Firan Technology Group Corporation

I would like to welcome everyone to the FTG Q3 2026 analyst call. All lines have been placed on mute. There will be questions and answer session following the call. If you would like to ask a question during this time, simply press star followed by 1 on your telephone keypad. If you would like to withdraw a question, press the star 2. 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 Friend 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 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 it's a result of new information, future events, or otherwise. Our third quarter was another record quarter for FTG. On virtually every metric, we had record revenues, record earnings, record bookings, and record backlog, with continued strong end-market demand tailwinds. More specifically, in our third quarter of 2026, we achieved the following. Bookings were $90 million, marking a 75% increase over Q3 2025, and a book-to-bill ratio of 1.41 to 1 in the quarter. The quarter end backlog stood at $221 million, a 49% rise from 2025 year end. Revenue was $64 million in Q3 2026, a 34.3% increase over Q3 25. Adjusted EBITDA was $15.1 million in Q3, a 97% increase from $7.5 million in Q3 last year. Adjusted EBITDA is $40.8 million for the trailing 12 months. Net earnings were $10 million in Q3 2026, an increase of $7.2 million from Q3 last year. And free cash flow was positive $7.1 million in the quarter. Net cash at quarter end was $3.9 million. We had no bank loans at the end of the quarter. Other accomplishments in our third quarter included bookings continued at a record pace, and many orders included both price increases and significant price premiums for quick delivery. FTG continue to leverage increased defense spending. In 2025, we qualified for two large-scale classified defense programs, and in Q3 this year, there were significant orders placed for these programs, and deliveries ramped up, contributing materially to our sales and earnings in the quarter. Strategic leadership appointments made at a number of FTG sites last year has resulted in stronger operating performance and throughput across the company. We continued our efforts to increase our international diversification and thereby reduce our exposure to U.S. tariff risks. Sales in Canada were up 61% in Q3 this year compared to Q3 last year. This included shipments for deliveries for the De Havilland Canadair 515 aerial firefighting aircraft and shipments for the C919 narrowbody airliner, also continuing Q3, driving a 40% increase in sales to Asia in the quarter. FTG qualified with new customers in Europe and Australia. We opened our aerospace facility in Hyderabad in the quarter, which will also reduce our tariff exposure and open new markets for us. FTG Aerospace Calgary continued to benefit from efforts to certify and sell its product portfolio globally and had profitable results again in this quarter. An FTG Circuits Toronto Union Agreement with its representative staff was completed and ratified. It is a new four-year agreement. Drew will provide some more details on Q3 2026 shortly, but let me turn to some external items. Our end market demand remains strong. Airbus is targeting 870 aircraft deliveries in 2026, up about 10% from last year. As of August, they delivered 475 aircraft this year. But more importantly, they're looking to ramp to over 1,000 aircraft annually in the next few years. Airbus has a backlog of over 8,000 orders. At Boeing, they shipped 600 planes last year, and in the first six months of this year, they shipped 314. They're planning to increase their delivery rate on the Boeing 737 from 42 to 47 aircraft per month. And on the 787, they're planning an increase from 8 to 10 aircraft per month. Boeing's backlog is about 6,000 planes. In the business jet market, Bombardier reported mid-single-digit revenue increase for the first half of this year. They're also pushing hard to add a defense component to their business and have had some success to date in selling their business jets for defense applications. In the helicopter market, Bell Helicopters reported a 12% increase in deliveries in their last quarter. All of this bodes well for us as we look to future demand in the coming years. Defense spending is expected to continue to increase going forward. U.S. budget request for next year is for a 45% increase in spending to about $1.45 trillion. with increased spending on various hardware programs, which are most relevant to manufacturers like FTG. There are new commitments from all NATO members, including Canada, to ramp defense spending to 3.5% of GDP with another 1.5% for defense infrastructure. Canada increased their defense spending in their last fiscal year to 2% of GDP. All of this indicates significant increases in defense budgets for all European countries and Canada. 