Calian Group Ltd.

Good day and thank you for standing by. Welcome to the Caleen Group Second Quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, we'll open up for questions. To ask a question during a session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's call is being recorded. I would now like to hand it over to your first speaker today, Jennifer McCauhey, Director of Investor Relations. Please go ahead.

Thank you, Victor, and good morning, everyone. Thank you for joining us for Caleen's Q2 2025 conference call. Presenting this morning are Kevin Ford, Chief Executive Officer, and Patrick Houston, Chief Financial Officer. They will review our Q2 results and discuss future growth opportunities for Caleen. 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 good morning. Let me begin by recognizing that our Q2 results fell short of expectations. While this is disappointing, it's important to highlight that the shortfall is primarily limited to headwinds in our ITCS segments. The rest of the business continues to demonstrate resilience and performance in uncertain times. Notably, our overall defense business, which remains a high-growth area and a strategic priority for us, is performing well, giving us confidence on the broader trajectory of the company. Let me start with our ITCS segments. Year to date, we've experienced a 15% decline in revenue, but a significantly sharper drop in EBITDA compared to the same period last year. This indicates that the core challenges are more cost-related than revenue-driven, and importantly, several of these cost pressures are temporary and should start to unwind in coming quarters. Let me take a moment to clarify what occurred during the quarter. First, delayed procurement decisions by the Canadian government due to the elections affected our decisive business unit in its strongest quarter of the year. While we had anticipated some slowdown with the pending election, the impact was more significant than anticipated. The good news is that we believe this is a timing issue, and we will recapture these opportunities in the back half of the year. Second, delayed procurement decisions by the U.S. commercial customers due to -than-anticipated refresh cycles coupled with tariffs. The market uncertainty surrounding tariff-slot customers and our U.S. business to delay investment so they assess the impact on their respective businesses. We expect that this uncertainty will continue while businesses absorb the new policies and adjust their operating models. Third, we are incurring increased costs due to our cybersecurity platform transition from our in-house version to the Microsoft platform. Essentially, we are supporting two platforms until the transition is complete. Which is expected to be finished at the end of this year. Over in just six months, we have made meaningful progress across our North American market. We are seeing strong momentum with a growing number of clients, with over 30 customers now migrating to our next generation AI-infused platform powered by Microsoft technologies. Concurrently, our data and AI practices accelerate its pipeline growth, now exceeding 20 million. Some of these customers we have recently actively engaged with include La Vie en Rose, Crescent Energy, and Select Waters. Finally, we are actively investing in future growth by accelerating our pivot towards a services-led organization. Our strategic focus is on delivering AI-driven innovation across cybersecurity, data and AI, application modernization, and business applications. This shift is already creating strong momentum with key customers like Apache Industries who are leveraging expertise to modernize and scale their digital capabilities. As we support our customers through their transformation journeys, we're seeing longer sales cycles than initially forecasted, and these are natural consultative engagements that drive deeper impact. While this has resulted in a temporary higher cost base, we are confident that our investments in talent, solutions, and delivery capacity will translate into long-term value creation and sustainable, profitable growth. To summarize, ITC S-phase headwinds from macroeconomic conditions, the ongoing transition of our cybersecurity business to a new platform, and the challenges of repositioning towards a higher-end margin managed services model. That said, it's important to note that the impact is not uniform across the segment, as our on-demand services, for example, have remained stable and continue to perform reliably. The underlying fundamentals of the ITC S-business remain strong. The market opportunities in cybersecurity and managed services are substantial, and we're firmly focused on positioning the company to fully capitalize on them. While the market is increasingly competitive, we believe partnerships with Microsoft and the recent investments we are making, combined with our proven mission critical solution capabilities, are positioning us well to gain market share. While we're in the earliest phases of our transformation, we are highly confident in the long-term outlook for ITC S. A key part of our strategic plan is to improve our margin mix with greater percentage of business stemming from our cyber and A data and AI practices, and we believe this transition will create a stronger, more resilient, and higher value ITC S in all positions to lead in mission critical industries. Achieving this requires ensuring the business is appropriately structured and operationally prepared to capture this growth, and that's exactly where our capable team of leaders are driving their efforts. Overall, we've made meaningful progress, but given the evolving dynamics of broader market uncertainty, it's clear that ITC S will need a few more quarters to complete its transformation and return to sustainable growth paths. In the meantime, we expect continued volatility and pressure in this segment. Elsewhere, our other three segments have felt some impact of the federal election and tariff-related uncertainty, though to a much lesser extent. Despite these challenges, they