ADF Group Inc.

Good morning ladies and gentlemen and welcome to ADF group third quarter results 2024 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 0 for the operator. This call is being recorded on Thursday December 7, 2023. I would now like to turn the conference over to Jean-François Bourcy, Chief Financial Officer. Please go ahead.

Thank you. Good morning and welcome to ADF's conference call covering the third quarter and nine months ended October 31st, 2023. I will first update you on our quarterly and year-to-date results, which were disclosed earlier this morning by press release, and then proceed with a quick update about our operations. 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 third quarter and nine-month ended October 31, 2023, which were filed with CDAR this morning. After posting two consecutive quarters of $80 million in revenues, we closed our third quarter ended October 31st, 2023 with revenues of $82.1 million, $17.1 million or 26.4% higher than last year. Year to date. Revenues stood at $242.6 million compared to $199.4 million for the nine-month period ended October 31, 2022. These increases are in line with the past quarter's trend and our increased backlog. Gross margin as a percentage of revenues at 24.4% is up from the 15% margin for the quarter ended October 31, 2022, while adjusted EBITDA at $17.8 million is $10.2 million higher than the third quarter ended last year. Year to date, gross margin as a percentage of revenues at 21.1% is up from the 13.3% margin for the nine-month period ended October 31, 2022, while adjusted EBITDA at $40.4 million was $20.2 million higher than the nine-month period ended last year. Gross margins for the three-month and nine-month periods ended October 31, 2023, benefited primarily from the operational efficiencies generated by the commissioning of the new robotic production line and new programmable and automated equipment at ADS plant in Terrebonne, and also by the improvement in margins of recently signed projects that are now in fabrication. Year-to-date, these favorable gross margin variances did not entirely trickle down to adjusted EBITDA, considering the increase in selling and administrative expenses for the nine-month period ended October 2017. 31, 2023. For the three- and nine-month period ended October 31, 2023, SG&E expenses stood at $3.8 million and $15.2 million, respectively $119,000 and $5.1 million higher than for the corresponding periods a year earlier. Year-to-date increases comes from the higher salary levels in line with the recent inflation trends and share-based compensation fair market valuation in line with ADF stock price increase. In addition, selling and administrative expenses for the nine-month periods ended last year, on October 31, 2022, benefited from an $800,000 gain on disposal of fixed assets. We therefore close our third quarter with net income of $11.2 million, or $0.34 per share, compared to $2.9 million, or $0.09 per share for the corresponding quarter a year ago. Year to date, net income stood at $27.1 million, or $0.83 per share, compared to $12.6 million, or $0.39 per share for the same period ended October 31st, 2022. As at October 31st, 2023, cash and cash equivalents stood at $44 million, $36.8 million higher than as at January 31st, 2023, while working capital stood at $94.5 million, 44.1% higher than the January 31st, 2023 levels. Now that our investment program for the automation of our fabrication facility in Terrebonne is finalized, we expect full-year CAPEX to be under $6 million, with $5.2 million being spent year to date. Finally, we close the quarter with a backlog of $339.3 million. On the workforce front, we are happy to confirm that our 189 unionized Terrebonne facility employees ratified this December 3rd, a five-year renewal of their labor agreement. We are now turning our attention to closing our fiscal 2024 year. We are still seeing a good bidding pipeline and are confident that we will be able to announce new contracts in the coming weeks. With a strong backlog, sound balance sheet, and the recently ratified union agreement for our turbine facility employees, we are well positioned to maintain our past quarter's positive trend and pursue our growth. Thank you for your interest and confidence in ADF. We will now answer your questions.

Thank you. Ladies and gentlemen, we will now take questions from analysts only. Should you have a question, please press the star followed by the one on your touch-tone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please leave the handset before pressing any keys.

One moment, please, for your first question. Your first question comes from Nicholas Cortellucci from Atrium Research. Please go ahead.

Nicholas, your line is open.

Hi there, can you hear me?

Yes, Nick.

Morning, guys, and congrats on another great quarter here.

Thank you.

My first question was about capital allocation. With the cash balance at $44 million, how do you plan on thinking about capital allocation in 2024, whether it's increasing the dividend, buying back stock, or reinvesting back into the business?

Well, We're still in a growing mode from a backlog standpoint, so at least for the time being, still at these levels, still trying to keep our cash and working capital to support the backlog growth. Obviously, the trend in cash flow generation is positive. We do expect that to keep going for the coming quarter or so. Obviously, as we look at FY25 and start looking at budget, we will, as a group, look at this and start having those discussions about when we really get into what we consider excess cash so that we've got sufficient working capital to support the backlog growth. what will we do with the excess? So it's a bit early, obviously. We will, once we turn the new year, we will be looking at finalizing our FY25 budget. And as a group with our board, we will at that time look at capital allocation going forward.

Understood. Thank you. And then my other question was, it's been about two years since the U.S. infrastructure bill got passed. Are you guys starting to see those projects start to join the pipeline, or is that still something for 2024?

Yes, we do. But to tell you the truth, well, yes, we do. I think there's still a lot that will come in the future. Obviously, a lot of these infrastructure packages are allocated to public public projects which are subject to most often to the Buy American Act. So these would be projects that would be handled by our Great Falls Plan. What we do see, and because there are different packages out there, but what we do see is a lot of overseas manufacturing that is being brought back to the state. These are not – well, they might be in some instances financed by some of those subsidies, but a lot are coming just by the fact that there's a push from the U.S. administration to bring back manufacturing. So long story short, we still expect to see in the future some direct or indirect impact from these infrastructure packages. So it's – It's good news for us and actually for the entire industry.

Okay, great. Those were all my questions, and congrats on another great quarter. I'll jump back in the queue here. Thanks.

Thanks, Nick.

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

Mr. Bourffier, there are no further questions at this time.

Oh, one moment, please. We have a question from Murray Nightangle, private investor. Please go ahead.

Thank you. Great numbers, guys. What are your plans, if any, for bringing automation to your U.S. plant?

We are looking into it. We've started doing some inquiries, obviously. We want to finish because although the automation process is going well in Terrebonne, we're still learning and still improving on those processes. It's something at one point that we will look, but the markets are different. As we've explained, the automation is really for the more standard work. Historically, our Great Falls shop has done more complex work, so the automation would not be as, at least based on historical production trend, the automation would not be as significant in Great Falls. So we are looking into it. It's definitely not in the short-term plan, and if and when It wouldn't be the same size. The Great Falls facility is smaller than Intel Bun Shop, but we've seen what automation brings Intel Bun. So we're not saying no. It's definitely something we'll look, but I think it's too early to predict if and when and definitely not in the cards for the next fiscal year.

Okay, thank you.

And there are no further questions at this time.

I will turn the call back over to Mr. Bouffier for closing remarks.

Thank you. Again, we wish to thank you for your interest in and support of ADF Group. I would also like to take this opportunity in ADF's and my behalf to wish you all a safe and happy holiday season. Thank you.

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