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Calian Group Ltd
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Good morning, ladies and gentlemen, and welcome to the Calian Fourth Quarter 2021 Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Kevin Ford, Chief Executive Officer. Sir, the floor is yours.
Thank you, Katherine, and good morning, everyone. With me this morning is Patrick Houston, our CFO, and we'd like to welcome you to Calian's Fourth Quarter and 2021 Full Year Results Conference Call. 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 different from actual results. I'm going to start with our fourth quarter results. In the fourth quarter, we saw revenue of $128 million, a 4% increase compared to the same period last year. Adjusted EBITDA and adjusted net profit grew year-over-year at 35% and 54%, respectively. We have continued to see momentum in new contract signings this quarter with $84 million in new wins, leaving us with a solid backlog of $1.3 billion. Dividend levels remain unchanged at $0.28 per share. And as a reminder, this quarter marks our 80th consecutive profitable quarter. That's over 20 years of profitable execution and delivery. I'm thrilled to share for the first time in company history, we have passed the $0.5 billion mark, with annual revenues of $518 million. This is a major milestone for Calian on our journey to become a $1 billion innovative global growth company. COVID-19 has presented many challenges, particularly around maintaining our manufacturing capabilities, traveling to customer sites and supporting customers virtually. And I'm pleased we were able to achieved this milestone even during a difficult time. Adjusted EBITDA and adjusted net profit increased by 41% and 58%, respectively, and at 24%, gross margin are the highest they've ever been. Another point of pride for our team. Our net cash has grown threefold year-over-year and EBITDA margins are now above 10%. Our success in fiscal 2021 can't be told through numbers alone. We have hired 3 new companies, bolstering our capabilities in areas such as cybersecurity and high-performance antenna capabilities, allowing us to expand our customer base. Calian was named to the FP500, a ranking of the top 500 largest Canadian companies per revenue, and we were added to the TSX SmallCap Index. We've continued to add new leaders to help propel the company forward. It's included Michele Bedford, our Chief Commercial Officer; Seann Hamer, our Chief Technology Officer; and Sasha Gera as President of IT and Cyber Solutions. We have also made significant contributions to our communities. We are a key partner in Canada's response to COVID-19. We supported indigenous communities with remote health care. We continued to deliver our military family doctor network and assisted over 20 charities. Our efforts to diversify our revenue has shown tremendous progress. Just a few years ago, almost 70% of our revenue came from government customers at the federal, provincial and municipal levels. While we have continued to grow our government revenue, our efforts to diversify into commercial and international segments have resulted in significant growth and the revenue split is now 50-50 between traditional government sources and commercial customers. I'd like to spend a moment sharing an update on each of our segments. If you've been on one of these calls before, you've heard me mentioned our 4-piston engine and how a growth in one segment balances the potential decline in another. It is my sincere belief that this 4-segment structure, as well as our 4-pillar growth framework of continuous improvement, customer diversification, customer retention and innovation, are key ingredients to our success. Three of the 4 segments delivered double-digit revenue growth this quarter. IT & Cyber's impressive revenue growth of 61% was led by the contribution of the newly acquired Dapasoft and iSecurity companies. For Advanced Technologies, Advanced Technologies is the segment that has been most impacted by COVID-19. With supply chain challenges and travel restrictions delaying completion of some projects, and despite this, Advanced Technologies saw increases across the board in revenue, EBITDA and gross margin. Acquisitive revenue makes up 7% of the total increase and is attributable to revenue from the acquisitions of InterTronic and Tallysman. In addition to acquisitive growth, Advanced Technologies has demonstrated growth in AgTech product sales and continued expansion in growth in European ground system products. For Health, while revenue decreased 22% this quarter as a result of the onetime deployment of mobile respiratory care units in Q4 of 2020, revenue grew to 20% for the year. Demand for high-quality health care services has increased during the pandemic, and Calian has been engaged for a variety of services across Canada, including vaccinations, screening, quarantine support and virtual clinic setup. As an example, Calian nurses support a 1-800 hotline that offers COVID-19 screening, complete contact tracing and public health education for Nunavut residents. It is a critical services for everyone who live in remote areas as a far distance from health care services. For Learning, revenue growth in Learning was strong both in the quarter and the year. The team has embraced both in-person and virtual delivery of this learning platform, and growth in the fourth quarter was 23% when compared to the same quarter last year. Just after the fiscal year-end, we announced the acquisition of SimFront, a leader in immersive training solutions, incorporating augmented, virtual and mixed reality technologies. Now we can offer customers an end-to-end military training and simulation solution, with opportunities, not just in defense, but in health care and oil and gas. For IT segment, the IT & Cyber Solutions saw the largest increase in revenue growth with 52% related to acquisitive revenue. This demonstrates that the capabilities and assets from our acquisition of Dapasoft and iSecurity are indeed transforming our IT segment. Another proof point is the 2021 Microsoft Canada Healthcare IMPACT Award presented to Dapasoft for the Corolar Virtual Care solution, a solution that helps acute care providers quickly enroll a premium virtual clinic services. All in all, we see multiple new growth opportunities across all of our segments and are excited about the momentum we have created this year. Now I'd like to pass it to our CFO, Patrick, to discuss results and key performance indicators.