continue to demonstrate resilience and remain steady and are still in certain operating environments. While we have challenges, we are supported by a solid backlog of $1.1 billion, and I'm happy to report that it's now $1.4 billion with the closure of the AMS acquisition. Patrick will share more details on our Q2 results shortly. Let me provide you an update on our defence opportunity. Last quarter, we provided you with an overview of our renewed -to-market strategy for defence, which we are currently executing. Our overall defence business, which represents close to 50% of our revenues, continues to grow. In fact, treading 12-month revenues reached $363 million, up 10% from SY24. More specifically, year over year, our international learning business has grown 395%. Our health business has grown 10%, and our advanced technologies business has grown 19% in this area. We're seeing growing momentum in defence, particularly in Europe, where we've recently secured several net new contracts. While we are unable to disclose the details, such as deal size, duration, or customer names due to security sensitivities, what matters most is the strength of our current pipeline now exceeding $1 billion, which highlights sustained demand for mission-critical defence solutions. We are positioning the company to capture this growing demand by assembling a strategic leadership team with the experience, networks, and track record needed to drive results. As you may recall, last quarter, we appointed a regional VP of global defence and security and a managing director for our UK defence, which has strengthened our bench. With this team in place, we're confident in our ability to turn high-potential opportunities into concrete outcomes. In the US, we continue to strengthen our brand presence and expand our commercial footprint and defence. We've begun generating incremental revenue by successfully cross-selling our existing products and services to US commercial customers. At the same time, we're actively progressing towards folk-out compliance, which is a key milestone. Once achieved, it will position us to begin marketing our defence products and services to the US government, an important step in our long-term growth strategy. Turning to Canada, with the Canadian Armed Forces' budget costs starting to taper off in the third quarter in the federal election behind us, we expect investments in defence to gradually increase. A major driver is Prime Minister Rakharni's defence spending plan, which is expected to reach 2% of GDP by 2030. In fact, the Liberal election platform promised an additional $30.9 billion in new defence spending over the next four years with a commitment to buy Canadian, where possible, and prioritise Canadian raw materials. The plan includes filling this cash shortage of 14,500 members, who inevitably will require training and healthcare. While the timing of the contract awards is difficult to predict, the tailwind is undeniable. As we have said many times, defence is a marathon, not a sprint. Overall, the defence segment continues to act as a strong tailwind for the company. The global need for defence capabilities aligns with Canada's defence operational readiness platform, which delivers a comprehensive suite of services backed by decades of proven experience. These include training, IT infrastructure, health services, cyber security, space communications, and manufacturing. With all of these defence opportunities in the works, we strongly believe we are set up to participate in a meaningful life as the activity racks up. Besides defence, we believe space and health are backed by strong fundamentals and favourable tailwinds. In line with our strategy to sharpen Canada's focus and drive sustainable value creation, we are taking steps to simplify our operating model and align the business with high potential mission-critical markets. Recent cost-based adjustments on the launch of a portfolio review aligned to our growth markets will better position us to capitalise on strong industry tailwinds. These measures reinforce our commitment to operational excellence and long-term shareholder value. We are actively reviewing our assets, investments, and business lines to ensure alignment with our long-term strategic growth objectives. This portfolio review may include exploring options for non-core assets, refining our -to-market approach, doubling down on high-growth areas, optimising our cost structure, and re-incessing capital allocation priorities. Our goal is to focus resources where we see the greatest potential for greatest value and value creation. Earlier today, we announced the acquisition of AMS, a provider of healthcare services to the Canadian North, including the Northwest Territories, Yukon, Nunavut, and parts of Canadian Northern provinces. AMS is a great fit for Canadian health for a number of reasons. It broadens our healthcare solutions service offering into primary care, paramedicine, and air and ground ambulance, expands and strengthens our geographic footprints and competitive position in Northern and Canada, and it will enable cross-selling opportunities for both government and industrial customers. It's established brand in Northern healthcare, its contract backlog of roughly 250 million, combined with its key partnerships with Indigenous communities will be an asset as we work to scale the business over the next several years. AMS provides kind with a strategic footprint in the North at a time when the federal government is making substantial investments in the region. Our presence in the North, coupled with our strengthened relationships with provincial and territorial governments, will position us favorably to secure new contracts as Northern investments are rolled out. In the coming years, we believe there will be increased demand for health and defence products and services in Canada's Northern strategy and planned federal investments. Our portfolio review will position us well to gain from this. Now I'll turn the call over to Patrick to discuss consolidated results for Q2 and our outlook for FY25.

