Q1 2021 Quarterhill Inc Earnings Call
[music].
Good morning, and welcome to quarter Hills, Q1 fiscal 2021 financial results conference call.
On this morning's call, we have Paul Hill, President and CEO, and John <unk>, Chief Financial Officer.
At this time all participants are in a listen only mode.
Following managements presentation, we will conduct a question and answer session during which analysts are invited to ask questions.
To ask the question. Please press star one on your Touchtone phone to register.
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Earlier this morning quarter Hill issued a news release announcing its financial results for the three months period ended March 31, 2021.
This news release, along with the company's M. D N a and financial statements will be available on quarter Hills website and will be filed on SEDAR.
Certain matters discussed during today's conference call or answers that maybe given to questions could constitute forward looking statements.
Actual results could differ materially from those anticipated risks.
The risk factors risk factors that could affect results are detailed in the company's annual information form.
And other public filings that are available on SEDAR.
During this conference call quarter, Hilger, and we'll refer to adjusted EBITDA and.
Adjusted EBITDA does not have any standardized meaning prescribed by I F. R. S.
Please refer to page three on the Companys Q1, 2021 management's discussion and and analysis for our full cautionary notes regarding the use of forward looking statements and non I F. R. S measures.
Finally, please note that all financial information provided us and Canadian dollars unless otherwise specified.
I would now like to turn the meeting over to Mr. Hill. Please go ahead Sir.
Good morning, everyone. Thanks for joining us on today's call.
In terms of and agenda I'll start with a look at the business of Hollywood.
All of our Don will take a look at the peak on a handful of hardwood.
And then we'll open it up for questions.
The slides to accompany our remarks with the mood on the web portion of this call will also be available after the call on the water.
And Q1 consolidated revenue was $19 3 million consolidated adjusted EBITDA was negative 469000.
We ended the quarter with a strong balance sheet with $132 million of THAAD and working capital of 155 6 million of them.
Q1 was a good start to the year with both portfolio of companies and companies generating positive adjusted EBITDA. Despite the weakening of the U S dollar and the ongoing and dumber.
On the M&A front, we're off to a good start in 2020, one and made two acquisitions and we have a healthy acquisition pipeline.
I will start my review of the quarter with the look at results from each portfolio company.
I already had a good quarter with steady revenue.
Your margin.
And the acquisition and integration of South Carolina.
<unk> signed a five year of $13 million contract with the state of New York and from the one.
This is to install manage and maintain profit data collection around New York City.
The data of used to assess transportation needs.
And the highway infrastructure performance as well as for safety purposes, such as the evacuation routing.
It's part of a broader move IRB is seen within its customer base. The harvest data for the purposes of improving safety and of the source of revenue or cost savings.
R&D also of launch the web based analytics platform that is enabling could even Belgium and France the.
Collect and analyze the vehicle bike and pedestrian data to enhance safety and so.
Leasing comes from Ireland, Belgium subsidiary icon and we.
We'll also be deployed in the pilot program and Vancouver.
Overall, the pipeline and order book and the outlook for Iron and remains rock solid.
Why do I have had a positive adjusted EBITDA and the quarter and.
While we expect the business will have a characteristic variability in 2020 one on an annual basis, we expect wireline to generate positive cash flow is consistent with its track record.
COVID-19 and out of delayed his son and litigations and license agreement, but we believe these and temporary delays on wind.
Some of the litigations and the pipelines of day include Apple regarding wireless technology, which is currently and the appeal process.
And January wireline initiated litigation and Germany against the Apple with respect of three patents related to the memory interface, that's not the technology.
Motorola regarding wireless technology.
<unk> and regarding semiconductor and memory technology.
And Andy regarding semiconductor memory interface and power management technologies.
We continue to support wilen and future growth as they replenish the patent portfolio.
I do and has about 5000 patents per day, and we continue to look to invest and new partnerships as well.
Yes.
In terms of the Apple trial, and the oral hearing before a panel of the court of Appeals for the Federal Circuit is expected to be held sometime in the fall of this year.
2021 has been and active year, so far and the M&A from and the first week of January and we acquired sensor line of German based ICF provider of high and fiber optic sensors for the road and rail market.
