Firan Technology Group Corporation

Good morning, everyone. My name is Rain, and I will be your conference operator today. I would like to welcome everyone to the FTG Q4 2021 analyst call. All lines have been placed on mute. There will be a question and answer session following the call. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw a question, press the pound key. Please note that this call is being recorded today, February 10, 2022, at 8.30 a.m. Eastern Time. I would now like to turn the call over to Mr. Brad Bourne, President and Chief Executive Officer of Ferran Technology Group. Mr. Bourne, you may proceed.

Thank you. Good morning. I'm Brad Bourne, President and CEO of Ferran Technology Group Corporation, or FTG. Also on the call today is Jamie Crichton, our Chief Financial Officer. Before we go any further, I must caution you that this call may contain forward-looking statements. Such statements are based on the current expectations of management of the company and inherently involve numerous risks and uncertainties, known and unknown, including economic factors and the company's industry generally. The preceding list is not exhaustive of all possible factors. Such forward-looking statements are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied by forward-looking statements made by the company. The listeners caution to consider these and other factors carefully when making decisions with respect to the company and not place undue reliance on forward-looking statements. The company does not undertake and has no specific intention to update any forward-looking statements, written or oral, that may be made from time to time by or on its behalf, whether a result of new information, future events, or otherwise. Well, 2021 proved to be a lot more challenging than we expected when we started the year. I will explain some of these challenges later. But I do want to say that again this year, I am so very proud of the efforts of everyone at FTG in doing whatever it takes to overcome these challenges. In the face of such a difficult year for the aerospace industry and so much adversity, everyone buckled down, worked together, and did what was needed to be done to get us through the year in good shape. I am sure that this team is up to any challenge we might face in future years. Before I get into details, let me summarize some key accomplishments from 2021. FTG had forced sequential increases in quarterly bookings through the year as the commercial aerospace industry began to recover from the COVID-19 pandemic. Fourth quarter bookings of $23.6 million are up 42% over Q4 2020. FTG increased its net cash on the balance sheet to $17.9 million, an increase of $5.3 million in 2021, again showing the cash-generating nature of the businesses. Over the past two years during the pandemic, FTG has added $15.7 million in net cash on the balance sheet after $16.8 million investments in R&D and capital equipment. FTG achieved EBITDA of $9.6 million in 2021. FTG remained profitable in fiscal 2021 despite challenging conditions in the commercial aerospace market, currency headwinds, and COVID-19 operational impacts. And maybe most importantly, FTG accessed government support in Canada, the U.S., and even China in 2021 to enable us to maintain our workforce and position FTG to recover quickly as the demand rebounds in the aerospace industry. In addition, during the year, FTG extended the existing $20 million U.S. dollar committed credit facility with their primary lender to July 2026 with improved financial terms. In technology, FTG installed and commissioned the Averatech semi-adaptive circuit board manufacturing equipment in our circuits Fredericksburg facility during the year. Activity has been initiated with over 10 customers to develop this process to address future industry demands. This is a longer-term R&D initiative, but one we consider strategic. This manufacturing process is definitely more environmentally friendly, and the end product should have improved signal integrity. Also during the year, FTG was awarded a contract value to $3.7 million from the United States Defense Logistics Agency to provide electronic assemblies to retrofit airborne radar systems on U.S. Armed Forces aircraft. This work will be performed at the FTG facilities in Chatsworth, California. FTG Aerospace Chatsworth, which had maintained an engineering office in Dallas-Fort Worth since the acquisition of PhotoEdge in 2016, closed this office late in 2021 and moved the function to his Chatsworth site in California, reducing the site's facility costs in 2022 and beyond. And in Tianjin, we received a significant new customer approval from a Tier 1 aerospace company, opening up significant new revenue opportunities for the future. Jamie will talk about the financial shortly, but I'd like to highlight what we are seeing in future market demands. To state the obvious, the COVID-19 pandemic deeply impacted air travel in 2020 and 2021. This, in turn, has impacted airlines, which then flowed through to hurt the aerospace industry. But we are seeing a positive trend develop. In Q4, U.S. air travel continued to rebound. It is nearing 90% of pre-pandemic levels. And we are seeing the easing of travel and border restrictions. So barring any unforeseen setbacks, we anticipate an improving market going forward. There are many predictions regarding the length of the time to recover, but all of them indicate or forecast a strong commercial aerospace market in 