IBI Group Inc. Announces Q4 and Year End 2018 Results Highlighted By 9.9% Adjusted EBITDA Margin in 2018
IBI Group Inc. ("IBI" or the "Company") (TSX:IBG.TO), a global Intelligence, Buildings and Infrastructure firm, today announced its financial and operating results for the three and twelve months ended December 31, 2018. Select financial and operational information is outlined below and should be read with IBI's audited consolidated financial statements ("Financial Statements") and management's discussion and analysis ("MD&A") as of December 31, 2018, which are available on SEDAR at www.sedar.com and on IBI's website at www.ibigroup.com.
IBI's Q4 and year-end 2018 results demonstrate key financial metrics that met or exceeded management's expectations, including a year-end 2018 adjusted EBITDA margin of 9.9%.
Q4 and 2018 Highlights:
-- Net revenue for Q4 and year end 2018 totaled $92.4 million and $368.3 million, respectively, up 6.3% and 1.9%, respectively, compared to the prior year, supported by continued strength in the Canadian operating segment.
-- Adjusted EBITDA for Q4 2018 was $8.2 million or 8.8% of revenue and was $36.5 million or 9.9% of revenue for full year 2018, an 8% increase over Q4 2017, and a decline of approximately 10% compared to 2017. Both periods reflected non-recurring increases of $2.4 million in the onerous lease provision, which did not impact adjusted EBITDA in the same periods in 2017, but negatively impacted 2018 due to increased cash outflows. Looking ahead to 2019, the Company anticipates cash outflows related to this lease will normalize.
-- Continued improvement was realized in the U.S. operating segment with adjusted EBITDA of $2.0 million in Q4 2018, compared to $0.3 million in the prior quarter and a loss of $2.0 million in Q2 2018, related to cost-saving initiatives primarily in the Buildings practice, an increase in backlog in the region, as well as improvements in the Intelligence practice in the U.S. IBI anticipates the U.S. Buildings practice will revert to more normal operating metrics by the end of Q4 while the Intelligence practice will continue to strengthen.
-- During the year, the Company introduced its strategic technology pivot designed to transform IBI into a technology-driven service provider with enhanced margins and improved efficiencies. Consistent with this pivot and the Company's increased focus on growing its Intelligence practice, IBI posted an operating profit margin of 16.3% from Intelligence in 2018, compared to approximately 12.8% in 2017.
-- IBI launched three new products in 2018 to further advance its technology strategy: InForm by IBI Group, which is a product suite designed to reduce operating costs by helping clients improve the management of their assets, BlueIQ, a real-time energy management solution for urban water distribution, and Smart City Platform, a technology framework allowing cities to connect their own existing systems with the Company's onboard tools and insight-driven data analytics. The Company also purchased GreenOwl Mobile, which specializes in the design of mobile and internet of things ("IoT") product experiences for both public and private sectors.
-- Basic and diluted earnings per share was $0.10 in Q4 compared to a per share loss of $0.08 in Q4 2017 and was $0.55 and $0.54, respectively in 2018 compared to $0.30 in 2017. The increases in Q4 and full year 2018 are primarily due to increased net income, slightly offset by a higher weighted average number of common shares outstanding year-over-year stemming from the exercise of deferred share units and stock options. Net income for both Q4 and full year 2018 is higher than 2017 and are inclusive of a pre-tax gain in fair value of other financial liabilities associated with changing market conditions and include a loss in foreign exchange due to fluctuations in the market value of the Canadian dollar.
-- Amendments to IBI's credit facilities with lenders were secured during the latter half of the year to extend the maturity date, increase the maximum available amount on the swing line facility, and improve on interest rate margins, and were then used to redeem the remaining balance of the 7% Convertible Debentures for $14.8 million cash.
"IBI's pivot to a technology-driven design firm continued to advance organically through 2018 with the launch of three new products, and was supplemented by the acquisition of GreenOwl Mobile," said Scott Stewart, Chief Executive Officer of IBI Group Inc. "Continued strong performance from our Canadian operations, and in particular our Intelligence practice, provided the foundation for increased revenue and robust adjusted EBITDA margins in 2018. During the year, IBI also focused on improving the performance of our U.S. operations, including certain restructuring initiatives and cost efficiencies, the full benefit of which should be realized in late 2019 and beyond. This helps position IBI as leaders in a tech industry that is increasingly focused on the urban environment, as we further develop innovative products, solutions and services."
