Alithya Group inc.

Good morning, ladies and gentlemen. Welcome to the Aletia's Second Quarter Fiscal 2022 Results Conference Call. I would now like to turn the meeting over to Rachel Andrews, Vice President, Communications and Marketing at Aletia. Please go ahead, Ms.

Andrews. Thank you, Julie. Good morning, everyone, and thank you for joining us for Aletia's 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 presentation can also be found on our website in the Investors section. Presenting this morning are Paul Raymond, Aletia's President and Chief Executive Officer, Claude Thibault, Chief Financial Officer, and Claude Rousseau, Chief Operating Officer. Before we begin, I would like to specify that this call is intended for the financial community. Also, 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 risk and uncertainties section of our MD&A available on our website for more detail. 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-IFRS measures. Please refer to the cautionary note in our presentation and to the non-IFRS measures section of our MD&A for more details. Now I would like to turn the call over to Paul Raymond.

Thank you, Rachel, and good morning, everyone. Bonjour. 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 in the US. This is a day where we remember Larmistice Day of 1918. 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'm thrilled to announce another 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 or the summer. We are therefore very encouraged by the early indicators of a broad post-pandemic recovery in our operations and digital transformation acceleration. We continue to focus on our 2024 strategic objectives. So this morning, I'd like to further delve into some items that our 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 Investor section. And I invite you to take a look at the valuable content focusing mainly on our operations. You 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, Claude Szabo, our CFO, will present performance indicators, both including and excluding revenues from our latest acquisition. Second, speaking of our last acquisition, we are in track with the integration. R3D's highly complimentary operations are seamlessly integrating into Alivia's current structure, allowing for both short and midterm synergies. Additionally, new transformation projects with long-term clients, Benevent Québec, continue to roll out, further contributing to the strength of our overall performance. Claude Rousseau, 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 the Alivia Leadership Academy geared towards our managers, as well as the other onboarding and continuing education platforms that help us to welcome and train all our team members. Today, I'm pleased to announce the expansion of our Associate Academy. New graduates joining Alivia in 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 Associate Academy is focused on recruiting graduating students from multiple academic backgrounds. And once hired at Alivia, the 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 quarters by attracting the best of the best to join our ranks. Now over to Claude Sabuha to provide more details on our financial results. Claude.

Thank you, Paul. And good morning. I invite you to turn to the third slide of our presentation for certain second quarter fiscal 22 highlights. Bookings reached $90.9 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, bookings are in excess of $1 billion. That translates into a book to bill ratio of 2.9 or almost three years of backlog. Our continued superior bookings reflect not only strong demand for our digital transformation services, but also the fact that many new customers are turning to Aletia. Please turn to slide four. Revenues for the quarter increased 54% or $105 million, sorry, to $105 million. Excluding the impact of the R3D acquisition, revenues increased .2% or .2% on a constant currency basis. In other words, significant accelerating organic growth. With a rare 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 is also due to the general recovery of activity levels, revenues of $15.6 million from the R3D acquisition and growth from the two associated long-term contracts. In the US, revenues increased 32% to $35.7 million as we experienced strong organic growth in all areas and the general recovery of activity levels. The increase was partially offset by foreign exchange variations. Revenues would have been $37.8 million with a constant US 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 R3D's activities into Aletheia's existing operations in preparation for the full integration planned for the coming quarter. As such, all new projects and all new hirings are no longer occurring in the R3D entity. This somewhat distorts the R3D 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 .1% when excluding the impact of the recent acquisition of R3D. That is up from .4% for the same quarter last year. The increase was primarily driven by increased gross margin in the US and Europe due to increased utilization rates. The historically lower margins for R3D 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 as GIN expenses total $24.9 million, an increase of $4.7 million or .5% from $20.1 million during the same period last year. This increase is primarily driven by the R3D acquisition, as well as by increases in employee compensation and recruiting costs. In line with our strong organic growth, partially offset by decreases in share-based compensation and a favorable US dollar exchange rate impact. As a percentage of revenues, total SG&A decreased to .6% of revenue for the three-month ended September 30th, 2021, compared to .5% last year. SG&A expenses from R3D are expected to continue to decrease from additional administrative and operational synergies in connection with its ongoing integration. On slide six, you can see that overall, our second quarter adjusted a bit that 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 R3D acquisition, as well as increased gross margins, were partially offset by increased SG&A expenses. As in previous quarters, the amount of non-cash, depreciation and amortization, totaling $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 $3.4 million positive inflow from our statement of operations, minus the $10.9 million non-cash 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 which are 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 Investismat Quebec, which however came in at the very end of the quarter and did not allow enough time to reduce 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 good flexibility for possible future acquisitions. Our normal course issuer bid, or NCIB, launched on September 20th, is progressing as planned. While we view the NCIB at this time as an accretive use of our capital, we remain fully committed to securing future acquisitions to complement our growing market presence and capabilities. At this point, Claude Rousseau, our COO, will break down our second quarter successes with respect to our various practices and geographies. Thank you. Claude?