Thanks, Kevin. We have several important achievements in the fourth quarter, including increases across the board in revenue, adjusted EBITDA and adjusted net profit. This performance can be largely attributed to investments we had made in each of our segments to bring technology and differentiated services that resonate with our broad customer base. Acquisitive growth in the quarter was 8% and 12% for the entire year. The acquisitions we have completed during our fiscal year have all been meaningful contributors. Organic growth in the quarter was negative 4% and 8% for the entire year. Passing the $0.5 billion revenue mark is a major milestone for Calian, and growing gross margins and EBITDA margins ahead of revenue speaks to our profitable growth agenda. Gross margin performance in the quarter was strong, reaching 26% compared to 19% in the same quarter a year ago. The improvement in EBITDA of 35% and adjusted net income of 54% significantly outpaced our revenue growth in Q4. Our balance sheet remains a strength. We ended the quarter at $78 million in cash and a credit facility of $120 million, which is still undrawn. We completed 3 acquisitions during FY '21 and have already successfully closed one acquisition in FY '22. We continue to invest in our team to facilitate further investments in M&A, and our pipeline of deals is as busy as ever. I'll turn the call back over to Kevin.
Thank you, Patrick. I can't overstate how pleased I am with how far Calian has come. And I hope this demonstrates why. In only 4 years, we have nearly doubled our annual revenue, more than doubled EBITDA and achieved high margin levels. This has been the result of how we go to market. The assets and technologies we own and the geographical expansion we have accomplished. And I believe this is just the beginning of our journey. These results have reinforced our strategy to invest in our existing assets and technologies to accelerate organic growth in the long term. We've talked quite a bit about how our recent acquisitions have contributed to revenue growth. We spent $70 million on M&A this year, the most in company history, to acquire technology assets that strategically bolster our capabilities in different areas, like cybersecurity and immersive training solutions. We've never had more technology assets than we have right now, and we'll continue to grow this portfolio through M&A and continued organic investment. On guidance, I must caution that revenues realized are ultimately dependent on the extent and timing of future contract awards, customer realization of existing contract vehicles and any impacts due to COVID-19 and specifically government regulations related to social distancing, stay-at-home orders and broader global travel restrictions. Based on currently available information of contract backlog, sales opportunities and our assessment of the marketplace, we expect to continue our growth posture in the coming year. Our guidance does not incorporate any additional M&A activity. Should we close on any new opportunities, their contributions would be incremental. With that backdrop, our guidance for the fiscal year ended September 30, 2022, expect revenues in the range of CAD 550 million to CAD 590 million, adjusted EBITDA in the range of $57 million to $61 million and adjusted net income in the range of $39.25 million to $42.75 million, and please see our press release and MD&A for a detailed reconciliation of our guidance.As mentioned, this guidance indicates that FY '22 will be another record year with potential for double-digit growth in revenue and EBITDA. This guidance includes several millions in new investments in our health, cyber and communication assets to create long-term value. So why should investors have confidence in Calian? We've been in business for 39 years, having just celebrated 80 consecutive profitable quarters. Our balance sheet is strong, and our strategy of diversity, profitable growth and both organic and M&A growth is delivering results.I don't believe our stock price properly reflects our recent performance and our upward trajectory. As CEO, I'm confident that we have the team, the assets and the strategy to deliver long-term profitable growth.And finally, I want to thank our staff for, once again, achieving not only record results, but for being there for our customers. What has been demonstrated through the COVID is our services and solutions are essential to our customers across all of our segments, and I'm extremely proud of our team for rising to the challenge yet once again.With that, operator -- Katherine, I'd like to now open the call to questions.
