Calian Group Ltd

TSX:CGY

Earnings Call Transcript 2021-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to your Calian Third Quarter 2021 Conference Call. [Operator Instructions]At this time, it is my pleasure to turn the floor over to your host, Kevin Ford, CEO of Calian Group. Sir, the floor is yours.

[Kevin Ford, President, CEO & Director]

Thank you, Karen, and good morning, everyone. With me this morning is Patrick Houston, our CFO, and we'd like to welcome you to the Calian Third Quarter 2020 (sic) [ 2021 ] Conference Call. Before we start, please note that certain information discussed today is forward-looking and subject to important risks and uncertainties. The results predicted in these statements may be materially adjusted from the actual results. It is my pleasure to announce another very strong quarter for Calian. Calian's third quarter consolidated revenue was $136 million, an increase of 29% from the same period last year and our second highest quarterly revenue achieved in company history. This puts us well on the way to eclipse $500 million in revenue this year with 1 quarter remaining. This continued revenue growth coming off a record in 2020 demonstrates the company's continued strength in a quickly evolving environments and showcases our 4-piston engine running on all cylinders. Beyond our strong revenue performance, we were able to mark new milestones across several key indicators, with gross margins crossing 25% and adjusted EBITDA at $14.9 million. This was a record high quarter. Our adjusted net profit almost doubled, up 98% from the same quarter a year earlier. These significant improvements were the results of a multitude of initiatives we've been working on for many quarters and the result of the hard work of our dedicated team. COVID-19 has raised both challenges and opportunities in how we operate our business. We have had to adopt to meeting COVID-19 restrictions, maintaining our manufacturing capabilities, traveling to customer sites to deploy satellite ground systems, operating our health care business and supporting customers virtually, all while ensuring the safety of our employees. Our financial performance and the positive feedback we get from our customers is a clear sign that the team is rising to the challenge. I'd like to share an update on each of our segments. All 4 of our segments delivered revenue growth ranging from 16% to 63% when compared to the same period last year. Our diversified approach means that the strength of one segment can offset the performance of another. In this particular quarter, all 4 segments posted impressive revenue growth. Our Learning and IT Cyber groups both posted particularly impressive growth due to continued expansion of their footprints and recent acquisitions. Let's take a look at each segment. Unsurprisingly, demand for high-quality health care services has increased, and customers are reaching out to us on short notice. Our broad expertise has allowed us to respond quickly to our customers' evolving needs, whether it be screening, vaccinations, procurement of health care products, primary care or patient support programs. In Q3, Calian nurses vaccinated over 50,000 Canadians at 19 pop-up clinics, all of which use the Calian patient support program management software. Prime Minister Trudeau, paid a virtual visit to one of these clinics and had the opportunity to thank Calian nurses for their contributions. As well, Calian managed seven rapid testing initiatives across Canada, including for the Government of Alberta and Integrated Health Network. Customer retention based on excellent customer delivery is a key strategic for Calian, and we're pleased to be a partner to our customers to help them through this challenging time. The Advanced Technologies segment demonstrated the revenue growth of 22% when compared to the same period last year. This revenue increase was supported by 2 recent acquisitions, Tallysman and InterTronic. Early returns on both of these acquisitions looks promising. And in addition, Advanced Technologies has demonstrated growth in AgTech product sales and continued expansion in growth in European ground system products supported by our SaaS service acquisition. Notably, the company made a significant expansion in the automotive sector this quarter. Having signed a supply agreement with electric vehicle manufacturer to provide 2 products for their upcoming vehicle range. We adapted and refined our Acutenna technology for the specific project, resulting in a patented antenna that meets exacting requirements for phase-based positioning. This win exemplifies our strategic focus on customer diversification and service line innovation. The IT and Cyber Solutions segment saw revenue growth of 60% compared to the same period last year. The acquisition of Dapasoft and iSecurity has resulted in rapid revenue and margin expansion. iSecurity, a leader in cybersecurity, saw the addition of 24 new customers to the portfolio, including the City of Toronto and the Tier 1 Canadian commercial bank. The IT and Cyber Solutions team also supported the COVID-19 response by running instant response for hospitals and supported keeping hospital systems operational. I'm also proud to share that Dapasoft was recognized by Microsoft Canada as the winner of the 2021 Healthcare Impact Award, the third consecutive year that Dapasoft has been recognized at the annual Microsoft Canada Impact award ceremony. Through Dapasoft, we launched the Corolar Virtual Care solution in 5 health care networks, serving more than 5 million people in BC, Ontario and New Brunswick. Our Learning segment had the most significant revenue growth at 63% compared to the same period last year. Organic growth comes largely from existing customers, where in the prior year, the Learning segment was impacted significantly with government-imposed stay at home orders causing shutdowns at customer sites. The segment had to adopt over the last 12 months to deliver services remotely to customers in addition in-person events. As part of our COVID-19 efforts, the Learning team provided interim after-action reports for COVID-19 emergency management planning to public sector organizations, including the province in New Brunswick and the City of Nanaimo. Learning also continues to expand into Europe with projects for the French Ministry of Defense and NATO Rapid Reaction forces, the German Ministry of Defense and the NATO Security Force Assistance Center of Excellence. Our growing European presence and network represents customer diversification, a key strategic focus and brings opportunities from NATO member countries. I will now ask Patrick to review the quarterly numbers. Over to you, Patrick.

