Q2 2023 Alithya Group Inc Earnings Call
Good morning, ladies and gentlemen, welcome to <unk>.
Fiscal 2023.
Skull.
I'd like to turn the meeting over to Rachel.
Vice President Communications and marketing.
Please go ahead.
Good morning, everyone and thank you once again for joining us for our lithium second quarter fiscal 2020 results conference call. The press release and MD&A with complete financial statements and related notes were issued this morning and are now posted on our website.
Webcast presentation can also be found on our website in the investors section. 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 for more information. Please refer to the cautionary note in our presentation and to the forward.
Looking statements and risks and uncertainties section of our MD&A available on the website.
All figures discussed on today's call are in Canadian dollars, unless otherwise stated and we may refer to certain indicators that are non <unk> measures.
Please refer to the cautionary notes in our presentation and to the non <unk> measures section of our MD&A for more detail.
Presenting this morning are Paul Raymond <unk>, President and Chief Executive Officer, as well as Claude Thibault, Our Chief Financial Officer now, it's my pleasure to turn the call over to Paul Raymond Top yes.
Sure. Good morning, everyone and thank you all for joining us on the call. This morning to discuss the media second quarter 2023 financial performance.
To begin I'd like to congratulate the Alicia team on delivering another record performance in what is typically a seasonally slower quarter.
I'd also like to come back on the three guiding principles that allowed us to achieve these results and which continue to guide us through the economic up and down ahead.
First providing ever increasing and sustained value to our clients second investing in delivering exceptional employee experiences and third continuous improvement in our operational efficiencies as we grow our scale and offerings.
We are always looking at ways to provide more value for our existing and new clients by ramping up new agreements with leading solution partners and by targeting complementary acquisitions, we are maintaining our position as the trusted partner of choice for our clients on their digital transformation journeys.
The recent acquisitions of vital lesson data as well as new partnerships in certain verticals such as higher education.
Great examples of that.
Through our strategic partnerships with one world SaaS and frequency foundry Alithia is helping higher education institutions of all sizes to advance their digital transformation programs.
Those partnerships were instrumental in the recent signing of new agreements to assess to talk to your Canadian universities.
Alithia also continues to grow its capacity to help clients replace their legacy system with state of the art integrated enterprise cloud solutions, including our recently developed the Lithia 365 power apps for the manufacturing sector.
As an example at Lithia is currently assisting coverdale paint and connecting their sales and marketing products using our apps, which further strengthens our position as the go to partner for Microsoft Cloud solutions.
For many of our clients using Microsoft office 365 staffing enough people internally just to provide support during their transition would be a very cost prohibitive exercise so.
So recently vital lists provided <unk> employees with access to support for questions regarding how to use the new Microsoft technology.
Providing support through our own service desk capabilities.
In addition to investing in training and development, we continue to replace sub contractors with permanent employees and ensure our people's experiences with us is exceptional.
Initiatives such as our leadership academies are learning tools are stimulating professional growth opportunities, our internal mobility initiatives and our global footprint are all contributing to the retention and growth of our permanent employee base.
Over the past year, we realized an increase in proven employees up 20% and we intend to continue that trend moving forward.
Okay.
Our Onboarding process is also playing an important part of our retention strategy. Our new platform also enables new hires to quickly and easily find a mentor right from their phone 24 seven.
Our many initiatives are bearing fruit and our metrics indicate that our best TPI is the relationship between our leaders and their employees. This is considered the best driver employee retention.
And finally by publishing our first ESG report earlier this year, we have shed light on initiatives being undertaken to create positive impacts that our people and communities in which we work and live we can embrace.
As our long term strategy is demonstrating scale provides us with multiple advantages, including the ability to leverage valuable assets across our platform to improve our business processes and to identify efficiencies.
Additionally, our digital transformation expertise enables us to apply our best practices internally and to leverage our practices in cloud ERP CRM robotic process automation artificial intelligence change management E learning offshoring and many more.
Scale also provides us with larger strategic opportunities, where our project management expertise can be leveraged scale and remote delivery also play a role in our real estate strategy, where we can optimize our footprint and in alignment with our new reality.
Our global project management approach has also had a positive effect on our business. This process is revolved around the concept of applying a single PMO approach our project management office to all of our projects across our platform.
Our growing platform is also enabling us to now leverage cross geography opportunities for all of our higher value offerings.
Have begun to see the effects of this cross asset valuation and our gross margins and expense reductions.
