Adf Group Inc

TSX:DRX

Q3-2026 Earnings Call

[Operator]

Good morning, ladies and gentlemen, and welcome to the ADF Group Inc. Results for the period of 3 and 9 months closed on October 31, 2025 conference call. [Operator Instructions] This call is being recorded on Thursday, December 11, 2025.

I would now like to turn the conference over to Mr. Jean-Francois Bourse, ADF Group's Chief Financial Officer. Please go ahead.

[Jean-François Boursier, executive]

Good morning, and welcome to ADF's conference call covering the third quarter and 9 months ended October 31, 2025. I am with Jean Paschini, Chairman of the Board and CEO of ADF, who will be available to answer your questions 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, including the first-time consolidation of Groupe LAR, the acquisition of which was finalized on September 18.

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 third quarter and 9 months ended October 31, 2025, which were filed with the SEDAR this morning.

Revenues for the quarter ended October 31, 2025, at $71.4 million were only $8.5 million lower than last year. Year-to-date, revenues stood at $179.9 million compared with $262.2 million for the 9-month period ended October 31, 2024. While the corporation's order backlog is more than adequate and as we already mentioned in previous communications, the uncertainty surrounding the U.S. tariffs has created an nonrecoverable delay in fabrication hours, mainly at ADS plant in Terrebonne, Quebec.

We closed the third quarter ended October 31, 2025, with gross margin of 27.6% as a percentage of revenues, down from 30.4% for the quarter ended October 31, 2024, while the year-to-date gross margin as a percentage of revenues at 23.8% is also down from the 31.7% margin for the 9-month period ended October 31, 2024.

The decrease in revenues required ADF to implement a work sharing program during the second quarter ended July 31, 2025, at its Terrebonne plant. This program has allowed the corporation to mitigate the negative cost impact of the decrease in fabrication hours, but not entirely. Tariffs also had an indirect negative impact on the corporation's margins which is caused by the increase in the price of steel set by the U.S. steel mills.

Adjusted EBITDA for the quarter ended October 31, 2025, at $18.4 million compared to $24 million for the same quarter ended a year ago, while year-to-date adjusted EBITDA stood at $32.5 million compared to $72 million for the 9 months ended a year ago. Again, it is worth mentioning that while the financial results for the period ending October 31, 2025, are severely impacted by the tariffs and associated turmoil, last year's results benefited from an exceptionally favorable product mix.

Selling and administrative expenses for the 3 months ended October 31, 2025, stood at $3.1 million, posting a $1.3 million increase compared to the same period ended a year ago. This variation is mostly explained by the adjustment in the market value of DSUs and PSUs in line with the corporation share price during the period analyzed.

Year-to-date, these expenses stood at $15.3 million, which is $0.5 million lower than the same period a year earlier. This variation, although to a lesser degree, is also due to the adjustment in the market value of DSUs and PSUs. We, therefore, closed our third quarter with net income of $10.3 million or $0.36 per share compared with $16.4 million or $0.55 per share for the corresponding quarter a year ago.

Year-to-date, net income stood at $20 million or $0.70 per share compared with $47.7 million or $1.53 per share for the same period ended October 31, 2024. As previously mentioned, the October 31, 2025 quarter end included the first -- for the first time, the inclusion of Groupe LAR into our consolidated results. As such, and for the period starting September 18, 2025 to the end of the quarter on October 31, 2025, LAR increased our revenues by $6.2 million, adjusted EBITDA by $0.5 million and net income by $0.2 million.

We closed our third quarter with $37.7 million in cash and cash equivalents, $27.3 million lower when compared to the January 31, 2025, closing balance. The Groupe LAR acquisition explained $16.4 million of this variance, plus the working capital we invested to support LAR operations since the acquisition.

Working capital as at October 31, 2025, reached $101.4 million for a ratio of 2.27:1 compared with a working capital of $109.2 million or a ratio of 2.36:1 as of January 31, 2025. Year-to-date, operating cash flow reached $13.4 million for the 9-month period ended October 31, 2025, while we spent $8.7 million on property, plant and equipment and intangible assets acquisitions, including the upgrade of ADF ERP system, which is scheduled to take place over the next 3 fiscal years.

In addition, and as mentioned with the July 23 multiyear contract announcement, we will be investing in new equipment at our Terrebonne site, which should bring our full year CapEx investment at approximately $11 million. Finally, we closed the quarter and 9 months ended October 31, 2025, with an order backlog of $497.1 million compared with $330.3 million on the same date a year earlier and $293.1 million on January 31, 2025.

It should be noted that ADS order backlog as at October 31, 2025, includes the order backlog of Groupe LAR totaling $91.9 million and does not include the option to extend the long-term contract announced last July by 5 years. Although still not at last year's level, our third quarter results have improved when compared to recently closed quarters. we are still seeing the effect of the new U.S. trade policies as they continue creating uncertainties in our markets.

This said, and as we have explained at our last quarter end call and also in more detail on our October 29 analyst call, we are now working hard on Groupe LAR's integration into our operations. We are already seeing the impact from our acquisition as our consolidated backlogs U.S. content, which made up 95% of our January 31, 2025 backlog is now only representing 43% of our October 31, 2025 backlog.

