Q2 2022 Alithya Group Inc Earnings Call
[music].
Good morning.
Got it.
Welcome to you all.
Good morning, ladies and gentlemen, and welcome to the Lithia is second quarter fiscal 2022 results conference call I would now like to turn your meeting over to Rachel entries, Vice President Communications and marketing at our Lithia. Please go ahead Ms Andrews.
Thank you Julie good morning, everyone and thank you for joining us for <unk> second quarter fiscal 2022 results conference call. The press release and MD&A were issued with complete financial statements earlier today and posted on our website. The webcast. The presentation can also be found on our website in the investors section presenting this morning are.
Paul Raymond Alicia President and Chief Executive Officer, Claude Thibault, Chief Financial Officer, and Claude Who's the Chief operating officer before we begin I would like to specify that this call is intended for the financial community.
So please be advised that this call will contain statements that are forward looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Please refer to the cautionary note on our presentation and to the forward looking statements and risks and uncertainties section of our MD&A available on our website.
For more details let me remind you that all figures expressed on today's call are in Canadian dollars, unless otherwise stated and please be aware that we will refer to certain indicators that are non <unk> measures. Please refer to the cautionary note in our presentation and to the non <unk> measures section of our MD&A for more detail now I would.
I'd like to turn the call over to Paul Raymond.
Sure and good morning, everyone.
Before we begin our call today I'd like to take a moment to acknowledge that today is remembrance day.
And many countries are veterans day and in the U S.
This is a day, where we remember that missed this day 19, a team and as a veteran myself I believe it's important to underline and remember the sacrifices of those who fought for our freedom. So please make sure to take a pause at 11 a M. This morning, and thank you for indulging me on this before we start now on the business side I am thrilled to announce another.
A record quarter in terms of organic growth and gross margins for the company. This second quarter for fiscal 2022 performance occurred during what is normally our softer seasonal period, where in the summer. We are therefore very encouraged by the early indicators of a broad post pandemic recovery in our operations and digital transformation acceleration.
No.
We continue to focus on our 2024 strategic objectives. So this morning, I would like to further delve into some items that are senior leaders shared with you during our Investor day. This past September.
For those who did not have the chance to attend I would like to point out that the recordings of our Investor day are available on our website in the investors section and I invite you to take a look at the valuable content focusing mainly on our operations.
Can also hear some of our clients discussing how we are adding value to their business.
Now, let's take a look at three key highlights for our second quarter performance on slide two.
First and foremost we experienced another quarter of industry, leading organic growth across all our geographies further confirming our long term strategy and our discipline.
We are reporting growth for the fourth consecutive quarter and solid numbers for the second quarter of this fiscal year to highlight that organic growth close ball, our CFO will present, the performance indicators, both including and excluding revenues from our latest acquisition.
Second.
Speaking of our last acquisition, we are on track with the integration.
<unk> is highly complementary operations are seamlessly integrating into <unk> current structure, allowing for both short and midterm synergies. Additionally, new transformation projects with long term clients benevolent gimmick.
Continue to rollout further contributing to the strength of our overall performance.
So our COO will give you more color on our operations very shortly.
And finally, our recruitment efforts are going very well as demonstrated by our strong organic growth, we would not have been able to deliver these record revenues during our normally slowest quarter of the year without the dedication of our existing and hundreds of new professionals, who joined us during the past six months.
On Investor Day, I spoke about in the Olevia leadership Academy geared towards our managers as well as the other onboarding and candidate continuing education platforms that help us to welcome and trained all our team members today I am pleased to announce the expansion of our associate Academy.
New graduates joining of Lithia, and our Microsoft and more recently Oracle practices take part in an extensive onboarding program to launch their careers and prepare them to add value to the company and our clients.
The associated Academy is focused on recruiting graduating students from multiple academic backgrounds.
And one part of the Lithia recruits are assigned to one of three technology practice areas finance and operations human capital management and planning profitability and analysis. We promote these training and recruitment initiatives in colleges and universities throughout North America, and we are setting the stage for our future future quarters by attracting the.
Best of the best to join our ranks now over to <unk> to provide more details on our financial results both.
