IBI Group, Inc. (IBIBF) CEO Scott Stewart on Q4 2018 Results - Earnings Call Transcript

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About: IBI Group Inc. (IBIBF)
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Earning Call Audio

IBI Group, Inc. (OTCPK:IBIBF) Q4 2018 Earnings Conference Call March 8, 2019 8:30 AM ET

Company Participants

Scott Stewart - CEO

Stephen Taylor - CFO

Conference Call Participants

Michael Tupholme - TD Securities

Maxim Sytchev - National Bank Financial

Frederic Bastien - Raymond James

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Friday, March 08, 2019.

I would now like to turn the conference over to Scott Stewart, Chief Executive Officer. Please go ahead, sir.

Scott Stewart

Thank you and good morning. We appreciate you taking the time to join us on our fourth quarter and year end 2018 results conference call. IBI released our year end results yesterday afternoon and the complete financial statements and management's discussion and analysis for the period ended December 31, 2018 are filed on SEDAR and have been posted on IBI's website at ibigroup.com.

Joining me on the call this morning is our Chief Financial Officer, Stephen Taylor. Prior to commencing our formal remarks, I would ask Stephen to read the following disclaimer about forward-looking statements. Stephen?

Stephen Taylor

Thank you, Scott. On behalf of IBI Group, I am required to note that some of our statements made on today's call might contain forward-looking information. We caution listeners not to place undue reliance on our forward-looking statements since a number of factors could cause the actual future results to differ materially from the targets and expectations expressed.

The Company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, unless expressly required by applicable securities law. For further information on risk factors, please view the Company's Annual Information Form filed with the Canadian securities regulatory authorities and available on the company's website, the SEDAR website or by contacting the company.

I'd also like to point out that all amounts discussed today are in Canadian dollars unless otherwise stated.

I will turn the call back to Scott now. Thank you.

Scott Stewart

Thanks, Stephen. Through 2018, IBI demonstrated the strength of our business model and commitment to our new technology focused strategic plan, which we announced at last year's AGM. Our Q4 and year end 2018 results demonstrate key financial metrics that met or exceeded our expectations, including the year end adjusted EBITDA margin of 9.9%. Our transformational pivot to a technology driven design firm will continue to improve IBI's margins and provide a platform for growth.

Looking ahead to 2019, we are currently forecasting approximately 374 million in total revenue, with the relative geographic contributions remaining consistent with 2018. We currently have approximately 385 million of work that is committed and under contract for the next five years. This translates to approximately 12 months of background.

As a direct result of our pivot to a technology driven design firm, momentum continue to build in our intelligence practice through 2018. To illustrate, we saw a 13% increase in our net revenue year-over-year, with an operating profit margin of 16.3%. In 2018, the intelligence practice represented 17.9 or approximately 18% of our overall revenue, a meaningful improvement over 2017, where it was 16.1%.

IBI has set an internal goal for intelligence practice of generating 20% of our total revenue with a 20% margin by 2020. Our infrastructure practice realized a profit margin of 10% during the year. Despite the recent pause in infrastructure contracts being awarded by governments, especially in Canada, the infrastructure deficit continues and we do expect governments to initiate various projects starting in the latter part of 2019.

As mentioned previously, the buildings practice saw a decline in net revenue for the year due to the US operations. We have taken action to stabilize and we focused our US operations with that transition to new leadership and closer collaboration with our Canadian operations. We are also following our various buildings clients out of Canada as they look for opportunities in the major US cities.

As a result, IBI generated over $2 million in adjusted EBITDA for the segment, demonstrating the impact of our efforts. We expect the US performance will continue to improve through 2019. Here in Canada, there's continuing demand for architectural services in a variety of areas, but especially mixed use high rise residential in all major markets, including Vancouver, Toronto, Calgary and Montreal.

And we are winning ever greater commissions, including Ann City development in Mississauga. The development includes six towers with one tower over 80 stories. This is the tallest tower that IBI Group has designed and is set to become the tallest tower in Mississauga and the third tallest in the GTA.

