Good day, ladies and gentlemen, and welcome to today's Calyum's First Quarter Results Conference Call. As a reminder, today's call is being recorded.
At this time, I
would like to turn the conference over to your host for today, Mr. Kevin Ford, Chief Executive Officer. Mr. Ford, please go ahead.
Thank you, Sarah. Good afternoon, ladies and gentlemen. With me today is Jacqueline Gauthier, our CFO. We'd like to welcome to Allianz's Q1 2019 conference call. Despite mixed results this quarter, we've achieved several positive metrics with our largest quarterly revenues in the company history, as well as 20% growth in the profitability of our VTS division.
The CD division continues to be very busy in all segments with a focus on current projects and new technology innovation. In support of our customer retention pillar, we are very happy to report this quarter the re win of our Canadian Army Simulation Centre contract with an initial value of 93,000,000 and with options factored in an aggregate contract value for the full 9 year period of approximately 170,000,000 dollars For the duration of up to 9 years, this plan has helped grow our contracted backlog to 1,300,000,000 which is a very strong foundation to support our growth agenda. Factoring in the Cassie contract, our contract signings exceeded over $200,000,000 a quarter, again another strong sign that our sales efforts are working. I will now ask Jacqueline to review the quarterly numbers. Over to you, Jacqueline.
Thank you, Kevin. As Kevin mentioned, results for this Q1 are mixed. Our VTS division saw continued improvements in revenues and EBITDA from strong performance and demand in all of its market segments. The SCG division reported a slower quarter than the prior year, driven by a few projects moving to the right and a slightly less favorable revenue mix in the quarter. However, these results do not change our outlook for the year as we continue to expect strong performance from both divisions.
We also expect contributions from our most recent acquisitions, Infra Grain and SecurTech, to increase in the remaining quarters due to seasonality of their business, where the Q1 activity is typically minimal. Net profit for the quarter was $0.43 per share compared to $0.54 in the prior year, impacted by FCD results, the negative impact of seasonality of Intragrain and SecurTech acquisition, amortization of intangibles and the accretion of interest expense related to these two acquisitions. If we were to exclude the negative impact of Intragrain and SecurTec in this first quarter, net earnings per share would have been $0.50 For the Q1 of 2019, revenues were up 5% from the prior year. The general business environment in 2019 is strong in both divisions. The company's healthy backlog in its recent acquisition should provide for a solid year.
FCD revenues were down 16% this quarter. Although the division continues to work with a solid backlog of work, some ground system contracts are still ramping up. Product sales continue to provide solid recurring revenues, and interest continues to grow with some of our newer products, new customers and trendy mix. FCD's other business units continue to be busy in a range of activities. Intragrain activities did not play a major role in revenues this quarter as its business is seasonal and most of its activities will be reflected in the 3rd and 4th quarter.
DTS revenues increased 13% this quarter. The acquisition accounts for only 4% of the growth, but the remainder achieved through organic means. All service lines showed solid increase in demand for their services with existing customers and saw the benefit of various new wins. Gross margin continues to show an overall positive trend and was up again this quarter. Gross margin in SCD, although less than in the same quarter the previous year, was still respectable.
It reflects solid execution across all business units impacted by customer driven development projects until fully developed result in lower margins. In addition, the influx of new resources to fulfill project requirements continues to have an impact as these resources continue to be trained and ramped up. Gross margin in BTS continues to show improvements with most of the uplift being attributed to solid execution on existing contracts, with new acquisition only accounting for approximately 0.2% of the increase. Operating expenses have gone up. The costs have increased over the prior year due to the inclusion of the acquisition, SecurTech, Priority 1 and Intragrain, as well as continued focus on selling and marketing efforts and service line evolution, improvements and expansion in our facilities, the expensing of share based compensation in addition to certain one time costs.
We will continue to challenge discretionary spending. However, continued prudent investments are required to support the evolution of the company's service line. Our net cash position is now at 8,000,000 dollars following the acquisition of Intragrain. Cash position in the near term will be impacted by additional working capital requirements at SED and the remaining payments due on our acquisition. Finally, 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.
