ADF Group Inc.

Good morning ladies and gentlemen and welcome to ADF group first quarter results ended April 30th, 2023 conference call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, June 7th, 2023. I would now like to turn the conference over to Jean-François Boursy, Chief Financial Officer. Please go ahead.

Thank you. Good morning. I am with Jean Paschini, Chairman of the Board and CEO of ADF. We will provide additional information about this morning's contract announcement as well as an outlook. We are currently at our Terrebonne office where we will hold our annual shareholders meeting after this call at 11 a.m. by way of live webcast. Connection details are available on our website as well as on the press release disclosed this morning. I will first update you on our quarterly results which were disclosed earlier this morning by press release. First, a word of caution. Please note that some of the issues discussed today may include forward-looking statements. These are documented in ADF Group's management report for the first quarter ended April 30, 2023, which were filed with CDAR this morning. We are off to a good start with revenues of $80.3 million, which is $12.3 million, or 18% more than the first quarter ended a year ago. Gross margin as a percentage of revenues at 16.8% is up from the 12.1% margin for the quarter ended April 30, 2022, while adjusted EBITDA at $10 million, was $4.4 million, or 79% higher than the first quarter ended last year. These increases stem from the increased backlog, including the new projects worth $260 million announced in December 2022 and January 2023, and from the improved efficiencies coming from our new automated equipment at our turbine fabrication facility. It is also important to note that the quarter ended April 30th, 2022 had been temporarily impacted downward by work related to the just mentioned automation investments. We therefore close our first quarter with net income of $5.4 million or 16 cents per share compared to $4.3 million or 13 cents per share for the same quarter a year ago. As we have discussed on our call for the January 31st, 2023 results, receivables were higher than usual with the start of projects recently signed. The collection of those receivables during the quarter ended April 30th, 2023 explains most of the $41.2 million of cash inflows from operating activities. Now that our investment program for the automation of our fabrication facility in Tarbun is behind us, we expect full-year CAPEX to be under $5 million, with $0.7 million being spent in the quarter ended April 30, 2023. With this, we close the quarter ended on April 30, 2023, with $46.5 million in cash and cash equivalent, with no amount being drawn from our credit facilities, and thus in excellent position to pursue our backlog growth and execute our current backlog, which stood at $312.4 million as of April 30th, 2023, excluding the new contracts announced since the end of the quarter. In addition, on April 28th, 2023, We entered into a new agreement with our Canadian financial institution for our Canadian operating credit facility, which increased from $30 million to $40 million. This amount remains subject to our margination calculation, but only when we need to draw over $20 million. All other terms and conditions remain similar to the previous terms. I will now turn the call to Jean.

Thank you, Jean-Francois. We announced a week ago a series of new contracts totaling over $140 million, one of which is a major high-volume project in pharmaceutical industry in the U.S. Midwest region. These new contracts will be carried out at our turbine plant, with most of the volume being fabricated where a new robotic fabrication lines. Apart the efficiency gain from our new equipment and considering the level of our order backlog, our robotic line allows us to free up valuable production hours to work on higher complexity projects. As Jean-Francois mentioned, our gross margins are already showing the positive effect of our last investment, and we are confident. we will be able to fully benefit from our last investment and improving production-related costs, efficiency, and profitability with every new project we sign. Looking forward, we are encouraged by the bidding opportunity and still see growth in our market, and we feel confident we will be able to announce new contracts soon. We will continue our effort to pursue our growth and achieve improved results, and we remain focused on continuing building ADF on the know-how of our personnel, our long-standing industry expertise, and our state-of-the-art facility. Thank you for your interest and confidence in ADF Group. We will now answer your questions.

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to retry a question, please press the star followed by the two. Again, to ask a question, press star one. Collery from Pell Investment Partners, please go ahead.

Hey, guys, just a couple of questions. Obviously, I just want to say up front, very happy with the performance. So thank you there. We've been a shareholder for a while. I was wondering if you could provide a little bit of color on the split in the improvement of the operations that you're seeing between the strength in the market and the immediate impact of the automation investments.

Well, I'm going to start with the automation, okay? We did one job on the automation right now, and we finished that project. And the project that we did, only 38% of the steel passed into that new automation, that new robotic line, because, you know, we were testing and we wanted to make sure that everything was right. So right now, with the new projects that we signed and we're putting in the shop, we're going to gain, instead of having between 35% and 40% of pieces passing in there, we're going to go, we should be good between 70% and 80%. So there's going to be a nice gain of productivity on the robotic side. I don't know if that answers your question.

No, that's very helpful. My second question was about I guess just to confirm, you know, obviously you had a very good quarter, and I guess I'm sort of wondering, is that a reflection principally of the, you know, the results from the automation investment? Or, you know, I know we're also in a pretty good market.

There's two things. Yeah, the market is good. There's a lot of work, okay, in the U.S. right now. There's a lot of work, plus the robotic, okay? You know, when you do pieces with the robotic, you save, And you save a lot of time. So those two, they go together. You know, if there's no robotic in our shop, you know, we would have had a quarter like Q1 last year.

Okay. Got it. That's very helpful. Okay. And then just in terms of the efficiencies and the learning curve with the new equipment, You know, I understand that, you know, what you said is very helpful about, you know, sort of doubling the percentage of pieces that go through. But I'm wondering also, is there a learning curve in terms of, you know, efficiencies in your bidding and planning and sort of structuring of the use of the robotic line, you know, beyond just the efficiency on any job? You know, are you guys going to be learning stuff about, you know, what sorts of projects you can bid on more aggressively and see benefits there, or do you sort of understand it well enough already?

