Calian Group Q4 2023 Earnings Call Transcript

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November 28, 2023

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Calian Group 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jennifer McCaughey, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, Shannon, and good morning, everyone. Thank you for joining us for Calyen's Q4 and fiscal year 2023 conference call. Presenting this morning are Kevin Ford, Chief Executive Officer and Patrick Houston, Chief Financial Officer. As noted on Slide 2, please be advised that certain information discussed today is forward looking and subject to important risks and uncertainties. The results predicted in these statements may be materially different from actual results.

Speaker 1

As a reminder, all amounts are expressed in Canadian dollars except as otherwise With that, let me turn the call over to Kevin.

Speaker 2

Thank you, Jennifer. Good morning, everybody. I'm going to start this morning by providing a Q4 and fiscal year highlights. Clearly after our Q3 results, it was all hands on deck. We issued a call to action to all of our 4 business and corporate services and everyone took this very seriously.

Speaker 2

I'm proud to say that this team delivered and today we are reporting record results in Q4. This demonstrates the resilience of our business Notable highlights in Q4 include the completion of the acquisition of Hawaii Pacific Teleport, The launch of our digital health portfolio, the opening of a wholly owned subsidiary in Belgium, The signing of important contracts with NDA and Shared Services Canada, as well as our 2nd SaaS customer for Nexi, our digital health platform. We also closed a $255,000,000 debt agreement and launched an NCIB program. The strong finish in Q4 led to another record year for Calyen. We've made great progress towards our goal of reaching $1,000,000,000 in revenues And our one Calient strategic plan.

Speaker 2

This performance was the product of multiple initiatives, But above all, it came from our entire team working as one, bringing their commitments and talent to work every day. Subsequent to year end, we made 2 important announcements. First, we appointed Michael Tremblay as President ITCS, We'll join the team on December 1. I am thrilled to welcome Mike to the Cajun family. With his vast experience across auto in North America, He will be instrumental in driving results and growth.

Speaker 2

He is a seasoned, empathetic and deliberate leader. Given his experience at large multinational corporations, his alignment to our people first culture, Coupled with the start up and innovation experience at Investo Ottawa, I know he's the right fit to move our ITCS business in collaboration with our seasoned management team To the next level. 2nd, we announced that we entered into a definitive purchase agreement to acquire Decisive Group, A leader in IT Infrastructure and Cybersecurity Services business in the Ontario region. The addition of DECISV complements and rounds out our current ITCS portfolio in North Their addition means we now have a strong base of managed services, enterprise infrastructure and on demand resources in both Canada And the United States, our footprint in Ottawa, Toronto, Houston, Dallas, Minneapolis and Tampa Well, I was to serve a broad set of customers in both the commercial and government markets as we continue our journey to establish Calyen as a North American leader in IT. I'm pleased to report that we received approval from the competition bureau this week and that we're expecting to close this transaction on December 1.

Speaker 2

Now, I will turn over to Patrick to discuss consolidated results and guidance for fiscal 2024. Patrick?

Speaker 3

Thank you, Kevin. Q4 revenues reached $176,000,000 up 10% compared to the same period last year and represents the highest revenue quarter in our history. This increase was driven by double digit growth in health, learning, advanced tech combined with strong contribution from Hawaii Pacific Telecom For the 1st 2 months of the quarter, we signed $176,000,000 in gross new contracts in the quarter, reflecting a book to bill ratio of 1. Gross margin reached a record 31.7 percent representing the 6th consecutive quarter above the 30% mark. Similarly, adjusted EBITDA reached a record $20,000,000 driven by strong revenue growth, gross margin expansion And the start up benefits from the restructuring plan implemented midway through the quarter.

Speaker 3

Adjusted EBITDA margin stood at 11.6%, Returning to double digit from 8.7% in Q3. A strong Q4 capped off another record breaking year for Talend. Revenues increased 13%, in line with our objective to deliver consistent double digit growth. In fact, I'm proud to say this Year represents the 6th consecutive year of double digit revenue growth. Half this revenue growth was driven by acquisitions, Computex in the first half of the year And HPT in the 4th quarter.