Thank you, Jacqueline. I really believe that Clion is at a pivot point in the company's history as we continue to invest in R and D and headcount to drive long term growth for the company. Our innovation agenda is focused on new product developments, developing tools to support our professional services in areas such as emergency management training and also entering new customer segments. This quarter, we invested another $650,000 in new product development and continue to increase our delivering go to market resources to ensure that we have capacity to record to support our growth. Our M and A agenda also continues to be a focus with current priorities being the integration of Integrain, Priority 1 and Secure Technologies that we completed last fiscal
year. We
continue to proactively search for companies to support our growth objectives as we look to diversify our customer base as well as evolve our services. I'm also happy to report that our health service line with our business partner, Bay Shore, has successfully completed the startup phase of the healthcare provider requirement contract with National Defense, launching the in service phase with this contract with D and D RCMP Investors Affairs. At now 69 consecutive profitable quarters, strong cash flows, continued focus on our innovation agenda and our dedicated employee base, I'm confident we will continue to make progress against all of us of our 4 pillar strategic growth framework. I'd also like to acknowledge that this will be Jacqueline's last conference call as CAGNY's CFO. On behalf of our Board of Directors, our shareholders and our staff, we want to thank Jack Glenn for her dedication and years of service at Callion.
Anyone who knows Jacqueline respects her work ethic, her passion for growth and her outstanding ability to manage a complex financial publicly traded organization. She can be proud of her work here and the legacy she will leave with the company. I'm happy that she has agreed to stay on for a period of time to facilitate transition to Patrick Houston and as well support elements of our growth strategy. I would also like to formally welcome Patrick to the Calient team. Patrick is the seasoned CFO and I'm confident we'll bring an excellent toolkit in the CFO role to support Callian's profitable growth strategy.
In closing, 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 extensive timing of future contracts, 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 2019 to be in the range of $330,000,000 to 3 $30,000,000 increase to offer share in the range of $3.60 to 3 $0.90 and net profit in the range of $2.10 to $2.40 per share. With that, I'd like to now open the call to questions. So, Sarah, can you please open the lines for questions?
We'll go first to Deepak Kaushal of GMC Securities.
Hi, guys. Good morning. Thanks for taking my questions. Kevin, Jacqueline, I just had a quick question on the slowdown in FED. Is that related to the record satellite contract that you guys announced previously?
And is there any changes, if so, any changes to the 36 month ramp up period for that and the expectation for 66% of that to come in 2020?
It's Kevin. So from my viewpoint, slowdown, not necessarily with regard to SED. I think it's just reality of what we're doing with the project schedule. As we look at the phasing of that program, which we announced last year, the largest ground system contract as you're referring to for SED. It's really just a schedule timing issue right now from my perspective.
There is a lot of work going on with new technologies there that frankly is quite exciting. So we're monitoring that project very closely. So I wouldn't categorize it as a slowdown. I think it's just basically the reality of the mix of projects that where we're ramping projects up, ramping other projects down. The division right now is extremely busy across all segments.
So, I don't really think it's a slowdown. I think we're just doing more of a timing issue.
Okay. Okay, great. And then can you maybe perhaps discuss beyond this contract, particularly related to the satellite industry, what are you seeing in that environment of late compared to this time last year?
We're still seeing lots of opportunity, frankly, as we based on 2 factors, frankly. Number 1 is that our legacy customer base continues to come back to the FCD division, whether it's for upgrades to current systems or for new mandates. So our current base is continuing to be very loyal and I think that's just been observed by the fact that the excellence delivery we've had over the years. And then secondly, when you look at the innovation agenda at SED, I think a lot of people continue to look at SED as primarily satellite segment, which I understand because it's sort of been that. Just a reminder, the other segments we serve right now, the Aerospace and Defense is again going very strong.
With the acquisition of InterContinental and the AgTech piece, we believe we're just at the start of that journey and very excited that market by our market research is growing 12%, 13% a year and we're just starting to entering that segment. So we believe there's huge opportunities there as well for the company. So even within our core satellite business, it's good. Our aerospace business is good. And then now the ag tech piece, it's we're pretty excited about where that could go for SED.
And the last one I'm going to make is just on the research and development we're doing at SED. There's other segments we're looking at beyond those three. So, I'm still very positive in where we are with SED across its broad spectrum now of customer bases as we move to non just a satellite core. So, hopefully that answers your question.
Yes, it does. Thank you. Just going back to timing, I think you mentioned seasonality at Intigrain, sorry, pardon me, Intragrain. So I think in your press release, you also mentioned seasonality in SecureTech. I'm just kind of curious, is there seasonality impacting the revenue portion for that acquisition?
Or maybe you can give a more personal update there.
Yes. So they to sell quite a bit to the government. So they tend to have a very high Q2. So they do a significant portion of their annual revenues in Q2. So both Intragrain and SecureTech had a negative impact in Q1, but we are very confident that they are going to pick that up in the next quarters.
So SecureTech in Q2 and Integra Grain in Q3, Q4.
Okay. And in terms of is that something that is standalone versus things like PWA that you've acquired in the past? Or are you guys able to integrate and get some synergies around the cybersecurity acquisitions you've made in the past few years?
