This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Good day, ladies and gentlemen, and welcome to the Omni Light Industries investor call. Our host for today's call is Amy Vetrano Palmer. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to your host, Ms. Vetrano Palmer. You may begin.
spk01: Good morning and thank you for joining us. With me today is our Chief Executive Officer, Dave Robbins. Our call is being recorded and will be available for playback. The details of which are in our press release issued. The purpose of today's call is to provide an update of OmniLight's financial performance and operations as we did file our year-end 2023 results yesterday, April 18th. Our remarks after will be open for Q&A. If you have not received a copy of the press release, which was issued yesterday morning, you may find it on our website, www.omni-light.com, or email at d.robbins at omni-light.com to request a copy. Before we get started, I would like to remind everyone that today's discussion will or may include forward-looking statements, including information regarding OmniLight's performance based on our views of the company's business and the environments in which it operates. our future plans, objectives, business perspectives, and anticipated financial performance. These forward-looking statements are subject to future risk and uncertainties that could cause our results or performance to differ materially. We are also mindful of the risk and impacts and the changes in the health of the U.S. economy, including the effects of the U.S. financial market, U.S. global commercial aerospace markets, and the U.S. Department of Spends budgets. All forward-looking statements should be considered in conjunction with the cautionary statements contained in our press release and the risk factors included in the CDAR filings. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. I'd also like to mention that in addition to reporting financial results in accordance to the International Financial Reporting Standards or IFRS during our call, we may also discuss or reference non-IFRS measures. such as adjusted EBITDA, pro forma adjusted EBITDA, free cash flow, or adjusted free cash flow. A reconciliation of these items or metrics, if applicable, is included in the available CDAR filings and press releases. Lastly, unless noted, any reference or discussion of financial results or metrics are in U.S. dollars. I would like now to turn the call over to Dave. Dave?
spk07: Thanks, Amy. Good morning, everyone, and thanks for joining us. I'd like to make a few comments about our fourth quarter 2023 in-year performance, followed by comments on current business. Fourth quarter 2023 revenue of $3.3 million and $12.4 million for the full year marks an increase of 11% from fiscal year 2022, a 6% increase over the fourth quarter of 2022. Adjusted EBITDA for the fourth quarter 2023 was $78,000. which is the third quarter we have produced positive EBITDA this year, and a continued improvement, an indication of our ongoing efforts of managing and planning our fixed cost allocations and product rationalization and pricing. Our fourth quarter adjusted EBITDA, although positive, and a significant improvement year over year, still had some residual poor product mix, which is nearing its end, heading into Q1 2024. We invested in inventory buildup in the quarter and year of over $1 million in preparation for anticipated product demand heading into 2024. Bookings for the fourth quarter was $4.3 million, up 48% year over year, which resulted in a record-breaking backlog at quarter end of $7.0 million, a 91% increase from 2022 backlog of $3.7 million. These bookings and growing backlog numbers are significant in that they reflect strong demand for some aerospace and defense platform products and initial production bookings for newly designed products that happened at the end of 2022 and early 2023. Additionally, we expect this backlog has an improved product mix, which points to us a continued upward trajectory of revenue growth and profitability. Specific new products that are getting some traction are in-canal fasteners for high-temperature applications, gallium nitride sensor electronics for missile applications, and jet engine casting components. We are expecting sequential revenue growth over Q4 and Q1 of 2024 of over 30% from the $7 million backlog and new product production starts. With that, I'd like to turn the call over to Amy. Amy?
spk01: Thanks, Dave. Dave has addressed revenue and outlook, so I'll make a few comments regarding our cash. Adjusted free cash flow defined as cash flow from operation minus capital expenditure was a source of cash of $584,000 in the year as compared to a use of cash of $639,000 in 2022. We did use approximately $153,000 of CapEx for purchases and improvements in our manufacturing process throughout this year. We did have a one-time write-off of goodwill of approximately 469,000, as well as an addition to a prior impaired loan with Cal Nano of 852,000, both which affected our net income numbers. We finished the quarter with 1.1 million in cash and no debt, which has been consistent throughout all of 2023 and the end of 2022. We will continue to maintain a strong cash balance. This completes our prepared remarks. We would like to open the call up for questions.