Speaker 3

The other half was driven by double digit organic growth by Advanced Tech, Health and Learning. Gross profit reached $204,000,000 surpassing the $200,000,000 mark for the first time and gross margins continue to expand reaching 31%. This growth was driven by the increase in volume and a favorable revenue mix. Adjusted EBITDA reached $66,000,000 In line with last year, whilst related margin was down to 10% compared to 11.3% last year. These metrics were impacted by lower shipments in the EPS segment in the second half of the year as well as various gross investments we made at the end of FY 2022, which increased operating expenses.

Speaker 3

Recall that we implemented a restructuring plan midway through Q4, which we expected to generate annual savings of approximately $8,000,000 We signed gross new contracts of $580,000,000 and ended the year with a backlog of $1,200,000,000 positioning us well for next year. Net profit in FY 'twenty three increased to $19,000,000 or $1.61 per diluted share compared to $14,000,000 or $1.19 per share for the same period last year. Since adjusted EBITDA was in line with last year, the increase was mainly driven by lower Expenses related to acquisitions, partially offset by restructuring costs and higher depreciation. Adjusted net profit, which isolates the one time impact of Acquisitions related to charges and restructuring costs decreased by 8% to $41,000,000 or $3.45 per share versus $44,000,000 $3.87 per share last year. In FY 2024, we are expecting to pay the year 2 earn out for Symfrant.

Speaker 3

That amount is recorded on our balance sheet. Driven by increased profitability and working capital recapture, we generated cash flow from operations of $57,000,000 in 23, up from $43,000,000 last year. Working capital change in Q4 was $10,000,000 which brought the year performance to positive 3,000,000 This should be in concert with our strong revenue growth of 13%. Going forward, we'll be looking to drive more efficiency in working capital as we continue to Double digit revenue growth. Operating free cash flow was $45,000,000 and represented a 68% conversion rate from adjusted EBITDA.

Speaker 3

We continue to have a disciplined and balanced approach to capital deployment. We invested $68,000,000 in acquisitions, including earn out payments. We continue to pay earn outs, again showing the acquisitions we have made are growing and consistently hitting or exceeding their targets. We made CapEx investments of 8,000,000 The CapEx levels have remained stable despite significant increase in the size of our business over the last few years. We continue investing capital that will help us scale and not inhibit our growth aspirations.

Speaker 3

We also paid dividends of $13,000,000 or $1.12 per share, representing a 29 We continue to see the dividend as an important part of our balanced capital deployment strategy. Our objective is to maintain a payout ratio between 25% 30% of operating free cash flows. We're actively monitoring this and we may reevaluate the size of the dividend in future quarters. Following our Q3 results, we did put in place a normal course issuer bid As we believe our shares were undervalued, we purchased 32,000 shares for cancellation of approximately 2,000,000 Those purchases have continued in Q1 and we plan on monitoring this in the short term. After making all these investments, we ended the year with a solid balance sheet.

Speaker 3

Recall that in July, we extended and expanded our credit facility to committed amount of CAD180 1,000,000 with an accordion taking it up to CAD255 1,000,000 of capacity. This new 3 year term will give us access Additional liquidity to fuel our growth strategy. As of September 30, we had unused debt facility of 142,000,000. This facility combined with the cash on hand, brings us net liquidity of $176,000,000 to pursue our growth. We're able to expand this with our current lending syndicate if need be.

Speaker 3

As of September 30, we had a net debt of $4,000,000 and our net debt to EBITDA ratio was 0.1 times, well below our short term target of 2.5 times. Given our strong cash flow generating ability and liquidity position, we're operating from a position of strength as we continue to execute both our organic growth plans and our M and A strategy. Let's look forward and look at our guidance for FY 2024. We are assuming that the decisive acquisition will close on or around December 1st. And as a result, we expect revenues in the range of $730,000,000 to $790,000,000 for the year ended September 30, 2024.

