Baylin Technologies Inc. (BYL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Baylin Technologies Full Year and Fourth Quarter 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, March 20, 2025. I'll now turn the call over to Kelly Myles, Director of Marketing and Investor Relations of Baylin Technologies. Please go ahead.

Thank you. Hello, and welcome, everyone. Thank you for joining the call this morning to review our full year and fourth quarter 2024 financial results. On the call today, from Baylin are Leighton Carroll, Chief Executive Officer; and Cliff Gary, Chief Financial Officer. We will be available for questions at the end of the presentation. Before we begin, let me make it clear that our comments today may include forward-looking statements and information and answers to questions that could imply future expectations about the prospects and financial performance of the business for 2025 and beyond and could include the use of non-IFRS measures. These statements are subject to risks, uncertainties and assumptions. Accordingly, actual performance could differ materially from statements made or information provided today, so you should not place undue reliance on them. We also do not intend to update forward-looking statements or information, except as required by law. I ask that you read our legal disclaimers and explanation of the use of non-IFRS measures and refer you to the risks and assumptions outlined in our public disclosures, in particular, the sections entitled Forward-Looking Statements and Risk Factors in our Annual Information Form for the year ended December 31, 2024, and our other filings, which are available on SEDAR+. Our full year and Q4 2024 results were released after market closed yesterday. The press release, financial statements, MD&A and Annual Information Form are available on SEDAR+ as well as our website at baylintech.com. I would now like to turn the call over to Leighton.

Thank you, Kelly. As always, I would like to start by thanking the employees in Baylin for the incredible work that they've done, and in particular, in these extremely unusual times. We have indeed continued to improve as a company through their efforts. The current global trade landscape continues to present challenges with tariffs and threats of reciprocal tariffs creating turbulence across key markets, including the U.S., Canada, China and other regions. Shifting trade policies and ongoing negotiations have led to significant market volatility and uncertainty. While some tariffs have been in place for years, recent policy changes and the pace and change of said policy changes and new trade measures have added further complexity to the environment. We have been actively monitoring these developments and have been adjusting strategies accordingly to navigate in an effort to mitigate the impact to the corporation. On July 9, we announced that we had agreed to sell Galtronics Korea Co. or we call GTK and Galtronics Vietnam Company Limited or we call GTV to a Korean strategic acquirer. The sale of GTK was completed on the 30th of July 2024. And then on the 27th of December 2024, we completed the sale of GTV. A $4.6 million gain on the disposal has been recognized and included in discontinued operations. I'd like to thank the team and the employees of GTK and GTV, again, for their hard work and their dedication, and I wish them well with the new ownership. Satcom's softer performance in Q3 continued into Q4, largely driven by market dynamics with lower industry volumes and slower government opportunities towards the end of the year. The change in U.S. administration, it's our belief certainly had some level of impact in that regard. As a result of these conditions, we chose to take a noncash impairment charge of $2.6 million, which was booked in the fourth quarter. Interestingly enough, the Satcom business did year-over-year was flat in terms of total revenue. But given what we're seeing in order volume and where the business has been versus what our expectations for the business will be, we decided to take the impairment, thought it was the prudent move. Our North American Galtronics businesses continued the same strong sales and margin trends in Q3 and delivered very profitable a results in Q4. The Wireless Infrastructure business has been performing very well and this is despite the North American capital infrastructure spending market being at its lowest level in years. We have taken advantage of our strategy where we chose to play, and honestly, I feel like we have undoubtedly been capturing market share as others are receding. Our Embedded Antenna line continues to deliver solid results and its order backlog attained a record level in its history at the end of 2024, which has only strengthened recently. For the full year, the group saw an improvement in gross margin from 38.9% to 41.1% in 2024 with gross profit increasing to $34.4 million or an increase of 21.1% over the prior year. The Infrastructure and Embedded teams both saw significant double-digit year-on-year growth in revenue compared to the prior year. On the adjusted EBITDA basis, our continuing operations went from negative $0.2 million in '23 to a positive $5.4 million in 2024. Our cash generated from continuing operations was also positive at just under $1 million, at $800,000, in comparison to a negative $3.6 million in 2023. These metrics highlight the continued improvements in the core operational business activities. And honestly, I feel like we have been and will continue to be on the right path. Work remains to be done as we need to generate more cash from operations. We have to continue our cost optimization efforts. And we need to obviously secure longer-term credit facilities. All of these are -- continue to be underway. Despite the uncertainty of the macroeconomic environment that we operate in, our backlog from continuing operations remained consistent with the prior quarter at $30.2 million as of December 31. Cliff Gary, our CFO, will now comment on the fourth quarter and full year results.

