Q4 2020 Alithya Group Inc Earnings Call
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I would like to remind everyone does this conference call is being recalled that on Friday June 19th Sweeny screen I would not come to conference or whats PM Brushy President Ms. won't be so please go ahead sir.
Good morning, everyone. Thank you for joining us for Leaches fourth quarter fiscal 2020 results conference call. The press release and Mdna with complete financial statements and related notes were issued earlier today and are posted on our website.
The webcast presentation. It can also be found on our website indeed investors.
Presenting this morning are callable Elliot's Jones, President and Chief Executive Officer, and closed CIBIL Senior Vice President and Chief Financial Officer.
Following their comments, we will open the call for questions.
Before we begin I would like to specify that this conference call is intended for the financial community also see please be advised that this call would contain statements that are forward looking and subject to a number of risks and uncertainties.
That could cause actual results may differ materially from those anticipated.
Please refer to the risks and uncertainties section of our Mdna available on our website for more details.
Let me remind you that all figures express on today's call our ingenium dollars, unless otherwise stated and be aware that we will refer to certain indicators that are not <unk> first measures. Please refer dry AMD DNA for more details now I would like to turn the call over to Paul.
Thank you Jamie good morning, everyone vulnerable.
Today, I will discuss our response that cold in 19 pandemic. Our continued growth in fiscal 2020, and our continued diversification journey, which positions us well for our objective to become a north American theater in digital transformation services.
Let me begin with our response to the pandemic.
First and foremost elite and most of its customers are fortunate to operate as essential services providers.
In response to the Cobot 19 crisis, we proactively implemented business continuity plan focused on three priorities.
Protecting our people.
Protecting our clients and protecting the company.
We responded quickly by implementing an immediate work from home policy for all of our employees before were required to do so by the authorities.
As well as offering our clients uninterrupted support and helping them migrate to cloud environments. As they were also forced to adapt to tell the working conditions.
In addition, we took.
Since steps to manage our liquidity by further optimizing our cost structure restricting all non essential expenses limiting capital expenditures, reducing management and board compensation as well as reviewing and taking advantage of all available government programs. We are closely monitoring developments and we'll consider.
For additional initiatives as the situation evolves.
Now turning to our fiscal 2020 results on slide five.
Fiscal 2020 was an exceptional year in the we'd get a journey to becoming a leader in digital transformation services in North America.
We reached record breaking results in terms of revenue gross margins adjusted EBITDA and cash flow generated from operations.
Our revenues reached $279 million up 33% as compared to 29 team.
Primarily driven by the contribution from acquisitions and grow and higher value services.
This was partially offset by the elite UK divestiture and ongoing spending reductions from a select group of our large Canadian clients.
On the organic growth side, you have been working hard to mitigate some of these reductions through growth in new and existing clients of higher value added services.
Excluding these reductions.
Of these select clients organic growth in Canada actually increased 14.6% year over year, a testament to the resilience of our business model.
During the year, we successfully completed the integration of our Edgewater acquisition and successfully divested our small UK operations.
We were also very active on the acquisition front.
We completed three acquisitions, namely mattresses in October 2019, traverse in December 2019, and the Skena in February 2020.
These acquisitions will clearly accelerate our growth going forward reinforce our platforms on both sides of the border broadened our service offering and provide a lead yet with the scale to target larger clients and more complex projects.
We are already witnessing the benefits of these new additions in recent large project wins.
It all these acquisitions represent a total value of more than $45 million, which we financed with a combination of debt and equity.
Turning to slide six for profitability.
Gross margin reached $83 million or 29.7% of revenues up from 54.3 million or 25.9% of revenues last year.
This marked improvement was driven mainly by increased margins from acquisitions.
Growth in higher value added services revenues increased use of permanent employees versus contractors.
Our gross margin expansion journey continued in fiscal 2020 with margins approaching 30% from the low Twentys just two years ago.
Adjusted EBITDA, almost doubled to $11.8 million or 4.2% of revenues.
Due to higher gross margins and the adoption of is our S 16 leases, partially offset by a combination of recurring and nonrecurring expenses related to being a public company and expanding the business. In fact this represents the highest EBITDA level since going public.
