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Edited Transcript of ADA.AX earnings conference call or presentation 18-Feb-21 10:30pm GMT

·14 min read

Half Year 2021 Adacel Technologies Ltd Earnings Call Feb 18, 2021 (Thomson StreetEvents) -- Edited Transcript of Adacel Technologies Ltd earnings conference call or presentation Thursday, February 18, 2021 at 10:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Daniel Verret Adacel Technologies Limited - CEO ================================================================================ Conference Call Participants ================================================================================ * Alexander McLean Bell Potter Securities Limited, Research Division - Analyst * Andrew Charles Gracey Australian Ethical Investment Ltd. - Portfolio Manager * Chris Savage Bell Potter Securities Limited, Research Division - Senior Industries Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Adacel Technologies Limited HY '21 Results Investor Teleconference. (Operator Instructions) I would now like to hand the conference over to Mr. Daniel Verret, Chief Executive Officer. Please go ahead. -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [2] -------------------------------------------------------------------------------- Thank you. Good morning, ladies and gentlemen, and thank you for joining us for Adacel's financial results call for the half team ended December 31, 2020. With the results of the first half, we are pleased with our progress both in terms of project execution and sales activity. Despite the challenges of operating during a global pandemic, we have continued to execute on our business plan. Our large multiphase international ATM projects in Portugal and the French territory continue to move forward, while our North American programs with the FAA, the United States Air Force and the U.S. Army progressed largely unaffected by COVID-19. As for sales and business development, we continue to win some new business while maintaining and expanding our existing contracts and customers. We are pleased to confirm that we now have over 100% of our original budgeted revenues as either booked or in backlog. Turning to the financial results for the half year, the company's revenues increased by almost 4.5% to $20.6 million compared to $19.7 million for the previous corresponding period despite negative currency headwind. Revenues in our Systems segment increased from $4.1 million to $6.2 million due mainly to a higher number of systems implemented, including the delivery of additional air traffic control simulator units to the U.S. Army, which was partially completed during the first half. In our Services segment, revenues decreased from $15.7 million last year to $14.4 million this year due primarily to lower revenues associated with our FAA air traffic controller training program in the U.S., which has been impacted by COVID-19. Despite the restrictions imposed at these training facilities, our FAA training program operated at almost 70% of capacity during the first half. Revenues arising from our FAA ATOP program were consistent with the prior period. Consolidated gross margin as a percentage of revenues increased from 36.4% last year to 43%. In absolute dollars, gross margin increased by $1.7 million, which is equal to a 23% increase compared to the same period last year. Gross margin in our Systems segment increased by $1.4 million due to higher revenues and a different revenue mix. In our Services segment, gross margin increased by $300,000 despite lower revenues due to increased productivity and lower costs. Overall, for Services segment, gross margin amounted to 55% for the period compared to 49% last year. Profit before tax for the half year doubled from $2.1 million last year to $4.2 million this year. As a percentage of revenues, PBT was 20.5% compared to 10.7% last year. The company's earnings performance was driven by a more profitable revenue mix, improved project execution as well as the full accretion of the rightsizing of the cross cost structure initiated 18 months ago. From a balance sheet perspective, we ended the half with $5.2 million in net cash. The business generated $2.7 million of cash from operating activities, a significant improvement from last year where we generated a little over $500,000. We continue to expect a healthy cash conversion in the second half as we complete and advance several of our larger projects, including the U.S. Army contract and other international projects. Consistent with statements made at the AGM in November, the Board of Directors has declared an interim dividend of $2.75 per share unfranked. The dividend will have a record date of 1 March, 2021 and will be paid on 15 April, 2021. Moving on to our outlook. Based on our current forecast, we expect to deliver PBT of between $7 million and $7.3 million. As I mentioned earlier, this guidance is based on a revenue forecast that now includes over 100% and our original budgeted revenues has either booked or in backlog. Assuming no significant disruption in our operations caused by COVID-19 or otherwise, we are quite confident in meeting these revised financial objectives. Before closing off, I would like to reiterate that management is extremely pleased with the progress we have made in the first 6 months of the year. Despite some COVID-19 travel restrictions, our teams continue to deliver high-quality systems and services for our customers. In addition, our sales pipeline is healthy in both segments, and we continue to win new contracts. I will now open it up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Chris Savage of Bell Potter Securities. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [2] -------------------------------------------------------------------------------- First question, does the guidance assume that the FAA air traffic controller program stays at 70% capacity in the second half? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [3] -------------------------------------------------------------------------------- Chris, yes, it does, actually. We haven't made any changes to our expectations. We had hoped that the business -- the training facility would reopen up at full capacity, but so far, the average has been pretty consistent at 70%. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [4] -------------------------------------------------------------------------------- Okay. And you said you're now over 100% of budgeted revenue. Is it too late for any additional wins to come through in the second half and further increase the revenue? Or is that basically now as good as it's going to get? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [5] -------------------------------------------------------------------------------- I think at this point, our resources are pretty focused on delivering the projects we currently have. I doubt that any new orders that we sign in the next 5 months would have any meaningful impact on FY '21. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [6] -------------------------------------------------------------------------------- Okay. And I guess one of the highlights was the 55% gross margin in Services. Is that sustainable? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [7] -------------------------------------------------------------------------------- I think it is. I mean when you look at some of the changes we've put in place over the last 18 months, we focused a lot on increased productivity, increased execution. Our cost base is much leaner than it was, so I think all of that is coming really to ahead of this year where we're really getting the full bang for bucks [given the] changes that are fully accreting in FY '21. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [8] -------------------------------------------------------------------------------- Okay. And just in the other income, the $1.2-odd million you got collectively from the Canadian government, was that always anticipated and part of your original guidance? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [9] -------------------------------------------------------------------------------- So it was not part of the original guidance. And just to be specific on that, we received $600 -- a little over $600,000 from the Canadian government. In the U.S., the amount that we received under the CARES ACT works a little bit differently in that it's aimed to compensate employee downtime where they would have otherwise not been paid. Therefore, what we received from the U.S. government flow through directly through the employees. [That accounts] in and out. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [10] -------------------------------------------------------------------------------- So the only real benefit you didn't anticipate was what you got from the Canadian government of $600-odd thousands? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [11] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [12] -------------------------------------------------------------------------------- But does that then mean the upgrade in the guidance from $6.5 million to $7 million to $7.3 million, is that then not pretty much just wholly driven by that amount that you didn't anticipate you'd get? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [13] -------------------------------------------------------------------------------- No. I mean I think we're executing better than we expected. When you look at some of the numbers we put forth at the start of the year, we did not anticipate the foreign currency headwind. And I think the grant that we were benefiting from the Canadian government is offsetting some of that pressure on foreign exchange. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [14] -------------------------------------------------------------------------------- Can you say what the negative FX impact was? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [15] -------------------------------------------------------------------------------- I mean when you look at the U.S. dollar against the Australian dollar in the first half, on the P&L, we had an average of about $0.72 versus $0.68 last year. So that's quite a significant difference. When I look at it, I look at it on a USD 10 million basis -- on a $10 million basis in U.S., that's about $0.75 million. So if we're expecting PBT of, say, $7 million this year, $7 million, $7.1 million, if you take the midpoint, we're talking about an impact on PBT of probably $300,000 -- a little over $300,000 from FX. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [16] -------------------------------------------------------------------------------- Okay. So it doesn't wholly offset the amount you got from the Canadian government that it partially does? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [17] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [18] -------------------------------------------------------------------------------- Sorry. That was kind of rhetorical. Last question, M&A, any activity or focus there? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [19] -------------------------------------------------------------------------------- Nothing to report at this time. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Andrew Gracey of Australian Ethical Investment. -------------------------------------------------------------------------------- Andrew Charles Gracey, Australian Ethical Investment Ltd. - Portfolio Manager [21] -------------------------------------------------------------------------------- Daniel, you talked about some potential kind of a sale -- decent sales pipeline in terms of which you just executed. Are you up to give us some color whether that's your simulation or is that air traffic management your kind of product? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [22] -------------------------------------------------------------------------------- Yes. I mean we alluded in the media release. We're in advanced discussions with a number of new customers, specifically on the ATM front, we're hoping to be in a position to finalize these agreements shortly. Like I told Chris, most of these will benefit us going forward, FY '22 and beyond. But I'm really hoping that we'll be able to confirm those agreements very shortly. -------------------------------------------------------------------------------- Andrew Charles Gracey, Australian Ethical Investment Ltd. - Portfolio Manager [23] -------------------------------------------------------------------------------- Okay. And your ATOP program where you kind of come in under Leidos, that technically kind of expired even in '21, although there seems to be a kind of general thinking that this will continue. Is this expected to be a further kind of contract drawn up in terms of around kind of work on ATOP? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [24] -------------------------------------------------------------------------------- Yes. So the current agreement expires in -- at the end of July 2021. We've already begun discussions with Leidos with the main contract over FAA. The discussions are advancing very, very well, and we're very confident that this new contract will be in place before we report in August. -------------------------------------------------------------------------------- Andrew Charles Gracey, Australian Ethical Investment Ltd. - Portfolio Manager [25] -------------------------------------------------------------------------------- And this will be a multiyear contract? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [26] -------------------------------------------------------------------------------- Yes. As has been the pattern with Leidos and the FAA, we typically sign for quite a number of years. Historically, it's been in the 8, 9 years. So it would be at least for that term, we're confident. -------------------------------------------------------------------------------- Andrew Charles Gracey, Australian Ethical Investment Ltd. - Portfolio Manager [27] -------------------------------------------------------------------------------- Okay. And just in terms of the emergence of a vaccine and the effect the COVID-19 has had on the air traffic controllers markets and the use of simulation, is there an expectation that the number of kind of number of flights will go up that use -- there will be a kind of increased demand or at least increased usage of your simulation product as some of the air traffic control as it kind of bought back? Or have they never really kind of -- have they just been kind of stayed on the job throughout COVID? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [28] -------------------------------------------------------------------------------- Well, like I said, I think the fact that the training facilities have been operating at, say, 70%, I think that's a reflection of the fact that there's less demand for air traffic controllers. But you're right. I mean when the vaccination is more widespread and flights returns into the skies, everyone will quickly be calling the FA controllers to return to work. Before COVID, we were anticipating an increased demand in terms of training of new air traffic controllers because of growth of a number of airports and also because of just the retirement, the age of some of the Air traffic controllers, specifically in the U.S., is getting up there. So we do anticipate increased demand either way. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Alex McLean of Bell Potter securities. -------------------------------------------------------------------------------- Alexander McLean, Bell Potter Securities Limited, Research Division - Analyst [30] -------------------------------------------------------------------------------- Daniel, just a quick question. Can you just remind us when the FAA tower simulation support contract, which you guys lost in November, is up for tender? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [31] -------------------------------------------------------------------------------- Yes. So it will be up for tender in about 1.5 years. And obviously, we're very interested in getting back into that relationship with the FA, so we will be certainly putting our best foot forward with the FA at the appropriate time. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- (Operator Instructions) Your next question is a follow-up from Chris Savage of Bell Potter Securities. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [33] -------------------------------------------------------------------------------- Just one quick follow-up. Kevin's favorite subject, be it simple litigation. Is there any update on that, please? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [34] -------------------------------------------------------------------------------- Sorry. I didn't get that, Chris. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [35] -------------------------------------------------------------------------------- The litigation or dispute with Adsync, is there any update on that? Or is it still stuck in the courts? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [36] -------------------------------------------------------------------------------- So just an update on the Adsync litigation. We can report that this matter has been settled. We're glad to put this behind us, move forward and just focus, as I just said to you, Carl. We focus on reengaging with the FA and putting our best foot forward to winning back that contract. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [37] -------------------------------------------------------------------------------- Can you say what financial impact there was from that settlement? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [38] -------------------------------------------------------------------------------- Due to the nature of the settlement, we cannot disclose the terms. What I can say is there was no material impact on our results in H1. -------------------------------------------------------------------------------- Chris Savage, Bell Potter Securities Limited, Research Division - Senior Industries Analyst [39] -------------------------------------------------------------------------------- Was the cash flow impact reflected in the H1 result? Or will that come through in the second half? -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [40] -------------------------------------------------------------------------------- Everything was recorded in the first half. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- (Operator Instructions) There are no further questions at this time. I'll now hand back to Mr. Verret for closing remarks. -------------------------------------------------------------------------------- Daniel Verret, Adacel Technologies Limited - CEO [42] -------------------------------------------------------------------------------- Well, I just want to thank everyone again for joining us today, and we look forward to our update when we complete the full year in August. Thanks again, and have a great day. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- That does conclude our conference for today. Thank you for participating. You may now disconnect.