Yes. So we actually integrated SecureTech immediately with Calian. So they're part of our cyber team and both Calian SecureTech and the DWP portion are all working together to attack new markets to get into new markets.
Okay. Okay, excellent. And then, Jacquelyn, just on the cash flow side, you mentioned some increasing working capital requirements in FED. I'm just kind of looking in the past few years EBITDA to cash from ops conversion. It bounces around quite a bit on an annual basis, largely due to working capital requirements.
What should we expect over the next 2 years in terms of if we're taking round numbers, if you're doing about $30,000,000 in EBITDA, how much can we expect that to convert to cash from ops and rebuild your balance sheet?
So basically, the main element of our working capital is that large contract at FED that's going to be running for the next 36 months or so. We're to show up in the next few quarters for sure. And then once we get past the middle point of that contract, things should start reversing. And we're expecting that in the last 12 months, we should be working capital positive on that project.
Okay. And when you think about capital structure, I know perhaps maybe this is a question for tomorrow's Investor Day and Mr. Houston. How do you think about debt to EBITDA and that kind of ratio in terms of turns? What are you guys comfortable with?
Can you remind us?
So we've always said 1 to 2 times, and I think that's going to stay for a while. It's something we discuss at the Board on a regular basis. And I think we will just evolve as we continue to do acquisition and our additional cash. But for now, this is what we're targeting.
Okay. Okay. Thanks so much for taking my questions. I look forward to seeing you next
Great. Thanks Deepak. Appreciate the questions.
We'll go
We'll go next to Hanoi Poirier of Bjarne Bank Capital Markets. Please go ahead.
Thank you very much, and good morning, Joaquin. Good morning, Kevin. Yes, just to come back on the large satellite ground system contract, just want to make sure that there was basically minimal contribution in Q1. And is the ramp up still expected in Q2 mostly with the bulk reported or recorded in fiscal 'twenty next year?
Yes. So we haven't changed the profile of that contract. So it remains the same as what we provided last time. So it's on track. I think it's just there's quite a few players that are ramping up.
We have a lot of suppliers that require to do some setup and getting ready for this contract. So I think right now everybody is in that phase of getting ready for the 1st milestone, But there's no indication that things are going to significantly slide to the right on that contract.
Okay. And looking specifically for SCD Jacquelyn revenue or EBIT, how should we look at the ramp up over the next few quarters? The biggest increase will be done in Q3, Q4? Or are we going to see even a good improvement in Q2 for STDs specifically?
Well, we don't provide guidance on a quarterly basis. I'd hesitate to give any details there other than we feel very strongly that STDs can have a good year. And we have to cut off on the last day of a quarter end and sometimes things are done and sometimes you're just not quite done. So it's very difficult to assess a quarterly number, but we feel confident about the year.
And just a reminder, Ben, yes,
from
my viewpoint too, Benoit, I know the large ground system contract will take a lot of focus over the next period of time as we deliver that and push that project through with the delivery. But I'm also very positive on things happening outside the large contract, the research and development and our product developments in certain areas, whether it's in the 5, DOCSIS or even cable in some of the areas and then the Intragrain as well. So, we appreciate, as I say, the size of that program. But I think for SED for the year, it's going to be a combination of clearly that program as well as I think the other projects that are running right now that are really frankly quite exciting in the innovation they're going to be bringing to market.
With respect to the working capital ramp up that you talked about the 10 €15,000,000 at the peak, where would you be at right now or what remains to be done in terms of ramp up in terms of working capital?
I think we'll be ramping up that, let's say, dollars 12,500,000 by next quarter or beginning of the following quarter. So we're getting into that phase now.
Okay. So basically, you haven't ramped up the working cap yet. So there's another $12,500,000 let's say increase in the coming quarter or 2.
No, we started ramping up, but we'll be at our peak in the next quarter. Okay. We'll stay there for probably a year.
Okay, perfect. And for the guidance, obviously, there's intangible the acquisition interest expense. Just want to make sure that the 210, 240,000,000 are basically taking into account the amortization and tangible and accretion interest expense. Am I right here?
Yes. Yes, it includes everything.
Okay. And acquisition and stress expense, is it something that we should see in the coming quarter? Or it's basically just a onetime item?
So it's just crude over a period of 2 years. It's placed to the earn out. So when we set up our earn out liability, we need to discount it and then we need to bring it back up to the full amount at the time that it needs to be paid out. So whenever we have earn outs, it's going to be consistent with that the timing of the earn outs. So you will see this 1 on Intragrain for the next 2 years.
Okay. And basically, should we expect kind of a similar amount to be recurring in the coming quarter?
