Calian Group Q1 2023 Earnings Call Transcript

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February 15, 2023

Key Takeaways

  • Q1 revenues reached $148M, up 14% y/y with record gross profit of $45M and EBITDA of $14M, driven by acquisitions and double-digit organic growth, despite ~$10M of revenue lost to supply chain delays.
  • Signed $126M in new contracts (including $81M from new customers) and exited the quarter with a $1.3B backlog, of which $340M is expected to be realized in FY2023, underpinning reiterated full-year guidance for double-digit growth.
  • IT & Cyber segment revenue doubled to $46M with gross margin improving to 37%, supported by the March 2022 acquisition of Computex, SOC 2 compliance and investment in the FieldFX cybersecurity training platform.
  • Health segment revenue declined 5% as awards for new contracts slowed and COVID-related demand eased, leading to lower gross and EBITDA margins of 24% and 16%, respectively, although pharmaceutical services signings of $25M suggest improving momentum.
  • Generated $25M in operating cash flow (85% adj. EBITDA conversion) and ended Q1 with $58M cash and $131M total liquidity, while maintaining a disciplined M&A pipeline and a stable $0.28/share dividend.
AI Generated. May Contain Errors.
Earnings Conference Call
Calian Group Q1 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Greetings. Welcome to the Calian First Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note that this conference is being recorded.

Operator

I will now turn the conference over to your host, Jennifer McCaughey, Calient's Director of Investor Relations, you may begin.

Speaker 1

Thank you, Kelly, and good morning, everyone. Thank you for joining us for Calian's Q1 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 specified. With that, let me turn the call over to Kevin.

Speaker 2

Thank you, Jennifer, and good morning. Let me start with an overview of our Q1 results. We continued our momentum of double digit growth in the quarter. Q1 revenues reached $148,000,000 up 14% compared to the same period last year and represents a record level of revenues for our Q1. This impressive growth was driven by a strong performance of our recent acquisitions, Coupled with our ITCS and Learning segments, which both posted double digit organic growth.

Speaker 2

This growth was partially offset by delays in new business in our Health and Advanced Tech segments as well as the temporary impact of parts shortages coming preventing us from fulfilling orders in our Advanced Tech and ITCS segments. Supply chain issues resulted in a revenue impact of approximately $10,000,000 and gross margin of $3,000,000 in the quarter. We believe we will recapture this in the balance of Our gross profit reached $45,000,000 up 30% compared to the same period last year and also represents a record level for our Q1. Gross margin surpassed the 30% mark for a 3rd consecutive quarter, Increased four basis points from the Q1 last year despite the fact that we're dealing with challenging macro environment, inflationary pressures and ongoing supply chain issues. Similarly, EBITDA reached $14,000,000 up 2% year over year.

Speaker 2

It also represents a record level for our Q1. However, our margin was down slightly as we continue to invest for future growth. These solid results translated into strong cash flow from operations, as Patrick will discuss in a moment, and demonstrate once more the power of our diverse operating model. I'd also like to highlight our continued push to win new customers and extend our relationship with existing clients. This quarter, we recorded $126,000,000 in new contract signings with approximately $45,000,000 from contract renewals and extensions and $81,000,000 from new customers.

Speaker 2

We exited the quarter with a robust backlog of 1,300,000,000 of which $340,000,000 is planned to be realized in fiscal year 2023. With these new contract signings, A healthy backlog and improvements in the supply chain environment, we are confident in our ability to post our 6th consecutive record year and as such have I've reiterated our full year guidance. For now, let me provide an update of our results by business segment. Let's begin with the IT and Cyber Group. In the Q1, ITC has doubled its revenues to $46,000,000 driven primarily by our expansion in the U.

Speaker 2

S. Market the acquisition of Computex in March 2022. This growth was compounded by double digit organic growth in our overall cyber practice as we We continue to win new customers in Canada for cybersecurity offerings. This growth was partially offset by lower product sales as a result of significant deliveries in the final weeks of Q4 and part shortages resulting in orders of about $5,000,000 not being delivered. Gross margins increased significantly from 26% in quarter last year to 37% due to acquisitive revenue at higher margins coupled with the expansion of our cybersecurity offerings in Canada.

Speaker 2

Similarly, EBITDA nearly doubled to $7,000,000 or a margin of 15%. In the quarter, we invested in FieldFX Software, a simulation cybersecurity training platform used to grow individual skills, rehearse incident response and train teams. We see the investment in Field Effect as a way to enhance our solution set and begin to address the cybersecurity heels gap for our growing customer base, including governments and defense agencies. In addition, in the quarter, iSecurity achieved Service Organization Control Type 2 compliance, a gold standard of industry recognition, and we were awarded a cybersecurity contract with the Ontario Health. For the balance of the year, we expect this momentum to continue.

