Calian Group Q2 2024 Earnings Call Transcript

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Provided by Quartr
May 15, 2024

There are 8 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Kelly Group Q2 2024 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 over to your speaker, Jennifer McCaughey, Director of Investor Relations. Please go ahead.

Operator

Thank you, Tanya, and good morning, everyone. Thank you for joining us for Talion's Q2 2024 conference call. Presenting this morning are Kevin Ford, Chief Executive Officer and Patrick Houston, Chief Financial Officer. They will present financial highlights on our consolidated performance and key business highlights. As noted on Slide 2, please be advised that certain information discussed today is forward looking and subject to important risks and uncertainties.

Operator

The results predicted in these statements may be materially different from actual results. As a reminder, all amounts are expressed in Canadian dollars, except as otherwise specified. With that, let me turn the call over to Kevin.

Speaker 1

Thank you, Jennifer, and good morning, everybody. We closed the first half of the year with a record quarter. I consider this one one of the best quarters in company history and shows we continue to reach new levels as we execute our strategic plan. Q2 revenues, gross margin and adjusted EBITDA all hit historical highs. Revenues surpassed the $200,000,000 mark for the first time in company history.

Speaker 1

Gross margins are approaching 35% and adjusted EBITDA increased to over 50%. Let me repeat that. EBITDA has increased 50% as compared to 1 year ago. That is quite an accomplishment. Not only are we growing profitably, but we're doing so at record levels.

Speaker 1

These results are a testament to the strength of our business model and the successful start of our 3 year strategic plan, 1 calendar in 2026. In fact, 6 months into our plan, revenues were up 20% with strong contributions from our organic engine up 7% and our M and A agenda is delivering 13% acquisitive growth. Gross margins for the first half are about 33% and adjusted EBITDA margin is close to 12%. Let me speak to a few key highlights we had in Q2 with regards to our M and A agenda, contract signings and key management additions. With regards to our M and A agenda, we completed the acquisition of the nuclear assets from MDA in March, which will add new capability and services to our existing nuclear business in our Advanced Technology segment.

Speaker 1

Our nuclear team is growing with new projects and opportunities across Canada and globally. And we are thrilled to accelerate our growth through this powerful addition to our team. Last week, we announced the acquisition of Mabway, the leading military training provider for the United Kingdom. This coupled with our existing 25 year Canadian military training experience makes us a leader in this domain in Canada, UK and NATO. We're delighted to be acquiring a company that's such a strong offering complements and expands our current solutions and our learning segments.

Speaker 1

This acquisition presents a great opportunity to leverage the capabilities of both companies to provide a more comprehensive range of solutions to military and defense customers globally. And with the UK announcing their intention to increase defense spending to 2.5 percent of GDP by 2,030, Canyon will be well positioned as a strategic partner supporting their operational readiness. If you attended our Investor Day, we said we're going to accelerate our M and A pace while continuing to be an excellent supporter of capital. We're doing exactly that. We've acquired 3 companies in the first half of this year and 4 companies in the last 12 months.

Speaker 1

While we are increasing our remaining pace, we haven't lost sight of the importance of organic growth. We signed $162,000,000 of new contracts in the quarter. I want to highlight 3 initiatives that are perfect examples of our cross selling between our segments, customer retention and increasing our customer footprint. First, in learning, we signed a contract for a new military medical training program with the Canadian Armed Forces valued at $17,000,000 for 3 years with an option to extend for 1 year, potentially increasing the total value to 23,000,000 dollars This is an excellent cross selling example between our Health and Learning segments. I am convinced we bring a unique capability to customers and there aren't many companies that are able to bring these capabilities to bear and match our proven track record.

Speaker 1

In fact, we are starting to unlock the value of cross selling by demonstrating our full capabilities across customer segments. Verticals like defense, healthcare and cyber present opportunities for us and bring unique solutions that can't be matched by our competitors. We're currently having some very exciting discussions with potential customers for other cross selling opportunities, so stay tuned on that front. We have built a backlog of over $1,000,000,000 by retaining our existing customers. In learning, we renewed a $10,000,000 contract for military training with the Canadian Defense Academy and Military Personal Generation Group.

Speaker 1

We re won this contract through a competitive bid process and we're excited and honored to continue our partnership with CDA and MPG in supporting the women and men of the Canadian Armed Forces. We continue to invest in people and leading in technology that makes us the ideal military partner in Canada and worldwide. In ITCS, we renewed and increased our footprint with a key customer. We secured a 6 year $90,000,000 contract with General Dynamics for IT and software development services. This win continues our 5 year partnership in support of C4ISR with General Dynamics and D and D with an expanded scope and incremental value to the previous contract.

