Lionheart Holdings (CUB) Q2 2018 Earnings Report, Transcript and Summary

Greetings and welcome to Cubic Corporation Second Quarter Fiscal Year 2018 Conference Call. At this all time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would like to turn the conference over to Kirsten Nielsen, Vice President of Investor Relations. Thank you. Please begin.

Hello, everyone, and thank you for joining us today. Today, after the market closed, we reported our second quarter fiscal 2018 results. I am joined by Brad Feldmann, Chairman, President and Chief Executive Officer and Anshooman Aga, Executive Vice President and Chief Financial Officer. I will remind everyone that statements made on today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. You can find factors that could cause the company's actual results to differ materially from our expectations listed in today's presentation, press release and our most recent SEC filings. In addition, we've included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix of today's presentation. With that, I'd like to turn the call over to Brad.

Thank you, Kirsten. Thank you, everyone for joining us today. On today's call I'll start by discussing our second quarter and first half results for fiscal year 2018. Then I'll hand the call over to our CFO, Anshooman Aga, who will cover the financial results in more detail. Starting with Slide 3, you'll find an overview of our financial results from continuing operations as we recently announced the sale of our non-original manufacturer training services business. Sales for the second quarter were $278.6 million, a 12% increase compared to the second quarter last year. Sales for the first half were $527 million, a 7% increase compared to last year. Adjusted EBITDA for Q2 was $15.8 million, a 35% increase compared to the second quarter of last year. Where $27.3 million for the first half, a decline of 7% compared to last year due to $4.3 million increase R&D investments in Mission Solutions and Innovative Training technologies. Within financial close of Boston contract in March, our backlog is over $3.4 billion. The highest in Cubic's history. In the second quarter we also received a limited notice to proceed from the Washington Metropolitan Area Transit Authority in DC to launch a near field communications mobile solutions for their riders. With this win, the top five US transit agencies have now selected Cubic for their mobile solution. During Q3, we will be releasing the first iteration of the new Cubic mobile platform; Cubic traveler application. When the Chicago Transit Authority upgrades its Ventra mobile app. The Cubic travel application will build upon the success of the current Ventra app that has logged more than 2 million downloads since launch. On April 19, we announced an agreement to sell our defense services business to value Valiant Integrated Services. This transaction marks a significant milestone for Cubic as we continue to sharpen our focus on delivering market leading, innovative technologies that create superior value for our customers. It enables us to better concentrate our resources on markets with strong growth and high margins and further increases our financial flexibility to pursue profitable growth options that enhance shareholder returns. I would like to again thank our defense services team mates for their faithful service and contributions to Cubic over the past 24 years. Turning to Slide 4, we're pleased with the passage of the omnibus appropriation bill that includes $700 billion defense spending bill, with $56.4 million in increases for our T2C2, SLATE ATD, LCS Training Courseware and ITESS II programs compared to the President's budget. Less directly our transportation business will also benefit from an additional $10 billion in transportation funding which may provide a source of federal grant funding. Moving to Slide 5, we continue to make progress with our winning the customer initiative. In Q2, we were honored to be named supplier of the year at the London Transport Awards in recognition of our longstanding partnership, with transport for London. We're extremely confident that our one account platform leads the markets demand for technologically advanced back office systems and we remain well positioned for several other opportunities in large cities. In Mission Solutions, we made targeted investments that enhance our technology significantly. We have completed our acquisition of Motion DSP. A Silicon Valley based company specializing in real time video enhancement and computer vision analytics. We will now be able to detect and track entities in real time augmenting our existing full motion video dissemination capability. Additionally, following the close of the quarter we invested in Beatty and Company computing to enhance our access to secure cloud operating systems technology for our customers. In Defense Systems, our advance technology demonstration for the secure LDC [ph], advance training environment with the United States Air Force research lab pass systems verification and our encryption tool a key component from a data and cyber security perspective passed certification with the National Security Agency. Also known as SLATE ATD, it represents the future of multi-level encrypted. Live, Virtual, Constructive, air combat maneuvering instrumentation and will be important to the future combat training within the Department of Defense. Turning to Slide 6, we're pleased with the mobilization of both New York and Boston. In the case of New York, we successfully moved through conceptual design review per plan and our progress is evidenced by the receipt of our payment of $25 million for mobilization. As well as CBR and our initial base plans on April 3. In Boston, within weeks of financial close we're able to submit to our first batch of documentation for the design review scheduled for May. We have received positive feedback from our bid in Brisbane and continue to be confident of an award this fiscal year. Given the mid-market demand for affordable electronic fare collection, we are investing in cloud and digital platforms to extend our solutions to these mid-market transit agencies. Since FY 2017 we've invested over $6 million in R&D for our fully rebuild NextBus 2.0 solution. Public Transport Authorities including low serving smaller cities are under pressure to deliver more sophisticated and efficient services due to increased urbanization and rise in customer expectations. NextBus 2.0 is being designed to address the needs of these agencies. In Growing C4ISR, we've been awarded the United States Air Force, Theater Deployable Communications for $12.9 million. Under the TDC contract, Cubic provides inflatable satellite terminals and secured networking kits enabling the Air Force elements to rapidly establish critical communications, securely transmitting voice, data and video. Our Mission Solutions business also received a T2C2 LRIP 2 award for $6 million, which follows the full material release and full rate production decision that our GATR team received in January. In addition, our secured networking business won a tactical Local Area Network CERP Award for $5.5 million. In Defense Services, we reached the settlement with Lockheed Martin on the F35 for LRIP 2-4/11 and an agreement to negotiate a contract for combined buy of 500 units for LRIP 12/14. In ground systems, we received Long Lead funding for the next phase of the Canadian Urban Operations Training System and expect an additional $28 million in the near term. We continue to build our next training capability to provide performance based training for the United States and Allied Nation militaries. We received $16 million in new Littoral Combat Ship Courseware orders associated with Combat Systems, Engineering revisions and Learning Management. And our Navy customer continues to be very pleased with this new innovative training architecture. Finally, moving to Slide 7. We continue to make significant progress on our Living One Cubic initiative. We finished our major ERP back office implementation and we're now working on optimizing all global processes and workflows. We're also implementing product lifecycle management to standardize our engineering tools and workflows through the fiscal year 2019. The Asia Pacific region continues to be a market of opportunity across our three business divisions at Cubic. And we're expanding our operations in Hyderabad, India to support the company's growth objectives. We continue to share engineering talent and technology across all portions of our business. Next I'll ask Anshooman to describe our financial results in more detail.