Speaker 3

At the midpoint, this reflects revenue growth of 15%. This would represent our 7th consecutive year of double digit growth and another record year. In this guidance, the acquisition of HPT and DECISIVE represents approximately 7% acquisitive growth. At the midpoint of the range, organic growth would be Approximately 8%. When taking into account our $438,000,000 of backlog earmarked for FY 2024, our deferred revenues of $32,000,000 in our recurring revenue stream of about $40,000,000 We have almost 2 thirds revenue coverage right out of the gate.

Speaker 3

In terms of profitability, we expect adjusted EBITDA in the range of $83,000,000 to $89,000,000 At the midpoint, it reflects adjusted EBITDA growth of 30%, Significantly outpacing revenue growth as we continue to expand into higher margin businesses and obtain the full year benefit of our restructuring plan. It also implies a margin of 11.3%. With this guidance, we're off to a great start to achieve our $1,000,000,000 revenue target by the end of fiscal 2026. Just a quick note on modeling the Decisive acquisition. As mentioned earlier, we anticipate closing the transaction on December 1st and The majority of their EBITDA contribution will be in our 1st and second fiscal quarters.

Speaker 3

As always, we must make must caution that this guidance is ultimately dependent on the And timing of future contract awards and customer realization of existing contract vehicles. The guidance also implies no major changes to current economic environment, Defense spending and supply chains as well as no increases in interest rates and labor costs. Note that our guidance does not incorporate any additional M and A activity And those already mentioned, and should we close any new opportunities, their contributions would be incremental. Finally, in terms of capital deployment, we expect cash flow of $50,000,000 in Q1 with the acquisition decisive. For the year, earn out payment should be around 3,000,000 We continue to have a robust pipeline of acquisitions and we're looking to close a few acquisitions in FY 2024.

Speaker 3

We expect to maintain our CapEx investments in the range of $9,000,000 to $10,000,000 and our current dividend at $1.12 per share. We believe this guidance reflects the strength of our business and momentum coming off a record quarter. I'll now turn the call back over to Kevin to provide additional color on our outlook for Kevin?

Speaker 2

Thank you, Patrick. I want to echo Patrick's comments on the momentum and strength of our business. And I believe our guidance for next year reflects this. Let me spend a few moments to providing context on FY 2024 for each of our segments and let me start with ITCS. As expected in Q4, results were lower than the same period last year where a disproportionate amount of products were shipped due to the easing of supply chain issues, Coupled with the momentary pause in product deliveries in the resale business we experienced in Q3.

Speaker 2

I was glad to see our performance improve from our previous quarter and I still believe we have room to increase profitability in the upcoming quarters. New contract signings were $87,000,000 in Q4, significantly outpatient revenues, An indication that bookings continue to be healthy and we're well on our way to normalized levels. For the full year, revenues for the ITCS segment were up 9 driven by full year impact of the Computex acquisition in the first half of the year. However, the EBITDA was impacted by lower deliveries in the product resale business in the U. S.

Speaker 2

In the second half of the year and higher operating expenses, which we've addressed in the restructuring plan announced after Q3. Looking forward to FY 2024, profitability should be greatly improved. With the full year benefit from the cost reductions implemented in Q4 and the addition of Decisive, which complements and runs out our current IT and Cyber Solutions portfolio in North America. We're well positioned to extract a lot of synergies over the next 24 months. And under the leadership of Mike, combined with a very strong executive team and dedicated team that sits on ITCS, We have a team in place to do just that.

Speaker 2

Turning to our Health segment, in Q4 the Health segment continued its trend of quarter over quarter growth And posted once again its highest quarterly revenue since the peak demand of the pandemic, driven by increased demand from long standing customers as well as short term health response demand. Similarly, margins were at record highs. We are very proud of the Health segment's overall performance in FY2023. It has successfully backfilled the one time work generated from the pandemic and growth was driven by higher customer demand on long term contracts, New business wins from clinician services and a solid performance from our Pharma Solutions Group. With new gross contract signings of $150,000,000 and solid backlog of $633,000,000 we look forward to another solid year.