We generated 8.7 million in cash flow from operations a marked improvement.
Over the 80 28.3 million versus the use of cash of 19.6 million in 2019.
We also completed the year in a solid financial position.
Slide seven and eight Provida historical growth profile of Alithia.
Over the past few years, we have grown our top line by over 30% annually on average and our gross margin has improved from the low twentys that close to 30% today.
We were able to do this by selectively diversifying our business.
Turning to slide nine.
After close to two years since going public at media is a very different company.
We diversified our business by industry by geography and by client.
Two years ago, we were highly concentrated in the finance sector. We had almost all our revenues generated in Canada, and our topic clients represented 70% of our business.
Today, our revenues a diversified by industry with finance representing less than 30%. Furthermore, we are us acquisitions. Our revenues are almost evenly split between Canada, and the U.S. and our topic clients now represent less than 31% of our revenues.
We are proud of our evolution and remain focused on becoming a digital transformation leader in North America.
Furthermore, our diversification provides us with a much stronger foundation to face the potential challenges of upcoming quarters.
Closed will now review, our fourth quarter results and our financial position vote.
Thank you all and good morning to all.
Let me review certain Q4 numbers, please turn to slide 10.
Revenues increased slightly $73.2 million from $72.6 million for the same period last year.
This increase was driven by our latest acquisitions, coupled with good growth from new and existing clients.
It was partially offset by the continued spending reductions from several of our larger Canadian clients.
Decreased from Oracle legacy products and services into use.
And to a lesser extent by the early impacts.
[music].
A proven 19 in the month of March.
Including in France, where the occurred a little before.
Gross margin amounted to $20.9 million or 28.6%.
Down slightly from $21.3 million or 29.3% last year.
This variation is mainly explained by our normal variations in our revenue mix during the quarter. If you really impacts of go in 19.
As we indicated before and we don't factoring in our acquisitions.
The company long term strategy to move towards higher value added services, increasing the use of permanent employees will continue to drive gross margin improvements over time.
It's beginning expenses amounted to $21.9 billion.
8.8% from $20.2 million last year.
This increase is explained by additional expenses related to recent acquisitions.
Partially offset by the divestiture of our UK operations.
As well as certain nonrecurring items.
We continue to target decreasing administrative expenses.
As a percentage of total revenues.
As consolidation synergies materialize in larger scale allows for more fixed overhead leverage.
Adjusted EBITDA amounted to $2 million or 20% of revenues.
It was $2.2 million or 3.1%.
The same period last year.
In addition to the variations explained above the small decrease is also explained by increased costs related to expanding our business.
Coupled with early impacts from coping 19.
Partially offset by higher value added services and the 0.5 million dollar positive impact from afar 16 on lease accounting.
Okay nodes.
Excluding those early impact with proven buying team I understood EBITDA would have been slightly higher than the same quarter last year.
At the end of the quarter, we performed our regular annual goodwill and intangible impairment test.
In the context of Govan 19.
And the significantly increased uncertainty surrounding global economic conditions in general.
And so running our clients different geographies markets and industries in particular.
And using conservative assumptions, we decided to record an impairment charge of $28 million for intangibles and goodwill.
That includes a reduction in the accounting value of our American trade names.
Our strategy of transitioning our acquisitions onto the alicea brands as soon as possible.
Is proving well accepted and very successful.
As a result net loss during the quarter was $34 million or 59 cents per share.
Again, including non cash impairment.
Compared to a net loss of $2.7 million or five cents per share for the same period last year.
Turning to our liquidity and financial position on page 11.
Operating activities use $3 million and liquidity in the fourth quarter are marked improvement versus or use of liquidity of $6.7 million last year.
Despite completing three acquisitions investing in some real estate capex and dealing with the onset of Kogan 19, we ended the year in the healthy financial position.
At March 30, Onest 2020, we had $26.9 million have met bank borrowing.
Which reflects $11 million and cash unrestricted cash.
This compares with bank of $10.2 million.
At March 31st wouldn't 19.
Subsequent to the end of the quarter certain of our U.S. subsidiaries obtain loans totaling 6.3 million us dollars.
