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, take it away.
Thank you, Jake. Hello, everybody, and welcome to Atlas Engineered Products inaugural conference call f``or reporting on Q2 of 2024 . I wanna just before I start, I wanna thank you all for being on this call and being a shareholder and being a huge supporter of AEP and our dream there. And I appreciate every one of you. And I was trying to prepare for today's meeting, and I was looking at our industry for all over 35 years of me being in this business and construction and supply business.
It's been an amazing, interesting last few years, and that we started with the COVID, and then after the COVID, the challenges we had with the COVID, and then the 2022 challenges with the housing demand and the supply shortage demand, and all the breakdown and all the business we went through, and the housing prices and all the crazy stuff. Then immediately after 2022 was over, we had the sharpest increase in interest rate in forever, I think. That all of a sudden, we went from zero to 5%, and it created a major slowdown in our industry. Yes, it was needed for the inflation and all the price increases, everything.
However, all of those events created a huge challenge for us that we were not just waking up every morning and going and selling trusses and floors and walls, manufacturing it and shipping it. We had to deal with a lot of extra challenges that they were out of our control. I am absolutely proud of our team, that how we learn to deal with the challenges and manage the business we had and in hand, and what we can control. As you can see, in the last few years, what we have done, we have created a very, very healthy balance sheet. We have consolidated our industry through the M&A, and we have amassed a huge portfolio of real estate for future growth in our business, and we're moving forward.
And then looking at the future, right now, the future is pretty bright for us. We have a huge shortage of housing, over millions of shortage of housing. They predict anywhere from 3.5 million to 5 million shortage of housing, and the deficit doesn't go down; it goes up. For example, last year, I think we only had 240,00 houses built. So the future on that area, it looks bright. There is the other one is that there is an indication with the market that the interest rate is going the other way and the interest rate is going down, and that is positive. However, change doesn't happen in the real estate overnight. There is an adjustment period for the real estate to sink in, and that is another huge positive sign for us.
Hence, we at AEP are ready. We are ready for the opportunity that we see coming on the horizon. Out of that, we did a capital raise a while ago, and we have a very, very healthy balance sheet, and we have taken initiative on setting up robotic plants in three of our major provinces and our busiest areas in the country. After that, the second phase, we will have robotic plants on most of the areas we have our factories, and we have paid the deposits, and we are full speed ahead to making the robotics happen, so we will have all the facilities done by end of next year. Actually, those three facilities. I apologize. Based on the bright future, we are taking huge initiative of making that happen.
Still, every day we are working very, very hard in a very challenging environment to create the revenue and create a healthy margin and create a healthy profit and a healthy balance sheet for our shareholders. And right now, I would like to hand it over to Melissa MacRae, our CFO, to go over the financial results. And after that, we have the analysts on the call here, and then we will open up the floor for the analysts to ask any questions they'd like to have. Thank you, and go ahead, Melissa.
Thank you. Welcome, everybody. I'm pleased to present some key information on our Q2 financial performance. Just a high-level overview. Revenues, pleased to say $ 15.2 million for quarter two, $ 24.2 million for year to date. This is representing a 34% and a 16% year-over-year increase. Gross profit, we hit $ 4.4 million for quarter two and almost $ 5.9 million for year to date. Q2 represents a 31% increase over the comparative period, while gross margins for quarter two were a healthy 29%. This represents a significant increase over our quarter one margins, which were at 16%. I do wanna provide some context into margin variation and revenues a little bit here. Typically, quarter one is our lowest margins, with quarter two improving. This year was even a bigger difference.
So as everyone knows, we purchased LCF last year, which is located in Northern New Brunswick, and they have a building season that's significantly more condensed than even our Ontario locations. And the swing in performance between winter and summer is more dramatic. The difference in revenues at this location from quarter one, which were about $ 1.75 million, to quarter two, which was about $ 4.9 million, is typical from their historical performance. During this condensed construction season, this location typically runs at capacity. Impacting profits and margins, though, is the need to keep key laborers and designers employed year-round, or risk losing staff that make an important contribution during the peak construction period.