Patrick. Thank you, Kevin. Q2 revenues decreased 4% to 194 million as the combined growth of 7% from advanced tech, learning, and health was more than offset by the ITCS under performance with revenues down 25%. Quiz of growth was 4% and was generated by the contributions of the nuclear assets acquired from NDA and Madway. Organic growth was down 8% primarily impacted by the ITCS segment. As Kevin explained earlier, excluding ITCS, organic growth would have been 1%. Despite these levels, we continue to have high performing assets in our portfolio, such as our nuclear services, which increased 91%, and our GNSS antennas, which increased 22%. We continue to grow outside Canada with 42% of total revenues coming from international customers in Q2. It's the highest quarter of international revenues both in terms of revenue dollars and as a percentage of overall revenues. On a trading 12-month basis, revenues stand at 745 million in line with FY24. Gross margin was 33%, slightly below the same period last year due to revenue mix. It represents a 12th straight quarter above the 30% margin. Adjusted EBITDA decreased 10 million from 27 million last year to 17 million. Of the $10 million decrease, 8 million was attributed to ITCS for the same reasons explained earlier. As a result, adjusted EBITDA margin decreased to 9% from .5% last year. On a trading 12-month basis, adjusted EBITDA stood at 79 million, reflecting a margin of 10.6%. While our Q2 shortfall went largely confined to the ITCS segment, we took proactive steps in April in light of broader market uncertainty, including concerns around tariffs and increasing recessionary signals. We implemented target reductions in overhead and discretionary spending and temporarily paused select investments. These measures are designed to enhance our operational resilience and help mitigate potential economic headwinds in the quarters ahead. As a result of our lower adjusted EBITDA, adjusted net profit stood at $11 million, or $0.93 per share, down from 19 million in the prior year. In the quarter, we posted only a small net profit mainly due to non-cash accounting charges, which we amortized over approximately five years post-acquisition. Let's take a look at our cash flow and capital deployment metrics. Cash flow from operations of $10 million in this quarter compared to $36 million in the same period last year is impacted by lower net profit and working capital usage in the quarter versus positive working capital last year. We maintain our working capital efficiency level in Q2 by using 9% of revenues. This is a similar level from FY24, but down significantly from FY23 when we stood at 14%. Operating free capital stood at $10 million, representing a 56% conversion from adjusted EBITDA. On a trade-in 12-month basis, operating free capital stood at $57 million, expecting a conversion rate of 72% above our target of 70%. Experiencing capital deployment. In Q2, we used our cash in a portion of our credit facility to make tax-tax investments of $2 million. We also provided a return to shareholders in the form of dividends of $3 million and continued buying back shares to the tune of $4 million. In the last 12 months, we've invested $13 million in dividends and $14 million in share buybacks for a total of $27 million. We continue to believe that CALIAN shares are undervalued and plan on continuing to deploy capital to work refurbishing shares in order to deliver long-term value to our shareholders. We plan on refurchasing approximately 6% of shares outstanding in FY25 through a combination of daily purchases and block trades under our NCIP. As Kevin mentioned, we completed the acquisition of AMS earlier today. This demonstrates our continued ability to identify strategic assets that sit into our growth initiatives and acquire them at attractive valuations. We paid $21.5 million at closing for 100% of the shares and have an earn-out payment of up to $5 million in the first year. We continue to spend considerable time evaluating opportunities in defense, space, health care, and growth markets and plan on continuing to deploy capital towards M&A alongside our activities on the NCIP. Now let's take a look at the balance sheet and cash availability. As at March 31st, we had drawn $120 million on our debt facility. During Q2, we drew an additional $5 million on our facility to support our current operations and buyback shares. We ended the quarter with a net debt of $57 million representing a net debt to adjusted EBITDA ratio of 0.7. This is well below our threshold of 2.5 times and we have ample capacity on the balance sheet to pursue our growth with close to $200 million in available funds. Despite our more challenging quarter, our last 12 months adjusted EBITDA yields, operating free capital yields, and adjusted EPS yields were approximately 15%, 11%, and 9% respectively. This demonstrates our ability to generate solid returns and reflects our focus on operational efficiency, robust cash generation, and profitability, positioning as well for sustainable growth. Now let's turn to our FY25 outlook. Given ongoing economic and geopolitical uncertainty, as well as limited visibility and timing to key opportunities in the ITCF segment, we've made the decision to withdraw our guidance. The current market environment remains uncertain and is rapidly changing with many moving variables, making it difficult to provide a reliable and meaningful forecast at this time. In addition, we have a concrete plan to address the issues in ITCF. It will take some time. It's important to emphasize that this decision does not alter our confidence in Caleon's long-term growth trajectory. While we have withdrawn guidance, we can offer a few data points to assist with modeling, as our other three segments are performing to our expectations. Excluding ITCF, we expect combined adjusted EBITDA from our Health, Learning, and Advanced Technology segments, inclusive of corporate costs, to grow over FY24 levels in line with previous expectations. The primary variable remains the performance of the ITCF segment. Our confidence is underpinned by strong momentum and sightings. We secured approximately $248 million in new business during the quarter with both new and existing customers. Our backlog remains robust at $1.1 billion and will further increase by roughly $250 million with the addition of AMS today. Turning to capital deployments for FY25. We are targeting neutral to slightly negative working capital for the year. We anticipate to have an earn-out payment of approximately $5 million with respect to the acquisition of Mavway and Q3. We expect to maintain our capex investment for the year at approximately $8-10 million. We expect to maintain our current dividend of $1.12 per share. And we plan to accelerate our share buyback program by combining our daily purchases with block trades. Again, we intend to repurchase up to 6% of our public flow under the NTIE. I'll now turn it back over to Kevin for his closing remarks. Kevin?

