Firan Technology Group Corporation

Good morning, everyone. My name is Lara, and I will be your conferencing operator today. I would like to welcome everyone to the FDG Q4 2022 analyst call. All lines have been placed in 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 one on your telephone keypad. If you would like to address your question, please press star too. Please note that this call is being recorded. 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 and 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 on future events or otherwise. In 2022, FTG went on offense after two years of playing defense. During the year, the company invested in technology in their existing sites, grew the business organically, acquired our building in Chatsworth to protect our operations, but then, as committed, completed a sale lease back, announced two acquisitions, and bought back stock. Through all these actions, FTG is strategically deploying its cash balance in ways that will drive increased shareholder returns for the future in both the near term and long term. Specifically, FTG accomplished many goals in 2022 that continue to improve the corporation and position it for the future. These goals include we were awarded up to $7 million of funding from FedDev Ontario under the Aerospace Regional Recovery Initiative to invest to make our Canadian operations globally competitive post-pandemic. This funding is in the format of a repayable interest-free loan. On November 17, 2022, we entered into an agreement to acquire IMI Inc. based in Haverhill, Massachusetts. The closing of the acquisition is subject to approval by the Committee on Foreign Investment in the United States, or CFIUS. FTG will acquire 100% of the common shares of IMI for cash considerations of approximately $2 million, subject to typical closing adjustments. On December 24, 2022, after a year ends, we entered into an agreement to acquire Holiday Circus, based in Minnetonka, Minnesota. The closing of the acquisition is also subject to CFIUS and other customary closing conditions. FTG will acquire 100% of Holiday for cash consideration of approximately $24 million and contingent consideration of up to $6 million, subject to typical closing adjustments. Subsequent to year end, on January 31st, 2023, FTG completed a sale ways back of the Aerospace Chatsworth facility, resulting in net cash proceeds of approximately $8.5 million. Subsequent to year end, FTG's U.S. sites received $3.5 million in funds from the U.S. Employment Retention Credit Program. On the bookings front, our full year bookings were $113.3 million, up 41% over 2021. Within this, new orders included $8.8 million to supply cockpit assemblies for military and commercial simulators for different aircraft. We achieved a 1.26 to 1 book-to-bill ratio for 2022, resulting in increased backlog of $65.5 million compared to $39.7 million at the end of 2021. Our full-year revenues increased by 13% to $89.6 million as global air travel and commercial aerospace market continue to recover from the pandemic. We maintain strong liquidity with net cash on the balance sheet of $12.3 million after investments in the year of $3.8 million in capital expenditures, $5.9 million for research and development, $8.5 million for the aerospace Chatsworth facility, and $1.1 million for FTG share buyback. We achieved adjusted net earnings of $1.2 million for fiscal 2022. Jamie will talk about our financials shortly, but I'd like to highlight what we are seeing in future market demand. Our markets are strong or rebounding nicely. Air travel continues to rebound. It is nearing pre-pandemic levels. When you look at aircraft deliveries, Airbus reported an 8% increase in deliveries in 2022. They average about 43 A320 aircraft per month in the year. They are working to ramp production and are targeting 65 planes per month by early 2024, a 50% increase. At Boeing, it is more dramatic as they also had the challenges of the 737 MAX to deal with. Their 2022 deliveries were up 40% from the prior year. They have plans to ramp their 737 production from its current rate of 27 aircraft per month to 47 per month by the end of 2023, a 70% increase. Both companies continue to book new orders faster than they are delivering aircraft. In the business jet market, Lombardier delivered 123 aircraft in 2022, a slight increase from the prior year. They provided guidance for a 15% to 20% increase in 2023. All of this bodes well for us as we look to future demand in 2023 and beyond. I've also looked at results from key defense contractors, and Lockheed, the largest defense contractor, posted strong sales in 2022 and provided guidance for continued strong sales in 2023. Northrop Grumman provided guidance of 3% to 5% growth for 2023. The defense market is government-funded and appears well-supported in the near term due to increased geopolitical tensions across the globe. Looking at the longer term, Boeing's most recent 20-year forecast shows long-term industry growth. and it continued to show 40% of all new aircraft deliveries going to Asia, as has been the case in the 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 applications. But as we always remind everyone about this market, it is lumpy, so year-to-year variations are large. So as we have 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 cycles. This continues to prove effective. Beyond all this, let me give you a quick update on 2022 for FTG. First, as already noted, the leading indicator of our business is our bookings or new order. Full-year bookings were up 41%, and total backlog at the end of the year was 65.5 million, a 65% increase from year-end 2021. Within these increased bookings, our simulator-related business came back to life with over $8 million in new orders. In 2022, sales were 89.6 million compared to 79.4 million last year. This is a 13% increase. This could have been higher if not for some challenge in ramping production across the company. In our aerospace business, sales were up 14% or 4.4 million compared to last year. The increase was across all sites. On the circuit side of our business, sales were up 7.4 million or 14% on a year-over-year basis. Again, all sites contributed to the growth. Overall at FTG, our top five customers accounted for 55.7% of the total revenue in the year. This compares to 51.1% last year. While the percentage is similar, the companies have changed. Last year's top five included a large simulator company, and there were no simulator companies in our top five in 2022. 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. Also, for the first time, Sales to the U.S. Defense Logistics Agency made our top 10 list, as we increased our sales into the defense aftermarket segment. In 2022, 38.6% of our total revenues came from our aerospace business, compared to 38% in the prior year. I'd like to turn the call over to Jamie, who will summarize our financial results for 2022, and afterwards, I will talk about some key items we are working on. Jamie?