In international markets, we continue to realize robust activity in the Middle East, India and Israel. In India, we are involved in a variety of transportation, planning and intelligence projects and in Middle East, we are undertaking a number of master planning projects throughout the UAE. And work continues on the red line LRT project in Tel Aviv. In the UK, even with the uncertainty around Brexit, we don't see any immediate downsides to the ongoing results. However, we are concerned about the Brexit outcome in that it could have a negative effect on private sector investment.

Strategically, the launch of three new technology products in 2018 will create new opportunities throughout 2019. The first of these products is our Smart City platform, which combines monitoring and control big data and predictive analytics to support improved decision making for cities as well as smart communities and smart buildings. The platform can be tailored from an entire city to a single building or campus of buildings.

The second product informed by IBI group is a system to help clients manage their capital assets, assets that we design. It will help them to manage the assets by reducing costs of operations and maintenance.

Finally, BlueIQ is a real time management system that enables cities and utility operators to optimize and reduce the energy costs of water distribution. As of currently, saving the City of Toronto more than $1 million a year. In addition to our organic product launches, IBI has also purchased GreenOwl Mobile, which affords IBI new opportunities to rethink the way we deliver mobile technology across all of our sectors and software solutions.

Looking forward, we see significant potential for IBI to play a key role in providing services and solutions in ever growing urban areas. Canada is expected to welcome nearly 1 million new immigrants between 2019 and 2021. This represents the need for approximately 330,000 housing units mostly in major centers. This also creates a need for schools, healthcare transportation, other infrastructure, all areas of our business for IBI.

The scale of growth requires planning and IBI is leading some 55 major urban planning projects across the country, representing some 5000 acres of redevelopment. Once the plans are approved, they provide a stream of work for our buildings and infrastructure sectors, but also now provide a platform for our smart solutions for smart buildings, smart infrastructure, and smart mobility.

In 2019, we are planning launches of new products, including a traveler information service to complement the current coverage we have in North America. In addition to repurposing many of our existing systems, we are also fully engaged in the tech echo environments in Toronto, Vancouver and India. So we can work with startups and other tech partners to create and deliver new ideas and solutions to market quickly and efficiently.

Another key consideration in our tech pivot is the engagement of our staff. Recently, we held a hackathon with almost 300 staff involved over a two day period, the purpose to identify new products and solutions to improve the efficiency by which we operate, but also delivering new services and products to our clients.

We remain excited about the market opportunity in the coming years. Our recently reinvigorated core business, centered around the urban environment and the application of technology provides us with the platform for future growth and performance.

I will now turn the call over to Stephen for an overview of the financials.

Stephen Taylor

Thank you, Scott. Net revenue for the fourth quarter 2018 was 92.4 million, up 6.3% compared to the fourth quarter of 2017 and an increase of 1.9% to 368.3 million for the year ended 2018. These increases were supported by the continued strength in the Canadian and international operating segments, offset by lower than expected performance in the US, including the restructuring of operations, and identifying and implementing cost efficiencies in that geography.

Adjusted EBITDA for the fourth quarter was 8.2 million or 8.8% of revenue, and for the full year 2018, was 36.5 million or 9.9% of revenue. The adjusted EBITDA in 2018 reflected non-recurring increases of 2.4 million in the onerous lease payments, which did not impact adjusted EBITDA in the same period in 2017, but negatively impacted 2018 due to the outflow of cash.

Looking ahead to 2019, the company anticipates cash outflows related to this lease to be more normalized to the kind of 1 million per year level that we were experiencing prior to 2018.

Fourth quarter net income was 3.7 million or $0.10 per fully diluted share as compared to a loss of 2.9 million or $0.08 per fully diluted share in the same quarter in 2017. Net earnings - full year net earnings were 20.5 million or $0.54 per diluted share, increased 80% from 11.4 million or $0.30 per diluted share in 2017.

The increases over comparable periods in 2017 are primarily due to increased net income, offset slightly by an increase in the weighted average number of common shares compared to the same period in 2017, which reflects the exercise of deferred share units and stock options. Net income for both periods is inclusive of a pre-tax gain in fair value of our other financial liabilities associated with changing market conditions, including IBI share price, Canadian risk free rate and IBI's credit risk as well as a loss in foreign exchange due to fluctuations in the market value of the Canadian dollar.