See "Definition of Non-IFRS Measures" in the MD&A.
Financial Highlights (in thousands of Canadian dollars except per share amounts) THREE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 2018 2017 2018 2017 (unaudited) (unaudited) Number of working days 63 62 252 252 Gross revenue $ 115,878 $ 112,431 $ 454,614 $ 462,045 Less: Subconsultants and direct costs 23,491 25,545 86,314 100,637 Net revenue $ 92,387 $ 86,886 $ 368,300 $ 361,408 Net income $ 3,685 $ (2,891 ) $ 20,491 $ 11,372 Cash flows provided by operating activities $ 1,335 $ 2,802 $ 12,613 $ 15,139 Basic earnings per share $ 0.10 $ (0.08 ) $ 0.55 $ 0.30 Diluted earnings per share $ 0.10 $ (0.08 ) $ 0.54 $ 0.30 Adjusted EBITDA $ 8,162 $ 7,643 $ 36,538 $ 40,615 Adjusted EBITDA as a percentage of net revenue 8.8% 8.8% 9.9% 11.2%
-- See "Definition of Non-IFRS Measures" in the MD&A.
2018 In Review
Through 2018, IBI delivered solid performance demonstrating the strength of the Company's business model and commitment to successfully executing its new technology-focused Strategic Plan which was announced mid-year. Several new initiatives associated with the Plan will have recurring revenue streams and are expected to contribute to margin expansion and further increases to adjusted EBITDA over time.
The timing of several large infrastructure projects required IBI to make significant investments in working capital in 2018, which somewhat limited the Company's ability to pay down debt. IBI anticipates this working capital situation to be reversed through 2019 as the Company expects to realize cash flow from these infrastructure projects through the year, which will support IBI's ability to reduce overall debt and further advance cost reduction initiatives. The Company will continue to grow its core business, while leveraging data and intelligence to enable new revenue streams, higher margins and enhanced shareholder value.
Margin Performance in the Intelligence Practice Continues to Grow
IBI's Intelligence practice continues to build momentum with a 13% increase in net revenue year-over-year, resulting in an operating profit margin of 16.3%, compared to 12.8% in 2017. This growth is directly attributable to the Company's pivot to a technology-driven design firm. The Company's Infrastructure practice realized an operating profit margin of 10.1% during the year, compared to 8.8% in 2017 with net revenue growth of 6% year-over-year. In light of stabilizing and refocusing IBI's U.S. operations and transition to new leadership, the Company's Buildings practice realized net revenue that was 4% lower year-over-year with margin compression to 12.9% from 17.7% the prior year as 2018 net revenue declined.
Net Revenue Driven by Canadian Operations
IBI continued to deliver solid performance with net revenues increasing 6.3% to $92.4 million during the fourth quarter, compared to $86.9 million for the same period in 2017 due to stronger operating performance in the Canadian segment. Net revenue for the year ended December 31, 2018 was $368.3 million, up 1.9% from $361.4 in 2017 bolstered by stronger operating performance in the Canadian and international segments offset by lower-than-expected performance in the U.S. segment. During the year, the Company focused on initiatives to improve the performance of U.S. operations, including restructuring operations and identifying and implementing cost efficiencies. As a result, adjusted EBITDA within the U.S. operating segment increased quarter-over-quarter, and IBI expects to realize the full benefits of these initiatives beginning in late 2019.