The business was acquired at a reasonable multiple with the potential for additional revenue and cost synergies in the coming years.
And that's sort of lines of product growth strong fit with either of these global distribution network and financial results from sensor line and so far have met expectations and we're already exploring and realizing opportunities for sales synergies and North America and other international markets.
Our second acquisition announced last week of Bvs, which is also a German based Rps company.
Bds develops manufactures and sells the traffic monitoring devices that record of drivers speed and also red light and traction.
The net Bds's devices are currently the only radar based products certified under new regulations, and Germany that enabled direct enforcement for traffic violation.
And very well with our goal to expand our offerings and the area of the enforcement.
These types of products are highly sought after and governments to seek to improve safety, but also and identify new revenue sources.
The Dsos, one manufacturing facility and two service centers in Germany, and will be integrated into the sensor line.
Which is actually one of the bds's largest supplier of sensors.
We were introduced of EDF three sensor line and this demonstrates how our presence from the Ics industries can also leads the unique opportunities for acquisitions.
We are pleased to have already completed two deals in 2021 and look forward the more M&A activity during the remainder of the year.
The M&A conditions, and Ics are compelling and were given the substantial boost this year with the buyer and administrations plan to spend hundreds of billions of transportation over the next eight years.
We believe that the combination of massive new infrastructure spending and the need for governments to find new sources of revenue is to pay down debt means there is no better time to be and Ics.
Our target is to invest up to $400 million over the next five years the scale our Ics business.
We are confident and our prospects given our existing balance sheet access the low cost capital and a robust pipeline of M&A opportunities.
Successful execution of the strategy will lead the greater consistency of revenue and cash flow per quarter Hill, and we would expect that the translate into increased investor interest and a higher valuation multiple on the business and the future.
A couple of final items today, we are going live with our new corporate website and in Investor presentation that reflects the focus of our business strategy. The.
The presentation can be found on our website and the Investor section.
Finally, we are planning several initiatives to proactively get our store yet to a broader network of investors, which may include more conference appearances and targeted investor interactions and group of them.
We think we have a great story to tell and we look forward to generate and greater interest and quarter Hill as an investment opportunity.
With that I'll turn it over to John for a look at the financial highlights for the quarter.
Thanks, Paul and good morning, everyone. Thank you for joining us on the call and it's great to speak to you again next quarter.
Starting with our top line consolidated revenue and the first quarter was $19 3 million.
And as Paul mentioned, both of our operating segments enjoyed solid results and the quarter.
And I are D. It just want to remind everyone that the business typically experience of seasonality is less project work is performed during the colder weather months.
And.
And also given that a large portion of its revenue is from North American project implementations.
<unk> Q1, 2021 revenue was $11 5 million compared to $11 four in the comparable period last year.
I already as of Q1 revenue this year it got a boost from sensor line, which was acquired and the first week of January but also experiences experienced some of the effects of the week in the U S dollar compared to the same period last year.
In terms of Wildlands performance and Q1 and resulted from the execution of several agreements during the quarter, including a license agreement that settled litigation relating to television and display technologies with LG.
The licensed patents related to memory interface technologies, and digital display and TV technologies.
As we've mentioned before wildlands revenue may be variable quarter to quarter.
On the annual basis, the business has consistently generated strong margins and cash flow.
These cash flows are an important source of capital for our M&A strategy and also to reinvest and the wireline business itself as the shown with the patent acquisitions that we made near the end of last year.
In terms of gross margin consolidate gross margin was consistent year over year at 34%, but of note. However was that <unk> gross margin was 40% compared to 26% from Q1 of last year.
This improvement in gross margin was largely the result of strong margins earned on certain select projects worked on during the quarter.
As well as a higher proportion of product sales that typically have higher gross margins, including a very strong contribution margin of 64% from our newly acquired sensor line business.
In terms of operating expenses. The total operating expenses remained relatively consistent year over year at $12 5 million.
Compared to $12 6 million and Q1 last year and we continue to keep a close eye on our expenses both of the corporate level.
And the operating companies.
Okay.
For adjusted EBITDA, both Iot and while and had positive adjusted EBITDA on a on the segmented business basis.
