Q1 2024 Coda Octopus Group Inc Earnings Call
Good morning, welcome to Kodak Octopus group's first quarter 2024 earnings Conference call. My name is Sherry and I will be your operator today before this call Codell octopus issued its financial results for the first quarter 2020 four.
Ended January 31st.
2024, including a press release, a copy of which will be furnished in our report filed with the SEC and lumpy in Dallas or in the Investor Relations section of the company's website.
Joining us on today's call from coda, octopus, or a chair and CEO and Murray Gal, It's interim CFO Cal charging.
Following their remarks, we will open the call for questions before we begin Jacky for sure from the gate wake roof will make a brief introductory statement.
Jackie Please proceed.
Thank you.
Morning, everyone and welcome to coda occupancy first quarter of fiscal 2024 earnings conference call.
Before management begins their formal remarks, we would like to remind everyone that some statements. We're making today will be considered forward looking statements under securities law and involve a number of risks and uncertainties.
As a result, we caution you that there are a number of factors many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward looking statements.
More detailed risks uncertainties and assumptions relating to our forward looking statements.
Please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission.
Claim any obligation or undertaking to update forward looking statements to reflect circumstances or events that occur. After the date. These statements are made except as required by law.
Yeah for you to our filings with the Securities and Exchange Commission for a detailed disclosure descriptions of our business. So all of these uncertainties and other variable circumstances, including but not limited to risks and uncertainties identified in our Form 10-K for the year ended October 31st 2023, and Form 10-Q for the first quarter of this fiscal year.
You may get CDR I suppose the Securities and Exchange Commission filings Street, but at the same the SEC website at Www Dot dot.
Thank God.
I would also like to remind everyone that this call is being recorded and will be made available for replay via a link in the Investor Relations section of quota auspices website.
Now I will turn the call over to the company's chairman and CEO and Murray Gill.
Great.
Thanks, Jackie and good morning, everyone. Thank you for joining us for our first quarter 'twenty 'twenty four earnings call.
Our first quarter 'twenty 'twenty four results were in alignment with our internal business plan, but down on our first quarter 'twenty two 'twenty three.
Our internal business plan had budgeted for our engineering business revenue for fiscal 'twenty 'twenty four to be back loaded. This is largely because of reduced availability of funding for defense programs due to the use of continuing resolutions, resulting.
From the upcoming U S elections, we also planned within our forecast for several booked engineering projects to be converted into revenue later in fiscal 'twenty 'twenty four due to the lead times for receiving components.
Notwithstanding these challenges we have made some encouraging operational progress with our engineering business segment and I will discuss this later on in the call.
Morals, though we are seeing increased order take by our UK engineering business, which had been significantly affected by delays in receiving orders in fiscal 'twenty two 'twenty three.
Why is the marine technology basis revenue was down $3 5 million compared to $3 8 million in the first quarter of 'twenty two 'twenty three I am pleased with the recovery progress. This part of our business is making.
In the first quarter, we saw increased utilization of our rental asset, which I am very encouraged by and this trend is continuing.
Notable in the first quarter is that outright sales in Asia, a key strategic market for this segment fell by 26%.
Contributory factor today, it's weak demand from China caused by macro economic factors and increased geopolitical tensions.
And currently in those markets and continue to improve in the marine technology business.
Continued progress in the Marine technology base is critical to our growth plans as such I will give a brief overview of what we're currently seeing into the marine industry.
The industry. It's our biggest trade show is oceanology, which occurs every two years and took place last week. We therefore anticipated in our first quarter that outright sales would be down it's typically customers postponed significant infill.
Estimate your fishing until after this event.
Fiscal 2023 results were impacted by the downturn in offshore renewable projects due to inflation higher interest rates and supply chain problems. It has recently been reported back actually Knorr and <unk> have both now receive provisional.
Contracts in New York's fourth offshore solicitation.
We're further encouraged by seeing increased inquiries for our ranks and solutions for offshore renewables.
Although these are early days. This is good news for the marine industry and certainly for us.
We're also seeing increased opportunities for some significant on the water construction projects in the middle East, whereas some new islands are scheduled or development in calendar year 'twenty 'twenty four.
Moving to our first quarter 'twenty 'twenty four off a few.
During the first quarter of 'twenty 'twenty four we continued to make progress against our key growth drivers.
As I mentioned, we saw increased traction for our epic scope Rancho solutions.
We also made good progress in advancing the debate on cabinets used in customization and hardening program and based on the ongoing evaluation. We have received overwriting Lee positive feedback on the system and it's the cancel.
