Atlas Engineered Products Ltd. (AEP) Earnings Call Transcript & Summary

Good morning, everyone. Welcome, and thank you for joining the Atlas Engineered Products earnings call. My name is Jake Bouma, IR consultant for AEP. Today on the line discussing AEP's Q4 2024 financial results and company highlights will be CEO, Hadi Abassi; and CFO, Melissa MacRae. Following the discussion, we will open up the call for a Q&A. Before handing over the call to Hadi, please note that the information we present today could contain forward-looking information that is based on management's expectations, estimates and projections. Please consider the risk factors, including those in the filings made by Atlas on SEDAR when reviewing the information. Also, all amounts discussed will be in Canadian dollars, unless otherwise noted. Hadi, you can take it away.

Thank you, Jake. Hello, everyone. Welcome to Atlas Engineered Products earnings call to discuss our fourth quarter and year-end 2024 performance. We are excited to be with you today, and thank you for joining us. We appreciate your time. We are very proud of our team as we expect -- we executed through a challenging year for the industry volumes, while we continue to generate industry margins through the tough times and take market share and significantly growing the wall panel and engineered wood products business. We are very encouraged that both political party candidates have well-delineated platforms that address the housing shortage in Canada. While both of the parties' plans are different in the approach in terms of public versus private sector leadership, we see upside in the industry support from both sides of the aisle. AEP will play a pivotal role as a supplier of prefabricated structures to support the vision for more affordable housing. We are surprised that investors haven't paid more attention to this potential tailwind for our industry, but we see it and we will capture the opportunity and then we are ready for it. In terms of tariffs, as previously reported, AEP doesn't have material exposure to U.S. cross-border transaction. However, with our products exempt under the U.S. CMA and a strong U.S. dollar, we prudently evaluate and consider opportunities in adjacent states given the currency arbitrage situation on our lean cost structure. We expect 2025 to be the key inflection year for the company, and we are encouraged to see momentum from 2024 carried into 2025. The quote funnel and bookings are up year-over-year. In the meantime, the M&A pipeline remains robust, and we are investing in automation, which is the future of our industry. We have now formalized a relationship with robotic vendors for -- to diversify exposure and manage risk. Our first robotic hub in Clinton is under construction and is on time and budget. AEP anticipates seeing a return from the investment in time for the busy construction season of 2026. Capital allocation is important to the company. While M&A and automation have been the focus in 2024, we recently instituted an NCIB given the share price performance. The company has been active acquiring shares at attractive levels. We see deep value in our stock and we manage our capital prudently to make, create accretive purchases when appropriate. We are steadfast in our approach to evaluating a return on investment capital and will take a balanced approach considering organic growth, M&A and buybacks. We have a very ambitious plan at Atlas to expand our footprint across Canada and increase our capacity through automation. We have aggressively added to our sales head count countercyclically and anticipate material contributions from the team in 2025. These investments have been a short-term drag on our financial results, but we are positioning the company for long-term value creation. I would like to introduce Melissa MacRae, CFO of AEP, to provide commentary on our Q4 and year-end financial performance. Thank you for your time.

Great. Thank you, Hadi. Results for our Q4 and year ended December 2024 include revenue of $15.1 million for the quarter and $56 million for the year-to-date, which represents a 6% and 13%, respectively, year-over-year increases. These increases were driven largely by wall panel production and engineered wood products organic growth, along with the strategic acquisition of LCF. Just to remind everyone, we acquired LCF in August -- late August of 2023, and it's been one of our successful acquisitions. One of our main strategies and focus as a company is organic growth along with acquisitions. With this in mind, the company has been focusing on continuing to build its wall panel production and providing as much engineered wood products for the much-needed condo and apartment buildings on the West Coast of Canada. These condo and apartment buildings in BC have continued despite the housing starts dropping in the province year-over-year recently. Gross profits of $3.6 million for the quarter and $4.1 million for the fiscal year. Adjusted EBITDA, $2.2 million for the quarter and $8.5 million for the fiscal year. No adjustments were made in these numbers associated for costs with future automation, which includes expansion of the sales and management teams for the additional support. Also, there are no adjustments for management labor costs related to the previously announced due diligence completion for a location in Western Canada, still anticipated to close in the spring of 2025. Profits, income and EBITDA have been impacted by a more competitive market compared to the past few years. Initially, it was the higher interest rates and need to reduce inflation that impacted the construction market. The company had seen strong signs of a rebound at the end of fiscal 2024 with positive results and continuing into 2025 with a 25% increase in quoting through the first 3 months. The company is working diligently to convert those quotes to orders, increase the number of jobs that include a full package of trusses, engineered wood products and wall panels, representing organic growth and further gain market share with the bolstered sales staff. The company has a strong balance sheet with cash of $13 million, long-term debt of $21 million and net carrying value of real estate of $15 million. The strength of our balance sheet helps position the company to move forward with the robotic facility in Ontario and future acquisitive growth. I'd now like to open up the call for your questions. Operator, please provide the appropriate instructions.