Speaker 2

We believe product sales will increase as we continue to see robust demand and address the remainder of the consumer backlog due to supply chain shortages. Turning to our Health segment. In the Q1, revenue declined 5% due to a slower pace of awards for new business and ongoing lower COVID related business, which accounted for about 3% of this decline compared to the same quarter a year ago. In order to deal with the evolving healthcare landscape and the shortage of specific skill sets, We are investing in multiple initiatives to recruit new professionals to realize unfulfilled demand on existing customer contracts and to drive new business. Furthermore, our existing contract vehicles and services continue to track more to normal run rates.

Speaker 2

Gross margins and EBITDA margins decreased to 24% and 16%, respectively. In the quarter, we achieved our strongest revenue performance for our contract research organization division. With strong signings in our Pharmaceutical business of $25,000,000 we see good momentum in this segment for our business. Total signings in the quarter were 34,000,000 This is a good indicator of renewed momentum on the new business front. These contracts will start in the coming quarters as capacity is brought on in what continues to be a difficult environment in obtaining healthcare capacity.

Speaker 2

Our 3 pronged approach of healthcare professional services, pharmaceutical industry solutions and in store health clinics will provide multiple growth avenues while we continue to develop our health technologies. Last week, we announced the appointment of Derek Clark as the new President of the Health segment. He will take over the leadership of Calhoun Health from Keilor McDonald, He has a passion for teaching, mentoring and coaching leaders, a quality that we value here at Calyen. His experience leading teams through the commercialization journey, Change management and acquisitions will benefit the entire Calian Health team, and I'm delighted to welcome him at such an exciting time in our growth. I'd also like to thank Gordon for his years of service to Calian, leading the Calian Health team through the important transitions that have brought us to this point.

Speaker 2

Turning to our Advanced Technologies segment. In the Q1, revenue decreased 17% to $34,000,000 due to delays in the award of new grant system projects, Large scale projects rolling off and ongoing supply chain issues, which resulted in parts delay that slowed our ability to deliver products. In fact, this temporary part shortage impacted the realization of customer backlog of about $5,000,000 in the quarter. We expect these orders to be fulfilled in the remainder of fiscal year 'twenty three as parts are forecasted to arrive in the coming months. These factors were partially offset by a strong performance of our GNSS antenna which was up 38% compared to the same quarter last year.

Speaker 2

We continue to experience momentum in this business driven by current customers, where antennas are designed into their product increasing demand as well as new customer wins. We have continued to invest in incremental manufacturing and delivery capacity to meet strong demand. Although our revenue was down, gross margins improved significantly from 26% to 35% due to a better mix of higher margin business. The shift into our own products and software solutions over the last several years is showing its impact this quarter. These verticals deliver high gross margins Then traditional ground based antenna business are becoming a larger proportion of our revenue mix.

Speaker 2

In the quarter, we announced the Natural Resources Canada A solid win for us. As a leader in ground station design and implementation, our technology and our know how will improve them to a significant additional capacity, enabling to support their earth observation customers. Recall that this contract comes on the heels of the NASA contract signed in August and is a testament to our brand of excellence In the space exploration market. Although we had had a slow start in fiscal 2023, we expect a return to organic growth in the second half of the year. With new contract wins of $42,000,000 the supply chain coming back online and strong demand in our software engineering for satellite communication customers As well as demand for our precision location services for our GNSS products, we are well positioned to drive revenue in the coming quarters.

Speaker 2

Turning to our Learning segment. In the Q1, revenues increased 16% to $26,000,000 driven entirely by organic growth. It was generated by increased demand on ongoing projects along with new rail programs that have been implemented for long standing customers. Our ability to bring proven solutions in short order is key in this rapidly changing environment and is valued by existing customers. We have continued to expand to new nations in Europe based on the work with NATO, and we are seeing robust activity in Europe as nations look to evolve their military training practices.

Speaker 2

While gross profit was up to $7,000,000 gross margin was down slightly to 25%. This is a result of adjustments Rates on our contractual staff before customer contractual increases kick in. Similarly, EBITDA margin was down to 16%. Our expansion outside Canada has continued. We delivered 2 large NATO exercises in Europe, delivered seminars to military students from 13 Latin American countries And continued development of features of our command and control software in cooperation with NATO.