This is the first of many positive impacts we will see in the coming quarters as we fully integrate LAR and execute our investment plan. We are still finalizing the final detail of this important investment, but we will provide additional information in future communication as it becomes available.

The U.S. market remains a key market for ADF, but we are now better positioned to face the new North American landscape. We will continue our methodical and measured development approach while maintaining our tight management of operational risks, delivering solid results to our shareholders. Thank you for your interest and confidence in ADF. Jean and I will now answer your questions.

[Operator]

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

[Nicholas Cortellucci, analyst]

Jean and JF, congrats on the quarter here. First one is just on the LAR Groupe acquisition. Maybe just walk us through the steps of integration you guys are going through right now and what that looks like and what kind of synergies we can expect on the revenue and the cost side?

[Jean-François Boursier, executive]

Well, as we mentioned at the -- on the call at the end of October, still -- well, besides the financial integration and the first consolidation, we're working hard looking at how we will invest in Atlas plant in at LAR's plant in Lac Saint-Jean region. We need to increase capacity in light of the upcoming volumes. So obviously, a lot of emphasis being put on this investment and also how to finance that investment.

So that's really the emphasis we're putting now also working with them on the bidding process, trying to go back because, obviously, with -- through the acquisition process, they had to sort of slow down their bidding process because of other operating issues they had while we were doing the acquisition. But now that everything is behind us and that we're -- everybody is fully on board, we're back on the bidding trend.

Good things are coming, as we also mentioned on our October call with the analysts. So really working with them on the bidding process. We're hopeful to be able to have a nice announcement in the coming quarters. But if we're successful at signing those jobs, we need to make sure also that we're able to have sufficient capacity. So working with all of that. So a lot of work going on. Obviously, the fact that both operations have similar values really helped on the integration process.

So that the process really goes well, and everybody is eager to get LAR back on its usual trend and actually even better. As for synergies, we're still evaluating them. Obviously, some of them will come with -- as the integration goes, just from an administrative perspective, there will be synergies also as we combine the operation. And obviously, once we are able to have the new investment in with the equipment -- the new equipment, we can actually expect further efficiency improvement and additional synergies.

[Nicholas Cortellucci, analyst]

Right. Okay. Perfect. And then maybe just a bit on margins. If we calculate the margins from the numbers you guys reported, it was a bit lower than what you guys report. So where do you see that going over the long term? What is kind of the target EBITDA margins or even gross margins for the acquisition?

[Jean Paschini, executive]

Well, like we said before, like Jean-François said before, that facility, that shop was almost bankrupt. So right now, we are working with everybody, putting up systems, a lot of integration that we're doing. I want this shop at LAR to be able to do the same margin as of here in Terrebonne and in Great Falls, by investing the money that we're going to invest, the Board of Directors approves it. The new facility is going to be very sophisticated and margins are going to be, like I said, as high as we have them here.

[Nicholas Cortellucci, analyst]

And then I know you guys have made a big shift over to Canada. But if we are to get some type of resolution on the trade front over the next year, how quickly can you flip the switch and get back to what you guys are doing last year and the year before with a lot of these U.S. contracts?

[Jean Paschini, executive]

Well, it's -- when the switch is on, we have a lot of clients in the U.S. on the other side of the border. So -- but right now, those clients are not able to guarantee that there's not going to be any tariffs. So by doing that, they're shifting work to somebody else. But whenever there's an agreement between Canada and the U.S., then listen, we're going to return, and we're going to make sure that we will get work and -- get work and produce. But still, what happened with the new President, it can happen years -- it can happen again. So we're working hard to diversify our backlog. I think at the beginning of the year, it was 90% U.S. Now we're up to 57%. So we have to keep Canada, and we have to keep all North America to make sure that we won't get -- we won't get shipped it again.

[Jean-François Boursier, executive]

Nic, the goal is really not to exit the U.S. market. From a steel manufacturing standpoint, U.S. market is still the biggest market and a key market. Obviously, there are some struggles now, as Jean explained, because of the tariff and the uncertainty, but we're not -- definitely the idea is to have a better balanced backlog, which we achieved, but not shifting the U.S. volumes, to Canadian volume, it's just increasing. The Canadian volume and increasing the overall backlog. And by doing that, we were still keeping U.S. market as a key market, we have to. And -- but this said, we need also to be smart about it. And I think with the acquisition and the better balance, we're definitely reducing, mitigating the risk coming from the tariff uncertainty.

[Nicholas Cortellucci, analyst]

Yes. Absolutely. Okay. That makes sense. And then just last 1 for me. If you could give us some commentary on Q4 and how that's shaping up, what should investors expect?

[Jean-François Boursier, executive]

Q4 should be similar to Q3. We're expecting again a good quarter. So I'll leave it at that. It's -- Q4 is going to be a good quarter.

[Operator]

[Operator Instructions] There are no further questions at this time. I will now turn the call over to Mr. Jean-Francois for closing remarks.

[Jean-François Boursier, executive]

Thank you. Again, we wish to thank you for your interest in and support of ADF Group. Jean, and I would also like to take this opportunity to wish you all a safe and happy holiday season. 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.