Adf Group Inc

TSX:DRX

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the ADF Group results for the period ending October 31. [Operator Instructions] Please note that the call is being recorded on December 5, 2019.And I would like to turn the conference over to Mr. Jean-François Boursier, Chief Financial Officer. Please go ahead.

[Jean-François Boursier]

Thank you. Good morning, ladies and gentlemen, and welcome to ADF's conference call Covering the third quarter and 9 months ended October 31, 2019. Jean Paschini, ADF CEO, cannot be with us this morning.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 period ended October 31, 2019, which were filed with SEDAR this morning. Before talking numbers, we need to go back to our October 9 announcement when we confirmed an out-of-court settlement which ended the legal dispute opposing ADF to one of our clients regarding a structural steel fabrication and insulation contract in Florida. As we have stated in this press release, ADF's management and its Board of Directors deemed it appropriate, considering all factors involved, to settle out of court. Besides stopping the ongoing legal fees, the settlement enable ADF to collect a total amount of $13.9 million. However, the settlement generated a tax-free loss of $7.7 million recognized in the results of the quarter ended October 31, 2019. Taking into account this settlement, revenues for the third quarter ended October 31, 2019, totaled $42.1 million compared with $45.6 million for the same period last year. Year-to-date, revenues amounted to $133.4 million, which is $27.1 million higher than last year. Gross margin as a percentage of revenues stood at 2.4% for the quarter ended October 31, 2019, compared with 10.2% for the same period a year ago, while year-to-date gross margin as a percentage of revenues at 9.4% outperformed last year's percentages by 2.4%.At the close of the 3 months ended October 31, 2019, EBITDA stood at negative $2.4 million compared with $2.6 million a year ago. Whereas year-to-date, EBITDA increased from $1.5 million last year to $3.6 million this year.Selling and administrative expenses are higher than last year with an increase in expenses related to bids and professional fees, the latter being particularly affected by the legal fees related to the litigation previously mentioned and now settled. Net income for the third quarter ended October 31, 2019, stood at negative $4.1 million or $0.12 per share, basic and dilutive, compared with a net income of $1.9 million a year ago or $0.06 per share, basic and dilutive. Year-to-date, net earnings totaled negative $2 million or $0.06 per share, basic and dilutive, compared with a net income of $0.5 million a year ago or $0.01 per share, basic and dilutive. Considering that the out-of-court settlement is a onetime nonrecurring event, we consider it appropriate to also look at our results, excluding the impact of this settlement, to fully understand the trend of our results. Excluding the $7.7 million impact on the -- impact of the settlement, revenues for the quarter and year-to-date would have been $4.2 million and $34.8 million higher, respectively, when compared with last year. For the same periods, gross margin as a percentage of revenues would have, in turn, been 7.2% and 7.3% higher than of the same period last year. Additionally, EBITDA would have posted figures of $2.6 million and $9.7 million, respectively, higher than the 3- and 9-month periods ended October 31, 2018. All these increases are coming from our increased level of activities and their absorption of fixed costs, in line with our increased backlog and also in line with our recent quarter's improvements.Finally, and again, excluding the impact of the out-of-court settlement, earnings per share, both basic and dilutive, would have been at $0.11 per share for the quarter ended October 31, 2019, and $0.18 per share for the 9-months period ended on the same date. In spite of the negative impact on our results, we are confident that settling this litigation was the right thing to do. It provided welcome cash inflows, will reduce our upcoming SG&A expenses and will enable us to focus on the already started backlog and revenue growth initiated a few quarters ago.The income tax expense or recovery during the periods analyzed was affected by our Canadian and U.S. subsidiaries profit and loss and by the pretax loss resulting from the out-of-court settlement. The corporation deems it prudent not to recognize its new deferred tax assets related to U.S. operations ever since the write-off of deferred tax assets during the quarter ended January 31, 2018, which also derive from tax losses of ADF's U.S. subsidiaries. Taking this position into account, the impact of the $7.7 million resulting from the previously mentioned out-of-court settlement is therefore tax-free.As at October 31, 2019, the corporation had operating tax losses estimated at $35.9 million in the United States available for carryforwards for which no deferred tax benefit has been recorded in the corporation's accounts. With the inflows coming from the settlement, our net cash position, meaning cash and cash equivalent net of our drawn credit facilities, improved by $1.3 million in spite of the increase in our backlog which requires significant working capital resources since the beginning of this fiscal year. Working capital as at October 31, 2019, stood at $30 million, which is only $1.9 million lower when compared to January 31, 2019, considering the beforementioned backlog growth.Cash flow from operation generated $4.6 million for the third quarter ended October 31, 2019, while year-to-date, our operation generated $5.3 million. Year-to-date, CapEx stood at $0.1 million, net of a $0.8 million grant we received from the Québec provincial government related to reduction of greenhouse gases following the replacement of the VAC system in our ADF fabrication complex in Terrebonne. A semiannual dividend of $0.01 per share was paid on October 16, 2019, to shareholders of record as at September 30, 2019. Our order backlog stood at $36.5 million as at October 31, 2019, compared with a backlog of $215.8 million a year ago and $219.5 million on January 31, 2019.Increased backlog, increased fabrication volume and increased revenues were our main objectives for this fiscal year, and we are happy with our progress so far.As the out-of-court settlement reminds us, we are not working in a risk-free environment. Nevertheless, and as we have done for the past years, we concentrate our efforts, not only on growing our backlog but first and foremost growing a profitable backlog. Ladies and gentlemen, thank you for your interest and confidence in ADF. Should there be any, I will now answer your questions.