This is why we are actually looking at implementing robotics at this location, helping them to improve their summer capacity, which will allow for them to push for new customers that do work during the winter, but also have summer sales. These customers are looking for us to provide them year-round support, and the robotics allowing us to increase that capacity gives us that year-round support, which in turn leads to increased winter sales, helping to improve performance during those months. Adjusted EBITDA of $ 3.1 million for quarter two represents a 50% increase from the comparative period, led by the increase in revenues. This is a high-level overview. I'm happy to answer any further questions as we move on here.
And you can find more of our results in on SEDAR or on our website in our financial statements and Management's Discussion and Analysis document. I'd like to open up the call for questions. Operator, please provide appropriate instructions.
Thank you, Melissa. So at this time, we'll be conducting a question and answer session for our analysts. So please raise your hand, if you have a question, and we will address each analyst in order. And if there's any outstanding questions at the end of this call, the company will be happy to take them by email. So, the email address will be info@atlasep.ca. Again, info@atlasep.ca. And for the analysts, if you have questions, you can just click the Raise Hand button so then I can see that.
Thanks. Good morning, everyone.
Good morning, David. This is David from Cormark Securities.
Yeah.
Thanks.
Thanks, operator. I appreciate the commentary in the MD&A and the press release just on the conditions in twenty twenty-four being tougher because of the interest rate environment. And it's no surprise that organic growth, if we look at that, has been negative for the last few quarters or so, and that makes sense. But I am curious, you know, there's a lot of moving parts within the revenue line item, whether it relates to materials and pricing, but just wanted to drill into the volume environment that you're seeing in twenty twenty-four, whether that's by board foot or plant utilization. So commentary around that would be appreciated.
Okay, Dave, thank you for that question. Number one, it's actually quite interesting because of lumber pricing has such an effect on our top-line revenue. Sometimes, and right now, the lumber being as cheap as it is, it's not a true reflection of our total revenue and total growth year over year, but in terms of the board foot measure, we do measure that in different plants and operation we have, and for example, in BC, there's been a major slowdown. Like, although the starts are up, but still there's been a major slowdown on the housing, and people apply for permits, and they have everything ready, but it doesn't mean they have dug the ground, so there has been a slowdown of that, and there's been a lower board foot production.
However, we've had an amazing organic growth in BC as of finding out what the market is, and the new construction is slow in the housing. We got really aggressive, and we have gone across the country and through our BC branch, and we are supplying a lot of apartment blocks that they are built for rental, and they use engineered wood products, and because of our buying power at the moment, we buy mill direct, so we compensated the volume by selling the engineered wood product and at a healthy margin, so the board foot manufacturing in the factory is down, but the actual revenue, we kept it steady in BC because of the organic growth we had, as presented, on the engineered wood product there.
And out of it, we have learned that right now, once the market turns, not only we are a major force in the engineered wood products for the apartments and a bigger project, we are still have that major force in the housing market too there, and we have learned from it there too. But in general, all across the country, although the starts were year over year being up about 10%, but the actual start, there is a misconception in the industry. What is the start when you apply for permit is totally different to the timing when a bulldozer goes on a job site, and they dig a foundation, and that's the one there is some uncertainty going on there. And, of course, right now, the Bank of Canada indicate the interest is gonna down, going down.
Now, all the bargain hunters, they're gonna wait before they buy anything till they say, "Oh, no, the interest is gonna go up." That's why even in the last couple of weeks, the application for mortgage or the last month, the application for mortgage has gone up quite a bit, and most people are applying for a variable mortgage. So it's a little bit of a adjustment and a sitting-on-the-fence time right now, but it's when to jump. But I looking forward because I've been in this business for long term, and I know there is someday you wake up in the morning, and there is panic setting there because everybody jumping off the board all of a sudden together.
That's helpful there, Hadi. And then maybe my next one's just on the wall panel business.
Yeah.
I think you guys announced some awards this year.
Yeah.
