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 Q1 2023 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 one on your telephone keypad. If you would like to withdraw your question, press star 2. Please note that this call is being recorded. I would now like to turn the call over to Brad Bourne, President and Chief Executive Officer of Ferrand Technologies Group. Mr. Bourne, you may begin.

Thank you. Good morning. I'm Brad Bourne, President and CEO of Ferrand 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. Okay, FTG is off to a great start in 2023. FTG is playing offense, and it shows in our results. During the quarter, the company invested in technology, invested in new equipment, grew the business organically, completed a sale lease back on the facility in Chatsworth, received U.S. government funding assistance, announced a new Ontario government funding contract in support of future investments, and worked towards closing our two previously announced acquisitions. Through all of these actions, FTG is both building our available cash and then strategically deploying it in ways that will drive increased shareholder returns for the future in both the near term and long term. Within the first quarter of 2023, FTG accomplished many goals that continue to improve the corporation and position it for the future, including we achieved first quarter bookings of $33 million, up 28% over Q1 2022. We achieved a 1.34 to 1 book to bill ratio for the quarter, resulting in a backlog of over $74 million. Our first quarter revenues of $24.6 million were up 20% over Q1 2022. as FTG ramps up production to meet customer demand. We achieved net earnings in Q1 23 of 4.1 million, which was up 4.8 million from Q1 2022. Earnings include 3.4 million of U.S. government support in Q1 compared to 0.3 million in Q1 2022. FTG has cash on the balance sheet of 24.3 million as of the end of Q1 2023 as compared to 15.7 million at the end of last year. We added 12 staff in our first quarter, including operations leadership staff, to help increase throughput. As previously announced in our fourth quarter, we entered into an agreement to acquire IMI Inc. in Haverhill, Massachusetts, north of Boston. The closing of the acquisition is subject to approval by the Committee on Foreign Investment in the United States, CFIUS, and other customary closing conditions. FDG will acquire 100% of the common shares of IMI for cash consideration of approximately $2 million. The CFIUS review appears to be coming to a conclusion, and we expect to close the acquisition in our second quarter. During the quarter, we entered into a second agreement to acquire Holiday Circuits based in Minnetonka, Minnesota. This closing is also subject to approval by CFIUS and other customary closing conditions. FTG will acquire 100 percent of Holiday for cash consideration of approximately $24 million and contingent consideration of up to $6 million, subject to typical closing adjustments. It is expected that the CFIUS review on this acquisition will also be complete in Q2 2023. In Q1, FTG received $3.4 million in employee retention credits, or ERC, for its U.S. sites as they retain their staff through the pandemic. This funding improved our profitability in the quarter substantially. FTG received funding of an additional $0.6 million in the quarter for a total of $2.5 million received to date under the Canadian Aerospace Regional Recovery Initiative. This funding is an interest-free loan, which helps to strengthen our balance sheet. More recently, FTG was awarded up to $2.6 million of funding from the Ontario government under their Advanced Manufacturing and Innovation Competitiveness Program. This funding will be a loan against qualifying investments made by FTG during a 33-month period ending November 30, 2024. The loan will be non-interest bearing through November 30, 2024, with up to half a million forgivable upon achievement of specific objectives. Again, this program strengthens our balance sheet. Jamie will talk about our financial 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. When looking at aircraft production rates, Airbus is working to ramp production and are targeting 65 planes per month by early 2024, a 50% increase. But not everything is rosy, as they actually reported an 11% decline in shipments in their first quarter compared to a year ago. They, like many, continue to have supply chain challenges. At Boeing, it 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. In their first quarter, their shipments were up 37% from Q1 last year due to significant improvements in deliveries for their 737 and 787 aircraft. Both Boeing and Airbus continue to book new orders faster than they are delivering aircraft. In the business jet market, Lombardier 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, provided guidance for continued strong sales in 2023. Northrop Grumman provided guidance of 3% to 5% growth for this year. 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 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 end market applications, but as we always remind everyone about this market, it is lumpy, so large year-to-year variations do occur. 