Firan Technology Group Corporation

Good morning, everyone. My name is Michelle and I will be your conference operator today. I would like to welcome everyone to the FTG Q2 2022 Annals 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, please simply press the star followed by the one on your telephone keypad. If you'd like to withdraw your question, please press star followed by the two. Please note that this call is being recorded. I would now like to turn the call over to Mr. Brad Born, President and Chief Executive Officer of Fjorn Technology Group. Mr. Born, you may proceed.

Thank you. Good morning. I'm Brad Born, President and CEO of Fjorn 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 listener is cautioned 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 as a result of new information, future events, or otherwise. Q2 showed strong progress towards a return to pre-pandemic performance for FTG. The impact of the pandemic is waning after a tough couple of years. Our booking trend is very positive, and our backlog is now almost back to 2019 levels. Bookings is a leading indicator and a precursor to increased sales. Let me reiterate something I said last quarter, and that is the change in our mindset at FTG. For the past two years, we've been playing defense. We played great defense. We took many actions to ensure we got through the pandemic. But defense is only half the game. As of the start of 2022, we are consciously taking actions to play some offense. We have a great balance sheet, and the market is coming back. We are taking advantage of our balance sheet to increase capital spending, to support higher technology, improve our operations, and to grow. We will continue to do this. But we can and will do more. Our balance sheet puts us in a great position to grow through acquisitions or other corporate development activities. We are putting a lot of effort into this area now. And we can and are looking at other capital allocations options that can benefit our shareholders, specifically during Q2. we had an NCIB approved to buy back up to 5% of our outstanding stock. In May, we began buying back stock and purchased 45,000 shares in the month. We believe that FTG has the resources to pursue multiple capital allocation efforts to create shareholder value, including organic growth acquisitions and a stock buyback. Now let me summarize some key accomplishments from our second quarter of 2022. FTG achieved a sixth sequential quarter of increased bookings as the aerospace industry recovers from the COVID-19 pandemic. FTG's second quarter bookings of 27.6 million are up 6% over Q1 2022 and up 45% over Q2 last year, and it's the best booking quarter we've had since Q4 2019. We achieved a 1.24 to 1 book-to-bill ratio in the quarter. Total backlog at the end of Q2 2022 is $49.6 million, up 45% from Q2 last year. Sales for Q2 2022 were $22.3 million, which is an increase of 9.8% over Q2 last year and an increase of 9.1% over Q1 this year. FTG has maintained strong liquidity with net cash on the balance sheet of $16.8 million, after investments in the quarter of $400,000 for capital expenditures, $1.6 million for research and development, and $100,000 for the share buyback. As announced on June 30th of this year, FTG has been awarded up to $7 million of funding from FedDev Ontario under the Aerospace Regional Recovery Initiative Program. This funding will be a repayable contribution against qualifying investments made by FTG. The funding will be repayable without interest through to 2030. FTG achieved a trailing 12-month EBITDA of $8.8 million. Jamie will talk about the financials shortly, but I would like to highlight what we are seeing in future market demand. The aerospace industry is recovering. U.S. and global air travel continues to rebound. There are many predictions regarding the length of time for the aerospace industry to recover, but all of them indicate a strong commercial aerospace market in 2022, even if not quite back to pre-pandemic levels, and a full recovery by 2023. The big challenge the travel business is facing is not customer demand, but being able to staff sufficiently to support the increase in daily flights. When looking at performance and plans from the large airframe manufacturers, Airbus is projecting a production rate in 2022 that will be 15% to 20% above 2021. And for 2023, they are planning another 40% increase, which would put them above pre-pandemic production rates. Over the next few years, they're also projecting 180% increase in the production rate of the A220, where we have significant content. The story of Boeing is a little more complex if they have not shipped any Boeing 787 since May of last year due to certification issues with the FAA. But for the 737, they are now at a 27 plane per month production rate and are targeting ramping to 47 planes per month by the end of 2023, a 75% increase from the current rate. Looking at the longer term, Boeing's most recent 20-year forecast shows growth beyond the COVID downturn as air travel recovers. And it continues to show 40% of all new aircraft deliveries going to Asia, as has been the case in the recent forecast. For the defense market, the defense budget request in the U.S. for the next year has a small increase, but this market remains strong. And unfortunately, the conflict in the Ukraine is increasingly focused on defense spending around the world. The business jet market has already seen traffic recover. A recent forecast from Honeywell predicts growth in this market in the coming years. The simulator market mirrors the end market application, so commercial aerospace simulator activity is down but recovering, whereas the defense simulator market remains strong. But as we always remind everyone about this market, it is lumpy, so large year-to-year variations do occur. The good news is we are seeing real customer demand materialize this year on programs where we are well established. As we have said for many years, FTG's goal is to participate in all segments of the aerospace and defense market as each moves through their independent business cycles. Within FTG, our Canadian and China sites are more focused on the commercial aerospace markets, whereas our U.S. sites are more focused on the defense markets. Beyond all this, let me give you a quick update on Q2 2022 for FTG. First, as already noted, the leading indicator of business is our bookings or new orders. For the last six quarters, bookings increased, and Q2 2022 saw bookings up 45% compared to Q2 last year. In Q2 this year, sales were up 9.8% compared to Q2 last year. We definitely saw improved performance across the company, as we had far fewer operational challenges in the quarter as compared to Q1 this year. And sales were up in Canada, the US, Europe, and Asia, everywhere we do business. In our aerospace business, Q2 sales were up 3% or $300,000 compared to Q2 last year. Year-to-date sales are flat due to an over $2 million drop in simulator activity, offset by increased demand in our other market segments. Simulator activity is increasing going forward. On the circuit side of our business, sales were up 4.7 million, or 19%, on a Q2 over Q2 basis. All sites were up, with our JV in China being up almost 90% on increased demand and new awards. Overall at FTG, our top five customers accounted for 55.6% of total revenue in the quarter. The percentage compares to 52.3% last year. Also interesting to note, of the top 10 customers, seven are customers shared between our circuits and aerospace business. And as we always say, we particularly 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 Q2 this year, 34.1% of our total revenues came from our aerospace business compared to 37.4% last year. I would like to turn the call over to Jamie, who will summarize our financial results for Q2 2022. And afterwards, I will talk about some key priorities we are working on. Jamie?

