Good day, ladies and gentlemen, welcome to Calian's second quarter results conference call. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Mr. Kevin Ford, Chief Executive Officer. Please go ahead.
Thank you, Paula, good afternoon, ladies and gentlemen. With me today is Patrick Houston, our CFO, and I'm also happy to have join us this quarter, Patrick Thera, President of our SED Systems Division. We'd like to welcome you all to Calian's second quarter 2019 conference call. I was very happy with our results this quarter as they demonstrate the impacts of a growth strategy. We again posted Calian's largest quarter of revenues in the company's history, reported solid organic revenue growth, and won key contracts with existing customers. The broader team continues to execute our growth plan with innovation and global market opportunities in mind, as demonstrated in our recent announcements. First, we announced the acquisition of Germany-based SatService, a solid player in the European market for satellite communication systems. Effective April 1st, this is our first major international acquisition.
SatService will support the expansion of our Systems Engineering Division into the European market with turnkey satellite solutions as well as products. The company offers us a geographic footprint in Europe and a talented team to help offer combined products and solutions in new markets. The purchase price was approximately EUR 6.5 million on closing, plus two additional payments in December 2019 and December 2020 based on EBITDA performance. Second, in support of our innovation agenda, our Saskatoon-based Systems Engineering Division recently announced a new line of carbon fiber antenna products. I'm very excited about these higher performance satellite ground system antennas, which are the direct result of several years of R&D work at SED. This type of innovation supports the service line evolution pillar of our growth framework, and frankly, it is critical to protect our competitiveness going forward.
Now, as we go to market with our satellite solutions, we can offer satellite ground systems that are not only less expensive and faster to install, but they also offer higher performance in the industry's more commonly used higher frequency ranges. This is an excellent example of our innovation agenda at work. I'd also like to acknowledge that this is Patrick Houston's first conference call as Calian CFO. We're very happy to have him on board as we tap into his valued experience, not only in finance, but also in technology, innovation, and global growth. He's also happy that as part of this transition, our former CFO, Jacqueline Gauthier, has been able to continue at Calian to support transition and our strategic growth objectives. With that, I'd like to ask Patrick now to review the quarterly numbers. Over to you, Patrick.
Thank you, Kevin. I'm happy to report that Calian's profitable growth agenda continued this quarter. For the second quarter of 2019, revenues set a quarterly record of CAD 83.4 million, up 7.8% from prior year's CAD 77 million. In fact, with today's results, we have now reported record revenues for three consecutive quarters. The general business environment in 2019 remains strong for both divisions. With a healthy backlog, strong customer retention, and support from our recent acquisitions, we remain on track for a positive year. Strong revenue growth at the BTS division supported Q2 revenue expansion of 14% from the same quarter in the previous year. This was largely driven by double-digit organic growth in our health business. SED reported a slower quarter compared to the same period in the prior year due to ramp-up of existing ground system projects.
Both divisions had an excellent quarter for customer retention, with new contract signings and extensions totaling CAD 82 million. This reflected business with existing customers across all our service lines. These contract wins are a strong signal that our customer retention efforts are working and that our clients trust us to deliver. Gross margin continues to show an overall positive trend with improvements this quarter from both divisions compared to the same period in the prior year. On a consolidated basis, EBITDA was CAD 6.6 million in the quarter, down slightly from Q2 in the previous year. This was largely a result of one-time costs of CAD 0.6 million to support the acquisition of SatService. Operating expenses are up on a year-to-date basis when compared to the prior year. This is due to the acquisition of IntraGrain, investments in our growth agenda, and one-time costs related to the acquisition of SatService.
We continue to manage operating expenses while ensuring we invest where required to put the company in position to grow its revenue and EBITDA in coming quarters. Net profit for the quarter was CAD 3.9 million or CAD 0.50 per share basic, consistent with the CAD 3.9 million or CAD 0.51 in Q2 of the prior year. On a year-to-date basis, net profit was CAD 7.2 million or CAD 0.93 per share, down 11% from CAD 8.1 million or CAD 1.05 per share in the same period a year earlier. This is a result of increased amortization of intangibles and increase in expense from our acquisitions. Earnings per share in the quarter was CAD 0.50, down slightly from CAD 0.51 in the prior year. On a year-to-date basis, EPS was CAD 0.93 compared to CAD 1.05 at the same point in the prior year.
