Adf Group Inc

TSX:DRX

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to ADF Group First Quarter Results Ended April 30, 2023 Conference Call. [Operator Instructions] This call is being recorded on Wednesday, June 7, 2023.

I would now like to turn the conference over to Jean-François Boursier, Chief Financial Officer. Please go ahead.

[Jean-François Boursier, executive]

Thank you. Good morning. I am with Jean Paschini, Chairman of the Board and CEO of ADF, who will provide additional information about this morning 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 11:00 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 SEDAR 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 Terrebonne fabrication facility.

It is also important to note that the quarter ended April 30, 2022, had been temporarily impacted downward by work related to the just mentioned automation investments. We, therefore, closed our first quarter with net income of $5.4 million or $0.16 per share compared to $4.3 million or $0.13 a per share for the same quarter a year ago. As we have discussed on our call for the January 31, 2023 results, receivables were higher than usual with the start of projects recently signed. The collection of those receivables during the quarter ended April 30, 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 Terrebonne 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 closed the quarter ended on April 30, 2023, with $46.5 million in cash and cash equivalents with no amount being drawn from our credit facilities and thus, an excellent position to pursue our backlog growth and execute our current backlog, which stood at $312.4 million as of April 30, 2023, excluding the new contracts announced since the end of the quarter.

In addition, on April 28, 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 remain subject to our margination calculation, but only when we need to draw over $20 million. All other terms and conditions remained similar to the previous terms.

I will now turn the call to Jean.

[Jean Paschini, executive]

Thank you, Jean-François. 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 Terrebonne plant with most of the volume being fabricated with a new robotic fabrication line. Upon 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 complex -- higher complexity projects.

As Jean-François 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 projects we signed.

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.

[Operator]

[Operator Instructions] Your first question comes from Ned Collery from Pelham Investment Partners.

[Ned Collery, analyst]

Just a couple of questions. Obviously, I just want to say, Jean, very happy with the performance. So thank you there. We've been a shareholder for a while.

[Jean Paschini, executive]

Thank you.

[Ned Collery, analyst]

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 impact -- the immediate impact of the automation investments?

[Jean Paschini, executive]

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 we were testing and we wanted to make sure that everything was right. So right now, 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 robotics side. I don't know if that answers your question.

[Ned Collery, analyst]

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

[Jean Paschini, executive]

They're still -- yes, 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 robotics, okay? When you do pieces with the robotics, you see -- and you save a lot of time. So those 2, they go together. If there's no robotic, if there's no robotic in our shop, we would had a quarter like Q1 last year.

[Ned Collery, analyst]

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

[Jean Paschini, executive]

No, we do understand it well enough already because we -- that machine, we've been working on that robotic system for 1.5 years. So yes, it was installed. It was finalized last year. But once it was up and running, our people knew exactly what to do and how to do it. And we did an overhaul in a shop, in our shop, the ins and out, it's another way to work. So right now, we got that -- we do have that efficiency plus the talent of our people and engineering, we had to 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 an hurdle, it's passed. And right now, we're looking at the next 2, 3 years very productive and making money at the end of the day.

[Ned Collery, analyst]

Great. I was also wondering if you could sort of comment on what you think the runway is for growth here. And obviously, growth is great, but it's going to be a drag on cash in the meantime as receivables rise. So just sort of 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 provide there would be helpful.

[Jean-François Boursier, executive]

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. As Jean mentioned, the market outlook is also good. So obviously, for us, where we keep on pushing for backlog. We still have availability overall, in our 2 facilities, both in Terrebonne and in Great Falls, Montana. So we can grow. So as we had mentioned in our January 31 reporting, we did -- we do expect and still are expecting our revenues to grow this year compared to last year. We still have efficiency, some efficiency gains to see. We know the margins are going to -- are improving, and we'll keep on improving the pricing also in the market seems to be adding the right way. So really, all the signs are pointing in the right direction for growth. So it's -- things are looking -- things are really looking up. So we're still -- we're 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.

[Ned Collery, analyst]

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

[Jean Paschini, executive]

No. Level capacity at the end of the day, what I tell my people at estimating, forget about the capacity of the shop, go get worked. We'll figure it out, and we'll do it, okay? Because you cannot run a company saying, well, I did a -- I'm at my full capacity, I'm going to refuse contracts. There's not one contract here that we're going to refuse. So like I say, sky is the limit.

[Ned Collery, analyst]

Okay. All right. And then the last thing is, 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 free cash flow generation? Obviously, the growth sort of is a drag on cash. And sort of what the thoughts are on capital allocation at that point?

[Jean-François Boursier, executive]

Well, we -- as we mentioned in our -- obviously, the last 2 years -- the last 2 years, investments 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. 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 for -- 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 Jean just mentioned, that's really for us, that's what we -- that's really what's important. And 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 our -- the excess -- between the cash we've got on hand now between -- 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.

[Jean Paschini, executive]

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

[Operator]

[Operator Instructions] Your next question comes from [ Murray Knight Tingo ], a private investor.

[Unknown Attendee]

Yes. Are there any plans for bringing the automation to your American plant?

[Jean Paschini, executive]

We're looking at that right now because 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.

[Unknown Attendee]

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

[Jean Paschini, executive]

No. Listen, if we draw 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, if we go ahead, it's going to take before it's up and running. It's going to take about 8 months.

[Unknown Attendee]

Okay. Great. So not as long as it took you the first time?

[Jean Paschini, executive]

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

[Unknown Attendee]

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

[Jean Paschini, executive]

Exactly. If we go ahead, it's going to be a smaller line.

[Operator]

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

[Jean-François Boursier, executive]

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.

[Operator]

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