Oh, we do understand it well enough already because, you know, that machine, we've been working on that robotic system for a year and a half. So, yes, it was installed, it was finalized last year, but once it was up and running, you know, Our people knew exactly what to do and how to do it. And we did an overall in our shop. The ins and outs, it's another way to work. So right now, we do have that efficiency. Plus the talent of our people. And engineering, you know, we had to redo the connection on our drawings to make sure that everything would pass through the robot. So all the efficiency, all the little things that could be a hurdle, it's passed. And right now we're looking at the next two, three years of very productive and making money at the end of the day.

Great. I was also wondering if you could comment on what you think the runway is for growth here. Obviously, growth is great, but it's going to be a drag on cash in the meantime as receivables rise. Just wondering what your thoughts are. If we Are we 12 months from a steady state sort of level of revenue and production or longer or less? Any color you could draw there would be helpful.

Well, obviously, growth depends really on what we can achieve from a backlog level. So that's going well. Since December, it's around $400 million in new contracts that we've been able to announce between the December, the January, and the announcement from last week. Jean mentioned the market outlook is also good. So obviously, for us, we keep on pushing for backlog. We still have availability overall in our two facilities, both in Terrebonne and in Great Falls, Montana. So we can grow. So as we had mentioned in our January 31st reporting, we do expect and still are expecting our revenues to grow this year compared to last year. We still have some efficiency gains to see. We know the margins are improving and will keep on improving. The pricing also in the market seems to be heading the right way. So really all the signs are pointing in the right direction for growth. So things are really looking up. So we're still always mindful of making sure that we sign contracts that are at, acceptable risk level. We are not changing our approach, but the market is good, the growth is there, and we do expect to maintain good numbers in the coming quarters.

Okay, thanks. In terms of the available capacity, is there sort of a level that you would say that your utilization is at at present?

No. Level capacity, at the end of the day, At the end of the day, what I tell my people at estimating, forget about the capacity of the shop. Go get work. We'll figure it out, and we'll do it. Because you cannot run a company saying, well, I'm at my full capacity. I'm going to refuse contract. There's not one contract here that we're going to refuse. So, like I said, the limit.

Okay. All right. And then the last thing is, you know, again, this is sort of part and parcel with the prior question, but just sort of wondering when you think the company might turn to, you know, free cash flow generation. Obviously, you know, the growth sort of is a drag on cash. And, you know, sort of what the thoughts are on capital allocation, you know, at that point.

Well, as we mentioned, obviously the last two years, the last two-year investment are behind us. We're happy with what we've done now. It's really time to start reaping the benefits from those. So you saw the cash inflow in the first quarter. I'm not saying that we'll generate the same type of inflows in every quarter, but we're definitely – pushing to start generating free cash flow. So once we stabilize that and once we get a good run from that standpoint and that we're comfortable also with our backlog level, because as we have mentioned often, growing the backlog really puts pressure on working capital. So before thinking too far ahead of ourselves with our available cash, well, first we'll just confirm that we do have excess cash and that we're comfortable with our backlog level. Once we do that, then we'll start thinking longer term what we want to do. So as it stands now, it's still a bit premature to think too far away because we really want to focus on making sure that We keep pushing for backlog. As Jan just mentioned, that's really, for us, that's really what's important. That's what we're driving. We know that that comes with additional pressure. So we want to make sure that we've got the liquidities to be able, because it's nice to sign these 140-whatever-million contracts, but these come with raw material purchases early on, so it does put pressure. The terms from the steel mills and others are pretty strict, so obviously we want to make sure that we're able to get those projects going, and to have that, we need to have the capacity. So between the cash we've got on end now and the credit facilities we improve, we're comfortable with that. We'll Keep concentrating on that aspect in the coming quarters. And at one point, we will start thinking about, okay, what's the best use of the excess cash once we identify that excess cash. So a bit premature now, but at one point, hopefully, that's going to be something we'll have to come back to you guys and the market.

Third quarter this year, we'll come back to you guys.

Okay, terrific. Thank you, guys. That's it for me.

Thank you. Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one.

Your next question comes from Murray Nightingale, a private investor.

Please go ahead.

Yes. Thank you for taking my call. Are there any plans for bringing the automation to your American plant?

We're looking at that right now because, you know, it's nice to have robotics in our shop, but you need a staff. You need very experienced people to do it. So we're looking at it right now. I cannot... Today, as of today, I cannot tell you we're going to do it, but we are studying all the avenues.

Okay. Because I know that it was a fairly lengthy project and cost, I think, well over $20 million, if not more. If you embark on a project like that now, I assume the costs have gone up. What do you expect the costs would be if you were to, you know, adopt that technology to your U.S. plant? And how long would it take?

No, listen, if we drop that technology in our U.S. plant, the cost of the robotics are going to be the same, okay, because we did already talk to the robotic company. And if we go ahead, it's going to take, before it's up and running, it's going to take about eight months.

Okay, great. not as long as it took you the first time?

No, because the first time we put robotics, we finalized a new bay of fabrication, we changed all the new equipment that we had, so it was a lot bigger work that we did here than what we want to do in Montana.

Okay, and in Montana, obviously your facility isn't as big as your facility as in Terrebonne, so would it be the same, right? So it would be less equipment there or a smaller line, I take it?

Exactly. You know, if we go ahead, it's going to be a smaller line.

I see. Okay, great. Those are my questions. Thank you so much.

Thank you. Presenters, there are no further questions at this time. Please proceed with your closing remarks.

Again, we wish to thank you for your interest in ADF Group and remind you that we will hold our fiscal 2023 shareholders meeting this morning at 11. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines.