Calian Group Ltd. (CGY) Earnings Call Transcript & Summary

Good day, and welcome to the Calian Management Update Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kevin Ford, CEO of Calian Group. Please go ahead.

Thank you, Gerard, and good afternoon, ladies and gentlemen. With me today is Patrick Houston, our CFO. We would like you -- to welcome you to this conference call where we provide a management update given recent world events related to the COVID-19 virus. I appreciate many of you who have reached out asking for an update, and we felt it prudent to hold a conference call as we focus our efforts in response to COVID-19. As you can appreciate, the situation is changing daily, if not hourly, and we are providing an update as of today on the impact to Calian Group. First and foremost, Calian remains stable. While we have felt some impact, all of Calian's segments continue to operate as we actively work with customers to adjust their delivery, to meet their changing requirements and comply with government health and safety measures. In this environment, there are factors we can control and factors we cannot control. At Calian, we cannot control the pace and duration of the virus, how governments at all levels react to the pandemic or the financial market's reaction to this crisis. But we can control our own responses, such as finding creative ways to execute our services remotely, pulling back our expenses and seizing opportunities to provide our services in the overall crisis response. We have an experienced executive and management team, who I believe are doing an excellent job in our response to this unprecedented global challenge. Our focus remains managing the levers we control as we anticipate this softening environment will continue into May, if not longer. The coronavirus pandemic has highlighted the essential nature of our services. Government response measures have raised important questions about what is considered essential versus nonessential. When you look at what we do, whether it is defense and telecom manufacturing, satellite communications, health services, cybersecurity or nuclear engineering, many of these are essential services. This criticality in what we deliver is part of our DNA. I will now briefly walk through each segment. The health segment is experiencing increased demand in our provision of essential primary care services. These are services where we need to be on the front lines. This increase in demand has partially offset other areas in the segment that are experiencing a temporary decline, specifically in areas such as our psychological assessments and dental services. In the Advanced Technologies segments, projects continue without major disruptions at this time. Work on the large contracts through satellite ground stations continues. However, we recognize they may be affected by travel restrictions or potential worksite shutdowns. We are monitoring the situation closely and are hopeful that any temporary disruption to this project can be made up later in the year. We are continuing to fulfill orders for our custom products for wireless and satellite clients. We are seeing stable demand for our AgTech business, IntraGrain as well as SatService in Germany. Product development, programming and product sales are continuing with minimal disruption at this point. For our Learning segments, we have worked with our customers to find alternative ways to maintain continuity of service. Some projects due to the nature of their activity have been put on hold in the short term to meet social distancing measures. We anticipate that following this period of disruption, we can make up those projects in the coming quarters as the services remain in demand. The emergency management business continues at the same pace with additional opportunities arising in all levels of governments as well as first nations and critical infrastructure organizations. From our perspective, the emergency management team is currently at the front end of a wave of opportunities as potential clients recognize our capabilities to support the coronavirus and emergency management operations requirements. For our IT segments, the majority of our Information Technologies business comes from large, stable customers. Some projects have been scaled back due to work from home measures and school closures which will slightly impact billings in the short term. We are hopeful that additional work from home arrangements will be made for these projects, increasing our capabilities and revenue contribution. The cybersecurity business remains solid as we continue to focus on product sales. I'll now ask Pat to provide some comments from the financial context. Pat, over to you.

Thank you, Kevin. The effects of the COVID-19 pandemic are anticipated to be broad and deep across the economy. Despite these broader impacts, Calian remains stable due to diversity and criticality of the products and services we offer. When assessing the financial impact of what Kevin has described, we're currently modeling that these conditions that began last week will subside and our various effective projects will begin to return to a steady state in early May. A longer duration under these conditions could impact our assessments and financial estimates. For Health, we see a temporary $2 million revenue impact during this period, with approximately 25% being deferred to future quarters. For Information Technologies, we see a $2 million revenue impact with a limited opportunity to recapture these sales in future quarters. For Advanced Technologies, we see a $1 million revenue impact, with approximately 50% of this deferred to future periods. And finally, for Learning, we see a $2 million revenue impact. We expect this segment to experience increased demand in following quarters and hope to recapture the majority of this revenue. Overall, we see an impact of approximately $7 million to $8 million for the period starting last week and continuing until early May, with an opportunity to recapture approximately $3 million in future quarters. We continue to maintain our backlog of more than $1.3 billion with no changes due to recent events. We also maintain a strong balance sheet with cash and access to credit. The rapid change in the U.S.-Canadian dollar exchange rate during the last few weeks will result in increasing working capital pressure in the short term due to our net asset position, but the P&L impact will be limited due to our hedging program. Working capital may also be impacted in the event that further travel restrictions slow down installation progress on our large Crown system project. With the information we have today and the assumptions I have described, we believe these short-term impacts, along with the continued execution of our existing business and contracts, means our results for the year ended September 30 are expected to fall within our existing guidance range. 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 the actual results. I'll now turn it back over to Kevin.

Thanks, Patrick. The coronavirus crisis has highlighted the stability in Calian's diversity. The strength in our diversity is evident in our 4 segments as well as in our mix of products and services. In the challenging environment, product sales have performed quite well to date while services have been impacted. Overall, our assessment indicates the disruptions are not meaningfully impacting our backlog. We continue to work closely with our customers and our employees on a daily basis to ensure service interruptions are minimized and that we can resume operations as the business environment permits it. We also continue to work on our long-term strategic objectives including our M&A strategy in order to support growth momentum for the long term. As mentioned in the introduction, the situations continue to evolve, and we will respond accordingly to protect the health and safety of our staff and our commitments to our customers. So with that, I'd like to now open the call to questions for the analysts who are on the call. And for any shareholders who are on the call, if the analysts do not cover the questions you have, we'd be happy to deal with them directly after the call. You can contact us directly. We'll be happy to deal with them. And I also just want to note that Patrick and I are in virtually different offices right now working from remote sites, so we will do our best to coordinate our responses to these answers. So with that, Gerard, I'd like to now answer (sic) [ open ] the call up to questions.

[Operator Instructions] And we'll take our first question from Doug Taylor of Canaccord.

You went through a bunch of numbers there about the revenue impact to the various segments and your ability to recover. If I missed it, could you maybe walk through how would you expect to recover a bunch of the profitability that's associated with that revenue through cost reductions? You didn't mention that at the beginning of your prepared remarks. Any help there would be good.

Yes, the revenue impacts are mostly where we're offering services right now, so we'd lose the corresponding margin on that. Our margin generally in our service business is approximately 20%, so that's kind of what we lose. We're obviously trying to offset that with expense reductions corporately. And if the demand comes back, then we'll catch it up in the following quarters.

And Doug, just to give some color to that. You can think about our Learning and Training business, if a military exercise is postponed, there's a good opportunity or a good chance that, that exercise will still go ahead in future quarters. So there's one mechanism there as well. And from an Advanced Technologies perspective, if there's delays in schedule or implementation, for example, of ground systems, the requirement is still very much there. It's just now a matter that's getting pushed into future quarters as we see the travel restrictions lifted across the world.

So it sounds like, I mean, the revenue impacts are, I would say, modest, but you're not making any sudden news with respect to your cost base or infrastructure or anything like that. But can you talk about just in the off chance that this does extend beyond the May time frame that you sort of talked about, what tools do you have in your toolbox to be able to either rightsize or course correct in that scenario?

So I'll give you my perspective, and Patrick can jump in here. Obviously, the tools are, as we mentioned, our operating expenses, we basically shut down all nonessential expenses, and we can continue with that. So we pushed out any hiring for a period of time. Obviously, travel and costs of travel, we have a lot of travel expenses in our business, frankly, that are nonexistent at this point. So we would just continue to work on our expenses. We'd also look at our overheads with regard to where we can cut that's required or slow down when required. And I would also say that we are looking at opportunities to increase in certain segments our sales, emergency management services, health care services. Again, as this continues, we are seeing increased demand in those 2 areas. So we believe that the combination of moderating our expenses as well as increased sales in certain segments will help us get through this. And what I am finding in each of our segments, it's not a one size fits all. Each one of our segments is dealing with different types of challenges, and we've actually done a great job to manage through each one of those, for example, working from home for the majority of our staff. From my viewpoint, that's good. The other one I'd mention is we do a lot of marketing trade shows. All of those are being canceled. So all of the dollars we have in our budget, it's not insignificant for a company of Calian's size, and all of those are basically coming back to us as well. So we're still very confident in our financial posture going forward, and we're using every lever we can that we can control to make sure we remain financially strong, and I'm happy to see us staying within our guidance as of today.

One last question just so we can help to -- or we can understand some of the scenarios here. You mentioned the $7 million to $8 million impact for the period starting last week and going through to the end of May. So is it effectively $3 million to $4 million per month that this -- the current conditions carry on? Is that a fair assessment, Patrick?