Speaker 2

For the balance of the year, we see continued demand And for services and technology in the military training space in Canada and in Europe. We will continue to invest to make sure we are well positioned to continue to capitalize on the macro environment where military training Has become mission critical. This should put us on track to break the $100,000,000 revenue mark for the first time in our Learning segment. With that, I will now turn it over to Patrick to discuss cash flow, balance sheet and our guidance. Over to you, Patrick.

Speaker 3

Thank you, Kevin. In In the Q1, we generated $25,000,000 of cash flow from operations. This strong performance was driven by a combination of strong operating free cash flows and strong working capital performance. Operating free cash flow was $12,000,000 this quarter, an impressive increase of 24% compared to Q1 last year. It represents an 85% conversion from our adjusted EBITDA.

Speaker 3

Our conversion to cash flow has consistently improved as we have gained greater scale and been able to Our working capital performance was also a highlight as we recaptured $12,000,000 in the quarter. This was a result of combination of initiatives, including collection of long term projects as well as more focused cash management. The strong conversion and focus on managing working capital in the longer term means that our already strong liquidity position will strengthen in the coming periods, allowing us to continue to invest in our M and A agenda. We continue to have a disciplined approach to capital deployment with In the Q1, we paid earnouts totaling $3,000,000 based on the performance of our M and A We expect to add further payments in the balance of FY 'twenty three on the acquisitions of DataSoft, Talisman and Alio as their earn out periods come to an end. These amounts are recorded on our balance sheet at the end of the quarter.

Speaker 3

We continue to have a robust pipeline of acquisitions and are looking to continue our track record of deploying capital every year. As Kevin mentioned earlier, we made an equity investment of US2 $1,000,000 in FieldFX Software in partnership with other financing groups. We use equity investments for geographical expansion and entry into new markets, which necessitate greater partnership and ecosystem to bring best in class You'll see more investments of this kind in the coming years as we broaden our reach. We maintain our dividend rate at $0.28 per share this quarter. We continue to see the dividend as an important part of our balanced capital deployment strategy, and we'll reevaluate the size of the dividend in future quarters.

Speaker 3

Our CapEx levels came down this quarter to less than $1,000,000 We ended the Q1 in a net cash position once again. As of December 31, we had $58,000,000 of cash on hand, up $15,000,000 from the 4th quarter. This cash combined with our committed credit facility provides us with $131,000,000 of net liquidity. We're able to further expand its liquidity with our current lending syndicate if need be. Given our strong cash flow generating ability, solid balance sheet and a robust pipeline of acquisitions, we're well positioned to deploy this capital and drive long term value.

Speaker 3

Let's take a look at our guidance for FY2023. We're reiterating our full year guidance this morning. As a reminder, we expect revenues in the range of $630,000,000 to $680,000,000 At the midpoint, this reflects revenue growth of 13% over our record last year. After Q1, our last 12 month revenue sits at just over $600,000,000 Our guidance assumes a return to positive organic growth Even split between organic and acquisitive growth. We expect adjusted EBITDA in the range of $70,000,000 to $75,000,000 At the midpoint, it reflects adjusted EBITDA growth of 10%.

Speaker 3

After Q1, our 12 month EBITDA sits at $66,000,000 And finally, we expect adjusted net income in the range of $46,000,000 to $50,000,000 We see continued momentum throughout the first The year with approximately 55 percent of our revenue to be realized in the second half of this year as new business comes online fully and we recaptured $10,000,000 of customer backlog due to supply chain shortages. Finally, I must caution the revenues and profitability realized are ultimately dependent on the extent and timing of future contract awards, customer realization of existing contract vehicles, any impacts due to COVID-nineteen and potential recessionary pressures. Our guidance does not incorporate any additional M and A activity and should we close any new opportunities, their contributions would be incremental. Please see our press release and MD and A for a detailed reconciliation of our guidance. I'll now turn the call back over to Kevin to conclude our prepared remarks.

Speaker 2

Thank you, Patrick. In conclusion, coming off a record Q4 with strong deliveries at the end of the year, we managed to achieve record Q1 results once more. It represented the highest ever first quarter for revenues, gross profit and EBITDA, a performance worthy of mention given the current operating environment. The ITCS and Learning segments generate double digit organic growth, a testament to strong demand for those services. While Advanced Tech and Health had a slow start to the year, We believe their performance will improve in the second half due to timing of new business wins, recent new contract signings and the easing of supply chain issues.

Speaker 2

In addition, our recent acquisitions, namely Computex, Symfront, iSecurity and Talisman are performing very well and are driving significant value for shareholders. We currently have a strong pipeline of acquisitions and are working hard to close a few this year to continue to scale, drive growth and ultimately reach our $1,000,000,000 revenue objective. For all these reasons, we have reiterated our guidance, which implies another record year of double digit growth for Calian. Finally, I want to thank our staff for their commitment and dedication. They make all the difference.