[Operator Instructions] Your first question is coming from Amr Ezzat.
It's Michael Vaccarino on behalf of Amr. Congratulations on the strong quarter.
Thanks, Michael.
You are sitting on a record cash position with no debt. I appreciate that these things are hard to time. But going into 2022, can you give us a sense of how much capital you're looking to deploy into M&A? And then can you speak to which areas you're seeing opportunities in?
Michael, thanks for the question. So yes, we've been busy on M&A in the last couple of years. We've completed, on average here, 4 M&A deals per year. We've done one so far this year. Pipeline is quite full in terms of new opportunities coming to us. And right now, we're busy trying to assess which ones that make sense to us and execute those. It's hard to give you an exact number of how much capital we'll deploy, but we're certainly looking to continue the same momentum we've done here in the last couple of years and complete multiple transactions. The timing will just depend on as those come into focus and we get them done to our satisfaction.
All right. And then on the Health segment, I understand the year-on-year decline with the MRCUs last year. But I'm looking to get more color on the quarter-to-quarter movement from Q3. How much of the decline is COVID-related work that isn't there anymore? And then when thinking about your reported $44 million in revenues for the quarter, is that a good plateau to build growth on top of? Or is there still some COVID-related work that will taper off?
Yes. The COVID-related work, specific response kind of in our health care group this year was about $30 million for the year. That started to taper off, obviously, in Q4. Our expectation right now and in our guidance, we're expecting that there might be a slight come out a bit left in Q1, but not beyond that. But of course, the environment is changing pretty rapidly. So if that came back on, certainly, the team is ready to respond to that, and that would be incremental to where we're at, but I think that's our current understanding of the environment.
Okay. And on IT services, very impressive gross margin performance again. In your MD&A, you mentioned that this is on the Dapasoft acquisition. Is there anything unusual in the quarter that helped contribute to the margin expansion? Or is that the new normal?
Yes. Great question. It's Kevin. I think from my viewpoint, that's the new normal from our viewpoint. Dapasoft and iSecurity coming out of the blocks very strong, both in their cloud migration in our health care platforms and cyber. And it's exactly the type of assets and companies and staff and talent that we want to acquire for not only the capabilities we can bring to the customers but the impact to our margins, to your point. So we're not expecting that to be a blip. We're expecting that to be more of a longer-term trend and trajectory now for our IT business.
Your next question is coming from Benoit Poirier.
Congrats again. First question, if we look at Advanced Tech, what was the contribution from the large satellite ground system contract in Q4? And how should we be thinking about Q1, if there's anything to be done?
Yes, we've subbed $10 million this quarter, Benoit, and we've got probably about $6 million last year this year to recognize and finish the project. We're right in the last stages here. So really, that project has ramped down as we expected as we completed it. And the teams won some new ones in Europe and then those have been ramping up. So I think from Advanced Tech, strong quarter across those deliveries of the new projects plus some incremental product sales. So it's good to see a strong performance from AT this quarter.
Okay. And what should we expect once this contract is finished from a working capital standpoint? And maybe should we expect profitability for Advanced Tech to be back in toward more normal range for fiscal year '22?
Yes. So for working capital, we had some good progress this quarter. We brought back in about $20 million of that. And so you saw that appear in the cash and with balance come down. We're expecting kind of a similar contribution probably in Q1 and Q2 as that kind of ramps down and gets to completion. And then profitability, yes, I think this is the first step back to kind of more historical levels for AT this quarter, and then you'll probably see some incremental improvements next year.
Okay. That's great. And could you talk about the timing to start the other large one worth $33 million that was awarded in February 20? I thought it was expected to start early in 2022. And if you could talk about the pipeline to replace those large satellite ground system? I would be curious to get more color on the pipeline opportunity, especially for Advanced Tech.
Yes. Thanks, Benoit. It's Kevin. The -- yes, the large project basically has been ramping up primarily in Q4, and we'll definitely continue into our new year. So we'll have a positive impact to our 2022 AT trajectory. I think the exciting part I'm seeing an Advanced Tech right now, if you think about our antenna line and with the acquisition of Tallysman, SatService, InterTronic, if you had a menu in front of you with all the different antennas required for our communications, right now, we have a much deeper solution set than we've ever had. If you think about that announcement on the electronic vehicle manufacturer that we've sold with Tallysman antennas which serves global navigation support, you think about the full motion antenna capability with InterTronic, you think about our presence in SaaS service in Germany now. The pipeline is actually probably the strongest it's been in our Advanced Tech business for both large aperture antennas and also the GNSS antenna. So we're expecting AT to continue on a solid trajectory and very excited about the opportunities, not just because of the number of them, but the size and scope of some of these are actually quite significant.So we just got to do our thing, keep our head to the ground and win our share, but I think you will see some good progress on Advance Tech this year just by the nature of the investment we've made in our antenna line.