Yes. No, that's about right. Yes.

We'll take our next question from Deepak Kaushal of Stifel.

I missed the first part of the prepared remarks, so I apologize if I repeat something. But Kevin, I was quite interested in more color on the new opportunities that you're seeing, particularly on the health care side. And in those new opportunities, do they come up being under existing contract vehicle with the existing health care services contract? Or do they come under new contract vehicles? Do you have to go to bid? Or how do you pursue these? And what is the nature of them?

Yes. So good question. So really, it's a combination of 2 things right now. So our current health care customers, whether it's defense, some of the oil and gas sector, some of our provincial organizations and correctional services organizations, so in some cases, we're just being asked to increase coverage and hours, increase capacity in certain areas, primarily in primary care, doctors and nurses. So we definitely are leveraging current contract vehicles to work with our customers on increased demand requirements. We're also getting new customers come directly to us. So I think given the current situation, there is no time for RFPs, there's no time for a formal process. We're having some customers now come to us. We're actually seeing an increase in support for screening requirements, for example, whether that's people coming to and from organizations or traveling. So we're actually seeing quite a few requests on support. We're actually screening people as they move around as the virus continues to spread. So the combination of the 2. And again, I think we're just really starting to hit the wave of this, we expect more demand on that. The other element there, Deepak, is with Alio and Allphase, the acquisition we've done, they have a very strong and have a very strong home care and personnel support worker network and business. So again, we're seeing more demand even in that segment as well on the home care side. So while it's not -- as Patrick mentioned, I think we're just at the beginning of the wave of this, but we're confident that increased demand is not going to subside anytime soon.

Okay. And in terms of the Learning, as current or previously planned scheduled training sessions get postponed, have you seen new ones come up in terms of preparedness? I mean -- or maybe at a higher level, are you seeing the government look at using the military and doing your training to deploy them to help support health care industry in this crisis? And can you see a crossover between those 2 divisions in this environment? Or is that still too early to call?

Well, I think for us -- good question. I think for us, and I want to publicly acknowledge the men and women of our military who -- and all our first -- our health care responders in the front line. I want to acknowledge their efforts, and I want to thank them publicly for the work they're doing. The discussions around the military, if you think about the work we do with the military, now a lot of the work we work with them is to get them -- it's to work with them, actually, to continue to support operational readiness. So I'm confident. Obviously, the military is really well based on all of their training and planning and work that we've done for years of supporting them, and they are an incredibly well-tuned organization and ready to respond. I know the military executives are working day and night right now to be ready for not only -- if you think about the timing of this, not only the coronavirus, but we are about to enter into flooding and fire season, right? So I know for a fact that the military is getting ready to respond and will be ready as they always are. So for us, it's more, Deepak, the exercises that get them ready, that they continue to conduct. Those are the things that are going to be delayed for two reasons. Number one is, obviously, they've got to focus on core operations; and number two is, large exercises means bringing a lot of people together. So I think it's just being prudent to delay those until this challenge subsides.

Okay. But no new planning or thoughts of planning to use the military to help hospitals or manage the testing or the patient care during the COVID-19 crisis?

I would say, right now, we always support the military. But once it gets into deployment and command and control of, I'd say it that way, the military process kicks in and we support. But it's not a huge uptick for us, even though I know in some of our Army contracts, and I'm sure we'd be ready if required. Where we're seeing more uptick right now, frankly, those organizations that don't have that level of training and readiness, even the provincial organization as you think about maybe private industry organizations, critical infrastructure. Majority have operation centers and emergency operations center capability, but I don't think anyone, frankly, expected something of this magnitude to hit. And then as I mentioned, as we start moving into flooding, fire seasons, I think we're going to see a lot of organizations digging for support just to get through. It's going to be a crunch here over the next 6 to 8 weeks as these 2 things come to fruition. So I think the military are more than ready, they're ready to go, we'll support them. But I think where we'd see actually more demand potentially coming in here now is going to be the nonmilitary customers that we've got as they start to deal with the realities of this situation.

[Operator Instructions] We'll take our next question from Benoit Poirier of Desjardins.

Two questions. The first one, when we look at the -- given your strong exposure to the government, are you aware of any stimulus that could eventually deploy by the government for your services?

I think I heard that to say, is there any stimulus that the government would be deploying for our services. Did I get that right, Benoit?

