Earnings Transcript for CTXXF - Q3 Fiscal Year 2024

Grant Howard: We're going to get started. I'm Grant Howard, and thank you for attending today the Q3 Webinar, Financial Results Webinar with CEMATRIX. We're going to get straight into this. I would like to introduce Jeff Kendrick, CEO; Randy Boomhour, the COO; and Marie-Josée Cantin, the CFO. And just before you start, Jeff, just as a reminder, folks, at the bottom of your screen, you'll see the Q&A button. Any questions that you have, please submit them through that. And, Jeff, I'm going to hand this over to you now.

Jeff Kendrick: Well, thank you, Grant, and thanks for managing this today for us. I wanted to welcome everybody. Randy, MJ, and I want to welcome everybody to our third quarter review of our third quarter results and the year-to-date results. And, of course, we all know that we had previously disclosed that there was going to be a delay in revenue this year, but as we go through this review, there're certain things we want you to remember at the end or the thing -- the key things that we'd like you to keep in mind as we go through this presentation is

Marie-Josée Cantin: Thank you, Jeff. Let's go through our key financial metrics for the third quarter. Starting with revenue, as mentioned earlier on this call, our revenue was impacted by several project delays. Revenue for Q3 was $10.1 million compared to $20.4 million in Q3 2023, a 50% decrease, and $25 million year-to-date versus $33.7 million in 2023. This is a 26% decrease. Moving on to gross margins. Gross margin as a percent of revenue has improved significantly, 27% in Q3 versus 23% in 2023. This is a 4% gross margin increase. 26% year-to-date versus 19% in 2023, a 7% gross margin increase. This leads to operating income of $700,000 in the current quarter versus $2.5 million in 2023, which was our best year ever, if you remember. We reported a small loss of $100,000 year-to-date versus income of $0.4 million last year. Adjusted EBITDA was both positive for the quarter and the year, $1.4 million in Q3 versus $3.2 million in 2023, that's a 56% decrease, $1.8 million year-to-date versus $2.1 million in 2023, a 14% decrease. Cash flow from operations before non-cash working capital changes also posted for the quarter the year. $1.3 million in Q3 compared to $3.1 million last year. That's a 50% decrease. And $1.7 million year-to-date versus $2 million in 2023, which is a 15% decrease. Cash on hand at September 30th was $9.9 million, up $8 million from September 2023 when we had $1.9 million in the bank and up $6.6 million from December 31 cash balances. Can we go to the next slide? Thank you, Jeff. So, let's look at our financial trends. Upper-left corner is our revenue per quarter. Still solid at $10 million, as Jeff mentioned. You can also visually see our seasonality. The construction industry is largely dependent on the weather. So, we tend to be slower in the first few months of the year. On the lower-left corner is our gross margin percent. As mentioned earlier, we are seeing significant improvement as we are performing well on-site. On the upper-right side of the slide, we have our borrowings per quarter. It has come a long way from 2020. Just Jeff mentioned it, but finally you can see a summary of our LIFE financing. We've raised in July, we issued 14.7 million shares with 8.2 million warrants for $6.6 million gross proceeds. If you'd like more information, you can see our documents on our website or you can go to SEDAR+. Grant, I'll pass it back to you for questions.

A - Grant Howard: Thank you. And a reminder, submit your questions to the Q&A button at the bottom of your screen. We're going to start with a series of questions from Russell Stanley. And just so you folks know, Russell is the Managing Director of Equity Research at Beacon Securities, and he also covers and has written about CEMATRIX many times. So, Jeff, you were talking about the election results. In fact, Russell's first question is, whether or not you saw the risk on tariffs? And does the new administration also represent some notable opportunities? I know you talked about it, but perhaps you can expand a bit more on that.

Jeff Kendrick: Yeah. I'll just reiterate what I've already said is that we don't expect to have any negative effect on our business. In fact, it's important to note the first thing is the tariffs will not affect us because we're not selling any materials across the border. So, if they should come into place and have a general overall effect on all of Canadian products, it won't affect our business in that regard. And then secondly, a lot of the infrastructure spending that the Biden government had talked about, the replacement infrastructure, that is really in the trillions. They'd approved $6 billion a number of years ago, but a lot of that is not hitting the streets. And if it has, it hasn't been related to our business. We believe that Trump will actually move that forward. So, it should mean more business for us in the future. We don't count on it in our current forecast, but we do hope that we will be a positive effect on our business, not only in the current year, but in the future years to come.