Thanks, Brad, and good morning, everyone. I'd like to provide some additional detail on our financial performance for Q2. On a sales of $22.3 million, FTG achieved a gross margin of $5.6 million, or 25.2%, compared to $5.4 million, or 26.7%, on sales of 20.3 million in Q2 2021. Excluding the impact of government assistance included within cost of sales, gross margin dollars actually increased by 1.3 million on the sales increase of 2 million, and the gross margin rate increased by 3.8 margin points. Government assistance in Q2 2022 was limited to a residual amount from the U.S. AMJP program which was less than 100,000, as compared to 1.1 million in Q2 2021 from the CEWS program. In FTG's case, sales and gross margins have ramped up as government subsidies have been withdrawn. On a sequential basis, Q2 2022 gross margin dollars are up 1.4 million and 4.5 margin points relative to Q1 2022. The average FX rate experienced in Q2 2022 was 2.5% favorable compared to Q2 2021 with an estimated lift to sales of $400,000. In addition, realized gains on FX forward contracts contributed $200,000 to sales as compared to $600,000 in Q2 2021. From a geographical standpoint, the sales increase in Q2 2022 was spread across all of the regions. Sales to Asia, Europe, and other Americas were up 19% relative to Q2 2021, and these regions are predominantly commercial aerospace. SG&A expense was 3.3 million or 14.6% of sales in Q2 2022 as compared to 2.7 million or 13.1% of sales in Q2 2021. The cost increase is due to increased credit loss provisions, higher performance comp costs, and the inclusion of 100,000 of wage subsidies in the prior year quarter. R&D costs for Q2 2022 were 1.6 million or 7.3% of net sales compared to 1.5 million or 7.4% of sales for Q2 2021. R&D efforts include process development in the circuit segment and efforts to develop and qualify new products for future aerospace programs. A portion of our R&D expense is customer funded. From a balance sheet perspective, the Canadian dollar strengthened relative to the U.S. dollar by approximately 1.4% from the end of Q1 to the end of Q2 2022. The 120K foreign exchange loss identified in our Q2 operating expenses is primarily related to losses on the translation of U.S. dollar-denominated balance sheet items, including cash. EBITDA was $8.8 million for the trailing 12-month period ended Q2 2022, compared to $11.5 million for the trailing 12-month period ended Q2 2021. Although EBITDA is reduced from the level recorded 12 months back, it is important to note that in the most recent 12-month trailing period, government subsidies included in EBITDA were $3.2 million as compared to $6.1 million in the prior 12 months trailing period. For Q2 2022, FTG recorded earnings before income taxes of $0.5 million as compared to EBIT for Q2 2021 of $0.6 million. The Q2 2022 income tax provision of 0.5 million or approximately 100% of pre-tax earnings reflects that the corporation's Canadian operations were profitable and that deferred tax assets on foreign operating losses were not recognized in the court. On a sequential basis, EBIT for Q2 2022 is up 0.9 million on a sales increase of $1.9 million. Our net cash position as of Q2 2022 is $16.8 million as compared to net cash of $14.8 million as of Q2 2021. As noted in our comments last quarter, the lease for the aerospace Chatsworth facility expired on June 30, 2022, and the owner had advised us of their intention to sell the facility. To secure the facility for continued occupancy, We've entered into a purchase and sale agreement to acquire the facility for 6.5 million or Canadian equivalent of 8.1. The corporation has provided a non-refundable escrow deposit of 200,000 U.S. and expects to settle the remainder of the purchase price, 6.3 million, for cash on the expected closing date of July 27, 2022. The corporation intends to complete a sale-leaseback transaction with a third party following the closing date as soon as this can be completed. Free cash flow, defined as net cash from operations and investing activities excluding acquisitions, less lease liability payments, was $0.8 million for Q2 2022 as compared to $1.9 million for Q2 2021. Q2 2022 included a use of cash for changes in working capital whereas the prior year quarter included positive cash flow from changes in working capital. As at quarter end, the corporation's primary sources of liquidity totaled $52.4 million, consisting of cash, receivables, contract assets, and inventory. Working capital at June 3, 2021, was $39.9 million, as compared to $40 million at the 2021 year end. Accounts receivable DSO were 65 as of the Q2 close compared to 72 at the year end. Inventory returns were 3.8 as of Q2 compared to 3.4 the 2020 year end. And accounts payable days outstanding were 68 as of Q2 close as compared to 86 for the 2021 year end. Investment in plant and equipment for Q2 was $400,000. we do anticipate a higher level of capital expenditures for the second half of 2022. We are entering the second half of 2022 with a backlog of just under $50 million, which is the highest value since before the pandemic, so there is clear momentum in the recovery of the commercial aerospace market. We will continue our focus on cash, cost control, and operating efficiency. Our complete set of filings are now available on cedar.com. With that, we'll turn things back to Brad.

