Firan Technology Group Corporation

Good morning. I would like to welcome everyone to the FPG Q2 2026 analyst call. All lines have been placed on mute. There will be question and answer session following the call. If you would like to ask a question during this time, simply press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. 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 FTG. Mr. Bourne, you may proceed.

Thank you. Good morning. I'm Brad Bourne, President and CEO of France Technology Group Corporation, or FTG. Also on the call today is Drew Knight, 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 uncertainty, 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 applied 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 foregoing 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. Our second quarter was a record quarter for FTG on virtually every metric. We had record revenues, record earnings, record bookings, and record backlog. We continued strong end market demand. More specifically, in our second quarter of 2026, we achieved the following. Bookings were 86.7 million in the quarter, our best ever bookings in a single quarter, and an 89% increase over Q2 2025, resulting in a book-to-bill ratio of 1.64 to 1. This included additional bookings on the two classified defense programs we have previously mentioned. But to be clear, bookings were strong across our business, not just on these two programs. The quarter-end backlog stood at $193.5 million, a 30% rise from the previous year-ends. Revenue was $52.7 million, again our best-ever quarter, and an 8.2% increase over Q2 2025. Adjusted EBITDA was $10.5 million in Q2 2026, a record high, up 20% from $8.7 million in Q2 last year. Adjusted net earnings were $5.1 million in Q2 this year, an increase of 44% from Q2 last year, and another record for FTG. This once again demonstrates the top-line growth price profitability at FTG. Free cash flow was positive $2.7 million in our second quarter. And we maintained a strong balance sheet with net debt down to $2.9 million, or 0.1 times trailing 12-month EBITDA. Most of our debt is government loans. Other accomplishments in our second quarter included, in 2025, our circuits business qualified for two large-scale classified defense programs, and significant orders have been placed for these two programs during Q2 this year. Only one of these programs had any revenue in our second quarter, and it was not significant. FTG Aerospace Calgary continued to benefit from efforts to certify and sell its product portfolio globally, and have profitable results again in the quarter. I will talk more on this later. Our efforts to reduce our exposure to U.S. tariff risks continue, and in Q2 2026, our efforts continue to sell outside the U.S. Deliveries to China's C919 program continue. In addition, deliveries to the new Davlin Canadair 515 aerial firefighting aircraft started to ramp up. More deliveries on both these programs are expected to continue in the second half of 2026. We also made more progress on moving non-US customer orders to our non-US sites to further reduce our exposure to any tariff risk. And finally, we had some larger orders for circuit boards from a Canadian customer. But offsetting this was continued strong demand coming from the US market. Drew will provide more details on our second quarter results shortly. Let me turn to some external items. Our end market demand remains strong. Airbus is targeting 870 aircraft deliveries this year, up about 10% from last year. But more importantly, they're looking to ramp to over 1,000 aircrafts annually in the next few years. Airbus has a backlog of over 8,000 orders, which is over a decade worth of production at current production rates. At Boeing, they shipped 600 planes last year, up from 350 in 2024. but looking forward, Boeing has plans to ramp their production to over 800 planes annually in the next few years. Boeing's backlog is about 6,000 planes, so also over a decade's worth of orders at current production rates. In the business jet market, Bombardier reported a high single-digit shipment increase last year. They're also pushing hard to add a defense component to their business, and they've had some success to date in selling their business jets for defense applications, including a NATO award this week for surveillance mission aircraft. In Q1 this year, Bombardier sales were up 5%. In the helicopter market, Bell Helicopter reported a 20% increase in revenues last year, driven by increased defense programs. In the first quarter of 2026, revenues were up 9% again on increased defense activity. All of this bodes well for us as we look to future demand in the coming years. Defense spending is expected to increase going forward. The U.S. budget request for next year is for a 50% increase in spending to about $1.5 trillion. There are new commitments from all NATO members including Canada to grant defense spending to 3.5% of GDP with another 1.5% for defense infrastructure. Canada