Amendments to our credit facilities with lenders were secured during the latter half of the year to extend the maturity date by one year. It increased the maximum available amount on our swing line to 20 million and improved interest rate margins. We utilized this new financial capacity to go into the market and redeem the balance of the 7% convertible debentures in September for $14.8 million in cash.

Our debt position at the end of 2018 was 116.7 million, consisting of 41.2 million in convertible debentures and 75.5 million drawn on our credit facilities. We remain focused on reducing overall debt through advancing cost reduction initiatives. In 2018, our ability to pay down debt was somewhat limited due to the timing of several large infrastructure project payments that required significant working capital investments.

And as such, our net debt repayment totaled 4.3 million, however, we anticipate this working capital situation to return to more normal levels through 2019, as these projects start generating cash flow and we continue to focus on debt reduction.

Fourth quarter 2018 interest expense was 2.1 million compared to 2.6 million in the fourth quarter of 2017, with the reduction due to the redemption of the 7% convertible debentures. Also, interest expense for the year ended December 31, 2018 was 10.9 million compared to 10.3 million for the full year of 2017. In 2018, interest expense did increase due to the acceleration of accretion expanse of 1.5 million because of the redemption of the 7% debentures, offset by decreases related to the reduction in average amount outstanding on the credit facility and the convertible debentures.

Day sales outstanding were 73 days as at December 31, 2018, compared to 69 days at the end of 2017. This reflects the investment that we've made in these large infrastructure projects. We continue to undertake comprehensive reviews of our contract assets and accounts receivable on a regular basis with a priority of improving these numbers.

Looking ahead to 2019, our capital expenditure budget is forecast to be 8 million for the year, which will include some amounts that will be capitalized related to the development of software platforms.

I'll now turn things back over to Scott.

Scott Stewart

Thank you, Stephen. Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Michael Tupholme from TD Securities.

Michael Tupholme

Question about the US, the US business, you showed nice improvement in profitability within that business. It's been improving for a few quarters now. In the fourth quarter, we saw EBITDA margins in the US business back up to 7.7% and you've talked about margins normalizing by the end of Q4 '19. Just wondering what does the normalized EBITDA margin for that business look like? And is it a sort of a straight line improvement from where you ended '18 to where you expect to be at the end of '19?

Stephen Taylor

Well, we do provide guidance on margin, that's between 8% and 12%. We see the 7% as in the low end, or outside at the low end. I would - given that most of our work at the moment is public sector, one would expect margins that are more in the mid-range of that 8% to 12% range. But we are looking to engage more on the private sector side where we do see higher margins. So I would target that by the end of the year, we will see something that will be in the 10% range for the building sector.

Michael Tupholme

Sorry, that's for the entire US or just for buildings?

Stephen Taylor

That would be the entire US.

Michael Tupholme

Right, okay. Okay. And I guess sort of a related or similar question, as it relates to the Canadian business, certainly not a business where you've had any issues like you've had in the US. But we did see margins in the Canadian business, EBITDA margins in the fourth quarter of this year. They were lower than they were last year, down in the sort of the 7% level compared to 11% last year. Was there anything unusual that caused that and is it expected that those margins would come back up more into the mid-end of your - midpoint of your guidance range for the overall margin?

Stephen Taylor

I would certainly expect that through 2019, they will be in the mid range of what we have provided guidance on.

Michael Tupholme

Okay. And what would have caused the contraction we saw year-over-year down about 400 basis points?

Scott Stewart

On comparable quarters, Mike, I think we had some people transitioning off of some of the larger transit projects that - those were contributing very significantly in Q4 of 2017, the larger phases of those projects came to an end in Q3 of - towards the end of Q3, 2018. Those people are transitioning on to other work. So certainly, we see that the Canadian margins will rebound back up as people effect that transition. And so I don't think it's a cause for concern.

Michael Tupholme

Okay. Maybe just segue into a bigger picture question about Canadian infrastructure. There were some comments in the release about slowdown in awards due to changes in government. What does that mean for your ability to drive revenue growth in the Canadian infrastructure part of your business in 2019?

