Alithya Group inc.

Good morning, ladies and gentlemen. Welcome to Aletheia Q2 fiscal 2023 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. Good morning, everyone, and thank you once again for joining us for Aletheia's second quarter fiscal 2023 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. The 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 notes in our presentation and to the forward-looking statements and risk and uncertainties sections 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-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. Presenting this morning are Paul Raymond, Aletheia's 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. Paul? Thank

you, Rachel. Good morning, everyone, and thank you all for joining us on the call this morning to discuss Aletheia's second quarter, 2023, financial performance. To begin, I'd like to congratulate the Aletheia team on delivering another record performance in what is typically a seasonally slower quarter. I would 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 Vitalis and Datum, as well as new partnerships in certain verticals such as higher education, are great examples of that. Through our strategic partnerships with OneWorld SIS and Frequency Foundry, Aletheia 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 assist two top tier Canadian universities. Aletheia also continues to grow its capacity to help clients replace their legacy system with -the-art integrated enterprise cloud solutions, including our recently developed Aletheia 365 Power Apps for the manufacturing sector. As an example, Aletheia is currently assisting Cloverdale Paint in 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 recently, Vitalis provided MUFGBank employees with access to support for questions regarding how to use the new Microsoft technology, and later, providing support through our own service and test capabilities. In addition to investing in training and development, we continue to replace subcontractors with permanent employees and ensure our people's experiences with us is exceptional. Initiatives such as our Leadership Academy, our learning tools, our 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 permanent employees of 20 percent, and we intend to continue that trend moving forward. Our onboarding process is also playing an important part in our retention strategy. Our new platform also enables new hires to quickly and easily find a mentor right from their phone 24-7. Our many initiatives are bearing fruit, and our metrics indicate that our best KPI is the relationship between our leaders and their employees. This is considered the best driver of 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 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 alignment with our new reality. Our global project management approach has also had a positive effect on our business. This process has 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. We have begun to see the effects of this cross-asset valuation in our gross margins and expense reductions. Within that context, and with those priorities top of mind, Aletia maintained pace during a typically slow quarter to deliver yet another record performance marked by improvements across all key indicators. In Q2 alone, Aletia completed 13 enterprise cloud solution goal 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, it 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 acquisitions, 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 2024 strategic targets. There is much to discuss in respect of the numerous initiatives our leaders and employees are implementing, but let me briefly outline three key financial highlights that help put our second quarter fiscal 2023 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. Second, a revenue growth of 23%, or $129 million, fueled by cross-asset utilization and the acquisitions of Datum and Vitalis. And third, we're beginning to reap the benefits of a series of measures that we implement in response to an ongoing global labor shortage. Aletia 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 respond to client demands. Private and public sector clients are currently working with our global delivery teams for some of their projects, and our recent acquisition of Datum has opened the door to further contribution from delivery teams in Eastern Europe and India. Forging a path to continued success for Aletia begins with striking a balance between the combination of cost and efficiency. That's what we refer 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 costs 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 Aletia. It is also important to note that we continue to report our repeat revenues, our revenues from repeat clients, and in the second quarter, 80% of our revenues came from clients that we also served 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 the essential services sectors. They view 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 experts bring and continue to turn to Aletia as their potential transformation projects and to find efficiencies in their own organizations. The positive impacts 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 to Claude for more financial metrics.

