Atlas Engineered Products Ltd.

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 Q3 2024 financial results and company highlights will be CEO, Hadi Abassi; CFO, Melissa MacRae; and Director, Paul Andreola.

Following the discussion, we will open up the call for a Q&A. 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, over to you. Thank you.

Good morning, everyone. Welcome to Atlas Engineered Products earnings call to discuss our third quarter 2024 performance.

We are excited to be with you, and thank you for joining us. We are very proud of our team as we navigate the challenging environment for our industry volumes and continue to defend and take the market share while growing the wall panel and engineered wood products businesses.

With the recent interest rate cuts and a structural shortage of homes in Canada, we are seeing more activity in the fourth quarter, and the order book is looking constructive for 2025. We expect 2025 to be the key inflection year for the company.

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 relationship with several robotic vendors to diversify exposure and manage risk.

One of the vendors has experienced some financial and management turbulences recently, and we are monitoring the situation daily. However, we do not anticipate a material financial impact to Atlas, or our strategy or timing of the automation rollout.

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 historically been very active acquiring shares at attractive levels. We see deep value in our stock and we manage our capital prudently to make accretive purchases when appropriate.

We are laser-focused on return on shareholders' equity, and we 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 headcount countercyclically and anticipate material contribution from the team heading into 2025. The 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 now to introduce you to Melissa MacRae, CFO of AEP, to provide commentary on our Q3 financial performance. Good luck, Mac.

Hello, everyone. I'm just going to provide a few high-level financial information from our Q3 results.

Revenues for the quarter were $16.5 million, representing a 15% increase year-over-year. These increases were driven largely by year-over-year increases in wall panel production, engineered wood products and the strategic acquisition of LCF.

The construction industry has slowed in the first part of this year. So the company focused on building 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.

Product diversification has been key to ensuring revenues are maintained through this more competitive market. Gross profits for the quarter were just over $4 million.

Adjusted EBITDA was $3 million for the quarter, representing a 3% year-over-year increase. Profits, income and EBITDA have been impacted by a more competitive market compared to the past few years.

The higher interest rates and the need to reduce inflation has impacted the construction market, creating that slowdown. Although now with rates reducing, the company has noticed an increase in orders for the upcoming fourth quarter, and we're anticipating future progress.

Along with the competitive market, the company has been strengthening its management and sales team, as Hadi mentioned, to ensure that staff is trained and available for the upcoming automation and M&A in Western Canada, where due diligence was completed recently and announced. The upcoming automation will significantly increase our production capacity and it is important to have the sales team out there getting orders to fill that new capacity effectively.

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

Thanks. Can everyone hear me?

Okay. Perfect.

First one here, just Hadi, you brought up a supplier issue on the robotics side. And I think when you guys initially laid out your plans, LCF and Hi-Tec were supposed to come online sometime in 2025.

Is that still the case? And how should we think about CapEx from now until the end of 2025?

Maybe the latter question is for Melissa.

Okay. We, right now, with the Greenbelt at Clinton, everything our system go and then we're going ahead with that.

That's a simpler version. For the LCF and Hi-Tec right now, we still have that plan.

However, there are more opportunities have opened up with automation for existing plant. So basically, how the automation is rolling up.

And Dave, this is a new pioneering thing we are doing at the moment. This has never been done in our industry.

So there are lots of new information and ever-changing comes up. And sometimes there are lots of bumps in the road that you've got to navigate through it.

So ever since then, we have seen a lot of newer ideas coming up there. So we are looking at choosing the best system.

One is for Greenbelt and what is the best system for your existing factories. And then we are in the process of figuring right now, finding that best system for us.

And to be honest with you, I thought we had that system before with the House of Design. But now with the difficulty we have with them and their structure they're going through with the company they are with the breakdown, we are looking at other options.

And out of that adversity, there's been an opportunity that we have seen more viable and could be better and more affordable options out there that we are doing right now, looking at it. So that said, there could be a delay on LCF and Hi-Tec to find out the real perfect fit for them and stuff there.

And we are right now in the middle of doing all the research for that at the moment. I'm sorry if I don't answer your question definitely on that one there, but we are right now doing our homework at the moment, due diligence deeply in that.

Okay. That makes sense.

And I imagine you guys would lay out your capital deployment plans once you have everything figured out.

Absolutely. Excuse me, Dave, when we did the last time when we did raise the capital, we are very, very specific why we're doing it because that was a time for us to make a decision because at that time, we did not need the capital.

We did not need it. However, strategically, based on the shareholder quality we could get and what we had coming up right away with our industry in terms of automation and expansion and M&A was an opportunity for us.

And that's the capital is going to be allocated for that area and specified for it. However, it's my job and our job as our team to do our homework diligently to find out what is the best way to spend that capital.

And that's what we are doing right now because we are fortunate to have that capital available for us, and we're going to make sure we're going to get the best return for that money.

That makes perfect sense there, Hadi. And then just on your outlook, you guys noted that you're starting to see some increased quoting activity, and that should translate in 2025.

Just curious when that ultimately hits in 2025. And the stuff that you're quoting on today, do you expect margins to return to more normal conditions?

Because I know you had to sacrifice a bit of margins this quarter and may be the case in Q4, but potentially, we could see that return in 2025. Just curious on your thoughts there.

Dave, even if you see the statistics in Canada, like the stats were low last year in Canada, but not that low. However, in our industry, whatever stat you have or you apply for permit, it doesn't translate into you actually have a bulldozer on the job site starting the job there.