Speaker 1

This win is a testament to our strong customer relationships and quality of service. Finally, on the people front, in early April, we welcomed Valerie Trevalin as the new President for Advanced Technologies. She brings extensive leadership experience across GNSS, Telecom, Space, Cybersecurity and Digital Services. With her global perspective and passion for leveraging technology, she is well positioned to lead our AT business unit into a new era of innovation and empower our teams worldwide to reach their full potential. I'd like to take a moment to thank Pat Sarra, the outgoing President, who played a pivotal role in shaping the success of the Advanced Technologies segment.

Speaker 1

I am immensely grateful for his 39 years of dedication, sage counsel and commitment to the business and wish him nothing but the best in his retirement. Given our strong Q2 results, our confident outlook for the balance of the year and recently closed acquisitions, we're increasing our fiscal 2024 guidance, which puts us on track to deliver a 7th consecutive year of double digit of profitable growth. The combination of organic growth, 3 recent acquisitions, a strong balance sheet position us well to meet our $1,000,000,000 revenue target by the end of fiscal year 2020 6. So with that, I'd like to now turn over to Patrick to discuss consolidated results guidance for fiscal 2024. Patrick?

Speaker 2

Thank you, Kevin. Q2 revenues eclipsed $200,000,000 for the first time ever. This is up 19% compared to the same period last year and represents the highest quarterly revenue in the company's history. Acquisitive growth was 16% and was generated by strong performance from Hawaii Pacific Telekort, Decisive and 1 month of contribution from the nuclear asset acquired from NDA. Organic growth was 3% and led by strong double digit growth in our Health segment.

Speaker 2

Gross margins reached a record 34.8%. This is now the 8th straight quarter above 30%. This consistent performance demonstrates we can sustain 30% plus gross margins going forward. Adjusted EBITDA increased over 50 percent to $25,700,000 driven by revenue growth, margin expansion, cost efficiencies and strong performance from our recent acquisitions. Adjusted EBITDA margin reached a record 12.8%, up from 10% last year.

Speaker 2

In Q2, we signed $162,000,000 in gross new contracts and ended the quarter with a backlog of $1,100,000,000 positioning us well for the second half of the year and into FY 2025. Net profit in Q2 increased to $4,900,000 or $0.41 per diluted share compared to $4,500,000 or $0.38 per diluted share for the same period last year. The increase was mainly driven by higher adjusted EBITDA, partially offset by amortization in interest expenses related to acquisitions, as well as one time restructuring charges linked to realignment of management. We generated cash flow from operations of $36,000,000 in Q2, up from $6,000,000 last year, and we recaptured $15,000,000 of working capital in the quarter, while we used working capital in Q2 of last year. Working capital performance was strong in Q2, led by strong accounts receivables and collections.

Speaker 2

We expect some of this will reverse in Q3. For the total year, we expect our working capital to be neutral to slightly negative. That being said, our efforts to find more working capital efficiency as we grow is working. In FY 2020, we required $92,000,000 in working capital to generate just over $400,000,000 in revenue. At the end of last year, we reduced this to 14% and at the end of Q2, we now stand at 9%.

Speaker 2

Operating free cash flow was up 67 percent to $18,000,000 in Q2 and represented a 69% conversion rate from adjusted EBITDA. Looking at this through the lens of a shareholder, our operating free cash flow per share increased 66% to $1.51 per share and year to date stands at $2.71 In the first half of this year, we've already generated almost 75% of free cash flow per share of what we did all of last year. As Kevin mentioned, our capital deployment agenda is accelerating. In the second quarter, we invested in our business with acquisition of the nuclear assets of NDA for $8,000,000 as well as made the year to earn out payment for Symfront of $3,000,000 for a total of $11,000,000 of deployed. Also made CapEx investments of $3,000,000 Our CapEx levels have remained stable despite significant increase in the size of our business over the last few years.

Speaker 2

We also provided a return to shareholders in the forms of dividends. We paid dividends of $3,000,000 or $0.28 per share, representing 19% of operating free cash flows. In Q2, we paused our share repurchase program as our capital allocation priorities continue to be our M and A agenda. However, given the current level of our share price, we will consider resuming our share buyback program in the coming days as we believe we are undervalued. We will continue to moderate this in the context of the pace of our M and A agenda and debt leverage.