spk00: If you have a question at this time, please press star, then the number one on your telephone keypad. Once again, to ask a question at this time, please press star, then the number one on your telephone keypad. Your first question comes from Jason Sineski with Chapter 12 Capital. Your line is open.
spk02: Hey, guys. Thanks for taking my question. I guess just on the 30% revenue growth, Dave, that you talked about, I mean, that's a pretty substantial increase. Can you give any color on sort of which operations are seeing the bulk of the increase there? And then, you know, is that kind of like a one-time quarterly thing and then you expect to drop back down? Or should we see that as the foundation for, like, are you going to grow off that point through the balance of the year?
spk07: Yeah, so in my prepared remarks, I sort of alluded to that. So a little more color. There is, you know, bookings had steadily increased throughout 2023 and into 2024. So it's really driven from, you know, our growth comes from really sort of two primary areas. You know, the platforms that we're on, if they're growing, you know, we're growing. And we are on some notable platforms that are on increased build rates. And the other one is new product starts. So I had mentioned in early 2023 or at the end of 2022 that we had a number of new product starts and that they mature into something of the initial production and Nine to, you know, can be anywhere as nine months to upwards of 18 months. And so we're seeing some of that kicking in as well as, you know, some interesting platforms that we're on. So it's a combination. And we're looking at, you know, with a $7 million backlog and a $4.3 million, you know, we are seeing that pipeline, you know, pretty robust. So it's not looking – to us like a one-quarter thing. The bookings pipeline and bookings have been on a positive trend.
spk02: Okay, that's great. That's great, Dave. I appreciate that. Just one other one I wanted to ask was on DP TAS. I think you gave guidance for breakeven EBITDA from that operation in the second or third quarter of this year. If we look at the notes of the financials, it looks like the net income from the Canadian segment deteriorated in 2023. I understand that there's head office costs. I'm not sure if the goodwill write-down would have been in there. Is there anything you can say to help us bracket how much improvement we might expect in the consolidated EBITDA figure? as a result of DP cast moving towards break-even by the middle of this year?
spk07: Yeah, so you've got to be careful when you look at those numbers for Canada. There's a lot of costs in there that are unrelated to DP. But, yeah, and goodwill is in that number, so you've got to be careful deriving too much. There was an improvement from last year to this year in DP. So, you know, I mentioned that, we've mentioned that, you know, they're on a positive trajectory. So, and that continues. That's, we're drawing that line of improvement. And that's how we arrive at the Q2, Q3 of this year, based on the trend. And we see everything with product mix and pricing. You know, we should be in line. That's why we mentioned, you know, Q2 and Q3. of this year. Okay. All right.
spk02: All right. I appreciate it. Thanks, guys.
spk00: Your next question comes from Alexander Ryzakov with AlterVest. Your line is open.
spk04: Hi, Dave. Hi, Amy.
spk05: Hello. Hey, my first – I just have a couple of questions. My first is a follow-up on DPCAST. So I think, you know, it's now been over two years since you acquired the business. You paid 5.7 million U.S. for it. And it looks like cumulatively the business has lost probably another 2 million U.S. since your acquisition. So roughly 8 million, which is the total cost to OmniLife shareholders, which roughly equates to, you know, slightly under now the market cap of OmniLife. And I realize that we're beginning to see improvements in the business, and we hope it turns positive later in the year. But I think it's fair to say that so far this cash allocation decision has destroyed significant shareholder value, as evidenced by the goodwill write-down that you took. So, Dave, can you confirm that at the time all four directors voted in favor of the DP cash acquisition?
spk07: Yeah, 100%.
spk05: Perfect, perfect. And just as a reminder, it's right that Cypress Associates was the advisor who presumably sourced the transaction for you and then helped you with valuation and diligence. Is that accurate, too?
spk07: Yeah, as we've disclosed in our financial statements.
spk05: Exactly, exactly. No, absolutely. And Charles Samco, who is managing director and head of mergers and acquisitions at Cypress, is also director then, I would assume, who approved the transaction as well.
spk07: Well, yeah, as we've disclosed, yeah, nothing new there.
spk05: Perfect. No, that's a helpful clarification. My second one relates to CalNano and the equitization of our loan there. As part of the transactions, investors, which included a director of OmniLite and CalNano, received warrants for the shares that they bought as part of that equity raise. Do you have a sense of how much those warrants are worth today?