Okay. That's great, Kevin. And Pat, could you maybe share some thoughts about CapEx, R&D and free cash flow for fiscal year '22? How should we be thinking?
Yes. CapEx was up a bit this year. We obviously had onetime investments in our ERP platform. That project is scheduled to be done in February. So I think you'll see CapEx come down a bit next year back to kind of more normalized levels in that $3 million, $4 million normalized level. And then, the dividend, we've been holding right now will be about for next year at the current shares outstanding, about 12.5 million to 13 million. So I think those are clear, and then it's really how much we can generate. And obviously, we're growing again. From an EBITDA perspective, our guidance indicates plus 10% growth again there. So you should see free cash flow increase pretty significantly compared to this year.
Okay. And from a dividend standpoint, how should we be looking at the payout right now and the timing to consider a potential increase down the road?
Yes, we communicated to investors that our objective was to get the payout from a free cash flow perspective down into the 30%. So I think, as of Q4, we've kind of gotten to that level. So our objective in the last couple of years has been to grow that cash flow and bring the dividend back in line with where it should be. So I think as we go into next year and we see incremental growth, I think we'll start to look at whether we should adjust it. But I think certainly, the plan over the last 2 years has worked in terms of bringing in line with where we wanted to be.
Your next question is coming from Nick Agostino.
If I could just go back to the fiscal 2022 guidance. I think in your MD&A, you highlight a shortage of trained staff has been, I guess, part of the variables that you considered in putting together the guidance. Can you maybe talk a little bit to what areas -- where you're seeing that shortage, Learning, Health or what are the cases? And maybe what steps you're taking to rectify that and when you think you can have that shortage fully rectified?
Yes. So from our viewpoint, I think, look, all companies right now, not just Calian, you hear with my colleagues at organizations and CEOs and C-levels the war on talent. And what we've seen in a virtual world, Nick, is that the ability to work virtually has given more opportunities, frankly, to work from home, for wherever they want to work, whether it's in Canada or around the world. What we see primarily, the demand really for us is in 2 pockets. I think we're seeing on health care practitioners and then software and software engineers. We've never been busy in our software engineering group. Right now, we continue to grow. When you think about Calian now, we have software capability in all of our segments. We've moved from strictly services in some areas now to have technology assets. So we continue to look at methods and mechanisms to retain and attract talent, both in those 2 domains. And so far, actually, we've been able to keep up. So we just wanted to highlight to everyone that all companies right now, talent is going to be a constraint, but we continue to work with our CHRO, Sue Ivay, and our business unit leaders on mechanisms and ways to ensure that we can step up to our customer requirements. So right now, it's not impeding our growth, but it's something we've got an eye on and we're not taking it for granted.
And -- that's great color. Can you maybe quantify how much of a wage impact it's having on your overall business? Or how much of an impact it's having on your EBITDA margin, assuming that you've got to pay higher wages possibly for retention purposes?
Yes, we try to respond to the market conditions wherever those people are working and the roles they have. And we certainly -- that's an important factor, not the only one in terms of retaining the people, but a certain one. And then as we get new customer deals, we try to take all of that information, whether our fixed cost and our variable costs and try to price it appropriately. So far, we haven't seen a massive margin erosion because of it, but that's certainly one we're going to have to be dynamic with us as we continue to bid on new deals.
Okay. Pat, just so I heard you clearly, you're pretty much able to pass on, in a lot of cases, whatever higher wages?
So far, to some extent, yes, I mean, obviously, you've been seeing in the news pretty significant increases, and it's unclear when this is going to end. So I'd say so far, but our ability to that -- depending on the magnitude going forward is going to be something to watch.
Okay. And then just one last question for me. Supply chain issues. Obviously, it's something that's impacted the entire IT space. I would assume that you guys are going to feel it on your Advanced Tech side and in your IT side. Can you maybe talk a little bit about what those -- what specifically we're seeing? And just based on the feedback from your suppliers, how long do you think that issue is going to persist? Is it first half 2022? Or do you guys think it's going to persist through next year? And has it resulted in you guys maybe carrying a little bit higher inventory in some cases? And I'll pass the line.
