Jacob Shavit - President and Chief Executive Officer
William Martin - Chief Financial Officer
Discovery Air, Inc. (DA.A) F2Q 2014 (Qtr End 07/31/2013) Earnings Call September 16, 2013 11:00 AM ET
Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Discovery Air Inc. fiscal 2014 second quarter results conference call. (Operator Instructions)
Certain statements made during this analyst call may include forward-looking information. Forward-looking information can be identified by words such as may, could, expect, estimate, foresee or variations of those words. Although the corporation has a reasonable basis for the conclusions, forecasts and projections contained in such forward-looking information, actual results may differ materially from such information.
For information about the material factors that could cause actual results to differ materially from forward-looking information, and the material factors and assumptions applied by the corporation. Please refer to the cautionary statements regarding forward-looking information and statements contained in the corporation management's discussions and analysis for the year ended January 31, 2013. Except as maybe required by applicable securities laws, the corporation does not have any intention or obligation to update or revise any of its statements containing forward-looking information, whether as a result of new information, future events or otherwise. Investors and others should carefully consider the uncertainties and potential events that could affect the future accuracy of forward-looking information and not place undue reliance on forward-looking information when making decisions.
We take this opportunity to advise that the corporation will not provide any earnings guidance during this conference call. Thank you.
Mr. Koby Shavit, President and CEO of Discovery Air, you may begin your conference.
Thank you, and welcome to our second quarter fiscal 2014 conference call. I am joined today by Bill Martin, our CFO, who will provide commentary on our financial results in a moment. Q2 has been a better quarter for us, not only due to the strong ability of our business, but also due to a vigorous diversification strategy, both in terms of geography and in terms of the industry sectors which we operate. We have also implemented an affecting cost cutting campaign.
The results for the quarter are consistent with last year. After a challenging first quarter, we continue to see declines in the resource sector and we suffered from a cold and wet summer, affecting our forest fire management activities. That said, there was a positive increase of activity in airborne training services and continuing year-over-year growth in the MRO business.
As you're likely aware, the resource sector and in particularly the mining industry has been soft in 2013, affecting the demand for our services. We are proactively addressing the changes in demand in a number of ways, including diversification into other industry sectors, geographical diversification and the implementation of various cost reduction initiatives.
A notable example of this is the diversification strategy that we are undertaking at GSH. We have expanded its operation from working substantially in Northern Canada in the resource sector through diversification, both geographically, in other provinces and other countries as well as expansion into other industry sectors, including seismic and pipeline activity. As we are striving to depart from the seasonal phenomenon, we are beginning to see the benefits of this better balance.
Our forest fire management teams were less active than we have seen over the past numbers of year, due to cooler and wetter weather in the markets we serve. Conditions of this nature generally results in fewer fires and therefore a corresponding decline in our activity in supporting this sector. While we are protective in part with basing fees in our contracts, the quarterly results do reflect the negative impact of this weather conditions.
As I conveyed to you in the last quarter call, we had in Q1 a shift in military exercises, and if you recall, I anticipated that these exercises will be pushed to the second quarter. That indeed happened and we saw even more activity than I expected. In fact, we recorded our highest ever monthly flight hours in May for the defense services team and a solid quarter has evolved.
Minimizing costs without sacrificing quality or safety remains a priority for our organization. We have implemented strong cost cutting measures across the business units, and you will see in the numbers the initial result of that work.
I will make some additional comments in my concluding remarks, but at this time I would turn the call over to Bill to discuss the second quarter financial result in greater detail. Bill?
Thank you, Koby, and good morning, ladies and gentleman. Overall, our second quarter results were consistent with last year. Second quarter consolidated revenues were $72.3 million or 3% lower than the comparative prior. Our aviation segment experienced lower revenues. This was offset by higher revenues in technical services, which are reported in the corporate and other segment.