Speaker 2

I also want to thank our customers for their loyalty, our suppliers for their collaboration and our shareholders for their continued support. And with that, I'd like to now open the call to questions.

Operator

At this time, we will be conducting a question and answer session. Our first question is coming from Doug Taylor with Canaccord Genuity. Please pose your question. Your line is live.

Speaker 4

Yes. Thank you. Good morning. I'd like to ask about the last statement you made about the Expectations of a better second half due to in part to new business wins and new contract signings. We've heard a great deal of chatter about slippage From some of the peers in the broader tech industry, I guess my question is around your confidence Interval you make you have with a statement like that.

Speaker 4

Are these contracts all now in hand? Have they since begun post Quarter or are these deals that you still expect to close in the coming months that contribute to that?

Speaker 2

Yes. Thanks, Doug, and good morning. The one thing that gives us some confidence, a few things. Number 1 is our backlog. We have over $340,000,000 in backlog right now, from the context of deals won closed that we expect to realize this year.

Speaker 2

So we have the backlog element, Strong signings, as you said, in the context of new business that we've reported. And we are seeing, as we look at the supply chain Issues we've been facing. We are seeing some relief. We are starting to see now orders where we can predict when we can deliver. So Based on the backlog, the pace of our new business signings, supply chain issues and some tailwinds in certain elements of our business, we're We're quite confident in our ability to deliver another record year as per our guidance.

Speaker 4

Okay. And then maybe As a follow-up to that, in getting to the midpoint of your guidance for this year, I think implies a bit more of an uptick in your margins Versace is continuing on the same revenue trajectory you delivered here in Q1. Is that driven by an assumption of better cost absorption as you layer these new contracts Sean, is there more of just a seasonal pattern? I believe Q1 has been a little bit lower in terms of margin historically. Can you help us bridge that to your guidance there?

Speaker 3

Sure. Good morning, Doug. Yes, I think what we've been you'll see in Q1, we've been investing obviously to support the higher uptick in revenue in the 2nd half, I think a lot of our revenue sources now are driving higher margins, higher product margins. So In one way, as long as we as Kevin mentioned, we have the backlog and we close the new orders, those scale up a lot More from a margin perspective. So we're really trying to build the organization here to be able to deliver those types of performances in the second half.

Speaker 3

And right now, we're confident that we can deliver that.

Speaker 4

Okay. So front end loading the costs ahead of the growth, I get that. Last quick one. Patrick, you briefly mentioned working capital. I mean, you had a pretty good recapture of some investments you've made there.

Speaker 4

Can you I think you said you expect to capture more. Can you maybe just lay out what how much Excess working capital you've invested that you still think you would be able to convert

Speaker 3

Capital this year just from recapture minus investing to keep growing. Certainly, I think after Q1, we're probably ahead of where we thought we would be from just the Speed of getting that to that $20,000,000 but it was still a strong performance. I still think that that's a reasonable number for this year.

Operator

Thank question is coming from Maxim Moshansky with RBC Capital Markets. Please proceed your question. Your line is live.

Speaker 5

Yes, good morning. I just wanted to start in your prepared remarks, you mentioned the majority of the orders were from new customers, if I understood that correctly. Was that primarily from strength in any one segment like IDCS for the new customers? Or was it more broad based?

Speaker 3

I think we saw strong signings in both Health and AT. So I think both of them had some new setting mix. There wasn't one particular one, but you make a great point. We were thrilled to see $80,000,000 from new customers. That's not an easy task Go in and win net new customers like that.

Speaker 3

So certainly, we're pretty thrilled about the performance overall this quarter.

Speaker 5

Got it. And for the Learning segment, I mean, that was particularly strong this quarter. Was that A one time impact or is that an ongoing contract that should expect to see kind of a higher run rate At least for the near future, how should we think about that?

Speaker 2

Yes. Good morning, Maxim. It's Calvin. So the exciting part of our learning business right now, as you saw Growth double digit organic growth is the continued demand for training, especially in the military environment is strong And both in our customers here in Canada as well as now, as I've mentioned, NATO and Europe. So we really don't see the pace slowing down.

Speaker 2

We believe right now we're in an area that is in demand, more military training as well as our brand is getting stronger in the air we're expecting, as I mentioned, a record year for our learning business this year, which should push over $100,000,000 for the first time ever.

Speaker 5

Great. And last one for me, just on the Health segment. You talked about a slower pace of awards for new business. Is this And any particular area like the pharmaceutical solutions or healthcare services? Or is it more kind of just broader slower pace?