But you don't have that. So there are a lot of builders that were on hold especially in British Columbia, Manitoba and Ontario because of the prices of housing and the market activity.

The reports are that the market activity in BC and Ontario, our two biggest market is heated up since the last interest rate cut. And we have noticed that quite a bit of activity in the last few weeks come up.

Usually, that activity translates in anywhere from four to six months from us for a delivery. But at the moment, we've gone from -- even one decision we had a crossroad for our company was in the last quarter that we had to make was when we were slow and we were fighting for our market share and our clients and getting more business, what do we do with our employees?

Do we do like in the past and lay them off and do work sharing or we keep them? Because we could smell something will be happening there.

And we made the decision by bearing the cost that affected our margin. That was one area, too.

And keeping our main core team working. And thank God, we did that because immediately about a few weeks ago, all of a sudden was let's fight, fight, go get more business to all of a sudden become, oh my God, how are we going to deliver this stuff right now?

Because we are in that, oh my God, how we're going to deliver. And we are ramping up production, everything.

And one thing was about -- I give my ops managers the credit. They asked me and we made the decision to keep people working and not lay anybody up because of shortage of work there.

Like we are in this industry, and I saw this year was a nasty year for our business. I've never seen it this slow for a long, long time there.

It was like way pre-COVID time we saw it there. And it was expected.

The market needed some adjustment, and it happened. And the effect of interest rate raises by so many points overnight doesn't help anything.

But right now, to answer your question, simply that we could see it within the next three months and it’s spilling into Q1 that we can see the busy time coming in there. And we're just hoping all of a sudden, we might get a crazy snow down for something in BC and Ontario that slows things down, but the volume is bulking for us.

And we're looking at Q4 and Q1 to be pretty prosperous for us right now. It's pretty exciting to see that actually right now.

Okay, that's perfect. That's my two questions.

I'll hop back in the queue. Thanks, Hadi.

God bless Dave. Thank you.

Great. Thank you, good morning.

My first question would just be on the new build automated facility. I believe it was one-third total cost reduction you're expecting from that facility from the prior robotic automation supplier.

With some of the alternative suppliers you are exploring, do you think you can still meet or exceed that degree of cost savings? Or is that too difficult to say at this early stage?

Yes, still the return on investment is around those numbers there, Andrew, yes.

Okay. Great.

And then just maybe for the outlook in 2025, if we do see an improvement in activity next year, just maybe your early thoughts on what you think might happen with gross margins. Do you think there'd be some room for margins to improve into the next year or do you think you need to remain competitive on the pricing side of things?

Right now, with the way the market is moving and the busy we check, we see the gross margin improving, and we see that actually moving into positive. However, we will not allow anybody take advantage of us because we're going to hold tight a gain on margin and stuff.

If we see somebody is coming after our clients or after our market share stuff, we are able to defend it because we are in an industry that they become very aggressive. At the moment you give somebody an inch, they take a mile, and that has always been against my principle.

We're going to defend our territories and our clients and our market share. And if we have to fight with the gross margin, we will do it.

However, at the moment we will end up figuring out how we're going to deliver products. And when we become close to our capacity to the limit, that is when the margins will go up to there.

Of course that's a natural way of doing business. And that will be the same for the competition to the -- and I could see it right now, the gross margins improving in the next quarter and the quarter after and going back to the normal, the way business was.

And I could see that happening to that. Yeah, absolutely.

Great. That’s helpful.

Thanks for taking my questions. I’ll get back in the queue.

Thank you.

Good morning and thank you for taking my question. First, just around how you're thinking about capital allocation.

I think you prepaid some of your term loan during Q3. It sounds like the planned investments in automation in terms of the actual CapEx outlay might be a bit slower now.

So I'm wondering how you're ranking your priorities here in the nearer term between additional prepayments, M&A and the NCIB. Just wondering how you'd rank those at this point.

Well, the allocation we have Russell for the actual automation and the Greenbelt and stuff, that is allocation we have made. And for the NCIB, that area we use the capital allocation from our day-to-day business.

And for repayment of the debt and software, that was a short-term thing because we had the money in the bank and for the interest rate, we save money and we gained capital on that. And even with the NCIB and software, in the future M&A, the deals we have with part of the deals would be for issuing shares for the company we are purchasing and stuff.

So we will use the investment in NCIB for those share purchase agreement and stuff. But for the actual capital investment for the machinery, the automation and everything there for the robotics and automation and stuff there, that's the capital we raise and we use some cash from that area.

Okay. Thanks on that.

And maybe just a question around input pricing. I think lumber pricing has firmed up a bit since the summer.

Can you talk about what you're seeing on that front and how you plan to handle that going forward, understanding your prior comments around gross margins. I'm just wondering how you plan to balance input pricing when you want to maintain or add market share with protecting margins.

Well, the market for the lumber, the prices have firmed up. So it's not as low as it used to be before.

It could go a bit higher. And then we just have to see what the tariff does with the new tariffs coming into effect with the lumber industry with the US and the new election in US and stuff, how it will affect the lumber pricing and stuff.

But at the end of it, really, we are a big fan of the lumber firming up and the price goes up. That will affect our revenue and our margin.

But really just we have to see what the market does, Russell there and how the market will come there. But we are a big fan of it.

You want the lumber to be around $750 and be steady and firm rather than going up and down like a yo-yo. Now we passed the cost.

So it doesn't have a major impact on us, but the better the lumber price is the better for us, too, right?

That’s great color. I’ll hop back in the queue.

Thank you.

Thank you, Russell.

Thank you, everybody. Have a wonderful day.

Thank you.