Thank you Paul and good morning.
I invite you to turn to the third slide of our presentation for certain second quarter fiscal 'twenty two highlights.
Bookings reached $99 million.
Which translated into a book to bill ratio of 0.86.
As mentioned by Paul This is very good for our summer quarter, which is usually slower from a business development perspective.
As for the trailing 12 month book.
Bookings are in excess of $1 billion.
That translates into a book to bill ratio of two nine or almost three years of backlog.
Our continued superior bookings reflect not only strong demand for our digital transformation services.
I'll also the fact that many new customers are turning to lithium.
Please turn to slide four.
Revenues for the quarter increased 54%.
Or $105 million, sorry, two $105 million.
Excluding the impact of the <unk> acquisition.
Revenues increased 31, 2%.
Or 34, 2% on a constant currency basis in other words significant accelerating organic growth.
With the rare sequential sequential growth from Q1 into Q2, we believe the results. We are presenting today are quite positive.
In Canada revenues increased.
69, 7% to $66 $1 million.
Due to organic growth in all areas of our Canadian operations.
The increase was also due to the general recovery of activity levels.
Revenues of $15 $6 million from the <unk> acquisition and.
And growth from the two associated long term contracts.
In the U S revenues increased 32%.
$235 7 million as.
As we experienced strong organic growth in all areas and a general recovery of activity levels.
The increase was partially offset by foreign exchange variations.
Revenues would have been 37 8 million.
With a constant U S dollar, resulting in a currency neutral organic increase of 40%.
Europe is showing a similar strong performance.
It should be noted that we have started the gradual migration of our <unk> activities into <unk> existing operations in preparation for the full integration planned for the coming quarter.
As such all of the projects and all new hirings are no longer occurring in Dr. <unk> entity.
This somewhat distorts the yard <unk> numbers disclosed in our notes to financial statements.
But on a combined basis.
That does not change our significant organic growth in Quebec.
Please turn to slide five.
Looking at our gross margin gross margin increased by $9 8 million or 52% to $28 5 million for the quarter.
As a percentage of revenues for the second quarter gross margin was 27% or.
29, 1% when excluding the impact of the recent acquisition of our <unk>.
That is up from 27, 4% for the same quarter last year.
The increase was primarily driven by increased gross margin in the U S and Europe due to increased utilization rates.
The historically lower margins are explained by a higher proportion of billable subcontractors.
Which we are in the process of gradually improving.
On a sequential basis from Q1 into Q2.
Excluding the impact of the recent acquisition and excluding government subsidies and losses from one large customer project, which had been recorded in the first quarter of this year.
Gross margin as a percentage of revenues increased in all geographies.
Reported SG&A expenses totaled $24 9 million, an increase of $4 $7 million or 23, 5%.
From $20 $1 million during the same period last year.
This increase is primarily driven by the <unk> acquisition.
As well as by increases in employee compensation and recruiting costs in.
In line with our strong organic growth.
Partially offset by decreases in share based compensation and the favorable U S dollar exchange rate impact.
As a percentage of revenues total SG&A decreased to 23, 6% of revenue.
For the three months ended September 32021, compared to 29, 5% last year.
SG&A expenses from our three D are expected to continue to decrease.
<unk> from additional administrative and operational synergies in connection with its ongoing integration.
On slide six.
You can see that overall, our second quarter adjusted EBITDA amounted to $5 million.
An increase of $4 2 million compared to the same quarter last year.
Again strong organic growth the contribution from the <unk> acquisition.
As well as increased gross margins were partially offset by increased SG&A expenses.
As in previous quarters, the amount of noncash depreciation and amortization.
Totally $4 $7 million is significantly greater than the quarter's accounting loss.
Now turning to our liquidity and financial position on slide seven.
Net cash used in operating activities was $7 $5 million in the second quarter.
Which is comprised of a three $3 4 million dollar positive inflow from our statement of operations.
Minus at $10 9 million noncash.
Noncash working capital variation.
The negative working capital variations are in part explained by our continued organic growth but also include.
A number of timing elements.