spk07: I haven't calculated it, no. Well, by my figure, I might be off.
spk05: I think it's close to $800,000. And my understanding is OmniLite, despite being the largest shareholder in CalNano and also being a lender, I would argue, at the low market rate, has not received anything when it comes to the portion of its consideration that it cancels for the equity that it received in CalNano. Is that right?
spk07: Yeah, we've disclosed what we received for that transaction.
spk05: Yeah, which were just shares. I don't think there were any warrants or any other type of consideration attached. And so I guess my question to you as a large shareholder, also an OmniLite, is do you think that's fair to OmniLite shareholders?
spk07: Yeah, we're in alignment with what the exchange will allow. And yeah, I'm very happy with that transaction.
spk05: Well, I'll say, and I'll pass the line afterward, but I'll say I think as probably the second largest shareholder, I don't think it's fair to omni-like shareholders where you have insiders who get preferential treatment on a transaction. And I think there are different ways of structuring a transaction to make sure that everyone is treated fairly, especially the largest shareholder and someone who lent money I would argue at below market rates, and those rates were close to zero before I raised that question at the AGM a couple of years ago. So I'm hoping we make sure that OmniLight shareholders are treated fairly when it comes to their investment in Calnetta. But thanks for taking the time to answer my question, and I'll pass the line.
spk00: Your next question comes from Emanuel Kramer. a private investor. Your line is open.
spk03: Thanks for the good quarter. Keep it up. With inflation still not tackled and prices of materials and labor goes up, would you anticipating having a problem keeping your margins? Are you going to have to raise prices to effectively keep on the rate, the margin that you have?
spk07: Yeah, that's a good question. You know, part of, you know, my comment about, you know, product mix and pricing is for that very effort. You know, it happens throughout the year, but it's ongoing in this market with long lead materials and price increases. You know, it's a big part of our efforts that are ongoing, dealing with that before things get booked. So, you know, that directly relates to my comment about, you know, being able to, you know, stay on the positive trajectory because we're focused a lot on that. And, you know, it makes its real-time impact. booking and looking at costs of materials, as well as buying smart. So our inventory being up, as I mentioned, part of that is getting some pricing benefit of placing these on order early and getting some of that pricing. But even more importantly, it's pricing those into our product and passing that along to our customer, which, you know, is in full gear now.
spk03: Also, with all the news on Boeing coming out nearly daily, what of an impact, if any, does that have on your business with Boeing?
spk07: So we make a lot of fasteners on Boeing and Airbus and Embraer, and the fasteners tend to be more the high-performance engineered, highly engineered fasteners, which are in specific applications. but they're across many, many platforms. So we're not concentrated on any one platform like 737 or the 787. You know, those are two notable ones that have had some issues. Obviously, as being part of the supply chain, it could have some effect, but the broad range of platforms we're on means that – we're somewhat sheltered from having a high concentration on any one particular program. So our expectation is these issues at Boeing could have a small impact but not a large impact. Build rates are still climbing. Maybe the rates are slowing a bit, but they're still climbing. The demand is very high for our fasteners.
spk03: Would you say that Airbus and the other ones would pick up the slack and give you more orders?
spk07: And that's already starting to happen. We've seen some evidence of that already.
spk00: Okay. Thanks very much. Once again, to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from Frank Wineski, a private investor. Your line is open.
spk06: Hi. Good morning, David and Amy. A couple of questions. The inventory, you went into one of the reasons you were doing that, and certainly with the outlook for the immediate future, it's good to have that inventory. What kind of inventory – turns do you see going forward? Is inventory likely to stay at these levels as far as inventory turn, or will it come down a little?
spk07: Sorry, you can go, Amy. No, go ahead. Sorry, go. Yeah, I think you will see some ebb and flow of inventory This specifically, you know, and I'm commenting on it, was a specific buildup in anticipation of some orders in 2024, which, you know, we did book. It's going into the, you know, that $7 million backlog number. We expect the pipeline's pretty full. We are expecting some more growth. So, you know, you do need to anticipate. you know, inventory for a growing revenue, but, you know, but we're looking to, but that will ebb and flow. I don't see it. We don't see it continuing to just rise and rise. You know, most of that inventory buildup was for, you know, was for revenue. So I guess a little bit of picture. I think you might want to add to that. You had a comment.
spk01: Yeah, I was actually going to mirror pretty much what you said that, you know, we'll probably see that come down in the first quarter due to the shipments that were in inventory or in whip at the end of the year. And, you know, I think it's going to continue to go up and down, up and down, depending on the timing of the quarter, the shipments and everything in there. But we're not going to continue to see, you know, increases of a million dollars year over year or anything like that.
spk06: Okay. Thank you. The other kind of impressive thing, was your SG&A expenses that went down 30%. Now, in your filings, you mentioned a couple of reasons for that. It was all in the other category. But one of the reasons was decreased headcount. Could you quantify that? And where was that headcount decreased?
spk01: Yeah, so we did have a handful of people within the SG&A department that we did decrease in 2023, and it was across all the organizations, not one specific organization. Some of those were higher salary people, I'd say. Some of those took effect at the beginning of the year, so we did see a full year effect, and some did happen towards the end of the year, so we're actually going to see some effect of that as we go into 2024.
spk06: And, you know, can you quantify how much of the 30% decline came from decreased headcount? Or just put it another way, what's your headcount now as opposed to what it was a year ago?
spk01: We're pretty consistent with where we were a year ago, but the heads that we have added is more in the direct labor than in the cash. Okay. Okay. Yeah, get the product out the doors, you know, obviously.
spk06: Okay. And the other one is the decrease in amortization. Now, I assume that's because of the write-off?
spk01: No, the write-off actually, Goodwill isn't amortized on the books. It was just we are fully amortized on the Monzite books for their intangibles, which is the timing. Oh, really? Okay, good.
spk06: Good. R&D up 100% for the year. What's the go-forward rate on that? And could you go into a little bit of how do you decide what to spend the R&D on? Is it, you know, are you developing products that you think will be needed, or have airframe manufacturers come to you and said, we need this, would you develop it? Let's go into a little bit of detail on the R&D, if you would.
spk07: Yeah, Frank, I would expect that this number, you know, would continue or as a percentage is, you know, a healthier one. It's a sign, you know, something I spoke about a year ago is with new product starts. So the technologies, the themes that we see, you know, I mentioned it in this one, which is, you know, things like working with Inconel. So there was a lot of R&D associated with, you know, working with forming Inconel because it's high demand, a lot of products around Inconel, especially in certain areas that are high temperature. So we saw that. We invested in there. Same thing with, you know, gallium nitride is a new semiconductor that is finding its way into, you know, battery chargers, into – advanced sensors, radar. It's a high bandwidth semiconductor. So there was some R&D related to working with GAN. And, you know, it's directly helped with new products. You know, some of those GAN sensor electronics that had some effect in the core, you know, as a result of that. And In casting some technology, using, being able to form tubular components, using certain cores, again, seeing as an ongoing need for thin-walled tubular kinds of components. casting components. So directly, what drives it is we see technologies that are directly needed for products that we are or are going to develop. That's sort of the methodology.
spk06: We should sort of expect that percentage of revenues to be maintained?
spk07: I would think so, yeah. It wasn't that we weren't before But I think the focus on new product starts and then understanding what technologies were driving that. So this represents a more, yes, a level that, you know, we look to continue to invest in those areas.
spk06: Good, good. Understand. One or two more questions, if I could. Looking at, and I'm glad to see you wrote off the DP question, But looking at that goodwill impairment by CGU, for DP, you forecast 15% growth and an EBITDA margin of 18% over a five-year period, I believe, they require. How realistic is that? What have you done with DP to produce those kinds of forecasts? which certainly haven't been, you know, in the past, you know, exhibited in the past?