We're also encouraged by the engagement, we're seeing with the customer and the pace of the program.
This is good news and we are on track to receive the final tranche of funding of 1.25 million in our second quarter.
Following a fleet wide sharpie by the Navy of the users who were previously allocated DAP. It tablets systems. We have received broad positive feedback from the various current usage.
It is also interesting to note that the feedback from users cited the echo scoop as game changing for their operations.
Furthermore, three new Navy user groups have requested it from their respective commands debate and echo scoop as part of their operations.
And existing commands have also put in request for additional assistance.
This is great news for the success of the data technology and our company.
We also had a first seat of the DAP it habits outside.
Outside of the U S Navy to a large Asian offshore service provider, which is involved in on the water construction and Jai team who is also looking at the broader adoption of this technology for their operations.
This is a high profile project and the local environmental H N V will be in Boston.
This provider in tanks to create a core of super users.
And then look at a more systemic adoption of the technology, providing their initial project is successful.
Yeah.
We continue to work with several offshore surface providers globally on their plans for adult things adopted some of these are waiting for internal management decisions on funding.
In February we had success, we had a successful series of demonstrations of our after school debit technology and the digital audio communication system to several bodies in Texas. These include the fire service Department.
Transport and other law enforcement agencies, where our technologies being assessed for bridge inspection ports and Harbor security search and rescue and diving support.
The demonstration was well received by potential community of users and we are working with them on progressing their interest in our solution.
We're continuing to work with Naval information Warfare Center nine week as they advanced the selection of their sensor package, but the video read defender and we have provided proposals for accuracy and the technology for extended operational trials. We believe these trials will start.
In April 2024. In addition, we continue to work with the foreign Navy on integrating our after school technology on the video read defender, which they have also adopted.
The safety and electrical assessment of digital audio communication systems.
<unk> four has now been completed by the Navy and they are expected to start trials in April.
Our engineering business is making progress in key areas. We are pursuing two significant opportunities for our third night mission computers for two new applications and we are now awaiting the completion of these negotiations.
The relevant trials with our third night October were completed pre COVID-19, but these programs had stalled due to the pandemic I am very pleased that these are now advancing and securing these programs will be meaningful to our group.
Seth a thorough nights will mean diversification of revenues for the engineering business and improve the margin.
We have also received a small batch order for two new defense programs of record.
The significance of this however is that these are two new programs, which are likely to go into the production phase in this fiscal year. This is a key component of success in the engineering business operations, which depends on expanding the number of.
Programs that it supplies proprietor.
Trees sub assemblies into.
Our UK engineering basically is also seeing an uptick in its order take and has received orders for two new programs relating to mine hunting autonomous vehicles and the new line of military land vehicles we.
We believe the results of the engineering business will improve in fiscal 'twenty 'twenty four and significant part of this segment's revenue is back loaded.
Let me now turn the call over to our interim CFO Gail charging to take you through our financials before I provide my closing remarks.
Thank you Anne Marie and good morning, everyone.
Let me take you through our first quarter 'twenty to 'twenty four financial results.
Starting with revenue.
In the first quarter of 'twenty 'twenty four we recorded total revenue of $4.5 million compared to $5.6 million in the first quarter of 2023, a reduction of 26%.
The marine technology business, our products business generated revenue of $3.5 million compared to $3 $8 million, a 7.4% decrease from the first quarter of 2023.
And marine engineering business or surfaces business generates your trailing you Oh zero point $9 million compared to $1.8 million of.
Four to eight 2% reduction from the first quarter of 2023.
I should put you down earlier by angry.
And our consolidated revenue was largely as Ive just all of the surface businesses reduced orders are supply chain issues, which have impacted our short term ability to convert but engineering projects to revenue in the current quarter.
Moving onto gross profit and margin.
In the first quarter of 'twenty 'twenty four we generated gross profit of $3.1 million compared to $3.8 million in the first quarter of 'twenty to 'twenty three.
Gross margin was 69, 2% versus 67, 1% in the first quarter of last year.
In our marine technology business gross margin increased to 72, 5% in the first quarter of 'twenty 'twenty four compared to <unk>, 2.2% between two between T. G, reflecting changes in the mix of sales and the lower commission costs recorded in the first quarter of 'twenty 'twenty four due to the reduction in <unk>.
Sales in Asia.