Yes. Thanks, Nick. So in that area, it really depends on our segment. Certain areas, we've been absolutely able to find alternative sources if we've had issues, whether it's on chips or components. Other areas, it's been maybe lead times are longer. But so far, we just did an update and did a review yesterday. So far, we continue to be able to make schedules and deadlines from Calian's perspective. The risk is, as you said, as this continues, maybe we will see some delays, but I don't think it's going to be across the whole company. It will be in pockets of the company. And our procurement teams right now are working day and night to comply in alternative sourcing, both domestically and globally, to ensure that we don't hit that wall. So, so far, we've been able to manage through it, much to the thanks of our procurement and supply teams that are scanning a little globally. And if we see some issues, it will likely be in certain pockets. But again, we're not expecting a major delay, maybe minor delays currently. That could change, to your point, because of the current dynamics. As far as how long does this go, it's a bit of a crystal ball exercise, I think, for the world right now. We're starting to see some things come back online. But I think to your point, the first half of this year, I think most companies are going to be dealing with some form of this until we see supply chains get back to 100% capacity.
Your next question is coming from Neil Bakshi.
So I thought I'd start off just by following up on that last question about supply chain issues. Just wondering if that affects in any way that $5 million to $10 million opportunity you last noted regarding that EV manufacturer integration? Just wondering if that affects it at all? Or if it's being replenished with other opportunities as well?
So far, it hasn't. I think we've been trying to overcome it with just sheer time and effort. The team is working day and night to make sure that we can keep up with the customer demand. And we have to buy slightly more than we normally would have just to make sure that we can do that. So, so far, it hasn't, but it's not because we haven't -- we're putting in the effort to try to make sure it doesn't happen and the teams are working very, very hard.
Great. Okay. And then just a question regarding the modular reactor -- nuclear reactor services. I guess coming off of COP26 and a lot of kind of alternative energy sources. Just wondering what you're seeing in terms of pipeline of other servicing opportunities in that space or the pipeline you can speak to there?
Yes. Thanks, Neil. How exciting is to be the CEO of a company that's working with organizations on small modular reactors, nuclear reactors? When you think about the climate challenges globally, that obviously [indiscernible] and COP conference.So I'll also say is the team -- our nuclear group probably doesn't get enough visibility or highlight in our company because of the diversity and led by Annie and Francois. We have a very talented group of nuclear engineers that are working with organizations on SMRs with regard to their initial feasibility studies, the whole kit. So we believe this is not just a domestic opportunity but a global opportunity, but we're going to walk before we run.So we have quite a few discussions going on. We've won some contracts to start working through that. In many ways, we're winning our -- more than our share, I think, which demonstrates the talent of our team. So nothing I want to look at longer term, short term. It's going very, very well.But I think, frankly, that opportunity on its own could be a pretty interesting one for Calian over the next couple of years, not just from a growth perspective, but to your point, on the potential impact to climate. And so we're really excited about it and standby, we'll continue to try and update as we go through our next calls. And thanks for that question because we probably don't talk about those areas enough in the company.
Excellent. And then just one question, with regards to this -- the telenursing services contract. Just wondering if the margin profile is to be seen as similar to what you've been seeing in the last year? Or if it's any kind of higher or lower? Just any color you can provide there?
Sorry, I just missed the beginning of that. Which contract, sorry?
This is the telenursing services, it's about $13 million in the backlog for Q4?
Yes. So we continue with that one. It's been going well. I don't see any expectation and change on demand or margins. So I think that one continues here in the short term as the customer still wants the services.
We have no further questions from the lines at this time. I would now like to turn the floor back to Kevin Ford for closing remarks.
Okay. Thanks for everyone who attended and participated. I think you all are hearing a pretty excited CEO at the end of the line. The team, I want to thank again. I have just never seen so many assets on the technology elements. We're looking at health care platforms, we're talking about virtual care platforms, we're talking about learnings platforms. So I think that journey as an innovative global growth company is well entrenched and the team is committed to making that happen. I just really want to highlight again my thanks to the Calian staff who have really knocked it out of the park from my viewpoint, and not only created amazing results, but created a foundation for our continued growth to a $1 billion company. So my thanks. And with that, Katherine, we can end the call.
Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.