Thanks, Jamie. Let me delve into some important items regarding our performance across FTG. For me, I thought our second quarter had further improved operational performance. If you look at Q2 this year versus Q2 last year, and exclude the government's assistance received in each of the quarters, the revenues increased $2 million and the bottom line improved by $1.2 million. And we have a similar improvement on a year-to-date basis where sales are up $3.5 million and the bottom line is up $3 million, again excluding government assistance. While I know we have a high contribution margin, it takes an amazing effort by everyone at FTG to improve profitability by this amount so quickly. And as I and many others in the aerospace industry have suggested to many people in government, support to the aerospace industry was withdrawn before the industry had recovered sufficiently. We were very pleased to announce after the quarter end that we had been approved for the $7 million under the Canadian Aerospace Regional Recovery Initiative program. This program provides assistance to help companies recover faster from the pandemic. It's certainly going to enable FTG to play more often. In our aerospace business, our Toronto facility has done a great job in managing through the pandemic, but now the focus is on growth. They've made some good inroads in increasing activity in the defense markets. We are starting to see their simulator business recover, and this should benefit the second half of 2022 and beyond. We've had a few supply chain challenges due to chip shortages this year, but so far we have mitigated the impact down to a manageable level. Our aerospace Chatsworth facility was also impacted by push-outs by suppliers for some military components, but they continue to have a long list of new sales opportunities, almost all coming from the defense market. They continue to see and win U.S. defense aftermarket opportunities. Our aerospace Chatsworth facility operating performance was significantly improved in Q2 this year, and they were profitable for the quarter. In our circuit segment, bookings in our Toronto facility have been very robust this year as the commercial aerospace industry recovers. We are taking actions to ramp production in line with this increased demand, and May was an exceptionally strong month for that site. Circus Fredericksburg was improved in the second half of the quarter, subsequent to some management changes made during the quarter. Circus Chatsworth had improved operational performance in Q2 this year, with sales up more than 9%. We continue to invest in the business to further improve performance, including additional capital equipment, process improvements, and strengthening the organization. But this site is not yet at the performance levels we expect. Both our China sites are exclusively focused on the commercial aerospace market. As noted from the Boeing market forecast, Asia remains a key market for commercial aerospace activity, so we believe these sites will be valuable in the long term. Our aerospace Tianjin facility has seen orders increase consistently since the start of 2021 as the commercial aerospace market recovers and they win new work. In Q2, sales were up 32% compared to Q2 last year. In Q2 this year, we received a new order for cockpit products for the Boeing 737, with production to be shared between our Toronto and Tianjin facilities, and our total backlog of panels for the Boeing 737 aircraft is now approaching $2 million, with deliveries starting in Q3 this year. These orders are showing the results or return on investment from a multi-year effort to have these sites approved to supply cockpit panels for Boeing aircraft. Tianjin is also seeing strong demand from their business jet customers and in general aviation. We now have a hiring plan in Tianjin would see us add 40 to 50% more production staff the fastest possible. At their current capacity, they are sold out through 2022. But of course, our goal is to add capacity so they can continue to grow. And progress continues on the C919 aircraft development in China. And while we have not quite completed our qualification activities, We have shipped our first production orders and have received new orders for this year. At our Circus joint venture in China, we saw new wins and increased demand at that site in Q2 and for the coming quarters. As already mentioned, sales were up almost 90% year over year at that site. We continue to manage our balance sheet, but also to leverage its strength. Our net cash on the balance sheet is above $16 million at the end of Q2 this year. We are seeing a number of acquisition or corporate development opportunities arise that could fit with either of our business. Given our commitment to play some offense and our strong cash position, we are evaluating and pursuing them. Our criteria for any such transaction would remain what we have always said. They would need to meet a number of the following objectives. Be aligned with FTG's market and product focus, expand our technology offering, Expand our geographic coverage, such as Europe for commercial aerospace, or Europe, India, or other top 10 Western defense countries for defense. Accelerate FTG's penetration of the aftermarket segment. Drive up plant utilization. Be an attractive price multiple and be accretive to earnings. And finally, looking forward into the balance of 2022 and beyond, there are reasons for optimism. As already noted, the industry is recovering and production is ramping. Our sales team has been doing a stellar job, and we are seeing and winning new programs and adding new customers. We are playing offense to capture newer. With a focus on operational excellence in all parts of SDG, we are confident we remain on a growth trajectory in the coming quarters. This concludes our presentation. Thank you for your attention. I would now like to open the phones for any questions. Michelle?