I'm Marine engineering business gross margin increased to 56, 4% in the first quarter of 'twenty 'twenty four vicious 56.0% in the first quarter of 2023 again, reflecting the mix of sales.
Now moving to our operating expenses.
Total operating expenses for the first quarter of 'twenty 'twenty, four will slightly to $2 $5 million compared to $2.4 million in the first quarter of 2023.
Our selling general and administrative costs in the first quarter of 'twenty 'twenty four totaled $2.0 million, an increase of four 2% over approximately two points each $1 million in the first quarter of 2023.
As a percentage of revenue, our selling general and administrative costs for the first quarter 'twenty event for was 4.58% compared to 35, 1% in the first quarter of 2023.
This increase was expected as we've previously stated that just you the significant progress you've made in R&D in the last four years. We're now focused on aligning a significant portion of our resource base and strategy from research and development to global business development brand building and Investor Relations.
We expected SG&A to increase as we hired new staff in key areas and realized an increase in payroll costs and.
In addition, we're still watching unexciting, our management team and this will also increase our SG&A expenditure.
We believe these investments will increase shareholder value as we continue our focus on increasing sales across our whole grip.
Operating income in the first quarter of 'twenty 'twenty, four with zero point $6 million compared to $1.3 million in the first quarter of 2023.
A reduction of 58.7%.
Operating margin was 12, 4% compared to 24, 1% in the first quarter of 2023 driven.
Driven by the change in rates and use as explained previously.
Net income before taxes in the first quarter of 'twenty 'twenty, four with zero point $8 million compared to $1.4 million in the first quarter of 2023.
Net income after taxes in the first quarter of 'twenty 'twenty, four with zero point $6 million or six cents per diluted share compared to $1.4 million or 12 cents per diluted share in the first quarter of 2023.
Moving now to our balance sheet as of January 31st 2024, we had 25.0 a million dollars in cash cash equivalents on hand and no debt.
Represents an increase of zero point $6 million from October 31st two inch 23 that the comparable figure was $24.4 million.
Working capital increased to $40 million from $57.6 million as at October 31st tranche 'twenty three.
I will now turn the call back over to Andrey for closing remarks.
Thank you Gail.
I want to close by emphasizing that we continue to work to create stable long term shareholder value.
In the 'twenty 'twenty four fiscal year, there are a number of key management goals for our business to achieve with a focus on growth we have a compelling calendar pictures business development activities in 'twenty 'twenty four with its focus on.
Defense applications and defense programs.
Yeah.
Some of our goals include achieving revenue in fiscal year, 'twenty, 'twenty, four which exceeds our 2023 revenue.
Continuing to seek to increase the number of programs that are after school technology is embedded in.
Continuing to prior to rise and engaged in the topic on tablet system customization and hardening program with the goal of securing the technologies adoption by the special forces community in late calendar year, 'twenty 'twenty four or early 'twenty.
25.
Continuing to work to ensure the successful rollout and adoption of the DAP. It tepid system to the market both in the defense and commercial.
Market.
Supporting the rollout and adoption of the digital audio communications solution.
Continuing to work towards returning the engineering business to its pre Covid 10 million dollar revenue profile, and we're seeing traction with new programs, which will assist in achieving this goal.
Expanding the group's management team and capabilities.
It is ongoing.
Continuing to develop our pipeline of candidates on our M&A strategy with a goal of acquiring complementary value accretive technologies into our portfolio.
We continue to believe in the growth prospects and strategy built around our disruptive technologies.
It is always stretched you to focus on penetrating the defense market with these technologies, including C T and the inclusion of our imaging sonar and the new generation of underwater vehicles and securing the adoption of the debate on tepid systems by.
At the special forces.
By adopting the strategy it paper, what's the revenue model of the Marine technology based nature to a multi year and multi sale model as we have started to see with the DAP It product line.
Though it could take several years for these programs to mature we continue to believe this is the best strategy for our business growth prospects. Therefore, we believe that our near term growth will be incremental but solid.
We're also committed to returning the engineering services business operations to its pre Covid 10 million dollar revenue profile and we are starting to see new programs entering their pre production phases.
To conclude we would like to thank our shareholders for their continued support were now happy to answer your questions.
Operator.
Thank you.
To ask a question. Please press star one on your telephone keypad, a compensation tone will indicate your line is in the question queue.
You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star T is one moment, while we poll for questions.
Our first question is from Brian singer with Alliance Global Partners. Please proceed.
Great. Thanks, I've got a handful of questions.