Speaker 2

For FY 'twenty four, we see continued strong demand from the Canadian Armed Forces contract, our clinician services network and pharma solutions, We should have surpassed the $200,000,000 revenue mark for the first time in company history. We're also actively looking for acquisitions to build on our current assets. Since we will continue to invest in growth in order to expand our digital product and service offering and in our sales capacity To capitalize on the current momentum, we expect margins to be lower than last year. In Q4, We can and for Advanced Technology segment in Q4, we continued the momentum from the last two quarters and posted our highest ever revenue, gross margin and EBITDA. This growth was driven by strong product sales across all our divisions as well as from the contribution of the HPT acquisition for about 2 months in the quarter.

Speaker 2

Coming out of the blocks HPT is doing better than expected, not just in terms of results, but in terms of helping us make introductions Our Advanced Technologies segment has had a record year in FY2023, both from a top line and profitability standpoint. This growth was driven by growing demand from products including telecom, GNSS Antennas and AgTech as well as the consulting services and growing nuclear market. This clearly demonstrates that our diversification away from lumpy large ground system Over the past several years is yielding positive results. For FY 'twenty four, we see this momentum continuing. We see lots of opportunities in our products across our Space and Terrestrial business with our GNSS antennas expected to have another record year.

Speaker 2

In fact, we are currently having discussions with some of the major global players being incorporated into their platforms. We're also seeing lots of ground system activity going on and exciting to see the future in that segment. With continued strong demand for our products, The full year contribution of HPT, new contract signings of $192,000,000 and a solid backlog of $149,000,000 We expect to easily surpass the $200,000,000 revenue mark next year for Advanced Technologies. EBITDA margin should also increase given the higher margin We are also actively looking for acquisitions to expand and strengthen our portfolio of assets. Turning to our Learning segment.

Speaker 2

In Q4, the top line continued its year over year growth momentum displayed in the last few years, Driven by strong demand for military training with existing Canadian customers. We also continue to see demand for new products and technologies for NATO customers due to geopolitical issues We believe that this will take longer to get to fruition. We are proud of the progress we've made for the full year. In FY2023, revenue surpassed the $100,000,000 mark for the first time. This 16% growth was all organic and was primarily driven by strong demand with existing customers in Canada.

Speaker 2

However, EBITDA margins were under pressure this year as we continue to invest for future growth. Excluding investment in research and development, Our EBITDA margins would have been above 18%. In FY24, we expect the space of organic growth to slow down As we don't control government procurement decisions, in light of this, we will look for opportunities globally, focus on developing customers on the commercial side and look for acquisitions that will complement our diversification and innovation strategy. We will continue to invest in growth As we believe the global defense market will yield future opportunities. However, this is a long term play for Cayan and should be viewed as a marathon and not a sprint.

Speaker 2

In conclusion, as I reflect on our fiscal 2023 and our look forward to 2024, I see many positive indicators. Our diversification involving products business helps us post helped us post a record Q4. Strong signings and organic revenue momentum reinforces And finally, our capital allocation strategy is working With strong early returns from HBT, the forthcoming acquisition of DECISV and a robust pipeline of targets going into the year. There's one important point that I'd like to make about our financial results going forward. We anticipate that we'll see more fluctuations in our quarterly results.

Speaker 2

This greater variability is generated from 3 main sources. Number 1, our revenue mix, Our revenue mix which is less dependent on long term government contracts and more exposed to commercial customers and global defense which are characterized with greater demand variability. And 3rd, the global macro environment which is increasingly uncertain. Having said this, we are confident in our annual guidance, but we may experience quarterly fluctuations. Keep in mind that 1 quarter doesn't make a year.

Speaker 2

Therefore, assess Kalyan with a longer term view in mind. As we enter into year 1 of our 3 year strategic plan called 1 Vision, One purpose, 1 counting 2026. I'm excited as we now have a very clear roadmap for $1,000,000,000 in revenues. The combination of M and A and organic growth coupled with our dedicated and talented team, continued investment in innovation across all that we do, The globalization of the company and services and products that are very relevant in today's challenging world We'll position us to continue to stay in our track record as a double digit profitable growth company. On that note, I'd like to thank our staff for their commitment to dedication.