[Patrick Houston, CFO & Corporate Secretary]

Thank you, Kevin. Our objective of profitable growth was evident this quarter. The company posted significant growth across the board in revenue, gross margins and EBITDA. The acquisition growth has been led by a strong start from Dapasoft and iSecurity, which had an excellent quarter and continue to have impressive momentum. Gross margins have continued to increase quarter-over-quarter. This has been the result of our investments in M&A and R&D and being able to deliver differentiated products and services that demand higher pricing. Contract signings continue to be strong. We've been able to sign as much work as we deliver for several quarters, which leaves our backlog at over $1.3 billion. Moving on to our key performance indicators. Revenue grew by 29% when compared to the same period last year. Our gross margin percentage at an all-time high sits at 25%. EBITDA made a significant jump up 66% from the same period last year. We've seen efficiencies in our model through accelerated growth, leading to EBITDA margins of 11% this quarter. Adjusted net income is up 98% from the same time last year. Our balance sheet continues to be a strength. Our cash and debt facility availability is over $130 million at the end of the quarter, putting us in a strong position to maintain our investment and growth posture. I'll now pass it over to Kevin for his final comments.

[Kevin Ford, President, CEO & Director]

Thanks, Patrick. It is my pleasure to speak to you this morning as I get to represent a team of almost 5,000 amazing employees, who have been living our strategy of profitable growth and high customer satisfaction. Our diversity has shown strength this year and will continue to serve as well in each of our 4 segments as they continue to grow and be leaders in their respective markets. Finally, based on strong results this year-to-date and our continued momentum, we revised our guidance upwards for fiscal year 2021. We expect revenues in the range of $500 million to $525 million, adjusted EBITDA in the range of $49 million to $52.5 million and adjusted net income in the range of $34.9 million to $38.2 million. Please see our press release and MD&A for a detailed reconciliation of our guidance. In closing, I'd like to highlight the growth that this represents for Calian. Our full year guidance represents growth of up to 21% in revenue, up to 43% growth in adjusted EBITDA and up to 62% growth in adjusted net income. So with that, Karen, I'd like to now open the call for questions.

[Operator]

[Operator Instructions] We'll take our first question from Amr Ezzat with Echelon Partners.

[Amr Ezzat, Analyst]

Kevin, Patrick, congrats on a very strong quarter. I've got a couple of questions. First, on the Health segment, gross margins were going from records to records. I'm just wondering what is driving that gross margin performance? Then maybe some high-level thoughts on how we should expect that to evolve in the next year or 2?

[Patrick Houston, CFO & Corporate Secretary]

Yes. I mean the teams are performing pretty exceptionally. We've been doing most of this growth with the existing team we have. So in one way, we're running a bit hot on the team, but that shows the dedication from our Health team to just step up and meet the demand. So I think things will normalize over time as we adjust the capacity. But I think right now, it's just a bit of brute force from our team, just delivering.

[Amr Ezzat, Analyst]

Okay. So it's fair to assume that some of that is margins on the COVID screening and vaccinations?