Second quarter EBITDA of $21 million was 10% lower than last year, due to the lower revenues and higher infrastructure and business development cost. We are starting to see the benefits of cost reduction initiatives announced in previous quarters, but are also mindful that we need continued focus on profitable opportunities
On a segment basis, aviation revenues were $63.6 million, despite a 17% reduction in flight hour, revenues were down 6% due to the favorable shift in flight hour composition. Driving this was increased contribution from the airborne training services, which rebounded from a weaker than expected Q1. As in Q1, we saw a lower resource based revenues in both Northern Canada and South America and as well lower forest fire activity. We continue to monitor these conditions carefully and as Koby noted, we are taking steps to diversify our business activities into other market segments such as pipeline activity for our helicopter operations.
Aviation EBITDA of $23.6 million was down $2.2 million from a year ago. These were solid results, but could have been better, had we experienced more normal demand in either the mining sector or forest fire services. In our corporate support and other segment, revenues increased to $8.7 million due to additional MRO activity. The EBITDA loss of $2.5 million, which incorporates our corporate expense was consistent with the comparative period with lower contribution from our mining services operations offset by the higher MRO activity.
Our quarterly profit was $9.2 million compared to $8.9 million a year ago. Earnings in the current quarter include gains of $1.2 million from a revaluation of Chilean contingent liability as well as a $0.4 million gain on sale of Hudson Bay Helicopters. Excluding the impact of these gains, adjusted earnings were $7.6 million compared to $8.6 million in the comparative period. On a year-to-date basis, consolidated revenues were $115.9 million and EBITDA was $26 million, up 9% and 39% respectively on weak first quarter results.
Turning to the balance sheet. Assets increased from $306 million at the beginning of the year to $322 million at the end of the second quarter. The increase was largely attributable to the increased working capital requirements associated with our ramp up to peak season activity.
Cash used in operations was $8.1 million or $7 million higher than last year, largely reflecting the impact of lower year-to-date earnings. This was more than offset by a significant reduction in investing activities, which decreased from $37.5 million last year to $6.9 million this year.
At July 31, the loans and borrowing balance of $161 million remain consistent with our January 31 balance with debt repayment being largely offset by accrued interest on the secured debentures. We also have borrowings under our existing operating line of $14.8 million and unused borrowing capacity of approximately $8 million. Historically, our borrowing capacity increases as we move towards the end of the third quarter, when working capital requirements decrease due to seasonality of the business.
Finally, the decrease in the corporation's trailing-12 month EBITDA, primarily from lower than expected first quarter results continues to exert pressure on the total debt leverage ratio covenant under our secured debentures. Waivers were obtained for the first and second quarter and as a precautionary measure for the third quarter of the fiscal year. All other covenant tests for the second quarter were met and at this time we have no reason to believe that we will be unable to comply with our debt covenants for the reminder of the year.
To summarize, on a comparative basis, we have come in consistent with last year. Our debt levels are on track. We have unused borrowing capacity. And we are prudently managing our CapEx, while remaining mindful of the need to focus on profitable growth opportunities. This concludes my summary.
And I'll now turn the call back to Koby.
Thank you, Bill. With two significant milestones, that I would like to mention, to those of you that have followed the company. The first is that in November, Air Tindi will be celebrating its 25 anniversary. It has grown from a company of four aircraft and eight employees to one today that has 29 aircrafts and over 200 employees. I want to congratulate them on a very successful quarter century of aviation services to the North. Air Tindi is currently streamlining its operation and the fruits of those efforts are expected in the foreseeable future.
The second prestigious milestone I'd like to comment and it's from our Defense Services organization. Discovery Air Defense Services have provided over 40,000 accident-free flight hours to the Canadian Forces. This is unprecedented. No other competitor can say that. In fact, the safety rate is better than the rate in most air forces. We are very proud of this result and we'll build on our safety record and our expertise in delivering combat support services to grow this business internationally.
I will now ask to open the floor for questions.
(Operator Instructions) There are no questions at this time.
I suggest we wait about two more minutes. And then, if there will be no questions, our materials are out and we invite the listeners, if they want to ask any questions you ask later. Bill, CFO, is available. I, CEO, Koby Shavit, are available. And you can contact us with further question at any time.
So with no question now, I would like to thank everybody that joined us today. And we look forward to speaking with you again at our third quarter conference call. And again, please be in contact with us, if you have any question following this conference call or the material that we've sent. Thank you very much everybody.
Ladies and gentleman, this concludes today's conference call. You may now disconnect.
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