Speaker 2

Let's take a look at the balance sheet and liquidity capacity. Strong operating and working capital performance means our balance sheet and leverage position is in great shape. As at March 31, we had drawn $69,000,000 on our debt facility. During Q2, we repaid $25,000,000 of that. We ended the quarter with net debt of $23,000,000 representing a net debt to adjusted EBITDA ratio of 0.3 times.

Speaker 2

Pro form a including the acquisition of Mabway, which we announced after the quarter end, we expect to have a leverage ratio of approximately 0.8 times. This is well below our target of 2.5 times, meaning we have ample capacity on the balance sheet to complement our strong cash flow performance. Let's take a look at our guidance for FY 2024. Given our strong first half, our confidence for the balance of the year and the impact of recent acquisitions, we are increasing our guidance today. We now expect revenues in the range of $750,000,000 to $810,000,000 for the year.

Speaker 2

At the midpoint, this reflects revenue growth of 18%. This is driven from contributions from both our organic and acquisitive AgenTus. In this guidance, the acquisition of HBT, Decisive and Nuclear assets of NDA for 7 months and Mabway 4.5 months represents approximately 12% acquisitive growth over FY2023. At the midpoint of the range, organic growth would represent approximately 6%. When taking into account the revenues of $380,000,000 for the first half of the year and our $265,000,000 of backlog earmarked for the remainder of the year, we have 83% of our FY 'twenty four guidance of revenue covered at the midpoint.

Speaker 2

In terms of profitability, we expect adjusted EBITDA in the range of $86,000,000 to 92,000,000 dollars Note that this includes approximately $2,000,000 of transaction expenses related to the 3 acquisitions we've announced this year. At the midpoint, it reflects adjusted EBITDA growth of 35%, significantly outpacing revenue growth as we continue to expand into higher margin businesses. This guidance reflects our base business performing in line with the guidance given at the outset of the year and incremental contributions from the 2 strong acquisitions net of transaction expenses. It also implies a margin of 11.4%. With this guidance, we are on track to achieve another record year in FY 2024 and we're off to a great start to achieve our $1,000,000,000 revenue target by the end of FY26.

Speaker 2

As a reminder, we are expected to experience increased fluctuations on our quarterly results due to revenue mix, which is more highly skewed towards products where the timing of deliveries comes into play, as well as commercial customers characterized by greater demand variability. Looking at the second half, we see a stronger Q4 as Q3 will have partial contribution from the acquisition of MAPWAY and the associated transaction expenses will be recognized in Q3. Our Q2 results were strong due to positive timing and delivery dynamics. We continue to aim for the middle of our guidance range. As always, we must caution that this guidance is ultimately dependent on the extent and timing of future contract awards and customer realization of existing contract vehicles.

Speaker 2

The guidance also implies no major changes to current economic environment, defense spending, supply chains, as well as no major increases interest rates and labor costs. Note that our guidance does not incorporate any additional M and A and any of them would be incremental to the numbers we presented today. Finally, in terms of capital deployment for the year, earn out payments for the SymFront $3,000,000 were paid in Q2. We don't expect any other earn out payments for the balance of this year. Expect Q3 to have cash outflow of approximately $32,000,000 for the acquisition of Mabway, and we expect our CapEx investments in the range of $10,000,000 to $11,000,000 for the year and our current dividend at $1.12 per share.

Speaker 2

We believe the guidance reflects the strength of our business and momentum coming off a very strong first half. I'll now turn the call back over to Kevin for his closing remarks.

Speaker 1

Thank you, Patrick. So in closing, I'd like to leave you with a few key takeaways today. The first is our M and A agenda. Since the launch of our 3 year plan at the beginning of FY 2024, we have completed 3 acquisitions in 3 different segments. DECISIVE and ITCS, the nuclear assets from MDA and Advanced Technologies and MADWAY and Learning.

Speaker 1

At our Investor Day, we set out an ambitious goal of deploying up to $300,000,000 on our M and A agenda. After 7 months, we have already deployed 1 third of that target. We were looking to get to over $200,000,000 of revenue and $36,000,000 of EBITDA from that deployment. After 7 months, we've achieved 36% of our revenue target and 50% of our EBITDA target and we're not stopping. Our recent acquisitions are performing very well.

Speaker 1

We have the balance sheet capacity and a team poised to execute more accretive M and A. This strategy of disciplined capital deployment is delivering significant value. The second is margin expansion. Over the past 14 quarters, our gross margins have progressed from 23% to 35% and our adjusted EBITDA margins from 9% to close to 13%. We believe gross margins above 30% are sustainable, given we have achieved this over the past 8 quarters.