[Operator Instructions] So the first question is going to be from David from Cormark Securities.

Okay. Hadi or Melissa, you guys took a $1.5 million impairment charge this year just related to a vendor deposit. I'm guessing this is related to the House of Design failure. I was hoping you guys could walk us through your ability to reclaim some of that cash. And probably secondly, what other automation partners are you considering? Is it someone more local in North America? Or are you guys looking towards Europe?

I'll step in and answer the first part there, David. The -- under IFRS, we had to write it off. At this point in time, we don't have certainty until when and how much of that deposit we can get back. We have started legal proceedings. We do have a lawyer in the U.S. And we are confident that a portion of it will be returned. It's just when and how. They did have assets when they shut down, that should be supportive of returning some of the funds. We have joined a larger group that includes some heavy hitters in the U.S. that also need software support and are going through those legal proceedings. At this point, the U.S. legal system seems a little -- is a little slow, like, I think, any legal systems. And right now, we're just forcing them into bankruptcy. I don't know, do you want me to address the...

No, I can do that. And just to add to Melissa's, the fight we're doing, we're doing it with all organization from the private equity firms all the way down there. And we are and another company from Canada, we are part of it, but the fight is not just us. It's a worldwide group of companies that they have deposits there and they have machinery halfway done and everything there. And rather than me getting to a legal problem and stuff there, like this is a giant -- the team that they're fighting this money to get back and everything, there is giant team there. And they have -- it's a huge force. However, that put aside, lesson learned. This is part of pioneering everything. This kind of bump in the road will happen. We have moved forward, and we have made sure we have another solid supply that they've been in the business for a long, long time from Europe and Australia. And then still plants are moving ahead and thank God, we have alternative suppliers, too, for the automation and stuff. And there are more coming on stream there. So -- and then we're moving forward on that. And lesson learned from the last one, and we are moving very carefully, but still a steady forward.

That's very helpful color. And then maybe Melissa, you can -- can you provide us with a CapEx plan for 2025? And if that includes any other deposits that you have to make to the new vendors that you're establishing relationships with?

Yes. Just for a moment here, actually. So we're still finalizing the -- so this year, we'll be finalizing the building at the robotics facility in Clinton. That is estimated to be about $6.8 million for the budget at this point. All of that roughly will be this year. The further robotics and automation, again, still another -- probably another -- about another $7 million to $9 million here depending on how fancy we want to go with this project and on the outset. Additional capital expenditures are a little tentative at the moment, but they run about another $1 million to $2 million.

That's very helpful. And then maybe just last one for me before I turn it over. Hadi, when we think about the market in 2025, it does sound like it will be tough once again. So when you're thinking about defending market share, especially as you're expected to bring on additional capacity with robotics, how much margin are you willing to sacrifice to just maintain those same level of volumes you did in 2024?

Great question. David, the focus we've had all the time is take care of the employees, make sure everybody is working and they're feeding their family and take care of our customers and not lose any customer. And we have -- we are fighting very, very hard to do that. And usually, then it depends to your hunters and your soldiers and how you manage your margin. And it's an amazing chess game that you have to play and then we are doing that. And then in terms of -- we have a threshold of how far we go. And sometimes we go below that, but we make it in another job. But we will fight whatever it takes, however, we will not -- we will make sure we make money. And there are ways, there are many, many different ways. And I look at this business, right, last year was like this and this year. We are a cyclical business. And in my history in the last 35 years, I noticed this, when the winter comes and the snow comes and everything, that's when everybody book their holidays to go to a snowy destination and enjoy their holiday time. Our approach was now competition is hibernating, let's go fight it out harder. And then that's the approach we've taken even in the summer time right now and this year and we did last year because the stock has been down and it's a tough market there. However, with the power we have in our buying power, our production facilities and the sales abilities and manufacturing abilities, we will look at -- it's a multidimensional way we look at an order. How do we sell it and how do we produce it that at the end, we will make money? Because that's the main objective is we need to be positive there. And that's how we do it. So we take it job by job, whether it's $2,000 or it's a $1 million job. We analyze it. We talk to our suppliers. We look at what we can do to save money and everything, and we approach it like that. And it's very, very scientific and very, very prudent thinking behind it there. And I'm blessed I have a team there, that we have a team at AEP that they believe in this and then they do it. And they are amazing hunters, like they don't back off and they will make anything happen to get the job, keep people working and make money at the same time.

