Alithya Group inc.

Good morning, ladies and gentlemen. Welcome to Alithea's third quarter fiscal 2022 results conference call. I would now like to turn the meeting over to Rachel Andrews, Vice President, Communications and Marketing at Alithea. Please go ahead, Ms. Andrews.

Good morning, everyone, and thank you for joining us for Alethea's third quarter fiscal 2022 results conference call. The press release and MD&A with complete financial statements and related notes were issued earlier today and are posted on our website. The webcast presentation can also be found on our website in the investor section. Presenting this morning are Paul Raymond, Aletheia's President and Chief Executive Officer, and Claude Thibault, our Chief Financial Officer. Before we begin, I'd like to specify that this conference call is intended for the financial community. Please be advised that this call will contain statements that are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. For more information, please refer to the cautionary note in our presentation and to the forward-looking statement and risk and uncertainty section of our MD&A available on our website. Let me remind you that all figures expressed on today's call are in Canadian dollars, unless otherwise stated, and be aware that we will refer to certain indicators that are non-IFRS measures. Please refer to our cautionary note in the MD&A for more results. Now, I would like to turn the call over to Paul.

Good morning, everyone. Bonjour. I look forward to discussing some of the highlights of another Aletheia record quarter for revenues and client goal lives. But before I dive into the highlights of our third quarter, I'd like to take a moment to reflect on our most recent acquisition. On February 1st, as you remember, we announced Aletheia's acquisition of Vitalis, a U.S.-based learning and workforce development company with a blue-chip customer base of Fortune 1000 companies and the leading Microsoft partner in their field. Here are the key highlights of this transaction. One, Vitalus will accelerate our entry into the massive learning and workforce development industry, recently valued at over $50 billion in North America alone. The transaction also enhances Aligia's revenue mix with new high-margin subscription-based recurring revenue streams. And three, it presents strong organic growth prospects and promising cross-selling potential with Aligia's current services and client base. Oh, and by the way, it also enhances our already solid partnership with Microsoft. On a final note, our new proprietary adaptive learning platform now enables us to provide post-implementation change enablement to our customers. We can therefore accompany them over the long term in their digital transformation journey. Aledia will now be able to evolve the adaptive learning platform as well to fit the needs of our Oracle practice moving forward. A reminder that this acquisition occurred during our fourth quarter and is therefore not reflected in the financial results that we are disclosing today. Now on to Q3, another record quarter. Let's go through our three key takeaways for the quarter. First, Aletheia has posted once again continued industry-leading growth and another record quarter in terms of revenues with more than 55% year-over-year growth. We also continue to experience substantial organic growth across all of our geographies, including a record quarter for go-lives posted by our Microsoft practice for enterprise cloud implementations. Including Microsoft and Oracle cloud enterprise solutions, we had a record 27 successful client go-lives in the quarter. Our Oracle practice experienced record bookings as well for the U.S. in Q3. This is largely due to a sense of urgency amongst healthcare sector clients to accelerate their general transformation plans. With the current challenges and pressures that the healthcare industry faces, it is more important than ever to provide technology solutions that reduce risk and help clients to focus on improving patient care. We also continue to deepen our public sector market penetration in Canada. In January, we started a $3 million services contract with a federal government agency, the Parliamentary Protective Service. We also continue to leverage our Quebec government qualifications that allow the company to serve as a trusted advisor to other public organizations. In addition to paving the way to establishing a track record of ongoing successful projects with government agencies, the qualification position to take advantage of a recent Quebec government announcement that all of its departments will be migrating to the cloud within the next three years. Secondly, in line with the continued growth of our business, our recruitment campaigns continue on all fronts as we strive to expand the knowledge and expertise of our workforce. We continue to be very successful in attracting new employees looking for exciting challenges with a rapidly growing digital transformation leader. We recently hired 192 employees, and our growth-related job openings have increased by 92% over the same period last year. We also continue to strengthen our internal resources dedicated to the skill development for our professionals, which includes a series of specialized academies that focus on core expertise. To mention another highlight from the acquisition of Vitalist earlier this month, Aletheia will now be able to leverage the adaptive learning platform in order to sharpen the skills of our own professionals. And thirdly, despite the impacts from employee downtime due to COVID and well-deserved vacations for many of our people in December, we posted a record quarter for billable hours and total revenue in the quarter at close to $110 billion. Q3 also saw the completion of our integration of R3D as of December 31st, right on schedule. We're also on track with the ramp-up of our long-term agreements, totaling $600 million in guaranteed