Calian Group Ltd.

Good morning, ladies and gentlemen, and welcome to the Callion third quarter 2022 conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. Kevin Ford, CEO and President. Sir, the floor is yours.

Thank you, Ali, and good morning, everyone. I welcome you to Callion's Q3 fiscal year 2022 earnings call. from Callion's headquarters here in Ottawa, Ontario. With me is Patrick Houston, our Chief Financial Officer. Please note that certain information discussed today is forward-looking and subject to important risks and uncertainties. The results predicted in these statements may be material different from actual results. I'm pleased to report another very strong quarter for Callion across several key performance metrics. Despite the pandemic, the Ukraine conflict, and supply chain shortages, Calend continued our growth momentum. In Q3, we achieved our highest quarterly revenue to date. We achieved record gross margins. We continued to expand into the US and Europe, and we continued our journey to diversify our customer base. So let me elaborate. Gross margins this quarter were 30%. This is an all-time high and represents a significant milestone. Two years ago, our gross margins were 21%, and through our efforts organically and through M&A, we have made significant progress. Revenue was also at an all-time high level of $150 million. This performance was even more impressive given supply chain slowdowns and project starts being delayed. You've heard me speak frequently about our efforts to diversify our revenue both geographically and by sector. Just a few years ago, more than 70% of our revenues came from Government of Canada. As of this quarter, commercial revenues have outpaced government revenues and our expansion into the US and Europe continues to go very well. We were able to do this while continuing to grow our legacy Canadian government business. Each of these milestones is a significant indication of our strategy in action and further motivates our team to continue to execute against our plan. As a reminder, our four-pillar growth strategy consists of innovation, continuous improvement, customer retention, and customer diversification. Last quarter, we launched our innovative digital health platform. In Q3, we partnered with a precision healthcare company that will leverage our digital healthcare platform to deliver the product to Canadians. More on this later. You've also heard me speak about our goal to be a billion-dollar company, and we continue to improve and invest in technology that helps us scale and grow our organization in an efficient manner. Our customer retention efforts are the foundation of our business. In Q3, our ability to re-win mandates with existing customers remained strong. Of the $190 million in new contract signings, 90 million were customer renewals. As mentioned, our customer diversification strategy continues to achieve momentum this quarter, and the contributions of Computex and Simfront posted impressive results, which helped us expand our revenues into the US and Europe. Our four-person engine model offers diverse solutions to markets around the world. Our four-person engine consists of advanced technologies, health, learning, and IT and cyber solutions. Advanced technologies and health faced headwinds in Q3, whilst our learning and ITCS clearly had tailwinds. It showed the strength of our diversification this quarter again and still generated record revenues and record gross margins, despite those headwinds. I will now share an update on each of our segments. The ITCS segment posted impressive revenue growth of 109% this quarter, and a 76% increase for the nine-month period ended June 30, 2022. Gross margins increased 15 percentage points, and profitability increased 115% in the three-month period. Our strategy to first become a leading provider of information technology and cyber, and to be able to meet customers' needs across Canada and the United States is delivering results and resonating with the customers. We are also increasing our reoccurring revenue streams as more customers adopt our managed services platforms. I'd like to share a few of the customer stories to demonstrate our ability to provide high-quality services across many IT sectors and help those customers execute their business objectives. Katerra Energy is a U.S.-based gas and exploration company that is quickly expanding. We have partnered with them to support several initiatives from hardware infrastructure and network support to more recently rolling out our security operations center. Our SOC as a service offering for Katerra provides them with artificial intelligence and human integrated threat hunting, awareness training, and most importantly, remediation when a cyber tactic happens and is available 24-7. Omni Logistics is a rapidly growing global supply chain logistics company in a very competitive and intense supply chain management sector. Omni partnered with Calion as we understood the complexities of a global environment and offered them the ability to quickly bring on new logistical sites as their business expanded. Calian experts met with the Omni team to evaluate current and future needs and help them construct a comprehensive plan to support their fast-paced journey. We are now building, configuring, and deploying the first phase of the solutions for Omni Logistics. These customer stories demonstrate our ability to provide high-quality services which gains customers' trust to partner on additional capabilities in our broad product portfolio. Today, our ITCS offers cybersecurity to enterprise cloud migration to manage services, We listen to the complex challenges that our customers face and then offer them solutions, solutions that cross all four of our operating segments. For example, our ITCS segment, our health segment, are a great example of how we work together to cross-sell. The two segments came together and invested R&D in a virtual care delivery platform, and we're honored to be recognized in this quarter by Microsoft Canada, who awarded Calion their 22 Healthcare Impact Award. Moving on to health. Our health segment saw tremendous demand at this time last year as we helped Canadians respond to COVID-19. As that work ended, the demand normalized. Our ability to replace that revenue with contributions from different parts of our business, like the ITCS segment, speaks to the success of our four-fisted engine and diversification agenda. Revenue contribution from the health segment was $40 million, which was down 22% from this time last year. 14% of that decline was attributed to the reduced need for COVID-related services. In addition to the decline in COVID-19 response engagements, the company saw slow demand for patient support programs and clinical research as projects came to an end and new initiatives have yet to kick off. Despite the reduction in revenue during this transition period, we remain optimistic about our market position and have a three-pronged approach to drive future growth. The first is technology. Calion Nexi is an example of innovative technology that resonates in the healthcare market. It transforms healthcare delivery using automation, analytics, and machine learning, and actually can enable the healthcare industry to be more productive as it deals with less resources. The second is further focused on the pharmaceutical market. This quarter, Ciantra Inc. announced that Callion will provide the technology platform and nursing network for the mobile test administration of Ciantra's innovative blood test that can identify breast cancer. As pharmaceutical companies develop innovative and life-changing solutions, Calium is well-positioned to help them develop and bring those medications to market. The last is diversification. We are expanding our current offerings into the U.S. and looking for M&A targets to further accelerate our market traction. Before we move on to the next segment, I want to reiterate and say how proud I am of our efforts from our team that they've demonstrated over the last few years of COVID as they helped Canadians respond to the pandemic. Callion and our staff remain on ready so that we can step up quickly to help Canadians again if needed. For advanced technologies, we saw this segment revenue decrease 11% year over year. We ended the quarter with revenue of $39 million. In our space division, we have seen the timing from RFP to contract awards and project commencement lengthen. As we near the conclusion of some of our existing contracts, new initiatives have yet to begin. We have partially offset this by increased demand for our software services, which now has the largest backlog of work that we have ever recorded. Despite this, we have managed to replace these revenues with sales at significantly higher gross margins in our terrestrial division. Our entry into the GNSS and tennis sector continues to be the highlight in Q3. Demand in multiple markets, including electronic vehicles and mining, continue to be very strong, with an increase of 57% compared to the same quarter of the previous year. Our nuclear business continued to do well in Q3. We're also working with customers on new mandates, including analysis of small modular reactor technology. Part shortages continue to be an issue, slowing down our delivery speed for our hardware-based solutions. Our teams are working hard to find the solutions to bring those key parts into practice and catch up on our backlog. Moving forward, we will organize the advanced technology segment to ready ourselves to respond to ever-evolving market demands. The segment is now organized into three areas of business, space, defense, and terrestrial, as we believe this focus will support our growth objectives and provide focus on key market segments. And finally, our learning segment showed considerable revenue and margin expansion in the quarter. Revenue increased 23% compared to last year and closed the quarter at $22 million. In the last 12 months, Learning has achieved a revenue of $87 million. It is on track to break the $100 million year level for the first time in the company's history. This has been the result of our expansion to Europe, as well as expansion of our services to introduce more technology assets into our trusted and experienced delivery methods. Gross margins continue to track in the right direction, ending at 26%. This compares to 23% in fiscal 21. Our acquisition of SimFront and SimWave continues to be a highlight. Technology assets and synthetic learning environments, as well as our virtual reality and augmented reality, have allowed us to expand our Canadian presence within militaries and commercial customers. Now, our Chief Financial Officer, Patrick Hewson, will discuss results and key performance indicators. Over to you, Patrick.

Thank you, Kevin. This quarter saw balanced performance across the four segments. when put together resulting in several of our key performance indicators at all-time highs. Revenue was up 10% versus the same period last year. This is in line with our objective to deliver consistent double-digit growth. But perhaps more importantly, we've been able to expand our margins ahead of our revenue growth. This has been through multiple initiatives which have offset cost pressures we have seen due to current economic environment. We also managed to record $190 million in net new contract signings, which will help us as we enter FY23 starting in October. This also continues our recent trend of new signings exceeding our revenues and maintaining a strong backlog position across all four segments. As Kevin mentioned, our diversification efforts are showing meaningful progress quarter over quarter. Both our legacy government business and our commercial business are now equal contributors and we still see the ability to grow both of these in coming years. Business outside Canada now has reached 33% of overall revenues. We continue to seek M&A opportunities to help our efforts to grow business in Europe and the United States. Our recent acquisitions in cyber, learning, and GNSS antennas are performing above expectations and delivering strong results. This has helped offset revenue reductions year-over-year due to COVID response work coming to an end in our health segment. Our cash performance was strong this quarter. Cash flow from operating activities was just under $20 million. This was through strong business performance as well as positive working capital of $8 million. After earn-out payments of $5 million and dividend in CapEx, we ended the quarter up $9.4 million on net cash as compared to Q2 of this year. This puts us in a strong balance sheet position to continue to execute our strategy of organic and acquisitive growth with committed debt and cash on hand of over $120 million and the ability to further expand this liquidity with our current lending syndicate. This balance sheet strength and track record of profitability and excellent cash flow conversion will be an asset as we continue to allocate time and effort on our M&A agenda. With one quarter remaining in our 2022 fiscal year, we're still on track for another record year, our fifth consecutive all-time high performance. We have adjusted revenue down to reflect a few factors, the first being delays and signings of new work in our space division of advanced technologies and our health segment, and the second being supply chain delays preventing us from fulfilling orders in advanced technologies and ITCS. We now expect revenue in the range of $560 million to $585 million. We have maintained our EBITDA guidance, reflecting stronger gross margin momentum as seen in this quarter's performance, as well as pacing our investments on various organic growth initiatives. EBITDA remains in the range of $61 million to $65.5 million. Adjusted net income has been increased to reflect more favorable tax effects as our business expands internationally, as well as reduction in costs below EBITDA. We now expect adjusted net income in the range of $44 to $48 million. Finally, I must caution that revenues and profitability realized are ultimately dependent on the extent and timing of future contract awards, customer realization of existing contract vehicles, and any impacts due to COVID-19 and the conflicts in Ukraine. Our guidance does not incorporate any additional M&A activity, and should we close any new opportunities, their contributions would be incremental. Please see our press release and MD&A for a detailed reconciliation of our guidance. I'll now turn the call back over to Kevin.