Within that context, and with those priority is top of mind Alicia maintained pace during a typically slow quarter to deliver yet another record performance marked by improvements across all key indicators.
In Q2 alone lead you completed 13 enterprise.
<unk> solution go lives, while adding 34, new clients along the way.
We experienced 23% revenue growth in Q2, which is a significant achievement in our sector.
As for our gross margin continues to trend in the right direction and the ongoing integration of our latest acquisition is notably expanding the capabilities of our global delivery teams. Therefore, despite incurring costs associated with the acquisition salary increases inflation and more we are pleased to have posted results, indicating good control of our spending.
Particularly considering the three acquisitions of the past three quarters alone.
We are well on our way towards our 2020 for strategic targets.
There is much to discuss and respected numerous initiatives our leaders and employees are implementing but let me briefly outlined three key financial highlights that helped put our second quarter fiscal 2020 through performance into perspective.
First we take great pride in reporting the adjusted EBITDA that amounted to $9 4 million for this past quarter, which significantly exceeds consensus and is a good indicator of the potential of our platform.
Our revenue growth of 23% or $129 million fueled by cross asset utilization and the acquisitions of data and violence and third we are beginning to reap the benefits of a series of measures that we implemented in response to an ongoing global labor shortage.
Alicia has embraced a longer term approach based on a mindset of competitive compensation robust training abundant career development opportunities and internal mobility.
We also continue to grow our offshore capabilities to ensure our preparedness to response to client demand.
Private and public sector clients are currently working with our global delivery teams for some of their projects and our recent acquisition of data has opened the door to further contribution from delivery teams in eastern Europe and India.
Forging a path to continued success for Lithia begins with striking a balance between the best combination of cost and efficiency.
That's what we referred to as right shoring.
Accordingly, we have been diligently creating capability centers in key geographies that allow us to leverage additional talent pools, and lower cost and enter new markets for both project based work and managed services.
As outlined in our long term strategy our business continues to evolve today, 26% of our business is subscription or IP based or derived from fixed fee client initiatives. This segment provides significant value to our clients and to ALLETE. Yet. It is also important to note that we continue to report our repeat revenues are rare.
<unk> from repeat clients and.
In the second quarter, 80% of our revenues came from clients that we should also serve during the same quarter last year.
When combined with the addition of 34 new clients in the quarter. We believe this healthy mix of existing and new business provides us with both stability and growth opportunities.
As you may be aware most of our clients are in essential services sectors debut digital transformation as a gateway to competitiveness, we need to be able to support them, regardless of the inflationary pressures recession fears or whatever other external local or global event comes our way.
Our clients recognize the value that our expert spring and continue to turn to Alicia as their trusted advisor and partner to help accelerate their digital transformation projects and to find efficiencies in their own organizations.
The positive impact of all these factors in our Q2 performance reinforces our focused and disciplined approach towards the execution of our long term plan I will now pass it over the globe for more financial metrics.
Thank you Bob Boswell good morning.
Over the past few years since becoming public we've had quarters with strong organic growth.
Quarters with no growth.
We've had quarters with strong gross margins and.
In quarters, where gross margin was a challenge and over time, our SG&A has steadily increased even if mainly driven by our strong growth and acquisitions.
As such as Paul mentioned, our second quarter marks a clear shift in allegiance financial results.
As we are presenting to the strong performance on all three levels together.
Namely organic growth.
Gross margin progress.
G&A reductions.
Let's look at those numbers in detail, please turn to slide 11.
Revenues for the quarter amounted to $128 9 million, an increase of 22, 5% or 23 $6 million compared to revenues of $105 3 million for the second quarter last year.
Vitalist and data respectively contributed eight three and $4 $9 million in the second quarter.
Excluding the impact of those acquisitions, which occurred on February one and July one 2022, respectively and.
And excluding foreign currency impacts true organic growth was nine 2%.
In other words, we recorded good sustained organic growth once again.
In Canada revenue increased organically by 12, 2% to $75 1 million.
Although to growth across all of our operations, including continued growth from the two long term contracts.
Concurrently with the acquisition of April 2021.
In the U S revenues increased 41, 8% from $49 8 million.
Due again to the vital has been data acquisitions favorable U S dollar exchange rate and some organic growth.
As far as our international operations. They also reported a strong quarter in terms of growth, increasing 25, 3% to $4 million.
Versus $3 $2 million for the same quarter last year and despite some negative currency impacts.