Leighton, thank you. Prior to discussing the fourth quarter and full year 2024 results and financial position, I'd like to address some important disclosure in our financial statements. We have noted a material uncertainty related to a going concern arising from the outstanding court order for the return to the escrow agent of $1.8 million plus interest and the negotiation with our current lender of a new credit facility to replace the current one, which matures on 31 March 2025. We're actively addressing both these issues. If we're unable to settle the new agreement before its maturity on 31 March, we expect to enter into a 30-day extension with our lender in order to provide sufficient time to settle and sign the new credit agreement. Now to address the fourth quarter of 2024. Revenue at $20.8 million represented an increase of $4.7 million or 28.9% compared to the fourth quarter of 2023. The increase in revenue was due to sales growth experienced in the Embedded Antenna and Wireless Infrastructure business lines. Gross profit of $7.9 million in the fourth quarter of 2024 was an increase of $2.2 million or 38.8% compared to the fourth quarter of 2023. The improvement not only related to revenue increases, but also to an improvement in gross margin. Gross margin of 37.9% in the fourth quarter of 2024 improved 2.7% from 35.2% in the fourth quarter of 2023. The higher gross margin in the fourth quarter of 2024 was primarily attributable to stronger revenue and favorable product mix being caused by increases in the Wireless Infrastructure business line. Adjusted EBITDA of $1.8 million in the fourth quarter of 2024 was an increase of $3.8 million compared to the negative $2 million in the fourth quarter of 2023. The increase in adjusted EBITDA in the fourth quarter of 2024 was mainly due to the increase in revenue and gross profit and a reclassification of $2 million from cash-based to share-based compensation. The net loss of $4.9 million in the fourth quarter of 2024 included the $2.6 million impairment charge and compares to a net loss of $6.9 million in the fourth quarter of 2023. For discontinued operations representing the Mobile and Network business line, adjusted EBITDA from discontinued operations of negative $0.4 million in the fourth quarter of 2024 compared to negative $0.7 million in the fourth quarter of 2023. Despite the negative adjusted EBITDA, discontinued operations generated net income of $3.7 million in the fourth quarter of 2024, mainly attributable to a gain on the disposal of the business line of $4.6 million. This compared to a net loss of $1.1 million from discontinued operations in the fourth quarter of 2023. Turning to the full year results. Revenue at $83.6 million in fiscal 2024 represented an increase of $10.5 million or 14.4% compared to fiscal 2023. Consistent with the fourth quarter, the increase was due to sales volume increases in the Embedded Antenna and Wireless Infrastructure business lines compared to the prior year. Gross profit of $34.4 million in fiscal 2024 represented a gross margin of 41.1% was an increase of $6 million or 21.1% compared to fiscal 2023. The increase was primarily due to the increase in revenue and higher gross margins from the Wireless Infrastructure business line. Adjusted EBITDA of $5.4 million in fiscal 2024, an increase of $5.6 million compared to the negative $0.2 million in fiscal 2023. The increase was due to a combination of stronger revenue, higher gross margin and continued cost control of operating expenses. A net loss of $8.5 million in fiscal 2024 compared to a net loss of $8.2 million in fiscal 2023. The net loss in fiscal 2024 included the impairment charge of $2.6 million for the Satcom business line, interest and other finance expenses as well as an unfavorable adjustment of $1.5 million based on the fair market value of the company's convertible debentures. Discontinued operations for fiscal 2024 generated net income of $0.6 million with a net loss of -- net loss after taxes of $4 million offset by the $4.6 million gain on the disposal of the business line. This compared to a net loss for fiscal 2023 of $5.6 million. Cash generated from continuing operating activities was $0.8 million for the 12 months ended 31/2024, an increase of $4.4 million compared to the $3.6 million outflow during the 12 months ended 31 December 2023. The increase was mainly due to a combination of stronger operating performance and less interest being paid as a result of lower overall debt levels. I'll now turn the call back over to Leighton.