Merci Claude. Good morning, bonjour. Please now turn to the next slide of our presentation. Let's begin with our public sector practice in Quebec. During our Investor Day held on September 15th, we introduced 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 to the entire team, we are becoming the reference in digital and business transformation in the public sector as we partner with major departments of the Quebec provincial government. As we speak, our win ratio for the public sector in Quebec is excellent. Moving forward, our team is focusing on a landscape mark by winning strategic and higher value added contracts 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 contributes to the improvements of our overall gross margin. On the strength of our professional expertise, Aditya has developed a long track record of successful project realizations with government agencies and other public sector clients. By addressing numerous government agency challenges, our professionals have gained a clear understanding of public sector sensitivities and constraints. As a result, recent announcement regarding new major contract wins both validate and enhance the company's public sector experience. Moving forward, growth of our public sector practice will be driven by the integration of our latest acquisition and by the continuous professional development of our teams. Now remaining focus on Quebec, but looking at the second quarter performance of our commercial business. The insurance sector was a major contributor. The insurance industry is particularly dynamic and whether it be for major clients such as Beneva or Desjardins who owe a significant share of the Canadian market, their system modernization project generates significant income with important margins. On that note, I would also like to mention that the quality revenues provided for in our guaranteed long-term agreement with Beneva and Quebec are on track. Quebec with its subsidiary Videotron is one of three of the largest telecommunication companies in Quebec that we count as customers. We are also seeing very dynamic activity in that sector. Innovation has always been one of Quebec or major competitive advantages. At ETI Digital Solutions Center teams contribute to many of Quebec core innovation projects, including one strategic projects we have been working on for three years. In September, Quebec core unveiled a new Qube digital platform, which merged all of their news and entertainment content in a single location. Qube is differentiated by its vast quantity of multi-source, multi-format content delivered in an easy to navigate environment that promotes content discoverability. We are very proud of the work our teams are doing on this project. Another sector that we have discussed with you and where we see tremendous potential is the higher education sector. I would like to remind you that Alethea, our education practice, did not exist during the second quarter of the previous fiscal year. Today, the practice is experiencing incredible growth as our architecture 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 panel that optimism and momentum, we proudly announced a privileged 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 operation technology and cyber security background in order to deliver digital strategies for new projects. Last week, during the United Nations Climate Change Conference, also known as COP26, the issue of renewable energy other than fossil fuels was on everybody's agenda. Whether it be Japan or France, multiple heads of government discussed the revival of their nuclear industries. In Canada, the nuclear industry is a key pillar of our energy supply and Alethea 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 Alethea engineering expertise. In Ontario, where the majority of our operation in the sector are concentrated, more than 60% of our electricity is generated by nuclear 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, Roos Power, which we started two large nuclear generating units. Now let's start, now let's take a look. South of the border, in the United States, our operation generated organic growth in most areas, particularly in our recall cloud business. We can clearly see a general recovery of activity level as evidenced by our results. On a sequential basis, revenues in the US increased by 14%. Furthermore, if we'll look at the first six months of fiscal 22, our revenue reached $67 million for the US 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 US. In order for us to continue delivering quality projects, we need to attract and retain competent professionals everywhere, including in the US. Where the market is fragmented and very competitive. ADETIA continues to innovate its 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. ADETIA France is currently collaborating with the ODSRES, an industrial 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 reducing the emission of gas that are harmful to the environment. Now regarding our office in Morocco, our staff recruitment operations are ramping up. Our office is open and new employees have already been hired. To learn more about this project, I invite you to watch a video about the ADETIA Digital Solutions Center, which is available on the investors page of adetia.com. Now we'll turn the floor over to Paul LeMond. Paul, back to you.