Our net cash position was CAD 27.8 million at the end of the quarter, which included an additional draw on our line of credit to fund the SatService acquisition, which happened shortly after quarter end. Cash position in the near term will be impacted by additional working capital requirements at SED and remaining earn-out payments due on our recent acquisitions. We continue to maintain our dividend, currently at CAD 0.28 per share. Overall, our outlook remains positive for the year. We continue to expect strong performance from both divisions in the remainder of this year. With contributions from recent acquisitions, IntraGrain and SatService. 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. With that, I'll turn it now back over to Kevin.
Thanks, Patrick. I believe Calian is at a pivot point in the company's history. While our investments remain prudent, it is important to acknowledge the advancements we are making in R&D, innovation, and other areas of the company in support of our long-term growth. Our M&A agenda also continues to be a focus as we integrate recent acquisitions and continue to proactively search for companies that support our growth objectives as we look to diversify our customer base, add other services, and continue our pivot further into solutions. While the Calian story is one of our growth, I would not want to overshadow our stability. Today, we reported Calian's 70th consecutive profitable quarter. That's over 17 years that this company's been profitable.
This journey would not be possible without the dedicated work of our staff. I'd like to extend a thank you and acknowledgement for all of their collective efforts. With their continued support, I am confident we will continue to make progress against all elements of our four-pillar growth framework. As Patrick stated, we continue to demonstrate very positive results in our customer retention with CAD 82 million in new and renewed business from our existing customers this quarter. At Calian, we take pride in our service delivery, and across our five lines of business, it has been consistent with continued customer satisfaction. We are now celebrating one year since the initial implementation of our healthcare provider requirements contract with the Department of National Defence, the RCMP, and Veterans Affairs Canada. We won in 2017 with our business partner, Bayshore HealthCare.
Their single largest contract is running strong and has a full term of 12 years, including optional extensions. It is a testament to our commitment to exceptional service delivery and what I believe drives our customer retention results. In closing, the strong cash flows continue focus on our innovation agenda and our dedicated employee base and we celebrate this company's potential. Overall, this quarter was a solid demonstration of the execution of our growth plan as it captured all elements of our focus areas, continued organic growth, launching new innovative products, and closing our first international acquisition. This is the type of Calian that I want the investment public to know of us. We're providing solutions, we're developing products, we're positioning global markets, we're innovative, and growing organically as well through acquisitions.
Looking forward, the traditional markets in which Calian operates are stable, and management expects organic revenue and earnings growth in most or all of its service lines 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 contracting vehicles. Based on currently available information and our assessment of the marketplace, we expect revenues for fiscal 2019 to be in the range of CAD 330 million-CAD 360 million, EBITDA per share in the range of CAD 3.60-CAD 3.90, and net profit in the range of CAD 2.05-CAD 2.35 per share. We have reduced the EPS range by CAD 0.05, mainly due to an increase in expense related to our acquisitions of SatService and IntraGrain.
Paula, I'd like to now open the call up for questions.
Thank you. To signal for a question, please press *1 on your touch-tone telephone. Also, if you are using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. Once again, it is *1 at this time if you do have a question, and we'll pause to give everyone the opportunity to signal. We'll first go to Benoit Poirier with Desjardins Capital Markets.
Good afternoon, Kevin. Good afternoon, Patrick.
Good afternoon.
Yes, good afternoon. Specifically for SED, gentlemen, could you provide some more color about the unfavorable timing for project completion and the review mix?