Claude. Thank

you, Paul. Bonjour. Good

morning. Over the past few years, since becoming public, we've had quarters with strong organic growth and quarters with no growth. We've had quarters with strong growth margins and quarters where growth margin was a challenge. And over time, our SG&A steadily increased, even if mainly driven by our strong growth in acquisitions. As such, as Paul mentioned, our second quarter marks a clear shift in Aletia's financial results as we're presenting today's strong performance on all three levels together, mainly organic growth, growth margin progress, and SG&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 .5% or $23.6 million compared to revenues of $105.3 million for the second quarter last year. Vitalist and Datum respectively contributed $8.3 and $4.9 million in this second quarter. Excluding the impact of those acquisitions, which occurred on February 1st and July 1st, 2022 respectively, and excluding foreign currency impacts, true organic growth was 9.2%. In other words, we recorded good sustained organic growth once again. In Canada, revenue increased organically by .2% to $75.1 million, all due to growth across all of our operations, including continued growth from the two long-term contracts signed concurrently with the acquisition of April 2021. In the US, revenues increased .8% to $49.8 million, due again to the Vitalist and Datum acquisitions, a favorable US dollar exchange rate, and some organic growth. As far as our international operations, they also reported a strong quarter in terms of growth, increasing .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 Datum acquisition, which was partially offset 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 -to-bill ratio of 0.93. A ratio under 1 is normal for our summer quarter, and this year's ratio is actually higher than the Q2 ratios of the previous two years. Of note, excluding revenues from the two 10-year guaranteed contracts, which were all recorded to bookings in one lump in the first quarter of fiscal 2022, our second quarter -to-bill ratio is actually above 1. Now, let's take a look at our second quarter gross margin, which increased by .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 2.3 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 .9% in Q1 to, again, .3% in Q2, for a sequential increase of 240 basis points during a quarter, which is typically softer also from a gross margin perspective. 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 US, most gross margin drivers, utilization rates, project mix, and performance, etc., led to the improvement both on a -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 $30.4 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 vitalist and data acquisitions, the salary increases at the beginning of the year, an increase in non-cash share-based compensation, as well as the negative impact of the US 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 2023 to, again, $30.4 million in the second quarter, or a $1.5 million increase. However, if we take into account the following, one, the negative impact of the US dollar appreciation of several hundreds of thousands of dollars. Two, the addition of the datum expenses acquired on July 1st of $0.6 million. Three, the increase in share-based compensation of $1 million, which is a non-cash item mainly driven by the timing of business acquisitions. And four, an increase in variable compensation and commissions 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 about certain headwinds like inflation, the return of some pre-COVID 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 a strong sequential increase as well. Net loss was $400,000, an improvement of $2.3 million versus a net loss of $2.8 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 marked 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 vitalist and data. Our long-term adjusted EBITDA trend also reflects our growth in gross margin improvements and, more recently, our relative reductions in SG&A levels. 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 versus a 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 non-cash working capital items of $6.3 million, resulting in net cash used in operating activities of $2.6 million. That, combined with the disbursements and balance of purchase payable relating to the datum acquisition, and combined with the impact of the appreciation of the U.S. dollar on our debt balances and that currency, resulted in an increase of $37.7 million of our net debt to reach $140.3 million. This translates into a higher net long-term debt to trailing 12 months, adjusted a bit down multiple of 5.4 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 of vitalist and datum, which is how our bank covenant works, the multiple is actually only 3.8 times. As a reminder, on an annualized historical basis, vitalist and datum 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. Merci, Claude. So to recap, the three key takeaways of this quarter. First, we recorded adjusted EBITDA that 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 the growing capabilities of our global delivery teams. And third, Aletia has a longer-term approach to building its workforce based on a mindset of competitive 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. As a veteran myself, events such as the ongoing war in Ukraine unfortunately reminds me daily of the horrible human costs of war and the struggles for freedom that continue around the world. Here at home, let us never forget that those whose sacrifices have enabled us to mark this day in peace each year. So on that, we'll take questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star followed by 1 or you touched on the phone. Should we declare for the polling process, please press the star followed by 2. One moment, please, for your first question. Your first question comes from Jérôme Dubreuil with Desjardins. Please go ahead.

Bonjour, tout le monde. Thanks for taking my question. Good slide on page 9 to explain your evolving business model, I found. So it shows that you have more of the fixed pricing versus time and material. If you could just explain the strategy here, what this could mean, and if you can also confirm that fixed price can still include maybe inflation escalators for longer-term deals.

Yeah, sure. Thanks, Jérôme. Thanks for the question. So as we've said, as the business grows, 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 the strategic planning and architecting of the work, helping them decide on which direction to go, helping them pick a solution, and then implementing it and supporting it for them. So we've built the pieces in our platform to be able to do the cradle to grave of the project. So a good example, we spoke about MUFG at bank earlier. So in a typical project, in the past, we would implement a project and lead. Now we actually stay behind and we can train the people in a new platform and even support them through the change management process. So as we do those things, many of those projects either come with a fixed price or a fixed envelope or a transaction basis after when we're supporting. So it's per head or per call or per... So we try to move towards that more and more because the client sees more value. We have higher margin and it's a repeat business that just keeps on going. 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 cost. We can do the work from anywhere. We can structure it in a way that can maximize the margin and quality of what we deliver and based on the availability of personnel across our platform. So we see that evolving more and more in our business. I'm not sure if that answers your question, Jan-Om, but that's the long-term plan for the

company. Yeah, no, that's great. And the 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 R3D acquisition were fully rent up.

So from a revenue perspective, we've already reached the minimum rate from the agreement and we're still growing. And the focus, as you can imagine right now, and we're seeing it's part of the improvement in the margin that you're seeing quarter over quarter is we're replacing the subcontractors that came with the agreement with full-time employees. So that's also helping in the gross margin.

Great, merci and congrats on the quarter. Thank

you. Thank you. Your next question comes from Deepak Kushjal with BMO Capital Markets. Please go ahead.

We can't hear you.

Whoever is asking the question, we can't hear you. So maybe go to the next one, Anash, and we'll come back.

