ADF Group Inc. ($DRX)

Good morning, ladies and gentlemen, and welcome to the ADF Group results for the fiscal year ended January 31, 2026. [Operator Instructions] Also note that this call is being recorded on Thursday, April 16, 2026. And I would like to turn the conference over to Jean-Francois Boursier, Chief Financial Officer. Please go ahead.

Thank you. Good morning. Welcome to ADF's conference call covering the 12-month period ended January 31, 2026. I am with Pierre Paschini, President and Chief Operating Officer of ADF who will be available to answer your question at the end of the call. I will first update you on our full year results, which were disclosed earlier this morning by press release, and then proceed with a quick update about our operations, including our recent new contract announcement and the recent U.S. tariffs change. This said, let me remind you that some of the issues discussed today may include forward-looking statements. These are documented in ADF Group's management report for the 2026 fiscal year, which will be filed with SEDAR in the coming days. On this very call a year ago and in spite of exceptional results, we were confirming the significant uncertainties that the then recently announced U.S. tariffs we're bringing to markets and operations. A year later, and considering all the tariffs related turmoil, we can confirm that we, without a doubt, close our fiscal 2026 with exceptional results and in a much better position to face these uncertainties in light of Group Law's acquisition. Revenues for the fiscal year ended January 31, 2026, reached $258.7 million compared to $339.6 million last year. As a percentage of revenues, the gross margin went from 31.6% in fiscal 2025 to 23.1% during the fiscal year ended January 31, 2026. As just mentioned, fiscal 2025 was an exceptionally good year with a favorable project mix. The fiscal 2026 results have been impacted by the U.S. tariffs both directly with higher raw material costs and indirectly with delays in project signing and fabrication start. As such, and as already mentioned, improved in previous calls, ADF implemented a work-sharing program at its Tuban Quebec facility earlier this year, which reduced fabrication hours but also enable ADF to reduce the cost impact, although not entirely considering that the Canadian employment program compensated some of these reduced hours. The group Law acquisition added $20 million in revenue since its acquisition was finalized on September 18, 2025. And and added $2 million to our consolidated gross margin for the same period. Adjusted EBITDA totaled $43.5 million or 16.8% of revenues compared to $91.3 million or 26.9% of revenues a year ago. The year-over-year decrease comes from the previously explained gross margin variances and by the selling and administrative expenses, which at $23.2 million were $1.1 million higher than a year ago. All of the increase being explained by the inclusion of Gotla in our consolidated SG&A. We closed our January 31, 2026 fiscal year with a mostly nonmonetary foreign exchange gain of $2.1 million compared to a $5.6 million loss a year ago. Most of this variance coming from the end of the year mark-to-market valuation of our FX contracts on end at both year-end. Year-to-date, ADF posted net income of $26.3 million or $0.93 basic and diluted per share compared with a net income of $56.8 million a year ago or $1.84 basic and diluted per share. Cash flow from operating activities generated $49.4 million, while we invested $11.1 million in CapEx and mostly for equipment maintenance at both our plants in Tuban, Quebec and in great Falls, Montana. We plan to invest close to $35 million for our 2027 fiscal year the majority of this amount being for our group lower plant extension and modernization. In parallel, we are presently negotiating financing packages for these investments. We will be able to provide further updates on our next call. As of January 31, 2026, working capital stood at $104.8 million, just $4.4 million lower than last year. Also on January 31, 2026, cash and cash equivalents stood at $62.7 million, which is actually $2.7 million higher than a year ago even considering the conclusion of our NCIB and the acquisition of Gopa. Yesterday, the Board of Directors approved the payment of a semiannual died of $0.02 per share which will be paid on May 15, 2026, to shareholders of record as at April 