Thank you, Patrick. In closing, I want to leave you with a few thoughts. While our Q2 results came in short of our expectations, they were essentially isolated to headwinds in the ITCS segments. The rest of the business remain resilient and is expected to close out the year as expected. In fact, although we have withdrawn guidance, we still believe that we will end the year with record-breaking revenues and showing positive -over-year without progress when combining the learning, health, and advanced tech segments together and factoring in our corporate costs. Our goal remains to continue to build a purpose-driven organization, growing -15% per year through a combination of organic growth and acquisitions and creating value for our shareholders. Over the past year, we have engaged with new shareholders to have shared valuable perspectives on ways to enhance shareholder value. Suggestions have included refining our strategic focus on key growth markets, increasing share buybacks, and finding efficiencies among others. I want to assure you that your voices have been heard and we are actively working to address these priorities. As you heard Patrick state today, we will maximize our share buybacks with the objective of repurchasing up to 6% of our float in order to deliver long-term value. In addition, we began a portfolio review to better position the company to capitalize on the significant tailwinds that are emerging defense, health, space, and emerging markets. The strategic shift will involve the realigning of our overall approach, looking at options for non-core assets, and doubling down on high-conviction growth areas, all supported by a clear and actionable execution plan. To help support us with this exercise, we have been actively refreshing our board in the past few months to align with the evolving needs of the business. We are pleased to welcome three outstanding new directors, each bringing deep public company expertise and valuable perspectives. Lisa Graytricks adds strength to financial acumen and capital markets expertise that will support our focus on operational excellence. Josh Blair brings a proven track record across AI, data services, and healthcare, industries closely aligned with our growth ambitions. And we just recently announced and welcomed Eric DeMiriam, the chair and board of the board of the Descartes Systems Group, whose extensive experience in finance and M&A across diverse markets makes them a key strategic asset as we pursue scale and transformation. In terms of doubling down on growth initiatives, let me say a few words on defense and space. A few years ago, we made a strategic decision to position accounting for growth in the European defense sector through targeted investments and acquisitions, including a recent acquisition of Mavway. This foresight is now paying off. Our international learning defense business is going by 395% and 75% organically. With global defense budgets on the rise, we are well positioned to secure upcoming contracts. What's more, the global space economy is poised for significant expansion in the coming years. This growth is driven by advancements in satellite technology, lower launch costs, and increasing integration of space-based services across various industries, including communications, transportation, and defense. Right now, we are seeing a lot of activity in our space sector. We have numerous RFPs currently pending responses amid rising demand for space in Europe and growing attention in Canada given the Buy Canada movement. In fact, there is significant growth and opportunity across both defense and space sectors, and Coyne is uniquely positioned at the intersection of both. With shared technologies, overlapping capabilities, and common demands for precision and reliability, the synergy between these sectors allows us to deliver our experience and drive innovation across these domains. We are a company focused on innovation, increasing our R&D investment year after year. Artificial intelligence is transforming industry, and our company is actively embracing this change. We are investing in AI and embedding it across our products and services, and as a result, we are driving innovation, improving performance, and delivering smarter, more efficient solutions for our customers. From automation to advanced analytics, AI is helping us stay ahead and rapidly changing technology landscape. Moreover, we are also encouraged by the growing Buy Canada movement, which is gaining momentum across both public and private sectors. As a Canadian company, we are well positioned to benefit from this shift, especially as customers and government entities increase and prioritize local suppliers who understand domestic needs, comply with Canadian standards, and contribute to national economic resilience. This trend aligns well with our capabilities and footprint, and we believe it will create a new opportunity to expand our presence and deepen our relationships within the Canadian market. For example, in the Canadian defense sector, we not only want to capitalize on growing demand and training in health care, but also the OEM opportunity. Calendars is one of a handful of Canadian companies with the breadth and depth to manufacture mission-critical military equipment when failure is not an option. We design, build, and test custom components to meet or exceed military performance standards across our plants located in Ontario, Quebec, Saskatchewan, and Germany, and we want to drive growth here even further. Collectively, these actions position us well to navigate the path ahead, take the company to its next stage of growth, and enhance shareholder value. Having said all of this, I am optimistic about the future growth because our company is built on a solid foundation. We maintain a strong balance sheet that gives us selectability to invest strategically, a proven track record of execution, and a successful M&A strategy supported by a robust pipeline. With a healthy backlog of now $1.4 billion and a high-free cash flow conversion, we are well positioned to capitalize on terrible trends in our end markets and encouraging combination that sets the stage for continued success. In Q2, we grew some businesses, as I mentioned, like International Leonardine and Defense, GNSS and Tennis, and Nuclear Services by 395%, 22%, and 91% respectively. We signed $248 million of new contracts, representing a -to-bill ratio of 1.3, and stepped up our share repurchases. More recently, we refreshed our board and completed the acquisition of AMS, which will position us for growth in the North. In closing, despite some headwinds, we believe the company is well positioned for growth in the years ahead. Our strong fundamentals, strategic focus, and discipline execution gives us confidence in our ability to navigate challenges and seize emerging market opportunities. Above all, we remain committed to creating long-term value for our shareholders by building a more resilient, focused, and future-ready business. And with that, Victor, I'd like to now open the call to questions.