Yes. So we acquired Intragrain November 1, so we have 2 months in this quarter. So we'll have 3 months in the following quarters.
I see. And that would be stable over a 2 year period. Okay. Okay. Perfect.
And any impact from the IFRS 15 in terms of revenue recognition? Is there any impact at $1,000,000,000
Yes. So there's the main impact is on warranty. So if you've looked at the financial statement, you'll see that for the we restated last year and over the course of the full year, fiscal 2018, we will be recording an extra $0.05 of earnings per share. And it relates to having to record cost and revenue associated with warranties sooner than we did under the old rule. That's the main impact.
Okay. Is there an impact for fiscal 'nineteen though, Jacqueline?
Well, looking forward, it's hard to assess the impact because we'd have to do it the old way and the new way to see exactly what the impact is. Basically, we're using the new rules now. So in theory, if you take that further, we continue to recognize cost and revenue sooner on those warranty projects. So in terms of timing difference, there shouldn't be any other than the mix of projects we have at any given time.
Okay. So it's not like it's providing a big boost on the EPS for fiscal 'nineteen, let's say?
No. Okay, perfect. And last question for me.
If we talk about the health services contract, would you be able to quantify what is the run rate? And any color about further ramp up that could be done with the other departments?
So, right now, the contract, and then again, it goes up
and down. But generally, we're seeing
the run rate in that $75,000,000 to $80,000,000 range. The new customers that have come in through the new contract with RCMP and Veterans Affairs are ramping up. I think we've seen more uptick initially in Veterans Affairs and RCMP is not far behind. So, we're still the primary customer in Canada still is national defense. And as veterans of RCMP want to go aware of the contract, number 2, understand that it is nationally, we continue to see increased demand on that on those segments as well.
Okay, perfect. So, seventy $5,000,000 to $80,000,000 in terms of run rate and Air and Affairs is more advanced than RCMP in terms of ramp up, right?
Yes. And again, just it's a smaller piece of that. The major customer is defense for sure. And Veterans Affairs and RCMP, as I said, they're just now looking at a national governance around the contract. So we'll see that expect that to ramp over the next couple of quarters, but I wouldn't put it in any significant way at this point.
Okay. Thank you very much. Thanks,
From Acumen Capital, we'll go to Brian Howe.
Good morning, everybody.
Morning, Brian.
John, I just wanted to clarify again, you indicated that the seasonality related to Integraein would have impacted net income by about sort of $0.07 Is that what I understood from your comment?
Yes.
Okay. And so is it really just in sort of their Q1 that they're, I'd say, in a loss position and then they ramp up for the balance of the year and be thoughtful?
So, intra grain will tend to be in a loss position for Q1 and Q2. And then most of the revenues are in Q3, Q4. And for SecureTech, they tend to be in an ahead of position, let's say Q4, Q1 and they do most of their revenue in Q2 and the early part of Q3.
Okay. And do you expect
that to change at any time
in the future, or will that always be the
case? Based on the existing business, that would stay similar. But obviously, we're trying to expand in different areas. So that should be lessened in the future in terms of the impact.
Okay. All right. And then just switching to, again, the working capital. So again, on that SED contract, it sort of peaks at $10,000,000 to $15,000,000 and sort of sits there. So again, that's sort of like a work in progress.
Is that the best way to think about it?
Correct. So on that project, we have to deliver approximately 20 units. So we always tend to be a few units behind in terms of getting the payment for the work that's been done. So initially, we wrap up, then we continue to do work, but then we're paying on the previous units. So that's why it stays at the $12,000,000 $15,000,000 for a year.
Okay. Can you and again, just further on the working capital, can you give us a little bit more insight on sort of the remaining payments on the acquisitions or what you expect this year and next year?
So if you look at the balance sheet, we've got contingent earnouts of about 8,000,000 dollars I would say that more than half of that will be paid in the next year and then the remainder of the following year. Probably 60% this year.
Okay. Thank you. All right. Look forward to seeing you tomorrow. Hopefully, the flights will allow us
to get into Toronto. So,
enjoy your travel today. Yes. Thanks, Brian. We're getting pinged here all over the place from people trying to get into Toronto. So, if anyone's traveling today, I suggest you get to the airport or jump to a plane for those who have that option.
Okay. Any other questions, Sarah?
Sarah? No, it appears we have no further questions at this time.
Okay. That's great. So, thank you everyone for attending the call today. I appreciate the questions. And I guess next call, a little extra Patrick and I sitting here talking about the next quarter results.
So, we look forward to that discussion and I'll talk to you then. So, Sarah, with that,
we can close the call.
Thank you. And again, ladies and gentlemen, that does conclude today's conference.
We thank you all for joining.