ADF Group Inc.

Good morning, ladies and gentlemen, and welcome to the ADF Group, Inc. Results for the three-month and nine-month periods ended October 31, 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 zero for the operator. This call has been recorded on Thursday, December 12, 2024. I would now like to turn the conference over to Jean-François Bourcier, CFO. Please go ahead.

Thank you. Good morning and welcome to ADF's conference call covering the third quarter and nine months ended October 31st, 2024. I am with John Paschini, Chairman of the Board and CEO of ADF, who will be available to answer your question at the end of the call. 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 Group's management report for the third quarter and nine-month ended October 31, 2024, which were filed with CDAR this morning. Revenues for the quarter ended October 31, 2024 at $80 million, or $2.2 million lower than last year. Year to date, revenues reached $262.2 million, $19.6 million, or 8.1% higher than last year. Given that ADF carries out projects that differ in complexity and duration, upward or downward fluctuation from one quarter to the next may occur. In light of this, revenue growth, as well as the order backlog variations, must be analyzed over several quarters rather than from one quarter to the next. The positive gross margin level observed in the first two quarters continued. We closed the third quarter and did October 31st, 2024, with gross margins of 30.4% as a percentage of revenues, up from the 24.4% for the quarter ended October 31st, 2023, while adjusted EBITDA reached $24 million compared with $17.8 million for the same quarter and did a year ago. Year-to-date, Gross margins as a percentage of revenues at 31.7% is up from the 21.1% margin for the ninth month period ended October 31, 2023, while adjusted EBITDA stood at $72 million, which is 78.1% higher than last year's figure. The improvement in margins is in line with the increase observed in recent quarters and is largely attributable to a better absorption of fixed costs, the continued favorable impact of the investments in automation at ADS Plant in Terrebonne, Quebec, and a favorable mix of projects. The mix of products and fabrication continues to be favorable. Again this quarter, the mark-to-market valuation of our DSUs and PSUs impacted our SG&A expenses. For the quarter, considering the decline in ADF share price, the mark-to-market valuation and related DSUs and PSUs expenses decreased SG&A expenses by $2.9 million when compared to last year, while the year-to-date increase in stock price increased the year-to-date SG&A expenses by $100,000 when compared with the nine-month SG&A expenses last year. We therefore close our third quarter with net income of $16.4 million or 55 cents per share compared with $11.2 million or 34 cents per share for the corresponding quarter a year ago. Year to date, net income reached $47.7 million or $1.53 per share compared with $27.1 million or 83 cents per share for the same period ended October 31, 2023, a 75.9% year-over-year increase. Even considering the $2.8 million share repurchase finalized this past June, which required $48.4 million, we closed our third quarter with $65.5 million in cash and cash equivalent, which is $6.9 million lower when compared to the January 31, 2024 closing balance. while working capital, as at October 31, 2024, reached $105.4 million. Year-to-date operating cash flow stood at $53.3 million, $7.6 million higher than for the first nine months of last year. In light of these liquidities and considering our forecasted cash generation, ADF's board of directors authorized yesterday a normal course issuer bid. The corporation also announced that the Toronto Stock Exchange had accepted its notice of intention to proceed with a NCIB. Commencing on December 16, 2024, and ending on December 15, 2025, ADF will be authorized to repurchase from time to time a maximum of just under 1.8 million subordinate voting shares, representing approximately 10% of the public flow as of December 2, 2024. The subordinate voting shares will be repurchased for cancellation. We believe that the repurchase of subordinate voting shares that we may make from time to time in connection with this NCIB represent the best use of the corporation's funds for both the corporation and its shareholders. Finally, we close the quarter with $330.3 million in our order backlog. We are obviously very pleased with our results. The increase in adjusted EBITDA and net earnings, as well as a strong inflow from our operating activities, reflect our past year's investment and operating improvements. Although our backlog level is down from the beginning of the year, we are still seeing very good opportunities in our markets. It is still too early to see what the recent terrorist news will bring, but ADS management has obviously taken notice of this possibility. As we have done in the past, we will assess the situation as it becomes, or not, more specific and will adapt accordingly. Between our recent automation investment and our U.S.-based Great Falls Fabrication Complex, we do have options to counter Edwin's. In light of this, the next few months may see some hesitation in the markets served by ADF. However, given the requirements in public infrastructure, mainly for the U.S. market, we remain optimistic about our growth prospects. Independent of this, We will continue our efforts to pursue our growth and achieve improved results, and we remain focused on continuing building ADF on the know-how of our personnel, our longstanding industry expertise, and our state-of-the-art facilities. Thank you for your interest and confidence in ADF. Jeanne and I will now answer your questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Nicholas Cortellucci with Atrium Research. Your line is now open.

