Atlas Engineered Products Ltd.

Good morning, everyone. Welcome, and thank you for joining Atlas Engineered Products Q2 2025 Earnings Call.

My name is Jake Bouma, an IR consultant for AEP and moderator for this call. Today on the line discussing AEP's Q2 2025 financial results and company highlights is company President and CEO and Founder, Hadi Abassi; and CFO, Melissa MacRae.

Following their remarks, we will open up the call for an analyst Q&A session. Before handing over the call to Hadi, please note that 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 this information. Also, all amounts discussed will be in Canadian dollars, unless otherwise noted.

Hadi, please proceed with your remarks.

Thank you, Jake. Good morning, everyone.

Welcome to Atlas Engineered Products Earnings Call to discuss our second quarter first half of 2025. Thank you for joining us, and we are very excited to be on the call with you.

Despite the challenges faced by our industry and many other industries as a result of Canada and United States political and trade uncertainties during the 3 and 6 months period ended June 30, 2025, Atlas showcased its resilience by delivering year-over-year growth to start 2025 compared to 2024. This is a testament to our team's ability to execute in our market environment.

So I would like to acknowledge their work ethic and commitment to our company and their commitment to our investors that keep us on a solid footing to achieve our strategic goals over time. While AEP's low exposure to U.S.

cross-border transactions and the inclusion of its products in the USMCA limits tariff exposure, trade uncertainties impacted broader macroeconomic stability. This uncertainty resulted in project delays and more competitive market for sales, which impacted pricing and margins in Q2.

Despite this, we notably really has record coating activities from January to July -- from January to July 2025, increasing $34 million versus the previous year period, increased port footage output by 12% for the first half of the year compared to the prior period, closed the acquisition Truss-Worthy construction system operations and land near around Toronto and advance our automation investment with our new building progress in on time. The strength of AEP's national platform expertise and financial flexibility provide us competitive advantage to manage revenue and gross margin during this environment to determine whether to reduce margin to generate more revenue and maintain and increase market share over time, this will allow us to deepen our market penetration and leadership position across Canada in support of addressing the country's housing shortage and affordability crisis.

That requires more construction activity, driving demand for our products. The government continues to signal the announcement of a new program and incentive to capitalize these activity levels sometime this fall, which we expect, if fulfilled, will positively impact our business growth and margins.

As we know, Canada is extremely large and diverse geographically. This translates to significant variances in activity levels from province to province, with some provinces seeing a strong housing starts and favorable market condition and others experiencing the opposite.

For example, recent RBC economic reporting shows Rest of Canada housing starts are reaching 15-year high relative to Ontario market, which is significantly lagging on a 6-month moving average basis. AEP recognizes this and continues to utilize its M&A strategy and expertise to diversify exposure and capture growth.

We continue to evaluate the optimal capital allocation decisions, notably advancing our automation effort in Ontario, enhancing our financial flexibility and optionality with our banking partners and remaining active on our share buyback, purchasing just over 118,000 additional shares in Q2 2025 at an average approximately $0.81 per share. Subsequent to quarter end, we also announced the acquisition of Penn-Truss, our first location in Saskatchewan.

We saw housing start rise over 100% in the first 5 months of 2025, banking it first in the nation for growth. We also realized a 14% increase in revenue for July 2025 to $6 million, excluding recent acquisitions for now and continue to experience a strong coating levels.

This paired with potential interest rate cuts, favorable government policy announcement and further trade uncertainty creates a solid foundation to execute and build on this momentum during the remainder of 2025 and beyond. I would like -- I would now like to introduce Melissa MacRae, CFO of AEP, to provide commentary on our financial performance through Q2.

Go ahead, Mac.

Thank you, Hadi. Results for our Q2 2025 include revenues of $13.6 million for the second quarter and $24.6 million for the year- to-date.

Gross profits of $2.3 million and gross margins of 17% for the second quarter and $4 million in gross profit and 16% gross margin for the year-to-date. Operating losses of $546,000 for the second quarter and $1.3 million for the year-to-date.

The competitive market has been persistent and despite revenues declining for the quarter, they're still higher for the year-to-date compared to prior periods. Internal manufacturing metrics show increased board footage output for Truss Manufacturing.