[Patrick Houston, CFO & Corporate Secretary]

Yes, I think we just -- we obviously have quite a large team that manages the delivery across over 60 customers we have in Health, and we've really just relied on that team as these new customers have come on. So I think we'll need to adjust that capacity over time. But for right now, they're just delivering exceptionally.

[Amr Ezzat, Analyst]

Great. Okay. Switching gears to your second question, I guess, like Advanced Tech seems to be holding up well despite continued COVID impact. Last quarter, I think it was you, Patrick, you mentioned you're hopeful the mobile wireless product would start to pick up by year-end. Just wondering how your view has evolved since? Then maybe you could also give us an update on the ground system project that I think you're in delayed innings of that?

[Patrick Houston, CFO & Corporate Secretary]

Yes. The Advanced Tech did have a strong quarter. So it's a credit to that team. The mobile product hasn't turned back on yet. So we're still hopeful that, that's going to be a contributor for us next year. That's probably the likely time frame right now that it would start. What we've seen is some of the other elements that we have Tallysman, InterTronic really starting to step up and contribute to the existing strength of Advanced Technologies. On the big ground system project, we're still going despite all of the challenges. We were about 75% to 80% done on the sites, and I think we're scheduled to complete the site by the end of the calendar year. So I think the team will be focused on finishing that here in the next few months.

[Amr Ezzat, Analyst]

Okay. A bit minor, but on EMSEC I think the contingent considerations down, you're not paying the first year earnouts. Can you speak to that?

[Patrick Houston, CFO & Corporate Secretary]

Yes. So we did reverse that provision. We did see some slowdown. A lot of their business was reliant on in-person events to do the emission securities, whether it be at banks or military. So we've seen a slowdown a bit on that this year. They're starting to see it pick back up, but I think it's too late to make the first year, so we reverse that, but we're expecting still them to make a second year.

[Amr Ezzat, Analyst]

Fantastic. Maybe last one. On the guidance, the math suggests Q4 revenue range of $109 million to $134 million, if my math is correct, which is quite wide. Just wondering what is driving that, the wide sort of range or implied range for Q4? Is that like project-specific or...

[Patrick Houston, CFO & Corporate Secretary]

Not really. I mean to be honest, I would advise you to use the middle, and I think that will likely come in close to that, which we generally try to do on our guidance. So I think that's a reasonable expectation minus kind of some unexpected delays, but I wouldn't read more into that for now.

[Operator]

We'll take our next question from Nick Agostino with Laurentian Bank Securities.

[Salman Zia Rana, Equity Research Associate]

This is Salman Rana on behalf of Nick Agostino. First of all, congratulations on the great quarter. My first question is on the Advanced Technologies. So we saw this quarter how within that segment, the company is making great strides by expanding it's TAM and moving into new verticals. Is there any visibility into what else it's doing in the pipeline now and what other opportunities the company sees there?

[Kevin Ford, President, CEO & Director]

Yes, great question. We're really excited about our Advanced Technologies because in our Advanced Technologies, frankly, we have a bunch of capability, whether it's in ground systems, whether it's now with the Tallysman acquisition and GNSS antennas for things like electric vehicles. We have a nuclear group there that's just continues to win business in areas such as small modular reactors. So our product business continues to be strong as well as our software-based business continues to be strong. So what we expect with Advanced Technologies is we will move past the ground system project that Patrick mentioned. We're getting near the end. We have a great pipeline of opportunity across each of the segments within Advanced Technologies, whether it's ground systems, whether it's nuclear, whether it's our software business or product business, our Tallysman business, our InterTronic business. And actually, SaaS service in Germany continues to actually punch way above its' weight from it's acquisition. So I talked about Calian having a 4-piston engine. Our Advanced Technologies group is probably under path as 18 to 20 different pistons running in any given day, and every one of them is doing really well. And I'm excited about all the things I'm seeing there, both on the innovation of our products, but as well the customer diversification that we're getting as we continue to focus on market expansion.

[Salman Zia Rana, Equity Research Associate]

Great. And then my next question is on the Health segment. So we saw quite some strong interest in Canada for patient support services in Q3. So any update on how the pickup and interest was in Europe in the quarter?