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 some key metrics for FTG for Q1-23. As already noted, the leading indicator of our business is our bookings or new orders. First quarter bookings were up 28% and total backlog within a Q1 was 74 million, the highest it has ever been in the history of FTG. But I should mention that our bookings are somewhat inflated by the tight supply chain, causing customers to place orders out further than they have historically done. Sales were 24.6 million compared to 20.5 million in Q1 last year. This is a 20% increase. Within this, our aerospace business sales were up 29% or 2.3 million compared to Q1 last year. The increase was due to the rebound and recovery of our simulator business. On the circuit side of our business, sales were up 1.4 million or 10% on a year-over-year basis. The growth was driven by the double rebounding of commercial aerospace markets. Overall at FTG, our top five customers accounted for 58.7% of total revenue in the quarter. This compared to 58.2% last year. While the percentage is similar, the companies have changed. Back in the top five this year is a simulator company. Also interesting to note, of the top 10 customers, seven are customers shared between circuits and aerospace. We like to see the shared customers because it means we are maximizing our penetration of these customers by selling both cockpit products and circuit boards. within the top 10 to our simulator companies, again, due to the rebound in activity in this market. In Q1 23, 39.1% of our total revenues came from our aerospace business, compared to 35.3% last year. I'd like to turn the call over to Jamie, who will summarize our financial results for our first quarter, 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 Q1 2023. On sales of 24.6 million, FTG achieved a gross margin of 9.8 million or 39.7% in Q1 2023 compared to 4.2 million or 20.7% on sales of 20.5 million in Q1 2022. Government assistance within gross margin in Q1 2023 included $2.9 million from the U.S. retention ERC program compared to Q1 2022, which included $0.3 million from the U.S. AMJP program. Excluding the impact of government assistance, gross profit in Q1 2023 was $6.9 million or 28% of sales as compared to $4 million or 19.5% in Q1 2022. This means that FTG's underlying gross margin is up by $2.9 million on incremental sales of $4.2 million. The increase in gross margin dollars is the result of increased operating leverage on higher sales volume, operational improvements, and a favorable FX impact. On an annualized basis, revenue per employee was $208,000 in Q1 2023 an increase of 15% over Q1 2022. The average exchange rate experienced in Q1 23 was $1.35 as compared to $1.27 in Q1 2022 for an increase of 8 cents for 6%. Including unfavorable mark to market adjustments on US dollar forwards, there was a net favorable impact to sales of approximately $1 million. Most of that $1 million favorable FX impact on sales would also flow down to a higher gross margin. From a geographical standpoint, combined sales into Europe, Asia, and other Americas increased to $5.1 million, which is up 64% from $3.1 million in Q1-22. FTG sales into these markets is for the commercial aerospace market. where strong demand is being driven by increased production rates at our end customers. SGN expense was 3.8 million, or 15.4% of sales in Q123, as compared to 3 million, or 14.8% of sales in the prior period. The increased expense level is due to 0.4 million of acquisition-related expenses and increased performance compensation costs, partially offset by $0.5 million in ERC funds credited to SG&A. R&D costs for Q123 was $1.3 million as compared to $1.4 million in the prior quarter. R&D efforts include product and process improvements at the circuit segment and efforts to develop and qualify products for future aerospace programs. Continued significant investment in R&D reflects a high level of new initiatives in place at FTG. During Q123, Canadian dollar depreciated by approximately 1% as compared to Q422. FTG's balance sheet includes assets and liabilities denominated in U.S. currency with a net balance of approximately 20.4 million U.S. at the end of Q1 as compared to 11.8 million U.S. at Q4 2022. Realized and unrealized foreign exchange gains in Q1 2023 were 0.2 million as compared to losses of 0.2 million in Q1 2022. We have been intentionally building up our U.S. dollar cash balance in preparation of closing the IMI and holiday acquisitions. EBITDA was $6.3 million for Q123 as compared to $1.3 million for Q122. Adjusted EBITDA, which for Q123 included adjustments for government assistance and acquisition costs, was $3.2 million or 13.0% of sales as compared to $1.1 million or 5.2% of sales in Q122. On a trailing 12-months basis, EBITDA was $13.6 million and adjusted EBITDA was $10.9 million for an adjusted EBITDA margin of 11.7% of trailing 12-month sales. For Q2 2022, FTG recorded earnings before income taxes of $4.9 million as compared to loss before income taxes of $0.4 million in Q1 2022. the Q123 income tax provision of 0.8 million or 16% of EBIT is lower than the approximate statutory rate of 25% as there was a partial recognition of foreign tax losses which had not previously been reported on our balance sheet. Our net cash position as of Q123 is 20.6 million as compared to net cash of 12.3 at Q4 2022. Free cash flow, defined as cash from operating and investing activities excluding acquisitions, lease liability payments, was $8.3 million for Q123, which includes $8.4 million of proceeds from the sale leaseback transaction for the aerospace task force facility and $3.4 million of cash from government assistance. Uses of cash included $1.1 million for CapEx during the quarter, and $4.3 million for working capital growth. The working capital growth is primarily inventory in support of near-term customer deliveries. As at quarter end, the company's primary sources of liquidity totaled $64.4 million, consisting of cash, accounts receivable, contract assets, and inventory. In addition, FTG has access to approximately $19 million U.S. in credit lines. The pending acquisitions of Holiday Inn IMI will be primarily funded by cash on hand aided by modest use of our credit facilities. Working capital at quarter end was 42.6 million as compared to 30.5 million as of the 22 year end. Accounts receivable days outstanding were 63 a quarter end compared to 64 prior year. Inventory returns were 2.6 at the quarter end as compared to 3.7 at the 22-year end, and accounts payable days outstanding were 102 at quarter end, as compared to 73 compared to the prior year end. With robust market conditions, FTG will focus on profitable and efficient operations, closing and integration of the holiday and IMI acquisitions, and managing our balance sheet. Our complete set of Q1 filings are now available on cedar.com. With that, I will turn things back to Brad.