Continued Drive to Improve Adjusted EBITDA
Adjusted EBITDA increased to $8.2 million (or 8.8% of revenue) in the fourth quarter compared to $7.6 million (or 8.8% of revenue) for the same period in 2017, an increase of approximately 8%. For the full year 2018, adjusted EBITDA totaled $36.5 million (or 9.9% of revenue) compared to $40.6 million (or 11.2% of revenue) for the same period in 2017, a decrease of approximately 10%. An increase in cash outflows of $3.4 million impacted 2018 adjusted EBITDAand was related to the onerous lease, which arose from the Company finalizing a sub-lease agreement for one of its office spaces in 2017, at which point an increase in rent expense was recognized as part of net earnings but did not impact adjusted EBITDA in 2017. Cash outflows related to the onerous lease had no impact to net earnings for the year ended December 31, 2018 but reduced adjusted EBITDA. As this issue was resolved in 2018, IBI does not expect further impacts going forward. (1. See "Definition of Non-IFRS Measures" in the MD&A).
Focus on Financial Flexibility
At December 31, 2018, days sales outstanding ("DSO") was 73 compared to 69 at the end of 2017 and IBI continues to undertake comprehensive reviews of its contract assets and accounts receivable on a regular basis with an ongoing priority on improving DSO. The Company has made significant strides to accelerate billings and reduce DSO over the past 12 months, which are expected to contribute to a positive working capital position.
Late in the third quarter, IBI redeemed the remaining balance of its 7% Convertible Debentures for $14.8 million in cash. As a result of this redemption, coupled with some larger infrastructure project investments during the year, IBI's net debt repayment was $4.3 million. Over the course of 2019, IBI anticipates reducing debt by up to $10 million as cash is anticipated to be realized from these large infrastructure projects in 2019 and beyond.
Positive Net Income
The Company recorded Q4 net income of $3.7 million, compared to a net loss of $2.9 million in the same period of 2017. Net income during the quarter reflects a pre-tax gain in fair value of other financial liabilities totaling $0.9 million, compared to a pre-tax loss of $2.0 million in the same period last year. Quarterly net income was also inclusive of a loss in foreign exchange of $0.6 million, compared to a loss of $0.3 million for the same period in 2017 as a result of the movement in the market value of the Canadian dollar. During the year ended December 31, 2018, IBI posted net income of $20.5 million, a 79.8% increase from $11.4 million in 2017.
Earnings per Share Growth
Q4 earnings per share (basic and diluted) was $0.10, compared to a loss of $0.08 per share for the same period in 2017. The improvement was largely driven by the increase in net income, and slightly offset by the higher weighted average number of common shares outstanding in Q4 2018 compared to 2017 (December 31, 2018 - 31,220,877; December 31, 2017 - 31,190,153) stemming from the exercise of deferred share units and stock options. For the full year, earnings per share (basic and diluted) was $0.55 and $0.54, respectively, which represents an increase of 83% and 80% over the $0.30 per share generated in 2017. The improvement was primarily due to the $9.1 million increase in net income offset by the higher number of weighted average shares outstanding.
2019 Guidance & Outlook
For 2019, management is currently forecasting approximately $374 million in total revenue, with the relative geographic contributions remaining consistent with 2018. Currently, IBI has $384.9 million of work committed and under contract for the next five years. This contracted work translates to approximately 12 months of backlog (calculated based on the current pace of work that the Company has achieved during the 12 months ended December 31, 2018). IBI continues to see an increase in committed work to be delivered in future periods.
Intelligence- In 2019, IBI is planning formal launches of new products across North America, including a series of applications and services in the traveler information space with global product development and management groups established to meet the demand for new technology-enabled products across IBI's core business. Due to the Company's tech pivot, the Intelligence practice will continue to be a focal area for IBI, as the Company is striving for 20% of adjusted EBITDA to come from this practice and has a long-term target to achieve 20% margins.
Buildings- As global urbanization increases demand for building and infrastructure, IBI is ideally positioned to provide services and support for growing new economy tech hubs. In Canada, the major urban cities have experienced high levels of immigration each year, which places significant pressure on the housing market within these centres. Significant urban growth is expected to stem from new economy tech hubs, the majority of which are situated in core markets for IBI.
Infrastructure- In light of recent changes at varying levels of government - particularly in Canada - there has been a slight pause in terms of infrastructure contracts being awarded. However, the Company believes that governments need to continue investing in infrastructure, although the precise timing for which remains less transparent. In Canada, national spending is expected to increase as governments determine how to best address the country's current infrastructure deficit. Technology is a critical component of delivering efficient, safe and sustainable cities and through 2019, IBI intends to continue expanding its suite of products and services that can help clients meet the challenges of the 21 century.