Thank you, Cliff. The company delivered strong financial performance in fiscal '24 with substantial increases in revenue, gross profit, adjusted EBITDA, and perhaps most importantly, cash from operations compared to the prior year, and to be honest, compared to where this business was over the past several years. Both the Embedded Antenna and Wireless Infrastructure businesses exceeded expectations while the Satcom business, as mentioned, was flat year-over-year, particularly from a revenue perspective. As we navigate the challenging business environment, our focus remains clear: driving profitability and generating positive cash flow to strengthen our financial position. Despite macroeconomic headwinds, we continued to execute disciplined cost management, focus on operational efficiencies and our strategic initiatives are built to support long-term growth and sustainability. I am confident that our focused approach will position us for success. Now I'd like to speak about each of our businesses and what is going on in each. The Embedded business line, we expect to continue to perform strongly in 2025, although at slightly below those in 2024. Revenue is expected to be higher, but customer workflow delays could affect revenue attainment. The number of active bids for new projects remains at a strong level. And as mentioned, the Embedded group closed 2024 with a record high level of backlog, which has further grown as at the end of February 2025. Wireless Infrastructure expected -- we expect continued strong sales of our higher-margin multibeams, innovative small cells as well as stadium deployments throughout 2025. We are continuing to lever the competitive advantages that these projects afford in order to open up new global economic opportunities for us, drive sales with wireless carriers and third-party operators, and at the end of the day, just continue to grow this business. We are continuing to expand into new markets, particularly Europe and Mexico, where we have not previously had sales. Although there remains a risk of spending cutbacks by carriers and third-party operators, we expect to see further spending on multibeam and small cell antennas to continue in 2025, which will drive higher sales volumes for this business. Based on our current assessment, we expect fiscal 2025 to reflect improvements in revenue, gross profit and adjusted EBITDA over 2024, which was already a strong year. We do anticipate some impact from recent tariffs and are working to minimize the implications for gross profit. Our Satcom business, we expect to generate lower revenue in 2025 compared to 2024, mainly in a reduction in demand for its products, particularly specialized custom engineered products such as high-powered amplifiers for military, government and broadcast applications. Satcom's revenue may also be negatively affected by U.S. tariffs. We continue to see some softness in the commercial low-power market, but our broadcast applications remain solid. Our Genesis and Summit lines of solid-state power amplifiers are generating sales from clients due to the improvements in performance, monitoring and failover they provide over our older technologies and that -- products of our competitors. Importantly, these new amplifiers are consistent in architecture, meaning they will allow the business to simplify supply chain requirements over time, and therefore, improve efficiencies in our manufacturing. We expect to see continued opportunities for military and other government-related uses in Western countries, and we continue -- we expect we will continue to see high levels of defense and scientific spending. Conversely, the U.S. government administration and the Department of Government Efficiency, those activities may cause some delays in orders due to uncertainty with our customers. Tariffs, probably a subject I should get to and just cover broadly. It is a big deal, and obviously, there has been much in the news on Canada and China and what that means for our business. The Embedded Antenna line, if I can start there, will not -- we do not expect to be directly affected by an increase on tariffs in China. Although many of our products are manufactured in our facility in China, they are shipped to China to contract manufacturers and ODMs elsewhere in Asia for embedding into the final products, which are then sold on to in consumers. This has been our experience with previous U.S. tariffs levied on imports from China, which started in 2018. There is a risk that the impact of tariffs could cause our end customers to have lower volumes and that would drive lower order fulfillment activity within the Embedded Line. It is something we are actively monitoring at this time. Wireless Infrastructures are also manufactured in our facility in China with some in Vietnam. Our finished products are then purchased by Galtronics USA for delivery to customers in various jurisdictions, including the United States. We are also working with our U.S. customers and implemented measures to help mitigate the effect of the Chinese tariff. I can speak to a little bit more about these things in QA. In the case of Satcom, most of the products are produced in Canada, of which a significant proportion, typically between 40% and 50% annually, are delivered to customers in the United States. The company has been assessing and implementing various options to avoid or mitigate the effect of the tariff on Canada from the U.S., which include a change in the structure of the operations of the business and other measures so the products remain competitive for the U.S. market. We are also working to ensure that our products manufactured in Quebec are USMCA compliant. This came through in a recent executive order that if you qualify as USMCA-compliant, meaning 60% of what you produce is North American-based, you do not have to pay a tariff as the product moves from Canada to the U.S. Nevertheless, the Canada tariff could result in delays on existing work fulfillment and reduced orders for Satcom products. This could cause Satcom's revenue to be lower than planned due to reduced sales. We are actively playing offense, obviously, and defense to mitigate that. It is too early yet to know the full impact of the tariffs that -- may have on our business and the situation has clearly been very fluid. We are working to avoid and/or mitigate their effect as much as practical and have been very proactive in this space. We remain committed to achieving further growth and profitability. At this stage of our journey, the recapitalization of our balance sheet has strengthened our financial position, enabling us to capture -- to capitalize, excuse me and well, capture market share, but capitalize on the foundation we've been building in terms of our product development and go-to-market strategy. The financial performance obtained in '24, particularly in comparison to '23, demonstrates that these efforts are bearing fruit. We operate in highly competitive markets. And despite these broader macroeconomic challenges, Baylin has demonstrated growth. By leveraging our unique intellectual property, the talent of our employees and executing a very structured and focused go-to-market strategy, we have delivered strong results and continued to build competitive advantage. I cannot thank the employees of Baylin enough for all the hard work and dedication they've shown. Operator, that concludes our formal remarks. Happy to take questions.

