Calian Group Ltd.

Good day and welcome to the Callion Group Q3 2023 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. As a reminder, this call is being recorded. I would like to turn the call over to Jennifer McKay, Director of Investor Relations. You may begin.

Thank you, Michelle, and good morning, everyone. Thank you for joining us for Callion's Q3 2023 conference call. Presenting this morning are Kevin Ford, Chief Executive Officer, and Patrick Houston, Chief Financial Officer. As noted on slide two, please be advised that certain information discussed today is forward-looking and subject to important risks and uncertainties. The results predicted in these statements may be materially different from actual results. As a reminder, all amounts are expressed in Canadian dollars except as otherwise specified. With that, let me turn the call over to Kevin.

Thank you, Jennifer. And let me start right away with an overview of our Q3 results. After many years of meeting or exceeding expectations and considerable growth, we did not meet our expectations this quarter on some of our key performance indicators. This is unusual for us, and we do not take it lightly. I would qualify our Q3 results as mixed. We had some positives and we had some negatives, but we understand where we need to adjust to get back on track, and in confidence, we will do so quickly. On the positive side, we generated strong revenue growth of 11% as a result of strong organic momentum. Our health segments rebounded nicely and posted its best quarter since the days of COVID-19, and our advanced tech and learning segments continue to show momentum from Q2. We also continue to drive gross margin performance above 30% for fifth consecutive quarter, showing our ability to adapt and deliver consistent performance despite the challenging macro environment. However, adjusted EBITDA and related margin decreased due to various investments we made coming out of our last fiscal year. We have prided ourselves on profitable growth over the last six years and restoring the business to double digit EBITDA margin is our top priority. We believe it can be done and have already, as of this call, taking steps to deliver on this. We have underwent a complete review over delivery capacity and overhead costs and initiated cost reductions in targeted areas to rebalance our investment levels. These measures are expected to generate annualized savings, cost savings of approximately $8 million with the objective of driving a more optimal level of growth and profitability. Remember that we are trying to build a double-digit growth company. That comes with some level of risk as we need to push more aggressive in terms of investments ahead of demand. As we push forward, there will inevitably be some bumps along the way. The important thing is to make adjustments quickly and move on. Our business is still strong despite this temporary setback. Our customers still want Cali by their side and our expansion initiatives are still just getting going. What gives me great confidence is that the top line is there. The organic growth is there. The new contract signings are there. The backlog is there. It's the efficiency in certain areas that's not there, and that's what we're fixing. Following the end of the quarter, we announced two key events. The first being the closing of the Hawaii Pacific Teleport Acquisition, effective August 1st. I welcome that team to the Callion family and believe they will be key contributors in the years to come. I would just like to take a moment to express our condolences to the families of those who lost loved ones in the wildfires in Hawaii. We were relieved to hear that the new members of the Callion team and their families weren't harmed. Our HPT operations are located on the island of Oahu, therefore were not directly protected. We will be donating $10,000 to the Maui Strong, which will support wildfire relief and recovery efforts in the affected communities. The second announcement was the expansion of our credit facility to give us access of up to $250 million in liquidity. This is a sign of our commitment to the continued deployment of our capital on our M&A agenda in the years to come. Before I give you an update on the four segments, I'd like to acknowledge our team. Reducing staff is always difficult, but we believe it was necessary to do so at this time to put us in a better position to continue to invest and grow in our business in the years to come. With that, let's begin with IT and cyber. ITCS had a difficult quarter. Revenues decreased by 6% to $46 million, This short-term revenue shortfall was primarily due to lower shipments in our product resale business based in the U.S. The nature of this business can be lumpy as it depends on customer spend cycles as well as demand for infrastructure upgrades. We benefited during the quarter, or we benefited during the last few quarters due to pent-up demand and some supply chain relief post-pandemic. Recall that we've been working very hard in the last 12 months to address customer backlog, resulting from the ongoing supply chain issues, and we were able to do that successfully. With that behind us, we did see a momentary pause in order intake and deliveries midway through the quarter, which affected profitability. The good news is that towards the end of the quarter, we ramped up new signings, and we believe this sets us up for more normalized performance in the coming quarters. In fact, gross contract signings were $53 million in Q3, outpacing revenues. This is an indication that bookings continue to be healthy, and this quarterly miss is just a bump in the road. However, this revenue shortfall falls straight to the bottom line. Gross margins fell to 34% from 40% in the same period last year, and this gross profit miss combined with their accelerated investments in sales and delivery capacity resulted in our EBITDA dropping by more than 50% to 3.4 million. Part of our restructuring