ADF Group Inc. (DRX) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the ADF Group Inc. results for the 3-month and 6-month periods ended July 31, 2026 Conference Call. [Operator Instructions] This call is being recorded on Thursday, September 10, 2026. I would now like to turn the conference over to Mr. Jean-François Boursier, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, and welcome to ADF's conference call covering the second quarter and 6 months ended July 31, 2026. 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, including the impact of the latest U.S. administration proclamations. 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 second quarter and 6 months ended July 31, 2026, which were filed with SEDAR this morning. I'll start by saying that we are the victim of our own success. I'll provide more details later, but the DRX stock increase since the beginning of the year had a significant negative noncash impact on our financial results. Revenues for the quarter ended July 31, 2026, at $95 million were $42 million higher than last year. Year-to-date, revenues stood at $194.3 million compared with $108.5 million or 79% higher than the 6-month period ended July 31, 2025. It is important to recall that following the then new tariff uncertainty impacts, a work sharing program was implemented at ADF's plant in Terrebonne, Quebec, and remained in place for virtually the entire quarter ended July 31, 2025, thus reducing fabrication hours and, consequently, revenues for the same quarter and year-to-date. We closed the second quarter ended July 31, 2026, with gross margin of 18.7% as a percentage of revenues, slightly down from the 20.7% margin of the quarter ended July 31, 2025, while the year-to-date gross margin as a percentage of revenues at 21.5% was basically at the same level as last year, which then stood at 21.3% for the 6-month period ended July 31, 2025. The variation in margins, both in dollar terms and as a percentage of revenues, is explained by the higher revenues contributing to a better absorption of fixed costs. The positive effect thereof was, however, mitigated by higher input costs, including the price of steel and the recent changes in tariffs. ADF revenues and gross margin for the quarter ended July 31, 2026, were both positively impacted by the final settlement of a claim against a customer of Groupe LAR. The corporation has taken a cautionary approach to this settlement and the cumulative impact is reflected in the second quarter's results. This adjustment had a cumulative positive impact of $20.2 million and $5.3 million on Groupe LAR's and ADF Group's revenues and gross margin, respectively, for the quarter and 6-month periods ended July 31, 2026. Adjusted EBITDA for the quarter ended July 31, 2026, at $8.4 million compared with $3.7 million for the same quarter ended a year ago, while year-to-date adjusted EBITDA stood at $26.9 million compared with $14.1 million for the 6 months ended a year ago. We, therefore, closed our second quarter with net income of $3 million or $0.10 per share compared with $0.9 million or $0.03 per share for the corresponding quarter a year ago. Year-to-date, net income stood at $15 million or $0.52 per share compared to $9.6 million or $0.34 per share for the same period ended July 31, 2025. As previously mentioned, our results for the quarter and 6-month periods closed on July 31, 2026, were severely and negatively impacted by the costs associated with our deferred performance and restricted share units, mostly coming from the mark-to-market impact following DRX stock price increase since January 31, 2026, and also by our foreign exchange loss. DSUs, PSUs and RSUs had a negative impact on net earnings of $4.3 million and $5.6 million for the 3- and 6-month periods ended July 31, 2026, respectively, and therefore, $0.15 per share and $0.20 per share for the same periods, while the foreign exchange loss had a negative impact of $1.8 million or $0.06 per share and $1.4 million or $0.05 per share for the same period, respectively. We closed the second quarter with $91.4 million in cash and cash equivalents, up by $28.7 million compared with the January 31, 2026, closing balance. Working capital stood at $109.5 million as of July 31, 2026. As noted earlier, the claim settlement generated a $25 million cash inflow just before quarter end, which positively impacted our ending cash balance. Year-to-date, operating cash flow reached $47.1 million for the 6-month period ended July 31, 2026, while $15.5 million were used to acquire property, plant and equipment, and intangible assets, including the modification of a fabrication bay at ADF Terrebonne complex, Groupe LAR's plant expansion and our ERP upgrade. In light of the continuing trade uncertainty, we will also invest just over USD 10 million to increase our Great Falls facility output and add new equipment to further improve efficiency. We now expect our full year CapEx to total just over $40 million. Yesterday, our Board of Directors approved the payment of the second semiannual dividend of $0.02 per share. This dividend will be paid on October 15 to shareholders of record as of September 25, 2026. Finally, we closed the quarter and 6 months ended July 31, 2026, with yet another record high order backlog, reaching $693.7 million. This total also includes Groupe LAR's order backlog, which stood at $243.3 million at the same date. It should be noted that the corporation's order backlog as of July 31, 2026, does not include the 5-year extension option on the long-term contract announced on July 23, 2025. It is also worth mentioning that 64% of our consolidated order backlog is for Canadian-based projects. We cannot escape from the adverse impact of the U.S. tariffs on our year-to-date results. As of now, we can confirm that the new 50% U.S. tariffs announced a few weeks ago are not impacting ADF's products, and we can also confirm that we will be getting relief from the impact of the Canadian counter-tariffs that became effective earlier this week. Additionally, and based on the information available as of now, ADF will not be directly impacted by any of the proclamations signed by the U.S. President Tuesday night. Although the latest changes have limited direct impact on ADF, they are definitely increasing the uncertainty. This said, and as ADF has proven over its 70 years of existence, we are resilient. As previously mentioned, our Q2 results were negatively impacted by the strong performance of our stock following the accounting of our share units and by an FX loss. Once we understand this, it is important to look at the fundamentals, which for ADF are the backlog growth, the backlog geographic diversification and the strength of our balance sheet. To say the least, we can say that these are strong and are the foundation to our continued growth. Our capital investment in the Lac-Saint-Jean region for Groupe LAR's facility expansion is on time and on budget, and we will soon start a plant expansion and equipment upgrade at our Great Falls, Montana, facility. Our balance sheet strength, along with the soon-to-be-finalized additional financing, are enabling ADF to maintain and even improve its fabrication capacity and efficiency. Finally, and on a personal note, the process to find a new CFO following the announcement of my end-of-year retirement as announced in May is going well, and we are confident that an announcement will be coming soon. As a reminder, I will retire on December 31, 2026, after more than 16 years of service with ADF, but will remain as CFO until that date and then starting January 1, 2027, will serve as a strategic adviser until the date to be confirmed to ensure a smooth transition. Thank you for your interest and confidence in ADF. I will now answer your questions.

[Operator Instructions] The first question comes from Nicholas Cortellucci with Atrium.

Congrats on another strong quarter here. I just wanted to make sure I heard something correctly was on the percent of the backlog that was from Canada, was that 45%?

64%.

Okay. Got it. Yes. Okay. So a slight step down from Q1, it seems like.

And from Q1, yes. And you might recall, we had some announcement at the end of June, mostly for U.S.-based projects. So obviously, adding those reduced, I think we were at 72% at the end of Q1. So that's why we're slightly lower. For us, anything that looks like 50-50 or close to 50% is really good, but still at 64%, definitely at 64% of Canadian-based content, definitely considering the environment we're in, definitely better than the 5% of Canadian content we were at back in April 2025. So just over a year and a quarter ago.

Yes. Understood. Okay. And then with gross margin, we had some moving pieces in the quarter with the work Terrebonne did for LAR. But what do you see as like the normalized gross margin for you guys going forward? And then maybe how does that change into next year?