Charged subject to declining if not reversing in future quarters.
With regards to overall debt level variation in addition to the above.
We secured a $10 million sub debt from <unk>, Quebec.
Which however came in at the very end of the quarter and did not allow enough time to reduced cash balances against our revolving credit facility.
Taking into consideration our $26 $8 million in cash on hand, we ended the quarter with $29 6 million of net bank borrowing.
While we increased and extended our available revolving facility to $70 million into 2024, allowing.
Allowing good flexibility for possible future acquisitions.
Our normal course issuer bids are in CIB launched on September 20th is.
<unk> his plans.
While we view the in CIB at this time as an accretive use of our capital we remained fully committed to securing future acquisitions to complement our growing market presence and capabilities.
At this point <unk>, our COO will break down our second quarter successes with respect to our various practices and geographies. Thank you.
So Matt.
Good morning, Oswald. Please now turn to the next slide of our presentation.
Let's begin with our public sector practice in Quebec.
Our investors Investor Day held on September 15, we introduce our senior leadership for that growing business unit comprised of more than 550 professionals.
We are strongly positioned with major clients through our strategic service offering and recurring business. Thanks.
Thanks to the entire team we are becoming the reference in digital and business transformation in the public sector as we partner with major departments.
And the Quebec provincial governments as we speak.
Our win ratio for the public sector in Quebec is excellent.
Moving forward our team is focusing on our landscape marred by winning strategic and higher value added contracts with.
With higher total contract value.
And of course with our gross margins as we focus on higher value projects for our customer.
This in turn contribute to the improvements of our.
Our overall gross margin.
On the strength of our professional expertise alethia is develop a long track record of successful project realization with government agencies and other public sector clients.
By addressing numerous government agency challenges our professionals as gain a clear understanding of public sector sensitivities and constraints.
As a result recent announcement regarding new major contract wins, both validate and then.
The company is public sector experience.
Moving forward.
<unk> of our <unk> public sector practice will be driven by the integration of our latest acquisition and by the continuous professional development of our teams.
Now our remaining focus on Quebec.
Looking at our second quarter performance.
Our commercial business the insurance sector was a major contributor.
The insurance industry is particularly dynamic and whether it'd be for major clients such as been Eva.
Our bank.
Who own a significant share of the Canadian market the system modernization project generate significant income with important margins.
On that note I would also like to mention that the quarterly revenues provided for in our guaranteed long term agreements.
We have been able and Quebec are on track.
<unk> with its a subsidiary of Videotron is one of three of the largest telecommunications companies in Quebec that we count as customers.
We are also seeing very dynamic activity in that sector.
Innovation as always been one of <unk> core major competitive advantages.
<unk> digital solution center teams contribute to many of <unk> core innovation projects, including one strategic projects. We have been working on for three years in September <unk> unveiled in Youtube digital digital platform, which merged all of their news and.
Entertainment content in a single location.
<unk> is differentiated by its vast quantity of multi source multi format content delivered in an easy to navigate an environment that promotes <unk>.
Discovery discovery, we are very proud of the work.
Our teams are doing on this project and other sector as we have discussed with you and where we see tremendous potential.
Is the higher education sector.
I would like to remind you that Alicia our education practice did not exist during the second quarter the previous fiscal year.
Today, the practice is experiencing incredible growth as our <unk> services position us as the top of the value chain.
We see tremendous opportunity for developing Oracle and Microsoft solutions in this market.
Building, a pound that optimism and momentum we proudly announced a privilege partnership last week that will enable us to implement CRM module, specifically designed for University and colleges.
Now turning to our activities in Ontario, and Western Canada, we are leveraging our operations technology and cyber security background in order to deliver digital strategies accordingly projects.
Last week during.
The United Nations Climate change conference also known as <unk> 2006, the issue of renewable energy uttered fossil fuels was on everybody's agenda.
Whether it be sharpened our fracs notable as our government discuss the revival of the nuclear industries in Canada. The nuclear industry is a key pillar of our energy supply analysis is currently active on more than 50 renewable energy projects throughout the country.
From the control room to the boardroom customer can rely on more than 40 years of value and generate expertise.