I think right now what we're dealing with, Benoit, is we reported that we have the largest ground system contract that was signed last year, other product development. Really, we're just doing the ramp up in the implementation of those projects. Not necessarily unfavorable, more just a timing issue. As you see with our guidance, we believe that Q3 and Q4 are going to be much stronger from an SED perspective as the projects ramp up.
Okay. Mostly, if we look at Q3 and Q4, Kevin, is it fair to say that it will be mostly linear between Q3 and Q4 or even a greater skew toward Q4 in terms of contribution from this ground system contract?
Yeah, I think it'll be continued ramp up. We'll see some growth again in Q3, growth again on Q4. It just depends also on the timing of these projects, certainly that's what we're seeing right now.
With this information we have right now, Benoit, and the project schedules where they are, not just on that ground system project, Benoit, as you can imagine, we're running numerous projects at any given time at Calian. Based on the information we have today, we expect, again, a strong trajectory for Q3 and Q4. Balanced in some ways, but I think stronger Q4, frankly, if you look at our information we have today.
To come back on SatService, is there any seasonality in SatService that we should take into account?
Yeah, Benoit, this is Patrick Thera here. They tend to have a lot of smaller contracts, and they're spread throughout the year. They're involved in the satellite communication industry, so seasonality is not really a factor in anything that they're doing.
Okay. That's great color. With respect to IntraGrain, given that you are well advanced, could you talk a little bit about the integration, also about the potential to expand the business outside of Western Canada? I know that it's a core focus, so if you could provide some color, that would be great.
Yeah. I'll add some comments, then I'll get to Patrick's comments as well. From our perspective, the reason we acquired IntraGrain was obviously not, as you know, Benoit, wasn't just the focus on Western Canada, but also the global opportunity. The solutions that they build and manufacture are relevant to, and also not frankly just in the agriculture industry, but also in other ancillary industries. We have briefed again, from Kyle Folk, the president of IntraGrain, literally yesterday at the board with regards to the opportunities and where things are positioning. We're very confident that the opportunity base for IntraGrain is broader than Western Canada, and with continued focus on our marketing plans that we can expand, not only domestically, but potentially globally. Patrick, maybe you have any additional comments on that.
Yeah, certainly they're focused on keeping their customers, their current customer base in Western Canada, satisfied and supplied with product. They do that a lot through a distributor network that they're connected with. They've also been beefing up their resources to market their products into other regions, other agricultural regions, as well as other industries. The primary focus is certainly on fulfilling what their promises are to date, but they have also had a lot of increase in focus on other areas and regions.
Okay. That's great color. Last for me, could you talk a little bit about the additional investment that was required with respect to I know that you've invested a little bit more over the last year. It paid off in terms of bringing growth on the top. Is there any granularity you could provide and whether those investments are sustainable going forward?
Well, from our perspective, it's absolutely sustainable. Again, we're generating, if you look at our financials, we continue to be positive in the sense of the cash we're generating. What we're doing, Benoit, we're being very prudent on our organic research engine with regards to where we're investing and obviously continuing to ensure that we're funding these things appropriately. As I've said many times, we've invested in Calian as a company for many years, but it's just not until recently we actually started pulling some of it out and talking about R&D. That was an important element. If I just didn't believe that the markets, in many ways, viewed us as innovative.
Our recent announcement around carbon fiber was a result of 4 years of hard work by the FTD team in research and development with partners, and the millions of CAD of investment that we've made into this. I don't see that slowing down, frankly. If anything, I believe, again, going through my reviews of the business, there's a lot of new ideas out there in this company that we will continue to foster and fund as we look at new innovations for Calian moving forward. From my viewpoint, I don't see this slowing down. I don't see any impediments to our continued investment in this area. I think it's critical for our long-term growth that we do so. My team has full support to bring these forward so we can continue to innovate, like we just announced for the carbon fiber antenna.
Okay. That's perfect. Thank you very much for the time.
Thanks, Benoit. Always appreciate your questions.
Okay. Once again, it is star one if you do have a question. Moving on, we'll go to Deepak Kaushal, GMP Securities.
Hi, good afternoon, guys. Thanks for taking my questions.