<unk> adjusted EBITDA was $1 4 million and wireline adjusted EBITDA was $1 2 million for the quarter.
<unk> adjusted EBITDA improved to $8 million year over year on similar revenue.
Again due to the higher margin projects and.
The progress as well as the higher margin product sales revenue, including from central lines as I mentioned before.
On a consolidated basis adjusted EBITDA was.
Negative <unk> four.
And $4 million after corporate expenses, which include our public company costs.
Corporate costs were approximately $1 million higher in Q1 and 2020 than in the comparative prior period as we continued to invest and our ERP system implementation that will position our company to continue to grow and scale.
From a cash flow perspective cash used in operations was $5 9 million and Q1 were approximately $1 million excluding changes in noncash working capital balances.
And the balance sheet remains very strong at 102 million in cash and about $150 million and working capital was zero long term debt.
We continued our quarterly dividend payments in Q1 and toward the end of the quarter, we became more active on our previously announced and CIB, which will continue until August of this year.
This morning, and our earnings release, we announced details of our next dividend payment and the board of directors has declared and eligible dividend of 125 per share payable on July nine.
And for all shareholders of record on June 19th 2021.
So Paul spoke earlier of our intention to deploy 400 million over five years of scale, our Ics business too on the name <unk>.
And this morning, I'd like to share a few minutes to go over a slide that we think helps illustrate the shareholder value creation potential of this strategy.
So I'd like to start by reminding everyone that the information presented here is for illustrative purposes, only and that this is not to be construed as forecast or guidance.
These are targets that we aspire to but we are also confident that we can execute on.
You will see two charts on their revenue and adjusted EBITDA.
They show the actual business results for Q, 'twenty or 2020 and light blue.
And then and subsequent years of acquired businesses are represented by the dark blue bars on top.
While these crafts move and a linear direction to up to the right. The actual deployment of capital into our M&A may vary year by year.
Whats most important however.
Is that for illustration you can see our target by the end of year five.
There are a couple of assumptions, we use to develop our of illustration.
First the base business is reported at the end of 2020 and has held constant with no growth rate over the five years of.
Also we are not factoring in any proceeds from our current Apple litigation into outlook here.
Of course, we definitely expect our business of businesses will continue to grow organically as they demonstrated.
But for purposes of illustration were intentionally isolating the potential growth and tax from our M&A efforts.
The second key assumption is that we assume that quarter sales current market capitalization today is based on the sum of parts valuation of 10 times the <unk> adjusted EBITDA, plus our prevailing of working capital and each year.
Third.
We will continue to deploy capital, which will primarily be from existing and newly generated cash flow.
<unk> May also include external capital when it Optimizes our returns.
And this will be deployed to execute our M&A strategy acquiring smaller Ics companies at between five to nine times adjusted EBITDA.
Sure.
Possibly higher for higher growth or larger icf's companies already at the certain scale.
So.
Based on these assumptions as we execute our growth plans through M&A, we expect to Inorganically grow revenue and adjusted EBITDA over the five year period and the initial example.
We include the.
$330 million.
And Ics revenue and about $50 million of adjusted EBITDA.
Incrementally to where we are today.
This assumes therefore that our average acquisition multiple will be eight times EBITDA and that has been consistent with the two transactions we've completed so far.
Second with our Ics business at scale, we believe it would attract a higher multiple of valuation multiple consistent with our other public Ikea and Iot telematics companies debt.
That has achieved similar scale.
So again this slide is for illustrative purposes, only but we felt it was important to share with investors a sense of how we are planning to increase shareholder value over the next five years.
And in closing.
We remain focused on growing through M&A building, consistent and profitable revenue streams, maintaining a robust cash flows and controlling expenses throughout all of our businesses to increase shareholder value.
This concludes my review of the financial results and I'll now turn the call over to the operator for Q&A.
And ladies and gentlemen, and as a reminder, if you would like to ask and answer. Your question. Please press star and the number one on your telephone keypad.
And your first question comes from the line of Doug Taylor with Canaccord. Please go ahead.
Okay. Thank you and good morning.
Appreciate that last slide that you shared with US there. So I guess I wanted to ask one question on just start on the slide and that's the.
Can you speak to the the reasons and the justification for the expansion and the multiple from the kind of 10 ex that.