Thank you. As a reminder, to ask a question, you need to press star 1-1 on your telephone and wait for a name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the candidate roster. One moment for our first question. Our first question comes from the line of Doug Taylor from Canada Corp Genuity. The line is open.

Yeah, thank you. Good morning. I guess I'll start by asking some questions about the ITCS unit, which I'm sure will be the focus. It sounds like you've taken some steps already to, you know, buffer margins, understanding top-line visibilities and what you'd like for the reasons you've mentioned. But should we be thinking of Q2 as the floor here for that unit, or is it too early to say that in terms of profitability based on what you can see in the expectation of some second half catch-up on some Canadian government stuff?

Yeah, great perspective question. From my viewpoint, when I look at ITCS, Doug, I really see kind of a three-step process here from moving forward. So, number one, as I mentioned, the platform conversion that we're working on right now, I think, is going to take a couple of quarters to finalize into the calendar year. Our expectation will be pretty well done that, so that's going to help reduce some cost. Converting the funnel that we have, which is growing, you know, it's quite strong. That, again, is a timing issue. And then just the macro environment we're dealing with, the federal election coming on board, the U.S. commercial environment. So, in answering your question, I think the next couple of quarters is what it's going to take to get this thing back on a solid growth trajectory. And I want to reiterate my confidence in the strategy that the team has in doing exactly that. So, it's not a -by-quarter discussion. I think it's a couple of quarters. We'll continue to see some variability there. But the trajectory is strong. The trajectory is built on a solid, you know, strategy. And I'm confident in our ability to move that into the growth goal.

Maybe one more question on that. I mean, the duplicate platform cost issue that you mentioned, given, you know, the pressure we've seen on the margins in that unit. You know, can you quantify what that part of, you know, the calculus is here versus the demand side?

Yeah, right now it's $7 million, like, from a cost perspective, Doug. So, that's certainly something that was needed. We just had to do that to put ourselves in a better position to grow. But that is obviously a one-time thing. And once we're able to complete it, as Kevin mentioned, that should

significantly help margins. A million in the quarter or is this an annualized figure? A couple million for the year. Okay. That's great context. And then, I mean, I do want to ask a question on the AMS acquisition, which is, you know, one of the highlights here. You talked about the backlog that that business bringing in, I think, just from my understanding, is $250 million, which is, you know, appears pretty substantial relative to the, you know, the revenue profile of that company. Is that, so could you maybe expand, is that a single long-term contract? Is there, you know, growth anticipated for that business based on, you know, the contracts that you've got in hand? And, you know, I believe there's an earn-out. Can you speak to what that's tied to?

Yeah, great question, Doug. The backlog really is a combination of several relationships they have with many of the provinces in the North. So, I think it just speaks to AMS has been there for almost 20 years, delivering healthcare. They're probably the strongest delivery partner in the North on healthcare for paramedicine. And that was really the reason why we thought it would be a great 50-calium. So, you know, long-term visibility. I think the growth is really going to be combining the two together and going after as, you know, North becomes more important for Canada. There's going to be a lot of new opportunities. I think the combination of Cali and AMS, I think, positions us well to be the leader in that space. There are now just types that kind of keep it up performance over the first year, and that's kind of pretty traditional for us. And we anticipate them meeting those numbers.

Okay. I'll cede the floor.

Thank you.

Thanks, Doug. One moment for our next question. Our next question comes from the line of Rob Goff from Ventum Financial. Your line is open.

Good morning, and thank you for taking my question. My question is actually a bit more of a follow-up on Doug's. And with respect to the ITCS, what will it take for you to have the confidence and the visibility that revenues will return to growth? You did talk about the pipeline, but we don't know the term of that pipeline. So just sort of asking what triggers will give you that confidence?

I think to me the... Good morning, Rob. I think for me right now, as you mentioned, the confidence is really going to... I want to reiterate I have confidence in the team. Number one, I want to reiterate that. And I know in a tough quarter, it may feel that that's not necessarily needed to be said. But I want to say it. I have confidence in the team. I have confidence in our leader, confidence in the team's ability. So number one, I have confidence in where we're positioning ITCS and the trajectory and the transformation we're under. The visibility, I think, will come in as we look at that funnel, as you talk about the conversion of that funnel. Some of the macro areas, I expect the election will take another... We'll see what the budget has for the Canadian federal election. We'll see if there's any confusion still with regards to priorities, which I don't think there will be. So I think the macro factors, such as the Canadian government will start to unwind here now. We'll get a better sense of this government's priorities and spending. The macro environment in the US is the question mark for me right now is to just where that goes in the next couple of quarters. And as well, the platform conversion. So confidence is going to be a combination of those elements, where we've converted the platform, we have our customers on it, we see the macro environment in some of our key markets unwinding and then basically converting that sales funnel. And we have a big push right now from our marketing engine to continue to work with our team on creating a very strong funnel. So we're seeing some success there. So I think it's going to be a combination of factors. I want to reiterate, I am confident in their team's ability and trajectory, and I know the numbers may not show that this quarter, but I think a couple quarters out we'll be very excited about where this segment is going.