Please turn to Slide 8 to cover few of the highlights for the quarter. As Brad discussed we announced the agreement to sell the non-OEM defense services business subject to customary closing conditions and regulatory approvals. This decision is a reflection of our disciplined capital allocation priorities and provides us with additional financial flexibility to pursue profitable growth opportunities. The financial results for the defense services business are now reflected as discontinued operations and the previous period financial results have been reclassified for comparative purposes. Our financial results for the second quarter reflect continued strong execution. In March, we completed the financial course of the Boston Fare Collection contract. Adjusted EBITDA from continuing operations of $15.8 million was up $4 million versus the second quarter of 2017. As the Defense services business been included in the results, adjusted EBITDA would have been $22.5 million in line with our expectations as well as consensus prior to the announced divestiture. Free cash flow also improved in the second quarter. Lastly, we're maintaining fully year 2018 guidance adjusted for the divestiture. Turning to Slide 9, for our consolidated financial results from continuing operation. Our backlog is at another all-time high of $3.4 billion with the MBTA booking. Second quarter sales increased 9% on a constant currency basis and adjusted EBITDA increased 24% on a constant currency basis led by strong performance in our transportation business. Earnings per share from continuing operations was a loss of $0.12 per share and includes cost associated with our ERP and supply chain initiatives of $5.7 million. EPS from discontinued operations reflects the second quarter financial results of the defense services business as well as a non-cash charge of $6.9 million or $0.23 per share. Free cash flow from continuing operations for the second quarter were $7 million. The services business which is now reported in discontinued operations delivered strong free cash flow in the second quarter of $20 million. On Slide 10, we've outlined the second quarter impact of the divestiture waging [ph] to our reported results from continuing operations. Turning to Slide 11, Cubic Transportation Systems delivered solid performance. Sales increased approximately 15% in the second quarter on a constant currency basis, driven by systems engineering work on the New York project. Adjusted EBITDA and margin increased significantly as the result of higher sales, lower year-on-year R&D spend and operational improvement. On March 21, we announced that Cubic and John Laing reach financial close and executed their agreement with the Massachusetts Bay Transportation Authority. This was structured as a public-private partnership with a base contract award of $510 million. Given the timing of the booking late in the quarter, there was no material impact from the Boston contract in our second quarter results. We continue to evaluate whether or not Cubic will need to consolidate the special purpose entity in which Cubic has a 10% equity interest. Moving to Slide 12, Mission Solutions is performing in line with our expectations. With increase in bookings in Q2 reflects T2C2 LRIP order [indiscernible] and an early order for Theater Deployable Communications. Sales increased 26% driven by higher secured networking deliveries. As we discussed last quarter, we expect T2C2 LRIP production to enable year-on-year performance improvement for CMS. Also as we've communicated in the past, the majority of our adjusted EBITDA in this segment is generated in few [indiscernible]. Last fiscal year, CMS delivered $11.8 million in Q4 versus full year adjusted EBITDA of $1.48 million. We expect similar yearend concentration in fiscal year 2018. Turning to Slide 13, in Defense Systems all key metrics improved sequentially from Q1. Bookings were down year-on-year reflecting delayed orders which we expect to recover in the second half of this fiscal year. Sales were down $4.3 million year-on-year reflecting YoY shipments and Air Ranges. Adjusted EBITDA was in line with the prior year. Moving to Slide 14, we've provided a full year 2018 guidance adjusted for the divestiture. Excluding the transaction our guidance has now changed. For 2018, we had assumed that CGD Services will generate sales of $325 million and adjusted EBITDA of approximately $11 million net of corporate overhead allocations of $8 million. The midpoint of our guidance represents pro forma Cubic sales growth of approximately 5% and adjusted EBITDA growth of approximately 18%. Our confidence in the full year guidance is driven by strong year-to-date order activity and the expectation for strong Q4 shipments from Mission Solutions. As indicated during the last earnings call, we anticipate that adjusted EBITDA seasonality for fiscal year 2018 will be similar to 2017. Third quarter adjusted EBITDA is expected to reflect a gradual sequential improvement over the second quarter and we continue to expect a strong fourth quarter. Now I'll turn the call back over to Brad to wrap things up.