Speaker 2

They really do make all the difference. I also want to thank our customers for their loyalty, Our suppliers for the collaboration and our shareholders for the continued support. And with that, Shannon, I'd like to now open the call to questions.

Operator

Thank you. Our first question comes from the line of Maxim Matyshynske with RBC Capital Markets. Your line is now open.

Speaker 4

Yes. Hi, good morning. I want to start on the kind of 3 year outlook. I'm wondering what gives you the I guess, what you're Seeing that gives you the confidence to increase your top line growth targets from 10%, 5% organic, 5% acquisitive to now 15% And growth rate over the next 3 years, has there been any change to the M and A pipeline that you're seeing or the macroeconomic environment you're seeing or is it just kind of robust Performance across your segments?

Speaker 3

Because we could have been a Max. I think the balance we worked hard to put ourselves in a position where we have the balance I think, certainly we're seeing a strong pipeline coming out of the gate. We're optimistic between the acquisitions we've made and the pipeline We have, I think we can continue our trend of being a strong capital allocator with multiple deals for years. So I think the time we're seeing so far are positive on net

Speaker 2

Yes, it's Kevin and Max, a good question. The confidence really comes from my view that the investment we've been making in our businesses, I think gives us the confidence on that single digit organic growth profile. We have more products, more services, more innovation across all that we do. And as Patrick said, the M and A pipeline across 4 very dispersed segments is very strong. So when you look at that journey to $1,000,000,000 I think you look at Continued single digit organic growth and then pumping up our M and A engine.

Speaker 2

We're investing in that this year. We continue to strengthen under Patrick's leadership. So we're going to put more capacity into that M and A engine to make sure that we continue to acquire good assets for our long term growth objectives.

Speaker 4

Just switching maybe to the segments themselves. In Advanced Technologies, I mean, you mentioned the backlog Is unwinding from ongoing easing of supply chains. Should we think of the strength right now As a pull forward of demand that you previously expected to see maybe in 2024 or later or otherwise, how should we think about maybe the cadence of Revenues within Advanced Technologies in the coming quarters?

Speaker 3

Yes, it certainly has some benefit. I think it was more orders we would Expected to ship earlier in the year and the delays resulted in later shipments. We were glad to get that product into our customers' hands. I think going forward, I mean, as Kevin's point, I think, Advanced Technologies is still optimistic in terms of having another record year next I think the acquisition of HPT provides kind of additional horsepower there as well as the comments we made on GNSS and NSF, seeing Tremendous traction there. So I think those 2 should be the strongest one going into next year.

Speaker 4

And just finally for me on ITCS. The ITCS, can you maybe provide some more color on The decisive acquisition in terms of kind of the potential synergies you're looking for, it seems certainly on the surface there's possibilities for Cost and revenue synergies there. And I guess maybe as an add on to that, is there any dynamics or trends to call out Within that segment in Q4 compared to the first half of fiscal twenty twenty three, I know that there's volatility in the Product revenue, but the services revenue in ITCS was kind of still below Q1 and Q2 levels. I'm just wondering if there's any dynamics or chance to call out there?

Speaker 2

Good question. I think for me, 1st and foremost, let me just talk about the talent. I've met the decisive team a few times And we have some incredible talent that's going to complement the talent that we've brought into Canin through Concatx, the iSecurity, DataSoft So number 1, one of the things just capacity and talent with regard to our managed services or cyber services capability both in there Right across North America. So number 1, talent and capacity and just ability to continue to scale as we see a increased demand in their cyber business. The second piece is the cyber piece itself.

Speaker 2

The team continues we should continue to see Strong interest in our cyber capability. We continue to win our share of cyber specifically in the healthcare sector. The team has been working incredibly hard both on cyber preparedness, cyber incident response and again with DECISIVE, we're We're confident we can leverage their skill set as well to strengthen that and expand in our North American presence there for sure. The third is the government business. A lot of we talked about governments and as since they go to Calion, as you know, Calion was heavily weighted in governments and we're now about fifty-fifty commercial and government.