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. It is not often all segments are growing, as has been the case for the past few years. Beyond all this, let me give you a quick update on some key metrics for FTG for our third quarter this year. First, as already noted, the leading indicator for our business is our bookings for new orders. Our bookings were just over $90 million in the quarter, again, a record for us. This resulted in a backlog of over $220 million at the end of the quarter, even after record shipments. Q3 sales were $64 million, up 34% from Q3 last year. Within this, our aerospace business sales were up 18% in Q3 to $19.8 million compared to Q3 last year. Sales were up everywhere except Chatsworth, where we continue to see delays in the timing of some orders. While we have held our grand opening ceremony for our new site in Hyderabad, India, the site is not yet shipping products. Calgary saw strong revenues from hardware sales, which were mostly SATCOM radio delivered in Canada and the U.S., but also some additional edge equipment. We also saw some revenue related to weather hardware and increasing weather data revenues as well, mostly related to our NOAA contracts. Licensing revenues from our SATCOM radio were very strong again in the quarter. On the circuit side of our business, sales in the quarter were $45.1 million, up 40% over Q3 last year. Our Minnetonka and Fredericksburg sites were each up between 75% and 80% over Q3 last year. Only our Hayborough site was down marginally in the quarter. Overall at FTG, our top five customers accounted for 56.8% total revenue in Q3. This compared to 52.7% last year. The increase was primarily due to the increase in activity from the two defense programs. Both are with existing top five customers. Airlines were three of our top 20 customers in the year due to our flight acquisition. Also interesting to note, of the top 10 customers, seven are customers shared between Circus and Aerospace, and one is a former flight customer. Given the actions of the new administration in the U.S. of implementing tariffs. It's also good to see that two of our top 10 customers are outside the U.S. and another six have operations both inside and outside the U.S. While on this topic, 70.9% of FTG sales are to U.S.-based customers in Q3 this year. This includes sales by U.S. sites as well as sites from FTG sites in Canada or China. This compares to 71.2% last year. While sales grew by 34% in the U.S., they grew faster in Canada and Asia as we benefit from previous efforts to expand globally, including things like our content on the C919 aircraft in China and acquiring flight with sales globally. Sales were flat in Europe in the quarter. Sales outside the U.S. are helpful in the event of tariffs the U.S. might impose on our non-U.S.-based sites. Our goal is to continue to grow our non-U.S. revenue for our non-U.S.-based sites but at the same time, we're also happy to grow our U.S. revenue for our U.S. spaces. In Q3, 2026, 31% of our total revenues came from our aerospace business, compared to 35.1% last year. The drop is due to the ramp of the defense programs on the circuit side of the business. I would now like to turn the call over to Drew, who will summarize our financial results for our third quarter this year, 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 Q3 starting with revenue and gross margin. On sales of 64 million, FTG achieved a gross margin of 27.5 million or 42.9% in Q3 2026 compared to 14.5 million or 30.3% on sales of 47.7 million in Q3 2025. The increase in gross margin dollars and gross margin rate is based on top line growth and those that have followed FTG in the past have heard Brad say that top line drives bottom line. When top line revenue grows, FTG's fixed costs allow for much of the contribution margin to fall to the bottom line and improve margin and profitability rates. Of note, the improved profitability at Aero Calgary and several US sites has a substantial impact on consolidated margin rates. Aero Calgary continues to benefit from its ongoing licensing revenue that resumed in 2026 a customer contract cancellation charge as well as repeat hardware sales of its AFERS Edge Plus product. Additionally, Aero Calgary also certified and shipped the first units of its WVSS weather sensors, which also come along with ongoing data revenue streams. The U.S. sites improved margins via increased throughput with limited added resources. This heightened capacity utilization drives superior margins. Moreover, The improved throughput at several US sites enabled them to provide quick turnaround deliveries which attract pricing premiums. This quick turnaround production is a value-added service that is frequently requested by customers in the aerospace and defense marketplace and FTG has provided this service for many years in certain plants. In Q3, all FTG circuits plants were able to provide this high margin quick turnaround service. Moving on to SG&A, SG&A expense was $10 million or 15.6% of sales in Q3 2026 as compared to $6.3 million or 13.2% of sales in the prior year. The increase of $3.7 million in Q3 2026 was primarily due to increased performance compensation of $2.3 million tied to higher profitability. also driving an expense increase for IT costs tied to the FTG website redesign and CMMC cybersecurity efforts, plus sales and marketing costs associated with increased sales activities, including commissions and added headcount. Now, speaking to R&D, R&D costs for Q3 2026 were $3 million, and the Board of Directors of the Board of Directors of recorded in Q3 2025. Regarding foreign exchange, FTG is exposed to currency risk through transactions and 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 Q3 2026 was 1.389 as compared to 1.374 in Q3 2025. which equates to a strengthening of the U.S. dollar by 1.1%, and this helps results for FTG's operations located in Canada. Moving on to profitability and EBITDA, adjusted EBITDA, as detailed in the MD&A, was $15.1 million for Q3 2026 for 23.6% of sales compared to $7.7 million or $16. Adjusted EBITDA improved $7.4 million over Q3 2025 for the same reasons as noted for the gross margin improvement, namely increasing top line drives, increasing bottom line and profitability rates, and due to the significantly improved contributions from Aero Calgary and our five U.S. plants. The circuits expedite fees and Aero Calgary's licensing revenue and contract cancellation fee were all high margin revenues for Q3. Regarding earnings, for Q3 2026, FTG recorded net earnings of $10 million or $0.39 per diluted share as compared to $2.8 million or $0.11 per diluted share in Q3 2025. The earnings comparison to prior year was improved by favorable income taxes based on the distribution of profits in 2026 being more widespread and utilizing some historical tax losses that have been carried forward. Speaking to income taxes, in the prior year, Q3 2025 was tax inefficient with a few non-deductible losses unable to reduce taxable income in profitable business units and thus incurred a 30% tax rate. Conversely, in Q3 2026, profits were widely distributed and utilized historical tax losses for a tax rate of 12%. I'd 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 and repaid all interest-bearing debt in Q3. In other words, we repaid our bank debt and retained the government debt that is interest-free. We finished Q3 in a net cash position of $3.9 million as compared sequentially to net debt of $2.9 million in Q2 2026 and compared to net debt of $8.1 million as of 2025 year-end. Free cash flow in Q3 2026 was $7.1 million as compared to negative $4.6 million in Q3 2025. Capital expenditures, including non-current deposits, were $4.2 million as compared to $1.2 million in Q3 2025. Going forward, we expect CapEx to be closer to FTG's long-term target of 3% of revenue. However, as we add production capacity in Canada, the USA, and India, This rate may tick higher to 4% or 5% in the next couple of quarters. As at the end of Q3 2026, the corporation's primary sources of liquidity totaled $94 million, consisting of working capital of $66 million and $28 million of unused credit facilities. FTG has plans to improve cash efficiency and minimize stranded cash in various business units. Accounts receivable days outstanding were 61 at the end of Q3 2026, up from 55 days at the year end due to recent revenue and AR ramp-up, and also due to timing of a couple of specific customer payments. Inventory days were 101 at the end of Q3 2026, down from 112 days last quarter and 105 days at 2025 year end. This inventory level is higher than our usual plans and is to address order fulfillment in coming months. Accounts payable days outstanding were 69 at the end of Q3 2026 as compared to 58 at the 2025 year end. As we plan to manage working capital offsets with our partners, we're practical. Transitioning to our future outlook, FTG's book-to-bill ratio for Q3 2026 was 1.41 to 1. We entered Q4 2026 with a record backlog of $221 million, of which approximately 84.8% is expected to be converted to revenue through Q3 2027, or 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 new customer RFPs. In Q4 2025, we noted the program awards for two substantial classified defense programs. We have since received the opening POs and started deliveries in Q3 2026, though these orders are still 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 Q4, we are focused on managing cash flow and improving operational efficiency and throughput. Also, we are continuing with the Aero Calgary Revenue Plan, which is already bearing fruit with an incremental benefit from insourcing the manufacturing of their products starting this quarter. 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.