It does take customers, you know, quite a bit of time to adopt those products. But I guess when you're looking at your quoting activity, how much of that is now for, quote-unquote, the entire package versus just roof trusses? Or have you noticed a big shift in how your customers are requesting business from you guys?
Yeah, we have noticed a big shift, and we have noticed that they are way more receptive, and they're asking way more questions about it, and they want prices. However, our product is not an easy thing that you can look at a computer and say, "Okay, this plan," and it will take about five minute, and then, "This is your price." We are giving a lot of square footage, approximate budget to the clients, and then it's the same. They are going through a period of doing cost analysis and doing everything because we are a little bit slower right now, so there are more substrates available. So they are cost comparison and to see whether this makes sense, this makes sense, or everything like that.
There are some projects we're doing in certain areas like New Brunswick or even in Michigan, in USA, and certain areas in BC that we are. We have chosen, and we're doing wall panel. There are customers who are ready, and they know the cost difference, everything. Plus, their project is based on timeline, so they don't have the time to wait for the substrates to show up, frame to show up, everything. They need it done yesterday, and they have done the calculation versus how much money you're gonna save. If even if you're paying $ 10,000 more or 2% more for the wall panel, what you save into finishing the project and turning your cash over and turning your lockup over, it costs more money. So it's like everything else. The...
Our industry is changing, and it's all due to the labor changes and the labor shortage and the demand and the increase in demand. But there is. We are getting educated. We are getting educated to supplying the product, and the clients are getting educated into running their projects and buying the product. So we are going through that growth period at this moment, and one area you have to be careful. Like, you can go and pick up all you can get through the growth period, but growth period is that you don't have all the knowledge. So although we have increased our wall panel, the business significantly more in our book, significantly more this year, in the eyes of investors or other people, nothing's ever fast enough. They want it to get done yesterday or some of my staff.
But in my opinion, when you're doing a $ 800,000-dollar, a $ 1 million-dollar project, one small mistake because of what you're learning period, it could cost you thousands of dollars, and we do not wanna do that. Plus, you cause a bad taste in the client's mouth. So we're going through that experience of learning as we go along, but we are learning very, very fast, and we're becoming sophisticated about it, and that is the future. A few months ago, politician talked about it, then they forgot about it, but really, truly, that is the solution.
Pre-component manufacturing to the construction, that is the only way we can answer it, and that is three years, four years away, and we are. You will see from now on, every move we make, like we did in New Brunswick, we were interested in the wall panel manufacturing and their whole production facility. I ... That was amazing, but what is amazing, we have over thirteen acres of property and warehouses there. Everything we knew, we do now. We need land, we need warehouses, everything, and more robotic, because that is the future, pre-component manufacturing, and that's all we are trying to do. Set up our footprint in the country, set up our sales force, our design force, everything, to meet the demand in three years, five years, because that is where the our industry is moving forward. That is the future.
Great, and if I can sneak one last one in, just on robotics and the future. I think I saw a press release a couple of weeks ago, just from House of Design, that they're now beginning to offer robotics as a service. That's a new term for me.
Yeah
But is that something that you guys could pursue to expedite your robotics initiative, whether that's expanding it to your existing facilities or when you do acquire businesses rolling out robotics there?
To be quite honest, I'm probably the first and biggest and only client they have in Canada, and I haven't figured out yet what they're talking about. Because something just because it's like, some of the politicians, they wake up in the morning, and they say something, that they mean something, and at the end, what will happen, what they find out is for companies in Canada, that we are part of it, but there are a lot of companies that the owners are older, and the initial investment, like we just did, we have the power. We just did. We have a great follow in the market, and we just did a capital raise. They can't. In order for you to do it, you have to go borrow millions of dollars from the bank at the, these days, interest rate.
It's not just a robot you're buying. You have to change your whole factory. You have to change your whole building, your environment. So there are a lot of investments involved that the smaller companies in the country that consist of the majority of the truss manufacturing plants in the country are in that place. So... And then they look at the return on investment. So they're trying to do, work out some magic around that. So basically, all they're gonna do, they will make a deal with the lease companies that are owned by a private equity firm, and they will lease you the product, like the machinery. Like, it's always been like that in our industry. You can't borrow the money from the bank at 5%. You go lease it, and you pay 14%, 18%.... At the end, it's not free.
