KNRLF - Kontrol Technologies Corp. (KNRLF) Q2 2023 Earnings Call Transcript

2023-08-15 06:45:09 ET

Kontrol Technologies Corp. (KNRLF)

Q2 2023 Earnings Conference Call

August 14, 2023, 04:30 PM ET

Company Participants

Paul Ghezzi - Chief Executive Officer

Claudio Del Vasto - Chief Financial Officer

Presentation

Operator

Good afternoon, and welcome to Kontrol Technologies Q2 2023 Earnings Conference Call. I'm joined by the CEO of Kontrol Technologies, Paul Ghezzi; and CFO, Claudio Del Vasto.

Before we begin, please be reminded that certain statements and information included in the management discussion and analysis and financial statements and presentations, including information related to future financial or operating performance and other statements that express the expectations of management or estimates of future performance constitute forward-looking statements.

For more information on the company's forward-looking statements and risk factors, please reference to the management discussion and analysis and our financial statements. For all public information filings, please visit www.sedar.com. Thank you.

I will now turn the conference call over to Mr. Paul Ghezzi, CEO of Kontrol Technologies. You may begin.

Paul Ghezzi

Thank you. Hello, everyone, and welcome to the Kontrol Technologies Q2 2023 earnings conference call. I'm joined on the call today by our CFO, Claudio Del Vasto.

The second quarter of 2023 continues with the positive trend across our key financial metrics and demonstrates that we are executing against our strategic objectives. In a challenging macro environment for small companies, we were able to make our way back to positive net income this quarter. We are operating with fiscal discipline across our platform, and we are excited by the many scaling opportunities in front of us.

We continue to attract new blue chip customers and our gross margins reflect both the health of the business and our growing footprint in high-growth margin markets and the regulated emission market both in Canada and the U.S. I'll have more to say about this following the presentation of our financial results.

Claudio, go ahead.

Claudio Del Vasto

Thanks, Paul.

The company's first half performance reflects our focus on operational execution. On a continuing operations basis, revenue, gross profit, adjusted EBITDA and cash flow from operating activities all increased in the first half of 2023 compared to the same period in the prior year. Our commercial and industrial service teams performed in line with expectations. And the company has focused its operations on higher gross margin and -- service and technology solutions. We have reduced debt levels during the first half of 2023 as the company continues to deleverage the business.

The consolidated income statement is presented in a manner that captures activities from continuing operations and discontinued operations.

Revenues from continuing operations for the three months ended June 30, 2023 were $4.7 million, up 18% over the same quarter in the prior year. Revenues from continuing operations for the six months ended were $9.1 million, up 26% over the same period in the prior year.

Gross profit from continuing operations for the six months ended was $5.5 million, up 40% over the same period in the prior year. Gross margin from continuing operations for the six months ended was 61%.

Adjusted EBITDA from continuing operations for the three months ended June 30, 2023 was $863,392 compared to $72,536 for the same quarter in the prior year. Adjusted EBITDA from continuing operations for the six months ended was $1.5 million compared to an adjusted EBITDA loss of $178,413 for the same period in the prior year.

Net income, including gain on disposal of discontinued operations, for the six months ended was $21.4 million compared to $2.7 million for the same period in the prior year. Net income from continuing operations for the three months ended June 30, 2023 was $98,405, while net loss from continuing operations for the six months ended was $371,057.

Cash flows from operating activities were $815,427 for the six months ended June 30, 2023.

During the six months ended, the company paid down $3.8 million of principal toward the revolver and term loan. Debt reduction is a key priority and efforts to decrease leverage were impactful to the company's financials.

As a subsequent event, on August 10, 2023, the company entered into a second forbearance agreement with a secured lender for a six-month term to January 31, 2024.

I will turn the call over to Paul to discuss further company updates. Paul?

Paul Ghezzi

Thanks, Claudio.

Suffice to say, we're very pleased with the results, and we have more work to do. So both of those things can be true. So let me take you on a bit of a discussion on some of the areas that we're focused on, and then we're going to open up to Q&A.

As discussed on our last call, our primary strategic objectives are to be a self-sustaining company and operate with high gross margin, repeat and recurring revenues. On a comparative basis, removing discontinued operations, we have demonstrated organic growth and improvement across our key financial metrics. In the current market environment, which may be one of the most challenging for small companies, we are optimistic about our future. We have worked diligently to reduce discretionary expenses, are running lean while targeting organic growth opportunities with scale potential.

We continue to have a leadership position with our customers in the net zero emission market through our operating subsidiary efficiency engineering. In the past 12 months, we have won approximately 10 RFPs with various municipalities and cities. This puts us on the leading edge of helping to shape and develop what the buildings of the future will look like and how they will operate. Notably, we have won these RFPs against much larger organizations. What typically begins as a feasibility and a plan will then move into design and integration, allowing us to provide additional solutions, providing for revenue-generating potential beyond the initial RFP.

We are seeing numerous opportunities to further scale into the end of 2023 and into 2024. Private and public REITs, real estate investment trusts, are experiencing the impacts of rising utility costs and carbon taxes on their operations. These costs have accelerated well beyond headline inflation. While REITs are lagging behind municipalities in terms of net zero emission strategy and solutions, we see this market growing into the end of the year and into next year. This also benefits our HVAC service business with the growth of high-efficiency solutions and equipment required, and we're well aligned with government policy.