The U.S. government pay check protection program or PPP.
That program offers certain conditions, allowing for the forgiveness of these loans in whole or in parks.
We are using the funds were eligible purposes and we are following all prescribed rules in order to maximize such forgiveness.
However, there can be no certainty, whether we will obtain forgiveness.
What the amounts forgiven will be and when all this might be confirmed.
In Canada, we obtained approximately.
For smaller subsidiaries.
And for the initial two months of the program only.
Finally, we also things some government assistance in France from the program execute the best yet.
As it stands today, especially with this additional funding we believe we have good financial flexibility.
As may be required.
We weathered the current environment.
Turning back to Paul.
While this unprecedented crisis had limited impacts on our fourth quarter results, we do expect that to impact our results over the next few quarters. In fact from April to mid June we observed the longer sales cycle as well as delays and some projects, even though most clients remain committed to their projects long term.
Furthermore, our pipeline remains healthy providing a good base to build up.
While cobot 19 has created short term uncertainty over the goal. We believed demand for digital transformation services will remain strong as companies will increasingly need to improve operational efficiencies.
Given this context lithia is well positioned to benefit from future growth opportunities as it has successfully built its reputation as a trusted and experienced partner.
Turning to slide 13 for a few key takeaways.
I would first like to say that we remain fully committed two or three to five year strategic plan as detailed on slide 14.
Since going public we placed great emphasis on expanding our gross margins and we delivered on that front in 2020.
Over the next few years, the upward trend will continue to be driven by acquisitions value added services and investing in our talent and greater scale.
I'll leave you has now resting on a much stronger foundation, allowing us to support future growth and also faced potential headwinds.
As I indicated before our exposure to our topic clients has been significantly reduce in the past few years, even though we continue as their strategic partner.
Considering organic growth of 14.6% in Canada, excluding a few select clients means we were successful in offsetting these important declining IP investment cycles.
Acquisitions remain an important component of our growth strategy as detailed on slide 15.
The three acquisitions completed last year represent approximately 35 million an annualized revenues.
Considering the scale of our existing platform recent acquisitions were integrated quickly and smoothly and allowed for immediate focus on cross selling opportunities.
On a short term basis, our solid financial position is an important asset to whether the current prices. However, we remain open to opportunistic tuck in acquisitions.
As the dry for Joe transformation continues we all believe.
At.
That we were well position to deliver on our long term vision to become a north American leader in strategy and digital transformation.
Kobin 19 is still very much reality.
But we're now seeing the light at the end of the title.
The past three months have been unprecedented and difficult for everyone.
My sincere gratitude this first extended to our loyal professionals, who have clearly demonstrated their dedication to elisa and their customers.
I would also like to thank our clients for their unwavering support and trust.
To you our shareholders my thanks for your support and patients.
Finally, I have special thanks for the incredible healthcare workers and other first responders, who remain uncorrupt still today 24, seven trying to make all our lives better during these extremely challenging times.
We will now be pleased to answer any questions you may have operator.
Okay.
So ask a question you would need to Chris Paul one on your telephone. So we draw your question first the pound all hash key.
Please standby when compared to Q on Eros there.
Your first question comes from the line of Maehara Yankee official Dunn Your line is open.
Yes. Thank you for taking my question can you hear me well piece.
Yes. Thank you good okay.
Okay.
So I wanted to ask you maybe you can.
Help us understand a little bit how the called the 19 situation is affecting your business when it comes to.
Managed services versus.
Consultancy type work.
Can you maybe also split tour revenues.
And that sense and.
And discuss a little bit.
How how is it.
The print between the U.S. and in Canada.
Okay. Thank you for the question I'll I'll take the first one so.
Most of our customers are essential services sold so.
None of them have stopped we have a couple of exceptions, we had the in France. As you know air France is a big customer of ours and of course, the they've stopped.
And just about everything.
Flowed mention the there's a special program in France for companies was that the style. So they actually cover the salaries and employee but that impacts or revenue in France. It is a smaller portion of our business, but for French operation that was a big piece.
We had the one customer in the US which was a cruise line and as you can imagine they slowed down but it was a very small customer.
Every every other customer.
