Calian Group Ltd

TSX:CGY

Earnings Call Analysis

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the Calian Group Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.I would now like to hand the conference over to your speaker today, Jennifer McCaughey, Director of Investor Relations. Please go ahead.

[Jennifer McCaughey, executive]

Thank you, Shannon, and good morning, everyone. Thank you for joining us for Calian's Q4 and fiscal year 2023 conference call. Presenting this morning are Kevin Ford, Chief Executive Officer; and Patrick Houston, Chief Financial Officer.As noted on Slide 2, please be advised that certain information discussed today is forward-looking and subject to subject to important risks and uncertainties. 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.

[Kevin Ford, executive]

Thank you, Jennifer. Good morning, everybody. I'm going to start this morning by providing a few Q4 and fiscal year highlights.Clearly, after our Q3 results, it was all hands on deck. We issued a call to action to all of our 4 business and corporate services, and everyone took this very seriously. I'm proud to say that this team delivered, and today we are reporting record results in Q4. This demonstrates the resilience of our business and the power of our 4-piston engine.Notable highlights in Q4 include the completion of the acquisition of Hawaii Pacific Teleport, the launch of our digital health portfolio, the opening of wholly-owned subsidiary in Belgium, the signing of important contracts with NDA and Shared Services Canada, as well as our second SaaS customer for Nexi, our digital health platform. We also closed a $255 million debt agreement and launched an NCIB program.This strong finish in Q4 led to another record year for Calian. We've made great progress towards our goal of reaching $1 billion in revenues in our One Calian strategic plan. This performance was the product of multiple initiatives, but above all, it came from our entire team working as one, bringing their commitment and talent to work every day.Subsequent to year end, we made 2 important announcements. First, we appointed Michael Tremblay as President ITCS, who will join the team on December 1. I am thrilled to welcome Mike to the Calian family. With his vast experience across Ottawa and North America, he will be instrumental in driving results and growth. He is a seasoned, empathetic, and deliberate leader. Given his experience at large multinational corporations, his alignment to our people first culture, coupled with his startup and innovation experience at Invest Ottawa, I know he's the right fit to move our ITCS business in collaboration with our seasoned management team to the next level.Second, we announced that we entered into a definitive purchase agreement to acquire Decisive Group, a leader in IT infrastructure and cybersecurity services business in the Ontario region. The addition of Decisive complements and rounds out our current ITCS portfolio in North America. Their addition means we now have a strong base of managed services, enterprise infrastructure, and on-demand resources in both Canada and the United States. Our footprint in Ottawa, Toronto, Houston, Dallas, Minneapolis, and Tampa will allow us to serve a broad set of customers in both the commercial and government markets as we continue our journey to establish Calian as a North American leader in IT.I am pleased to report that we received approval from the Competition Bureau this week and that we are expecting to close this transaction on December 1.Now I will turn over to Patrick to discuss consolidated results and guidance for fiscal '24. Patrick?

[Patrick Houston, executive]