Speaker 1

We have been successful at expanding both our gross margins and adjusted EBITDA margins over the past few years, as we are bringing more and more higher value solutions to our customers through disciplined M and A and investments in innovation. Our customers are valuing those solutions these solutions and are willing to pay for them, which translates into higher margins. Based on the midpoint of our FY24 guidance, our adjusted EBITDA margin target is 11.4%. Some quarters will be above that, some quarters will be below that based on revenue mix and seasonality. Our objective remains to be 12.5 percent EBITDA margins by the end of FY twenty twenty six as applied by our 1, 3 year strategic plan.

Speaker 1

The third is talent. We are bolstering our bench strength. Recall that over the past 18 months we have welcomed 3 new segment presidents, namely Valerie Trevins in AT, Mike Tremblay in ITCS and Derek Clark in Health. I'm excited by the new energy and thought process coming into the company. Their experience of bringing solutions and scale to customers around the globe, while working hand in hand with the seasoned management team of corporate will be key to take the company to the next level.

Speaker 1

In closing, I want to leave you with my thoughts on our share price. We have made tremendous progress in the first half of the year with another record performance. We have completed 3 strategic acquisitions since the beginning of fiscal 2024, which accelerates our growth path. In addition, we are starting to unlock cross selling across our business segments and we're diversifying globally and are well capitalized to execute our strategic plan. We are a company with over 20 years of profitable execution on its way to its 7th consecutive record year and right now we are trading at less than one time revenues.

Speaker 1

We strongly believe that we're undervalued and present a great investment opportunity. As Patrick mentioned, given our current valuation, we'll be monitoring this and can consider resuming our share buyback activity. On that note, I want to thank our staff for their commitments and dedication. They do make all the difference. And I also want to thank our customers for their loyalty, our suppliers for their collaboration and our shareholders for their continued support.

Speaker 1

And with that, Tanya, I'd like to now open up the call

Operator

And our first question will come from Doug Taylor of Canaccord. Your line is open.

Speaker 3

Yes. Thank you and good morning and congrats on a strong second quarter. I wanted to ask a question about the defense end market. It remains a pretty substantial piece of your business. I think you last quoted it at 30% or 40% of your overall consolidated business being tied to that and maybe that increases a little bit with Mabway.

Speaker 3

Looking through the defense part of the last Canadian budget and commentary from several other NATO nations, you see a lot of discussion about significantly increasing defense budgets. And yet we have yet to see that really translate into organic growth for Kalian. So I wonder if you could help us think about when you'd expect to see some of that translate to bookings and ultimately revenue expansion for the consolidated Caelian enterprise?

Speaker 1

Yes, Doug, thanks for the question. And it's a good one. I think the I've mentioned on previous calls, I'm trying to make sure working with our analysts in the market to understand the dynamics of defense spending from time announcements are made on increases to the reality of that actually hitting the street. So we're still seeing a bit of that with just regard to the procurement process, the delays, the time it takes to go from requirement to RFP to close. So I think in the short term, in the next 12 months, it will be moderately good.

Speaker 1

I think over the long term, it's going to be very good. We see that even in Canada right now where the Liberal government announced increase in defense spending and in the short term is actually targeting some cuts in defense in certain areas as they do with some of the economic realities of budgets. So I think

Speaker 4

there's going to be a mix in

Speaker 1

the short term, but long term, we're very confident The global support and I think any government in Canada is going to continue to support increasing defense spending. I think the NATO countries, I think the UK have all announced their commitments to increase defense spending. So I see it as more short term headwinds, Doug. In the long term, I think it's going to be very strong growth. So I'd say 12 to 18 months for sure at the latest.

Speaker 1

And in the short term now with Madway on board, our continued pace in Europe and NATO, as well as I still see a lot of good opportunities defense. I think it will be positive. It's just we're just going to have to ride through as they get organized to deploy that capital.

Speaker 3

Okay. Thank you for that. Let me just ask one more question here about the guidance. First, maybe I'll just get you to break apart what you see the change in guidance from what you see has changed to the organic business prior to Mabway and MDA? What you'd consider from the addition of that?

Speaker 3

And then what other one time costs related to that M and A are factored into the guidance? I think it would help everyone understand what we should read from the increase in guidance overall. And then a second question around the overall guidance profile. I think you said you got 83% of the remaining revenue for this year coming out of backlog. So I guess I'm a bit surprised that the range halfway through the year is still as wide as $60,000,000 And maybe you could speak to the elements that factor into achieving the bottom towards the top end of the range?