So the next question is from Russell from Beacon Securities.

Congrats on the growth in wall panels. Understanding you've got a diverse customer base, but you mentioned trying to sell full packages now including trusses, panels and engineered wood products. I'm just wondering, roughly what share of your existing truss customers are now buying wall panels from you? Just want to understand where your penetration is on this product category.

I would say in location to location, I would say, in Maritimes, it's a major, major -- I couldn't give you the exact percentage, Russ, I apologize for that. But major part of our business in the Maritimes is from the wall panel and trusses with the customers. We are more advanced and more experienced workforce there, and the clients are more receptive to that product because of the shortage of season they have in that area. And we have expanded that really. It's a small percentage at the moment. But when it comes to organic growth, especially in the wall panel, we did the same approach with engineered wood a few years ago. You don't open the tap all of a sudden there because of our capability of producing it and the knowledge of the client and the knowledge of our team there. And in the rest of the country, Ontario in one operation is a pretty good percentage too there. But in BC and stuff, it's a very small percentage, but a very steady growth because with our business, you need to know what you're doing. You need to know how to manufacture it, how to deliver it and the client needs to do -- knows how to install it. And we're going through that process of growing. And then as bigger the better we become at it, the more we open the tap to the client and stuff there really. If the customers are there and the demand is there, it's us managing the supply and not all of a sudden. It's not like a buffet dinner. You can't just go eat all you can. You have to take a prudent approach to it and be very conservative about it.

Got it. That's helpful. I think in the report, you noted you worked on a large multifamily project in Q4 that helped margins. Just wondering, has any of that carried over into Q1? Are you seeing more projects like that in the outlook for '25? And any color around that type of business would be helpful.

Yes. That wasn't just one-off. That was one of many projects we have. And usually, there is a big segment. As the starts went down and the housing costs went up, the rental activity in the country for rental units and especially BC government gave some incentive with PST and everything there. So they were there. So there was a -- there is a huge increase in multifamily and hotel structures and everything across the country. And that's the one area we have the experts in design, and we have great suppliers and great buying powers on there, and that's been the mainstay of our business. Like that has always been there and increases year-over-year there. And as we can see it, as the affordability, it gets tightened and the density and the approach is not into building a big house. In Scottish countries and Vancouver Island and Maritime, they do that. But most of the other areas, they need more square footage out of a piece of land. So we had seen that in the past years, and we are ready for it with our design team and sales team, and we try to capture as much market share as we can from that area. And those are big major construction companies that they have ongoing projects going through year-over-year, and those are condo projects, old people's homes, all kinds of projects that the density is high on it. And they need our expertise and our engineered wood products and the way we do everything together with.

Great. And maybe just one more question for me, and I think this one is for Melissa. Just on deferred taxes, I think a notable impact there on operating cash flow. Just wondering if you can provide some color on what's behind that.

Yes. The completion of the LCF purchase price allocation, so we hadn't completed that by the year-end prior. So the tax account -- the tax lady that we have that does everything had an extra deferred tax allocation to the intangibles that were valued out, a noncash item overall.

So the next question is from Frederic from Desjardins Securities.

I wanted to follow up on the large multifamily project there. Can you clarify which products were sold into that project? Was it the full package you're talking about? Or was there one product specifically that was part of that project?

In certain projects, we just do the roof, the floors and the engineered wood product. And most of them, because of the height restriction and the view restriction in certain provinces and certain locations, they do not use trusses on the roof. They use I-joist, we call it, or engineered wood products. It's a flat roof they put on there. And in certain projects, we do everything. We do the walls with the roofs, the floors, the floor cassettes, the engineered wood products, the beams, everything we supply them. So it's a mix of depending to the contractor choice, how they want to do. And some of them, they do a mixture of different types of wall and everything there. So we just do the roofs and the floors for them and stuff. But majority of those jobs becomes right now we're doing the walls and the floor cassettes for them, too.

Okay. Great. And speaking of the...

And just to add -- excuse me, and just to add, the industry is moving that way now, the construction industry and our industry. We're moving more and more towards -- especially on these big multifamily projects that they need huge labor force. And because of the shortage of the labor force, once things get busier, they're moving more and more towards they want the whole package. That's the walls, the floors, the trusses, everything. This is an amazing organic growth opportunity, and we are trying to get ready for that demand.

Okay. Great. And speaking of the walls, 27% growth in Q4 was really impressive. Just wondering if you could maybe dig a bit deeper on where that growth came from? I know you spoke about the Maritimes being -- the walls being more penetrated there and a bit earlier stage in BC. But in terms of the growth you saw in Q4, was it from that sort of legacy Maritime business? Or did you get contributions from earlier-stage markets like BC?