[Operator]

[Operator Instructions] And your first question will be from [ Jazz Ray ], investor.

[Unknown Attendee]

Regarding the fabrication percentage, it looks quite high going forward. Is that sustainable?

[Jean-François Boursier]

You're talking -- sorry, fabrication, the fabrication percentage, meaning margins or talking about the level of fabrication in our backlog?

[Unknown Attendee]

Yes, the level of fabrication in the backlog.

[Jean-François Boursier]

We've got -- our total backlog, we still have a lot of room. But considering our 2 plants we've got, we're very far from full capacity. So we could further grow the backlog and still have room to increase fabrication.

[Unknown Attendee]

Okay. One final question regarding the Investor Relations, the company seems to be quite undervalued, I assume, anyways. Is there a plan in place to get out there more and tell the story kind of thing? Or that's not really a focus of yours?

[Jean-François Boursier]

No. Well, yes. The short answer is yes, but we would really like -- we understand. We agree also that we are undervalued. We understand that the market will look at the results. I think we're starting to have a story that makes sense. We'd like to be able to get a good story between the investment we did in Great Falls 4, 5 years ago, their performance, the growth in backlog. What we'd like to do is maybe put a series of quarter of growth and profit in line, and then, yes, we will be more -- we will be more visible and go out there. But first and foremost, I think we want to concentrate on making sure that the operations are running smoothly, that we are increasing the revenues. I think with that and what I've just said, it will be a good story. And hopefully, by being maybe a bit more visible and posting strong consecutive quarters, then the market will react and the share price will also follow.

[Unknown Attendee]

Excellent, and congrats again on a great quarter. You guys are doing a fantastic job over there.

[Operator]

[Operator Instructions] And your next question will be from [ Peter Crooks ], investor.

[Unknown Attendee]

Yes. This is John. Just a quick question about that contract in Florida. What was the original -- well, the overall value of this contract? And from a technical perspective, why was it decided to let go of that $7.7 million? And trying to be prospective, what will be changed in your process so that, that type of story doesn't repeat itself?

[Jean-François Boursier]

The original contract was, in total, around $50 million. Well, a bit lower originally, and then there were contractual changes, the project have grown. Really, the -- for us, the -- at one point and as we've explained in our October 9 press release, obviously, when you go to court, there's never any assurance. Considering the growth in our backlog, considering that as the fact that we are in a business where working capital -- we are in a working capital-intensive environment, we needed the money. The settlement came on the table. We were still confident that we could have gone longer and get maybe a higher sum, but then there were risks associated to that. And the -- all of that could have gone to appeal, so we would never have seen the color of the dollars.So considering all the factors, considering that there are also, obviously, legal fees associated with this litigation, management and the Board said, well, we'll take the dollars. It does provide a welcome working capital and then put this thing to bed, and we can concentrate on still growing the backlog and doing what we do, which is fabrication. The last point of your question is not -- to go forward, how can we avoid that. The accounting guidelines are -- as you know, obviously, being a public company, we are following IFRS guideline specifically. Our accounting is sound. The -- if there were anything we could have done differently from an accounting standpoint concerning all of the factors without going into all the details, I'm not sure there is because we've done the accounting and we've booked per -- we took a conservative approach. But sadly, we had to come up with a strategic decision on that, and it was our mindset. And as I've said in the call just a few minutes ago, still believe that it was the right thing to do concerning all of the factors, considering where we stand from a backlog growth and our working capital requirements. So we'll move forward. We're not -- obviously, it's not something we'd like to do. But the factors and all the elements made us take the decision, and now we're looking forward.

[Unknown Attendee]

Okay. That makes sense. Just another quick one. I'm an individual investor with you, and I follow your company. And I really hear on the invitation for this call that media are welcome but only in a listen-only mode. And that followed the comment from this other gentleman, I'm concerned that you guys do not push for more public visibility. Why is it that you don't like or like the media to ask questions during those calls?

[Jean-François Boursier]

It's not that we don't like the media, it's more -- at one point, the calls were getting longer, which is not necessarily the case now. It might be something we'll consider down the line. We'll definitely talk about it. We'll see, but it's definitely nothing against the media in itself. And by the way, we do get, and as I -- we always say, we're always available for additional questions after the call. I will take -- we will definitely consider this going forward. Not saying that we might change. But again, going back, first and foremost, we are a public company. We understand that we need to -- there are things we need to do from our share price, but we've always liked our operation and results, really, to talk -- to do the talking, understanding that you need sometimes to give it a hand. And then -- so hopefully, in the coming quarters with the improved results and having that good story, we'll be able to do that. And then we'll see if it makes sense to add the media to these calls.

[Operator]

[Operator Instructions] And at this time, Mr. Boursier, it appears we have no further questions. I would like to turn the call back over to you.

[Jean-François Boursier]

Thank you. Again, I wish to thank you for your interest in ADF Group. We will remain available to answer your questions. Have a good day.

[Operator]

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.