It's still going so we didn't have to stop I'd say in the first few weeks like everybody else. There was a lot of uncertainty people weren't too sure what to do.
We had customers needed help and moving to two teleworking.
Never done it before so that generate some work there were some slowdowns in some customers.
Say early on.
But.
But that's also.
Stabilized.
I'd say, we're seeing a longer sales cycle on some of our.
Our larger projects, but as you can imagine all of the projects that were on the goal.
We haven't stopped so if you're in the as I've mentioned before once you start a digital transformation projects R&D ERP implementation, you don't stop in the middle of it.
It has given us challenges and how we implement those projects because as you can imagine the ERP project equal usually go on site for the customer.
We've been able to deliver all those projects and continue by doing it remotely it's been a very interesting challenge for our teams and our customers, but it's actually working very well.
So that's a that's been interesting.
What was the second part of your question again.
Is there isn't a difference and how and how revenue mix is between Canada and new as.
Which one you think would be affected more by the cold with 19 pandemic.
It's an interesting question, it's not as much by country as by by customer.
So for example financial services I'd say there was some hesitation that the in the first few weeks, but everything is.
Running full steam now.
Manufacturing with the business that we do in manufacturing is mostly in the food business and as you can imagine food has not slowed down it actually accelerated during the pandemic. There was a lot of restructuring within those organization on the whole logistics and supply lines and that the impact the created some of this.
Events, but it was a.
Ongoing energy.
Hasn't really slowed down when they still have to generate we're not in the oil and gas business. So that we didn't have any impacts there.
So I'd say, it's very is more by customer that by country.
Okay and wonder.
When I look at your.
Fourth quarter results, we saw some some pressure on gross margins and.
Higher as Jan the account.
A month.
That was expense.
How much of that then.
Due to covert and let's say increase an M&A activity and what would you would you say a more normalized level should have been on those two.
Level to two metrics.
So are you talking about gross margin or EBITDA margin.
Gross margin sequentially down quarter over quarter I was just wondering what was the reason for that and also the higher SGN a month quarter in Q4.
Okay. So gross margin sequentially Q4, which is the first quarter of the calendar year is always.
A very much lower than Q3 because of the reset of government benefits.
So as you May know when you started a year every all employees are sort of starting over 40. The government benefits. That's both in Canada into US starts easing up in the second calendar quarter, our Q1 and then.
Q2 in Q3 fiscal and so that is Q3 in Q4.
Our much better from that perspective, that's point number one the impact of coded we have estimated to be at least $300000.
So as you know if we're talking about mid to late March and friends So little before.
So basically clients certain clients have reacted quickly they were not prepared to do remote working for example, so we had staff temporarily unable to invoice.
Some of that reversed.
But that's the amount we are providing at least $300000.
And that's both topline gross margin and bottom line because again, we did not have to react that quickly to reduce costs.
That we could have reduced in terms of this DNA same thing regarding a on salaries regarding the government the benefits reset on Jim first.
Or acquisitions year over year brought with them a certain level as ginny.
What specifically is your sorry.
Well I'm trying to.
In terms of the as you and the level that you expect could be an ongoing incurring in the next couple of quarters.
What would be a more normalized level, but we should be.
Be thinking about.
We can to provide specifics how for example, how the expenses that are.
I really impacted by coven via travel business development training recruiting.
And so on will be decreasing significantly from Q3 as sorry from Q4.
Although that may be temporary when scoville gets behind us at normal levels should should resume.
This thing about benefits reset obviously into Q1 will be easing off so directionally expenses as Ginny will be lower going forward.
Although there is some.
Impact in the other direction, we only had this key that for two months.
In Q4 in Q1, we're going to have axis keyed up for three months, but the amount is marginal.
When we talked about as Ginny.
But it should be going down.
Okay and my last question I'll leave I'll leave other people to go ask as well.
Two questions.
You mentioned in the press release, what's your organic growth rates would have been if we excluded.
A few off your large clients.
[music].
When.
When should we start or are you seeing enough stabilization and those four or few clients that have that are affecting your results negatively so that we begin to see events from b that organic growth.
More visibly on your reported results or.
We still don't have.