Exactly. Exactly, Kevin.

Yes. I think right now, specifically, if you look at the government's announcements with regard to, obviously, on the human resource side, with [ EI ] and then some of the emergency measures they are putting in place, where we do see some upside is more on things like delaying taxes, those type of things, if we need it from a cash flow perspective, even though I don't think will be a requirement, at least we know when those are available to us if things were to drag on here. The first stimulus with regard to budgets for response, we haven't seen it specifically aligned in that context. But we are confident that the government has the resources required, whether through the military, whether through Public Safety Canada to respond. And it's just now more a matter of the process in which they engage industry. There was a government letter of intent that was recently published asking for industry feedback on how we can help get through this crisis. We have seen the request from federal government for refueling manufacturing sites for, obviously, personal protective gear, whether that be masks or ventilators. So we believe there's going to be a direct connection to industry where required, and I think the government right now is just trying to make sure they understand all the capabilities that they can call on if required to continue to work through those. So I don't think it's as far as stimulus spending, but my personal opinion, Benoit, is that they need to get the funding to support any element of the response to this that they will find it.

Okay. That's great color, Kevin. And my last question, could you maybe provide some color on how this outbreak impacts the M&A strategy, if there's any, probably from a traveling standpoint? But would be just curious.

Yes. So Jacqueline Gauthier, as you know, the previous CFO, she continues to work on our M&A files. There's truly 2 impacts we're assessing with M&A. Number one, and I think you can all relate on the phone here, is valuation. The world's hit a reset button here on valuation of companies and multiples. So clearly, you want to be cognizant of that as you look at your M&A portfolio. You want to be conscious of that reality and making sure that as you look at potential targets that whatever valuation you had 3, 4 weeks ago likely needs to be reinvestigated considering the current environment. And then secondly, it's just, as you said, the pace is slowing down just a bit in the short term and I think as organizations just deal with the reality of focusing on operations. So the one strength we have as a company by putting an M&A office outside of operations, it gives my service line, my divisional leaders the opportunity to focus on operations. And Jacqueline and her team can basically continue to focus on M&A. So we're not slowing down in any way. If anything, we're going to try and also keep an eye out for opportunities that may arise out of this environment with companies that may be looking for speeding up their exit strategies or merger opportunities, whatever. So yes, so we're not slowing down. We're definitely keeping that in our radar, and we're just trying to make sure we balance that day-to-day operational focus with not stopping on our strategic objectives because we do view this as something that will pass, and it is something that's coming out of it, I want to make sure we're not slowing down our momentum on our growth objectives long term.

Thank you. There are no further questions in the telephone queue at this time.

Okay. Well, listen, thank you, everyone. I appreciate -- again, a few closing comments from my perspective. Number one, I do appreciate everyone who's reached in with questions and looking for updates. I totally understand with this -- in this world that we're living in that requirement, and we're doing our best to try and keep up with that. I hope you can appreciate that our primary focus is on operations, on our staff and making sure that we get through what is a global challenge and come out of that not only strong through it, but even stronger out of it. And so our focus is on that. So if there's any delays, my apologies upfront, and I just ask for your patience. And if there's anything today on the call that you have or any other questions, we'll be happy to take them off-line. Just -- we just wanted to do a general update today. Number two, I just want to reemphasize that from my perspective and Patrick's perspective, I believe that Calian is very stable. The fact that we can stay currently today as of today in our guidance elements, I think, is a testament to the work that we're doing, the criticality of our services as well as our customers working with us to make sure that we can keep going. So I want to thank them as well as they deal with their own challenges. So it's been a real joint effort. Third, if there's any other changes that we see, any other major shifts, obviously, we will not hesitate to come back and update our shareholders on that. We have planned -- our next planned communication with shareholders officially is in May when we announce our Q2 results. But obviously, between now and then, if there's anything we want to communicate or need to communicate, we will definitely do that. So we continue to focus on operations. I believe we're doing a great job considering all of the moving parts. Our management team is engaged. We're actually a customer to our own emergency management services. We have our own crisis response team in place. So all the things that I think we could do, I think we are doing, and I just wanted to reassure our shareholders of that. So with no further questions, I want to thank you again for your time today, and please don't hesitate to reach out if there's other areas that you would like some clarification. And with that, we can close the call. And I wish you all safety, and I hope everyone is fine in all parts of the world, and I look forward to talking to you in May, if not sooner. So thank you so much. And you can end the call now.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.