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Nick Corcoran of Acumen Capital. Please go ahead.

Good morning and thanks for taking my questions. Good morning. Just a couple questions for me. So think with the lockdowns in China and employee absenteeism in North America, can you quantify what the impact might be on the sales in the quarter?

Yeah. We have had an ongoing, you know, small one or two people a week absence due to COVID across the company. But that was much improved from what we had seen in Q1, where we were having departments being absent due to COVID. So the impact was a lot less, but still there. And specifically related to China, the lockdowns in China in this quarter were more around Shanghai and other areas. Tianjin was not impacted, or our sites in Tianjin was not impacted by any shutdowns, lockdowns during our Q2. Good.

And then I think you mentioned in the disclosure that availability of electronic components impacted sales in the quarter. Can you quantify what that might have been?

Again, it was not a huge number. I'm going to say maybe it's somewhere in the 0% to 5% of sales range, something like that. It definitely impacted our aerospace business only, not our circuits business. And Aerospace Toronto in some assemblies had shipments delayed, and Aerospace Chatsworth, same thing, had some delays. But overall, it's It was a relatively small percentage of our total activity.

That's good, Keller. And then you disclosed the up to $7 million of funding from FedDev Ontario. Can you maybe give some color on what period you expect this and whether there's any retroactive funding?