[Patrick Houston, CFO & Corporate Secretary]

Yes, Europe was still a pretty small contributor from a dollars perspective. We're just getting going there. We're launching in -- we launched in 3 countries, and I think we're trying to get up to 6 countries by the end of the fiscal year. And we also just started with that same customer or patient support programs in the U.S. I think we're just getting going. But hopefully, by next year, it should be a solid contributor for them. And I think it's a good entry for us into those markets and now it's how do we expand into other customers in those markets to support already our strong Canadian footprint.

[Salman Zia Rana, Equity Research Associate]

Okay. And my next question is on the booking. So I believe this quarter, the company signed contracts worth around $113 million. And by using that figure, I believe the book-to-bill comes at approximately 0.8x. So is there any reason why the figure was below the -- normally the onetime historical range? Is there any seasonality involved there?

[Patrick Houston, CFO & Corporate Secretary]

No. I mean we're -- if I look on this year, revenue year-to-date $390 million. I think we signed about $380 million of new contracts. So we're trying to replenish it as quickly as we use it, which historically we hadn't done before. We would see the backlog kind of come down over time until we would win larger contracts. But I think with so many more avenues we have now, we're seeing that backlog just maintain. And I think that's a new strength for us and that we're able to do that consistently.

[Salman Zia Rana, Equity Research Associate]

Okay. That makes sense. And my last question is on the ERP implementation. So I believe it's been going on for a while, at least for the last 3 or 4 years. Is there any update on how that's going on and whether it's set to finish on time?

[Kevin Ford, President, CEO & Director]

It's going well. It's actually been -- it's been a key program for us as we look at our, our go-forward posture. The goal there is obviously to have all Calian integrated with regard to our applications, finance, HR, manufacturing. So it's going well. Our COO, Jerry Johnson, and our team is working with our business units to implement. We've already upgraded the accounting in the [ Legacy County ] and [ East version ] that already had run on SAP. So it's going well. The team continues to make good progress. We're expecting probably by Q1, latest Q2 next year, we'll be going live. So everything is going well. But we are making sure that we do this in a fashion that ensures we have no impact on our operations. So we are taking our time to make sure we get it right. So it's going very well. And we expect by this time next year, we'll be up and running on -- for the first time in the company's history, a united application for the majority of our business.

[Operator]

[Operator Instructions] We'll take our next question from Benoit Poirier with Desjardins.

[Benoit Poirier]

Congratulations for the strong quarter.

[Kevin Ford, President, CEO & Director]

Thanks, Benoit. Appreciate.

[Benoit Poirier]

Yes. Just to come back on the Health segment. This was another strong contributor to the performance. I was wondering whether it would be fair to expect a year-over-year revenue growth decline in Q4 given the tougher year-over-year comparison. I was just wondering if there's anything that might be less sustainable, given the impact of the pandemic. What is kind of sustainable going forward, especially for the Health segment?

[Patrick Houston, CFO & Corporate Secretary]

On quarter-to-quarter for Q4, if you remember last year in Q4, we had that deal with FMC, where we were supplying mobile hospitals, which was a big quarter for Health. So I think minus that, I think Q4 this year, and the momentum has in software Health, and I think they'll have another strong quarter. Going into next year, Kevin?

[Kevin Ford, President, CEO & Director]

Yes. From my viewpoint, it's been interesting as I just continue to be amazed by health care team on how we are responding with very short notice, whether it's vaccination, clinics, testing. So what we're expecting going into next year is the continued momentum. We're not sure, obviously, I think anyone is watching COVID now. We're talking about fourth waves. We're talking about potential boosters, vaccination. So we still believe that there's going to be COVID-19 business going into next year. And we're also very excited about the relationships we've built with new health care customers through COVID response. And Gordon and his team have been -- new customers are literally calling us with a couple of days' notice to get support. So I think that ability for us to react, respond and deliver effectively is just increasing our health care brand right across the country. So I expect that, that's going to pay dividends in the sense of new customers and other mandates post COVID. So we're expecting between the COVID piece, the continued growth of our patient's support programs, contract research organization capability as well as just increased demand on our core legacy products and projects, we're expecting Gordon the team to keep up momentum for sure going into next year.