2022, even if it is not quite back to pre-pandemic levels. Our customers are mostly showing return to sales growth in their latest quarters. When you look at aircraft deliveries, Airbus had reported a 35% drop in deliveries in 2021, but then achieved an 8% recovery, a 35% drop in deliveries in 2020, but achieved an 8% recovery in 2021. This does still leave them about 29% below 2019 levels. At Boeing, it is more dramatic, as they also had the challenges of the 737 MAX to deal with. Their 2020 deliveries were down 80% from pre-pandemic, pre-737 issues. In 2021, their deliveries are up 116% versus 2020, but this still leaves them down 58% from their high in 2018. Both companies have announced production rate increases for 2022. And with our increased bookings, we should see revenue growth, at least sequentially going forward. I've also looked at results from defense contractors. and for example, Lockheed, the largest defense contractor, reported a 4% revenue growth for fiscal 2021, and Northrop Grumman reported a 3% growth for the same year. The defense market is government-funded, and it appears well-supported in the near term. At a higher level, President Biden released his defense budget request for 2022, and it had some growth, so this market should remain strong for a while longer. Looking at the longer term, Boeing's Most recent 20-year forecast for commercial air transport, lower than last year, does show growth beyond the two- to three-year downturn as air traffic recovers. And it continues to show 40% of all new aircraft deliveries going to Asia, as has been the case in their recent forecast. The business jet market has already seen traffic recover. A recent business jet market forecast from Honeywell similarly predicts growth in this market in the coming years. The simulator market mirrors the end market application, so commercial aerospace simulator activity is down, whereas defense simulator remains strong. But as we always remind everyone about this market, it is lumpy, so the year-to-year variations are large and do occur. So, as we've said for many years, FTG's goal is to participate in all segments of the aerospace and defense markets as each moves through their independent business cycle. This continues to prove effective. In the past number of years, dips in activity in helicopter and business jet markets did not impact FTG's growth. Now, the commercial aerospace market is in a downturn, but as it represents about 40% of FTG's overall activity, we have mitigated the impact. Our Circus Toronto site, as well as our sites in China, are most closely tied to commercial aerospace, so they were the most impacted. Our U.S. sites are more focused on the defense markets. Beyond all this, let me give you a quick update on 2021 for FTG. First, as already noted, the leading indicator of our business is our bookings or new orders. In each quarter of 2021, bookings increased, and Q4 2021 saw bookings up 42% compared to the same quarter in the prior year. In 2021, sales at FTG were $79.4 million versus $102.4 million in the prior year. This is a 22% drop. This was a much tougher year than we expected for a few reasons. First, the COVID-19 pandemic was sustained through all of 2021 as the Delta and Omicron variants arose and spread around the globe. This impacted our total demand by about 8%, which on its own is not too bad. But on top of that, our simulator business was down almost $10 million due to its inherent variability we talk about each quarter. And this was unfortunate timing to have to deal with this decline at the same time as the pandemic was happening. This represented a negative 10% impact on year-over-year sales. And finally, the strengthening of Canadian dollar versus U.S. dollar was a $4 million, or 4% headwind. In our aerospace business, sales were down 26%, or $9.6 million compared to the prior year. The decline is virtually 100% due to the decline in our simulator business year over year, which was also down 9.6 million. So we're seeing stable demand in our traditional products, which is a surprisingly good result in the middle of a pandemic. On the circuit side of our business, sales were down 13.4 million or 20% on a year over year basis. Circus Toronto was off the most in absolute dollars as their focus is primarily in commercial aerospace. But all three North American sites had decreased sales. Our joint venture in China saw a decline in demand from existing customers due to the pandemic, but offset this with new wins and ended the year up marginally compared to 2020. Overall at FTG, our top five customers accounted for 51.1% of the total revenue in the year. This percentage compares to 51.5% last year. While the percentage is similar, the companies have changed. Last year's top five included a large simulator company, and there are no simulator companies in the top five this year. Also interesting to note of the top 10 customers, seven are customers shared between circuits and aerospace. We like to see the shared customers as it means we are maximizing our penetration of these customers by selling both cockpit products and circuit boards. In 2021, 34% of our total revenues came from our aerospace businesses. compared to 35.7% last year. The drop is due to reduced simulator activity, partially offset by stable demand for legacy products. I'd like to turn the call over to Jamie, who will summarize our financial results for 2021. And afterwards, I will talk about some key priorities we are working on. Jamie.