Yes. To answer the second part, it definitely is retroactive. And basically, the way this program works is it will support investment in the business between April of 2021 through March of 2024, so a three-year period of investment. So it goes back a year, actually a little bit more than a year. The investment it supports is really across a full range of things you can do with a business, which was great. It supports investment in capital equipment. It supports investment in finance. Research and development, but you know within that it can be product development, which you know, we have some plans around that particular search or aerospace business. It supports investments and process improvement and efficiency improvements, which supports both of our businesses. It supports investments and automation and industry 4.0 technologies, which is something that we had already started. So we're going to be able to continue to do that. It supports investments in green technologies. We actually like that. We like it for two reasons. Generally, when we invest in green technologies, it actually is a benefit to the business financially, and obviously it's good for the environment and good for the community in which we live and operate, so it's a double benefit. And then lastly, it supports investments in cybersecurity. And if you remember back in 2019, we were actually subject to a cyber attack, which hurt us in that year. That's one reason we like to invest in cybersecurity, to protect the business. But also, more and more so, in doing business in the defense market, it's a requirement to have a robust cybersecurity program in place to be able to do business in that market. So it supports all of these investments. over a three-year period. And then it is repayable over a five-year period, but starting in 2026 through 2030. So it's a long-term program. It is interest-free funding. It's really going to be good for FTG. And, you know, it definitely is going to allow us to invest more aggressively and play more offenses.

Great, and the backlog is almost $50 million. How much do you expect to have through that in the third quarter?

Yeah, there's more than $25 million due in the quarter. Having said that, there's always little challenges. We talked about one, such as chip shortages. So I never planned for perfection in a quarter. And so that's one factor. So we're going to be under the $25 million. And I guess the other one on that is our Q3 picks up the summer months, June, July, and August. Summer months typically have higher vacation. My estimate has always been I lose about a week of production in the summer due to vacations. And so, again, I would expect that to be the case this year. So, you know, that's going to put us... You know, in the 20s for sure, but exactly where, I don't know, definitely, you know, under 25.

And would you expect a sequential improvement from Q2, or do you think the sudden period and other challenges to potentially challenge that?

Yeah, I mean, I think that's a bit of a challenge just because, you know, as I say, for sure we lose on average one week of production, which is about, you know, an 8%. reduction in production days in a 13-week quarter. So, you know, I got to be able to, I would have to grow more than 8% just to stay flat from Q2 to Q3. And not sure I'm going to do that.

Great. And just the last question for me, the purchase of the Chatsworth facility is expected by the end of July. How long do you expect to take to do the sale, lease, voucher, and voucher?

I don't know. My goal is immediately. I don't think I'm going to achieve that goal. We've been working on finding buyers already. There's definitely interested parties in California for the building. We had to get through all of our due diligence in terms of closing the acquisition, and that just took longer than we'd hoped. My goal is to own that building for as short a period of time as possible. and we're going to keep working on that to get it off our balance sheet as fast as we can.

That's all for me. Thanks again.

All right. Okay. Thanks, Nick.

Thank you. Your next question comes from David Plum, private investor. Please go ahead.

I was going to ask a question about Chatsworth, too, whether it's going to be third-party related, but obviously you don't know the buyer at this stage. So the question is, is this going to mean an increased cost to operate at Chatsworth?

I guess we will see. But my expectation is, as we started to talk to potential acquirers of the building, it is really just pure math. They're financial investors. They put X number of dollars down, they expect a return and that converts to a lease rate. My goal on the building is to sell it at approximately the price we paid for it. And that should translate into probably a small increase in the lease rate from where we have been, but I would not call it a material number.

Okay. Thank you for that. And the other question I wanted to ask you is, Normally in your comments you put Airbus in front of Boeing. Does that indicate that Airbus is a bigger customer?

No, I think it indicates A comes before B. I can't think of a reason why. It's just first. But I would actually say Boeing is a bigger customer to us. I would love to do more work with Airbus. But I think to really penetrate the airbus supply chain will require us to have a footprint and, you know, some activity in Europe, which we do not have yet.

Okay. Thank you, guys. And it's nice to hear the increased confidence, especially from a couple of years ago.

Yeah, agreed. It's nice to be able to be more confident. Thank you.

Thank you. Once again, ladies and gentlemen, if you do have a question, please press star 1 at this time. There are no further questions at this time. Please continue.

Thank you. A replay of the call will be available until August 14th at the numbers on our press release. The replay will also be available on our website in a few days. I thank you all for your interest and your participation. Thank you.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.