Earnings call transcript: ADF Group Q1 2025 sees stock plunge amid earnings miss

ADF Group Inc. (symbol: DRX) reported its first-quarter 2025 financial results, revealing a miss on both earnings per share (EPS) and revenue forecasts. The company posted an EPS of $0.31, falling short of the anticipated $0.38, while revenue came in at $77.33 million against the forecast of $80 million. This disappointing performance triggered a significant pre-market stock decline of 27.07%, with shares trading at $5.55. According to InvestingPro analysis, the stock appears undervalued at current levels, with analysts setting a consensus price target suggesting significant upside potential.

Key Takeaways

• ADF Group's EPS and revenue both missed expectations.
• The stock experienced a sharp decline of over 27% in pre-market trading.
• The company reported annual revenue growth and improved gross margins.
• ADF Group announced a strong order backlog and new contracts.
• Future guidance suggests challenges ahead with lower expected revenues.

Company Performance

ADF Group demonstrated solid annual performance with revenues reaching $339.6 million, an increase of $8.6 million year-over-year. The company's gross margin improved significantly from 22% to 31.6%, reflecting enhanced operational efficiency. However, despite these annual gains, the quarterly results fell short of market expectations, impacting investor sentiment.

Financial Highlights

• Revenue: $339.6 million, up $8.6 million year-over-year
• Gross margin: 31.6%, up from 22% last year
• Adjusted EBITDA: $91.3 million (26.9% of revenues), up from $55.9 million
• Net income: $56.8 million ($1.84 per share), compared to $37.6 million ($1.15 per share) last year
• Cash flows from operating activities: $55.1 million
• CapEx investment: $9.1 million

Earnings vs. Forecast

ADF Group's EPS of $0.31 missed the forecasted $0.38 by approximately 18.4%. Revenue also fell short, coming in at $77.33 million compared to the expected $80 million. This marks a notable deviation from expectations and contributed to the sharp decline in stock price.

Market Reaction

The market reacted negatively to ADF Group's earnings miss, with the stock price dropping 27.07% to $5.55 in pre-market trading. This is a significant move considering the stock's 52-week range of $6.16 to $8.94, highlighting investor concerns over the company's ability to meet financial targets. InvestingPro analysis indicates the company maintains excellent financial health with a score of 3.53 (GREAT), suggesting the market reaction may present a buying opportunity for value investors.

Outlook & Guidance

Looking ahead, ADF Group anticipates a challenging fiscal year 2026, with revenues expected to be lower than in 2025. The company projects a decline in gross margins and plans a CapEx budget of $8 million. Despite these challenges, ADF Group is actively seeking USMCA and other tariff exemptions to mitigate potential impacts. Wall Street analysts maintain optimism, with consensus targets suggesting 38% upside potential. Dive deeper into ADF Group's prospects with the comprehensive Pro Research Report, available exclusively on InvestingPro.

Executive Commentary

"We have been faced by other challenges in our close to seventy-year history and have always found ways to navigate through uncertain times," said Jean Francois Borsi, CFO. CEO Jean Pasquini added, "We see a year that we're gonna lose money. We see a year that we're gonna make money. Not as much, but we're gonna make money."

Risks and Challenges

• Potential impacts from US tariffs and trade measures
• Expected steel price increases
• Anticipated decline in gross margins
• Operational challenges with reduced working hours for employees
• Uncertainty in achieving USMCA tariff exemptions

Q&A

During the earnings call, Nicholas Protolucci inquired about the production shift to the Great Falls facility, capacity and revenue potential, Canadian project opportunities, and the CapEx budget. These questions underscore the focus on operational efficiency and strategic positioning in response to market challenges.

Full transcript - ADF Group Inc. (DRX) Q4 2025:

Conference Moderator: morning, ladies and gentlemen, and welcome to ADF Group Inc. Results for the Fiscal Year Ended 01/31/2025. At this time, note that all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Also note that the call is being recorded on Thursday, 04/10/2025.

And I would like to turn the conference over to Mr. Jean Francois Borsi, ADF Group's Chief Financial Officer. Please go ahead, sir.

Jean Francois Borsi, Chief Financial Officer, ADF Group Inc.: Thank you. Good morning. Welcome to ADF's conference call covering the twelve month period ended 01/31/2025. With me today is Jean Pasquini, ADF's CEO, who will be available to answer your questions. Once again, we are very pleased with the improvements in our results over the recent years, and more particularly during fiscal twenty twenty five.

Unfortunately, these very good results are overshadowed by the uncertainty coming from The US tariffs that are not only increasing our costs, but also creating uncertainties in our markets. We will provide additional information about these tariffs later based on the most recent and available updates. This said, and before I update you on ADF's annual results and changes in financial position, which were disclosed earlier this morning by a press release, 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 2025 fiscal year, which will be filed with SEDAR in the coming days. Revenues for the fiscal year ended 01/31/2025 reached $339,600,000 which is $8,600,000 higher than last fiscal year.

