ADF Group Q2 2025 Earnings Call Transcript

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September 12, 2024

There are 4 speakers on the call.

Operator

This call is being recorded on Thursday, September 12, 2024. I would now like to turn the conference over to Jean Francois Broussier, ADF's Chief Financial Officer. Please go ahead.

Speaker 1

Thank you. Good morning and welcome to ADF's conference call covering the Q2 6 months ended July 31, 2024. I am with Jean 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.

Speaker 1

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 Q2 6 months ended July 31, 2024, which were filed with SEDAR this morning. Revenues for the quarter ended July 31, 2024 at $74,900,000 were 5,300,000 dollars lower than last year. This decrease is mainly attributable to one client delays in construction site preparation. We estimate that were it not for these site delays, revenues for the quarter year to date would have been approximately $35,000,000 higher.

Speaker 1

These additional dollars coming from additional steel insulation work. In fact, more than 300 loads of fabricated products are waiting to be delivered to the construction site. These revenues are of course not lost, but rather postponed to the next quarters. This said and given that installation schedules are difficult to compress over time, these missing revenues risk being moved forward to our next fiscal year. Year to date, revenue stood at $182,300,000 compared to $160,500,000 for the 6 month period ended July 31, 2023, a 13.6% year over year increase.

Speaker 1

The positive gross margin level observed in the Q1 continued. We closed the Q2 ended July 31, 2024 with gross margins of 36.9 percent as a percentage of revenues, up from the 22.2% for the quarter ended July 31, 2023, while adjusted EBITDA at $24,900,000 compared to $12,600,000 for the same quarter ended a year ago. Year to date, gross margins as a percentage of revenues at 32.3 percent is up from the 19.5% margin for the 6 month period ended July 31, 2023, while adjusted EBITDA stood at $48,000,000 more than doubling 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 investments in automation at ADF's plant in Terbonne, Quebec and a favorable mix of projects. For the 2nd consecutive quarter, the mix of products in fabrication was particularly favorable with the anticipated catch up in insulation volume as previously explained, margin should stabilize in the coming quarters.

Speaker 1

Again this quarter, the mark to market valuation of our DSUs and PSUs impacted our SG and A expenses. For the quarter, considering the decline in ADS share price, the mark to market valuation decreased SG and A expenses by $2,400,000 when compared to last year, while the year to date increase in stock price increased the year to date SG and A expenses by $3,000,000 when compared to the 6 month SG and A expenses last year. We therefore closed our 2nd quarter with net income of $16,000,000 or $0.51 per share compared to $10,500,000 or $0.32 per share for the corresponding quarter a year ago. Year to date, net income stood at $31,300,000 or $0.98 per share compared to $15,900,000 or $0.49 per share for the same period ended July 31, 2023. Even considering the 2,800,000 share repurchase finalized this past June which required $48,300,000 we closed our 2nd quarter with $76,000,000 in cash and cash equivalent, 27.7 1,000,000 more than the April 30, 2024 levels and $3,700,000 higher when compared to the January 31, 2024 closing balances, while working capital as of July 31, 2024 reached $90,100,000 Operating cash flow reached $82,400,000 for the quarter ended July 31, 2024 driven by favorable working capital variation and improved operating results.

Speaker 1

Year to date, operating cash flow stood at $60,100,000 9 point $7,000,000 higher than for the 1st 6 months of last year. Yesterday, our Board of Directors approved the payment of the 2nd semiannual dividend, which now stands at $0.02 per share as announced this last June. This dividend will be paid on October 17 to shareholders of record as of September 27, 2024. Even with the decrease in revenues during the 3 month period closed on July 31, 2024 compared with last fiscal year, as previously explained, we were able to close the periods ended July 31, 2024 with higher net income while increasing our liquidity. Although the pipeline of projects under negotiation is still very active, we are seeing a certain slowdown in the finalization of contractual agreement with mainly for projects affecting the green energy sector.

Speaker 1

This is most likely linked to the American presidential election to be held in early November where opposite energy investment in November, where opposite energy investment

Speaker 2

strategies are presented by the

Speaker 1

2 U. S. Political parties. In light of this, the next few months may see some hesitation to the markets served by ADF. However, given the size of our order backlog as at quarterend, which stood at $402,300,000 and the requirements in public infrastructure, mainly for the U.

Speaker 1

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 long standing industry expertise and our state of the art facilities. Thank you for your interest and confidence in ADF. Jean and I will now answer your questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Nicholas Cortellucci with Atrium Research. Your line is now open.

Speaker 2

Good morning, JF and John. Hope you guys are doing well.

Speaker 1

Good morning, Nick.

