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.