Thanks, Brad. Good morning, everyone. I'd like to provide some additional detail on our financial performance for 2021 and Q4. On sales of 79.4 million, FGG achieved a gross margin of 17.1 million, or 21.6% in 2021, compared to 26.4 million, or 25.8% of sales of 102.4 million in 2020. The decrease in gross margin dollars and the gross margin rate is the result of reduced operating leverage on lower sales volume. In addition, gross margin at the Toronto sites is negatively impacted by the stronger Canadian dollar relative to the U.S. dollar as much of the cost structure of those sites is in Canadian currency. In Q4, on sales of $20.3 million, FTG achieved a gross margin of $4.2 million or 20.9% compared to $7.1 million or 26.4% on sales of $26 million. Reduced sales volumes of 6.4 million, principally within the simulated product line, resulted in lower gross margin of approximately $2 million. Although FTG continued to qualify for wage subsidy programs in Canada and the U.S., the amount realized in Q4 2021 was $0.9 million less than in the prior quarter. which equates to approximately 4.5 percent of gross margin points. From a geographical standpoint, 75 percent of FGG's 2021 sales were derived from customers in the U.S., which has decreased from 77 percent in the prior year. The lower percentage of revenue from U.S.-based customers is due to lower simulator revenue, which is primarily for U.S. customers. SG&E expense was $11 million or 13.8% of sales in 2021 as compared to $13.3 million or 13% of sales in the prior period. The reduced expense level is due to reduced travel, lower marketing costs, reduced performance compensation costs, and reduced provisions for expected credit losses. R&D costs for 2021 were 5.4 million or 6.7% of net sales compared to 5.3 million or 5.2% of sales for 2020. R&D efforts include product and process improvements at the circuits segment and efforts to develop and qualify products for future aerospace programs. FGG is exposed to currency risk through transactions, assets, and liabilities in foreign currencies. primarily U.S. dollars. The average exchange rate experienced in 2021 was $1.25 as compared to $1.34 in 2020, which equates to a strengthening of the Canadian dollar of 7%. We estimate that for each 1% of strengthening of the Canadian dollar, FTG would experience a reduction in pre-tax earnings of $217,000. In 2021, the negative impact was approximately 1.5 million, which was largely offset by realized gains on forward foreign currency contracts of 1.25 million. In 2021, we have reduced our exposure to currency risk by reducing the amount of foreign currency cash balances on the balance sheet. Earnings before interest tax depreciation and amortization As EBITDA as calculated or described in the press release was 9.6 million for 2021 compared to 13.4 million for 2020. The EBITDA margin for 2021 is 12.2% as compared to 13.1% for the comparable period in 2020. EBITDA for Q4 2021 was 2.3 million or 11.1% of revenues. Arguably, Q4 2021 was FGG's strongest quarter, as EBITDA, excluding government subsidies, was $1.9 million. For 2021, FGG recorded earnings before income taxes of $2.6 million, as compared to earnings before income taxes for 2020 of $4.6 million. Reduced profitability follows from lower sales of 22%. which was mitigated in part through increased government assistance, $6.5 million in 2021 as compared to $3.2 million in 2020. Government assistance in 2021 included a gain of $3 million on forgiveness of US PPP loans following achievement of the specified criteria. The 2021 income tax provision of $2.4 million, or 93% of pre-tax earnings, reflects that the corporation's Canadian operations were profitable and that deferred tax assets on foreign operating lawsuits were not recognized during the year. Our net cash position as of Q4 2021 is 17.9 million as compared to net cash of 12.6 as of Q4 2020. Free cash flow, defined as cash from operating and investing activities excluding acquisitions, less lease liability payments, was 2.9 million for 2021 as compared to 11.1 million for 2020. As at the 2021 year end, the corporation's primary sources of liquidity totaled 54 million consisting of cash, accounts receivable, contract assets, and inventory. During 2021, FGG extended the committed revolving credit facility with our existing bank to 2026. This facility includes $10 million in support of working capital requirements and $10 million U.S. in support of CapEx investment. As of the 2021 year end, outstanding term loans pursuant to this credit agreement amounted to $1.8 million U.S., leaving over $18 million U.S. of credit availability. Working capital at November 30, 2021 was $40 million, which is up 0.6 million from 2020. Accounts receivable days outstanding were 72 at the 2021 year end compared to 62 last year. Inventory returns were 3.4 as compared to 3.8 in 2020. And accounts payable days outstanding were 86 at the 2021 year end as compared to 74 in 2020. Investment in planned equipment for 2021 was 2.9 million with over $1 million of that investment focused on operational improvements in the circuit's Chatsworth facility. We enter Q1 2022 with a backlog of just under $40 million, which is an increase of 6.6% as compared with the start of 2021. We will continue our focus on cash management and the balance sheet, cost control, and operating efficiencies. Our complete set of Q4 2021 filings are now available on cedar.com. With that, I will turn things back over to Brad.