In Ontario, where the majority of our operation.
In this sector are concentrated.
60%.
Electricity and generated by new <unk> power in fact in the past decade, Ontario has closed down five coal power generating stations.
Thanks in part to the increased availability of nuclear power from one of our major customers gross power, which we started two large nuclear generating units.
Now, let's start let's now, let's take a look sort of the border in the United States, our operation generated organic growth in most areas, particularly in our record cloud business. We can clearly see a general recovery of activity level as evidenced by our results.
Our second sequential basis.
Revenues in the U S increased by 14%.
Furthermore, if we look at the first six months of fiscal 'twenty, two our revenue reached $67 million for the U S as opposed to $57 million for the same period last year.
Representing an 18% increase of which is all organic growth and a clear indication of post pandemic recovery in the U S.
In order for us to continue delivering quality projects, we need to attract and retain competent professionals everywhere, including in the U S where the market is fragmented and very competitive.
<unk> continues to innovate is recruitment and retention process in order to position the company as the employer of choice.
Our European business also continues to grow highlighted by an outstanding 47% organic increase in revenues in the second quarter.
As mentioned during our last quarter call. This is a result of new customers added during the pandemic and pre pandemic clients regaining momentum.
We also have new and exciting project in this geography of Lithia, France is currently collaborating with Veolia Suez and industry oil company engaged in environmental management to optimize waste treatment and improve quality of life.
Both artificial intelligence and Iot will be applied to this project, particularly in the manufacture and design of sensors for.
Or are reducing the emission of gas that are <unk> to the environment.
Now regarding our office in 'murica, our staff recruitment operations are ramping up.
Our office is open and your employees have already been hired.
To learn more about this project I invite you to watch a video about the Alitalia digital solution Center, which is available on the investors page of <unk> Dot com.
Now I will turn the floor over to empower women Paul back to you.
Our cyclone.
I will now be pleased to answer any of your questions. Julio we can open the line. Please.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
For just a moment to compile the Q&A roster.
Yes, good morning.
This is a modern behalf of Nick Agostino.
First of all congrats on the quarter. Paul My first question is on the fixed price contract.
You guys were talking about last quarter, how has the progress been there.
Believe that contract was based in Canada and was nearing completion when you guys reported your fiscal quarter one.
Yes. Thanks for the question of <unk> that project as we reported last quarter was the last time, we took an adjustment on that project is on track.
Everything is good.
There are no adjustments this quarter related to that.
Okay great.
And.
Alright, you did talk a little bit about the higher education practice seems like Lithia has seen some really good initial positive signs there any update on how it's been so far like any traction like how many universities are guidance have been signed up in Canada.
<unk> plans on now when the company seeks to expand in the U S and the potential revenue opportunity with the partnership with frequency foundry.
So so.
Question is on the progress of our University practice, our higher education practice I will turn the question over to Claude who so when may be closed. If you can also talk about the new partnerships that we signed in the in that sector.
Thank you very much for the question.
First of all let me cover the geographic aspect is a very important point.
Before we'll expand the activities in the U S. We need to accomplish in country to learn and put in place everything we need to know are growing it's not only a question to get new customers, but we need also to leverage the expertise and adding more folks related to that kind of expertise, but all in all good.
Really well, but before will go.
Gross out we need to continue really to prove our plant in Canada and talking about the foundry as a second part of the question.
Andre.
Specializing indication that's a reason why the agreement we signed with them in their relationship we signed with them. That's complementary about the expertise we have in terms of.
Adviser in terms of supporting our clients, creating value and the technology behind the scene with the foundry company and Thats. The reason that's a good mix for us.
Have the technical expertise to implement CRM as you know in the Ida indication CRM is absolutely critical in their operations and with the expertise we have to now brain and complete the total aspect and offering an end to end solution to our customers. That's a reason to foundries was very very essential.
In order to offer a full solution to our clients.
Okay great.
And I also noticed in the press release on the company mentioned that around 400 people have been hired in the last two quarters.
First of all is the company seeing any wage or cost pressures to attract and retain employees and off that 400 Lake how much of that was from the Moroccan base.