Speaker 5

I'm more curious of whether there's any difference

Speaker 2

business with regards to our medical network that we deploy, that's where we're seeing a few headwinds just in capacity and as I said recovery from COVID. What we're seeing positive uptake is on our pharma business right now. Pharmaceuticals, both in our patient support program and contract research, strong signings in the quarter And continued growth. So while we see some headwinds on the clinician services side, we are definitely seeing growth opportunities with our pharma business. So we expect those 2 to Come back online this year and hopefully with clinician services and the rest of the year, we'll start to see the capacity come

Speaker 5

back so

Speaker 2

that we can We fulfill frankly numerous contracts that we're just dealing with the capacity shortages right now.

Speaker 5

Great. Thanks. I'll pass the line.

Speaker 2

Thanks, Maxim.

Operator

Your next question is coming from Michael Cyprys with Desjardins Capital Markets. Please proceed your question. Your line is live.

Speaker 6

Thank you and good morning. Maybe just quickly on the Canadian government, you recently saw it announced and approved commercial space launches, giving private companies the ability to launch satellite. I was wondering how does this exactly impact the Advanced Technologies segment or your customers or maybe just the Canadian space sector in general? There seems to be A lot more open to study than just a couple of years ago.

Speaker 2

Yes, great question. It's an exciting time for space Globally and also in Canada, I sit on the Board of the recently launched Space Canada Association that is really they're mandating To provide that visibility and all the incredibly good space exploration, innovation that's happening here in Canada. So for me right now, it's positive in that the investment in space, both again in Canada and globally, continues to be strong, whether it's space exploration, whether it's Communications satellites, so the launch on the East Coast, that company, I know the owners, that it's going to be an exciting time when we see the first launch of a spacecraft from So I think it's a great time for space. And from my viewpoint, it only is good news when we see innovations actually becoming realities here in Canada And the funding increasing that we're seeing in the Space segment. So that's all positive for the Space segment and for our business as well.

Speaker 6

Thank you. And maybe just quickly on M and A. In terms of the 4 segments, have you with the interest rates going up, have you seen one segment in particular where there's been more Evaluation compression, there's more maybe attractive targets than the others or it's the same across all 4?

Speaker 3

I think we're seeing good in 3 of them. And in Health, we were expecting things to start coming back based on the valuation Modifications last year, they were pretty drastic. I think that's been slower than we thought, but I still think it's going to happen here this year in terms of More health targets coming on the market. The other three segments, we're seeing good deal flow from a pipeline perspective. So I don't think anything's changed from our perspective.

Speaker 6

Perfect. I'll pass it over to the line. Thank you.

Speaker 2

Thank you.

Operator

Your next is coming from Rini Sharma with BMO. Please close your question. Your line is live.

Speaker 7

Hi, good morning. Can you hear me?

Speaker 3

Yes, good morning, Rini.

Speaker 7

Hi. So my question actually, I was wondering if maybe you could comment about the seasonality in the ITCS Business through the rest of the year and how that's expected to evolve, given the delays that occurred in last quarter and The supply chain constraints that you're currently facing?

Speaker 3

Yes. I wouldn't say we have traditional seasonality in that business, but we do have Obviously, we still do hardware delivery, and we've been working through the supply chain realities here. Things have been getting better, which has given We're excited about that. Obviously, our customers are excited. But you saw, obviously, we had large deliveries last year.

Speaker 3

At the end of Q4, we were able to pull in some material. In this quarter, we're actually short again. So I think you're going to see some of that until we get back to a kind of a normal lead time environment. So I think it's just more timing than anything, but we're still seeing strong demand across hardware, our services And our consulting, so I think it's strong across all the aspects of ITCS right now.

Speaker 7

Thank you. And should we be

Speaker 3

Points up or down depending again on the mix that quarter between our services and our hardware delivery. But over time, I think they would stay stable to the levels that you're seeing right now.

Speaker 7

Okay. Thank you for taking my question and that's good color.

Speaker 3

Thank you,

Operator

We have reached the end of our question and answer session. And I will now turn the call back over to CEO, Kevin Ford, for any closing remarks.

Speaker 2

Thank you, Kelly, for facilitating today's call. And before closing this call, I'd like to remind you that we are hosting our Investor Day in Toronto at 12:30 For those of you who would like to join us at the Global Mail Center, on that note, thank you to each of you for attending, and we look forward to providing an update on our next quarterly call. And with that, Kelly, we can close the call.

Operator

Certainly, this does conclude today's conference. You may disconnect your phone lines at this time. Thank you for your participation.

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