Scott Stewart

As I had said, I don't anticipate that we will see any significant additional new infrastructure projects until the latter part of 2019. We're certainly involved in a number of them, including the LRT [indiscernible] and also here in Ontario, but with the change of government, there has been a review - [indiscernible], there has been a review of process and here Ontario as one example is slow to the point where the technical submission is now due this summer and the financial submission would be due later in the summer or early fall and I wouldn't anticipate that we will see a decision until late in the year. So I don't see - I don't anticipate that those projects, the big traditional P3 projects will have any material impact on our infrastructure work until at least the end of the year, if not into 2020.

Michael Tupholme

Okay, that's fair. So where does that leave you then just as we think about full year '19, does - I realize you're not expecting those awards to come through and to help you much, if at all this year, but does that imply sort of flat revenue and infrastructure or were there actually some projects that wrapped up and - or are wrapping up and therefore, you're actually going to be down year-over-year until you do get some of those new awards coming through?

Scott Stewart

There will be marginal growth in revenue I expect. There is other work that we are getting in infrastructure, such as the environmental assessment on a major VR2 project, heading to the east end of the Greater Toronto Area and there is continuing work in the, some of the major projects that we have, as we go through construction administration. I just - on the work, I just don't see any significant big new P3 projects.

That being said, Metrolinx in the Toronto area is still a very major client of ours and we're still doing very significant work with them. And we anticipate that to be further work. It's just that it wouldn't be the major announced P3 initiative. So I would see a stable revenue stream and infrastructure for the year.

Michael Tupholme

And then Stephen the - you mentioned that you do expect a reversal of some of the non-cash working capital investment you saw in 2018, expect a reversal in '19, can you try to quantify that for us?

Stephen Taylor

Well, I think in the material that we presented, we talked about, we had in excess of $20 million tied up in working capital in those larger projects. I would see that that would start to add in the opposite direction as we're into the Q2 and Q3 of this year. So we will start to realize on some of that investment around that time, I think.

Michael Tupholme

So sounds like it's certainly positive for the year, but it's coming mainly in the back half of the year?

Stephen Taylor

In the middle as opposed to the back half. And I think that's when you're going to start to see some more acceleration of pay down of debt, consistent with what - more consistent with what we've done in prior periods.

Michael Tupholme

Can you talk about the impact of IFRS 16 on your results and expected results in 2019?

Stephen Taylor

Yeah, I can, Mike. I think the way that people need to look at it is that we will end up, the majority of the adjustment that is going to come to our financial statements is related to leases of office space, it will end up in assets and liabilities on the balance sheet of between $80 million and $100 million. Probably, I would think if you picked the middle - the number in the middle of that range is where we will likely land and the impact on the P&L is essentially the $21 million of air boats of rent expense that we have is likely to end up, as it will be split between depreciation, increased depreciation and interest.

That split will likely be $2 million to $2.5 million additional interest expense and the balance of the 21. So, 18.5 million is likely to be the impact on the amortization. Those are numbers that are moving around as things happen in terms of renewals of office leases, and that sort of thing. So they're general guidance as opposed to more definitive numbers, which will be included in the Q1 statements.

Operator

Our next question comes from the line of Maxim Sytchev with National Bank Financial.

Maxim Sytchev

So just to clarify, the 20% intelligence EBITDA margin that you're targeting by 2020, this is excluding all the IFRS impacts, right?

Stephen Taylor

That's correct.

Maxim Sytchev

And do you mind maybe sharing where you guys are right now in terms of the margin profile in that business, so we can get a sense of potential improvements.

Stephen Taylor

Sorry, what are we doing currently and as a gross margin in intelligence?

Maxim Sytchev

Yeah. Well, EBITDA margin, if it's possible.

Stephen Taylor

We said 16.3% at the moment. So…

Maxim Sytchev

That was - okay. That's the actual margin and it's 17.9% of the overall revenue, right?

Stephen Taylor

That's correct.

Maxim Sytchev

Okay. And so in terms of getting the extra 400 basis points, what exactly are you going to be doing between now and then to drive that margin improvement?