We have not preached let's say the potential.
Bottom on on those large key account yep.
Yes, and Great question. My if you had asked me that question four months ago.
My answer would have been much clearer right now in the context of coal vis until we get more clarity on the next quarter, it's very difficult to say.
Okay.
Okay. That's great. Thank you.
Thank you.
Your next question comes on the line of AMR as though.
Hmm Putnam your line is open.
Good morning, Thanks for taking my questions.
I just want to go back to the gross margin dynamics.
You guys just mentioned that the sort of normalized impacts or you don't like you could adjust your gross margins by $300000 due to co beds, but if I'm looking at the year on year number.
If I make that 300000 dollar adjustment. It seems like you would have still been like flat year on year on gross margin.
So im just trying to understand the dynamics there like traverse anthem My Pcs.
Both contributing to your quarter or it seems like from your notes of fleet that there are 40% gross margin businesses.
So just wondering if you could quantify what what other things are impacting I go through gross margins year on year.
So as we said that a fair chunk of that variation is revenue mix.
So even though the the fundamental direction is how you put it should be going up.
Over time, sometimes in a given quarter, we may have some of certain projects less of another type and that impacts the mix.
We have increased significantly as Paul was mentioning the the number of permanent employees those are impacted by this benefit reset factor.
Why before with contractors, it's flat line throughout the year. So we have a bit of a greater impact from that this quarter.
Other than that our recent acquisitions are smaller they have a bit of a different business model being more IP based and so.
So I would see that volatility from quarter to quarter may be greater there.
Certain quarters will be higher than average certain quarters will be lower than average so the impact on Q4 per se, especially at Scioto, which was only there for two months.
Remains to be.
Who we see in our in our gross margin.
But overall, we are we're maintaining the general directions, we've been talking about certainly.
Okay.
Yes.
Okay, just switching gears.
Your impairment charge of 28 million.
Just looking at your financial notes it seems to be subdivided into two parts 15 million due to the cobot and the balance of 13 million was related as you cited in your prepared remarks to both the MD ERP business in the U.S.
So in my understanding correct that the only a portion of the impairment was what you the coal that.
Then you know and can you give us more lights on the dynamics, there I'm surprised to see the U.S. ERP business.
Taking an impairment charge the legacy EM im not surprised.
Okay. So.
We we should not.
Look at it the way you're looking at it.
Finally, we we looked at what was being done by the other.
Comparable companies, we spoke to our auditors.
We looked at what was being done so it's basically a broad generics.
Approach that we took increased uncertainty.
You know increased risks.
More conservative forecasting.
And what does the numbers.
You know look like if we're going to do that so.
So it's not really passing judgment on this business unit is doing very good this business unit not so much et cetera et cetera. So that's how it's being reported because that's how it should be.
But the approach was not that is really let's take the opportunity to to look at our balance sheet.
Let's figure opportunity to.
BB assumed the worse for this purpose clean up the balance sheet and so we don't have to talk about that going forward.
It's really how we should look at this and then we once we that decision was made and made sense we basically.
Allocated that amount about $12 million, we allocated between between business units.
Pretty much equally.
Certain minor differences to your point.
You know a Microsoft we have been saying that has been performing better than Oracle. So there's a.
A consideration there but more than that.
So, it's roughly half and half between goodwill and the brand you know writing off the accounting value of our brands in the us.
Roughly half and half sorry, so are these two and like I'm not sure like how you guys subdivide. The business units are these two independent business units in the U.S.. So you have to to run like to impairment.
Okay.
For this purpose yes.
Okay understood.
Okay, maybe maybe one last one and I'll jump back into queue.
And then on your adjusted numbers I guess like when I'm looking at EBITDA, you have like $400000 them.
Severance of them.
$400000 and your internal ERP, both our significant upticks.
From previous quarters can you give us an update to there.
And what should we be expecting going forward on both severances and secure internal ERP.
Yes, so severance at the end of March we took the the opportunity to make certain head count reductions in as Ginny not so much in Cogs.
And so we reported the severance amount there. This we're not expecting this to be recurring.
However, the positive impact of those head count reductions should be.
Showing off in in our upcoming quarters.