You've talked about last earnings call as well as this earnings call about industry cancellation shelving of major offshore renewable projects due to inflation higher interest rates and supply chain problems. I think you mentioned a few positive signs, but maybe from a high level do you think we're seeing meaningful progress in terms of <expletive>.
The terms as it relates to electricity electric Christy pricing resets resets for the rates.
Hi, Bryan. Thank you for that question and we look I think com.
While we are not directly involved in those discussions were not at the table. There what I can see you guys see from where I am sitting in our business, we're seeing increased demand for our ex coop solution into offshore renewables.
If you recall it actually Brian 20, I think it was 2019 I think we did 25 million and that yeah. What was different in that year. We were on almost all European offshore in Europe, a project, what I'm, saying to you know what I am seeing in terms of.
The utilization rate for our rental it is very very encouraging we saw that in the quarter, we see that continuing in Q2 and really at the moment, we have to potentially look at expanding our rental assets because.
And a lot of these projects are offshore renewables and construction. So I definitely think that there are positive signs that some of these programs are going forward.
Great and then you highlighted oceanology, where I'm sure you've got to demonstrate your technology in the past when do you see the impact on new orders from this conference is it a couple of months a couple of quarters, maybe give us a sense for the sale cycle post this conference.
Well you know what we know check in the first quarter is that seeds from Asia continued to be down and they'll do China piece apart a suit us, Japan, and South Korea, where we saw reduced demand. So a nice think batch at that market will purchase.
In Q2, not necessarily China, because we've lost visibility of demand from China, but I feel high level or high sense of confidence that Japan, and South Korea will stock in Singapore will start picking up following the chute.
Great.
In terms of the Dab tethered and Untether products, you gave a lot of information what are the next goalpost you mentioned the sales of your first commercial sale sorry for the tethered system, what's the contract value of that program and when do you expect the actual revenue contribution to rapidly increase how should we think about that timing.
Well you know I'm, Brian. Thank you for that question. Because then you know I am and I think there needs to be more alignment with expectations of what we're doing so.
That is a program and it's now a program of record. So DAP. It started 2019. It took five years to mature before we had the system going through evaluation and now being on the Navy useless now what I am excited about Brian is the fact that that path.
The revenue stream that I've spoken about.
Year on year out, we're now seeing that because we're seeing existing come on put.
Putting in request for more equipment more adaptive solutions and also we're seeing new commands pushing in request for DAP. It. So I'm very very excited about that why it's I can't give you a number of what that will mean last year for the type of system between $3 million.
This year, where they now internal China, we have $4 5 million and I've always said that growth will be incremental for the adapt what will be pivotal in terms of getting those numbers up will be to have not just the U S. Navy like foreign Navy also acquire.
The solution and we know that that is the mean for the untethered system. For example, we are funded jointly between the U S Navy and in Allied Navy a significant allied Navy. So implicitly there on that adoption trading with us. So I think what I am seeing is.
And I'm excited about as I said the program for the Derby habits to steam going for what it's a passive revenues, we don't need to do any business development. It's on their pools need beliefs, and theyre, just buying equipment and that's what I talked about for this business quite a lot. So.
Overall I think this year, we're trying to do $4 5 million and another thing I'd like to mention on the adapt to that I see and it's very encouraging for our company is the net loss and keach means we're enjoying with the key customers on the program, it's one of the barriers or.
<unk> is the sense that it goes much slower, but we've seen them doing several died with the one turbine spin all of the feedback overwriting Lee I'm positive for the business and we don't feel there are huge hurdles for us to overcome in terms of the.
Technology, its fitness for purpose and the path that we're going down so I'm overall I continue to believe that the data will be significant for our group and it's one of our disruptive technologies in the market.
Great. Thanks for that that's helpful I'm turning to the services. Our engineering business you were very clear that you hope to get it back to the pre COVID-19 levels, which as you know $9 million to $12 million.
The federal government has essentially been in a continuing resolution almost every year since I've been following which is 20 years notwithstanding the longer lead times, what else have been the limiting factors to that recovery.
Well.
The main thing is that every time first for first of all every time there is the upcoming elections, that's care, you'll never get your federal budget through and that's the real background to the continuing resolution. So it just means back to you for programs that they're there they're not optimally fund it and they've got to meet choices when do you get.
Purchased money somebody go to X and some will go to Y but not the amount that's contracted so that's what we see but they they the biggest.
For for example, the engineering based and it's been the pace at which the New program school for what so what I reported for example on the U S. Engineering site, we have two new programs now which is going into it's preproduction phase we've now.