On a sequential basis from Q1 to Q2.
The overall increase in revenues mainly comes from the data acquisition.
Which was partially upset by the normal usual slowdown in revenues occurring during the summer quarter in all geographies.
Lastly on revenues a quick word on our second quarter book to Bill ratio.
Point 93.
Our ratio under one is normal for summer quarter.
And this year's ratio was actually hired into Q2 ratios of the previous two years.
Of note.
Excluding revenues from the 210 year guaranteed contracts, which were all recorded to bookings in one lump in the first quarter of fiscal 2022.
Our second quarter book to Bill ratio is actually above.
Now, let's take a look at our second quarter gross margin.
Which increased by 32, 6% or by $9 3 million to $37.8 million.
Up from $28 5 million last year.
As a percentage of revenues our second quarter consolidated gross margin was at 29, 3%.
This is up two three percentage points over the same quarter last year.
At 27%.
On a sequential basis, comparing Q2 to Q1 of this year, we are showing an increase from 26, 9% in Q1, two again my 29, 3% in Q2.
Or a sequential increase of 240 basis points.
During a quarter, which is typically softer also from a gross margin perspective.
Sure.
Yeah.
The increase in gross margin percentage in Canada is derived from increased revenues from permanent employees relative to subcontractors.
Increased average hourly selling rates and improved overall project performance.
In the U S. Most gross margin drivers utilization rates project mix and performance etcetera.
Led to the improvement both on a year over year and sequential basis.
And that is before taking into account the expected positive margin impact from our two recent acquisitions.
Now, let's look at SG&A.
We are beginning to show the benefits of the efficiency initiatives, we talked about back in June , particularly considering the additional expenses incurred relative to the three acquisitions completed in the last three quarters.
And the increased compensation costs that kicked in at the start of this fiscal year.
Total gross SG&A expenses in the second quarter totaled $34 million.
An increase of $5 $5 million or 22, 2%.
Compared to $24 $9 million in the same quarter last year.
The increase was primarily due to the expenses coming from the vital has been data acquisitions.
The salary increases at the beginning of the year.
An increase in noncash share based compensation as well as the negative impact of the U S dollar appreciation.
More importantly, when looking at the sequential variation of SG&A.
We see an increase from $28 $9 million in the first quarter of fiscal two.
2023 again 34.
In the second quarter, or a $1 $5 million increase.
However, if we take into account the following.
One the negative impact of the U S dollar appreciation of several hundreds of thousands of dollars.
To the addition of the data expenses.
<unk> done on July one.
Zero point $6 million.
Three the increase in share based compensation of $1 million.
Which is a noncash item, mainly driven by the timing of business acquisitions.
And for an increase in variable compensation and commission accruals, which are naturally tied to the overall improved company performance.
So if we take into account. These four factors we can see that notable sequential net reduction in SG&A in the other categories of expenses.
While we need to be careful about the timing of certain expenses and.
And about certain headwinds like inflation.
The return of some pre COVID-19 spending and currency variations, we are quite satisfied with the progress to date of our ongoing expense review efforts.
With certain initiatives still to be fully reflected.
As such we remain committed to our mid to long term objective of 20% of revenues.
Which will also come in part from continued revenue growth.
Overall, our second quarter adjusted EBITDA amounted to $9 4 million an increase of 87, 5%.
Or $4 $4 million compared to the same quarter last year and.
And a strong sequential increase as well.
Net loss was $400000 an improvement of $2 3 million versus a net loss of $2 million for the second quarter of last year.
Looking at long term trends on slide 13, we can see the impact of our acquisitions and more importantly of our strong organic growth achieved over the past several quarters.
Regarding gross margin, we see a similar trend in dollars as a percentage of revenues a number of factors occurred in fiscal 2022, which had put some pressure on our performance.
But Q2 of this year March the third quarter in a row, showing a sequential improvement.
Highlighting our efforts on improving labor mix utilization rates and general project performance.
And also reflecting the higher historical gross margins of vital list and data.
Our long term adjusted OIBDA trend also reflects our growth and gross margin improvements and more recently a relative reductions in SG&A levels.
Yes.
With sustained organic and acquisition growth our continued long term initiatives to generate higher gross margins.
And a steady focus on SG&A, we believe again, we are well on our way to achieving our three year financial objectives.
Now turning to liquidity and financial position on page 15.