[Operator Instructions] With that, our first question comes from the line of Daniel Rosenberg with Paradigm Capital.

My first question was around the Satcom business. You mentioned some softness in the pipeline towards the end of the year. I know hard to tell and then layering on tariffs on top of it. But just could you dig a little deeper in terms of how we should think about growth rates or provide some guardrails on what the outlook looks like around that business itself in terms of all that's going on?

Yes. Sure, sure. Happy to. So -- and it's been pretty fluid. So maybe I'll start on the tariff front and then I'll pivot to market conditions. The tariff thing has been bananas. And it has changed so many times, particularly when Ontario was going to do a tariff on energy and then the Trump administration was going to double tariffs and then they backed off on that. And then the U.S. automakers got an exemption for a period of time. And then I think it was a day later they came out and said any product in Canada that qualifies under USMCA with appropriate paperwork would be exempt. It's fluidity in this space, and you know for CEOs in general, one of the things they cannot stand is when you have a lack of stability or a lack of certainty, particularly in terms of regulations. It's something we've been dealing with. So we feel good that we'll qualify under USMCA. We've never had to do that step before. There is paperwork and documentation involved. But that is an example of -- and a very easy example to point to of something that can be done to help mitigate the threat of a tariff on our business, particularly when you think about a lot of the amplifiers, and certainly, you can see even on my LinkedIn page and on the Advantech page or the Baylin page, pictures of these enormous amplifiers that make incredibly high power we produce. The end customer, that is for a U.S. DoD application. So effectively, it's tariffing themselves. And because a lot of our customers are taking receipt of what we produce FBO, it pushes the tariff to the customer who ultimately may be a defense contractor working with the U.S. government. It's a really unique situation, a lot of moving parts, a bit of complexity. Obviously, we're having numerous customer conversations, particularly in the Satcom space, on how do we mitigate, what are the implications and when it comes to a lot of the product we ship to the U.S., which are for U.S. government applications, what does that mean? And I'll actually use a U.S. government application to give you a pivot and some of the uncertainties we've seen. So we have been working on an opportunity with the National Oceanographic and Atmospheric Administration of the United States, and this has been in our funnel for some time. We look at it and we feel confident we will win that. Well, what happens? We have a new administration. There is now this thing called the Department of Government Efficiency and they have been going through various groups at the U.S. government, including NOAA, and have laid off a significant amount of people. As you can imagine, that causes interruption. It causes uncertainty in some of the governmental entities that we deal with. And while we remain confident that, that order will indeed come to fruition, it is a unique dynamic that at least in my experience of working with governmental entities I have never seen before. So the net effect is we're dealing with a unique and challenging time. Customers have the same uncertainty that we do. And given the environment, we do expect there to be some uncertainty in order flow and we're going to do our best to work through it.

Okay. I appreciate that context. And I mean, to an extent, fully, really out of your hands, just got to navigate it as possible. I guess, turning to the balance sheet. So I think there was mention of if something isn't finalized by March 31 and extension is expected, I was just wondering what are the options here? Are you looking at alternate sources? How confident are you in negotiating through with the current lender? Just some added color there would be helpful.