[Benoit Poirier]

Okay. And you recently announced a new contract to supply antennas for fleet of electric consumer and delivery vehicles. Could you talk about the size of this opportunity, the timing for the deliveries and maybe the overall profitability of this venture?

[Patrick Houston, CFO & Corporate Secretary]

Yes, the deliveries start in the fall. So really, we've been designing into, to the vehicle. So as they start production, our demand will fluctuate with their end production. But it should be strong, it should be somewhere between $5 million to $10 million next year from a revenue opportunity for us and continue to increase as they scale up their production. So it's an exciting space to be in. And obviously, proud of the team for able to develop a product and get acceptance in that market, which is a very stringent market in terms of the demand they have on their suppliers.

[Benoit Poirier]

Okay. And you recently announced the appointment of Mr. [ Jira ] for the IT segment and you made some interesting comments about the expertise with SaaS solution and recurring revenue. So could you talk about the strategy on that front for the IT segment? And are there any opportunities to leverage his expertise throughout other segments?

[Kevin Ford, President, CEO & Director]

Yes. Great question. And before I specifically answer that, I want to take that opportunity and thanks for the question, Benoit, to thank Sandra Cote for her leadership. Sandra and I have known each other for years and came to Calian when I asked her to help me transform our IT business. And she's done exactly that. And if you look at her legacy of doubling the business, improved margins, latest [indiscernible] Security acquisition, we're going to wish her well, but we have a couple of months of transition with [ Sash ]. So number one, I want to acknowledge and thank Sandra for very incredible leadership at Calian. Number 2 is we're excited that Sash come on board. If you do see his background with regards to cloud, SaaS-based capability, the last company he's coming from, and you think about that pivot Benoit, that I've been talking about that an innovative global growth company, where I think we're about halfway in that pivot. Sash is going to bring great DNA, great experience for us to look at our Dapasoft acquisition specifically, both in the context of our cloud offerings there, our health tech offerings as well as our iSecurity team to look -- continue how to productize, how to go to market, how to maybe change our revenue models and also look at the customer diversification, both domestically and globally. So we're really excited to have Sash on board, where he's actually been sitting through our Board meetings and through today as we update our strategy. So looking forward to getting his contribution as well as a successful transition with Sandra over the next few months.

[Benoit Poirier]

Okay. That's great. And last one for me, just in terms of M&A. It seems that there's more competition in the market for the assets, including competition from private equity firms. So I was just curious to know whether valuation -- multiple valuation has evolved. And if you could comment about the pipeline and whether we should expect you to maybe see acceleration of M&A in the later part of fiscal '21 or fiscal '22, given your strong balance sheet?

[Kevin Ford, President, CEO & Director]

Yes. So right now, coming out of a year where we did 7 acquisitions in just over 12 months, clearly, #1 focus is on integration. We deployed quite a bit of capital in our M&A strategy, which is all part of our Imagine 2023 goals. We've got some amazing companies, amazing talent in Calian through those acquisitions. So job #1 is to ensure we continue to integrate what we've done successfully. As far as the pipeline, we do see opportunities in each of our segments. We expect there's going to be a combination of maybe smaller tuck-in unders with regard to strategic capability that we need for our strategic plan. And also, we continue to look for larger acquisitions as we continue to grow Calian coming into a $0.5 billion company now. Clearly, you got to continue to assess the right level and size of acquisitions. So to your point, Benoit, we're feeling very confidence with regard to our ability to continue with the M&A. We definitely have the balance sheet to do that. But if you look at our last year and a bit, where -- on average, we're in that 5.5 to 6x multiples on EBITDA. Even though we do see increased valuation expectations, we believe being patient, finding the right companies that will value Calian in the context of our culture and the people that are looking for amazing home for their staff and longevity, we are still doing very well even in auction-type environments where people recognize the strength of being part of the Calian family. So from my viewpoint, though the acquisitions we're going to continue to seek outs, we're not going to get into bidding wars or try to overpay for something. We will continue to make sure that we follow our playbook and working with our Board and our management team, continue hopefully to deploy capital in a way that continues our growth framework posture and goals. So I think we're going to keep going here, Benoit, but it won't be just because we're doing it just to grow. We're going to do it because it's the right acquisition.