Merci Claude, and I will now be pleased to answer any of your questions. Julie, 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. We'll pause for just a moment to compile the Q&A roster.

Yes, good morning. This is LeMond on behalf of Nick Agostino. First of all, congrats on the quarter. Paul, my first question is on the fixed price contract, which you guys were talking about last quarter. How has the progress been there? I 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 our, yes, that project as we reported last quarter was the last time we took an adjustment on it. That project's on track and everything's good. There are no adjustments this quarter related to that.

Okay, great. 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 fared so far? Like any traction, like how many universities or colleges have been signed up in Canada? Any plans on when the company seeks to expand in the US and the potential revenue opportunity with the partnership with Frequency Foundry?

So the question is on the progress of our university practice or higher education practice. I'll turn the question over to Claude Rousseau and maybe Claude, if you can also talk about the new partnerships we signed in that sector.

Thank you very much for the question. First of all, let me cover the geographic aspect. It's a very important point. Before we'll expand the activities in US, we need to accomplish and continue to learn and put in place everything we need to know for 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, it's going really well. But before we'll go south, we need to continue really to prove our point in Canada. And talking about the fund read, that's the second part of the question. Fund read, they are specialized in education. That's the reason why the agreement we signed with them, the relationship we signed with them, that's complimentary about the expertise we have in terms of advisor, in terms of supporting our clients, creating value and the technology beyond the scene with the fund read company. And that's the reason that's a good mix for us. They have the technical expertise to implement CRM. As you know, in the area of education, CRM is absolutely critical in their operations. And with the expertise we have to now bring and complete the total aspect and offering an -to-end solution to our customers. That's the reason the fund read was really, really 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, like how much of that was from the Moroccan base?

And Claude, will you answer that one?

Regarding the Morocco base, we are talking about anywhere between 15 to 20. The hiring process in Morocco is going very, very well, but the new employees, as you can imagine, like any other countries, they need to give a notice to their current employees before they will become an Alifia employee. And regarding now the recruitment aspect, we have different strategy. I don't want to expand too much on our strategy because it's pretty, pretty competitive strategic information, but we have several strategies regarding the hiring process. And that's the reason we have a certain level of success. As we already described in the investor day, no doubt it's not only people that are recruiting in Canada, but also people that are coming from overseas. And we have a outstanding crew. We are doing an outstanding job to attract new talent. And that's exactly what we are doing in our day to day.

Okay, perfect. And just one last question from my end before I jump back into Q. So in Q1, the company did mention a six million per Mississippi loan forgiveness. I see that in the news release as well. So did that number, just for my own understanding, did that number flow through the adjusted EBITDA number in Q1? That is, was that a part of the adjusted EBITDA number in Q1?

I'm not sure I understood the question. Are you talking about the PPP loans in the US?

Yes, the six million forgiveness that the company gave in Q1. Was that a part of the adjusted EBITDA number back then or not?

I'm sorry, I'm having a hard time understanding the question. We booked the full forgiveness, 100% forgiveness in Q1, whatever was left of the $6.3 million US. Nothing is recorded in this quarter. We are still waiting for confirmation of the last loan. We got five loans and five of our US 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 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 locations for whatever reason, but our position has not changed. We believe we will obtain a forgiveness in due course of that loan as well, but no impact in the second quarter on the PNL.

Okay, I hope I

answered the question.

Sorry, 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 the exact amounts that hit the PNL, but it's roughly $6 million Canadian, just under that hit the PNL in Q1.