Morning, JF. Sean, how's it going? Good, you?

Doing well. Yeah, I guess the first question here, I think the backlog has been in everyone's focus over the last two quarters here. So are you guys confident you'll be able to sign some new contracts over the coming months and, again, post another year of growth in fiscal 2026? Or what should we be expecting?

Yeah. First of all, let's not panic with the backlog. We still have $330 million of backlog. So that's good for a few quarters in advance. With the election, the U.S. election, we had a slowdown in incoming contracts. Right now, we're bidding a lot of jobs. We're negotiating a lot of jobs. So I'm very confident that backlog is going to go up in the near future. But You know, it's not a – how can I say that? I don't see any problems at all with it because the backlog that we have, it's a very good backlog with very good profit margins. So I could assign jobs that, you know, you put up the backlog and margins are going to go down. instantly so you know we have to be smart that's the way we did that's the way we we're doing our business to make sure to keep a growth because we're going to have a growth this year on top line and bottom line so next year it's going to be the same thing but let's not panic with backlog backlog to me it's it's very good right now understood okay and then the second question here

I was looking into your guys' history a bit, and I think the last NCIB was in 2016. So maybe give us a bit more rationale on why you guys got that approved. Mainly devaluation, I'd imagine. Why have you guys at three times EBITDA taking advantage of that going into the new year?

Yeah, well... Definitely, I think that we believe the recent valuation is a bit low.

Three times EBITDA, it's a joke.

So, yes, valuation, obviously. We are still in a situation where we do have what we call excess cash. We obviously need some cash just to secure jobs and make sure that we're able to get new jobs going because we know that there are a lot on our working capital, but above that we need to be smart about how we use the cash. And I think in light of of that, in light of our forecasted inflows in light of what we see coming from the market, in spite of the decline in backlog, we still see a lot of opportunities and a lot of growth. So considering all these factors, we did consider that setting up an NCIB would be the best use of our excess cash. We know that there might be some blocks that are that have been on the market uh in recent uh months and and quarters uh so if people are willing to put blocks and put on due pressure on the stock well we will repurchase it great okay thanks for that um and then i guess the last question here mostly on margin so um about 35 percent of the backlog is fabrication hours now so

how should we look at margins going into Q4 and fiscal 2025? Are these levels still pretty realistic, what we saw in Q3?

Yeah, well, for Q4, definitely. And actually, I think the first quarter of next year should also see good margins. The projects we have in the backlog are, favorable from that standpoint. Obviously, as I mentioned, we are looking. The bidding pipeline is good. So what will be the margins on the projects we'll sign in the coming weeks and months and quarters, that remains to be seen. So at that time, there might be some downward pressure, but it's still, even at 25%, it'd still be really good margins. Short term, we don't see a huge decline in margins. And obviously, we'll see what the next few months and quarters bring.

Getting back with the backlog, a few weeks ago, I was asked to, you know, I had the contract if I wanted to. to do an Amazon. Amazon, it's $150 million U.S. But at the end of the day, there was only 8% profit in there. So we didn't take it. It's a strategy. That's what we want. We want to keep the bottom line very healthy.

Understood.

Yeah, no, that makes sense.

Yeah, those are the only questions I have. Thanks for the time, guys, and happy holidays. Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Gavin Gee. Your line is now open.

Thank you. Hello. Congratulations on the quarter. I have a question about something that was described in Q2. You had a an unrealized $35 million possible gain that was being possibly transferred forward into the next fiscal year. And I'm wondering if you could give us some status update on that particular deal at all, whether we're going to see that maybe in Q4 or it's being pushed into the next fiscal year.

yeah the it was actually a delay on the installation portion of one of our projects so it was 35 million of revenues not of profit uh the the good news is since then we have not only started to start to ship the material to the site but we've also started an installation so installation is back on schedule the problem with a delay on the installation phase as we had explained is that we cannot recuperate delays very easily. There's a limit to the number of cranes and jobs you can actually do on site. So that's why we said that that volume or that revenue is not lost, it's just really pushed to the right. We're obviously working really hard with the client to see how we can try to recuperate because that was an issue not coming from us, coming from site preparation, so really not our responsibility. But obviously, if we can do things to try to catch up, but there's limited. So to answer your question, uh it is not going to happen by you can't look at our q3 and add 35 million on top of it because of that additional review it's something that will it's not going to be added to a quarter it's being just being pushed so that the project in total will finish 35 million later in revenue recognition so most likely the 35 million you will see it sometime next year, but not as an addition to a quarter, really just as the rest of, as normal revenue.

