ADF Group Inc.

Good morning, ladies and gentlemen, and welcome to ADF Group's second quarter of fiscal 2023 results conference call. At this time, all participant lines are in listen-only mode, but following the presentation, we will conduct a question-and-answer session. And if at any time during this call you require needed assistance, please press star zero for the operator. Also note that the call is being recorded on Thursday, September 8, 2022. And I would like to turn the conference over to Jean-François Bourcy, Chief Financial Officer, please go ahead.

Good morning, ladies and gentlemen. Welcome to ADF's conference call covering the second quarter and six months period, end of July 31st, 2022. I will first update you on our quarterly and year-to-date results, which were disclosed earlier this morning by press release, and then update you on our operation. But first, a word of caution. Please note that some of the issues discussed today may include forward-looking statements. these are documented in adf groups management report for the second quarter and six month ended july 31st 2022 which were filed with cedar this morning revenues for the quarter ended july 31st 2022 stood at 66.4 million dollars compared to 73.2 million dollars a year earlier while year to date revenues for the period ended July 31st, 2022 at $134.4 million were $10.8 million higher than for the same period a year ago. The second quarter ended a year ago on July 31st, 2021 was favorably impacted by the start of projects with high output but low margins. As we can see when looking at the gross margin, as a percentage of revenues, which went from 7.7% for the quarter ended July 31st, 2021, to 12.9% for the quarter ended this July 31st, 2022. Year to date, margins as a percentage of revenues also increased, standing at 12.5% for the six months ended July 31st, 2022, compared to 10.9% for the same period a year before. Besides the fast-track projects with lower margins that I just mentioned, margins for the quarter and six-month period ended July 31, 2022, were favorably impacted by the forgiveness of a $1.3 million loan granted to one of the corporation's U.S. affiliates. This loan forgiveness resulted in the recognition of a $1.2 million government grant which will mainly go towards salary expense for the second quarter ended July 1, 2022 with the balance of $0.1 million reducing the net financial expenses. This loan was granted and forgiven under the US small business administrative program in response to COVID-19. It is important to note that the year-to-date period ended a year ago on July 31, 2021 benefited from a Canadian government COVID-related subsidy, which improved gross margin during the quarter ended April 30th, 2021 by $1.6 million and adjusted EBITDA by $1.9 million. Finally, the temporary loss of operational efficiency caused by the installation of the brand new robotic production line, as well as new programmable and automated equipment at our Therboin plant which negatively impacted our gross margins during the first quarter ended April 30, 2022, did not impact as significantly our quarter ended July 31, 2022, and will not impact our upcoming quarters. Considering the improved gross margins, adjusted EBITDA for the three- and six-month periods ended July 31, 2022, stood at $7.1 million and $12.7 million, respectively, compared to adjusted EBITDA of $3.1 million and $9.2 million for the same periods, respectively, a year ago. Besides the elements mentioned before, adjusted EBITDA for the three- and six-month period ended July 31, 2022, benefited from a $0.8 million gain on disposal of fixed assets, which reduced selling administrative expenses by this amount. We therefore close our second quarter with net income of $5.4 million, or 17 cents per share, compared to $1.5 million, or 5 cents per share, for the corresponding quarter a year ago. Year to date, net income stood at $9.7 million, or $0.30 per share, compared to $5.9 million, or $0.18 per share for the same period ended July 31st, 2021. Taking into account the ramp up, including the purchase of steel for projects announced at the very end of our last fiscal year and last June, year to date cash flows from operations required funds of $6.8 million. We also, as previously mentioned, continued our CAPEX investment program at our Terrebonne facility, which year-to-date required investments of $7.2 million during the six-month period ended July 31, 2022. We expect full-year CAPEX to reach $8 million with minimal CAPEX over the next two quarters. As previously confirmed, we received the first amounts of our new financing with Investissement Québec in the amount of $15 million in the quarter ended April 30, 2022. Considering that the total available financing stands at $20 million, we still have $5 million from which we could draw in the coming quarters. Our balance sheet remains strong with working capital of $56.2 million as of July 31, 2022 compared to $38.7 million as of January 31st, 2022. With this, we close our second quarter ended on July 31st, 2022 with $5.5 million in cash and cash equivalent, net of $1.8 million being drawn from our credit facilities. As of today, And considering significant cash inflows since July 31st, cash and cash equivalent have gone up while we are not drawing from our credit facilities anymore, thus an excellent position to pursue our backlog growth and execute our current backlog, which stood at $348.3 million as of July 31st, 2022. For a second consecutive quarter, ABF results were adequate, despite the uncertainties related to inflationary pressures. The quarter ended July 31, 2022, benefited from the forgiveness of the loan, as already mentioned, and also benefited from the completion of the investments and the commissioning of new automated equipment, which negatively impacted our normal operating efficiency in the first quarter ended April 30th, 2022. We continue to see opportunities in our markets and are confident that our order backlog will continue to grow. In addition, although the impact of inflation is felt on some of our inputs, mainly in terms of labor costs and some supplies, the cost of steel remain relatively stable and even declined recently. This said, we will begin to see the positive impacts of our new investments, mainly our new turbine automated fabrication line, in the second half of the current fiscal year, which will allow us to maintain attractive operating margins. Finally, we have several projects in negotiation and we will be able to confirm new contract signing in the coming weeks. This additional volume, coupled with the efficiency improvement, bodes very well for the coming quarters, and will translate into improved return for our shareholders. Ladies and gentlemen, thank you for your interest and confidence in ADF. I will now answer your questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, please slowly press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by two. And finally, if you're using a speakerphone, you will need to lift the handset before pressing any keys. And your first question will be from Edward Colery at Talent Investment. Please go ahead.