Okay, I just want to... Sorry, go ahead.

If you go to our presentation, the same deck you're 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 PNL, nothing.

Yeah, I just wanted to know about the accounting procedure, but thank you for the color and I'll come back in a minute. Thank you, Dan.

And that is a good point. It would appear our performance of 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 Amr Asad from Echelon Partners, please go ahead.

Gents, 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 US. I'm pleasantly surprised in that it's like you pointed, it's typically a very seasonally weaker quarter. Is it like vertical specific or what's really happening?

Thanks for the question, Amr. 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 recording very strong bookings. And the ramp up of our projects, typically in the US, will take a couple of quarters, right? But between the time you sign the contract and you define the requirements and get the project going, usually the ramp up, there's 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, right? A lot of companies are struggling right now, trying to hire people to catch up. We're in an opposite position. We have people. So because we kept the senior folks, we can add on to 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, training them and putting them on projects. And it's a really, really good way for us to bring on board 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 to. So again, we see this as very positive. These projects are growing and we have a great backlog. 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.

OK, so we shouldn't be expecting weakness in the current quarter. Are your people going to take vacations after these strong utilization rates? Well,

people have been taking vacation despite that. As we said, we've hired over 500 people in the last six months. So I guess some of that is what you're seeing, is that even though people are taking vacation, we've added so many people that, you know, 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 that's why it looks like it looks like there was no slowdown. But the reality is, is we're adding a lot of people because of the new projects.

That's great color. So in your investor day, you spoke about the strategy with R3D and taking the margins higher, but like what you guys did with Alifia and just like going for higher value at projects. Can you maybe give us very high level insights into like even that margin expansion and how you see that like evolving? Like, is it reasonable for us to expect you guys double digit even that margin in a year?

Sure. So let me give you some color on that one. And I think you can, Claude tried to provide more details in the numbers here during the call and on the slide. So if you look at Q1, R3D, we reported 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 MDNA. And don't quote me 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, you know, even if you remove R3D, it's still significant double digit, over 20% organic growth. Right. So why R3D looks lower in Q2 than Q1 is we're transferring the new business that we signed under the Alifia brand. Right. So we did the two new contracts that we have with Quebec Art and Beneva as we sign new higher margin business, instead of putting them in the old R3D entity, we put them into the Alifia entity. So if you remove the revenue coming from R3D and Q2, our gross margins are actually over 29%. So despite the pressures, despite the added cost, despite the inflation, the salary increases, we're able to price in those increases into our projects because these are, you know, if you look at the type of business that we do project based, the projects have a beginning and an end. It's not a 10 year project. It's multiple projects within these long term agreements. So we can price the increases into our projects, into the higher value business. So that the plan is that as we've said, we're going to be integrating R3D into Alifia over the course of this year. December 31st is when the full integration occurs because of everything to do with salary and benefits, retentions, whatever, Revenue Canada. The best time to integrate people into your systems is January 1st. Right. I mean, that's the most simple way of doing things from a technical perspective. We've invested in a 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 months, the R3D legal entity is going to disappear. It's all going to be reported under Alifia. So with the agreements we've signed with Quebec Art and Beneva, the way they're structured is to enable us to move that business from the lower gross margin to 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. The plan was to do it over 24 months starting April 1st of this year. Right. So that's what we said would take us 12 to 24 months of ramp up. And we're on track for that as we speak.

Fantastic. That's great. And maybe one 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 like volatile quarter to quarter. So is there anything to read into that?

No, actually, if you look at the summer quarter last year, same thing. Usually in the summer, the customers don't sign a lot of new contracts and typically Q1 and Q3 are very strong and Q2, which is our summer months, are usually lower. But we're about the same place we were last year at this time.

Great. Just confirming. Thanks. I'll pass the line. Congrats again. Thank you very much.

Yannick, and there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

Thank you, Julie. Thank you, everybody, for being in the call today. Merci beaucoup pour vos questions. Stay safe and talk to you soon.

This concludes today's conference call. You may now disconnect. The host has ended this call. Goodbye.