Yes. Happy to take it, and Cliff, feel free to join in. We -- as I think you are aware and I think we've press released a lot of this, we have done, particularly since the time that I've been with the company, which I haven't quite hit 4 years, but I can see it. I'm going to be here 4 years this summer, we have certainly been and had a very productive working relationship with our primary lender, RBC. And as a result of that, have done multiple loan amendments as we have fixed the business. The challenge with that is when you have 14 loan amendments on a base agreement, which is legitimately exactly where we have been, you have to go back and the complexity of amending and amending and amending, it adds risk, I think, to everybody. Meaning if we got something wrong or if this cancels that, you get the idea. So the whole idea is, we're repapering the whole thing. And Cliff and I have been in discussions with Royal going back months now. Honestly, in my opinion, we're very close to having this done. However, one thing I will say about banks, they don't like to move at warp speed or Baylin speed perhaps and it's just taking longer than I think we all would like that. And by the way, it's not to say that this is in any way the bank's fault. It's a negotiation, you're going through points. We are -- I am personally highly confident that we will repaper the tender, we just needed some additional time to get it done. Because that can't be accomplished before the earnings announcement, RSM, being our auditor, added a going concern disclosure as they should. We're confident that, that will not be an issue. Longer term, we are looking at alternative options in terms of our credit structure and our capital structure. One of the unique things that we're finally at the position of is, particularly when you talk about Wireless Infrastructure and the growth we're attaining there, that provides runway for the business. And it means we can potentially consider moving to an alternative lending source with more flexible terms for the business. That will make a lot of sense as we continue to grow. So those conversations are also underway. But first things first, let's extend. And then Cliff and I will continue to look at and evaluate alternative credit facilities. Cliff, is there anything you want to add?

No, nothing to add. I think that was a good summary. I 100% agree with you that we are quite close and we do expect that it will be closed. So yes, nothing to add there. Thank you.

Okay, appreciate that. Lastly for me, I was curious, the backlog is still kind of sustaining the strength from last quarter. I was wondering about the composition, how it shifted, what you've seen within that pipeline?

Yes. So it kind of matches the talk track from the earnings call, right? If we talk about the Infrastructure business has grown -- and by the way, that's a fast-turn business, we have seen really nice order flow. So that backlog will never explode to a great number because we fulfill pretty quickly. Our manufacturing team is really solid. And we're not sitting on gazillions of pieces of inventory. We are fulfilling as we get the orders and doing it quickly. So our backlog has been solid and way above prior years and certainly way above 2022 levels as we were entering 2023, markedly so. But it's consistent and solid. And I feel good about the Infrastructure business. The Embedded business is the one that's interesting, meaning we have seen material growth in our backlog that is across a number of different customers, and yet, I do expect there will be some softness in the order fulfillment at the beginning of '25 simply because of customer pushouts and delays. And in some of this, and I can only speculate, but some of this may be tariff-related or people having concern or wanting clarity. But at the end of the day, if I think about 2025 as a year and we're sitting at that level of backlog, that's a really good place to be. Where we finished in February, the Embedded team has never been in its history. I went back and looked myself as far as I could go back on backlog numbers, and that's a good place to be, and I'm happy with the results in that team. The Satcom business has had a softening in their backlog, and that's just because of what we expect them to produce on a monthly basis to attain numbers, coupled with the fact that we've had some slowdown in softness in some of the key markets. We're continuing to have wins. We actually have a pretty nice funnel of work. And we continue to work on some pretty large opportunities. But as I think people who are familiar with the Satcom market know and certainly larger governmental opportunities know, our wins will be a bit on the lumpy side. And so when you couple that with tariffs and the changes driven into the government itself by the U.S. administration, it creates a level of uncertainty and we've seen some softness in the order book. But we remain confident that the Satcom business will be solid in the long term. One of the things that I've talked with people about, is this cyclical or structural? And it is my view right now that this is cyclical, that our strategy is solid. What we've been doing with high power has really put us in a unique position, and we're going to continue to see that materialize over the course of time. The question is, in the short run, what does that look like? And we have seen some softness in that book.

[Operator Instructions] And I'm showing no further questions at this time. I would like to turn it back to Leighton Carroll for closing remarks.

All right. Look, I'm very proud of the team and what we've accomplished. 3.5 years ago -- when putting this into '24 context, 3.5 years ago, we were rough, to say the least. And we had 4 businesses and there were cash burns. The company wasn't generating cash flow. We had too much debt. We have really changed. We're thinner. We're leaner. We have unique intellectual property and market position now. The Infrastructure team growing by the level they grew in what is widely considered a down year in wireless infrastructure spending. It really says something. It says we're getting a lot right. We're not perfect. We still got a lot of work to do. As I say, some is good, more is better. It's great to be generating cash in the business. We need to generate more, and we will continue to focus on making that a reality. I really appreciate everyone's time today, and thank everyone for attending the meeting.

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.