Speaker 3

Thank you for that.

Speaker 2

Hey, good morning, Doug. Yes, I think the way to read the guidance increase is, I think for the base business excluding the last 2 M and A deals we've done, I think we're on track for the guidance that we kind of put at the outset of the year. So I think the existing business is performing. Obviously, we had a very strong quarter this quarter, got opportunity to pull some of that demand for us. We did.

Speaker 2

So I think that was a positive. So I think that business is performing on track and that business is up 30% year over year. So I think that translates into strong performance. The 2 recent acquisitions we've done obviously will have partial contribution, but we've got the transaction expenses related. So I think those are probably going to contribute about $3,000,000 for the balance of this year, but obviously much more significant contribution going into next year for both those acquisitions.

Speaker 2

I think with respect to the range, yes, we do have 85% booked. I think Kevin spoke to some of the defense realities here in the very short term. So I think we're just trying to be realistic there. But obviously, once those get settled out here in the next 3 months, then we should be able to pretty tighten up that range and nail down where we're going to be. But we always try to shoot for the middle of the range and I think that's how people should read the guidance that we put out today.

Speaker 1

Thank you. Thanks, Doug.

Operator

One moment for our next question. And our next question will be coming from Rob Goff of Echelon Capital Markets. Your line is open.

Speaker 4

Good morning and congratulations on a very good quarter guys.

Speaker 1

Thanks, Rod. Appreciate that.

Speaker 4

And my question is a bit of a follow-up on Doug's. In terms of the NATO opportunities there, do you see Mavway pursuing those opportunities on a direct to contract or partner?

Speaker 1

Yes, good question. I think right now what I'm excited about and I was recently visiting NATO and the UK military. What I'm excited about is our presence in brand is growing stronger in Europe and the UK, just number 1. Number 2 is that we continue to add portfolio to contracts to our portfolio with regards to whether it's NATO, specific European countries and now the UK. So combined we see geographically our footprint is obviously stronger with the Mad Boy acquisition.

Speaker 1

We've incorporated in Belgium now. We're looking at basically the next 12 months continuing to expand our geographic footprint and our physical presence in Europe and the UK and clearly with Mabway, we've got a good start. So as far as the pursuit, the way we're organized, Rob, is that that team, our training team in Europe is a coordinated team and we will definitely bid whatever capabilities required to win and deliver in whatever country in that region. And obviously with MAPWAY now, our presence is just that much stronger to do exactly that.

Speaker 4

Very good. And if I could turn to the Health for a second with a follow-up, Can you talk to what is driving that growth in the sustainability of the 20% plus organic growth?

Speaker 1

Yes, absolutely. I think right now we're seeing with the health team a few tailwinds for sure. Number 1 is our the demand on our current defense contract continues to be very high. Despite what I said earlier, we're seeing in the health segment that that pace and capacity that the department needs to support their health agenda is not weighing in any way and if anything, it's increased. So we're seeing very strong demand there.

Speaker 1

And it's not just the demand frankly, it's our team is stepping up to the demand and delivering. It's not easy. And they're doing a great job at that. We continue to see good pickup on our psychological services. We're seeing more customers come on board now as more and more people are taking and leveraging our national psychological footprint, which I think is very exciting.

Speaker 1

So I think even in the mental health services that's growing. And we're seeing opportunities now in our digital footprint, even though it's still a relatively small part of our health business. There's some exciting discussions happening I think with regard to our digital health platforms getting more and more visibility out there. And as Calian now being able to bring not only the digital footprint, but also the services capability nationally combined with our program delivery record of very complex programs. I think that's the tailwinds we're seeing and driving that organic growth in healthcare.

Speaker 1

Very good. Thank you. Thanks, Will. Appreciate the question.

Operator

And our next question comes from Paul Treiber of RBC Capital Markets. Your line is open.

Speaker 5

Thanks very much and good morning. Just wanted to follow-up on the 20 4 guidance. The question about the change in organic growth, the outlook there, I think you're looking for 6% now and it's down from 8% previously. What

Operator

changed what

Speaker 5

do you sort of see as the incremental headwind or reason for the slightly lower organic growth outlook?

Speaker 2

Yes. I don't think there's anything particularly concerning there. Like I think we're just tuning it up. I think from an EBITDA perspective, we're still on track. So I think the margin profile slightly better on the revenue profile we're putting forward.

Speaker 2

So I think Kevin spoke to the defense spending a bit in the very short term. So I think we're just being a bit cautious there. But again, going into next year and longer term, I think that's still going to be a strong sector for us. So I think that's really what you can point to.

