Adf Group Inc

TSX:DRX

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to ADF Group Second Quarter of Fiscal 2023 Results Conference Call. [Operator Instructions] 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 Boursier, Chief Financial Officer. Please go ahead.

[Jean-François Boursier, executive]

Good morning, ladies and gentlemen. Welcome to ADF's conference call covering the second quarter and 6 months periods ended July 31, 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 Group's management report for the second quarter and 6 month ended July 31, 2022, which were filed with SEDAR this morning.

Revenues for the quarter ended July 31, 2022, stood at $66.4 million compared to $73.2 million a year earlier. While year-to-date, revenues for the period ended July 31, 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 31, 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 31, 2021, to 12.9% for the quarter ended this July 31, 2022. Year-to-date, margins as a percentage of revenues also increased, standing at 12.5% for the 6 months ended July 31, 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 6 months period ended July 31, 2022, were favorably impacted by the forgiveness of a $1.3 million loan granted to one of the corporation U.S. affiliate. 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 31, 2022, with the balance of $0.1 million reducing the net financial expenses. This loan was granted and forgiven under the U.S.

Small Business Administrative program in response to COVID-19.

This said, 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 30, 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 Terrebonne 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 3- and 6-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 period, respectively, a year ago. Besides the elements mentioned before, adjusted EBITDA for the 3- and 6-month periods 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, closed our second quarter with net income of $5.4 million or $0.17 per share compared to $1.5 million or $0.05 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 31, 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 6 months period ended July 31, 2022. We expect full year CapEx to reach $8 million with minimal CapEx over the next 2 quarters.

As previously confirmed, we received the first amount 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 remained strong with working capital of $56.2 million as of July 31, 2022, compared to $38.7 million as of January 31, 2022. With this, we closed our second quarter ended on July 31, 2022, with $5.5 million in cash and cash equivalents net of $1.8 million being drawn from our credit facilities. As of today and considering significant cash inflows since July 31, cash and cash equivalents have gone up while we are not growing 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 31, 2022.

For a second consecutive quarter, ADF results were adequate despite the uncertainties related to inflationary pressures. The quarter ended July 31, 2022, benefited from the forgiveness of a 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 30, 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, namely 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, namely our new Terrebonne 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.

[Operator]

[Operator Instructions] And your first question will be from Edward [ Corey ] at Pelham Investment.

[Unknown Analyst]

Jean-François, can you hear me?

[Jean-François Boursier, executive]

Good morning.

[Unknown Analyst]

So my -- I've got 2 questions for you. The first one is, 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?

[Jean-François Boursier, executive]

Yes. Well, as I mentioned, after 6 months, we had the $7.2 million and only expect to spend approximately not even $1 million. So our total CapEx for the year should stand around $8 million. With this and including the next 12 months and actually including next fiscal year, we really -- we will go back to our regular CapEx spend, 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 works 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.

[Unknown Analyst]

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

[Jean-François Boursier, executive]

Well, for the time being, as long as we're in backlog growth mode and as we've explained either in MD&A 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 2 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 the 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 of short-term financing to support that growth.

[Unknown Analyst]

Okay. And then on that topic, 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?

[Jean-François Boursier, executive]

Well, the other thing we're thinking -- well, the markets are 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 investments still coming.

As we -- 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 positive, active. And bearing something unknown as we stand, and we know that things could change, but what we see now, we definitely see growth for the coming 3, 4, 5 years.

[Unknown Analyst]

Okay. And it's principally that. It's not so much the investment [indiscernible].

[Jean-François Boursier, executive]

Sorry, you're cutting out.

[Unknown Analyst]

[indiscernible] 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?

[Jean-François Boursier, executive]

Well, some of it is there, but we remain the -- as we've also mentioned, the new equipment will obviously improve our efficiency. So just with the actual volume, we should -- we will generate better margin left alone. Yes, it opens up new markets on 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 market. But as I mentioned in the text, coupled with our efficiency gains, it will not only generate increased top line -- increased backlog and increased top line, but also at better margins.

[Unknown Analyst]

Okay. Great. And then just one last one for me, if I can? You've spoken about the need for working capital, and then obviously, the company runs with a big working capital surplus. And 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. If you can sort of get a -- if you could factor it or get some sort of a credit line against your receivables or if that -- if you think that would introduce liquidity risk. But I'd be interested for your thoughts there.

[Jean-François Boursier, executive]

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

[Unknown Analyst]

Okay. But there's no opportunity to bring the net working capital further down, you don't think?

[Jean-François Boursier, executive]

Well, the July 31 -- also, as I mentioned, the July 31, the receivables were really high as at July 31 and it was really timing. We did collect a lot of cash since then. We're beginning a lot of projects. So obviously, a lot of receivable but also lots of payables. So you 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 an there. We really want to have the best use of our available cash. It's just that in a -- as I mentioned, as in a growing backlog environment, we may -- we just want to be prudent from that approach. 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 free cash flow.

[Operator]

[Operator Instructions] And at this time, I would like to turn the call back over to Mr. Boursier for closing remarks.

[Jean-François Boursier, executive]

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

[Operator]

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.