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.

Hi, Jim. John Crenshaw. Can you hear me? Good morning. Hi. So, Monty, I've got two questions for you. The first one is, you know, obviously things are good now, and it sounds like things are going to get better. I was wondering if you could talk a bit about capital allocation looking out over the next 12 or 24 months. I understand there's a need for some more investment in the immediate period, but I was hoping you could talk a little longer term about what the company's plans are for earnings and cash flow after that.

Yeah, well, as I mentioned, after six months, we had the $7.2 million, and I only expect to spend approximately not even a million. So our total CAPEX for the year should spend around $8 million. With this, and including the next 12 months, and actually including next fiscal year, we will go back to our regular CAPEX expense, which is pretty limited. We are really... happy with the fixed assets that we have. We're happy with the new investments we've done, so we'll make sure that these work before these ramp up effectively before we start looking at something else. So CAPEX for the next quarter, probably for the next 18 months, should be pretty limited with basically maintenance CAPEX.

Right, so I guess I'm wondering, does the company have a plan currently for what it plans to do with the earnings and cash flow?

Well, for now, for the time being, as long as we're in backlog growth mode, and as we've explained either in MDNAs or on these calls, Backlog growth really puts pressure on working capital. So for, at least for the time being, again for the next probably two years to keep that backlog growth and make sure that we've got the working capital availabilities to start these projects, free cash flow will probably go toward maintaining a solid working capital. Once we get going and get to a certain backlog level and maintain it, then we will start looking at what can be done with the excess cash, be it share buyback, increasing the dividends or whatever else. But at least for the, as I said, for the time being, because of our goal, we still want to, not only maintain, but grow the actual level of backlog. And as I just mentioned, it is putting pressure. So we want to be, I guess we want to be prudent and just make sure that we've got the availability, short-term financing to support that growth.

Okay. And then on that topic, you know, I think we've spoken about, you and I just a little bit in the past, but I was hoping maybe you could elaborate given your comments just there. What gives you confidence that the backlog will be growing for the next couple of years?

Well, the markets are really, really active. We see a lot of projects out there. We're starting to see some of the impact from all the infrastructure package, mainly in the U.S. There's still a lot of volume out west in the U.S., California with the 2028 Olympics coming, a lot of investment still coming. As you know, we're active at the airport and around the airport. So pretty much everywhere and what we're seeing now, and in spite of the raise in interest rates and the inflationary pressure, we still see the bidding pipeline really uh positive active and uh bearing something unknown as we stand and we know that things could change but what we with what we see now we definitely see growth for the coming three four five years okay and it's and it's principally that it's not so much the uh

Sorry, you're cutting out.

It's principally the environment that you're seeing, not the investments in automation and the change in strategy in terms of bidding on low margin business?

Well, some of it is there, but we remain, as we've also mentioned, the new equipment will obviously improve our efficiency. So just with the actual volume, we will generate better margin left alone. Yes, it opens up new markets, a more standard volume, but we remain, and this is really what differentiates ADF from the others. Our niche market is really the complex projects, and we're staying with that. But the new equipment will give us flexibility to target other markets should there be opportunities, but will definitely help us from an efficiency standpoint on any project. So, yes, it does, but really the bulk, as it stands now, based on the market, what we see and all the outside elements, the bulk of the future, at least the upcoming increase, is really coming from the markets. uh but as as i mentioned in the text coupled with our efficiency gains it will not only generate increased top line increased backlog increased top line but also at better margins okay great and then and then just one last one for me if i can um you know you've spoken about the need for working capital and obviously the company runs with a big working capital surplus um

you know, and it's, it's particularly large in light of the company's market cap. I'm just wondering if there's any way to get that down. Um, you know, you can sort of get a, uh, if you could factor it or, or get some sort of a credit line against your receivables, um, or, or if that, if you think that would introduce a liquidity risk, uh, but I'd be interested for your thoughts there.

Well, we actually have, uh, we've got a $30 million credit line, which is based on margination, uh, in part against our receivables, so we already have that.

Okay, but there's no opportunity to bring the net working capital further down?

Well, the July 31st, also as I mentioned, the July 31st, the receivables were really high as of July 31st and with really timing. We did collect a lot of cash since then. We're beginning a lot of projects, so obviously A lot of receivables, but also lots of payables. So you've got to be, when we're looking at the working capital, we're looking at it on a longer basis because quarter to quarter, it could change significantly just because of the cutoff lines and where we are. But in general, and looking at it from a consolidated or an overall perspective, We try to have the available liquidities available, but obviously we don't want to overly freeze dollars in our working capital just for the sake of having it there. We really want to have the best use of our available cash. It's just that, as I mentioned, in a growing backlog environment, we just want to be prudent from that approach. As we As we get to a certain level of backlog that we haven't reached and maintain it, then it's going to be easier to stabilize the policy and see what we do, as I mentioned, with the cash flow. Great.

Thank you very much. Appreciate it. Thank you.

Thank you. Once again, ladies and gentlemen, if you do have any questions, please press star followed by one on your touchtone phones. And at this time, I would like to turn the call back over to Monsieur Bourcy for closing remarks.

Again, I wish to thank you for your interest in ADF Group. Have a nice day.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.