And we're at now buying things at eight times, and yet ending up with the 14 times valuation multiple of what do you think the changes and the business model of the revenue mix or the dynamics that you think are going to justify that multiple expansion.
Hey, Doug this is Paul.
Morning.
So first of all of Theres, some proof points already.
The two acquisitions, we've made are and the mid single digit range.
There are also public comps debt.
That we can provide to you that the public companies that trade and the kind of 13 to 15 range and some of little higher than that so there is a public comp.
Sort of Icf's companies at scale I would call it.
And just looking at the M&A pipeline that we have the bigger deals could potentially be slightly higher multiples and we paid for the first couple of but not by a wide margin and in my opinion.
It's kind of a combination of looking at the public comps of Ics the deals that we've already done the current pipeline and we can see kind of the.
The healthy GAAP between.
What we can pay and what we think we can get valued at scale of <unk>, but maybe John you of other comments on the.
Yes, I do targets of good question.
Obviously as we.
We're looking at companies that are not at scale that are private their owner managed businesses.
They don't have the same type of synergy potentials as the larger organization, we're seeing that now with sensor and line.
The you know.
They have access to our sales channels and.
And we're already starting to.
And realize opportunities there so I think.
In addition to <unk>.
Past practice and what we've seen what we can buy companies for and what the public is volume and other Ics and adjacent industry companies at scale and that gives.
Is this a lot of confidence and in addition to that I would also say there are cost synergies as well to be to be realized.
Obviously, if on common systems common processes common sales channels.
The opportunities in that respect as well too.
And I, just think of as the larger organizations.
And the things that typically come with being larger and that scale access to other opportunities higher barriers to entry and things of that Mike.
All contribute to the fact that.
And we're seeing these multiples and the public company markets.
And the the the cost synergies that you talked about is not reflected in this the.
And the scrap or this.
And you've given us here.
This is straight on multiple accretion.
We have a more detailed model obviously I mean, we've tried to be conservative here as I've mentioned before we want to try to isolate the impact of.
And just our M&A program and the comparison with public company multiples.
And for larger companies of scale in our industry.
Absolutely.
The internal models, we model and growth rates, we'd model and cost synergies, we even model and have several what if scenarios in terms of sales synergies as well too so.
It's why we are very confident with the optimistic and the strategy.
Okay.
And you point to.
Relatively stable.
Performance in terms of EBITDA from the wildland asset, which is anything but stable.
And in particular.
This year I mean is there anything standing and the way of achieving that historic 40 million plus EBITDA and cash flow.
And.
In 2021.
Well I think I think Hugh you.
You mentioned the rate there is if you look at our last.
And for a five year average for between 80 and $90 million of revenue and $35 $30 million to $40 million of EBITDA consistently on on an annual basis every year.
Nothing.
Come to our attention.
Net.
I would suggest that it would be other than that at this at this time and.
And we have a lot of confidence and our wireline business and the ability and their track record of the achieving those results.
And I wonder if.
And as the assumed.
Proceeds from the the.
The litigation with Apple of factor and that statement.
Could you help us think about that.
I think Paul gave an update on the status.
The variability because comes and the IP licensing business because of the the.
The nature of that business and.
And the sort of the relative lack of predictability and the timing.
But also there are other considerations.
Our team is expert at.
The.
And the negotiation process to optimize the value of our licensing agreements as well. So that is also something that's sort.
And considered.
During that process so.
I'm sorry.
<unk>.
I would also just say a bit more color on that.
First of all just on the Apple case.
Where we're at specifically on that is.
There's going to be and oral argument sometime in the fall right.
To the court of Appeals and.
Normally there is a decision made somewhere from.
And three to six months after that.
Hearing at the.
Kind of the historic norm.
So if you play that out it's kind of early part of sort of call. It first half of 'twenty.
2022, so just to answer your question no.
And unless we unless we settle the case along the way just if you look at the timing of that process as it unfolds its more likely if it goes all the way.
And to bleed into 2022.
So put another way you could get there without it.
Feel.
Yeah listen, it's very widely and has a very active pipeline I mentioned, a bunch of the things the Motorola the micron is AMD as Google Amazon and Microsoft.