Speaker 2

Couple of questions here. Firstly, I know we had the $35,000,000 delay, but inventory was actually down quarter over quarter. So maybe explain that to us and add some commentary there.

Speaker 1

Well, the inventory the fabricated material doesn't impact the inventory. It would be included in our contract assets or contract liabilities depending on where we stand from a billing standpoint. So there's no linked the inventory is really for general inventory, not project inventory.

Speaker 2

Okay, understood. And we saw a great improvement with the margins this quarter. So I wanted to ask you guys how sustainable that is. I know last quarter you're talking about that being in the steady state, but you came out again with vastly improved margins. So just curious on the sustainability of that and how you see that coming in the next couple of quarters?

Speaker 3

Well, fabrication wise, okay, it's sustainable. But when you do the fabrication and the installation, installation, there's less margin. So if you make the 2 together, the margins are lower. So that $35,000,000 shift, it wasn't at the same margin. The margins were they would have been lower on that $35,000,000 So in the next quarters we will do fabrication but we will do installation too.

Speaker 3

So right now what we're seeing, we're seeing margins very high. I think they're going to go down, okay, but they're going to be maybe like the Q1.

Speaker 2

Okay. Perfect. So you ended the quarter in a very large net cash position here and we expect you guys to keep generating cash over the next couple of quarters. So it seems like AVF is going to be in another position to allocate capital, whether it's increasing the dividend or buying back stock. So am I right in assuming that we should see some more capital allocation over the next couple of quarters or at least in the next year?

Speaker 1

Well, for the time being, as we mentioned in the SG and A, our at least the CapEx portion with some small purchase of equipment for a turbine shop, we see the total CapEx for this year at $8,000,000 The cash generation, you'll remember that we ended the Q1 with $90,000,000 of revenues and that are of not revenues $90,000,000 of receivables. And most of these obviously these receivable were collected in the Q2 which drives the operating inflows that we see in the second quarter. Are ending receivable for the Q2 are lower. So we will generate cash flow in the second half of the year, but not necessarily to the same tune we've seen in the first half. The last part of it is that in light of that, in light of the delays in the installation, we're happy obviously with the cash position.

Speaker 1

It's probably more cash than we need just to support the working capital. So I think we'll let the year run its course, see how we stand, see how the U. S. Election impact our markets or not. As I mentioned on the call, the infrastructure requirement is still really high.

Speaker 1

So we still see lots of opportunity from a bidding standpoint. So things independent of what happens in November, things should remain the same for that portion. But we will close the year, see where we stand from a cash flow and overall cash situation and then reassess our position and our strategy going forward with the excess cash. But at the time being, there is no major CapEx plan, there is no M and A plan, and no other share repurchase plan for the time being. So we'll just stay the course and reassess the situation once we're done with the fiscal year.

Speaker 2

Okay, great. And then just the last one for me. Do you have any updates or color on new contracts for the Los Angeles Olympics in 2028 or any other secular trends that are worth mentioning that should drive new contracts over the next coming quarters?

Speaker 3

Well, there is quite a few contracts right now that we are in the final negotiation. But they have been delayed. Everybody's waiting for the election in November. So are we going to sign something in October? I don't know yet, okay?

Speaker 3

But we are in a very good position to sign new projects, but maybe it's going to be only after the American election.

Speaker 2

Okay. Understood. All right. That's all for me. Thanks for the time, guys.

Speaker 3

Thanks, Joe. Thanks.

Operator

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

Speaker 1

Again, we wish thank you for your interest and support of ADF Group. Have a nice day.

Operator

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

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Key Takeaways

  • Revenues for Q2 were $74.9 million, down $5.3 million year-over-year due to a major client’s site-preparation delays, with an estimated $35 million of steel insulation work postponed and an order backlog of $402.3 million.
  • Gross margins improved to 36.9% in Q2 (up from 22.2% a year ago), driven by fixed-cost absorption, automation investments at the Terbonne plant and a favorable project mix, lifting adjusted EBITDA to $24.9 million (vs. $12.6 million).
  • Net income rose to $16.0 million (EPS $0.51) for the quarter versus $10.5 million (EPS $0.32) in Q2 2023, while year-to-date net income doubled to $31.3 million (EPS $0.98).
  • Operating cash flow hit $82.4 million in Q2 (YTD $60.1 million), leaving the company with $76.0 million in cash post a $48.3 million share repurchase and working capital of $90.1 million.
  • While green-energy project sign-offs have slowed ahead of the U.S. election, ADF remains optimistic given robust infrastructure demand and its strong backlog, with capital allocation strategies to be reassessed post-election.
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Earnings Conference Call
ADF Group Q2 2025
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