You're gonna pay for it. But then as an owner, they look and say, "Okay, I'm 60, 65, 70 years old. Do I wanna spend another $ 20 million bucks?" That there are a couple companies in the country come up, and one of them is AEP, and then take those companies on. No, it's quite an interesting time in our industry at the moment. Times are changing right now. There's lots of thinking and lots of overthinking and lots of planning. How do we move forward?
That was a very helpful caller there, Hadi. I'll hand the line over to... and hop back in the queue. Thank you so much.
Thank you, Dave. God bless you.
Thank you, David. So the next question is from Russell Stanley from Beacon Securities. And Russell, your microphone has been unmuted. You can go ahead.
Steve, he's still muted.
Can you hear me now?
Yes.
My apologies for that. Congrats on the results, and appreciate you hosting a conference call. Hadi, you mentioned the U.S. market a little earlier, and, you know, following up on that contract when you announced back in May, around some projects in Michigan. Just wanted to dive in a bit deeper on that and just, you know, see what you can say around the U.S. market, how much of a priority it is for penetration, and how you're approaching those potential customers, how competitive that market is for you.
Thank you, Russell. Basically, every M&A we have done, and if you look at it, we have an eye on close to the border, close to that line, and then moving into U.S. because we consider that as one of our market. And, we have a great technology, and we seem to be pretty good at doing what we do, and the U.S. clients like our service and like the way we manufacture our products for them and stuff there. So we... The moment we saw it, and of course, the thing about it is we need to be ready for it. We need to be ready to deliver and design and deliver. So we started that after the COVID.
We started going back into one of our best markets is in Michigan and those areas, and then we are gaining ground there. And right now, the next level we are working on is, like Melissa mentioned, with LCFs, we are over capacity. We are busy there, and we can't just expand it because we let our clients down. So now, robotics gives us a chance by having a robotic facility and expanding our manufacturing facilities. We are looking at... Because we have an office and a place actually close to the border to Maine in Edmundston, and we're going to start expanding to Maine, and then from this side, we're gonna expand from Michigan, then go to New York and everything. So really, once we look at Canada, then we look at the boundaries with U.S.
We look at it as part of our market, and we're training and we're developing more of our sales force to cover that area for us. But one thing we do, we are not gonna put all our eggs in basket for U.S. and all our eggs in one basket in Canada. We're just going to treat it as it's just part of our business, and we're gonna cover it. And then, slowly, slowly, we increase our manufacturing facilities. We're gonna do that in Clinton with fully robotic facility that is over and above what we have in Ontario and any other area we do it, and train our sales force, train our design department, train our manufacturers to just expand on market. So when you look at it, at the end of it, then our market is not Canada wide.
It's Canada wide and all around the U.S. border. Then after that, once we get a good, healthy market share, then we figure out what to do with M&A in United States or whatever. But at the moment, we just look at it as the market, and on a steady, proper growth, we just set up our facilities, and then we keep growing and growing, and that's what we are looking at, Russ, and the U.S. market is great for us, and the other thing is, because of the price of the wood and the dollar exchange, everything, so it's always been a pretty good market for us there.
That's great. Thanks for that, color. And you brought up M&A in the US and just wondering, given the investments you're making in automation, and then... And they're underway, wondering how your acquisition criteria now compare to what they were a year ago. I mean, you highlighted the US as a geographic option, but just wondering what are, what else, you know, what other criteria you're looking at, and has that changed at all?
Since the automation and the implementing of robotic stuff there, that has added another exciting element to every M&A we look at in terms of the geography, the demand, the land, the capacity, and everything there. Right now, if we go phase by phase, we have a few more location and a few more opportunities in Canada. We're still growing in Canada. We have not finished. You never finish, but we have not finalized the first phase of our M&A in the country, in Canada, yet. First, we are concentrating huge on the M&A and the expansion in Canada, and of course, now by robotic, then it's added a huge element for us. In the past, if we wanted to get a factory here and then another plant, we need two hours or 150 miles.
