company this year, it was very strong, both from a margin profile and EBITDA perspective. Again, very positive IntraGrain, very talented team, and I do believe that they're going to continue to support our long-term objectives. SatService, we've had a very short window for SatService after we acquired them. Very short earn out period for the first phase. Again, we look at that as being just a timing issue. Their backlog is very strong.
I did a review a few weeks ago with SatService, and I'm very impressed by the orders that are coming in and the diversity of customers that are coming in, frankly, from accounting perspective. Again, a brilliant team over there, very dedicated, and I'm very confident in their ability to, again, support our long-term objectives. As Patrick said, the one thing we're doing very well with our M&A playbook is that we're making sure that any company we talk to, everyone has growth objectives, which is fantastic, and those are the companies we want to buy. We also want to make sure that from a value perspective, we're getting the right multiple on trailing and future EBITDA. The earnouts, we still believe is a great mechanism to ensure that there's shared risk between the buyer and the seller to achieve those targets.
I think it's working. We've had nine acquisitions. Our framework's worked. We've paid earn-outs in many of our acquisitions. It also protects to make sure we're not overpaying for perceived EBITDA that may be coming going forward. It just revalidates to me our M&A playbook is working, and in all three, no regrets. All three are doing very well. Very proud of them, very proud of the team that's working there, and I'm confident again that we'll see continued growth in each of those acquisitions. Still very positive in all three, and we will continue to look for more M&A opportunities this year for sure.
Okay, maybe just a quick one. With respect to the ground system contract, could you talk, Kevin, about the opportunity to replace those revenues that it will ramp down in fiscal 2021? It is still a good contributor this year and fiscal 2021. I would just be curious, the opportunity to replace those revenues going forward.
No, thanks. Great question. I think that's a very fair question because we have had history at Calian of kind of moving these, I call them the big programs, through the system and then kind of taking a step back on our growth objectives as they finish. Number one, over the next two years, I think we'll see solid contribution from that project. During that time, we're doing a few things. Number one, I've invested more of any CEO on our innovation agenda in new products, new capabilities, just organically. I believe those are going to start to increase to start offsetting any major project wind down. Number two is our acquisitions. We've just acquired two last year. We are looking strongly at acquisitions to support our growth objectives. Again, I'll be looking for opportunities to make sure we don't take a step back.
Three, when you look at the other segments that we're dealing with, both in healthcare, our IT business was up 22% last year, healthcare business up 16%. What I'm very confident on, as you know, Benoit, I call Calian a four-piston engine, and I believe right now. If our Advanced Technologies is firing all its cylinder this year, I think the other ones continue to pick up pace. They have picked up pace. If you look at IT services, for example, and cyber, we are just getting going as a cyber professional services company, and you saw that growth, 22%. At CAD 55 million, I think there's huge opportunity for us to continue to grow that segment, so both organically and through M&A.
The plan right now in our strategy is to not take a step back when those projects are done, to backfill them with either new business or backfill them with M&A. That's our collective challenge, and I'm pretty confident the team's up for that challenge.
Okay. Thank you very much for the time. That was a great call. Thank you.
No, great questions. Thank you, Benoit, appreciate that.
Thank you. I'm showing no further questions in the queue at this time.
Okay. That's great. I just want to circle back to a Doug Taylor question. Actually, I think about it. I think Doug asked the question on our guidance and whether or not what's the basis of that. I just want to really confirm right now. That guidance is based on what we know today. It doesn't factor in any other acquisitions. It's basically what we're doing today in the company is driving that guidance. I just want to make sure that's clear as we exit this call. Kerry, thank you for moderating. Everyone, thank you again for joining the call. I hope to see all of you at our AGM in Toronto on February 6. An investor day, we're going to be bringing some of our leaders in to talk about all the great things that are going on in this company and the innovation.
Obviously, Patrick and I are available for any other further questions post this call. You have a very excited CEO here with regards to what I'm seeing in the company. I think the four segments really will help define the company moving forward for our shareholders, our employees, and our customers. I think it's a right time for this at Calian, and I look forward to talking about our progress again next quarter in February on how we're doing against our growth objectives. With that, Kerry, we can end the call. Again, thanks everyone for your time this morning. Very much appreciated.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.