27, 2026. We closed the year with an order backlog of $561.1 million as at January 31, 2026, and excluding the new contracts totaling $157.3 million announced last week. The ending backlog included $138.2 million of contracts from Coke law, which also excludes last week's announcement. Quickly looking at the fourth quarter results, ADF recorded revenues of $78.8 million, up $1.4 million from the fourth quarter of 2025 fiscal year. Fourth quarter revenues this year did include $13.8 million coming from the from Gola. The gross margin as a percentage of revenues stood at 21.5% for the fourth quarter ended January 31, 2026, compared with 31% for the corresponding quarter of fiscal 2025. The margin decrease between these 2 quarters is primarily explained by the mix of products and fabrication, including lower margins coming from the law projects. We recorded a net income of $6.4 million during the last quarter of fiscal 2026 compared with net income of $9.1 million for the corresponding period of fiscal 2025 and with minimal impact coming from law, which basically broke even for the quarter. Because the corporation carries out contracts that vary in complexity and in duration, upward and down fluctuation may occur from quarter-to-quarter. In light of this, revenue and order backlog growth must be analyzed over several quarters, not just from 1 period to the next. As made at the beginning of the call, the situation was believed a year ago, and we're definitely very satisfied with how everything turned out, including our overall financial results our ending balance sheet and cash situation and with the conclusion of the law acquisition. As we have seen as recently as 2 weeks ago, with the latest tariffs announcement, we are still in a we are still in for more surprises and sadly uncertainties. Talking about these last areas modifications, we can now confirm that for the time being. Our U.S. projects fabricated and Tarun will now be impacted by a 10% tariff, which is applied on the value of the commercial invoice, including profit and this in spite that the steel used to fabricate this project comes from U.S. mills. Although not ideal, we can say that our recent backlog shift from U.S. to Canadian projects aided by our July 2025 long-term contract and group acquisition reduced what would have been a much higher cost increase for ADF. Additionally, we are working with our U.S. clients to alleviate some of these additional costs. This said, what this late assessment definitely brings is additional uncertainties to our market as it confirms the unpredictability of the overall trade situation. Nevertheless, as we announced last week, we are still focusing on the elements that we do control, and as such, we have been able to further increase our backlog. The largest of the series of new contracts in terms of values and duration is for the fabrication and delivery of various heavy steel structures for a project in the hydroelectric sector in Quebec. This project is a 4-year master contract for Golar. Since the acquisition, we've been able to grow our backlog, and we are still active as the hydros market delivers its expected growth. We are on the verge of breaking ground in Meta beta for our group cloud plant expansion and modernization, which is a key step in our continued growth. In light of all of this, we do anticipate revenue growth for our fiscal year ending January 31, 2027, and despite the ongoing challenge of finalizing contracts with our U.S. customers that would normally be carried out at our plant located in Tuban, Quebec. However, given that the capital investment that I just mentioned will not have a significant operational impact in the fiscal year ending January 31, 2027, and we expect margins to somewhat stagnate in the first quarters of fiscal year 2027, especially when adding the recently announced a exchange. This trend will be reversed as the integration of Golar continues and we complete the projects inherited at the time of Go Claus acquisition. The acquisition of Golar the new Canadian U.S. allocation of our order backlog and the optimal utilization of our fabrication facility in great Falls, Montana allow us to still look forward to fiscal year 2021 with optimism allowing us to continue our orderly growth despite tariff uncertainties. Thank you all for your interest and confidence in ADF. Pierre and I will now be happy to answer your questions.