increased their defense spending in 2025-26 to 2% of GDP. All of this indicates significant increases in defense budgets for all European countries and Canada. The recent Creation of a defense investment agency in Canada to accelerate and streamline future defense procurement activity is positive for the industry here. Looking at the longer term, Boeing's most recent 20-year forecast for commercial aircraft shows significant long-term industry growth, and it continued to show 28% of all new aircraft deliveries going to China and close to 40% to Asia. That has been the case in all of their recent forecasts. A recent business jet market forecast from Honeywell similarly predicts growth in this market of 5% this year and 3% annually over the next decade. So, as we have said for many years, FPG's goal is to participate in all segments of the aerospace and defense markets as each moves through their independent business cycles. It is not often all segments are growing as is the case right now. Beyond all this, let me give you a quick update on some key metrics for FTG for our second quarter of 2026. First, as already noted, the leading indicator of business is our bookings or new orders. Our bookings were almost $87 million in the quarter. This resulted in a backlog of over $193 million at quarter end, even after record shipments in the quarter. Q2 sales were $52.7 million, which is up 8% over Q2 last year. In our aerospace business, sales were up 21% in Q2 to $17.1 million compared to Q2 last year. Sales in Toronto, Tianjin, and Calgary were up while Crippley and Chatsworth was down in the year due to timing of some orders. The growth in aerospace was in spite of some challenges on our C919 program in China where we had to deal with some sizable customer concerns and returns including some shipments that arrived at the customer with water damage to the shipping containers. In this case, the good news was when we took the product back and inspected and tested them, none of the product itself was damaged. But this took a lot of time and energy for our plants in Tianjin and Toronto to support our customer and get the product returned successfully to them, and still they had a strong quarter. Calgary saw strong revenues from hardware sales, which were mostly SATCOM radials delivered in Canada and the U.S., but also from our second delivery of EdgePlus WQARs in Asia. Data sales were also strong due to SATCOM radio data, but also an increase in weather data for NOAA. Licensing revenues were, again, from our SATCOM radio, which were very strong in the quarter. On the circuit side of our business, sales in the quarter were $34.3 million, up 1.9% over Q2 last year. Our two largest sites were down slightly in the quarter, but the other sites more than offset this. Circus Toronto was down to an operational disruption mid-quarter, and Circus Minnetonka was down due to a product net shift towards higher technology product and by labor constraints. But by quarter end, Minnetonka had made strong progress on staffing, which will benefit them in the second half of the year. On the positive side, our Circus Fredericksburg site almost doubled their revenues in our second quarter with work transferred from Minnetonka and with no change in their staffing levels. They truly had an amazing quarter. While our two largest sites did not grow, Fredericksburg was up over 90%, Chatsworth was up 18%, and our Haverhill site was up 15%. Overall at FTG, our top five customers accounted for 51.2% of the total revenue in Q2 26. This compares to 52.8% last year. Airlines were three of our top customers, in the year due to the flight acquisition. Also interesting to note, of the top 10 customers, five are customers shared between circuits and aerospace, and two are former flight customers. Given the actions of the new administration in the US of implementing tariffs, it's also good to see that two of our top 10 customers are outside the US, with one in Canada and one in China, and another six have operations outside the US. While on this topic, 70.3% of FTG sales are to US-based customers in 2026. This includes sales by our US sites as well as sales from sites in Canada or China. This compares to 69.7% last year. While sales grew by 10% in the US, they also grew by 4% in Asia and by 44% in Canada. As we benefit from previous efforts to expand globally, including things like our content on T919 aircraft in China and acquiring flight with sales globally. Sales decreased in Europe by 8% in the quarter. Sales outside the US are helpful in the event of any tariff that the US might impose on our non-US based sites. Our goal is to continue to grow our non-US revenue for our non-US sites. In Q2 2026, 35.8% of total revenues came from our aerospace business compared to 32% last year. I'd now like to turn the call over to Drew, who will summarize our financial results for our second quarter of 2026. And afterwards, I will talk about some key priorities we are working on. Drew?