IBI continues to be very excited about the market opportunity in the coming years. The Company's recently reinvigorated core business, centered around the urban environment, provides IBI with the platform for future growth and performance. IBI is unique in the industry with a long-standing Intelligence practice, delivering leading technologies for urban environments. This practice offers high growth and profitable returns in an increasingly technology-focused industry. Technology is a core component of IBI and has been a vital aspect of its business since the Company's doors opened in 1974. With IBI's powerful technology-centred strategy, the Company is poised to lead the sector and capitalize on powerful long-term trends favouring infrastructure investments, increased urbanization and connectivity.
Investor Conference Call
IBI will hold a conference call at 8:30 a.m. (Eastern Time) on March 8, 2019 to discuss these results. A recording of the conference call will be available within 24 hours following the call at the Company's website. The conference call replay will be available until March 22, 2019.
Conference Call Details:
Date: Friday, March 8, 2019
Time: 8:30 a.m. ET
Dial In: North America: 1-888-227-5884
Dial In: Toronto Local / International 1-416-981-9070
Replay: North America: 1-800-558-5253
Replay: Toronto Local / International 1-416-626-4100
Replay Reservation #: 21915386
About IBI Group Inc.
IBI Group Inc. is a globally integrated architecture, planning, engineering, and technology firm with over 2,500 professionals around the world. For more than 40 years, its dedicated professionals have helped clients create livable, sustainable, and advanced urban environments. IBI Group believes that cities must be designed with intelligent systems, sustainable buildings, efficient infrastructure, and a human touch. IBI Group is a lead partner of the Smart Cities Counsel North America. Follow on Twitter @ibigroup and Instagram @ibi_group.
For additional information, please contact:
Stephen Taylor, CFO
IBI Group Inc.
55 St. Clair Avenue West
Toronto, ON M5V 2Y7
Certain statements in this news release may constitute "forward-looking" statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company and its subsidiary entities, including IBI Group Partnership ("IBI Group") or the industry in which they operate, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. When used in this news release, such statements use words such as "may", "will", "expect", "believe", "plan" and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this news release. These forward-looking statements involve a number of risks and uncertainties, including those related to: (i) the Company's ability to maintain profitability and manage its growth; (ii) the Company's reliance on its key professionals; (iii) competition in the industry in which the Company operates; (iv) timely completion by the Company of projects and performance by the Company of its obligations; (v) fixed-price contracts; (vi) the general state of the economy; (vii) risk of future legal proceedings against the Company; (viii) the international operations of the Company; (ix) reduction in the Company's backlog; (x) fluctuations in interest rates; (xi) fluctuations in currency exchange rates; (xii) upfront risk of time invested in participating in consortia bidding on large projects and projects being contracted through private finance initiatives; (xiii) limits under the Company's insurance policies; (xiv) the Company's reliance on distributions from its subsidiary entities and, as a result, its susceptibility to fluctuations in their performance; (xv) unpredictability and volatility in the price of common shares of the Company; (xvi) the degree to which the Company is leveraged and the effect of the restrictive and financial covenants in the Company's credit facilities; (xvii) the possibility that the Company may issue additional common shares diluting existing Shareholders' interests; (xviii) income tax matters. These risk factors are discussed in detail under the heading "Risk Factors" in the Company's Annual Information Form. New risk factors may arise from time to time and it is not possible for management of the Company to predict all of those risk factors or the extent to which any factor or combination of factors may cause actual results, performance or achievements of the Company to be materially different from those contained in forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Although the forward-looking statements contained in this news release are based upon what management believes to be reasonable assumptions, the Company cannot assure investors that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of March 7, 2019.
The factors used to develop revenue forecast in this news release include the total amount of work the Company has signed an agreement with its clients to complete, the timeline in which that work will be completed based on the current pace of work the company achieved over the last 12 months and expects to achieve over the next 12 months. The Company updates these assumptions at each reporting period and adjusts its forward-looking information as necessary.