[Benoit Poirier]

Okay. Perfect. And maybe a very quick one for you, Patrick. Just in terms of working capital release related to the large ground system contract, could you maybe give an update about the opportunity to release some working cap and maybe the timing on that?

[Patrick Houston, CFO & Corporate Secretary]

Yes, we didn't make much progress this quarter. That's still around $60 million right now on the balance sheet, and we're hoping to see some unwinding of that potentially in Q4 and then certainly in Q1, for sure.

[Operator]

We'll take our next question from Jesse Pytlak with Cormark Securities.

[Jesse Pytlak, Analyst of Institutional Equity Research]

Obviously, the Health segment as being a big beneficiary from all the COVID work and understanding that things are moving quickly. But as some of this work potentially ramps down in coming quarters, how should we think about the evolution of the margin profile?

[Kevin Ford, President, CEO & Director]

Well, I think right now, the -- clearly, as you said, Jesse, the COVID short-term demand, even though I think we all feel it hasn't in that short term, it's been over a year and a bit now, we've all been kind of working through this. Clearly, that's been a major push here. But when I look at the tailwinds on health, COVID-19 has been one for sure. But when I look at, again, our demand for our legacy contracts, whether it's defense, continues to be very strong. Our continued growth with the Alio, Allphase acquisition and patient support programs, contract research organizations and, as I mentioned, now the customer diversification that we've just -- Gordon and the team have had to deliver with regard to responding to COVID response. So I'm still very optimistic about our health care momentum. Going forward, what we're going to continue to do is look at our core services, if you -- as a reminder, I think one of the biggest assets we've got is the largest national network of medical practitioners in Canada. So as you think about us growing from that base, layering on more health technology now with the home application with health care as well as our Dapasoft acquisition that brings us virtual care, health care integration capabilities through our Corolar platform, the merging of that national network of medical practitioners, combined with now our product stock that really, I think, can go head-to-head with any kind of health care pure play. I'm pretty excited about the potential because that's the differentiation for us. We not only bring the technology, we have that network nationally. And as we're starting to see now, we're starting to deploy that globally. So I think the combination of those 2 things are going to continue to be exciting for our health care business and our health care brand is on to continue to expand and grow both in domestic and global markets.

[Jesse Pytlak, Analyst of Institutional Equity Research]

That's helpful. And then just maybe a quick one for Patrick. Just, there was a bit of a tick up in corporate costs sequentially. Was there anything onetime in there? Or should we kind of think about this as being maybe a new normalized level?

[Patrick Houston, CFO & Corporate Secretary]

No, I think it's just more investment. Obviously, we're investing across lots of different categories, whether it be our corporate team. We're seeing still lots of opportunity to the segments to growth. So we're taking an opportunity now to make sure we've got the right people there to keep this kind of momentum going year-over-year. So I think it's just kind of -- to be more investment and there wasn't any particular onetime item.

[Kevin Ford, President, CEO & Director]

Yes. And to Patrick's point, Jesse, the continued growth, growing from a $200 million company to a $500 million company is one thing. Growing from $500 million to $1 billion, which is definitely our goal. We're going to continue to invest, as Patrick said, in areas that we believe that we need capacity, whether it's our marketing, go-to-market capability. We continue to play defense with our IT group, making sure that we're upgrading our cyber infrastructure, our ERP implementation, our tools, our collaboration tools. So I think you're going to see a balance of growth and investment in our corporate costs just offset the reality that we are growing, and we're going to need strategic investments in certain pieces to sustain and help us propel that growth.

[Operator]

There appear to be no further questions at this time.

[Kevin Ford, President, CEO & Director]

Okay. Well, thanks again, everyone, for attending this morning. Again, congratulations to my team, to the team at Calian for all the amazing crazy things you continue to do, both in the context of delivering results, but more importantly, the work that we're doing for our customers. I couldn't be prouder as CEO of this company and as a Canadian company as well to continue to see our growth posture on the global stage, just so exciting at this time. So with that, Patrick and I look forward to joining you in November to talk about our full year results and our thoughts about our fiscal 2022. So I appreciate your time today. And now, Karen, we can close the call.

[Operator]

Thank you. This does conclude today's teleconference. We thank you again for your participation. You may disconnect your lines at this time, and have a great day.