ADF Group Inc. ($DRX)

Good morning, ladies and gentlemen, and welcome to the ADF Group Inc. Results for the 3-month period ended April 30, 2026 Conference Call. [Operator Instructions] Also note that this call is being recorded on Tuesday, June 9, 2026. I would now like to turn the conference over to Mr. Jean-Francois Boursier, Chief Financial Officer. Please go ahead, sir.

Good morning, and welcome to ADF's conference call covering the first quarter ended April 30, 2026. I am with Pierre Paschini, Chief Operating Officer of ADF, who will be available to answer your questions at the end of the call. We are currently an hour from hosting our 2026 Annual Shareholders Meeting, which will take place here at our corporate office in Terrebonne. I will now 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 first quarter ended April 30, 2026, which were filed with SEDAR this morning. Our fiscal 2027 is off to an excellent start. Even if we are dealing with the numerous and never-ending past changes, we are still keeping our focus and managing these challenges proactively. Revenues during the 3-month period ended April 30, 2026, totaled $99.3 million, 78.8% higher than the $55.5 million for the same period ended a year ago. The increase comes from the recently signed contracts, which are now in fabrication. It is also worth mentioning that our first quarter revenues a year ago were negatively impacted by the then recently announced tariffs. The gross margin at $24.0 million almost doubled when compared with the same period of the previous fiscal year. Gross margin as a -- as a percentage of revenues went from 22% during the 3-month period ended April 30, 2025, to 24.2% during the same period ended April 30, 2026. The increase in margin, both in dollars and as a percentage of revenues is explained by the higher revenues, which improved the absorption of fixed costs despite higher input prices, including the price of steel and the recent changes to tariffs. The revenues and margin for the quarter ending April 30, 2026, are now inclusive of the Groupe LAR acquisition, which was finalized in September 2025. As such, our revenues and gross margin for the quarter ended April 30, 2026, included $18.1 million and $1.3 million, respectively, coming from Groupe LAR. For the 3-month period ended April 30, 2026, selling and administrative expenses amounted to $7.6 million, posting a $4.2 million increase compared with the same period a year ago. This variation is mainly explained by the adjustment in the market value of deferred share units and in performance share units granted to external Board of Directors members and certain members of senior management in line with the variation in the corporation share price during the period analyzed. The acquisition of Groupe LAR also had an upward impact on selling and administrative expenses of $1.1 million during the 3-month period ended April 30, 2026. We, therefore, closed our first quarter with net income of $12 million or $0.42 per share compared to $8.7 million or $0.30 per share for the same quarter a year ago. Our balance sheet remains very strong. We closed our first quarter ended last April 30 with cash and cash equivalent of $62.1 million, only $0.6 million lower than our January 31, 2026, ending balance. Working capital stood at $111.9 million for a 2.2:1 ratio. Acquisition of property, plant and equipment and intangible assets for the first quarter ended last April 30 totaled $9 million, including the modification of an existing fabrication bay in Terrebonne, the start of the expansion CapEx in Metabetchouan for Groupe LAR and the redesign of the corporation's integrated ERP software package. We actually had the first shovel ceremony last week for our LAR expansion project. We expect full year CapEx to be approximately $35 million. Finally, we closed the quarter with a record-breaking backlog of $645.8 million. This backlog includes $266.5 million coming from Groupe LAR, which includes the multiyear contract announced last April. Worth mentioning, the April 30, 2026 backlog includes 72% of Canadian projects. As previously mentioned, we are very satisfied with the results of our first quarter, which is highlighted by the progress of our operating activities and the ongoing growth of our order backlog. As announced this past April, we have finalized a long-term contract in the hydroelectric sector in Quebec for Groupe LAR, which confirms our optimism expressed in our year-end reporting and communication and highlights the importance of the investments we will make in the coming quarters to not only increase the production capacity of Groupe LAR's plant, but also outfit it with state-of-the-art equipment. Our financial position remains strong, and we are continuing our discussion with the goal of securing adequate financing for our capital investment in Metabetchouan. As such, we were able to reach an agreement with the federal government for a $12.5 million loan, which subject to certain conditions would be 50% forgivable and 50% interest-free. We expect to have the full financing package confirmed before the end of the second quarter ending next July 31. Though our market remains active, U.S. tariff policy remains a significant irritant and will continue to have pressure directly and indirectly to our cost structure. This being said, and as shown by our results for the first quarter, our proactive approach allows us to continue our orderly growth and minimize the risks associated with existing uncertainties. Thank you for your interest and confidence in ADF. Pierre and I will now answer your questions.

[Operator Instructions] And your first question will be from Nicholas Cortellucci at Atrium.

Congrats on the quarter here. So I was wondering about the time frame on the LAR CapEx plan. Is it kind of a phased approach? Or how long do you think it will take to get a meaningful revenue impact from that?

Well, [indiscernible], actually, as I mentioned, we had the first shovel ceremony last week. We actually started construction on the site yesterday. We plan to have the building closed out before winter, so around November, December, finalized the setup during the winter. So technically, April, May, the plant should be up and running. So starting with the second quarter of next fiscal year, we should see -- we should start to see some impact from the additional volume and the improved efficiency coming from the new equipment.

Right. And would you be able to tell us what LAR's capacity was prior to this, maybe just in dollars versus after or maybe even just a percentage increase, if that would be easier...

Well, they typically -- volume-wise with the mix of product they presently have, they were able to do about $100 million, maybe a bit more. The expansion will double the capacity. So again, depending on mix, we should be able to double on a revenue standpoint, it always depends on margins and the pricing of the projects. But basically, the expansion should double the capacity.

Okay. Sounds good. And then for JF, on the SG&A levels going forward, is this kind of the baseline what we saw in Q4 and Q1 if we exclude the stock-based compensation?