This is a KPI that we track internally, showing that we are producing more than the comparative period for Truss' specifically, but a competitive market is dictating lower pricing still. The company has been working hard to gain market share and keep staff busy even in the competitive market, which has meant sacrificing margins and profits at this time in order to be better prepared for the turnaround in the market.

Skilled staff and a strong customer base will be necessary for quarter 3 2025 and moving forward as the company's sales initiatives start to show more results in top line revenues moving forward. Additionally, design and sales work has already been put into building up our quoting and future pipelines that are reflected in our year-to-date results.

Normalized EBITDA was $1.1 million for the second quarter and $1.7 million for the year-to-date results. Normalized EBITDA does not include adjustments to onetime costs for legal and consulting fees related to the new automation facility in Ontario and acquisition projects that we had on the go, which include Truss-Worthy and Penn-Truss.

No adjustment has also has been made for some other costs associated for future automation, which would be ongoing moving forward, but incurred now to prepare for that future expansion and organic growth. These costs continue to include the expansion of sales teams and management teams and consulting for -- to ensure that we are ready to go with the automation as soon as possible.

Additionally, there are no adjustments for management labor costs related to 2 acquisitions, one of which was completed subsequent to quarter 2, 2025. Let me just touch quickly on the balance sheet as we have major projects in progress that are utilizing our cash flow.

We have been using our cash for the new automation building and the Truss-Worthy acquisition as seen on these financial statements. We still have a cash balance of just over $5 million, plus a line of credit still available to us at $7.5 million on top of the $5 million.

Additionally, with the seasonality of our industry, typically, our free cash generation is noticeable from about July, August through to January, February of each year. We are seeing -- and we are seeing this trend continue this year.

Additionally, we have strong asset backing in our real estate that we own with a net carrying value of just over $15 million, most of which hasn't been appraised in the last 4 years. So moving forward, we're confident with our balance sheet to continue these projects that we have on the go.

I'd like to open up the call for your questions. Operator, please provide the appropriate instructions.

Thank you, Melissa, and thank you, Hadi. [Operator Instructions] So the first question is from Frederic.

The first question is just with the builder delays and potential announcement from the [ current Mark Carney ] government in the fall, do you think that the pent-up demand could benefit not only Q3, but also Q4 relative to prior years? Just trying to get your sense on what the timing of orders and deliveries could be for the balance of 2025?

Okay. Frederic, even on Q2, we had a lot of completed orders sitting on the ground that due to various delays that happens in any business, especially construction with so many different trades involved that they sat on the ground and the number didn't show on the actual revenue side.

And those orders now after a week or 10 days, they were all delivered. And then that will continue.

Right now, to answer honestly from [indiscernible] or coat and the orders and activities we have, there is one area that I'm paying a lot of attention right now is on the margin because there is a fine balance being aggressive and protecting your clients and extending your market share to another way to making money. And those are -- we are managing.

Our biggest anxiety in all the operation is the labor and being able to deliver because we can see that is coming right now. That is happening.

And to answer your question in a long way, yes, that I can see it. And that's -- and still, there has been no announcement from the government.

They're just talking right now. They haven't said anything.

And even when they announced that in fall, we introduced a program, I wish they handled on it because that put more projects on hold with people wondering, oh, what is this magic government going to come? What is this magic solution?

And right now, without all of those announcements after, I can see the wave right now coming that the demand is going to get bigger and bigger and then the next issue is the labor shortage and everything that we deal with that every day anyway. It doesn't matter.

But the reason I'm saying that it's not a worry about the labor, it's more of -- it is where we are paying more attention right now because we're seeing the activity is picking up right now. It's picking up across the country and you can see and that is one advantage for us, we get exposure to what's coming in the next 6 months, and we can see the activities happening, right?

Okay. Yes, that's interesting on the activity picking up.

And is that reflected in pricing as well? Like is there less pricing pressure in recent weeks?

And what does that imply for margins relative to Q2? Like are you confident that you can improve margins in Q3 relative to the Q2?

Yes. Yes, we can improve that and the margins will go up while the revenue goes up and different parts of it, yes, we can do that.

And especially there is with M&A, everything, we spent all the money that -- not we spent all the money, the expenses were higher because of the 2 previous M&A we had and all of that stuff there. So yes, I can see that the margin has been improving quite drastically.

And next question is from Andrew Semple from Ventum Capital Markets.

