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Edited Transcript of ADA.AX earnings conference call or presentation 20-Feb-20 5:30am GMT

Half Year 2020 Adacel Technologies Ltd Earnings Call

Mar 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Adacel Technologies Ltd earnings conference call or presentation Thursday, February 20, 2020 at 5:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Verret

Adacel Technologies Limited - Acting CEO & CFO

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Adacel Technologies Limited Half Year 2020 Results Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Daniel Verret, CEO. Please go ahead.

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Daniel Verret, Adacel Technologies Limited - Acting CEO & CFO [2]

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Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us on the financial results call for the half year ended 31 December 2019. I'm joined by Michael McConnell, Chairman of the Board of Adacel Technologies Limited; as well as Kevin Pickett, VP, Operations. I apologize for the late filing. So before I get into the prepared remarks, I will read the headlines from the press release.

Adacel delivers first half PBT above prior period, excluding one-off items; reinitiates ordinary dividend; and updates guidance for FY 2020.

Profit before tax of $2.6 million, excluding $0.5 million related to nonrecurring litigation costs and the impact of the adoption of AASB 16.

As of February 19, 2020, approximately 93% of forecast revenues for FY 2020 are booked or in the backlog. The company will resume payment of dividends, declaring an interim dividend of $0.01 per share, unfranked. And the company updates its FY 2020 earnings guidance of PBT between $5.5 million and $5.8 million, excluding nonrecurring litigation costs and the impact of the adoption of AASB 16 of an estimated $1.1 million to $1.4 million.

Hopefully, by the time we conclude this call, the documents, which have been lodged with the ASX, will have completed their queuing process and will be available to all of you.

If you recall, back in July 2019, we announced our intention to focus on the company's core products and services. With the results of the first half, we are pleased and encouraged that the changes we have implemented have stabilized the business and returned it to profitability. These changes have provided us with much enhanced line of sight to both forecast revenues and costs as well as operational efficiency metrics.

Importantly, we are on track to complete our Air Traffic Management projects in Fiji and Portugal this financial year as planned. Also, as a consequence of its expanded scope, the Guadeloupe project in the French Territories is now forecast to complete in FY 2021.

Turning to the financial results for the half year, the company posted revenues of $19.7 million compared to $23.8 million for the previous corresponding period. Revenues in our Systems segment were lower by $5.5 million, as we have lower volume of projects to deliver, allowing us to focus on key deliverables in the French Territories, Fiji and Portugal.

In our Services segment, revenues increased by over 10% to $15.7 million due to increased orders from our military customers in North America and internationally. Revenues arising from our FAA ATOP program were consistent with the prior year.

Consolidated gross margin as a percentage of revenues increased from 35.4% last year to 36.4% for the half. In absolute dollars, gross margin decreased by $1.2 million.

Gross margin in our Systems segment decreased by $1.7 million. While gross margin for the half was impacted as we had lower revenues compared to the prior year, the execution of our existing projects is on track and within budget.

On an individual basis, we expect each project to generate positive contribution margin with the exception of the Guadeloupe project, for which a provision for onerous contract was recorded in FY 2019.

Because gross margin includes an allocation of fixed costs incurred to support both segments, we reported an accounting loss for the segment. Gross margins from our Services segment increased by $0.4 million due to higher revenues.

PBT for the half year was $2.1 million compared to $2.2 million last year. This includes nonrecurring items of approximately $530,000 associated with nonrecurring and litigation costs and the impact of the adoption of AASB 16. On a normalized basis, the company delivered PBT of $2.6 million compared to $2.4 million for the prior corresponding period.

As a percentage of revenues, normalized PBT was 13.4% compared to 10% last year despite the lower revenues. This is a clear indication that the changes we have implemented early in the half year designed to stabilize the business and return it to profitability are working and bearing fruit.

From a balance sheet perspective, we ended the half with almost $2 million in net cash. Despite generating over $2 million of PBT, net cash flows from operating activities amounted to $400,000. This is mainly due to how some of our contracts are structured and the fact that the timing of cash payments are tied to specific milestones which differ from how we recognize our revenues for accounting purposes. We do anticipate a higher cash conversion in the second half more closely tied to PBT as we complete and advance our large ATM projects. I'm being advised that the 4D as well as the press release are slowly coming up on the ASX website.

In light of our cash forecast, the Board has reinitiated its ordinary dividend program and declared an interim dividend of $0.01 per share, unfranked. This dividend will have a record date of 28 February 2020 and will be paid on 15 April 2020.