spk07: Yeah, so it's a good question, Frank. And, you know, Alex earlier mentioned, you know, it's been two years. So when you're in the aerospace and defense space, business producing very high performance products, you know, the life cycle is pretty long. So even to turn an order, you know, from the time, let's say you design a new product, get it qualified, and then start producing with any real revenue, you know, that's an 18-month endeavor. So You know, I made no bones about the fact that there was opportunities to product rationalize at DPCAST. So, you know, it was a combination of spending some – and we spent some, you know, capital early on with improvements of some efficiency and getting some new product starts. and pricing and product rationalization, and all of that takes some time. So, you know, would I have liked it to go a little faster? Sure. But, you know, two years was not, you know, was not a long period of time that, you know, some of those efforts can't kick in. You know, it takes some time in this. These products are going on jet engines. They're going in very high-value assets. There's a lot of work and a lot of qualification and buy-off that takes. So I think that's sort of maybe the time horizon looking at in such a narrow – it doesn't move that fast. And it's more important about the trajectory because you're going to keep that momentum up. So, you know, that's what gives you the optimism of that. And along the way, we have some products – that perform better than that, right? So they're more towards our delivering 25% EBITDA kind of target. So that's how we come to that conclusion because we see it happening now on some basis. And there's where the public rationalization comes in is that we don't do too much of low margin and strip that away. And that's what's happening.
spk06: Yeah, I was going to mention that. The EBITDA margin of 18% seems a bit pedestrian. But, you know, are your orders going out now with EBITDA inherent margins higher than 18%? We have some, yes.
spk07: Yeah, and that's the 18 really comes from, you know, we're still on this path of improving, right? It's hard to improve to that point. But we feel very strongly that DP, that casting operation, can and will deliver to the same profit margins as we see in the rest of the company.
spk06: Staying on the CGU for a moment, the Monzite company, estimate for going forward is 27% EBITDA. Is that indicative of what the EBITDA margin is currently at Monza?
spk01: That does show, you know, when putting this together, you know, we don't want to be too aggressive in terms of, you know, really having to expand that EBITDA margin. I'd say right now it's a little bit lower than that, but it's projected to be, you know, a bit higher than that. So, you know, it's in and around, you know, 20 to 25% as we look forward through the next five years.
spk06: And would the growth rate, revenue growth rate of Ronsight be in excess of the rest of the company? You have 14% in there, right? Is Monzite expected to grow faster than the rest of the company on a revenue basis?
spk01: Yes, on a revenue basis, yes.
spk06: It would seem that Monzite is, you know, an unappreciated but increasingly important part of the total company. And I've mentioned this before, but when you break out your CGUs, is there any thought yet that – Monzite might be broken out as a separate category of business. It's certainly different. It's electronics rather than metalwork.
spk07: Well, so I'm not really sure how to comment on the underappreciated. It feels like Monzite's appreciated, so I don't know exactly what you meant there. But having said that, on the electronics, very often our electronics – The electronics that Monzai produces are high-value assets and platforms and very often around metal, whether it's formed metal or a metal enclosure. So, you know, part of our platform of products here, they're very related. So, you know, the electronics, even though it's technically electronics, it's – It's very much involved with the same manufacturing, the same product, same platforms, you know, as the metal in many cases. So we don't really see it as that distinct as what you may think.
spk06: Well, yeah, you know, when I said underappreciated, I appreciate it, and I'm sure you do. I would just say, you know, when people talk about OmniLite, they're talking about casting and forging. not the electronics category, which is growing better and has a very fine EBIT margin. But I'll let it go there. One final question, and that's on the CalNano investment. It's a reasonable percentage of your market cap now. What are your thoughts about that going forward, anything you can share? I know you can't share everything, but what are your thoughts?
spk07: Well, we're certainly happy we've made the investment. It's an important asset for us. And as we spoke about before, so, you know, we're supporting, we're supportive of Cal Nano. And we're looking at it like, you know, as an investment that, you know, we'll do what's prudent and, you know, in our interest. and we're just watching it closely.
spk06: Okay. But there's no discussion on how to redirect that capital?
spk07: Well, no, we're constantly evaluating, you know, potential uses and taking that, you know, under our thought process.
spk06: Okay. Great, Dave. Thanks for answering the questions. Thank you to Amy and Dave. You know, I'll talk to you again in the near future, hopefully.
spk07: Sounds good, Frank. Thanks.
spk00: At this time, there are no further questions in queue. I'd like to turn the call back to our presenters for any further remarks.
spk01: Thank you so much. So we appreciate everyone joining the call today, and we look forward to releasing our Q1 2024 results here within the next month. Thank you so much.
spk00: This concludes today's OmniLight Industries investor call. Thank you for attending and have a wonderful rest of the day.
Disclaimer