Okay.

Thank you. Thank you for that. Split it over the first three quarters.

Okay. Thank you very much for that update. I appreciate that. Another question is that if you guys needed extra capacity for demands, would you probably be a expanding your existing plants, or are you guys open to expanding into a new office at all?

I think as of now, we still have capacity at both plants, so we're not near full capacity. Should we need to add capacity, we do have room at both locations, both at our Terrebonne plant here in Quebec or at our Great Falls plant to extend, to add fabrication base. So we don't need to look for new sites. We do have room to grow from a fabrication standpoint at both locations should we need it.

Okay, and my final question is, I'm trying to get an assessment of the valuation of your company compared to other companies. Is there a number one competitor you have in the U.S. that you could name? Or are you guys pretty unique in terms of what you do?

Well, the problem we have is that most of the steel fabricators have gone private. So really, we're one of the sole remaining publicly traded steel fabricators. So it makes sense. And that, I think that for the longest time and still today, probably one of the reasons why people are scratching their head. But what I've seen from an evaluation standpoint is people are looking at steel mills, which we're not. They're looking at an engineering firm, which we're not. And Can-Am used to be public. They've gone private. Shuff, way back, used to be public. They've gone private. So there's not really... At least for the size or the type of fabrication we do, there's not really any other publicly traded companies doing steel fabrication.

Okay. Thank you very much for your answers. Appreciate it. Thank you. Thank you.

Your next question comes from Scott Coppin with Force 2 Holdings. Your line is now open.

Hey, good morning, and congratulations on hiring more people. with your EBITDA successful company. Thank you. So just a question with all the cash on hand, I'm just trying to figure out why you're not providing maybe a special dividend to shareholders. You know, please don't forget about us too. There been any discussion?

Yeah. Well, we internally and with our board, we obviously look at all the options. We're not ruling out special dividends, but for the time being, I think between, as I mentioned, we do need, especially since we were still pursuing backlog growth, and that does put pressure on the working capital, so we need to keep cash on hand to get projects going. Between that, between the increase in dividend we did in the second quarter, the NCIB, that technically it's 1.8 million shares. So at $10, it's another $17, $18 million of outlay. If the stock goes up, it's a bit more. So, and there are some, as we mentioned, we'll face it, but there are some uncertainties coming in the next few months just to see what happens following the U.S. election. So, I think for the time being, we're really confident putting an NCIB up and re-purchasing shares. So, I think that will have a favorable impact also for our shareholders. If things go accordingly, we continue to grow the backlog, generate free cash flow, and fall into additional funding, then we will have other discussion internally and with our board, and we'll see. And if at that time a special dividend makes sense, then by all means, I'm a shareholder, so I'd be thrilled, but we need to be – We need to be prudent also. So we're obviously happy to return and really understanding of the patience of our shareholders. We'd like for them to have the best return. I think that by performing as we have done and continue to perform, that will reflect well on the stock and that will reflect on the valuations. But if and when we get to the point where we reach another level, we're comfortable with the backlog, we're comfortable with our cash generation strategy, then I'm not saying no, but obviously it needs to be discussed, as I said, internally and with our board. But for the time being, I think we're happy with what we decided, and I think it's still probably the best, as I mentioned, the best use of our cash in today's, considering today's factor in our cash position.

Okay. No, I'm comfortable. It's a great company, and with having an operation in the U.S., it makes me more comfortable. Is there any new contracts you might announce before the end of December, like Eli Lilly or something?

There's going to be a new contract that we're going to announce soon. By by February.

OK, OK, great. It's not really a question, but I mean the. Earning for sure at the $1.65 and in a successful company. I mean we we should be somewhere between 16 and. $20 share price I think here so but yeah, I guess that's 153.

But yes, valuation.

You know, you go three times and bid up, there's a huge problem.

Yeah, something's not right. Something doesn't add up. But again, very successful company, and I congratulate you. Thank you. Well, that's all. Thank you.

Thank you.

There are no further questions at this time. I will now turn the call over to Jean-Francois for closing remarks.

Thank you. Again, we wish to thank you for your interest in and support of ADF Group. Jean and I would also like to take this opportunity to wish you all a safe and happy holiday season. Have a nice day. Happy holidays.

Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.