plan implemented subsequent to the quarter end, willing to realign our sales and marketing delivery capacity with a run rate level of business. Looking forward, macro conditions are neutral with a hint of conservatism from customers due to recession fears. Realistically, we will not be able to make up the shortfall in the fourth quarter, especially since we're already expecting a lower Q4 than last year, giving significant deliveries in the final weeks of the quarter last year. But we do expect to return to more and more of these liabilities in the coming quarters. Turning to our health segment. In the third quarter, a whole segment rebounded and posted its highest revenue since the third quarter of 2021 in the peak of the pandemic. Revenue increased 23% to $49 million, primarily driven by existing customers increasing their requirements for healthcare services, as well as new programs being launched across Canada. We have now built a run-rate business of approximately $200 million in reoccurring revenues. Similar U.S. margins and EBITDA margins increased to 27% and 18% respectively. as our recent investments in recruiting and various outreach initiatives have helped us address customer needs across our portfolio. Our ability to fulfill contracts at higher utilization levels and lower turnover were key in achieving higher gross margins. In the quarter, we signed new contracts valued at $27 million. Amongst these new signings was our first software-as-a-service customer under the Nexi solution. For the fourth quarter, we expect continued momentum in the business, and we see continued strong demand signals for our existing customers for pharmaceutical CRO services that are gaining increased traction. Turning to our events technology segment. In the third quarter, we continued our momentum from Q2. Revenue increased 14% to $45 million, primarily driven by stronger telecom product sales with existing customers and increased demand for GNSS products. In fact, GNSS products generated double digit growth again at 22% this quarter. and our book-to-bill ratio so far exceeds two times. This growth comes from new large-scale customers as well as increased demand from existing customers as they include our products into more of their offerings. During the quarter, we continue to make progress on orders and projects that were delayed due to supply chain issues. We continue to see delays in certain products, but the delays have started to ease. We are optimistic that we can make further progress in the fourth quarter as we chip away at our product backlog. Gross margins improved from 29% to 35% due to a better mix of higher margin business. The contribution of more Callium products will continue to drive higher gross margins in the longer term. This gross profit margin improvement flowed to EBITDA line with EBITDA margins increasing from 14% to 16%. In the quarter, we signed new contracts valued at $50 million, outpacing our revenues. Key wins included upwards of $15 million for GNSS antennas, as well as some significant deals for defense and space products. We were also selected by the Canadian Space Agency to receive half a million dollars in funding to further develop RF over IP technology. RF over IP is the ability to digitize and transport RF signals over an IP network without data loss. This technology will be a key enabler for the introduction of virtualized satellite ground systems. For the fourth quarter, we expect to continue on this momentum given the continued easing of supply chain restrictions, delivery of ground system projects for the student loan, and strong demand for GNSS products. Turning to our learning segment. In the third quarter, Topline continued its year-over-year revenue growth momentum displayed in the last few years. Revenue increased 20% to $27 million. driven by recent investments in technology and geographical diversification as we take advantage of strong demand in the military training market due to geopolitical issues and renewed focus on readiness. Gross margins temporarily decreased to 25% as the cost of our delivery increased in advance of the contractual rate increases with customers. Predetermined increased intervals are set to take place in Q1-24. Similarly, EBITDA margins went down to 14% as we invest to support growth in new area countries in Europe. The learning segment is a perfect example where we don't want to hit the exit button in investments. The issue is that the demand signals from military training in Canada and Europe continues to be high. The procurement process is a challenge to keep up. Global defense takes time. Our strong position with our legacy contracts allow this to continue to grow revenues while we wait for procurement activities to catch up. We made the conscious decision to continue to invest in our assets to position Calion in the market because we see significant global opportunity down the road. For example, we are seeing positive growth signs in our Simfront software assets and are investing in R&D to get more features and functionality to be able to address a wider customer set in the future. In the quarter, we continue the expansion of our training globally with projects in Poland, Germany, the Netherlands, Australia, and Switzerland. This is a strong indication of our pedigree and ability to be a global training partner in defense. We also diversified inside of defense and signed contracts with academic clients, including the University of Guelph and Sioux College. For the fourth quarter, we anticipate continuing on the same momentum. As a result, we believe we are on track to break the 100 million revenue mark in learning for the first time ever. This continued growth is giving us more confidence to continue to invest to make sure we are well positioned to capitalize on the macro environment where military training has become mission critical. Now, I'd like to turn the call to Patrick to discuss cash flow balance sheet and our guidance. Patrick.