[Operator Instructions] First question will be from Nick Cortellucci at Atrium. Nick.

First thing I was wondering about was the new 4-year contract. What does the timing look like on that for getting started? .

Yes. The most of the volume That contract will not have much impact in our FY '27. Most of the fabrication will start next year. So it's going to be 4 years, but with limited impact or close to no impact on our revenues this year for FY '27.

Okay. And are you guys seeing anything in kind of the growth markets you're going after, maybe being nuclear or data centers or anything like that?

Yes. We're looking at a couple of those projects. Like I said, I mean, right now, we're bidding on some stuff, data centers, stuff like that. But with the tariffs right now and that's new 10%, well, it's we need to be a bit more competitive. So it's going to cost us 5% of our margin. So but there's a lot of work out there. So I think it's feasible that we should be able to get some work by the end of the year.

Okay. regarding the CapEx plan and operational efficiencies for LAR, how do you see that playing out kind of sequential improvements throughout the year here?

Well, the construction will occur this year. It's really so the expansion itself will not really happen this year. So we shouldn't see too much efficiency gain margin-wise in FY '27 because the plant will be up and running only late in the first quarter of next fiscal year. But as I mentioned earlier, we're besides the expansion and the new equipment, we are working with a on optimizing our the synergies between the 2 entities, and we're still in that process. . So that, as I mentioned, should start to transpire on our actual margin, probably more so in the second half of the year. And lastly, as I also mentioned, we did with the acquisition, there was a backlog that was in place that had a certain margin profile in it. Obviously, you can understand that last year, while La was trying to cope with their situation and as we were negotiating, they were still trying to get business and maybe not have the same leverage in negotiating contract that they normally do so. some of the contracts that were signed in the past months might not be as that might not have carried the usual margin. So they are still positive. They're still good. As you saw from the number I'm giving, it's definitely not the same level of margin. So it did have a downward impact on our overall consolidated margin. But this said, it's added volume. The good news is that we are growing. As we had mentioned, we're seeing huge potential from Law on the hydroelectric side, we've been pretty successful in signing new contracts, actually probably even better than we had anticipated. We're still seeing lots of opportunities forward. But obviously, for all of that to work out, we do need to have a successful expansion. So we're obviously spending a lot of time on not only finalizing the bid and making sure that the construction starts on time, a project and the entire project is on time so that we meet our deadline. So once that all pans out, FY'28 and the following years are really will really start showing the full positive impact of that acquisition, along with what we hope will be a return to normal to our more ADF regular structural work as we see what will come out of the U.S.

So that kind of $2 million gross margin from AR, that's kind of an upwards looking number and the new contracts from what I get or that you guys are signing are more up to that ADF standard, you're getting closer to it.

Well, pushing that way, obviously, there are things we need to do to further improve including the actual operations. So obviously, with the new equipment, they'll definitely be able to be more efficient with the work, so that helps. This is something that ADF has been really good at doing over the years as more equipment is as efficient as possible and always invest to be as optimal as we could be. from an efficiency standpoint. So there are things we can do now are definitely things that will further there's definitely going to be a huge step with the new equipment and the expansion, but working and definitely negotiating with not only higher margins but also with more favorable payment terms and overall conditions. So we're really putting I think we've been talking for a number of years about how careful we are on contract signing and our risk management. So we're putting all our processes in place so that we bid projects, both for law and ADF or actually follow the same way and with the same due diligence that we did for our ADF did. So that should all translate into better terms and better margins.

Yes, that makes sense. And then just last 1 here from the tariff commentary you had there. I think kind of the summary is that you guys qualify for the 10% tariff because the steel is purchased from U.S. steel mills. But because it's being applied to the total value, it's a net negative.

It's been applied to the fabrication and the material even though it's from the state. So we've penalized, I mean, $300 a ton basically, which amounts to maybe 5% on the margin, depends on the kind of margin, it depends on the work. There's a lot of work in the States right now. I mean most of the plants are busy. So we'll be able to charge a bit more and compensate for that 5%. That's what I think. So right now, the bigger guys out there 5 or 6 are the biggest companies, they're busy for the next 2 years, which is a good sign for us because there are more work coming up. So we'll see. I mean, I think there's an opportunity because cash flow-wise and financial-wise were very sound. It's just a question of hitting the right job with the right margin.

