ADF Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 7, 2023

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to ADF Group First Quarter Results Ended April 30, 2023 Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Wednesday, June 7, 2023. I would now like to turn the conference over to Jean Francois Bossier, Chief Financial Officer.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning. I am with Jean Paschini, Chairman of the Board and CEO of ADF, We will provide additional information about this morning contract announcement as well as an outlook. We are currently at our Terbonnet office where We will hold our Annual Shareholders Meeting after this call at 11 am by way of live webcast. Connection details are available on our website as well as on the press release disclosed this morning.

Speaker 1

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 Q1 ended April 30, 2023, which were filed with SEDAR this morning. We are off to a good start with revenues of $80,300,000 which is $12,300,000 or 18% more than the Q1 ended a year ago.

Speaker 1

Gross margin as a percentage of revenues at 16.8 percent is up from the 12.1 Margin for the quarter ended April 30, 2022, while adjusted EBITDA at $10,000,000 was $4,400,000 or 79% higher than the Q1 ended last year. These increases stem from the increased backlog, including the new projects worth $260,000,000 announced in December 2022 January 2023 and from the improved efficiencies coming from our new automated equipment at our Theban 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 Q1 with net income of $5,400,000 or $0.16 per share compared to $4,300,000 or $0.13 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.

Speaker 1

The collection of those receivables during the quarter ended April 30, 2023 explains most of the $41,200,000 of cash inflows from operating activities. Now that our investment program for the automation of our fabrication facility in Tubman is behind us, We expect full year CapEx to be under $5,000,000 with $700,000 being spent and the quarter ended April 30, 2023. With this, we closed the quarter ended on April 30, 2023 with $46,500,000 in cash and cash equivalent with no amount being drawn from our credit facilities and thus We are in excellent position to pursue our backlog growth and execute our current backlog, which stood at $312,400,000 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 $30,000,000 to $40,000,000 This amount remains subject to our margination calculation, but only when we need to draw over $20,000,000 All other terms and conditions remain similar to the previous terms. I will now turn the call to Jean.

Speaker 2

Thank you, Jean Francois. We announced a week ago a series of new contracts totaling over $140,000,000 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 turbine plant With most of the volume being fabricated, we're a new robotic fabrication line.

Speaker 2

Apart 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 Francois 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 project we sign. 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.

Speaker 2

We will now answer your questions.

Operator

Thank

Speaker 3

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

Speaker 3

I was wondering

Speaker 2

if you could provide

Speaker 3

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.

Speaker 2

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 Pass into that new automation and that new robotic line because we were testing and we wanted to make sure that everything was right. So right now, with the new projects that we signed and we are putting in the shop, We're going to gain instead of having between 35% 40% of pieces passing in there, We're going to go we should be good between 70% 80%. So there's going to be A nice gain of productivity on the robotic side.

Speaker 2

I don't know if that answers your question.

Speaker 3

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? There's 2 things.

Speaker 2

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 robotic, okay.

Speaker 2

When you do pieces with the robotic, you save a lot of time. So Those 2, they go together. If there's no robotic in our shop, We would add a quarter like Q1 last year.

Speaker 3

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 So doubling the percentage

Speaker 2

of pieces that go through.

Speaker 3

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?

Speaker 2

We do understand it well enough already because that machine we've been working on that The robotic system for a year and a half. 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 the shop, in our shop, the ins and outs, 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 redo the connection on our drawings to make sure that everything would pass through the robot.

Speaker 2

So All the efficiency, all the little things that could be a hurdle, It's fast and right now we're looking at the next 2, 3 years Very productive and making money at the end of the day.

Speaker 3

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. Are we 12 months from a Steady state sort of level of revenue and production or longer or less?

Speaker 3

Any color you could provide there would be helpful.

Speaker 2

Well, obviously,

Speaker 1

growth depends really on what we can achieve from a backlog level. So That's going well. Since December, it's around $400,000,000 in new contracts We've been able to announce between the December, the January and the announcement from last week. As Jean mentioned, And the market outlook is also good. So obviously for us, we keep on pushing for backlog.

Speaker 1

We still have Availability, overall in our 2 facilities, both in Turbine 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 Are improving and we'll keep on improving.

Speaker 1

The pricing also in the market seems to be heading 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 signed contracts that are at acceptable risk level. We are not changing our approach, But the market is good.

Speaker 1

The growth is there and we do expect to maintain good numbers in the coming quarters.

Speaker 3

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

Speaker 2

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 work. We'll figure it out and we'll do it, okay. Because you cannot run a company Saying, well, I did I'm at my full capacity, I'm going to refuse contract. There's not one contract here that we're going to refuse.

Speaker 2

So like sky is the limit.

Speaker 3

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?

Speaker 1

Well, we As we mentioned in our obviously the last two years, the last two year investment 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 Q1, 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 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.

Speaker 1

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 terms, 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 Jan just mentioned, that's really for us, that's what we That's really what's important. 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 liquidity To be able, because it's nice to sign these 140 whatever 1000000 contracts, but these come with Raw material purchases early on, so it does put pressure.

Speaker 1

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 add that, we need to have the capacity. So between our The excess cash between the cash we've got on and now between and the credit facilities we improve, we're comfortable with that. We'll Keep concentrating on that aspect in the coming quarters.

Speaker 1

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

Speaker 2

the market. Q3 this year, we'll come back to you guys.

Speaker 3

Okay, terrific. Thank you, guys. That's it for me.

Speaker 2

Thank you. Thank you.

Operator

Your next question comes from Murray Knight Stengel, a Private Investor. Please go ahead.

Speaker 4

Yes. Thank you for taking my call. Are there any plans for bringing the automation to your American plant?

Speaker 2

We're looking at that right now because it's nice to have robotic 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.

Speaker 4

Okay. Because I know that you it was a fairly lengthy project and cost, I think, well over $20,000,000 if not more. You're embarking on a project like that now. I assume the costs have gone up. What do you expect the costs would be if you were You adopt that technology to your U.

Speaker 4

S. Plant. And how long will it take?

Speaker 2

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, it's going to take before it's up and running, it's going to take about 8 months.

Speaker 4

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

Speaker 2

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

Speaker 4

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

Speaker 2

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

Speaker 4

I see. Okay, great. Those are my questions. Thank you so much.

Speaker 1

Thank you.

Operator

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

Speaker 1

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.

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