As indicated in our statement of cash flows our operations generated $3 7 million of positive cash flow in the second quarter.
Another metric trending in the right direction.
On the other hand, certain timing elements led to negative changes in noncash working capital items of $6 $3 million, resulting in net cash used in operating activities of $2 six mil.
<unk> million dollars.
That combined with the disbursements and balance of purchase payable relating to the data acquisition.
And combined with the impact of the appreciation of the U S dollar on our debt balances in that currency.
<unk> and an increase of $37 $7 million of our net debt.
To reach $143 million.
This translates into a higher net long term debt to trailing 12 months adjusted EBITDA multiple of five four times.
However, this does not take into consideration a full year impact of our recent profitable acquisitions.
When calculating the multiple on a pro forma basis, incorporating the full 12 months of historical profitability a vital there's been data.
Which is how our bank covenant works.
Our multiple is actually only three eight times.
As a reminder, on an annualized historical basis, Vitalist and data account for close to $20 million of adjusted EBITDA.
On that basis, despite the apparent trend shown on page 15.
Considering that our current profitability levels should translate into steady deleveraging.
And considering that the timing driven working capital drag of the past three quarters should stabilize we believe our current leverage remains optimal.
Now back to you Paul.
Nasty clouds, so to recap the three key takeaways of this quarter first we recorded an adjusted EBITDA amounted to $9 4 million for this past quarter a record second we delivered revenue growth of 23% or $129 million fueled by leveraging the valuable assets across our platform as.
Well as their growing capabilities of our global delivery teams and third Alicia has a longer term approach to building its workforce based on a mindset.
<unk> compensation World class leadership robust training and abundant career growth opportunities.
So before we open up the questions I'd also like to take a moment to remind everyone that tomorrow is remembrance day and as a veteran myself event events such as the ongoing war in Ukraine. Unfortunately reminds me daily of the horrible human cost of war and the struggles for freedom that continue around the world.
Here at home, let us never forget that those sacrifices have enabled us to mark this date in pes each year, so on that and as well we will take questions.
Thank you, Sir ladies and gentlemen, let me now begin the question and answer session. If you have a question. Please press the stifle by one or you touched on.
Should you wish to declare for Chipotle process. Please press the star followed by <unk>.
Please for your first question.
Your first question comes from Sheila <unk> with <unk>. Please go ahead.
The volatile demand thanks for taking my question.
Good slide on page nine to explain your evolving business model iPhone.
So it shows that you have more more fixed pricing versus time and material. If you can just explain the strategy here, but what this could mean and if we can also confirm that fixed price can still include maybe inflation escalators for longer term deals.
Yes.
Yes sure. Thanks, Thanks for the question so as we.
Said as the business grows and we try to move up the value chain with our customers and more and more of the customers are looking for turnkey solutions. So we can commit upfront help them with their strategic planning.
The architects of the work in helping them decide on which direction to go helping them at pick a solution and then implementing it and supporting it for them. So we built the pieces in our platform to be able to do.
<unk> degree.
The projects. So a good example, we spoke about <unk> bank earlier, so in a typical project.
In the past, we would implement a project and leave now we actually stayed behind and we can train the people on the new platform and even support them through the change management process. So so as we do those things many of those those.
Projects, either kind of with a fixed price or a fixed envelope or on a transaction basis accurate. When we're supporting so it's per head our per call or per so.
We try to.
Move towards that more and more because of the client sees more value, we have higher margin and it's repeat business that just keeps on going.
Data <unk> data acquisition is the same thing they actually have IP or intellectual property that helps us accelerate the transformation of legacy applications to the cloud. So again when we do those types of things. It's a service fee. So we control the entrance we control the costs. We can do the work from anywhere we can.
We can structure it in a way that to maximize margin and quality of what we deliver and based on available personnel across our platform. So we see that evolving more and more in our business.
Sure if that answers your question gentlemen, but that's a long term plan for the company.
Yes, no that's great and second one just to help us a bit model.
The growth in the coming quarters I was wondering if in the third quarter of last year. The two large contracts from the <unk> acquisition were fully ramped up.
So from a revenue perspective, we've already reached the minimum required from the agreement and we're still growing.
And the focus as you can imagine right now we're seeing it as part of the improvement in the margins that youre seeing quarter over quarter as we're replacing the subcontractors that came with the agreement with full time employees. So that's also helping in the gross margin.
Great.
Congrats on the quarter.
Thank you.