Thank you, Kevin. Q4 revenues reached $176 million, up 10% compared to the same period last year. It represents the highest revenue quarter in our history. This increase was driven by double-digit growth in Health, Learning, and Advanced Tech combined with strong contribution from Hawaii Pacific Telecom for the first 2 months of the quarter.We signed $176 million in gross new contracts in the quarter, reflecting a book to bill ratio of 1. Gross margin reached a record 31.7%, representing a sixth consecutive quarter above the 30% mark. Similarly, adjusted EBITDA reached a record $20 million, driven by strong revenue growth, gross margin expansion, and the start of benefits from the restructuring plan implemented midway through the quarter. Adjusted EBITDA margins stood at 11.6%, returning to double-digit from 8.7% in Q3.This strong Q4 capped off another record-breaking year for Calian. Revenues increased 13%, in line with our objective to deliver consistent double-digit growth. In fact, I'm proud to say this year represents the sixth consecutive year of double-digit revenue growth. Half this revenue growth was driven by acquisition, Computex in the first half of the year, and HPT in the fourth quarter.The other half was driven by double-digit organic growth by Advanced Tech, Health, and Learning. Gross profit reached $204 million, surpassing the $200 million mark for the first time, and gross margins continued to expand, reaching 31%. This growth was driven by the increase in volume and a favorable revenue mix. Adjusted EBITDA reached $66 million, in line with last year, while its related margin was down to 10% compared to 11.3% last year.These metrics were impacted by lower shipments in the ITCS segment in the second half of the year, as well as various gross investments we made at the end of FY '22, which increased operating expenses. Recall that we implemented a restructuring plan midway through Q4, which is expected to generate annual savings of approximately $8 million. We signed gross new contracts at $580 million, and ended the year with a backlog of $1.2 billion, positioning us well for next year.Net profit in FY'23 increased to $19 million, or $1.61 per dedicated share, compared to $14 million, or $1.19 per share for the same period last year. Since Adjusted EBITDA was in line with last year, the increase was mainly driven by lower expenses related to acquisitions, partially offset by restructuring costs and higher depreciation. Adjusted net profit, which isolates the one-time impact of acquisitions related to charges and restructuring costs, decreased by 8% to $41 million or $3.45 per share, versus $44 million and $3.87 per share last year.In FY '24, we are expecting to pay the year 2 earn out for SimFront. That amount is recorded on our balance sheet. Driven by increased profitability in working capital recapture, we generated cash flow from operations of $57 million in FY '23, up from $43 million last year. Working capital change in Q4 was $10 million, which brought the year performance to positive $3 million. This should be in concert with our strong revenue growth of 13%. Going forward, we'll be looking to drive more efficiency in working capital as we continue to deliver double-digit revenue growth. Operating free cash flow was $45 million and represented a 68% conversion rate from adjusted EBITDA.We continue to have a disciplined and balanced approach to capital deployment. We invested $68 million in acquisitions, including earn out payments. We've continued to pay earn outs, again showing the acquisitions we have made are growing and consistently hitting or exceeding their targets.We made CapEx investments of $8 million. Our CapEx levels have remained stable, despite significant increase in the size of our business over the last few years. We continue to invest in capital that will help us scale and not inhibit our growth aspirations. We also paid dividends of $13 million or $1.12 per share, representing a 29% of operating free cash flows. We continue to see the dividend as an important part of our balanced capital deployment strategy. Our objective is to maintain a payout ratio between 25% and 30% of operating free cash flows. We're actively monitoring this, and we may re-evaluate the size of the dividend in future quarters.Following our Q3 results, we did put in place a normal course issuer bid, as we believed our shares were undervalued. We purchased 32,000 shares for cancellation of approximately 2 million, those purchases have continued in Q1, and we plan on monitoring this in the short term.After making all of these investments, we ended the year with a solid balance sheet. Recall that in July, we extended and expanded our credit facility to a committed amount of $180 million, with an accordion taking it up to $255 million of capacity. This new 3-year term will give us access to additional liquidity to fuel our growth strategy.As of September 30, we had unused debt facility of $142 million. This facility, combined with the cash on hand, presents us net liquidity of $176 million to pursue our growth. We're able to expand this with our current lending to indicate if need be. As of September 30, we had a net debt of $4 million, and our net debt to EBITDA ratio was 0.1x, well below our short-term target of 2.5x. Given our strong cash flow generating ability and liquidity position, we're operating from a position of strength as we continue to execute both our organic growth plans and our M&A strategy.Let's look forward and look at our guidance for FY '24. We are assuming that Decisive acquisition will close on or around December 1. And as a result, we expect revenues in the range of $730 million to $790 million for the year ended September 30, 2024. At the midpoint, this reflects revenue growth of 15%. This would represent our seventh consecutive year of double-digit growth and another record year. In this guidance, the acquisition of HPT and Decisive represents approximately 7% acquisitive growth. And at the midpoint of the range, organic growth would be approximately 8%.When taking into account our $438 million of backlog earmarked for FY '24, our deferred revenues of $32 million, and our recurring revenue stream of about $40 million, we have almost 2/3 revenue coverage right out of the gate.In terms of profitability, we expect adjusted EBITDA in the range of $83 million to $89 million. At the midpoint, it reflects adjusted EBITDA growth of 30%, significantly outpacing revenue growth. As we continue to expand into higher margin businesses and obtain the full year benefit of our restructuring plan. It also implies a margin of 11.3%. With this guidance, we're off to a great start to achieve our $1 billion revenue target by the end of fiscal '26.Just a quick note on modeling, the Decisive acquisition as mentioned earlier, we anticipate closing the transaction on December 1, and the majority of their EBITDA contribution will be in our first and second fiscal quarters.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. The guidance also implies no major changes to current economic environment, defense spending, and supply chains, as well as no increases in interest rates and labor costs.Note that our guidance does not incorporate any additional M&A activity than those already mentioned. And should we close any new opportunities, their contributions would be incremental.Finally, in terms of capital deployment, we expect cash flow of $50 million in Q1 with the acquisition of Decisive. For the year, earn-out payments should be around $3 million. We continue to have a robust pipeline of acquisitions, and we're looking to close a few acquisitions in FY '24. We expect to maintain our CapEx investments in the range of $9 million to $10 million in our current dividend at $1.12 per share. We believe this guidance reflects the strength of our business and the momentum coming off the record quarter.I'll now turn the call back over to Kevin to provide additional color on our outlook for next year. Kevin?