And we're also accounting.
We are certain extend b b severance and retention payments in our U.S. subsidiaries, that's coming to an end as well, but theres a few dollars in Q4.
There as well not material to be to be honest.
Regarding our ERP.
So.
As you May know April 1st was the big migration of the us onto our Oracle platform.
That took a quite a bit of work as you can imagine changing processes as well and.
And staffing of these functions back to Montreal as was the plan. So this also as that being a big chunk will be going down going forward. It will not get just completely disappear.
We're still working on our.
CRM.
Modules HR modules.
So there will be some of that going forward, we're isolating it because it is a onetime thing for us once we're up and running.
We're going to be good for many many years and for much more revenues.
Without incremental investing in business.
So they do you guys have a specific credits.
I'm sorry go ahead.
Did you guys have a specific budgets for the ERP like going forward like how much how much budgets as lifts.
To me stance on the ERP.
We do have a budget I'm not sure we're disclosing.
That amounts.
We also add hi, there it's a small thanks. Thanks for the question. We also have to be careful in there between what's the project cost of just the ongoing project, putting it in place versus the cost of migrating a acquisition onto the system.
In the last quarter as well that was mentioning a big portion of the cost of the ERP was migrating the U.S. operations onto the platform, which was a.
Transition the project. So every time, we have an acquisition.
We will be transferring that to this platform. That's why we invested put in place it's a cloud base. It's.
Been very a useful in the past few months as actually is helping us accelerate integrations going forward. So.
Great. Thanks, I'll pass the line.
Alright, thank them there.
Your next question comes on the line of Kevin with Cormark Securities. Your line is open.
Hey, there good morning.
Hi, good color, hoping you could.
Hoping you could talk about the clearance not Ferguson.
Talk about how they.
Got it together would be providing kind of 35 nine of annualized revenue can you talk about how they've been performing and the current environment.
Sorry, Gavin Kid in the sound that was breaking up can you can you repeat the question. Please.
Yes, I'm just curious how the three recent acquisitions have been performing kind of in the recent PHARMAQ from a top line perspective.
We still gain here at Gavin I know, you water and slower flatter or closer to the microphone. Please.
On the three weeks and acquisitions curious if you could comment on how the being performing sharing cobot.
Okay, great. Thank you. Thanks for the question sorry about that.
Yes, so the three acquisition one is a nio team.
Specialists and they are which we've integrated into the rest of our business.
Traverse it is a healthcare at specialized business in the in the cloud ERP.
And the Escondida it into the automated testing piece of our business. So as it was very late in the quarter. So the impact on our business was limited as echoed was it was saying, but the other businesses.
I have not slow down if anything in health care. We're we're.
Leveraging that expertise on other at other.
Customers and other geographies so the.
Traverse the acquisition mixed with what we already had on the Oracle cloud side.
As actually generate it's a very positive.
Cross selling opportunities and when that recently, so we actually wonder if you knew projects leveraging that that new acquisition.
Okay, Great I'll pass the line. Thank you.
Thank you Kevin Sir.
Your next.
Your next question comes from the line of Sorbents Kumar of it capital Your line is open.
Good morning, guys.
Just wanted to.
Just wanted to touch on.
Your your client base.
What are you seeing in terms of their spending priorities.
Certainly and I kind of how that's changed versus kind of six months ago.
Obviously, it's fluid, but no our clients considering there this spend in investment across maybe in newer.
Categories. This spend versus some of the more traditionally or is that they would have focused on.
During the crisis.
Yes. Thanks for your question. So so the first thing I'd say it it was a very fluid in the last three months.
The first a few weeks.
It was kind of a scramble everywhere to find the.
Including our customers as a finding at finding laptops that said there are people home and setting up work from home that infrastructure.
We were fortunate because we had already invested in those technologies as a as you know we're all cloud based here so sending our people home was was very simple from a technical perspective.
We saw a lot of scrambling customers to do that as well. So we did that work on those those issues. There was a lot of uncertainty as well and those first few weeks customers not too sure what what to do especially.
For those of you would like be went through the financial crisis of 2008 in 2009, who is a lot of craziness in the first few weeks even people drawing down there on their margin lines as you as you as you know and I'd say that crazy that craziness has gone away.