Grant Howard: I'm sure Russell is looking into 2025, which project types or applications are you seeing the strongest demand for?

Jeff Kendrick: We're seeing strong demand right across the board. And so, I think that highway underlays, bridge abutment backfill projects, tunnel projects, we're working on a number of those in design right now. And, of course, that small to medium sized business that I talked about a little bit earlier, this is a big part of our business. Generally, represents sometimes 30% to 40% to 50% of our entire business, and that's where projects that are less than $1 million, generally, they're traditional projects, traditional things like we do, whether it's backfilling of pipe lines or insulation of shallow utilities or backfilling of abandoned utilities and/or road construction and things like that. So that is a big part of our business, and it continues to grow on a regular basis.

Grant Howard: Also his next question is and since you're talking about project size, understanding that project sizes can vary significantly, what size range do you find it ideal to target? Larger projects boost the top-line more, but delays can be more disruptive to reported financial results, while smaller projects can offer higher margins. How are you balancing those factors going forward?

Jeff Kendrick: It's a good question. And we focus on both. Okay? But it's important -- because it is important to grow both ends of the business. The large -- as mentioned, the large projects, of course, add significant amount to the top-line, but the small to medium sized projects are a strong base business that we continue to grow that are less likely going to have project delays and things like that. So, again, the short answer is that we focus on both.

Grant Howard: [Technical Difficulty] it still looks very healthy. Can you talk about your sales process and pipeline and how you work to win contracts?

Jeff Kendrick: I missed the first part of that question, Grant.

Grant Howard: It was, the backlog still looks very healthy. Can you talk about the sales process and pipeline?

Jeff Kendrick: I'll pass it on to Randy. Randy, you feel like taking on that question?

Randy Boomhour: Sure. Yeah. Absolutely. I mean, it builds on a lot of what you've already described, Jeff, right? I mean, we kind of have two different ways we try to win work as we would chase the bid, which is we're looking for public procurement projects. And then, the other one is a more relationship or strategic-based selling where we're actively working on a business development perspective to create connections and relationships with general contractors or designers that would specify cellular concrete and would maybe award directly to us. So, we're doing both things. And whenever we have extra resources to add, we add first in the sales department because we understand the key to growing our business, we have to grow the top-line. We've gotten better at managing margins either by bidding more effectively and executing more effectively in the field and targeting our margins for the situation, but we're trying to do both, chase the bid and strategic selling.

Grant Howard: Last question from Russell, so far, you've noted in the past that the Canadian market has been slower to adopt cellular concrete than the US, and it looks like an increasing share of revenue is coming from the US. Can you talk about any recent inroads you've made in Canada with respect to product adoption?

Jeff Kendrick: Randy, would you like to take that one on too?

Randy Boomhour: Yeah, I can give it a go. So, it has been slower. I think the way we actually kind of articulate it is we just say the US is 10 to 20 years ahead of Canada, and the US market is just significantly bigger and has advantages of concentration. If you look at the amount of infrastructure and population that exists on the East Coast or the West Coast, you just have a much bigger market to pursue and you can make bigger inroads. In Canada specifically, we've really focused on trying to get the requisite approvals from the different departments of transportation in the provinces. We've made progress recently in Quebec to get on the MTQ's approved product list. Recently, in Ontario in the last couple of years, we've gotten approval on that. And we made some changes to our selling force in Ontario and Quebec to try to access those markets. So again, we try to focus on the markets where you have the biggest population centers because there you're going to have the biggest infrastructure where our product has a lot of applications that make sense. So that's really what we're trying to do in Canada to improve product adoption. Jeff, anything you would add to that?

Jeff Kendrick: No. I think you did a great job of explaining it, Randy, and thank you for doing that.

Grant Howard: Next question. When there is a customer delay, are there any penalties to that customer? It seems like when you set aside capacity, in other words, you're mobilizing equipment, and then they all use the term mess up, that there should be a cost to that customer.

Jeff Kendrick: Unfortunately, there is no cost to the customer. And in order for us to continue to do business with customer, we can't really charge them a penalty. Now, fortunately, we find out the delays before we mobilize. So, there's really -- there's an administration cost and there are some general costs from carrying people for periods of time where -- when those projects should have been going and they would have been more utilized. So, there is a cost to the company, but generally, it all balances out. And it's unfortunate that the delays happen. Where it does affect the general contractors that we work for is, sometimes they can get into penalty situations. And because of our ability to speed up our process, we can help them gain back some of their lost time if they have delays. And we've done that many times in the past. So, it's something we can contribute to the whole business or their business and their projects. And because of that, we do a lot of repeat business with a lot of customers that have faced the same situations.