Moving on to our outlook. Based on current forecast, we expect to deliver normalized PBT of between $5.5 million and $5.8 million. This excludes approximately $1.1 million to $1.4 million of nonrecurring litigation costs as well as the impact of the adoption of AASB 16. It is also based on our revenue forecast that includes approximately 93% of our budgeted revenues that's currently booked or in backlog. I will now open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from [Kate Harris], a private investor.

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Unidentified Participant, [2]

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I was just wondering, you keep mentioning, obviously, the nonrecurring litigation costs. I'm assuming it's the litigation with Adsync Technologies. I have noticed recently that you filed -- sort of both filed for summary judgment. And I'm just wondering what the ongoing sort of implications of that are and if it's affected other relations, I suppose, like business relations, potentially with FAA. That's the question.

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Daniel Verret, Adacel Technologies Limited - Acting CEO & CFO [3]

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Thank you. So just to clarify, the non (sic) [nonrecurring] litigation costs that we are referencing in our remarks and on the press release as well as in the financial statements, they relate to, one, the Adsync litigation as well as the fact that our former CEO has filed a breach of contract claim against the company, and the matter is currently in arbitration in the state of Florida. We believe that we have honored our obligations under the contract and will defend ourselves as this case moves forward.

In terms of the Adsync litigation, there is no real update to provide at this time other than to say that the case is proceeding through the various stages. We have a court date set and are hopeful that we can conclude this by the end of this FY.

And to answer your last question, in terms of the impact of the Adsync litigation with our relationships with the FAA, there has been no impact in our continuing relationship with our FAA ATOP program. That relationship remains very strong. And as I said in my remarks, the revenue that we generated for the half, which relates to that program specifically, is consistent with what we generated last year.

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Operator [4]

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(Operator Instructions) Your next question is from [Stella Wang], a private investor.

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Unidentified Participant, [5]

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Got a couple of questions. The first one is a follow-on from the question just now kind of related to ATOP contract. Now you guys have had the contract since year 2000. Could you help me understand how sticky it is? Why is FAA sort of prevented from switching to any other competitors? And when do you think we can get updates on the next extension?

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Daniel Verret, Adacel Technologies Limited - Acting CEO & CFO [6]

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Thank you, Stella. So why this relationship is sticky: we own the IP. So the software that is used -- the oceanic software that is used by the FAA, that IP is owned by Adacel. It's a long-standing relationship. That contract continues well into 2022. And in terms of providing an update as to the extension of that contract, we will be providing an update when that extension is signed with the interested parties.

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Unidentified Participant, [7]

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So that's in another 2 years' time?

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Daniel Verret, Adacel Technologies Limited - Acting CEO & CFO [8]

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Yes.

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Unidentified Participant, [9]

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Right. Great. The second question is, now that you guys are getting on smoothly with the French island project, are you making further progress in business development with the potential customers for the Approach and Tower control product? You previously mentioned there were about 30 potential customers.

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Daniel Verret, Adacel Technologies Limited - Acting CEO & CFO [10]

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Yes. So we are -- as I said, we expect to complete the Guadeloupe project at the expanded form now in -- well into FY 2021. We remain extremely confident that the Aurora platform that we have developed for the French Territories can be successfully deployed to a number of customers, and we have identified close to 30 potential customer sites where we can deploy Aurora, and we have also commenced discussions with several relating to upcoming proposals and bids.

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Unidentified Participant, [11]

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Glad to know that. Last question. Do you still have much tax loss asset carryforward? How much more profit before tax can you generate before having to pay substantial tax?

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Daniel Verret, Adacel Technologies Limited - Acting CEO & CFO [12]

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So we do have quite a bit of loss carryforwards. In fact, we have -- in some jurisdictions, we have loss carryforwards, in other jurisdictions we make use of tax credits. In terms of how many years and the specific quantum, I'll be glad to get back to you with the specifics.

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Operator [13]

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(Operator Instructions) There are no further questions at this time. I'll now hand back to Mr. Verret for closing remarks.

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Daniel Verret, Adacel Technologies Limited - Acting CEO & CFO [14]

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Thank you. So once again, I would like to apologize for the late filing, but I would like to close the call off by reiterating that management is extremely pleased with the progress we have made since 1 July 2019. Our goal was to focus on our core products and services while improving our execution. At the half, we are reporting profit, improved gross margin and PBT as a percentage of revenue, and enhanced line of sight on our revenues and costs as well as the reinitiation of our dividend programs. Thank you for joining us today.