[Kevin Ford, executive]

Thank you, Patrick. I want to echo Patrick's comments on the momentum and the strength of our business, and I believe our guidance for next year reflects this.Let me spend a few moments by providing context on FY '24 for each of our segments, and let me start with ITCS. As expected in Q4, results were lower than the same period last year where a disproportionate amount of products were shipped due to the easing of supply chain issues, coupled with the momentary pause in product deliveries in the resale business we experienced in Q3. I was glad to see our performance improve from our previous quarter, and I still believe we have room to increase profitability in the upcoming quarters. New contract signings were $87 million in Q4, significantly outpacing revenues, an indication that bookings continue to be healthy and we're well on our way to normalized levels.For the full year, revenues for the ITCS segment were up 9%, driven by full year impact of the Computex acquisition in the first half of the year. However, the EBITDA was impacted by lower deliveries in the product resale business in the U.S. in the second half of the year and higher operating expenses which was addressed in the restructuring plan announced after Q3.Looking forward to FY '24, profitability should be greatly improved. With the full year benefit from the cost reductions implementing Q4 and the addition of Decisive, which complements and runs at our current IT and cyber solutions portfolio in North America, we're well positioned to extract a lot of synergies over the next 24 months. And under the leadership of Mike, in line with the very strong executive team and dedicated team that sits on ITCS, we have a team in place to do just that.Turning to our Health segment, in Q4 the Health segment continued its trend of quarter-over-quarter growth and posted once again its highest quarterly revenue since the peak demands of the pandemic, driven by increased demand from longstanding customers as well as short-term health response demand. Similarly, margins were at record highs. We are very proud of the Health segment's overall performance in FY '23. It has successfully backfilled the one-time work generated from the pandemic and growth was driven by higher customer demand on long-term contracts, new business wins from clinician services, and a solid performance from our Pharma Solutions Group. With new gross contract signings of $150 million and a solid backlog of $633 million, we look forward to another solid year.For FY '24, we see continued strong demand from the Canadian Armed Forces contract, our Clinician Services Network and Pharma Solutions, which should have us surpass the $200 million revenue mark for the first time in Company history. We're also actively looking for acquisitions to build on our current assets. Since we will continue to invest in growth in order to expand our digital product and service offering, and in our sales capacity to capitalize on the current momentum, we expect margins to be lower than last year.In Q4, for Advanced Technology segments, in Q4 we continued the momentum from the last 2 quarters and posted our highest ever revenue, gross margin, and EBITDA. This growth was driven by strong product sales across all our divisions, as well as from the contribution of the HPT acquisition for about 2 months in a quarter. Coming out of the blocks, HPT is doing better than expected, not just in terms of results, but in terms of helping us make introductions to other potential customers in our space.Our Advanced Technology segment has had a record year in FY '23. Both from a top line and profitability standpoint. This growth was driven by growing demand from products including telecom, GNSS antennas, and ag tech, as well as the consulting services and growing nuclear markets. This clearly demonstrates that our diversification away from lumpy, large ground system projects over the past several years is yielding positive results.For FY '24, we see this momentum continuing. We see lots of opportunities in our products across our Space and Terrestrial business with our GNSS antennas expected to have another record year. In fact, we are currently having discussions with some of the major global players about being incorporated into their platforms. We're also seeing lots of ground system activity going on, and exciting to see the future in that city.With continued strong demand for our products, the full year contribution of HPT, new contract signings of $192 million and a solid backlog of $149 million, we expect to easily surpass the $200 million revenue mark next year for Advanced Technologies. EBITDA margin should also increase given the higher margin [technical difficulty] favorable revenue mix. We are also actively looking for acquisitions to expand and strengthen our portfolio of assets.Turning to our Learning segment. In Q4, the top line continued its year-over-year growth momentum displayed in the last few years, driven by strong demand for military training with existing Canadian customers. We also continue to see demand for new products and technologies for NATO customers due to geopolitical issues and renewed focus on readiness. But we believe that this will take longer to get to fruition.We are proud of the progress we've made for the full year. In FY '23, revenue surpassed the $100 million mark for the first time. This 16% growth was all organic and was primarily driven by strong demand with existing customers in Canada. However, EBITDA margins were under pressure this year as we continue to invest for future growth. Excluding investment in research and development, our EBITDA margins would have been above 18%.In FY '24, we expect the space of organic growth to slow down as we don't control government procurement decisions. In light of this, we will look for opportunities globally, focus on developing customers on the commercial side, and look for acquisitions that will complement our diversification and innovation strategy. We will continue to invest in growth as we believe the global defense market will yield future opportunities. However, this is a long-term play for Calian and should be viewed as a marathon and not a sprint.In conclusion, as I reflect on our fiscal '23 and our look forward to '24, I see many positive indicators. Our diversification involving products business helped us post a record fourth quarter. Strong signings and organic revenue momentum reinforces customer's trust, us, and expertise in our domain. And finally, our capital allocation strategy is working with strong early returns from HPT, the forthcoming acquisition of Decisive, and a robust pipeline of targets going into the year.There's one important point that I'd like to make about our financial results going forward. We anticipate that we will see more fluctuations in our quarterly results. This greater variability is generated from 3 main sources. #1, our revenue mix, which is increasingly skewed towards higher margin products where the timing of deliveries comes into play. #2, our revenue mix, which is less dependent on long-term government contracts and more exposed to commercial customers and global defense, which are characterized with greater demand variability. And third, the global macro environment, which is increasingly uncertain.Having said this, we are confident in our annual guidance, but we may experience quarterly fluctuations. Keep in mind that 1 quarter doesn't make a year. Therefore, assess Calian with a longer-term view in mind. As we enter into year 1 of our 3-year strategic plan called One Vision, One Purpose, One Calian 2026, I'm excited as we now have a very clear roadmap for $1 billion in revenues. The combination of M&A and organic growth, coupled with our dedicated and talented team, continued investment and innovation across all that we do, the globalization of the Company, and services and products that are very relevant in today's challenging world, will position us to continue to sustain our track record as a double-digit profitable growth Company.On that note, I'd like to thank our staff for their commitment to dedication. They really do make all the difference. I also want to thank our customers for the loyalty, our suppliers for the collaboration, and our shareholders for the continued support.And with that, Shannon, I'd like to now open the call to questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Maxim Matushansky with RBC Capital Markets.