Thank you, Anshooman. Turning to Slide 15, in summary we're very pleased with our first half performance and we expect growth to accelerate in the second half with the major transportation wins at Mission Solutions recent T2C2 full rate production decision. We've made great progress on our strategy, by strengthening our portfolio with the divestiture of the non-OEM services business and the recent investments in full motion video and secure cloud computing. Finally, with our ERP back office system in place we have a solid and scalable foundation for first class processes and efficiency to support the company's expected growth. In closing, I'd like to thank my Cubic team mates for their strong performance and commitment to driving long-term value for our customers and shareholders. Now let's proceed to the Q&A session.

[Operator Instructions] our first question comes from the line of Ken Herbert with Canaccord Genuity. Please proceed.

I just wanted to first ask on, within CMS. I mean it sounds like the major contract T2C2 is on track. Can you just give a little more detail on how big you expect the award to be when you move to full rate production at the end of the fiscal year and do we see profitability in this segment in the third quarter or is it really all going to hit in the fourth quarter? I mean any more detail around this would be helpful.

Thanks, Ken. So I'll start off with the last part of your question. In terms of profitability in the third quarter. standalone third quarter we expect it should start getting to profitable again it depends on, we've had appropriations, the money started flowing, it should get to the contracting offices and then we should start seeing bookings, starting to rollout in the near term. So it depends on the timing of the bookings coming in, but we expect, it should get above breakeven for the quarter and then again it will have a strong Q4 based on when the orders are coming in.