Speaker 1

Yes. And it's Kevin. I don't want anyone reading in anywhere some concern on that longer term. We've been as per Investor Day averaging at 7%, 8% growth over the last couple of years. I don't think that's changing.

Speaker 1

As Patrick said, we're just being cautious just on the sense of understanding short term defense posture in Canada as they look at the longer term budget increases. Short term right now we're seeing some slowdown in certain areas, but even then not convinced it's going to be for the full year. So we're just we're being conservative in our guidance estimates until we get better clarification from the department on expectations for the remainder of this year.

Speaker 5

Thanks. That's good to understand. The just trying to like the ITCS segment, revenue was quite strong there. I think it's stemming from the acquisition of the sites of the and it looks like the contribution was higher than the implied run rate. Was there anything unusual about this quarter?

Speaker 5

Is the seasonality that we should take into account? Or and is this sort of the new sustainable run rate of revenue? Or was there was it really just something unusual in the quarter?

Speaker 2

Yes. Decisive has been to your point has been ahead of pace, very strong contribution out of the gate for them. Q2 is their biggest quarter, so there is some seasonality specifically with government customers and government year end. So I think this is seasonally their biggest quarters. So I wouldn't see it as a run rate, but I think this is a recurring thing every year now in our ATS business due to the acquisition decisive.

Speaker 2

I think the rest of the business was flat from last year, which I think, but up 10% from kind of Q3, Q4 last year. So I think we're starting to see some return of demand there on the existing business. So I think overall it was a good quarter for ITCS.

Speaker 4

And then just lastly if I

Speaker 5

may, just in terms of your 3 year outlook, when you look at the valuations that you paid this year for acquisitions is below, I think the 3 year target called to deploy capital at 6 to 8 times EBITDA and you're doing better than that. Is there anything what's driving the better prices this year? And then how do you think about it looking forward? Do you still want to try to maintain these lower purchase prices? Or do you think that gives you opportunity to potentially move up if you see the right candidate?

Speaker 2

It really depends on the deal, Paul. Like I think, we try to do everyone the best deal we can and buy great companies at a good price and then set them up to grow. So I think it's more deal dependent. We are looking at larger transactions. I think those larger transactions will bring higher prices.

Speaker 2

It's just the reality of business that scale with a proven track record. But we keep challenging ourselves to up the pace here on capital deployment. We've done 4 deals in 12 months. And as Kevin said, we're not stopping. So when we look at that target for that we set out at the Investor Day, I think we're well on track for that and we can hit that number likely overachieved.

Speaker 2

So I think we're things are working well in M and A and we still got a solid pipeline that targets here.

Speaker 1

And I think from my viewpoint, thanks, I think for me as well, Paul, the one thing that is consistent we're seeing is that companies that are valuing their long term post acquisition tenure with regard to a company that's going to take care of their stock, companies that are well financially strong, companies that are doing it as a long term investment in their both their employees and their customers. I'm not sure we're always the highest price frankly that are being offered, but when people understand the overall value and have a passion to make sure their team is taken care of and their customers are taken care of, that's when we're continuing to see good value. And I think those targets still exist out there that people are looking for good homes for their companies.

Speaker 4

Thanks for taking the questions.

Speaker 1

Thanks, Paul.

Operator

And one moment for our next question. Our next question will be coming from Scott Fletcher of CIBC. Your line is open.

Speaker 6

Good morning. Good morning. I wanted to ask a question on the learnings bookings. They had bookings there have not been strong in the last number of quarters, but they did seem to sort of perform better this quarter. Was there anything should we read into that, that learnings bookings can improve going forward?

Speaker 6

I think that sort of maybe doesn't match with the commentary on the near term?

Speaker 1

I would say, yes, good question. And I think for me on the learning side, what I want to condition everyone is that learning and defense is a long term game. It's not a quarter by quarter game. And what you'll see is definitely some variability on learning signings. We have a good backlog there.

Speaker 1

And it's characterized, especially in some of the newer countries, they do 100 of 1,000 of dollars initially to get going on an exercise and then they visually say, we're going to hunt rabbits while we chase the elephants and we're visually say, we're going to hunt rabbits while we chase the elephants. And right now, you're going to see that in learning. So stronger quarters and signings, the science, but we're just going to continue to I think to grow that backlog. We do have a strong pipeline of opportunities both in Canada, Europe, NATO and now with Mabway. So we're hoping the pace increases over the next 12 months, but expect some variability in our learning segment just due to the nature of that business, especially in

Speaker 4

the defense global defense area.