As a percentage of revenues, the gross margin went from 22% in fiscal twenty twenty four to 31.6% during the fiscal year ended 01/31/2025. This significant increase is explained by a very favorable fabrication mix together with the improvement in internal efficiency from the investments made in automation in recent years at ADF plant in Turbine, Quebec. Adjusted EBITDA totaled $91,300,000 or 26.9% of revenues compared with $55,900,000 or 16.9% of revenues a year ago. Selling and administrative expenses amounted to $22,100,000 or 6.5% of revenues, which is $700,000 lower than last year. Although the opening and closing of ADF stock price was almost at the same level, the mark to market valuation of ADF's deferred shared units or DSUs and performance share units or PSUs decreased the SG and A expenses during the fiscal year ended 01/31/2025 by $3,800,000 when compared to last year.

The recent discussions around tariffs and trade agreements had a significant impact on The US and Canadian currencies. As such, we closed our 01/31/2025 fiscal year with a mostly non monetary foreign exchange loss of $5,600,000 which is $4,400,000 higher than last year. Most of this variance coming from the higher end of year mark to market valuation of our FX contracts on end at year end. Year to date, ADF posted net income of $56,800,000 or $1.84 basic and diluted per share compared with a net income of $37,600,000 a year ago or $1.15 per share. Cash flows from operating activities generated $55,100,000 while we invested $9,100,000 in CapEx, mostly for equipment maintenance at both our plants in Turbine, Quebec and Great Falls, Montana.

As of 01/31/2025, working capital stood at $109,200,000 just $900,000 lower than last year. Our 01/31/2025 cash and cash equivalents stood at $60,000,000 which is $12,400,000 lower than a year ago. It is worth mentioning that we repurchased for cancellation just under 3,500,000.0 subordinate voting shares during the fiscal year ended past 01/31/2025 for a total cash consideration of $54,600,000 After 01/31/2025 until 02/20/2025, we were purchased also for cancellation an additional 423,000 subordinate voting shares for total cash consideration of $3,500,000 through our ongoing NCIB program. Yesterday, the Board of Directors approved the payment of a semi annual dividend of $02 per share, which will be paid on 05/15/2025 to shareholders of record as at 04/24/2025. We closed the year with an order backlog of 293,100,000 as of 01/31/2025, excluding the new contracts totaling $120,000,000 announced last February 26.

Given the projects currently included in the order backlog and the fabrication schedules thereof, and as announced in this morning's press release, ADF has applied and will soon receive authorization from Service Canada to implement a work sharing program for some of our employees at our fabrication plant and paint shop in Telbon. The program would come into effect this April 14 and would allow the concerned employees to benefit from the employment insurance program to compensate for their reduced working hours. This program, as already discussed with the union executive, will be submitted to a vote of our unionized employees this April 12. This program would allow ADF closely manage its costs until the fabrication phase of the recently announced projects begins. As a result, approximately 200 employees would see their working hours reduced by 50 to 60%, hours that would be compensated by the government program.

Quickly looking at the fourth quarter results, ADF recorded revenues of $77,400,000 down by 11,000,000 from the fourth quarter of twenty four of the 2024 fiscal year. The change quarter over quarter is explained by the fabrication schedule in line with the order backlog in hand. The gross margin as a percentage of revenue stood at 31% for the fourth quarter ended 01/31/2025 compared with 24.4% for the corresponding quarter of fiscal twenty twenty four. The margin increase between these two quarters is also primarily explained by the mix of products in fabrication and by improvement in internal efficiencies. We recorded a net income of $9,100,000 during the last quarter of fiscal twenty twenty five compared with net income of $10,500,000 for the corresponding period of fiscal twenty twenty four.

The quarter ending 01/31/2025 was negatively impacted by an exchange loss of $4,300,000 as already explained before. Because the corporation carries out contracts that bearing complexity and duration, upward and downward fluctuation may occur from quarter to quarter. In light of this, and order backlog growth must be analyzed over several quarters, not from one period to the next. We should be thrilled with these exceptional results. But sadly, the trade and tariffs back and forth of the past four months are putting a damper on our new fiscal year.

Although our markets are still active, as shown by the January new contracts we announced at the February, we are assessing the direct and indirect impacts of our business of set tariffs, retaliatory tariffs, and other trade measures implemented as this situation unfolds. These impacts could be material. As such, we can already confirm that revenues for our current fiscal year twenty twenty six will be lower than this past fiscal year, more so in our first two quarters when compared with last year. Additionally, in light of these tariffs and already confirmed steel price increases, we will also see a decline in our gross margins. This said, we have been faced by other challenges in our close to seventy year history and have always find ways to navigate through uncertain times finding innovative and creative solutions to minimize as much as possible these negative situations.

Thank you all for your interest and confidence in ADF. Jean and I will now answer your questions.

Conference Moderator: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone You will then hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press star followed by 2. If you're using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions.

First, we will hear from Nicholas Protolucci at Atrium Research. Please go ahead.

Nicholas Protolucci, Analyst, Atrium Research: Hey, JF. Hey, John. How's it going?

Jean Pasquini, CEO, ADF Group Inc.: Hey, good, Joe.

Nicholas Protolucci, Analyst, Atrium Research: Not too bad. Maybe wanted to start off talking about maybe the things you guys can do and are thinking about doing on a more of a strategic side. So is there any plans to shift production down to Great Falls?