Hello, Deepak.
I'm going to follow up on FTD. Kevin, you mentioned the new carbon fiber antennas. I'm trying to get a better sense of the opportunity with that technology innovation. Can this drive an upgrade cycle through the ground system plant that's already installed throughout the world, or is this really just an opportunity to get you further ahead on the newer satellites that are getting launched, high frequency ones?
Yeah. Hi, Deepak, it's Patrick here. We look at it primarily as an inflection point to enter into the market for the higher frequency satellites. That's our primary focus, is make sure that we can support the Ku and V band initiatives with the large aperture antennas going forward. That will help us sustain our relevance in the industry and keep us at the same growth rates and market rates that we have going through time here. In terms of new opportunities for refurbishment, replenishment, other frequency bands, things like that, we're going to take it as it comes, but the cycles on those, on antenna refurbishment or replacement is very long. Antennas are built to last 15 to 20 years, right? That cycle just comes very transactional, very piece by piece as it comes along, nothing major.
I wouldn't see that as being a fundamental growth factor in what we do, although it is an opportunity.
Okay. Great. Patrick, now that I have you giving some insight, are you seeing anything from a macro perspective in the satellite industry, relating to these on again, off again, on again apparently trade wars or anything else in terms of macro that might shift attention or focus on CapEx from some of your traditional customers in this space?
I haven't seen much from what you're describing as a trade wars perspective. There's always been competition amongst competing technologies and competing companies, depending on where they're located in the world. I don't see the other factors as having any impact to us at this point in time.
As a fact, I just ran past the team in Washington when we were at recent satellite conferences, and I always attend an open forum they have with the CEOs of the larger satellite operators. The tone was still very positive. Majority of them were looking at new satellite launches, and they were even looking at new constellations. I really took away from that conference that, as you said, a "customer base." I didn't really sense anyone slowing down right now with regard to their ambitions to either launch new satellites, upgrade their networks, or be prepared for the next wave of capacity bandwidth that's going to be required to support things like Internet of Things technology, planes, trains, automobiles, tractors. I think we were very positive, a few months from that conference, with regard to plans for the future.
Okay, excellent. Thanks, Kevin. Kevin, I think earlier you mentioned double-digit organic growth in BTS on the health side. You still have quite a diverse healthcare business. Can you maybe perhaps elaborate on what's driving the growth in particular? Is it Veterans Affairs or RCMP? Is it the core business? Is it primary commercial side? Anything would be helpful.
Yeah. Good question. I think right now it's a mix of a few things. Definitely number one would be new contracts with National Defence. As you know, the scope of that contract was expanded into the RCMP and Veterans Affairs, we're seeing some new opportunity there and working with them on the important healthcare agenda for all the departments. We're seeing some growth there. We're definitely seeing some new customers come to the table with regard to our large national network of medical practitioners in correctional facilities, police services, for example. We've had a few wins recently in there, we're expanding our customer base. Generally, I would say that our marketing efforts have been very strong at figuring out on the psychological health side as well.
You may remember last year we acquired Priority One, which is focused on psychological services, which, again, is helping to drive our growth as we look at new customer bases in that segment. It's a combination of those parts, not necessarily one thing, but the sum of the parts is driving that trajectory right now.
Okay, thanks. I did have a question on emergency response planning. Another year has gone by, we see more flooding in more regions. I'm just trying to understand how these events are impacting that business. Do the cities and governments do what they need to do to be prepared, what's the gap that you think they need to get to, how do you get this business line to grow?
Yeah. I would say, interesting question. I just briefed on this recently. In the end, the team showed me the map of Canada and where we're actually proactive right now in emergency response exercises. We're helping customers, and it's growing. To your point, it's municipalities, it's organizations that this is now a consistent trend. I think I take our home base here in the city of Ottawa as a great example. Two years ago, in 2017, we had flooding. We were asked to do a post review of the response to that. Now we are having flooding again in Ottawa.