Speaker 6

Yes, that makes sense. And then another segment question on the ITCS. Some of the peers in the IT services space have sort of seen commented on less bullish outlook on demand recovering in the back half of the year. Are you seeing similar sort of demand headwinds, particularly on the hardware side?

Speaker 2

Yes, I think we're seeing similar things, Scott. So I think, although we've been able to increase the demand from Q3, Q4 last year, we're still kind of in line with where we were a year ago. So I think we're seeing that kind of there's still demand there and for customers that we've been with for a very long time, we're still working with them. But we're still similar to our competitors waiting to see that kind of demand uptick come in and we'll be ready to react when that comes back.

Speaker 1

And for me, the exciting part for that and Patrick staying on on that. The exciting part as well is that Mike Cromwell is working with his team right now on looking at our go to market model, bringing a more regional focus, looking at things like AI into our offering. So while the market may be facing bit of headwinds, we're taking this an opportunity to reinvest in our platforms and come out of it stronger under his vision. So I'm again very positive on the long term outlook for ITCS. Every company is dealing with the short term headwinds, but we still believe the customers are going to need more access to cyber capability, more access to infrastructure, more access to cloud modernization.

Speaker 1

So we don't see this market long term being a bad place for us to be.

Speaker 4

We think it's going to be a definite growth pillar for us.

Speaker 1

Thank you. Appreciate the color.

Speaker 4

Okay. Thank you.

Operator

And our next question will come from Benoit Poirier of Desjardins. Your line is open.

Speaker 7

Good morning, Kevin. Good morning, Pat, and congrats for the results of the latest acquisition.

Speaker 1

Thanks, Benoit. Appreciate it.

Speaker 7

Yes. When we look at organic growth, obviously, it was very impressive for Health that offset the negative contribution from the other segment. But as we look to Q3, it looks like that you might be facing a tougher comparison versus last year as organic growth was kind of up 11% with Learning and ITCS above 20%. So how should we be thinking in terms of organic growth cadence as we go into Q2 and the second half? Could we be in the negative territory on consolidated basis in Q3?

Speaker 7

And where do you see the stronger organic growth opportunities in the second half?

Speaker 1

Yes. Thanks, Benoit. For me, when I look at it from the CEO of Callian perspective, I've coached Taki and I definitely don't look at things sometimes in a period construct, I appreciate the question. Right now, I'm confident that we're in a 6%,

Speaker 4

7% growth organic growth posture, if you look at our first stop 7% and

Speaker 1

I growth organic growth posture. If you look at our 1st half 7% and I think that will continue going forward. The beauty of this company is that, as you said, certain segments up, certain segments down, but at a consolidated level, 7% organic growth in today's market is very strong considering all the other things we do on the M and A side. So number 1, I just need us all collectively thinking not quarter by quarter, but year over year with regard to the fact that we are seeing good organic growth in a very challenging market. So that's number 1.

Speaker 1

Number 2 is that the things that are going to drive organic growth, as you look at our segments, as I mentioned on the healthcare side, we still see a great demand on defense. We see an exposed increasing psychological services capability. Our pharma business continues to do well. On ITCS. We still see good opportunities.

Speaker 1

Obviously, the decisive acquisition, the customer diversification there is driving that. In learning, obviously, with now Mabway, some key programs that are going to be in process as we buy Mabway, as well as just some of our legacy contracts. That's the piece we're watching right now to see how defense spending plays out. So that may be a headwind versus a tailwind. And then basically in our advanced technologies business, our GNSS antennas are continuing to be strong, our agriculture business continues to be strong, our nuclear business continues to be strong And our space business, we're just looking at some timing of some product delivery, which may affect that number up or down with regard to organic growth.

Speaker 1

So that's why I love being the CEO of this company is that I get I have all these levers and I hope the shareholders that value that as well that despite headwinds in certain segments, we can still capitalize on tailwinds and others and drive consistently 6%, 7% organic growth across the company, not only for this year, but also for previous years.

Speaker 7

Okay. Thanks. That's great color, Kevin. And now looking at the EBITDA margin contribution of your latest acquisition, obviously, very positive margin accretive. It looks like that it will help you to bring you closer to the 12.5% target in fiscal year 2026.

Speaker 7

Is that a fair statement?