Now, we look at getting one and then having a major robotic and then have an outreach of 12 hours dry. Because you can do that with the cost saving we get from robotics and the RaaS, then you can manufacture more in a 24-hour. It's not an 8-hour or a 16-hour plant anymore, it's a 24-hour robotic manufacturing. So it's really a, I guess I could say it, every time you think you learned it, like in all my years in business and all of the management and all the team, we have everything. Every time we think we know everything in our industry, with the robotic, there is an area open that is the you don't know, that you don't know area, and that's where the possibilities are magical, and we are working on that.
At the end of it, though, we are concentrating on our country in Canada, and we ship—we're going to be shipping significant amount of products to U.S. Now, if there is something comes up from United States, that is great. It's an amazing deal because we only pay three, three and a half to four times EBITDA here. If something comes in that range and it's, it stares you in the face, ticks all the boxes and there is, this is the best deal out there, we will jump at it. Because at the end, my job is to always deliver the best value for the shareholders and for the company. And if something like that comes up, trust me, we will look at it.
But right now we still have a lot of growth to do in Canada. We have a lot of opportunities and a lot of growth in Canada. Canada is going to be exciting market for our industry within the next five years because of... They say it's three million housing shortage, it's five million, and it keeps adding up to it. And all the politicians talking about it, but they haven't done anything because there is a change. It could be a change of government, or it could be something else, but future is very bright in Canada for the housing and construction. We have a lot of room to grow in this country, especially we adding the organic growth of the wall panel and the floor cassettes, everything. That is where the most amazing times are happening for the manufacturing facilities.
That's great, color . Thanks very much. I'll hop back in the queue.
Thank you, Russell.
Thanks, Hadi. Thanks, Russell. And so the last question is from Andrew Semple, Ventum Capital Markets. Andrew, and enable your microphone, and then you may unmute yourself momentarily.
Great, thank you. Good morning to those on the West Coast. First of all, congrats on your first public earnings call. We appreciate the additional opportunity for transparency and disclosure. My first question here would just be on engineered wood products sales. That was a product category that was exceptionally strong this quarter. I believe it's a new quarterly record within this product category. You mentioned earlier that you went out to bid for apartment projects and that helped with engineered wood products sales. I was also wondering if maybe there had been some progress on revenue synergies with LCF, given this was a product category you're hoping to expand on some of those East Coast markets. Could you maybe expand on that?
Perhaps tell us where things stand on achieving revenue synergies with the LCF acquisition and engineered wood product sales, specifically?
Yes, absolutely. Thank you, Andrew. So even though LCF facility in New Brunswick is an absolutely some area that we really learned a lot from, from seasonality of the winter, and you don't panic for one quarter. Like, our business is a marathon business. It's a four-quarter in a season business, and it's a long-term plan. But they actually, they were worried a bit because of the capacity of picking up a new client, but if you notice or Melissa had the numbers, during the wintertime, we actually did a good number through LCF, and that was because of our engineered wood product and some of the multi-families we did in certain areas in New Brunswick. Because some of those five-story, six-story apartment blocks, they do not, in certain areas, they do not use roof trusses or floor trusses. They use engineered wood for flat roof.
So we ventured into that market, and we did a significant volume in there. However, you need to walk before you run, and it was new for them, and we haven't even had LCF at that time for one year, and they were learning from it, and they needed to get confidence into design, the sales force, and the delivery part. But right now, they are looking at it, and then we are looking at expanding that market for the next year. And that's one significant area for us there. And even for all of us here, because for years you always become a truss manufacturer, and that's all it's been. You wake up, you eat, breathe, and you manufacture roof trusses and floor trusses.
But right now, all of a sudden, we say, "Oh my God, we are actually a major supplier, engineered wood product and, engineered beams and all of those products." We are becoming major in the country in that too there. And now it's up to us, how are we going to cash into that opportunity? And then we are working on that too there, to become a force in that area. But sometimes, you know, business, Andrew, is, what you get used to for years and years, it doesn't change overnight. Like, it will, it will take time. I remember when I first started selling engineered wood product around early year two thousand and five or something it was.