Thank you. Your next question comes from Deepak with shallow with BMO capital markets. Please go ahead.
And we can't hear you with Goldman.
Okay.
Whoever is asking the question we can't hear you. So maybe go to the next one at Ash and.
I will come back.
Your next question comes from Amit <unk> with echelon wealth partners. Please go ahead.
Hi, Thanks for taking my questions.
On the book to Bill I know, it's hard to make any conclusions on the quarter to quarter numbers, but maybe you could speak to us on how conversations are evolving with clients.
Both existing and potential ones in light of a more fragile economic output.
Thanks for the question of art.
It's a question I ask every meeting that I have with <unk> and <unk>.
With our clients and Mark everybody's concern with.
What's happening out there, but in the same conversation that the next thing is is that they asked us how we can help them become more efficient so we.
We're not seeing a slowdown from that perspective, if anything based on past experience that I have mentioned this before we are keeping a close eye on it but.
If I look at our bookings, where we're not we're not seeing that slow down.
Thank you.
I believe the.
Desire.
For ways to become more efficient from our customers is going to increase so I believe our offshore managed services offerings are fixed price type projects to modernize and become more efficient robotic process automation, we're seeing an uptick in that area.
I think we're going to be seeing more of that over the coming.
I mean, we still have many many open positions and we still have a pretty good backlog and sales funnel. So we're not seeing it so far.
Okay.
Encouraging then on the gross margins. It is good to see see it rebound this quarter and I appreciate the color on the shifts to permanent staff.
From subcontractors.
I'm not sure if you're able to tell us where that ratio stands or how far along are we in that process.
Just so I have about the replacement of subcontractors.
Yes, the mix through the ship.
Okay.
Yes sure were mixed is progressing well the target we always said, we'd like to get to at least 70% that's where we were when we when we completed the <unk> acquisition, a year and a half ago and if you remember our three D had a very very high percentage of ads.
Subcontractors and we said, we'd give ourselves 24 months that they get through that and we're progressing on our plan, we like where we're going and there is still some room there for.
For more for more upside.
Okay, so sort of a bit of room, but late innings of that process is fair.
No I think theres still a lot of room.
Coming back to your first question on the recession.
If anything I think that's also going to open up more opportunities for more full time employees.
Okay, Okay, that's great color.
On the leverage.
Yes, obviously pro forma like three eight times.
I think you've got a couple of earn outs do one of which is coming up in December so.
How do we think about leverage going forward is the expectation for you guys to deleverage or stay at three eight maybe you could speak to what you guys feel is an optimal leverage level.
Well, it's a range.
Obviously.
And we're probably towards the higher end of that range, but it's within our as I said in my notes, it's within our comfort zone for sure.
And you know that level of profitability, our conversion to cash flow and therefore deleveraging is pretty good so.
We're quite satisfied with that and.
Last three quarters on the working capital variations as I said, we've been we've been hit a little bit.
<unk>.
So that typically reverses itself or at least at the very least stabilizes. So we can expect better.
Cash flow generation and debt reduction.
And do it in coming quarters.
Okay, but is there.
Yeah go ahead sorry.
Yes.
So just to see overall.
As I said, where it is.
On purpose that we got there when we make acquisitions, we always have a bit of a choice between issuing shares.
And using leverage.
We did not like where our stock price was so we turned to leverage to a certain extent. So it's all on purpose. So we are pretty much where we want to be and it's looking looking good for.
For the future going forward.
Understood and then just like the last one on the drag.
The drag from working cap.
The last couple of years like your Q3, you'd like your December quarter has been like a positive working capital contributor to cash flows.
Expectation at the same for this year.
You've done your homework.
It really depends where a service company as you know so it really depends when the the end of the quarter lands. So the impacts on.
On the accrued payroll and stuff like that so it's a bit of a crap shoot.
I'm expecting a stabilization I wouldn't go as far as to confer.
Confirm we're going to have the same numbers, but.
We should have some relief for sure.
Fantastic. Thanks, Thanks for all the details I'll pass the line.
Thanks Mark.
Thank you. Your next question comes from Nick Agostino with Laurentian Bank. Please go ahead.
Yes, good morning, apologies I joined the call little bit late so where you guys did you guys call out or maybe in your MD&A you maybe call out what is the <unk> gross margin presently.
Good morning, Nick.
We didn't call it out it's merged into our to our operations now so we don't we don't call it separately.
Okay.
How I mean.