Jean Pasquini, CEO, ADF Group Inc.: Absolutely, right now we're looking at Great Falls to do more and more work in there. So that's one thing, but we have a couple of things on the drawing board right now.

Nicholas Protolucci, Analyst, Atrium Research: Okay. And how much capacity can you guys do out of Great Falls? Maybe just from like a revenue perspective?

Jean Pasquini, CEO, ADF Group Inc.: Well, right now with revenue. You're asking revenue and grid power?

Nicholas Protolucci, Analyst, Atrium Research: Yeah,

Jean Pasquini, CEO, ADF Group Inc.: revenue you could do about between 100 and $150,000,000

Nicholas Protolucci, Analyst, Atrium Research: Okay. And have you guys seen anything in terms of trying to increase the percentage of revenue that's deployed in Canadian projects? We've talked about Hydro Quebec before and other projects in Canada, the demand is still there. How's that kind of playing out?

Jean Pasquini, CEO, ADF Group Inc.: Well, right now we have a few bids out in Ontario. We have a few bids here in Quebec. So, we're waiting for answers.

Nicholas Protolucci, Analyst, Atrium Research: Okay, that makes sense. All right. And then I know there's a lot of moving pieces with the tariffs, but can you guys tell us a bit more about the USMCA exemptions and and what that exactly includes for you guys and doesn't include?

Jean Francois Borsi, Chief Financial Officer, ADF Group Inc.: Well, as of now, and this is the issue we had over the past few months is that it's sort of a moving target, but as of today, there are basically two tariffs having impact on us, the overall tariffs with the exclusion of USMCA products and also the second tariffs on steel and aluminum. For the overall tariffs, to your point, there are exclusions to USMCA products. So, going forward, knowing what we know now, we will obviously procure our material according to the different exceptions. The thing is that for projects that were already ongoing where some of the procurement was already done, We had procured for operating reasons and financial reasons. We had not necessarily procured all our steel and other material from countries within the USMC.

So, some of our shipments since the tariffs have been put in place have been impacted by the overall tariffs because we don't necessarily meet the, on all shipments, we don't necessarily meet USMC requirement, but again, it's not all of the volume. It's split between what's the different shipments, but there is an impact. Same could be said for the steel and aluminum tariffs where we know there will be exemption if the raw material is poured in The US from US mills, again, for upcoming projects, new projects, and projects we will be looking in the future, we will procure according to these situations, but for those, for the projects that were already in our backlog and that we ended up US projects being fabricated in Canada, so that had to go across the border. There were some impact also on tariffs. So, luckily for us presently, the volume was not as high as it could be from a shipment standpoint, and we'll try as much as we can within the guidelines, and as we know them now, we will try to take advantage of all the exceptions within the existing procedures and the existing guidelines of those different items, but the challenge is really we know what we know today.

As we've seen yesterday and in the past weeks, all of this changes on a whim. So, we know what we know today, but we test for what's gonna happen in the coming days, in the coming weeks, and in the coming months. And that's the challenge.

Nicholas Protolucci, Analyst, Atrium Research: Yeah. Yeah, for sure. It's rapidly changing. So, we'll see. Okay.

And then on are you guys able to share your CapEx budget for the year? How much you guys are looking to spend?

Jean Francois Borsi, Chief Financial Officer, ADF Group Inc.: Yeah. Presently, we're looking at $8,000,000 We will obviously adapt that amount in light of the overall financial, and there are also, as Jean mentioned, a couple of things on the drawing board that we're looking at that could change that CapEx. But again, we're in the analysis phase. We're trying to gather all the information we can, but for now the number we're working with is 8,000,000.

Nicholas Protolucci, Analyst, Atrium Research: Okay. So you guys are still well positioned with the balance sheets you have for the year ahead, seems like.

Jean Francois Borsi, Chief Financial Officer, ADF Group Inc.: Yeah. We're obviously getting into this new luckily, we're getting into this new fiscal year with a strong balance sheet.

Jean Pasquini, CEO, ADF Group Inc.: And the backlog is strong Towards the end of the year. So, we see a year that we're gonna lose money. We see a year that we're gonna make money. Not as much, but we're gonna make money.

Nicholas Protolucci, Analyst, Atrium Research: Got it. Okay. Those are all the questions for me. I'll jump back in the queue.

Jean Francois Borsi, Chief Financial Officer, ADF Group Inc.: Thanks Nick.

Nicholas Protolucci, Analyst, Atrium Research: Thank you. Thanks guys.

Conference Moderator: Ladies and gentlemen, a reminder to please press 1 should you have any questions. And at this time, gentlemen, we have no other questions registered. Please proceed.

Jean Francois Borsi, Chief Financial Officer, ADF Group Inc.: Before we conclude today's conference call, I would like to remind you that ADF will hold its shareholders meeting on June 10 at eleven a. M. And this meeting will be held this year at the Imperial Hotel in Terbain, Quebec. Financial results for the first quarter ending 04/30/2025 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.

Jean Pasquini, CEO, ADF Group Inc.: Thank you.

Conference Moderator: 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.

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