<unk> got the small batch orders and why I'm excited about this and see the promise of returning the business to the 10 million is though the parch that now we've received the small batch orders for our four established programs of record and the engineering part is the result.
Of obsolescence, what that means is that the production quantities like it to be large because they'll be retrofitting boost of the assets in the field. So I'm really super Super excited about those two programs that we have.
That's fair and they're on we've now received as I said, the preproduction order the valuation batch and we expect the backend of this year that we will get the production orders, but that's on the U S side in the us on the UK side for engineering business.
Last year revenues were significantly down because of the it's like the parties have shifted for the main customers and they were really pursuing a lots of land based applications, but what we're seeing now is the uptake of those orders back or.
Meant to come through some of them are coming through and where that business is quoting also a lot at the moment. So I am excited about that part of the business and also as I mentioned before the thorough Mike. It's a good example, Brian you know we had two really major opportunity.
As for the thorough my pre Covid and those had stalled and stalled and they've now just come back on the table and those again will be core to opportunities for business because now it's in the production fees, that's not the design phase for our business. So the limiting factor.
It's really been more a bit of COVID-19 the slow recovery from Covid, but also you know the engineering business. They go through different space from you get a new program, where they're doing the design fees, it's pretty small, but once that Richard and into the program and then you get the production.
That's really what gives us the case and that's really where we are with these new programs of course, but that business. It has to continue expanding the number of new programs. It is supplying the product.
It costs into but I feel we're in a good spot now with recovery Covid and then also last year, where we see saw a lot of land based application, we're now seeing more and more naval requirements coming through and have won some orders there.
So two more I'm wondering as a follow up to that one in terms of the two programs that are hopefully going to go into production in the U S as well as the New awards in the U K is there any way at least in total to size. What these mean are these.
<unk> of each of million dollars a couple of hundred thousand dollars, it's hard to understand the magnitude of the impact of these collective programs yeah.
Yeah, So the way to really think about and.
The orders is that first there there are number of things because it's not just about the upfront production quantities you get today. It is the fact that this is a repeat orders that you'd get over the time. So at any one point like those two new programs that we have in the U S. I think that that would probably be around.
$4 million for that business and then the.
On the UK side, that's about $2 million.
But that those are high value from node. So not lifetime values are Oh wow values that we expect I can see why you think recoveries ahead.
Great question, Brian So I think I'm pleased to report we've made really really good.
Progress.
Since we last spoke so we've now successfully and I don't have permission to identify the group, but we have now successfully hired a focus group in the U S are very very well establish to scoop.
In the defense space and the whole idea of that U S focus group, which will be to.
Provide that's our understanding of the opportunities we are pursuing happiness to match the opportunities.
The module the opportunities more care me, which I'll expand on once we have lapped. In addition, the focus group will help us with identifying new programs and making sure we're not missing any any programs and generally strategy. So I'm very very excited we will have our.
Kickoff with that focus group the first of April and I'm, you know I'm pleased that they'll be very impactful for our business there well experience in this area.
In addition to that and that would be a significant investment for our business very very significant in terms of the cost for our business. In addition to that one of the things we've been looking for is E. E. Therefore, our das Covid system technology.
In Europe, and I'm pleased to report that we are close to completing back.
Agreements with this candidate and that's this candidate will be based in the Netherlands, where we have the top 20 dredges in the world. There. So it's a significant location for us and these things take time, because you want to make sure that the person has the right access the right experience.
So long and short buying you know we are continuing to invest significantly in.
Based on this development and expanding our management team you know so our management team not only are we shored up the CFO, but the biggest thing for our business is.
Senior personnel marketing and futures officer for the vision and strategy of our business. So you know we will be investing heavily in expanding our management team, which I assume by this year, we have the full complement of.
The team that can help us to taper to where shareholders want us to pay for it but it does take time.
Actually just one more the focus group is that a third party or hiring or is that a 10 year hiring to be part of coda.
It's a third pocket team that provide this service got it. Thank you so much.
We also get allocated a number of personnel to work with.
Great. Thank you Anne Marie.
Welcome.
Yeah.
As a reminder, just star one on your telephone keypad, if he would like to ask a question. We will just pause for a brief moment to see if there's any final questions.
With no further questions at this time I would like to turn the conference back over to Anne Marie Gal for closing remarks.
Well. Thank you very much everyone for your continued interest in cuda.
Thank you for your continued support and have a great day. Thank you everyone.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
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