Your next question comes from Amar Izad with Enschlomm Well Partners. Please go ahead.

Hi, thanks for taking my questions. On the -to-bill, I know it's hard to make the conclusions on the -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 outlook.

Thanks for the question, Amar. It's a question I ask at every meeting that I have with my team and with our clients, Amar. Everybody's concerned with what's happening out there, but in the same conversation, the next thing is they ask us how we can help them become more efficient. So we're not seeing a slowdown from that perspective, if anything, based on past experience. I've mentioned this before. We are keeping a close eye on it, but if I look at our bookings, we're not seeing that slowdown. And I think, or 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, 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, that's pretty encouraging. Then on the gross margins, it's good to see it rebound this core, 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 want to know about the replacement of subcontractors?

Yeah, the mix to the shift core. Yeah, go ahead.

Yeah, sure. The mix is progressing well. The target, we always said we'd like to get to at least 70%. That's where we were when we completed the R3D acquisition a year and a half ago. And if you remember, R3D had a very, very high percentage of subcontractors, and we said we'd give ourselves 24 months to get through that, and we're progressing on our plan. We like where we're going, and there's still some room there for more upside.

Okay, so sort of a bit of room, but late innings of that process is fair?

No, I think there's still a lot of room. And 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, that's a great color. Then on the leverage, yes, obviously pro-forma, like 3.8 times. I think you've got a couple of urnouts due, one of which is coming up in December. So how do we think about leverage going forward? Is the expectation for you guys to de-leverage or stay at 3.8? 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 de-leveraging 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 hit a little bit. So that typically reverses itself, or at least at the very least stabilizes. So we can expect better cash flow generation and debt reduction in the incoming quarters. Okay.

I recall, yeah, go ahead,

sorry. No, just to say overall, as I said, it's 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're pretty much where we want to be, and it's looking good for the future going forward.

Understood. Then just like the last one on the drag from working cap, like the last couple of years, your Q3, like your December quarter has been like a positive working capital contributor to cash flows. Is the expectation the same for this year?

You've done your homework. It really depends. We're a service company, as you know, so it really depends when the end of the quarter lands. So the impacts on the accrued payroll and stuff like that. So it's a bit of a crapshoot. I'm expecting a stabilization. I wouldn't go as far as to confirm we're going to have the same numbers, but we should have some relief for sure.

That's fantastic. Thanks. Thanks for all the details. I'll pass the mic.

Thanks, Amar.

Thank you. Your next question comes from Nick Agostino with Low Action Bank. Please go ahead.

Yes, good morning. Apologies, I joined the call a little bit late. So did you guys call out or maybe in your MD&A maybe call out what is the R3D gross margin presently?

Thank you. Morning, Nick. No, we didn't call it out. It's merged into our operations now, so we don't call it separate.

Okay. I mean, if we think about where 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?

The commercial agreement perspective, we're exactly where we want it to be, so that's going very well. The other big improvement that we saw you over here is the rest of the R3D business, again, replacing subcontractors with permanent employees on projects, and that's also progressing well, and that's why you're seeing some of these improvements in the gross margins on the Canadian side.

Okay. I guess maybe to take on the same line but a little bit of a different approach. In prior quarters, the gross margins was always being impacted because obviously you would see strong sales demand and you had to maintain a high subcontractor number just to be able to meet and service your clients. Should we – I'm just trying to understand what change maybe this quarter as far as you guys being able to improve that permanent employee subcontractor ratio? Is it a case of – if we interpret as the market conditions are maybe slowing down a bit and you're able to, I guess, use more of your permanent employees to service it, or are you now able to hire at a faster rate than in prior quarters, especially in Morocco and abroad? And if it's the latter, maybe what has changed on the part of the strategy?

Thanks for the question, Nick. It's a combination of many factors. So maybe to run you through the full scenario, I've got to do a bit of a rewind. So if you go back to April 2021, so April a year and a half ago, our gross margins were at 30% or they're about within a couple of points. They were already at 30%. Then we did the R3D acquisition, which was mostly some contractors. And you saw the following quarter, we set up, the gross margins went down dramatically just because of the mix, the headcount mix, and we've been gradually moving that back to the 30% mark, which we're almost at, by that mix of transforming the type of business and the type of employees from some contractors 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 we talked about earlier, 26% of our business today is recurring business, right? So it's either fixed price projects or subscription type projects or managed services type projects. So that's also changing the margin mix. And throw into that, we now have 5% of our workforce, so almost 200 people working from offshore, right? So again, the margin improvement tied to that new capability that we didn't have a year ago. So all those three things combined together are impacting gross margins. I think the, on a side note, I can't put a number on it yet, but it's something that we're tracking. I think the fear or 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 what I see out there right now and I hear.