Grant Howard: Fiscal '25 already anticipated to be busy with projects, and now all the delayed projects from '24 being pushed into next year, do you have the manpower and equipment to execute on all the projects?

Jeff Kendrick: Randy, would you like to take that one on?

Randy Boomhour: Yeah. I mean, the simple answer is yes, right? We have a lot of additional capacity in our equipment to do even more revenue than what we've got scheduled for 2025, and we've been planning to do this work from a crew and manpower's perspective for a while. So, we believe we have all the people and equipment that we need. And then, to the extent that we need more manpower, we have the ability to get extra help from the general contractor or to train up new people in time to do it. So, we feel very confident that we've got the right crew and equipment in place to do that right.

Grant Howard: Can you explain how it is that gross margins are up in the face of the revenues declining to the extent that they did?

Jeff Kendrick: Well, there's a couple of reasons. I'm sure Randy has some other ideas on this too. But generally, there's -- one of the things that we've tried to explain in the past is when we bought the two US companies, and particularly the second one, there was some in-place projects that had lower margins associated with them. So, first and foremost, we were working through most of those projects. There's a couple left that are still being done, but -- so that's why you're seeing a general increase in the overall margins of the company. Secondly, we're focusing on that small to mid-sized project level where we are getting better margins. And then thirdly, just overall, just managing costs within the projects that we do and pricing better on the regular jobs that we do also as well, is also contributing to that margin level.

Grant Howard: Can you comment on market share? And from that question, I'm presuming the intent is to get an understanding of how CEMATRIX compares in the Canadian market and the US market versus your competitors.

Jeff Kendrick: Well, in Canada, we're generally the only supplier. There are a couple of small players in -- one in Toronto and one in Southern BC, but they don't really compete in the markets that we're in that much. In the US, there are a number of different competitors. There's hundreds of small mom and pop operations and -- that do small projects like flooring systems and smaller roof decks. So, with all the machines, they can do two to five cubic yards an hour. Our equipment does 100 to 250 to 300 cubic meters an hour. So, we're in a different level of business. There are a number of competitors in the larger project business that we compete with. As mentioned in the past, a couple of them are out of California. There's one in the northeast and -- or a couple in the northeast. So, they are out there competing with us on the general business. As to market share in the US, it's difficult to determine where we stand, but we are one of the leading suppliers on the large projects and the medium sized projects business. But because there's no overall knowledge of what the overall market is, it's very difficult for us to determine what our actual market percentage is in the US. And, again, we're the only public company as well, so it makes it difficult again to generate any comparable information.

Grant Howard: Halfway into Q4, can you give us some idea of progress in Q4? And do you anticipate it will be similar to Q3?

Jeff Kendrick: That's what we said in our press release and nothing has changed from that.

Grant Howard: I see your bread and butter is in roads and highways. With cellular concrete used as a base, what inroads are you making into this segment while road construction continues as it is?

Jeff Kendrick: Randy, you want take that one on?

Grant Howard: Well, I guess what the person is getting at here is what part of your business is of road and bridge construction, I guess?

Jeff Kendrick: Well, before Randy takes it on, if he has any further comments, is that this is one of the areas that we believe we're going to see the most growth from in the future. It will be bridge abutments and overpasses as well, but really the roads, and we're seeing that in the US where it's growing quite dramatically, and we expect the same thing to happen to Canada in the foreseeable future. Randy, is there anything else you wanted to add to that?

Randy Boomhour: No?

Jeff Kendrick: Yeah.

Grant Howard: [indiscernible] It's the same person that is asking, no pun, have you made any inroads recently into Ontario and the Quebec jurisdiction since the last webinar?

Jeff Kendrick: Randy?

Randy Boomhour: Well, the last webinar was only three months ago, so we have not done a road project in the last three months in those two jurisdictions.

Grant Howard: Question. Has the South Carolina project started?

Jeff Kendrick: It's the North Carolina project. If you didn't know, that is one of the delayed projects that is expected to start early in the New Year.

Grant Howard: With that, I think we have it covered. Any closing comments?

Jeff Kendrick: I just want to reiterate what I said at the beginning. Again, thank you for all for joining us today. And key things to remember

Grant Howard: Thank you, everyone, who attended, and we will see you in a few months. Have a good Christmas. And if you're south of the border, happy Thanksgiving.