Alithya Group inc.

Good morning, ladies and gentlemen. Welcome to the Aletheia'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 Aletheia. Please go ahead, Ms. Andrews.

Thank you, Julie. Good morning, everyone, and thank you for joining us for Aletheia'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, Alethea'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 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-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 U.S. This is a day where we remember the Armistice 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 experience 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 Thibault, our CFO, will present performance indicators, both including and excluding revenues from our latest acquisition. Second, speaking of our last acquisition, We are on track with the integration. R3D's highly complementary operations are seamlessly integrating into Aledia's current structure, allowing for both short and mid-term synergies. Additionally, new transformation projects with long-term clients, Bénévoine Québécois, 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 Aletheia 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 Aletheia 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 Aletheia, 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 Sibyl 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 Aletheia. 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 31.2%, or 34.2% 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 U.S., revenues increased 32% to $35.7 million 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 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 29.1% when excluding the impact of the recent acquisition of our 3D. 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 for 3D 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&E 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 R3D acquisition, as well as by increases in employee compensation and recruiting costs. In line with our strong organic growth, partially upset by decreases in share-based compensation and a 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 30th, 2021, compared to 29.5% 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 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 ARC3D 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 7. 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 a $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 Investissement Québec, 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 bring down our second quarter successes with respect to our various practices and geographies. Thank you.

Claude. Thank you, 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 15, 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 marked 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 customers, 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 announcements 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 focused 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 quarterly revenues provided for in our guaranteed long-term agreement with Beneva and Quebecois are on track. Quebecor, 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 Quebecor's major competitive advantages. ETI Digital Solutions Center teams contribute to many of Quebecor innovation projects, including One strategic project we have been working on for three years. In September, Quebecor unveiled a new cube digital platform which merged all of their news and entertainment content in a single location. CUBE 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 Aletheia higher 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 cybersecurity 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 the nuclear industries. In Canada, the nuclear industry is a key pillar of our energy supply, and Valencia is currently active on more than 50 renewable energy projects throughout the country. From the control room to the boardroom, customers can rely on more than 40 years of Valencia engineering expertise. In Ontario, where the majority of our operations 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, Rose Power, which we started two large nuclear generating units. Now let's talk, now let's take a look. Start 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. 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. ADTI 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. Alitia France is currently collaborating with Veolia Suarez, 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 Alitea Digital Solutions Center, which is available on the investor's page of Alitea.com. Now, we'll turn the floor over to Paul LeMond. Paul, back to you.

Thank you, 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 Salman on behalf of Nick Agostino. First of all, congrats on the quarter. Paul, my first question is on the fixed price contract that you guys were talking about last quarter. How has the progress been there? I believe that contract was based in Canada and was there in completion when you guys reported your fiscal quarter one.

Yes, thanks for the question, Amar. 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. And 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 U.S. 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 the 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 it goes out, 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. Foundry, 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 Foundry 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 end-to-end solution to our customers. That's the reason the fund was really, really essential in order to offer a full solution to our clients.

Okay, great. And I also noticed in the press release, 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 of that 400, like how much of that was from the Moroccan base?

Claude, would you want to answer that one?

But regarding the Morocco base, we are talking about anywhere between 15 to 20. The hiring process in Morocco is going really, really 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 Alifia employees. 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. We have an 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 $6 million promissory loan forgiveness. I see that in the news release as well. So did that number, just for my own understanding, did that number flow to the adjusted EBITDA number in Q1? 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 U.S.?

Yes, the $6 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 U.S. Nothing is recorded in this quarter. We are still waiting for confirmation of the last loan. We got five loans and 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 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 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. 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 – the exact amounts that hit the P&L, but it's roughly $6 million Canadian, just under, that hit the P&L 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 P&L, nothing compared to Q2.

Yeah, I just wanted to know about the accounting procedure, but thank you for the color and I'll come back at night. Thank you again.

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

Thanks for the question. As we mentioned last quarter, if you go back and look at our booking for the past year, basically, quarter after quarter, we've been recording 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 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, 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.

Okay. 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 there was no slowdown, but the reality is we're adding a lot of people because of the new projects.

That's great, Keller. So in your investor day, you spoke about the strategy with R3D and taking the margins higher, a bit like what you guys did with Alifia and just going for higher value ad projects. Can you maybe give us very high-level insights into EBITDA margin expansion and how you see that evolving? Is it reasonable for us to expect you guys at double-digit EBITDA margins 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 MD&A. And don't quote me the exact number, but it's in that range. And the overall business is growing significantly. So if you look in Quebec alone, our organic growth, even if you remove R3D, it's still significant, double-digit, over 20% organic growth. So why R3D looks lower in Q2 than Q1 is we're transferring the new business that we sign under the Aletheia brand. So the two new contracts that we have with Québécois and Bénévois, as we sign new higher margin business, instead of putting them in the old R3D entity, we put them into the Elite 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 costs, despite the inflation, 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 the plan is that, as we've said, we're going to be integrating R3D into Aletheia 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 Aletheia. So, with the agreements we've signed, With Québécois and Bénévois, 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, Keller. 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, sir?

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.

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 on 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. The host has ended this call. Goodbye.