Speaker 2

Yes. I mean the last two acquisitions we've done, Benoit, the Nuclear Access and the Aimov Way, although they're only contributing about $3,000,000 next year, the combination of those be over $10,000,000 next year. So I think again, strong contribution, strong profile from a margin perspective. So although we're at 11.4%, we've got strong momentum going into next year. And to your point, I think we're making progress here incrementally getting to that 12.5%.

Speaker 2

So I think after 7 months into the 3 year plan, I think we're we've done a lot of the moves we need to do to get there and now we just need to keep going.

Speaker 7

Okay. And just in terms of corporate cost, Patrick, it came in at $11,600,000 in the quarter. So it's below the EBITDA line by segment. This is up obviously versus $8,700,000 last year. How should we be thinking about corporate costs going forward, especially as you integrate the latest acquisition?

Speaker 2

Yes, we're just trying to find the efficiency. Again, we're trying to drive the consolidated EBITDA performance. Some of the drivers on corporate costs were some of the performance equity that has been granted as well as some transaction costs and investments in our M and A, again, like we keep trying to increase, like we said on the call multiple times, like we're trying to pick up the pace there. So we're putting more investment there to just increase our capabilities. So we're trying to manage it within targeting that 12.5 percent for FY 2026.

Speaker 7

Okay. And is $11,600,000 a good run rate going forward? Or is there do you see opportunities to bring that down a little bit?

Speaker 2

Well, we'd rather grow the revenue double digits. So I think that's the number one target and keep the cost within that and hit our EBITDA target. So I think that's the number one.

Speaker 7

Okay. Okay. Last one for Kevin. We've heard you your comment about the valuation, obviously attractive trading below one time. Aside buyback, what are the kind of the options that you might consider in order to bring up the value given?

Speaker 1

Well, yes, 1st and foremost, we just got to keep delivering gun law, right? Like my frustration as the person who represents all the people that work incredibly hard every day at Calyrio for customers is that the work that's happened and it's not a one time thing, 7 years now, record execution. So number 1, we just got to keep delivering and showing and instilling confidence in the market that not only can we deliver profitable growth, but we are on track to deliver our $1,000,000,000 goal here, which is aggressive. And if you saw and as you heard done at the beginning of my comments, 7 months in, we're well on track to that. So number 1, we just got to keep delivering and delivering the growth that we're promising to the market and keep making sure our customers are delighted.

Speaker 1

Number 2 is that I think where I need all your help frankly is that I still am concerned that many times people with Italian can visualize again a plane, everyone's talking about the engines. I need more people talking about the plane. The consolidated capability of this company, the consolidated track records, they used to the fact in certain quarters, one engine maybe up, one engine maybe down, but as a collective, the thrust of those 4 engines will continue to allow us to beat those $1,000,000,000 target. So I think if we can perform the way we have been performing and number 2, almost reposition Calient frankly, because I think we need to in the public markets to demonstrate and unlock the valuation potential. I think those are 2 that are on my mind right now.

Speaker 1

The share buyback we'll consider. Again, if we feel that we still are not getting the valuation numbers we should be Benoit, but right now perform, work with folks like yourself, work within industry to really understand the plane versus the engines, I think is what we're going to focus over the next short term here.

Speaker 7

Okay. Thank you very much and congrats again.

Speaker 1

Thank you, Ben. I really appreciate those questions.

Operator

I would now like to turn the conference back to Kevin Ford for closing remarks.

Speaker 1

Okay. Thank you, Tanya, sorry, for facilitating today's call. I'm just going to go off script a bit, if I could. Yesterday in the Board meeting, I made a point to open a bottle of champagne with our management team. We hit a $200,000,000 mark for a quarter.

Speaker 1

When I came to Calian, our revenues were just over $200,000,000 for the full year. I think about the journey as a CEO sometimes and where we are right now. And I think it's important to reflect and pause and celebrate, frankly, a $200,000,000 quarter increasing our EBITDA by 50% compared to last year, the margin performance, I just want to leave you with that today. I just want to leave that the incredible pride I'm feeling as a CEO of this company. The frustration on share price, sure, but more importantly, I want to celebrate.

Speaker 1

I want to celebrate the quarter. I want to celebrate the year. And as somebody who's seen a lot of our customers around the world, including some of the most challenging areas right now with our military Let's say they couldn't do without Kallian, I just hope that everyone understands our passion and commitment to continue to grow and serve our customers globally. So with that, I'd like to thank everyone for attending and look forward to providing an update on our next quarterly call. Enjoy the day, enjoy the weekend, long weekends.

Speaker 1

And with that, Tanya, we conclude the call.

Operator

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

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Earnings Conference Call
Calian Group Q2 2024
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