Thanks, Brad. Good morning, everyone. I would like to provide some additional detail on our financial performance for Q2, starting with revenue and gross margins. On sales of $52.7 million, FCG achieved a gross margin of $19.2 million or 36.5% in Q2 2026, compared to $15.9 million or 32.6% on sales of $48.7 million in Q2 2025. The increase in gross margin dollars is based on top line growth, while the gross margin rate increased due to operational improvements in multiple facilities despite unfavorable FX variances. The improved profitability at Aero Calgary and several U.S. sites has a substantial impact on consolidated margin rates. Aero Calgary continues to benefit from its ongoing licensing revenue that resumed in 2026, as well as repeat hardware sales of its AFERS Edge product. The U.S. sales improved margins via increased throughput with limited added resources. Moving on to SG&A, SG&A expense was $8.4 million or 15.9% of sales in Q2 2026 as compared to $6.8 million or 14.1% of sales in the prior year. The increase of $1.55 million during Q2 was primarily due to performance compensation tied to profitability, amortization of deferred financing costs, and some corporate admin costs of the new leadership team. Now speaking to R&D, R&D costs for Q2 2026 were 2.8 million or 5.3% of sales compared to 2.4 million or 5.0% of revenue in 2025. R&D efforts include product and process improvements at the circuit segment as well as aerospace segment product development and product process improvements. Regarding foreign exchange, FTG is exposed to currency risk through transactions also assets and liabilities recorded in foreign currencies, and finally, from foreign subsidiaries' translation of financial statements for consolidation. The average exchange rate experienced in Q2 2026 was 1.373 on the U.S. dollar as compared to 1.407 in 2025, which equates to a weakening of the U.S. dollar by 2.4%, and this hurts results for FTG. Moving on to profitability and EBITDA. Adjusted EBITDA, as detailed in the MD&A, was $10.5 million for Q2 2026, or 19.9% of sales, compared to $8.7 million, or 17.9% of sales, for Q2 2025. As noted with gross margins, the year-over-year comparison of adjusted EBITDA is improved $1.78 million over Q2 2025 as a result of growing the top line organically. Operational improvements in the U.S. plants and Aero Calgary revenue streams added in 2026 for Edge Plus and licensing. Regarding earnings, for Q2 2026, FTG recorded net earnings of $5.0 million, or $0.20 per diluted share, as compared to $3.5 million, or $0.14 per diluted share, in Q2 2025. The earnings comparison the prior year was improved by favorable income taxes based on the distribution of profits in 2026 being more widespread. Speaking to income taxes, Q2 2026 was tax inefficient with a few non-deductible losses unable to reduce taxable income in profitable business units. However, this inefficiency improved year over year. Also, FTG incurred a $200,000 withholding tax hit on the repatriation of some cash from a foreign subsidiary. I would like to remind everyone that FTG continues to have substantial tax losses available to offset future income, and the accounting benefit of these losses has not been recognized in our financial statements. These tax loss carry forwards are located in both the USA and Canada. with the Canadian losses recently acquired in the acquisition of Flight in December 2024. Regarding our financial position, FTG maintains a strong balance sheet with our net debt position as of Q2 2026 at $2.9 million, as compared sequentially to net debt of $4 million as of Q1. This leverage ratio represents 0.09% of trailing 12 months EBITDA. Pre-cash flow in Q2 2026 was 2.7 million as compared to negative 5.5 million in Q2 2025. Capital expenditures were 0.9 million as compared to 1.3 million in 2025. Going forward, we expect CapEx to be closer to FTG's long-term target of 3% of revenue, notwithstanding any significant capacity increases. As of the end of Q2 2026, The corporation's primary sources of liquidity totaled $85 million, consisting of working capital of $61.8 million and $23.3 million of unused credit facilities. FTGS plans to improve cash efficiency and minimize stranded cash in various business units. Accounts receivable days were 60 at the end of Q2, up from 55 at the recent year end, due to timing of a couple of customer payments and top-line revenue growth. Inventory days were 112 at the end of Q2 2026, up from 105 at 2025 year-end to address order fulfillment in upcoming months. And accounts payable days were outstanding, were 57 at the end of Q2 2026, as compared to 58 at the end of year-end. Transitioning to our future outlook, FTG's book-to-bill ratio was, for Q2 2026, was 1.64 to 1. We enter Q3 2026 with a record backlog of 193.5 million, of which approximately 66% is expected to be converted to revenue in the next 12 months. The new business activities in both the aerospace and defense industries are strong and continue to accelerate. Both the circuits business and aerospace business are increasing throughput and winning their share of customer RFPs. Last quarter, we noted program awards for two substantial classified defense programs. We have since received the opening POs for delivery in 2026, though these orders are only a fraction of the annualized volumes. I should note that FTG's reported backlog only includes POs received and does not include program awards with estimated volumes. As we approach the midpoint of Q3, we are focused on managing cash flow and improving operational efficiency. and continuing with the Arrow Calgary Revenue Plan, which is already bearing fruit. I should note that our complete set of quarterly filings are available on CDARplus.com or on the FTG website. With that, I would like to turn things back over to Brad. Brad?