I'll start with the outlook. You provided some color on July sales being up year-over-year relative to July 2024.

Just wondering kind of we're most of the way through August here, what have you been seeing in August kind of month-to-date? Are you still seeing revenue trend higher year-over-year?

Yes. I -- if the trend is year-over-year and the one week in August and usually in the last 10 days in August before the school holiday, sometimes you see a little bit of a holiday season for everybody and stuff that they indicated that it could look like maybe a slowdown but it is not because the first 2 weeks in September, it will go crazy again once the kids go back to school.

But the way the trends are right now is going up and up right now, the revenue and everything -- the orders, everything is increasing at the moment. And there is a trend in there going up right now, yes.

Great. And then maybe in terms of margin expectations for the second half of this year, you highlighted it's a number -- it's a key metric the team is watching closely and trying to balance that with sales growth.

What can we expect from margins in the second half compared to what we saw in Q2 here?

You can expect an improved margin -- much more improved margin, but I can't give you the actual number that Andrew. I apologize for that, but you can expect that much approved margin -- much improved margin.

Great. Okay.

And then maybe another one, if I may. Looking at the cash resources on the balance sheet at quarter end Q2, you also have Penn-Truss, which is closing subsequent to quarter end.

Do you feel like you have additional financial flexibility for M&A or is the cash and kind of credit facility resources you have available to you today, is that mostly geared towards Clinton? I just want to kind of gauge what sort of liquidity buffer you feel you have to continue to pursue M&A?

On the liquidity buffer right now on the other potential M&As that come in up there, we are working more creative ways of doing the deal rather than depending on the cash at the moment. Because the one disadvantage of a slow marketplace is that you fight for margin, you fight for business, everything and the numbers don't look good.

But the other positive side is the M&A is pretty good and the appetite is much higher. And out of that, it becomes a biased market.

And right now, we're looking at different creative way of making the deals rather than using the cash because we are managing the cash flow pretty good right now. And we are pretty disciplined on it and the main concentration right now and effort is for the automation to be in effect by next spring, that everything is on time.

So we manage it, and we are -- I'm looking at all the other deals rather than just going to the market or spending the cash money at the moment.

And next, we have Russell Stanley from Beacon Securities.

Maybe first, just around the price pressure that you're seeing. Wondering if you can provide some color as to how broad-based that is across product categories?

Are you seeing any categories be particularly hit or any categories showing particular resilience? Or is it fairly even?

Any color there would be great.

Russell, it's really -- when I look at it is on all the categories because especially the 2 provinces, British Columbia and Ontario, that the common correlation with the housing prices is over millions of dollars, right? So whenever there is a job available right now, there is an amount of people that you fight for it and then it reduces the margin.

So it's just the price category affects all the products you have. Now we have advantage on a lot of products with our buying power and our strength that it doesn't hurt us as much as it hurts the competition.

And -- but to answer your question, I think it's all across the board that you will receive products to products that once it comes to it and if the people need that business to keep their lights on and keep the business moving. So they drop the margin in those areas, and that's what's happened.

Got it. And maybe if I could, just around CapEx expectations for H2 and perhaps early '26, appreciating Melissa's comments earlier around the balance sheet flexibility, but what should we expect for CapEx in H2?

And then how much more spillover might we see in Q1 as Quinton is finished?

Okay. I will let Mac to answer that one and stop there, please, yes.

Yes, no worries. So through quarter 3 into the end of the year, we're expecting the building completion to be done and into quarter one a little bit.

So expecting about 50% of that still to go here about $3 million, $3.5 million. So the way we are starting deposits on to the equipment, but that won't show into our CapEx necessarily the way you're expecting until it's in use later next year with the vast majority of those payments actually being in quarter one and quarter 2 of next year to just -- because the way we've negotiated the payment plan through that project.

CapEx outside of like the acquisitions in the automation facility, we're still expecting to be minimal. We have a lot of equipment throughout the group that can support our operations as it is until we get these projects on the go.

Thanks, everyone. So it looks like there's no more analyst questions.

So that marks the end of our question and answer session. And will be available post call to answer all of your questions that you may still have, via e-mail or through the contact form on the website.

And also the recording of this call will be available on the website shortly today. So at this time, you may now disconnect, and have a great day.

Have a great day, everyone.