Yes, pretty much. LAR is included. So as I mentioned, the impact of LAR alone in Q1 is $1.1 million. We can grow the revenues without really having to grow much of the SG&A, at least not significantly. So besides inflation on salaries, SG&A should be pretty flat. There's always the DSUs and PSUs fluctuation based on the market. So just based on this morning's stock reaction, my SG&A just went up significantly. So I guess that's good. But besides that, there's -- it should be pretty stable.

Okay. Got it. Understood. And then last one for me, if you guys have an update on more kind of like the growth sectors or growth projects, whether that's nuclear data centers. Are you seeing any more volume in areas like that?

This is Pierre Paschini. Yes, we've had some volumes coming in the space also. We're looking at some data centers and some other jobs, jobs that we can do with great fall and all that. So I think there's a lot of job bidding. There's competition, there's niche work that we can do here in Canada, there's a lot of work coming with Quebec and other places in Ontario also some nuclear stuff. So we'll be busy in estimating, I mean, basically, so we do our to do more estimates so we can pick up more work, but that prices -- so for us, I mean, it's -- market is good. I mean the reason why we're able to do what we're doing is that we can do jobs in the states by American Act is not an issue with the Great Fall and some other stuff, I mean, even with tariffs with the new equipment, we can be competitive in Montreal. And I think is quite an acquisition and they're going to do their work. I mean they're on point and I think the volume is going to be there for the next 5 years.

[Operator Instructions] Next question will be from Sebastien Schadler at Ag Capital.

My first question is regarding the gross margin. I think a very positive surprise this morning. Last quarter, I believe the guidance or perhaps what we discussed was more in the lower 20% range, 20% to 22%. It seems we're recovering towards that 24% and up despite the lower margin contracts at LAR. I'm just wondering what could explain the stronger performance in Q1? I think we were more expecting this in the second half of the year. Has there been any project pull forward, anything exceptional? Do you expect a second quarter a bit weaker?

Well, I'd love to be more precise on the guidance, and that's why we don't provide specific guidance. But sometimes it's not a whole lot of things. It's just a project coming in sooner than expected or one not coming in with lower margin as soon as expected. So it's really more a matter of the product mix. So it's not a huge shift. But to your point, maybe a point or two higher than we might have expected. I expect margins in the second quarter to be pretty similar as with considering the volume that we should be able to tackle in that second quarter. As we also mentioned at year-end, we're still working on the integration of Groupe LAR. So in the second half of the year, we should start seeing some of those -- some of the benefits from the synergies being driven by this. But the step change will really be -- as I mentioned on the first question, the step change will really be next year when the new -- the addition and the expansion in Groupe LAR kicks in with the new equipment. But again, we're obviously happy with the numbers. And I guess it just -- it shows that we've been able to execute the project. But as I said, sometimes it's not a whole lot. It's just timing of maybe a couple of weeks that might have pushed some of the margins up higher than expected.

Got it. That's helpful. And apologies, I shouldn't have said guidance. Perhaps I should say you manage your expectations right. So that was a positive surprise. On the financing agreement news, that's great to see the Fed's Federal coming in with this. I was wondering, would it be crazy to expect the provincial level to maybe come in as well, especially in the [indiscernible] region?

It wouldn't, but still having discussions. So hopefully, we'll be able to button down everything we're working on. So -- but we're looking at, obviously, both levels of government, and we've always had a good relationship at both levels. So we're pleased to be able to finalize with -- on the federal side and working for the rest of the package. So we'll have more to say in the coming weeks, definitely at least unless something drastic happens, but we should be able -- as I said, we should be able to button down everything by the end of the quarter.

Got it. And maybe the last one for me. I think we understand LAR it's pretty much buckled up for the foreseeable future, plus the expansion plan. If we focus back on Terrebonne and even Great Falls, can you comment on perhaps the capacity that's left there, maybe as a percentage or calendar-wise for '26 and '27?

Well, Great Falls, obviously, with the issues with the tariffs is definitely much easier to U.S. -- sign contracts for U.S. projects being fabricated in Great Fall because obviously, you take the tariff discussion out of the equation. So as it stands now, our Great Fall plan is getting pretty full for the year, and we already have volume for next year. [indiscernible] this year, obviously, in normal circumstances, we do have good volume coming from the U.S. As surprising as it may seem and even with the difficulties, we're still having projects -- U.S. projects that are coming in Terrebonne, where we manage the tariff impact along with our clients. And we're also -- because of the success we have and the fact that the expansion in LAR for Groupe LAR is not in place, we're also doing volume that would have normally been done at the Groupe LAR. So we're helping out LAR, which fills some of the capacity here in Terrebonne. For next year, you saw the backlog. So we're starting also to have good volume. The long-term contract gives us longer-term visibility, which is something new for ADF, which is also really nice to have the longer-term visibility. And as Pierre mentioned, the markets are still -- in spite of everything, the markets are still strong. There's still a lot of projects out there. So the plan is to fill as much as possible the shops. The initial objective was really to put additional effort on LAR. I think we've been pretty successful of doing that. So now it's just making sure that we fill the capacity in Terrebonne for the remainder of the year and next year. But we still have room. There's still capacity available. So things are looking good, and there's always a possibility also in Great Falls, as we have mentioned in previous communication, to add capacity should we get to that point. There's nothing on the table now, but we're obviously monitoring the situation.

And at this time, Mr. Boursier, we have no other questions registered. Please proceed.

Again, we wish to thank you for your interest in ADF Group, and remind you that we will hold our fiscal 2026 shareholders meeting in just a few minutes at 11 here at our corporate office in Terrebonne, Quebec. Thank you.

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