<unk> answer that one.
Right.
Adding the Morocco base, we're talking about anywhere between 15% to 20.
The hiring process in Morocco is growing really really well, but new employees as you can imagine like any other countries they need to get a notice to their current employers before they will become Alicia employees.
And regarding the recruitment aspect and we have different strategy I don't want to expect too much on our strategy because it is pretty pretty competitive.
<unk> information, but we have several strategies regarding the hiring process and as a reason that we have a certain level of success as we already described in the Investor day No doubt is not only in people. We are recruiting in Canada, but also people that are coming from overseas and we are.
Outstanding crew, we are doing an outstanding job to attract new talent and that's exactly what we're doing in our in our day to day.
Okay, perfect and just one last question from my end before I jump back into queue.
So in Q1, the company did mention of 6 million government city loan forgiveness I see that in the news release as well. So did that number just for my own understanding that that number flow through the adjusted EBITDA number in Q1 that is was that a part of the adjusted EBITDA numbers in Q1.
I'm not sure I understood. The question are you talking about the PPP loans in the U S.
Yes, the 6 million forgiveness that the company engaged in Q1 was that a part of the adjusted EBITDA number back then or not.
Im sorry, I am having a hard time understanding the question, we booked the full forgiveness, 100% forgiveness in.
In Q1, whatever was left.
$6 $3 million U S. Nothing has recorded in this quarter.
We are still waiting for confirmation of the last loan we got five loans in five of our U S subsidiaries last year. All four of those were forgiven, we're still waiting for confirmation in one case.
But we're told that those delays are quite normal with the volume that they're seeing in south of the border. We do not understand why that one loan is.
Taking more time it appears it's being administered by different persons at different location for whatever reason.
But our position has not changed we believe we will obtain forgiveness in due course of that loan as well, but no impact in the second quarter on the P&L.
Okay.
I hope I answered the question.
Sorry, yes did that impact the Q1 adjusted EBITDA figure though.
Was there an impact on Q1, yes. There was if you read our disclosures you will see all of the.
The exact amount that hit the P&L, but it's roughly $6 million Canadian just under.
That hit the P&L in Q1.
I just wanted to sorry go ahead.
If you go to our presentation the same deck youre seeing today on our website. If you go to the Q1 deck you will see the exact dollar figure just under $6 million Canadian.
On the P&L nothing too.
Just wanted to know about the accounting procedure, but thank you for the color Anil Ambani. Thank you Dan.
And that is a good point.
Our performance with Q1, if you remember we reported $7 million of EBITDA.
Obviously, if you remove this what we were just talking about you see a significant increase of our EBITDA not only from last year, but also from the first quarter.
Understood. Thank you.
Again, if you'd like to ask a question press star one on your telephone keypad and your next question comes from Andrew <unk> from Echelon partners. Please go ahead.
James Thanks for taking my questions and congrats on a very strong quarter.
I'm curious to get more color on what's driving the strong growth in the U S I'm pleasantly surprising.
Like you pointed is typically a very seasonally weaker quarter.
Is it like vertical for the cyclical what's what's really happening.
Thanks for the question.
As we mentioned last quarter. If you go back and look at our booking for the last for the past year basically quarter after quarter, we've been reporting very strong bookings.
And the.
The ramp up of our projects typically in the U S will take a couple of quarters right between the time you sign the contract and you define.
The requirements and get the project going usually the ramp up there is a couple of quarters.
And.
Given we kept our people at the beginning of the pandemic, we were able to accelerate those projects and accelerate the revenue capture of those projects because we already had the people write a lot of companies are struggling right now trying to hire.
People that catch up we're in an opposite position we have people. So because we kept the senior folks we can add onto that the junior ones, which we've done through our academies that we talked about earlier so for the past two years, we've been hiring these college grads.
At training them and putting them on projects and it's a really really good good way for us to bring onboard new people and get them into the process. So during the summer months, we had a very high utilization rate because of all these projects, which we're now adding people do so again, we see this as very positive in these projects.