It was a nightmare trying to talk a contractor to not use 2x10 and 2 x12 and go with the engineered wood product. It's amazing product, it's cheaper or the same price, and it's great for the environment, but it took years before you could change their mind. Now, nobody thinks the other way, so it will take time, but we see a huge opportunity in that product for us. The only... , and we have to just keep pursuing it right now and to get there.
Great. Sounds like you had some good first steps, but still plenty of room to run, which is great to hear.
Absolutely.
Um-
Absolutely. Sorry, this one thing we always forget to, we've been doing this for long, long time, but with consolidation and M&As and everything, this has just been five, six years. We're still babies at it. We are learning, but we are fast learners, too. And then the last few M&As we have had, they have been very, very successful. We added the organic growth, and we are getting bigger, and people are taking notice of us. So it is all the baby steps, but I'm amazed at the area of you don't know, you don't know. How much we are learning and how much how great the opportunities are for us.
Great. Great.
Thank you.
My second question here would just be on gross margins in the quarter. It was good to see those come in where they were. I believe just a few months ago, the management team was cautioning about margins potentially remaining, you know, softer like we saw in the first quarter for the Q2 period. I know this is your first quarter with LCF for the Q2 period. Were you perhaps being a bit cautious with the margin outlook, given you haven't operated LCF during the second quarter previously, or were there some fundamental shift in market conditions that allowed you to capture some additional margin opportunity, that maybe you weren't anticipating a few months prior?
It's actually in terms of margin this year and aggressiveness in our industry. This is not a good time. This is not for the faint of heart. People in business at this time, because the market is very, very competitive. After the increase in interest rate, and of course, we had such a crazy demand in year 2022. Nothing ever stays up like that. So most of the housing starts, everything went down, and the market is very, very aggressive. The competition is very aggressive, and usually that means lower margin, cheaper product to sell. The lumber has been, is the cheapest ever I've known. So it is a huge challenge, and I am absolutely proud of our team there, how they have been able to deal with the market condition.
Because trust me, it's not nice fights out there, but we are fighters, too. We have been able to deal with the market condition, and we have been able to make a healthy profit, and we will continue doing that. We're going to be moving forward this year and maybe even next year. We have learned something new. We have a huge power in buying power and a sales force and design. We're gonna remain being aggressive and defend our market share and go after extra market share, and we're going to manage what we manage our margin at the bottom line. And maybe even we will not look at the percentage of the margin. We will look at how much, how many thousands of dollars we're gonna make on each job, and then we're going to increase the...
We're gonna increase the EBITDA, and we're gonna increase our revenue, whichever way we can. And what I like about it is that's the area we control. We control our efficiency. We control what we can sell. It's our choice to say, "Yes, we want that job or not," and it's our job to control the efficiency, how we manufacture it, how we deliver it, how many pennies we save, and we control how we buy it, and those are within our control. Everything else, interest rates, competition, anything else, we can't really control that. What we started to learn is what we control within our environment and our business. And last Q2 was an amazing indication how we can produce it.
It was a great confidence booster for me and for the team that, hey, we have the power and we control it, and we're going to maintain becoming aggressive and more aggressive in the marketplace. We are not gonna let allow competition come and just take our clients away or even our market share away. We're going to defend it with our life.
That, that's very helpful. Appreciate the color, and I'll get back into queue. Thanks, Hadi.
Thank you.
Thanks, Andrew, and thank you, Hadi. So there's no more analyst questions. That means this marks the end of our question and answer session. So for those of you who may still have questions, we'll be available post-call to answer any of the questions you may have, either by email, phone call, or go to our website, and then on the bottom there, you can actually submit your question directly to us. And yeah, thanks to everybody for joining the call, and at this time, you may now disconnect.
Thank you. Thank you, everybody. Have a wonderful day.
Thanks, Hadi.