Speaker 2

That being said, we still see a lot of opportunity within government and Decisive has a very strong footprint, especially with some of the secure accounts where we have not had a Focus outside of defense. So they're going to help us diversify within our government business in Canada. And again, I think their brand, you probably don't know that the brand here is very strong. So we're expecting it to help our government business So the combination of our government business, the diversification of our North American presence with regard to their capacity supporting our Current teams and then just getting stronger in our managed services capability, I think it's going to be a great addition to our IPCS team.

Speaker 4

Great. I'll pass it by. Thanks.

Speaker 2

Okay. Thanks so much.

Operator

Thank you. Our next question comes from the line of Benoit Poirier with Desjardins. Your line is now open.

Speaker 5

Yes. Good morning, everyone. Could you provide an update on the status of the restructuring plan? Just wondering whether the restructuring is fully complete or can we expect something residual beyond the 2,600,000 that was took in the quarter?

Speaker 3

No, Benoit, it's pretty much complete now. Obviously, we've Taking an estimate Q3 given we've done it late in the quarter, but now it's pretty much done.

Speaker 5

Okay. And with respect to the guidance for the next fiscal year, could you maybe provide some puts and takes that Was part of the guidance and maybe the assumptions behind the latest acquisition that this is in terms of EBITDA and earn outs?

Speaker 3

Yes. We're assuming the acquisition of Decisive closes on around December 1. We've gotten the approval, as Kevin mentioned, from the Competition Bureau, so we expect that to close or shorten. I think our contribution will be certainly strong here in our Q1 and Q2, Although Q1 only for a month. And I think that certainly there'll be a strong future that we think going into the guidance for next year.

Speaker 5

Okay. And in the quarter, you announced a partnership with MDA on the Canadarm III development. Can you speak more About the opportunity and its impact on the Advanced Tech segment?

Speaker 2

Absolutely, thanks, Kamal. So, MDA continues to be A strong partner for us. We're working with them on a bunch of different initiatives and we're happy to get this mandate from the NDA team. It's working really in the testing of certain elements of the arm that the team will be doing out of Saskatoon. It's some of the work we did actually in Canadarm 2, we were able To re secure that same scope for this next for this next for this next for this next for development.

Speaker 2

So that will be based out of our team in Saskatoon. And again, lots of great exciting things happening in the space economy and we're happy to participate in it. This is a good sign of I think there's going to be some exciting announcements as you go for the next couple of years as space becomes totally relevant again both in defense, public And the journey to the moon as you see by the Artemis mission. So, yes, so it's basically really working with them on the Catadarm III along with testing of that arm and then Basically certain elements of engineering that we'll be doing as we've done in Canada.

Speaker 5

Okay. Just in terms of capital deployment, you've been active in In terms of buying back shares during the quarter, although you completed 2 acquisition and you also mentioned that you have a strong Pipeline of M and A going forward, any thoughts about the buyback going forward and especially in light of the more Tractive valuation recently?

Speaker 3

Yes, we continue to buy back shares in Q1. I mean, our major still continues From a capital deployment perspective, it continues to be the M and A. I mean, we're optimistic about the deals we've closed and the pipeline that we have, and that's where we want to spend the capital. I think that's going to be the nature, although we'll continue to maintain our NCIB and monitor and adjust accordingly. But I think our preference is to put As much capital towards the M and A as possible going into next year.

Speaker 5

Okay. Thank you very much for

Speaker 2

the time.

Speaker 3

Thanks, Benoit. Thank you, Benoit.

Operator

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Kevin Ford for closing remarks.

Speaker 2

Okay. Thank you, Shannon, for participating today's call. Always appreciated. I'd like to mention in my closing comments We will be hosting an Investor Day in Toronto on February 15. So please save that date.

Speaker 2

More details will be Shared in the coming weeks and it's a great chance for us to talk about our 12026 strategy and our thoughts moving forward on the growth of So I hope you can attend again February 15 in Toronto. So on that note, I'd like to thank each of you for attending and we look forward to providing you with an update on our next quarterly call. And with that, Shannon, we conclude the call.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Calian Group Q4 2023
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