Just to further explain on the tariffs, Nick, the with the previous there were tariffs, but more specifically on the steel and aluminum, if we're buying are still from U.S. mills were basically there were basically no tariffs. We had the exemption. Now in spite of buying all the steel, there is that additional 10%, and that 10% applies not just on the material but on the commercial invoice, including profit. So I think it just highlights the fact that it is still, nobody knows and there were no advanced notice from all we understood things were sort of moving along and then all of a sudden, you've got coming out of nowhere that 10% announcement that nobody saw coming. . So as I mentioned on the call, we're not thrilled with it. But obviously, the moves we made over the past year are definitely paying off because the same 10% announcement with our old set up 85% volume and the majority of the turbine fabrication going to U.S., that announcement could have had the potential of being a really significant negative impact on us luckily, Well, luckily, considering the mix the portion of volume fabricated in Taba going to the U.S. is much lower. And as I mentioned also, we will be working really hard with our clients. I think we think we've got a couple of opportunities maybe to pass some of those costs along to the clients. And for the upcoming contracts, as Pierre just explained, we'll have that discussion. And obviously, everybody isn't in the same boat. This is not something that's just specific to ADF. All the Canadian steel manufacturers have the same the same tariffs and actually all Canadian fabricators doing businesses with the U.S. I have the same that are still in aluminum and there are components of the same impact. So as we've always did, we'll negotiate, make sure that it makes sense to us that it won't help from the it won't reduce the time, the negotiation of signing new contracts will take. And it's too bad because we're starting slowly, but surely, I think everybody was starting to get used to the setup. But as I mentioned, the announcement that happened just reconfirm to everybody that we're still in a an unknown and uncertain situation.

Okay. Understood. Well, I think you guys have definitely made some major improvements, as you said, from where we were at a year ago. So definitely better positioning going into this. And hopefully, it all and something you guys is favored. So thanks for asking my questions, and I'll hop back in the queue.

[Operator Instructions] Next will be Anne Kamasi at Base Asset Management.

Maybe just to wrap up the gross margin commentary. So as I look at the next fiscal year you've done 23% this year. Do you expect sort of the full year for next year to be similar with the first half being lower in the second half, maybe higher? Or do you expect for the full year overall, gross margins to be lower than fiscal the current fiscal year?

Well, we don't provide guidelines margin guidelines, but suffice to say that we're not we're definitely not expecting huge improvements. So I'd really be satisfied to maintain the same type of margins for the full year with maybe margin being a bit more sluggish in the first half of the year and improving in the second. But it all I think it will depend on what happens next how successful we are in signing new contracts and avoiding these new tariffs. But based on what we're seeing now, based on the backlog, based on the had be satisfied to maintain or slightly improve year-to-date on a full year basis, what we've been able to do this year, but really in 2 steps. .

Understood. Maybe second question, broader picture question here. We're witnessing sort of a significant acceleration in Canadian infrastructure activity. I'm interested in your perspective on sort of how ADF's current capacity and footprint aligns with the demand shift. Are you seeing this momentum translate into your bidding pipeline within your traditional projects and maybe beyond that in Canada specifically?

Basically, we're following our customers. I mean these guys like the Palmer low and all the big guys, BCL has done. I mean they've been chasing us and looking at some work right now, looking at major work in the Montreal airport, so more work in Ontario also some work out west, we're looking basically with the oil right now, which is going up. there's going to be some major investments. So we're going to feed in the right place right now. So and we know these customers. So I think that probably right now, we get 57% of our work is here in Canada, maybe it's going to be more than 50%. We've got work in the states. But our plan in Montana right now is busy but we still can add more work in there. So I think infrastructure-wise, we can do bridge work, we can do any type of work with facility in their bonds. So like I say, the work is there and the bids are coming in, and we'll be looking at getting more work in the Canadian side.

And then capacity-wise, we don't have and capacity wise, there is no issue. We've got we still have sufficient capacity. So we've got room to add into bone. And obviously, with Golar expansion that we'll be doing this year, we will provide them with the additional capacity. So it's not definitely not a problem to grow further grow the backlog with the facilities as they are today. .

At this time will see it appears we have no other questions registered. Please proceed.

Before we conclude today's conference call, I would like to remind you that ADF will hold its shareholders' meeting on June 9 at 11 a.m. And our AGM will be held this year at our corporate office here in Taobao, Quebec. Financial results for the first quarter ending April 30, 2026. And will also be disclosed during our shareholders' meeting. Additional meeting information will be made available in the coming weeks. Thank you again for your interest towards ADF .

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 do ask that you please disconnect your lines. Enjoy the rest of your day.