So we know that the appropriations bill was passed the 23rd March and it takes a number of weeks for the money to flow the contracting officers who place things on order. As of this morning, we understand that the Department of Defense has its money and it started allocating to the military services. We're starting to see pre-contract kinds of activities out of contracting officers and so we expect the orders to flow. Our team is ready and we've been working ahead to ensure we can make substantive deliveries by the end of the year.

Okay, so it sounds like there's still maybe a little timing risk, but everything is lined up for at least starting to get the contract funding around full rate and CMS should obviously do it's part of the guidance for the full year.

That's right.

Okay and if I could just on CTS, on the transportation side. I mean really nice - margin improvement was that - can you maybe just help with how much of that was New York versus base business. And I know obviously you had some tailwinds in the quarter around R&D and operational performance. But if you [indiscernible] the margin improvement a bit within CTS that would be very helpful.

So Ken we had a about $2 million reduction in R&D year-on-year, the rest was driven through growth in the business and also operational improvement. When you look at our services margins they're up. We've talked a lot about the improvement measures, that we've implemented in the business which Brad mentioned briefly our engineering center in India, we have engineering in Perth that's low cost. When you look at what we're doing around service delivery with our Stockton [ph] service center. So all of those are starting to play and lead to improved results, so it's a blend of those two in there.

We're very happy with how CTS's is doing Ken.

Yes I know it's really nice quarter and nice improvement. Are we going to see any revenues this year now from Washington DC or is that more in 2019?

We'll see a little bit this fiscal year, but we'll see the majority next fiscal year.

Okay, great. Well thank you very much. Nice quarter. I'll pass it back there.

Thank you. Our next question comes from the line of Brian Ruttenbur with Drexel Hamilton. Please proceed.

So I caught in there, in the prepared remarks that guidance for the third quarter. I'm wondering if you can repeat this, is going to be flat. Is that on an adjusted basis versus Q2, is it a revenue, is it EPS, can you help me out with the statement that you've made?

Sure Brian. So what I said for Q3 adjusted EBITDA will improve sequentially gradually over Q2, so we do expect Q3 adjusted EBITDA to be higher than Q2.

Okay, but only modestly is that - that's what I heard was flat. So you said it's going to improve, but you didn't say how much it's going to improve, right?

No it's again, if you heard the last part of Ken's question on CMS. It's the timing of the order, so we're forecasting gradually better than Q2, but we haven't given specific guidance for the quarter. We still for the full year, we feel comfortable with our guidance there could be some movement between Q3 and Q4 based on the timing of the orders from CMS>

Okay, my other question is with the ERP implementation complete. We should see a dramatic drop in this period is a question in SG&A, is that correct?

Well we've finished implementing SAP, what we're going to be working on for the remainder of the fiscal year is improving the efficiency of SAP. So making sure the numbers of screen, number of clicks for the employees had reduced. And yes, implementation bugs are worked out and we can start driving out cost out synergies that we talked about in the past. So our full year guidance for ERP spend was $25 million that still remains. We also as Brad indicated are working on our PLM solution where we're going to [indiscernible] PLM solutions for our engineers across the business, so that kind of ramps up a little bit. But the full year $25 million still stands.

We expect next fiscal year to have a drop in investment. And when the issue guidance later this year for next year, we'll delineate that but it will be lower.

Okay. So should I be looking for a sequential change from Q2 to Q3 in terms of SG&A? I'm just trying to.

Little bit, yes. Our ERP spend won't be at the same level. It should come down a little bit, but it won't be dramatically down year-on-year from Q2 to Q3.

Perfect. Thank you very much. That was helpful.

[Operator Instructions] thank you. And it appears we have no further questions in queue at this time. I'd like to hand the floor back over to Mr. Feldmann for closing remarks.

Thank you for joining us today. Cubic had a solid quarter and we remained very optimistic about the future. We look forward to joining us on the next call. Thanks so very much.