Yeah, I like that last comment. I think that is interesting in terms of the quarter over quarter change. Yeah, everything else I follow. I just wanted to see if the read through is a slowing or if the read through is just more of, as you said, better revenue mix, but also better hiring environment because of a potential recession. So all good there. I think it's a combination. Okay. 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 subleasing market. So it's not very strong right now, as you can imagine. So then we need to go to the end of certain leases before we get to savings. But not sure how specific we want to be considering timing and considering our evolving needs. We always say we're active on the acquisition front. We've always said that. And we remain on that basis. And the other thing you need to consider is that because of IFRS 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 don't save 50% of our overall spend over the coming several years, I think we're looking at least at that, just to give you a very rough feel for that.

Okay. I appreciate that color. I'll pass the line. Thank you. Thank you,

Nick. Thank you. Your next call is from Rini Sharma with BMO Capital Markets. Please go ahead.

Hi. Good morning. Can you hear me?

Yes. Good morning, Rini.

Good morning. So I just have a question on the cash flow side of things. We noticed that we had a cash flow loss this quarter versus the EBITDA gain. And I know you mentioned that the working capital variance has some, you know, a little bit to do with that. Is there anything else that you'd say drove the loss or, you know, and really when are you expecting cash flow to start tracking EBITDA and what the expectation for the conversion rate would be?

Okay.

Well, the conversion of EBITDA to cash flow, basically there's a few things to consider. There's 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 Datum 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's obviously tax, cash taxes. That's a very low amount in our case. You can see this quarter is $164,000. 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 $300,000 this quarter. That's a sustainable amount in our mind. The other one is repayment at least liabilities. So you see that further down. That's about $900,000. That's, we just talked about that. That's going to go down eventually. But for now, for now it's there until we sublease our space or we come to the end of certain leases. And finally is the interest. So interest is $2.3 million in the quarter, combination of the debt level increasing and also the interest rate increasing. So that amount should be trending down as we de-leverage, we generate cash flow. So if you take our EBITDA number, you know we're 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 cost.

Okay, yeah, got it. That's very helpful. Thank you. And just another question on the OPEC side of things. Are you expecting it to trend, you know, going further over the next quarter? Are you expecting it to be sort of seeing a similar trend? And then, you know, particularly on the, you know, the exchange gain side as well as on the share-based compensation side, has anything changed? And will it be consistent with this quarter, you know, in terms of getting more permanent employees versus contractors?

Okay, so when we talk about subcontractors versus employees, that's mainly of a gross margin discussion. If I understood the first part of your question. So the first part, we don't provide guidance, and I've been very careful in my notes to stay away from that. So we have positives to come and we have a few cautions to look at. So on the positive note, as I said, we have initiatives, expense reduction initiatives, that took place over the second quarter. So that did not have a full quarter impact. So we can expect some additional gains there. And we're still, as we said, keeping a close eye on the spend levels. But we also have a few headwinds, and I also mentioned that there's inflation. There's some return to pre-COVID spending elements like travel, business developments. So we keep a close eye on that. And not all SG&A is fixed. Some SG&A elements are semi-variable. So they will track to increased performance. But all that combined, we're, how can I say,

we're... We

like the trend. We like the trend. Spall is whispering in my ear. We like the trend and we think we should see some stabilization. You know, the... Yeah, the level we had in the second quarter is a good base to work from.

Okay, thank you very much for taking my questions. Appreciate the call.

Thank you. Thank you. Your next question comes from John Chow with National Bank. Please go ahead. Hey, good morning. Thanks for

taking questions. I just want to get more color in the position. I know that was closed at the beginning of the quarter, but could you give us some updates on the current integration works and when do you think the company will start realizing the expected synergies?

Did you say integration?

Yes, integration. Of our acquisitions? On date and acquisition.

Okay. So the... Talking about the expenses, there's not much synergies and efficiencies to be had there. They were quite a small operation, so operating there with very low costs. So there's not too many savings to gain there in the first place. But when we talk about synergies with Datum, it's taking place mainly at 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 modernization tools and expertise. They are big in the insurance industry, as we mentioned at the time. We had clients in the insurance industry before. So we started 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, the DSGN expenses.

Okay, great. That's all my questions. I've passed the line. Thanks. Thanks,

John.

Thank you. There are no further questions at this time. Mr. Raymond, over to you.

All right. Thank you, Anas. Thank you, everybody, 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. It outlines the current best practices that the companies put forth, as well as the critical measures identified for future implication. So ESG intersects all lines of Aletia's ecosystem, and our business has far-reaching effects on the important economic sectors that we service. And 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 economies. So if you haven't read it, I strongly encourage you to do so. And I'd 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 with their high-quality service and advice to those clients every day. Thank you once again. Have a great day. Take care.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.