[Maxim Matushansky, analyst]

I want to start on the kind of 3-year outlook. I'm wondering what gives you the -- I guess what you're seeing that gives you the confidence to increase your top-line growth targets from 10%, 5%, organic 5% [indiscernible] to now 15% kind of growth rate over the next 3 years. Has there been any change to the M&A pipeline that you're seeing, or the macroeconomic environment you're seeing, or is it just kind of robust performance across your segments?

[Patrick Houston, executive]

I think I'll speak to the M&A, Max. I think the balance -- we've worked hard to put ourselves in a position where we have the balance sheet to deploy, and I think that we're seeing a strong pipeline coming out of the gate. We're optimistic between the acquisitions we've made and the pipeline we have. I think we can continue our kind of being a strong cap allocator with multiple deals per year. I think the signs we're seeing so far are positive on that, Max.

[Kevin Ford, executive]

Yes, it's gotten -- and Max, good question. The confidence really comes from my view that the investment we've been making in all our businesses, I think, gives us the confidence on that single-digit organic growth profile. We have more products, more services, more innovation across all that we do. And as Patrick said, the M&A pipeline across 4 very dispersed segments is very strong. So when you look at that journey to $1 billion, I think you look at continuing single-digit organic growth and then pumping up our M&A engine. We're investing in that this year. We continue to strengthen under Patrick's leadership. So we're going to put more capacity into that M&A engine to make sure that we continue to acquire good assets for our long-term growth objectives.