We got from Maritime business a significant part, significant part from Ontario, from our locations in Ontario and a small part from the BC location.

Okay. Great. And if I could squeeze in a last one here on M&A. On your M&A pipeline, just curious if you had any comments on the types of opportunities that you're seeing out there and sort of the M&A landscape as we move forward in 2025?

The M&A landscape is very, very healthy and is amazing. And sometimes you wish you had all the capital and all the bench power and the manpower so you could go buy everybody tomorrow. But in reality, M&A is it's an amazing tool for adding to your location, to your footprint and to the geography of the areas you cover, but it can go sour very, very fast. So we take a very prudent conservative approach to it. And then we will try to keep on norm of adding 1 or 2 a year and if they fit into the program and everything. And now we have another eye to M&A that has added in the toolbox is the automation. We have to make a choice now. When you are all across every provinces and when you have a footprint with your manpower, with your sales force, everything, does it make sense to add another company? Or does it make sense to put up a new automated green build factor in there? And those are all the factors we are looking at right now. But looking at the M&A, it's very, very healthy right now. And then it will get better as we go around because of the demographic of the age, ownership, the age of all the ownership and the succession planning and stuff there. And it's pretty healthy right now.

So next, we have Andrew from Ventum Capital Markets.

Great. And congrats on the Q4 results. I just want to go back to the CapEx, some of the CapEx items we were talking about earlier, $6.8 million number that Melissa said, I believe that's -- or I'm assuming that's for Clinton. For the additional $7 million to $9 million of further automation spend, could we just get an update on the scope of those projects, the timing of when they might be implemented? And what kind of return on invested capital you might be budgeting for those investments there?

Yes. So the robotics project, we are anticipating having those ready to go for the building -- the busy building season next year in 2026, given the fact that just taking the time to make sure it's installed and we're using the equipment effectively and efficiently. So allowing for that, a little bit of time in there for that project to move forward. ROI, we're looking at 3 to 5 years depending on capacity. So we see a strong return once we get up to the 2 out of the 3 shifts running. And I think that's what we presented before when we're looking at House of Design equipment, and it's about similar with the new supplier.

Great. And just to be clear, that's automation lines being installed in other existing facilities?

So these are the -- this is the robotics for the Clinton facility. So the $6.8 million was the building itself, not the robotics inside of it.

Got it. Okay, okay. And then just...

And Andrew, if I may add to your question, for the automation role, that will be partly robotics and software for the other facilities. We have identified the facilities, and we are in the process of working with a new supplier and going through the design, the costing and everything there and stuff there. And then we'll have further update later on in the year for you on that. But right now, we are working on that angle to that right now.

Great. That's helpful. And it actually ties into my next question. So just on the cash balance of $13 million on the books at the end of the year. I know the company is EBITDA positive and bringing in cash flow from operations. But just kind of summing up some of the items on the agenda, it looks like there is about $14 million to $16 million of total spend for Clinton, the building and the automation, the gross CapEx there. You've also noted an acquisition of about $3 million to $4 million that's expected to close soon. You're talking to a healthy M&A pipeline ahead and potential other automation activities going on across the organization. Just wondering like how you're feeling about the cash balance now given all these opportunities ahead of you and thoughts on self-financing that, going back to lenders, thinking of other alternatives for funding growth options ahead of you?

Yes. We've -- we're investigating all opportunities, and it's the best one that's going to be for the company and the shareholders. We do have a healthy cash balance, and we have -- we're anticipating healthy cash even through a positive cash flow throughout the year here. We've actually negotiated some great payment structures with suppliers and with the M&A potentials that allow for continuous payments through over the course of 1 year, 1.5 years here to stretch things out and allow for our internally generated cash to help support these projects. As Hadi mentioned before, though, obviously, if more cash in the bank, and there'd be a lot more -- we could do a lot more acquisitions. And with a lot more manpower, we could get this all done right away, but being prudent and being efficient and managing our cash that way. Thankfully, we have a great partner in our bank, and they're willing to step up should we need it.

[Operator Instructions] Now just so you know, we will take questions from all the analysts that we have invited. So if you're not on that list, please follow up with us with the -- by using the contact information that we will be providing before the end of this call.

Thank you, Steve, and thank you, everybody, for being on the call. We appreciate your time.

Thanks, everyone. And so this is then the end of our Q&A session. So we will be available to answer all of the questions that you may have. I know some of you may have raised your hand, although you're not on that invitee list, but you can definitely reach out to us at [email protected] or you can submit the contact form from our website, which is atlasaep.ca. And this is the end of the call, and you may disconnect now. And thank you so much, and have a great day.

Thank you. Thank you.