Thank you very much. Good luck.

Thanks. Appreciate it.

Thank

you. One moment for our next question. Next question comes from the line of Scott Fletcher from CIBC. Your line is open.

Good morning. I will stick with the ITCS for my first question here. You gave us some good details on their performance, whether it was related to decisive or the US market. Is there anything, any more detail you can share on how much of the decline was maybe on the US side versus on the Canadian side, whether it was similar between the two or if one was maybe worse than the other?

Yeah, I'd say probably about a third of it was in the US. I think we did end the quarter with some backlogs, so I think we are seeing some signs, but again, it's hard to decipher exactly, so I think we did see some delays. I think in Canada we did see some delays certainly around the election, but the team's working hard to try to recapture those in the next year. So some of it is temporary, and the team's working hard to try to recapture.

Great. And then on those temporary delays, I mean, those are pretty established relationships you have with the Canadian government. Are they giving you any type of signal that this is a timing difference, that you can't expect some of those seasonal Q2 strengths to recur in the back half of the year? Or have these folks, yeah, just anything that they've given you on that,

for example? Yeah, you're right. The relationships are deep. I think these are key projects for them, so I think there is confidence that those projects will happen eventually. I think a lot of it is getting reset with the new government, everyone getting their new budgets, and then reassigning kind of those projects of high confidence, but I think the team's confident that those projects that we were working on will still be there.

Yeah, and it's Kevin. I think for me, another thing that we're doing here is we're having a very proactive government relations campaign that I'm working with my team on right now. I'm spending a lot of time with this, basically ensuring that as the government assesses priorities, spend opportunities, 2% GDP opportunities, that they are very cognizant of counting capabilities. We are uniquely positioned. There's no other company like us that can handle a multitude of missions or capability. I've talked about the NORAD. We've talked about NORAD modernization. So from my viewpoint, a good relationship, but we're not taking it for granted. We are going to go hard at government with regard to our value proposition across all of the priority areas. So I think that's a, I didn't mention that in my speech, but I want to reiterate to our shareholders that this is an opportunistic time, and we're going to capitalize that on our Canadian footprint and ensuring our government understands that we are ready to take on more.

Okay, thank you. And then I'll ask one more on the portfolio review that you mentioned. You discussed non-core assets. You guys have a diverse set of assets here. Is there anything you can share as to what may be considered non-core? Would it be sort of outside of the fence? It sounds like that would make some sense. And then would the ITCS business, would those be, you know, considered in the review?

Yeah, I think, you know, I prefer not to comment on specifics with regard to areas of what we consider non-core. The discussion, you know, we're in the middle of board meetings right now, and as I leave this call, the next discussion I'm having with our board is just on our strategy update, you know, where we think the opportunity is from a growth perspective. So I prefer not to comment on specifics right now, but I want to reiterate and reconfirm to the market, to our shareholders. This isn't a business as usual environment. We recognize that. We've had many great discussions with our shareholders on the simplification of Calion. I believe we're a mission-critical solutions company when you look at what we do. And from my viewpoint, what we want to do is take that capability and point it, and continue to point it at markets that value that. And that's where I'm looking at core, non-core, is who values the capability for non-fail solutions. And that's the discussion I'm about to walk into with our board with regard to some of the work we've been doing to ensure that we are aligned to these markets. So stand by, and nothing to comment on specifics right now, but we have lots of discussions happening on exactly that question.

Okay, thank you. I'll back to you.

Thanks,

Scott. And for our next question, our next question will come from the line of Paul Traver from RBC Capital Markets. Your line is open. Oh, thanks very much. Good morning.

Just a question on visibility in the near term and in medium term. And specifically, could you comment on RPO and then also backlog and the timing for conversions on both of those? I think RPO for the next 24 months is up 36%. So how do you see that? What's your expectation on the timing of the ramp or conversion of that RPO to revenue?

Yeah, I'd refer to the NDA. Paul, there's a disclosure on what we think the backlog that will burn off in the rest of the year. So I think we've got decent coverage, especially in our health learning businesses. We've got good coverage. I think ATEAP are certainly, for some orders, we're trying to book in the second half. Those will be important. And then the backlog strong, like we talked about this morning, is up to 1.4 billion. So going into next year, I think we're going to have as high of coverage we've had in many years.

And secondly, just on nuclear, you know, seeing really strong growth in that segment, how should we think about the size of nuclear in terms of quarterly revenue? And then just given the bookings in the quarter, what's the typical duration of nuclear bookings and how quickly do they convert to revenue?

Good question. I mean, nuclear overall for the year, we should be well past $30 million this year in that business. And that's a huge increase. You know, you think when we started this journey four or five years ago, that was a couple million dollar business. So, you know, huge growth from that team. And I think there's still a lot of upsides, lots of investment in Ontario and across Canada really on nuclear. Strong signings this quarter, we had almost 20 million in signings in nuclear. I think usually those are, I think it was probably about a year to deliver that. So I think the signing sets us up for another strong year next year.