[Maxim Matushansky, analyst]

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

[Patrick Houston, executive]

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

[Maxim Matushansky, analyst]

And just finally, from me on ITCS. The ITCS, can you maybe provide some more color on the size of acquisition in terms of kind of the potential synergies you're looking for? It seems certainly on the surface, there's possibilities for cost and revenue synergies there. And I guess maybe as an add-on to that, is there any dynamics or trends to call out within that segment in Q4 compared to the first half of fiscal '23? I know that there's volatility in the product revenue, but the services revenue in ITCS was kind of still below Q1 and Q2 levels. I'm just wondering if there's any dynamics or trends to call out there.

[Kevin Ford, executive]

Yes, good question. I think for me, first and foremost, let me just start with the talent. I've met the Decisive team now a few times, and we have some incredible talent that's going to complement the talent that we've brought into county through Computex, the iSecurity, the Dapasoft acquisition. So #1, one of the things, just capacity and talent with regard to our managed services, our cyber services capability, both in America, right across North America. So #1, talent, and capacity and just ability to continue to scale as we see a increased demand in their cyber business.The second piece is the cyber piece itself. The team continues -- we should continue to see strong interest in our cyber capability. We continue to win our share of cyber, specifically in the healthcare sector. The team has been working incredibly hard, both on cyber preparedness, cyber incident response. And again, with Decisive, we're confident we can leverage their skill set as well to strengthen that and expand in our North American presence there for sure.The third is the government business. A lot of -- we talked about government and since we've taken over Calian, as you know, Calian was heavily weighted in governments and we're now about 50/50 commercial government. That being said, we still see a lot of opportunity within government and Decisive has a very strong footprint, especially with some of the secured accounts where we have not had a focus outside of defense. So they're going to help us diversify within our government business in Canada. And again, I think their brand, you probably don't know that, but the brand here is very strong. So we're expecting it to help our government business both short and long-term. So the combination of our government business, the diversification of our North American presence with regard to their capacity supporting our current teams, and then just getting stronger in our managed services capability, I think it's going to be a great addition to our ITCS team.

[Operator]

[Operator Instructions] Our next question comes from the line of Benoit Poirier with Desjardins.

[Benoit Poirier, analyst]

Could you provide an update on the status of the restructuring plan? Just wondering whether the restructuring is fully complete or can we expect something residual beyond the $2.6 million that was took in the quarter?

[Patrick Houston, executive]

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

[Benoit Poirier, analyst]

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

[Patrick Houston, executive]

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

[Benoit Poirier, analyst]

Okay. And in the quarter, you announced a partnership with the MDA on the Canadarm3 development, can you speak more about the opportunity and its impact on the Advanced Tech segment?

[Kevin Ford, executive]

Yes, absolutely. It's Kevin. So MDA continues to be a strong partner for us. We're working with them on a bunch of different initiatives, and we're happy to get this mandate from via MDA and team. It's working really in the testing of certain elements of the arm that the team will be doing out of Saskatoon. Some of the work we did actually in Canadarm2, we were able to re-secure that same scope for this next Canadarm3 development. So that'll be based out of our team in Saskatoon. And again, lots of great exciting things happening in the space economy, and we're happy to go participating in it. This is a good sign of what I think is going to be some exciting announcements as you go for the next couple of years, as space becomes totally relevant again, both in the defense, public sector, and the journey to the moon as you see by the Artemis mission. So yes. So it's basically, we working with them on the Canadarm3 along the testing of that arm, and then basically certain elements of engineering that we'll be doing as we've done in Canadarm2.

[Benoit Poirier, analyst]

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

[Patrick Houston, executive]

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

[Operator]

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

[Kevin Ford, executive]

Okay. Thank you, Shannon, for facilitating today's call. Always appreciate it. I'd like to mention in my closing comments that we will be hosting an Investor Day in Toronto on February 15, so please save that date. More details will be shared in the coming weeks, and it's a great chance for us to talk about our One 2026 strategy and our thoughts moving forward on the growth of the Company. So I hope you can attend, again, February 15 in Toronto. So on that note, I'd like to thank each of you for attending, and we look forward to providing you with an update on our next quarterly call.And with that, Shannon, we can close the call.

[Operator]

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