revenues over the next decade with QMI and Beneva as announced in our first quarter. This brings me to some highlights of some of our new partnerships. So our success in greater scale and attracting attention from industry-leading solution partners, Aligia is in the process of finalizing its AWS Advanced Tier Services Partner Accreditation, enabling us to now access the full spectrum of AWS cloud-based services and solutions. As you know, the Quebec government has awarded some 40 cloud computing contracts, totaling more than $55 million over the past year and a half. A recent $10.5 million contract won by AWS alone represents more than 15% of the value of the agreements concluded since January 2020. Therefore, Aletheia's AWS certification will open up more doors for us for a broader cloud consulting and solutions implementation offering moving forward. We also continue the critical process of developing strategic partnerships and achieving certification with other industry leaders our clients care about. For example, our partnership with VITAC, a global provider of cloud-native benefits and administration software for the insurance industry, will enable collegiate professionals to unlock a transformative suite of applications embraced by our current and future insurance customers. We also gain accreditation as a systems integrator of Solutions from Talent, a California-based technology company with a global clientele. This enables us to expand our offering of both on-premise and cloud-based migrations. Despite the context surrounding COVID around the world, we are encouraged by our continued strong bookings. They are the best predictor of what is to come. In Q3, bookings reach $125 million, which translates into a book-to-bill ratio of 1.14. As for the trailing 12 months, even excluding our $600 million 10-year contract, other bookings are in excess of $330 million. That translates into a book-to-bill ratio above 1. Our continued superior bookings reflect not only strong demand for our digital transformation services from our existing clients, but also the fact that we are gaining market share and new customers who are now turning to Aletheia. Before I turn things over to Claude, I would just like to shine a light on the significance of the collective achievements of our company in Q3. Powered by our rapid growth, the completion of the R3D integration, and the addition of our latest acquisition, Violet, Aledia's scale now enables us to fine-tune our cross-structures in order to reap the benefits of past investments. This scale and strong financial position also enables us to continue our creative acquisition strategy. I will now pass it over to Claude to cover some of the financial highlights. Claude? Merci, Paul. Bonjour, good morning. Please turn to slide 8 for the key Third quarter highlights. Revenues for the quarter increased 55.4% or by $39.1 million to $109.7 million. Excluding the impact of the RFID acquisition, which occurred on April 1st, 2021, true organic growth was 33.5% or 35.1% on a constant currency basis. In other words, significant and accelerating organic growth. In Canada, revenues increased 80.2% to $72.1 million due to organic growth in all areas of our Canadian operations, a general recovery of activity levels, and revenues of $15.4 million from the RTE acquisition, including intercompany revenues, and finally growth from the two associated long-term contracts. In the U.S., revenues increased 22.2% to $33.7 million as we experienced strong organic growth in all areas. The increase was partially offset by foreign exchange radiations, as the increase would have been 26.4%, assuming a constant U.S. dollar. As for our international operations, they are showing a similar strong performance. Looking at gross margin, it increased by $7.9 million, or 38.3%, to $28.3 million for the third quarter. As a percentage of revenues, the third quarter gross margin was 25.8%, or, if excluding the impact of the R3D acquisition, 28.1%. That is down from 28.9% for the same quarter last year. As previously mentioned, the R3D revenues historically show a higher proportion of billable subcontractors and a corresponding lower gross margin profile. When excluding R3D, the decline in gross margin percentage mainly comes from A, an increase in subcontractors' revenues relative to those from permanent employees, coupled with an increase in the average cost of subcontractors, explained in part by the tightening labor market. B, increased costs in certain customer projects, and C, decreased software revenues, which typically carry higher margins. SG&E expenses in Q3 total $25 million, an increase of $4.6 million, or 22.4%. This increase is primarily driven by DR3D acquisition, as well as by certain 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 U.S. dollar exchange rate. As a percentage of revenues, total SG&A decreased to 22.8% for the three months ended December 31, 2021, compared to 28.9% last year. As Paul mentioned, we have now completed the migration of RITD's commercial and administrative functions into a leased infrastructure, resulting in certain additional cost savings to come. Overall, our third quarter adjustment event amounted to $4.5 million, an increase of $2.2 million compared to the same quarter last year. As in previous quarters, the amount of non-cash depreciation and amortization totaling $4.8 million is notably greater than the quarter's accounting loss of $3.5 million. Looking at long-term trends on slide nine, we can see the impact of our acquisitions and more importantly of our strong organic growth of the past several quarters. Regarding gross margin, we see a similar trend in dollars, but recent challenges in percentages for the reasons I mentioned before. We believe most of these factors are largely cyclical, subject to some natural recovery over time, and we aim to reverse the trend also with a number of targeted initiatives, focusing on labor mix and costs, utilization improvements, setting prices adjustments, and focusing future growth in our higher margin segments. On slide 10, our long-term EBITDA trend reflects our growth, but also our recent gross margin percentage challenges, as well as some increases in SG&As, despite their gradual expected decrease as a percentage of revenues. I would like to take a moment to put our recent results in the context of our long-term business objectives, which we have often been communicating over the past few years. For revenues, we pursue sustained organic growth and selective strategic acquisitions in order to reach the $600 million mark. Our organic growth and acquisitions of the last year have taken us close to the half billion dollar mark, and we certainly intend to maintain the efforts on both fronts. For gross margin, we believe our long-term strategies, some discussed on this call, remain appropriate and relevant for gradual recovery and further improvement, including as it relates to the two long-term agreements stemming from the R3D acquisition. We also intend to keep targeting acquisitions with a higher gross margin profile, and the recent Vitalist acquisition is certainly a very good example of that. For SG&A, we believe that we have now reached a certain critical mass. to make stabilization of certain SG&A categories, including with regards to corporate and head office costs. Going forward, these expenses should grow more slowly than our revenues, and as such, we intend to continue our downward trend of SG&A as a percentage of revenues, with some acquisition synergies still to come, including longer-term savings relating to rent. Also, most acquisition targets that we look at typically have a lower SG&E percentage profile even before potential synergies, which would further compound the trend. In a nutshell, that is the step-by-step playbook of how Aletia believes that it can realistically aim to achieve its three-year objective of $600 million in revenues with an EBITDA margin of 3% to 13%. Now turning to our liquidity and financial position on slide 11. Net cash from operating activities improved to $10.1 million in the third quarter, a significant increase from the third quarter of last year. Excluding our positive working capital variations, the third quarter cash flow from operating activities was $2.3 million, which represents over 50% of the reported adjusted EBITDA. Moreover, considering that we have fairly stable interest expenses in CapEx and fairly low effective tax rates with our available tax tools, this conversion percentage should increase exponentially with any future growth in EBITDA. On slide 12, we see total debt decreasing from 84.5 million down to $61.6 million during the third quarter. with a similar decrease of our net bank borrowing. This comes from cash flow generated by operating activities, as mentioned before, a transfer of cash balances to debt, and the new CDAE financing facility reducing bank borrowing. This decrease of total debt combined with a higher trailing adjusted EBITDA shows a steady four-quarter deleveraging trend, breaking us to a 3.1 ratio of total debt to trailing 12 months adjusted EBITDA. Looking at these metrics following the vital list acquisition on slide 13, we see the pro forma total debt to TTM EBITDA multiple decreasing to 2.6. This reflects the debt and equity raised for the acquisition and the current profitability of the target. Looking forward, even considering the historical profitability of Aletheia and Vitalist, we are expecting the leveraging dynamics to continue. Of note, we also announced in the context of the Vitalist acquisition, an increase of our senior credit facility from $60 million to $125 million. As such, considering our permitted 5.5 times maximum ratio, this provides us with ample capital to continue on our growth strategy, even though we intend to maintain, as always, our prudent use of debt. In closing, our normal course issuer bid launched on September 20th is progressing as planned. Since its beginning, Alicia has repurchased and canceled 330,000 Class A shares for a total cash consideration of $1.1 million. Back to you, Paul. Thank you, Fred. So our industry leading growth is a reflection of the quality of the work of our people and of the level of trust that our customers have in our ability to guide them through their complex digital transformations. Accordingly, Aligia will continue to focus on those core values that guide us toward the objectives set forth in our three-year strategic plan, which foresee the delivery of more than $600 million in revenue and between 9% to 13% EBITDA by the end of that period. As we wrap up Q3, we're also very pleased with the strides we are making in mounting a comprehensive environmental, social, and governance strategy that is in line with Aligia's values and the many initiatives already underway. For example, our management incentive plan already includes ESG criteria, and we were the first technology services company in Canada that joined the 30% Club years ago. We are one of the few IT services companies that provide all of its employees with paid leave to give back to their communities. We have paid-purchase work environments, work-from-home and employee assistance programs, and many more. As with everything we do, we want to be a leader in the field of sustainability. So it should be of no surprise that we're establishing progressive ESG guidelines that meet the expectations of all of our stakeholders and reflect much of the valuable work our people have done over the years to improve the communities where we live and work. To that end, and in association with a leading Canadian ESG consulting firm, Aligia completed all of the steps of their Phase 1 recommendations in Q3. We now turn our attention to Phase 2, and we look forward to sharing our ESG framework with you in the near future. Thank you for being with us this morning, and Julie will now be opening up for questions.