And then just lastly, just on the comment about looking at non-core assets, and we'll get into specifics. But the investor, you laid out good, I guess, returns on acquisitions over time. So what would you define at a high level in terms of non-core, non-performing assets among acquisitions you made or even organic businesses?

Yeah, I think right now the, you know, where we see the opportunity and from our viewpoint right now with defense, as we've talked about defense-based healthcare, is being, you know, primary focus. Again, that we feel there are segments that have tailwinds, there's spending, as well as, you know, the ability to sell our mission critical solutions capability into them, both domestically and globally. So those clearly are going to take focus. We also have emerging markets that we're looking at, things in energy, for example. You know, look at our nuclear business. It was a couple weeks ago, I was crawling around a nuclear reactor, meeting with their executive team on the value that we're providing. So for us right now, we want to capitalize on what I think are definitely, you know, mid to longer term tailwinds in areas of space, defense, and health. We also want to continue to position the company for long-term growth in emerging markets that we believe will value and consume mission critical solutions. So that's areas such as energy. So this is all areas, and non-core for me, Paul, will be something we're going to continue to assess. That doesn't necessarily mean non-core is something that we would, you know, shut down. I think it's more a matter of areas that we just want to make sure that our investment is pushed into those growth assets. That's the focus right now. Make sure that we get those right. And with those being right, the trajectory of the gun remains very strong.

All right, thanks. That's helpful. I'll pass on. One

moment

for

our next question. Our next question is from Jesse from Cornwall Securities. Hey,

good morning. Just on the $1 billion pipeline in Europe for defense opportunities, can you just speak to the composition of that pipeline? Is it a few large potential deals or a larger collection of smaller opportunities?

Yeah, great question. It really is. It's exciting, actually, because it's a combination of when I look at the portfolio in Europe right now. And as I mentioned, you know, we hired Major General Rock Peltier. He's come on board now. I had a briefing from him recently on the opportunity, the strong team we have in Europe already. We've decided that managing director. So number one, the pipeline is right across Europe and the UK. It includes NATO, European countries, and UK opportunity-based opportunities. Number two is the funnel is a combination of, I would say, transformational opportunities for Caleon with regard to larger opportunities, long-term programs, and a combination of smaller, you know, smaller opportunities that establish our presence and allow us to continue to grow in that region. So it's exciting. It's good to see it. It's validated. You tie that in with the Canadian opportunity that we think will emerge as the government gets organized now around this 2% of GDP. Let's be clear, you know, defense will be a focus for Caleon moving forward. And these are validated pipeline opportunities that our team is now maniacally focused, ensuring we have our highest amount to go after and close.

That's helpful. And then maybe just moving over to your comments you made on the opportunities that you're seeing in space. Can you just speak to what maybe service or product theories you're seeing the majority of that activity in?

Yeah, great question. You know, from my viewpoint, and probably one of the areas that we've got to continue to work from a Caleon perspective, to be honest, on our brand is, you know, we are a center of excellence in space for everything ground-based to the sky. So, you know, we talk about our strategy of wanting to own the ground to the sky. Our ground infrastructure, our software solutions, our air and orbit solutions, our communication products are all about connecting the ground to the sky. We've been doing this for over 50 years, and I don't think we're recognized enough globally as a center of excellence. That's something we're working on with Valerie and our team there, our great space team. So, number one, we want to own the ground to the sky. We will not build satellites. We're not a satellite operator, but we will own the integration and the solutions required for those networks to work, whether it's LEO, MEO, GEO. We are well advanced now in talking to many companies about whether it's our teleports, whether it's our software solutions, our ground-based antennas. We are uniquely positioned to grow in that marketplace as a global leader in ground-based solutions. So, that's our role, and frankly, we stand by. We're going to get more aggressive on this with our tone as well as our market presence in that. So, very exciting times there as well.

That's all for me. I'll pass the line.

Thank you. Thanks for the questions.

Thank you. As a reminder, that's star 101 for questions, star 101. One moment for our next question. Our next question will come from Benoit Poirier from Desjardins. Your line is open.

Yeah. Good morning, everyone. First question, in terms of revenue growth, you broke down the revenue growth between ITCS and the rest of the business, so minus 25 versus plus seven. So, if you would look at organic growth, could you maybe break down the same? I'm just trying to see what would be the implied organic growth excluding ITCS. So, I don't know if you can share those numbers.

Yeah, I think Benoit, for non-ITCS, it was slightly positive. I think it was one or two percent for organic. I think that should increase here in a second.

Perfect. In terms of SG&A, when you mentioned the potential to optimize your cost structure, so you mentioned some color about the platform conversion, but when I look at the SG&A, it was made mostly up from $40 million to $45 million. So, could you quantify what's kind of the potential to reduce SG&A going forward? And also, when we look inside the corporate cost, what we call share services, also reach $11.6 million. So, I was just wondering whether there was something non-recurring or is $11.6 million a sustainable number going forward?