If we think about where they were you guys started on that front versus the margins today.
How far along on that journey to improve those margins would you say that you are.
On the commercial agreement perspective.
Sure.
Exactly where we want it to be so that's going very well.
The other big improvement that we saw year over year as the rest of the <unk> business again, and they're replacing subcontractors with permanent employees on projects and that is also progressing well and Thats why youre seeing some of these improvements on the gross margins on the Canadian side.
Okay.
I guess it may be too.
I think along the same lines, but a little bit of a different approach.
What has.
In prior quarters, the gross margins was always been impact on.
Obviously, you're seeing strong strong sales demand, but you had to maintain a high subcontractor number.
Just to be able to meet and service to your clients.
We I'm just trying to understand what changed this quarter as far as you guys being able to accrue that permanent employee subcontractor ratio is it a case of should we interpret as the market conditions are may be slowing down a bit and you're able to.
I guess use more of your employees to serve our Permian employees to service it or are you now able to hire at a faster rate than in prior quarters, especially on the <unk>.
In Morocco and abroad, and if it's the latter maybe what what has changed on the part of the strategy.
Thanks for the question Nick.
A combination of many factors so maybe.
So running it through the full scenario I gotta do a bit of a rewind. So if you go back to April 2021, So April that year and a half ago. Our gross margins were at 30% or thereabout within a couple of points. They're already at 30%. Then we did the <unk> acquisition, which was mostly subcontractors and you saw the following.
Quarter do we set up the gross margins went down dramatically just because of the mix the head count mix and we've been gradually moving that back to the.
The 30%, Mark which were almost at that by that that mix of transforming the type of business and the type of employees from subcontractors to full time. So that's a gradual thing in parallel with that the mix of business has also changed so again, if you go to the slide nine that edge.
We talked about earlier, 26% of our business today is recurring business right. So it's either a fixed priced projects or our subscription type projects or a managed services type projects.
So that's also changing the margin mix and throw into that we now have 5% of our workforce almost 200 people working from offshore.
So again the margin is a margin improvement tied to that that new capability that we didn't have a year ago. So so all of those three things combined together are impacting gross margins I think the.
<unk>.
On a side note I can't put a number on it yet, but it's something that we're tracking I think b b.
Fear a talk of a recession is probably helping some people decide to become a permanent employee versus a subcontractor, but I can't put a number on that one it's just based on the on.
And what I see out there right now and I hear.
Okay.
I like that last comment I think.
That is interesting in terms of the quarter over quarter change yeah, everything else I follow.
Just trying to see you.
If the read through is.
Is a slowly or if the read through is just more of a.
As you said better better revenue mix, but also better hiring environment because of a potential recession.
So I'll get there.
It's a combination here.
And then my last question.
I noticed in an earlier slide.
Obviously and I think this came up in the past the real estate optimization to meet the operational needs. When you look at where you are today versus your needs for tomorrow.
How much dollars do you think you guys can squeeze out from a real estate perspective.
That's a good question and the main challenge to answer that is.
The sub leasing market.
So it's not very strong right now as you can imagine. So then we need to go to the EMS.
Of certain leases before we.
We get to savings but.
I'm not sure how specific we want to be considering timing considering our evolving needs.
We always say we are in.
Active on the acquisition front, we've always said that and we remain.
We remain.
On that basis so.
And the other thing you need to do.
To consider is that because of ifr 16.
Rent expense does not hit our P&L all that much some of it hits our cash flow statement.
But I guess, if we had to throw a number.
You know if we if we don't save.
50% of our overall spend.
Over the coming several years.
Sure.
I think we're looking at least at that just to give you a very rough.
Fuel for that.
Okay I appreciate that color I'll pass the line. Thank you.
Thank you Nick.
Thank you.
Your next question comes from Rain Sharma with BMO capital markets. Please go ahead.
Hi, Good morning can you hear me.
Yes, good morning Rudy.
Good morning.
I just have a question on the cash.
Cash flow.
We noticed that.
We had a cash flow loss this quarter.
But that gain and I know you mentioned that.
The working capital.
You know a.
A little bit to do with that is there anything else that you'd say the law or.
Yeah.
Really when.
Are you expecting cash flow to start tracking EBITDA.
What are your expectations for the conversion rate will be.
Okay well.
The conversion of EBITDA to cash flow basically there is a few things to consider there is our acquisition and integration expenses.