On March 28, 2023, we announced that Kontrol was selected by a Fortune 100 customer for energy monitoring and facility optimization spanning 1.6 million square feet of built environment. We have now successfully completed this opportunity and are working on many more. The process of working with large global customers is that we operate on their timelines and schedules. We are certainly pleased to have a successful outcome with one of the largest building performance integrators in the world.

With respect to our emission business opportunities, on February 6, Kontrol announced that its operating subsidiary, CEM Specialties Inc., was selected by a new U.S. customer for multiple integration projects. CEM has a long history of integrating complex monitoring systems and industrial facilities across North America. This new revenue growth opportunity is directly related to CEM's core competencies and includes integration of various hardware and software with the software developed being licensed to the customer.

This new opportunity and its growth potential ties to the recent environmental protection agency rules and regulations around the measurement and quantification of ethylene oxide. We have now expanded this relationship into multiple product line development. Each of these product lines have their own scale potential, primarily driven by government regulation. Our emission team continues to innovate, and we are optimistic about scaling opportunities in the emission analyzer market.

Typically, the second half of the year has tended to be stronger than the first half of the year. We are not providing guidance at this time. But certainly, we have established a financial performance trend that we will seek to continue and add to.

As Claudio previously mentioned, we are pleased to enter into an extension of the forbearance agreement with our secured lender. I would like to spend a few minutes on our balance sheet and deleveraging plan.

On the balance sheet, the amount owing to the secured lender is approximately $11.4 million, down from more than $15 million. We continue to be current on principal and interest. We are comfortable that we will continue to pay down the debt and our operating performance will be sufficient to deleverage. I will point out that the debt reflects as a current obligation on the balance sheet and this is concern to some investors. This is the accounting treatment required on the balance sheet under a forbearance agreement. Our view as management is that we have been able to manage this debt to date and will continue to do so. From a normalization perspective, a debt-to-EBITDA ratio of 3x to 3.25x would be a target. While we have more work to do, we are on the right path.

The team has worked tirelessly for the past eight months to write the business, deal with a discontinued operation and get the financial metrics back on the high-growth margin path. We remain the largest shareholders of the business, and we are committed to the success of the business over time.

To get a little philosophical to close out, I'm not going to deal with the share price directly, but we'll make some comments since that seems to be the question that is of most interest to investors and certainly the one that I get asked the most. This may be one of the most difficult environments for small cap public companies that we've experienced. Small caps tend to trade primarily off sentiment and liquidity because they are typically held by retail investors. The sentiment has been negative across the board, including Kontrol and the market liquidity has mirrored that sentiment. On that front, we will continue to demonstrate in our financial performance that we are executing and further, as the largest shareholders in the business, our equity position is a significant incentive to continue to grow our way out, right size the balance sheet and be profitable going forward. From that perspective, the share price will take care of itself over time.

I'll now turn it over to the operator to administer the Q&A portion of the meeting.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from [Mike Mazarakis] (ph), from private investor. Please go ahead.

Unidentified Analyst

Hey. Can you hear me?

Paul Ghezzi

Hi, Mike. Go ahead.

Unidentified Analyst

Hey, Paul. Congratulations on a solid second quarter. Just a couple of questions. Just based on the performance in the first six months, I mean, it's pretty strong organic growth. Do you foresee the need to raise capital in the near term or the medium term in order to continue with that organic growth? I have one more question, but I'll let you answer that one.

Paul Ghezzi

Sure. Okay. So yes, so based on the first six months, and I think given our strategic objectives and our plan, I think you can see that margins are up, costs are down. We're trending in the right direction. We've added organic growth. So, at this time, we don't see ourselves raising any capital. We think we can be self-sustainable and self-sufficient. And of course, we want to grow our way out of this. So, to answer your question, that's not something that we see for ourselves at this time. Hopefully, that's what you wanted to hear.

Unidentified Analyst

Yes. No, that's exactly what I was hoping to hear. And the second question, just -- I mean, you've done a great job trying to reduce that debt. Where do you guys see the debt levels in, say, the next six months from now or end of the calendar year?

Paul Ghezzi

Yes, it's a great question. So I think if you think about it from a -- what does a normal business look like, and we could say normal in a secured banking relationship is something like 3x to 3.25x leverage. I think if you do some trending and you look at where we are, that's a ratio that we want to hit. I don't want to give a specific timeline on that. But the idea is if you can see that we're closing that gap there, that should give some comfort. And because it's listed as a current obligation, I know it's made some investors wary. We look at it differently as management, and as large shareholders, we're going to work our way through this. And if we can get to that target ratio, then it looks much better for us. So that's how we think about it. I don't want to give a specific date.

I should also say there is some debt on the balance sheet that is not with the secured lender. Those are the -- specifically the [B2Bs] (ph) related to the Global acquisition. We have commenced litigation on those. We don't plan to pay those to protect shareholders' interest. We have started that litigation. So I think it's important when you look at us from a debt perspective, you focus on the secured debt, which is really our focus. And if we get that ratio where it needs to be, I think everyone is going to feel a lot more comfortable even though as management, we feel like we're working our way towards that, and we're highly motivated to get that into the right place.

Unidentified Analyst

Great. Thank you. Just great job turning things around in short order. And I know you guys had to make some really tough decisions, but a good job so far.

Paul Ghezzi

Yeah. Thank you. I appreciate that.

Operator

[Operator Instructions] There are no further questions at this time. I will turn the call back over to Paul for closing remarks.

Paul Ghezzi

Okay. Thank you so much.

Operator

That does conclude today's conference call. You may now disconnect your lines. Thank you for your participation, and have a good day.

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