A good question. I mentioned, I think, in my remarks that we did some reductions. So, we are looking at everything. I think when you're in these moments, it's just on us to go through all of our expenses and make sure we're investing in the ITC to drive growth. We've made some adjustments, so I think that will help get the margin back up.

Ben, what's up, Kevin? We continue to invest as well with our Mike Mulder and his team on process efficiencies, technology, leveraging AI, even our own internal processes. So, we continue to focus on corporate operations. So, I just want to reaffirm that it's not just as usual. It's nine cents a word. The team is both on cost reductions, but also process efficiencies is where we continue to focus.

Okay. And with respect to the acquisition of AMS, could you talk maybe about the historical growth profile at AMS and maybe more detail about the cross-selling opportunities? You made a few comments in the opening remarks, but I was curious to maybe get a little bit more granularity on those cross-selling opportunities.

Yeah, I think there's certainly consistent organic growth. I mean, the big step functions have been when they've been able to expand into new territories and secure those long-term contracts. I think that's really what's driven the growth, and I think going forward, that's going to be similar. We're going to try to expand, get more footprint, and that should be significant step functions in the growth.

Yeah, and I think, Benoit, Kevin, this is an exciting acquisition for us. Number one, you know, we haven't done acquisition in 12 months, and I just want to reiterate, I think that demonstrates our disciplined M&A engine. You know, we've been looking at a lot of different opportunities, and, you know, closing on this one met all of our criteria as far as not just the financial metrics, but strategic metrics. So, we're excited to have AMS as part of the accounting family. If anyone's listening to AMS, welcome. We'll have our welcome in the next couple of days here. So, when you think about the discussions that are happening in this country right now about the North, we saw this as a fantastic opportunity for us to strengthen our presence for our health business for sure, because we have been working in that area, but this will strengthen it. Our relationship with Indigenous communities is strengthened, and we're excited about that. And now, as I talk about our, you know, discussions with government in areas such as North and Norad modernization and defence, how better positioned are we now as counting to talk about our ability to support the growth in the North for whatever the purpose may be. So, I think it's exciting. It's not just for our health business, it's for our health, it's for our defence footprint. And in a value Canadian mindset, I think this is just so well timed for us to strengthen that message to the current government.

Okay, in terms of capital allocation, you mentioned in the presentation that you want to reassess priorities. Obviously, you've been active on buyback, M&A. So, any thoughts about potential scenarios that you're looking at right now?

No, I think for the balance of the year, I think it's going to be both of those, Benoit. So, the M&A, the Fusat, the Laughlin, the Pipeline, they're still working to close their next deal now that we've got AMS closed. And I mentioned the buyback, we will be accelerating that. We plan on buying up to 6% of the shares here this year. And then we'll reassess going into the next year.

Okay, and given today's announcement, do you still plan on expanding in the US as announced earlier? And I understand that guidance is withdrawn, but any thoughts about whether the fiscal year 26 targets mentioned earlier at the investor day, so a billion dollar in revenue and 125 million in EBITDA still achievable?

Yeah, on the US, we're still going ahead. I think there's still some, you know, we've got some really interesting products that have, you know, some interesting opportunities in the US that we're still going at, you know, specifically in our space segment. So, I think those are still opportunities that we're pursuing.

Yeah, I think from my viewpoint, Benoit, the US, you know, clearly right now, if you look at our, you know, geographic footprint between Canada, Europe and the US, you know, we're seeing obviously really strong opportunities in Canada, very strong options in Europe, as I mentioned, and also very strong opportunities in the US. And I think we're all just trying to work through the current macro environment there and understanding how a Canadian company can compete in that market. That being said, our team in the US continues to find and close exciting opportunities, whether it's our teleports based in Hawaii, in Guam, our space discussions, our positioning in the defense marketplace, and then our commercial focus now as we repivot into more of that Microsoft cyber capability. We still believe the US is a good long term market for Calian. We obviously are working through what many companies working through right now just on the macro turbulence that may be in that market. But frankly, our team is still committed and we still see opportunities there. So we will invest, we will continue to invest. But we want to make sure in the short term though that we're really operationally focused on those areas that have the short term, you know, tailwinds that we've talked about in defense space in those areas. So absolutely, we'll continue to be in the US, we'll continue to focus in the US and we'll make sure that we're prioritizing investments in all our geographies based on the opportunity file.

Okay, thank you very much for the time.

Thanks, Benoit, I appreciate that. Thank

you.

I'm not showing any further questions in the queue. I would now like to turn it back over to Kevin for closing remarks.

Thank you, Victor. Appreciate you facilitating today's call. And I want to thank everyone for attending. We look forward to providing an update in the next quarter call. You have the CEO that is excited, obviously a tough quarter, but in the same construct, very excited about the position we have going forward, very excited about our footprint, very excited about our foundation. And I know that I speak on behalf of the 5,000 people that are committed to continue to take this company to new heights. So looking forward to giving you that update next quarter and appreciate the time today. And with that, Victor, we can close the call.

Thank you for participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.