The large projects, we were doing did not slowed down but there was a lot of a concern from from customers all over whether we would be able to do the same level of support remotely as we did from on site.
That question's been settled and actually we had some customers who who very much prefer the new approach.
So I think a lot of people are going to be slow going back to where everybody into the office. So we can we can support that model forever now.
We have I think theres a lot of uncertainty out there in the environment. The NJ economy in general people, whether they're going to commit.
In the next couple of months at least to their long term projects most of our customers I've told us they're still coming into their long term projects.
They're just not too sure whether they started now wait a few more weeks. So wait a month. So we some areas of our business are doing very well have not slowed down others were.
Kind of wait and see mode. We're very we're cautiously optimistic but it vary tremendously between the between industries I'd say more than between customers.
Okay. Okay, great. Thanks, that's helpful.
And ER.
And you mentioned earlier about.
Progress that.
Kind of you can you kind of see something some early signs of.
Of synergies with the acquisition and then.
Sort of helping to drive from the win rates that you're seeing in the quarter.
How should we think about kind of your pipeline right now.
How much of it is kind of qualified or or mature at this point, then and how is that kind of changed.
Since.
Since before the pandemic and is there.
And trends are going to call out around some of the backlog and the potential to close out backlog in coming quarters.
Yeah. That's a great question I have two answers on that when the first one is our pipelines at very healthy.
The we Havent had customers say were canceling.
This this project because of cold and wet.
Worst ones, where we're going to delay it until we have more clarity, but none were cancels our pipeline is very healthy.
The addition of traverse it.
As you remember in the US Oracle practice was very focused on the M. piece. So the the financial reporting consolidation piece of Oracle, whereas conversant was very focused on the ERP side of the yet so we were able to immediately put those.
Two together and go after a much bigger projects, where instead of doing just one piece of the project. We now into the end to end piece and we were very successful with that and already have some very interesting.
Opportunities and win was related to putting those two together. So we see see very positive impacts from from that that acquisition on both sides of the border by the way.
The as to quantifying the funnel I'm happy to say that one of those expenses that you saw in the ERP side as code mention is rolling out our new CRM system companywide, which we put in place April 1st so.
You can expect that when we report Q1.
I'll have a lot more information the.
On our final and backlog and so on and so forth.
Okay great.
Thank you for cats for taking my questions guys I'll pass one.
Thank you.
Again, if you would like to ask a question Chris Paul one on your telephone.
Your next question comes on the line of its lie of Stifel GMT Your line open.
Hi, Good morning, guys. Thanks for taking my questions on so the press release called out $21 million headwind from revenue from historical customers.
We are those mainly Canadian or where some of that related CVSR glad water customers and is the coding impact only $300000 from about 21 million how should we think about that.
So so that the it's great question as and thank you at first of all those are Canadian customers there from the pre pre edgewater.
As we've been transitioning our business and you know I always mentioned it earlier in my comments. If you go back and look at our business three four years ago, we had a lot of staffing or sub contracting business, which was much lower margin and much more temporary.
Since the past three year as we transition.
The business much more high end project based digital transformation services all of our acquisitions were in that direction as well so that today our business is mostly a employee driven. So these are full time employees working on projects, where we managed the project at our much higher margin.
So over that period, and especially in the last year.
A few of our Canadian customers.
We're transitioning through that as well so the staffing and lower margin business has reduced dramatically in terms of their cyclical spend and we've been kind of walking around that or dancing around this past year on these calls and you asked us for more clarity. So we wanted to quantify that and make it very clear so.
So those customers year over year that lower margin business declined represents about $21 million. So nothing to do with Covance Thats, just the just that cyclical spend with those customers and we replaced that business. So that's where the we looked at the rest of our customers and say what happened while the rest of those customer.
As in Canada, we eliminate those four actually grew almost 50% a better business and that's why year over year, you're seeing a significant improvement in our gross margins.
Does that answer your question.
Yes for sure that's that's good clarity at great.
But the wages subsidies programs and how sorry, sorry.
Yes, sorry, Essen just a second a second part of your question on the Covance and I'll, let close yes.