Stephen Taylor

The change will come in the mix of what we're offering. As more of these software products come online, things that we have introduced and will continue to introduce, those will be generating the ongoing revenue stream and higher margin and the amount of work that we're doing in the intelligence sector that is more of a consulting nature will have less significant impact.

Maxim Sytchev

So I guess it's also fair to say that the blended consolidated margin should also move up by, let's call it, 150 basis points between now and then, is that a fair assessment? All things being equal?

Scott Stewart

Well, it won't move up that much. Really, the biggest gain is going to be in the solutions area where we either offer by way of a software-as-a-service model, revenue off of the fixed platform with a multitude of clients and/or we're continuing expansion of systems deployments where the margin then on the ongoing support and maintenance typically is well above 20% and we continue to win new project deployments that then sets up that continuing high margin revenue as a follow on.

Maxim Sytchev

Right. And then maybe another way to think about this, in terms of the working capital commitments for intelligence, I assume it must be pretty neutral right, so technically as that piece of the business becomes, on a percentage basis, a bigger part of the overall, that should be helping the working capital as well, is that how you're thinking about this?

Stephen Taylor

I think that that is correct, Max. I think that the majority of our heavy investment in working capital at the moment is coming in projects in the infrastructure sector. Our turns - day sales outstanding in buildings and intelligence are better than the overall 73 days. So I don't anticipate, as that business grows, that we will have significant investment in working capital.

Maxim Sytchev

Right. And so - and the last thing kind of building on Michael's question on working capital, so we should be assuming positive working capital contribution for 2019. Is that how you guys are modeling right now?

Stephen Taylor

Absolutely.

Maxim Sytchev

Okay. And the very last question I have, do you mind maybe commenting on the US margin progression to the 10% level from current, I guess, it's at 7.7, in terms of what exactly you're doing? Is it just more work coming on to relativity fixed SG&A or do you have to win new contracts to be able to scale the margin profile? What exactly gives you the confidence to be able to improve that margin?

Scott Stewart

It's a combination, first realizing better efficiency with the existing ones that we have in hand. But it also is growth in our private sector work. And we have seen that many of our buildings clients out of Vancouver and Toronto are looking so to major urban centers and we're following them down and on that kind of work, especially when we can get leverage off of our Canadian base, we are getting much better margins on that design service. So typically the private sector work that we do when we're doing it in volume, we're getting at the high end of the guidance range that we provide. So that mix and improved efficiencies we see is taking us back to the mid range.

Maxim Sytchev

Okay, that's helpful. And maybe just, sorry one last one that I've been asking for a while, but the high rise market in Canada, you're not seeing any slowdown, obviously given your commentary, right?

Scott Stewart

Not seeing any slowdown, we are seeing a change in the mix away from condominium market, not that it's diminishing in any significant way. But there is a greater interest in rental mixed use high rise rental, where the developers, especially the major pension funds are looking for long term return on their investment. And so we're seeing much more of that. And that also then changes the relationship with the client because it sets up more of an opportunity for us on our technology side to be able to be - to work with them, to have long term arrangements and asset management and operational efficiencies work, but we don't see the same degree of that in the condo market.

Operator

Our next question comes from the line of Frederic Bastien with Raymond James.

Frederic Bastien

Guys, I was wondering whether your revenue guidance was based on adding professionals throughout the year, getting better utilization out of them or a bit of both.

Stephen Taylor

Bit of both. We certainly see revenue or sorry, better utilization being a key thing, not only more better utilization, but also just applying more product, internal product efficiencies. So we can reduce the amount of what we call the labor intensive efforts and allowing staff to be more engaged in the creative side and the value creation prospects and that has involved for us a lot of development and deployment of robotic software and bots and such to just take away the drudgery of the kinds of things that our senior professionals are doing. And we've had a steady program of activity in that area and we see that that will continue through 2019.

Frederic Bastien

And if we just look at the geographies, looking in Canada, US, the UK and the rest of the world, I mean, do you see adding professionals versus maybe cutting some professionals? I suspect that you're happy what you've done in US, but just wanted to get a feel for what might be happening in the UK?