One of our thought leaders, Richard Merrill, was actually interviewed a few times with regard to the city's applying the lessons learned from our assignment from two years ago, and we're happy to report that they had applied many of the lessons learned that we worked with the city on in a more effective response. With the increased occurrences now between flooding and fires, the terrorist attacks, we are still, I think, growing this segment, not only nationally but also now potentially globally with customers seeing us globally on this. I'm very positive on that segment. As you said, these customers are now proactively trying to get ahead of an incident and using our emergency management, either our emergency management exercise capability or lesson learned from other areas to apply to make sure they're ready as well. It is growing.
It is growing nationally for sure, right now we're seeing also international opportunities in that segment because the reality of flooding and terrorist attacks and fires and natural events is not a Canadian-only occurrence, as you know.
Got it. Okay, thanks. That's helpful. I just have one last question, more of a maintenance admin question for Patrick. On the OpEx line, I know that you had some non-recurring in there, I think CAD 600,000. Is CAD 10 million a quarter generally a reasonable number to think of going forward for the next several quarters?
Yeah. I think we'll take on a little bit more with SatService as they bring on a whole new P&L of their own. That'll be Q3, otherwise, I think other than the one-time item, I think it's been consistent between Q1 and Q2, and that's certainly kind of the level, minus one-time items in the near future. Yeah.
Okay. Excellent. Well, thanks again. I'll pass the line. Have a great afternoon.
Thanks. Thank you, Deepak.
Flipping on. We'll go to Jeremy Coleman with Private Investor.
Good afternoon, gentlemen. I just have one question regarding the guidance range which you customarily provide. I compared the two together, so the gross revenue, EBITDA, and net profit per share. Of the three metrics, two were unchanged by comparison with Q1, and net profit was the only one that sort of changed in a reduction of CAD 0.05 per share. The range between the top and bottom end of the guidance is almost 10% for both the revenue line and the EBITDA line, and almost 15% for the net profit line. As the company grows and goes down different paths nevertheless, is there any chance that you can tighten the guidance range early in the reporting cycle as you go through the year?
Yes. On the change, the reason we changed EPS and not the other two metrics that we report on was as we brought on the two acquisitions, there's some accounting expenses that are below the line that are non-cash that affected the earnings. Although they're contributing positively to revenue and EBITDA, the contribution on an EPS is much smaller because of those charges. That was the reason we reflected that in the numbers. On tightening, obviously, as we make progress throughout the year, if we could do that, we certainly would. To Kevin's earlier point, we have a big second half. This reflected in the guidance, and although we have a lot of projects going on, it's really a delivery exercise here in the second half as we try to realize that.
I would say as well, Jeremy, the other nuance here, and I've left it a bit wider than normal, frankly, at this time of the year, is we are going through our first cycle with IntraGrain, SatService as well. We're trying to be cognizant, not so much for SatService or IntraGrain, but more seasonal in the context of the spring and summer. I'm trying to keep it a bit wider just as we go through one full business cycle with these two organizations so I can ensure that as we reflect guidance going forward, that we have the benefit of that experience under our belts. I appreciate your comment.
Normally, we would be tightening it right now, it was a conscious decision for me right now to just let's get through the cycle, let's make sure we understand the IntraGrain component, because it is a high-margin business, so it definitely has an impact on us both on revenues and EBITDA. I wanted to leave that a bit wider for another quarter, and then we'll see where we're sitting at the end of Q3. Just one of those things we got through one full cycle there, on the same scale, I totally appreciate your comment, and I'd rather be the tight-knit as soon as we can so we have a good sense for the year going forward.
Thank you.
Okay. Thanks, Jeremy, for the question.
There are no further questions.
Okay. Well, thank you, Paula. Okay, I want to thank you all today for joining us on the call. I really do appreciate the questions. It's valuable for us to ensure that it's clear on how the company's performing and any questions you have. With that, Paula will close up the call, and I look forward to discussing our next quarter results with you in three months' time. Thanks for your time today, everyone, and we'll talk to you again in three months period.