Next are growing and we have a great backlog. So so we're very encouraged by what we see happening out there, but I agree with you. It was a very strong quarter for us given it was a summer quarter.
Okay, So we shouldnt be expecting weakness.
In the current quarter are your people going to take vacations after.
The strong utilization rates.
But people have been taking vacation despite that as we said we've hired over 500 people in the last six months. So so I guess some of that is what youre seeing is that even though people are taking vacation. We've added so many people that.
The ramp up of those people make it that even though some are taking vacations the ramp up of the new people are picking up the slack. So thats why it looks like it looks like it.
There was no slowdown, but reality is as we are adding a lot of people because of the new projects.
Great color.
So in your Investor Day, you spoke about the strategy with <unk>, taking the margins higher but like what you guys did with Lithia and just like going for higher value add projects.
Can you maybe give us a very high level insights into like EBITDA margin expansion and how you see that evolving like is it reasonable for us to expect you guys at a double digit EBITDA margins in a year.
Sure. So let me let me give you some color on that one and I think you can.
<unk> tried to provide more.
Details on the numbers here during the call and on this slide so if you look at Q1.
Our <unk>, we reported $20 million around $20 million in revenue.
And if you remember the gross margins were significantly lower than ours.
And so in Q2, if you look at their revenue we said it was around $15 million in the MD&A and don't comment the exact number but it's in that range. So and the overall business is growing significantly. So if you look at in Quebec alone our organic growth.
Even if you remove <unk>.
<unk>, it's still significant double digit over 20% organic growth alright, so so.
Why our three D looks lower than Q2 than Q1, as we're transferring the new business that we signed under the Lithia brand right. So we did two five to two new contracts that we have with would kick out in Denver, as we signed new higher margin business instead of putting them in the old <unk>.
Entity, we put them into the Alithia diesel if you remove the the revenue coming from our <unk> in Q2, our gross margins are actually over 29%. So despite the pressures despite.
The added cost despite the inflation salary increases we're able to price the <unk>.
<unk> send those increases into our projects because.
These are if you look at the type of business that we do project based on the projects at the beginning of the <unk>, it's not a 10 year projects. It's multiple projects within these long term agreements.
So we can price, we can price the increases into into our projects into the higher value business. So that the plan is that as we've said, we're going to be integrating <unk> into <unk> over the course of this year at December 31 is when the full integration occurs because of everything to do with.
With.
Salary and benefits Retentions, whatever revenue, Canada, where is the best time to integrate people into your systems.
Is January one right I mean thats the <unk>.
Most simple way of doing things from a technical perspective, we've invested in the platform as we've talked in previous quarters. We've invested in a centralized oracle cloud platform that enables us to integrate acquisitions faster and put them. All on the same system. So it gives us better control and visibility so over the course of the next few.
<unk> the <unk> legal entity is going to disappear, it's all going to be reported under under our lithia. So with the agreements we've signed.
Got it and then I love the way they are structured is to enable us to move that business from the lower gross margins at the higher gross margin and everybody is aligned on that the customers are aligned on that we're aligned on that so everybody benefits from that in the plan was to do it over 24 months starting April one of this year right. So that's what we said with <unk>.
Take us 12 to 24 months of ramp up and we're on track for that as we speak.
That's great color and maybe one last last one on the book to Bill I know, it's volatile quarter to quarter.
Anything to read into this quarter like how are conversations going with customers.
Sorry, I'm not sure I understood the question.
On the book to Bill like coming in below one I know, it's volatile quarter to quarter.
Is there anything to read into that.
No actually if you look at the summer quarter last year's same thing usually in the summer that customers don't sign a lot of new contracts and typically.
Q1, and Q3 are very strong in Q2, which is our summer months are usually lower but were about the same place we were last year at this time.
Great just confirming thanks ill pass the line congrats again.
Thank you very much.
Your next.
And there are no further questions at this time I will turn the call back over to the presenters for closing remarks.
Thank you Julia and thank you everybody for being on the call today enough cyclical global guest.
Stay safe and talk to you soon.
This concludes today's conference call you may now disconnect.
[music].
The host has ended this call goodbye.
A question.