The application of Germany.
It is it is of it is a very active pipeline.
It's a similar comment I have on the M&A pipeline and they're both very active.
So.
We are confident that wildlands going to perform to kind of the historic.
The performance, but on a quarterly basis, we all know the profile of that business.
And that's what you do see if you look at the quarterly level at the annual level, we're very confident.
Okay.
I mean again, the kind of reiterated this 400 million dollar of capital deployment target for the next five years.
You've obviously got over $100 million and cash right now and the ongoing cash flow but.
Perhaps you could just refresh us on.
You mentioned low cost sources of capital are you, referring just to the cash on hand, or what would be your ideal capital.
Structure and to achieve that.
Exiting 2025, I guess, if you could pick.
If we were.
And if we're looking at a larger acquisition of larger acquisitions, we are contemplating.
Leveraging through debt primary debt.
At these interest rates.
And drive greater returns right.
Sure, assuming and how the growth profile. So we are looking at sort of leveraged and on leverage scenarios. As we model. These acquisitions I don't know John if you want to add something to that.
Absolutely no Paul I think you've got the essence of it.
Doug as we acquired companies, obviously, we're acquiring and cash generating companies as well too and.
So with no debt and over.
Over seven times current ratio.
We are under leveraged and my opinion.
And so.
The interest rates being so low.
And on.
Yes.
I speak with financial institutions, all of the time, who we.
Our approach by offering financing.
And.
The acquisitions that we make can easily support the carrying costs.
So it just provides the incredible flexibility for us to have.
All of that available to us and it also improves our returns obviously because we are.
The business that we're buying is basically funding and.
Servicing its own debt.
And so it's definitely part of our strategy.
But we're going to be selective and thoughtful and conservative conservative levels of debt where it's at.
And the coverage is easily managed.
Okay.
Think of Hog the line long enough I'll pass it. Thank you.
Okay. Thanks.
Again, ladies and gentlemen, if you would like to ask and audio question. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of Paul Piotrowski with and partners.
Good morning, guys.
And I just had a good margin.
The question with respect to IRA and you guys noted some contract delays could you guys go into a bit more detail and talk about that and maybe just quantify it a little bit more and then as well and maybe add on what youre seeing and Q2.
Yes, it's not I wouldn't say characterize of the very substantial but the.
The.
If you look at the revenue of buyer of the there is a component of revenue around projects and also servicing of.
Equipment that we have and in the field for example, the way the revenue recognition works is you have to.
Perform those services in order to recognize the revenue. So you can imagine with COVID-19 there are periods of time, where the.
The crews just can't get onto the site and we can't recognize the revenue.
I mean, having said that I have to say Q1 was the very strong quarter for <unk>, its a seasonally softer quarter, because youre dealing with winter months.
Which also limits the ability of the team to serve as some of their gear.
So it's always seasonally softer than other quarters, but having said that if you. If you add back the FX because they had very big headwinds with the U S. The softening of the US dollar if you put that back in and looking at it more from a constant currency basis IR day at a very strong quarter.
Especially considering.
The headwinds of FX and COVID-19.
And so that's number one number two and sensor lines off of a fast start to I mean, we've already done the deal and North America on that product.
And we have of pipeline growing all over our distribution network. This is the company with a great product, but it had very little and the way of sales coverage.
And so.
So there is a bit of of that going on but I think we're getting near the end of that hopefully and.
It should be of strong future.
Okay great.
And then I know this is.
Pure speculation, but what are you guys kind of handicap the odds of maybe its coming to some kind of settlement with Apple ahead of time or where do you think this will kind of grow the course.
I really cant comment on amount of and I don't know.
And that is always possible we've seen it.
And the past with the other litigations that.
Certain points that can make sense for both parties, but I can't really comment beyond that okay.
Okay.
Alright.
And that's it from me Thanks, a lot guys.
I'll pass the line.
Thanks, Paul.
As we have no further questions at this time I will turn the call over to Mr Hill for closing comments.
Okay, well. Thank you operator, and thank you everyone for participating in today's call and we look forward to speaking with you again on the next call.
Goodbye.
Okay.
This does conclude today's conference call you may now disconnect your lines.