That's cash spend so it impacts cash flow you see this quarter was $2 $7 million because Q2 was an acquisition quarter, we acquired data at the beginning of the quarter.
So.
That's a bit of a.
That will track acquisitions, if we don't have any acquisition that number quickly goes down.
Then there is obviously a tax cash taxes, that's a very low amount in our case you can see this quarter is 164000, that's very small and that will stay that way for a while to go we have tax pools, we can use.
The other one is capex. So capex, we spent under $300000 this quarter that's as.
A sustainable amount in our mind.
The other one is the repayment of lease liabilities. So you see that.
Further down that's about $900000 that we just talked about that that's going to go down.
Eventually.
But for now.
For now its there until we sublease space or D. We come to the end of certain leases.
And finally as the interest so interest is $2 $3 million in the quarter combination of the debt level.
Global increasing and also the interest rate increasing.
So that amount should be trending down as we deleverage we generate cash flow.
So if you take our EBITDA number you know are in round numbers about $10 million and then you deduct.
Tax and Capex and interest that leaves maybe 75% of it and then it depends on the integration and acquisition costs.
Okay got it that's very helpful. Thank you.
Another question on the Opex side of things.
Expecting it to trend.
Going forward there.
Over the next quarter.
Expecting it to be sort of seeing a similar trend and then.
Particularly on the.
Exchange.
Keane side as well as.
On the share based compensation side has anything changed.
Will it be consistent with this quarter in terms of.
Getting more permanent employees or contractors.
Okay. So when we talk about.
Subcontractors versus employees, that's mainly of our gross margin discussion.
Sure.
If I understood. The first part of your question. So the first part is we don't provide guidance and I've been very careful in my notes too.
To stay away from that so we have.
We have positives to come and we have a few.
Caution.
Cautions do to look at so on the positive note as I said, we have initiatives.
Fence reduction initiatives that took place over the second quarter.
So that did not have a full quarter impact. So you can expect.
Some additional gains there.
And we're still as we said keeping a close eye on the spend levels.
We also have a few headwinds and I also mentioned that there is inflation and there's some return to pre COVID-19 the spending.
Elements like travel business developments.
So we keep a close eye on that.
Sure.
And not all SG&A is fixed some SG&A elements are semi variable so they will track to increased performance.
So, but all of that combined we are.
How can I say.
I think the trend we like the trend [laughter], Paul is that with spring in my ear, we like the trend then we.
We think we should see some stabilization.
You know the yet.
The level, we had in the second quarter as a as a good base to work from.
Okay. Thank you very much for taking my questions I appreciate the color.
Thank you.
Thank you. Your next question comes from John <unk> with National Bank. Please go ahead.
Hey, good morning, Thanks for taking the question I just wanted to get more color.
In addition, I know that was closed at the beginning of the quarter, but could you give us some update on the current integration works and what do you think the company will start realizing the expected synergies.
Did you see integration.
Yes integration.
Of our acquisitions.
On data acquisition.
Okay. So the.
Talking about the expenses there is not much synergies and efficiencies to be had there they were a quite a small operation so operating there with very low cost.
So there's not too many savings to gain there in the first place, but when we talk about synergies with data mitts, taking place mainly of the cross selling side really taking their unique technologies and expertise to our broad customer base.
All of our clients sooner or later will need their motor ninth nation tools and expertise they are big in the insurance industry. As we mentioned at the time, we have client we had clients in the insurance industry before.
So we started to the cross selling there so accelerated growth higher revenues with great margin.
So that's more where we're seeing the integration and the upside much more so than the actual expenses.
<unk> expenses.
Okay, Great. That's all my question on top line. Thanks.
Thanks, John .
Thank you.
Yes, no further questions at this time, Mr. Raymond over to you.
Alright. Thank you. Thank you and thank you everybody for again for participating today.
I'd also like to draw your attention to our inaugural ESG report that was published in September we're very proud of this document outlines the current best practices that the company has put forth as well as a critical measures identified for future implication. So ESG intersect all lines of our Lithia is ecosystem in our business has far reaching it.
On the import economic sectors that we service.
Since the company's founding we've embraced the responsibility of being an agent of change in our industry and that responsibility extends to helping our clients transition to more sustainable economy. So if you haven't read it I strongly encourage you to do so and I would like to take this opportunity to thank our clients for the trust that they continue to place in us and to thank our passionate professionals will deliver high quality service.
Advice those clients everyday. Thank you once again have a great day take care.
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