$1 is very small I mean, it makes event in our couple of million dollars of adjusted EBITDA for the quarter $300000, but if you look at our our metrics, we invoiced something like 70000 to 80000.
Powers per week.
If we have only lost 1000 hours, let's see in you know the week the two weeks at the end of March.
Times about I don't know $150 an hour you get to our number.
And again, the topline impact becomes a gross margin impact because the costs don't change and becomes an EBITDA impact also because as Ginny does not change in such such short notice.
So thats how the $300000.
Impact is should be.
Looked at.
Okay, that's pretty helpful.
Can you talk about the wages subsidy program, but how that can offset EBITDA headwind going forward like how resilient EBITDA margins of let's say, 45%, which which it it's been in the past last year.
How should we think about that.
Okay. So each program is different to the.
The biggest one is the peak paycheck protection program in the U.S. $6.3 million.
If you've read the the newspapers and you look and Demedio over the past few months. This has been a very interesting story the rules have changed.
Some companies have refunded the monies.
It looks like we qualify for that.
This is our opinion that we do qualify and we're doing everything we can too.
To achieve that however, the clearance been so much.
Vague and they've changed so many times that were very prudent so that in itself should it be forgiven and we're not we're not seeing it will we will have to wait and see but that would be street impacted the bottom line.
The Canadian program. The first month was a 50% test.
And as I said two of our smaller subsidiaries qualified for that.
You know mainly timing related we were not seeing we are seeing reductions in our top line of 50% at all but it's so happened that for the month of March into cases, we hit that 50% magic number.
And if you qualified as you know the rules if you qualify for the first month you automatically qualify for the second.
Even though the rule for the second month was 30% three zero, we're not going to get.
Well I shouldn't be making forecast them outlook, but I don't think we're going to get to minus 30% anywhere.
So that's a one time, we disclosed the amount in our subsequent event note you can look at that.
In France, the employees that are afterwards.
Because of coal, but we're not allowed units complicated lever law in France, but we're not allowed.
This is fairly to lay off the people. So they are covered 80% of their salaries.
By the program and there is an annual ceiling per employee.
So how those I'm going to shake out air France large clients, obviously in France for us that's such a large client overall, but in France was a big big client.
You know severely impacted by Covance I've already started bringing back people.
So we're going to we.
We need to wait and see how that shakes. So did I answer your question.
Ah yes, that's that's perfect. So it sounds pretty well insulated from I guess, all three geography, but on these wage subsidy programs.
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Yes, okay.
Okay awesome.
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Sorry go ahead sorry.
I just know I was just about left we the the rules in Canada, our much clearer. So we know what we put in our notice.
It will be an impact to the personnel to profitability, albeit a nonrecurring element, but it's going to be there in Q1.
Perfect. That's a that's helpful.
I have two more if I may.
I wanted to talk about the net bank boring calculation.
You explain why you guys include de restricted cash, but then adjust out some of the purchase payables and transaction costs.
Is this more in line with your covenant calculations.
Or duties adjustments limit your ability to raise more debt and would you guys consider doing so for further M&A.
Well.
Restricted cash is just when we made when acquisition a few years ago that was how it was structured before we were public.
In reality. This is cash just like the rest of our cash so thats why we included.
That amount will be payable is also in our long term that note that balance of sale will be payable in a couple of years.
Regarding that we are.
I mean, you seem to numbers and before we said we were aiming to go to two times adjusted EBITDA two to two and a half times adjusted EBIT that we would not go.
Much more than that so.
So.
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It doesn't mean, we will not consider acquisitions in fact, but we go after usually is profitable acquisitions. We're.
They talk to them.
So it's a prudent yes.
We will still consider acquisitions.
Okay awesome.
Is it from me I'll pass the line. Thanks.
There are no further questions at this time I would tend to call back over to the presenters.
Thank you taking.
So thank you everyone for your questions, a and again I just want to be clear that our number one priority is to generate long term profitable growth to enhance shareholder value and I assure you. This is our ongoing focus everyday.
So thank you for being on this call today, we look forward to speaking with you at our next quarterly call.
Have a nice day and take care. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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