Stephen Taylor

UK, we're watching very carefully. We - certainly, the market mix is changing, so we are adjusting staff, skills and the number of staff to better suit the market, as it evolves. And so we are seeing - there are certainly cuts being made in certain areas, but we're also adding in other areas where the markets are strong and that's a general comment across the board, just tailoring our capacity, sort of the needs of the market. I don't anticipate that we will see a major increase in staff from an organic basis, but focus more on efficiencies.

Frederic Bastien

And turning to more strategic growth, do you feel a need to add more GreenOwl type businesses to your intelligence practice right now? Or are you satisfied with the initiatives that you have going on internally?

Scott Stewart

We are - no, we are looking to engage with other companies either by way of partnerships, by acquisitions or joint ventures. We just - we don't have the bandwidth and capacity to do all the kinds of things or all of the things that we see as being important, as we do this pivot and that's why we're involved in the various tech echo environments in Toronto and Vancouver, et cetera. And acquiring in a very selective way is part of the plan.

Operator

Our next question comes from the line of Michael Tupholme with TD Securities.

Michael Tupholme

Just a few additional questions here, Stephen, the onerous lease impact, you mentioned $1 million in 2019 is a reasonable expectation, is that going to affect adjusted EBITDA the way it did in 2018? Or is it going to be more like 2017 or there was actually no impact?

Stephen Taylor

2017 was a bit of an odd year because we did book in the fourth quarter, a $3 million provision to P&L. That was reduced by the amount of actual cash outflow against that provision. I think you would look more towards, we will have cash outflows in the vicinity of somewhere between 800 million and 1000 and $1 million for 2019. And that will be a reduction of our adjusted EBITDA. I think we will have worked our way through the unfavorable elements of that lease by the time we get out of the back half of 2019. It runs through to 2024 and I think we have solutions in place to minimize the impact on adjusted EBITDA after we get out of the transitional period that still exists this year. So we're moving new tenants in.

Michael Tupholme

Okay. And then this is not a major thing. But when I look at the Q4 '18 and the impact of the onerous lease, in the MD&A text, there's mention of a $600,000 negative impact in it, but in the adjusted EBITDA table that you presented in the MD&A, there's an adjustment for $867,000. I'm just a little bit unclear on the difference and what, if one wanted to make an adjustment for this to the 8.2 million and add something back, should we be focused on this 600,000 or the 867,000?

Stephen Taylor

We should be focusing on the 867,000. I'll have a look at the - find that 600,000 number, but the number in the table is the right number.

Michael Tupholme

I just wanted to also clarify a couple of things on the intelligence targets. So, you talked about, I think, it was a 16.3% operating margin and 20% margin target for 2020. Are these EBIT margins or EBITDA margins?

Stephen Taylor

EBITDA.

Michael Tupholme

EBITDA. Okay. Perfect. And then just lastly, in terms of the non-US and non-Canadian part of the business, you break out the UK and other international. Scott, what would be your expectation for those regions on a year-over-year basis as far as revenue, would you expect there to be some growth in those regions or is it sort of better to assume relatively flattish performance in those two on a year-over-year basis?

Scott Stewart

Those other internationals have been very strong and yeah, we have grown considerably over the past five years and I would expect that that will continue. We're up to about 150 people in India and the work continues, especially in areas of Infrastructure, Transportation in particular and also in systems. The - in Mexico, we are delivering - Mexico is largely an intelligence market for us. We deliver toll systems and there we're just delivering a major traffic management system for one of the major freeways.

The Middle East is a very strong market for us in planning and I would expect that we will see continued growth in that. And we also see in that professional services market, we see very good margins. And so we're working through at the UAE as well as in Saudi Arabia, doing some very major master planning projects, drawing on all of our planning, design, architecture, engineering skills.

And Greece will be - we will have a big growth in Greece this year where we're delivering a major new toll system and a whole new technology of open road tolling, but it will then revert back to a more normal continuing service there after this year. So bottom line, I would say that other international, we have greater expectations for us. We're very competitive. We have very strong positions in the areas that we operate in and a very strong relationship with our clients.

Operator

There are no further questions at this time. Please continue with your presentation.

Stephen Taylor

That's it for the call. I want to thank everybody for being with us this morning and have a good weekend.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.