Thanks, Brad. Good morning, everyone. I'd like to provide some additional detail on our financial performance for 2022 and Q4. On sales of 89.6 million, FTG achieved a gross margin of 21.3 million or 23.8%, compared to 17.1 million or 21.6% on sales of 79.4 million in 2021. Excluding pandemic-related government subsidies, the gross margin was 21 million or 23.4% in 2022, as compared to 14 million or 17.6% in 2021. The increase in gross margin dollars and the gross margin rate is a result of increased operating leverage on higher sales volume and a favorable foreign exchange impact. Revenue per employee was 194K in 2022 as compared to 176K in 2021. In Q4, on sales of 23.8 million, FTG achieved a gross margin of 5.7 million, or 24.2%, compared to 4.2 million, or 20.9%, on sales of 20.3 million in Q4 2021. The increase in gross margin is also the result of operating leverage on higher sales and a favorable FX impact, partially offset by a 0.3 million reduction in government subsidies. There were no government subsidies in Q4 2022. From a geographical standpoint, FTG achieved sales growth in each region in 2022. 73% of FTG sales were derived from customers in the United States, which is down nominally from 75% in the prior year. A large majority of our revenues in all other geographic regions is tied to the commercial aerospace market, which in 2022 grew more than military markets on a relative basis. SG&A expense was $12.7 million or 14.1% of sales in 2022 as compared to $11.0 million or 13.8% of sales in the prior period. The increased expense level is due to resumption of normal business travel, reduced wage subsidies, unfavorable FX impact on U.S. dollar-denominated expenses, and acquisition-related expenses. Acquisition-related expenses for our holiday and IMI deals were $0.2 million for 2022 and $0.1 million for Q4 2022, as compared to zero in the prior periods. Operating expenses also include a loss provision on the sale leaseback at the Chatsworth facility. Although the gross proceeds of the deal exceeded the purchase price that we paid in Q2 2022, the loss provision of $357K covers commissions, taxes, and legal fees in connection with the transaction. R&D costs for 2022 were $5.9 million, or 6.5% of sales, compared to $5.4 million or 6.7% of sales for 2021. R&D efforts include product and process improvements at the circuit segment and efforts to develop and qualify new 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 2022 was 1.295, as compared to $1.254 in 2021, which equates to a weakening of the Canadian dollar of 3%. We estimate that for each 1% weakening of the Canadian dollar, FGG would experience an increase in pre-tax earnings of 345K. In 2022, the positive impact was approximately $1 million, a positive impact on earnings, which was supplemented by realized gains on foreign currency forward contracts of 0.3 million. Adjusted EBITDA, as described in the press release, was 9.1 million for 2022, or 10.2% of net sales, compared to 9.6 million, or 12.2% of net sales for 2021. The benefit of increased sales volume was largely offset by reduced government subsidies. On a pre-tax basis, subsidies in 2022 were $0.3 million as compared to $6.5 million in 2021. Items adjusted from EBITDA for 2022 were the $357K loss provision on the sale-leaseback of the Aero Chatsworth facility and $168K of expenses related to the two pending acquisitions. Adjusted EBITDA for Q4 2022 was 2.9 million, or 12.1% of net sales, as compared to 2.3 million, or 11.1% from net sales in Q4 2021. For 2022, FGG recorded adjusted net earnings of $1.2 million, as compared to $0.3 million in 2021, with the same adjustments as in EBITDA. The 2022 income tax provision of $1.6 million, or 55% of adjusted 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 year. Our net cash position as of Q4 2022 is $12.3 million as compared to net cash of $17.9 million as of Q4 2021. The decrease in net cash position is after investments in CapEx of $3.8 million, R&D of $5.9 million, share buybacks of $1.1 million, and the temporary use of cash to secure the aerospace Chatsworth facility of $8.5 million. The stale leaseback of that facility was completed in January 2023, generating net cash proceeds of $8.5 million. Excluding the Chatsworth facility purchase, free cash flow for 2022 was $4.1 million, as compared to $2.1 million in 2021. As at the 2022 year end, the company's primary sources of liquidity totaled $52.4 million, consisting of cash, accounts receivable, contract assets, and inventory. Our revolving credit facility includes 10 million US in support of working capital requirements and 10 million US in support of CapEx investment, which is committed through July 2026. As of the 2022 year end, outstanding term loans on the credit agreement are 1.1 million US or 1.4 million Canadian, leaving nearly 19 million US of credit availability. Other sources of financing for qualifying investments include up to $5.1 million in incremental funding from the Government of Canada to the ARR program. We received $1.9 million from this program in 2022. All such funding is repayable over five years without interest, starting in 2025. Subsequent to year-end, our U.S. sites received $2.6 million in funds from the Employment Retention Credit Program, These funds further add to our net cash balance and will be included in first quarter 2023 income. Working capital at November 30, 2022 was $30.8 million. Accounts receivable DSOs were 64 at the 22 year end compared to 72 in 2021. Inventory returns were 3.7 at year end as compared to 3.4 in 2021. and accounts payable days outstanding were 73 at the 22-year end as compared to 86 in 2021. Inventory returns were better in 2022, despite our decision to carry higher levels of certain raw material components to mitigate the risk of global supply chains. We entered Q1 2023 with a record level of backlog of 65.5 million. which is an increase of 65% as compared to the start of 2022. 2023 will be an exciting year for FTG as we deal with the challenge of growing organically to meet customer demand and the integration of IMI and Holiday into FTG. Our existing sites are completely focused on meeting delivery requirements. Both acquisitions will continue to operate as independent sites in their current locations making the integration considerably less complex. Our complete set of year-end and quarterly filings are now on CDER.com. And with that, I will turn things back to Brad.