Firan Technology Group Corp
TSX:FTG
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Firan Technology Group Corp
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Ladies and gentlemen, thank you for standing by, and welcome to the Firan Technology Q1, 2021 Analysts Call. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I now like to hand the conference over to Mr. Brad Bourne. Please go ahead.
Thank you. Good morning. I'm Brad Bourne, President and CEO of Firan 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 in 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 there's 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. Well, our first quarter had its challenges, but it also had some very important accomplishments. I will elaborate as I go through our results. But simply put, the COVID-19 pandemic hurt our end market demand and hurt our operations. We are through the operational challenges, and we are seeing the aerospace market start to recover. The recovery won't happen overnight, but the trend is now upwards. Before we go into details, let me summarize some key accomplishments from the quarter. FTG continues to manage through the COVID-19 pandemic by focusing on 3 key strategies: first, FTG's long-term market diversification strategy enables the company to mitigate the dramatic downturn in the commercial aerospace market through its involvement in the defense market and other aerospace sectors. Second, FTG continues to carefully manage costs across the company, balancing decisions on cost reductions with a goal to retain critical skills to ensure the company is positioned for a faster recovery in the future. And thirdly, FTG continues to carefully manage investments and has its strongest balance sheet ever. Jamie will talk about the financials shortly, but I'd like to highlight some very important technology and sales related accomplishments from the first quarter, including FTG had bookings increased by 11% compared to Q4, 2020, indicating the market is now trending upwards. We received a new customer approval or qualification from a major airframe company for our Aerospace Toronto and Aerospace Tianjin facilities, opening up significant new revenue opportunities. We received a significant new customer approval from a major Tier 1 aerospace avionics company for our Aerospace Tianjin facility, also opening up significant new revenue opportunities. We received a new development contract from a major Tier 1 aerospace company for a family of cockpit assemblies that leads to significant future revenues in 2022 and beyond. We continued efforts to pivot towards the defense market and have substantially completed qualification or approval at 5 new customers for our sites in both Canada and the U.S. We supported customers' efforts to begin to resource and procurement of aerospace printed circuit boards in support of new U.S. regulations. And we installed the [ evertec ] semi-additive circuit board manufacturing equipment in our circuits Fredericksburg facility and will begin process development in Q2. I will add that, our first test results of this technology were very impressive as I got to see these last week. All of these accomplishments should position FTG for growth in the coming quarters and beyond. Now let me switch to the market or external situations we need -- now see it. To state the obvious, the COVID-19 pandemic deeply impacted air travel in 2020. This, in turn, has impacted the airlines, which then pulled through to hurt the aerospace industry. I've been watching results from various aerospace companies in the latest quarter is being reported, and revenues have been down between 20% to 40%. Similarly, Airbus and Boeing have implemented production rate cuts in the 30% to 40% range. And we are seeing similar drops in our commercial aerospace activities. Estimates are air travel and commercial aerospace activities will take 2 to 3 years to recover to 2019 levels. So this will be a tough market, at least through 2021. But things are definitely improving. A recent report on air travel in the U.S. showed that at its highest level since the start of the pandemic and at about 50% of pre-pandemic levels. The vaccination program there is definitely improving the situation. And domestic air travel in Asia, particularly in China, is up as well. I also looked at results from defense contractors, and Lockheed, the largest defense contractor, reported a 7% revenue growth in the most recent quarter, while Northrop Grumman reported 17% growth. The defense market is government funded, and it appears to be well supported in the near-term as part of the efforts to stabilize the economy. At a higher level, President Biden released his defense budget request for 2022, and it had some growth. So this market should remain strong for a while longer. Also looking at the longer term, Boeing put out their updated 20-year forecast, and while it is lower than last year, it does show growth beyond the 2- to 3-year downturn as air travel recovers. And it continue to show 40% of only aircraft deliveries going to Asia as this has been the case in their recent forecast. The business jet market is already seen traffic recover. This appears to be due to people believing private jets are safer than commercial air travel and in some cases, because commercial flights are no longer available. There was a dip in business jet deliveries in 2020, but it appears this market will recover faster. The simulator market mirrors the end market application. So commercial aerospace simulator activity is down, whereas defense simulator activity remains strong. 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. In the past number of years, dips in activity in helicopter and business jet markets did not impact FTG's growth brands. Now that commercial aerospace is in the downturn, but as it presents about 40% of FTG's overall activity, we have mitigated the impact. Our Circuits Toronto site, as well as our sites in China, are most closely tied to the commercial aerospace. So they were the most impacted. Our U.S. sites are more focused on the defense market. Operationally, COVID-19 did impact us in Q1. We continued our stringent health checks for all people entering FTG facilities. We continue to do enhanced cleaning at all sites, and we have taken many steps to ensure physical distancing in our workplace. While we continue this, we did have a number of COVID-related events across FTG in our first quarter. In December, our Circuits-Chatsworth site was most negatively impacted and had over 50% of production staff out at its peak with people either testing positive or being in close contact with someone who tested positive. After the Christmas break, we had smaller events in both Toronto sites as well as our Fredericksburg site. The worst of this is behind us, but there are still some lingering issues in Chatsworth. Also related to Chatsworth, we did make some significant organizational changes that I am sure will pay off in the long term, but the transitions negatively impacted our operations in the first quarter. Beyond this, let me give you a quick update on our first quarter. In Q1, sales were $19 million versus $24.5 million in Q1 last year, representing a 22% drop. The drop relates to lower demand in commercial aerospace, the impact of COVID-19 on our operations, the impact of the organization changes, offset by an increase in simulator sales from $1.3 million in Q1 last year to $2.6 million in Q1 this year. In our Aerospace business, sales were down 14% or $1.1 million when comparing Q1 this year to last year. The business benefited from the increase in the simulator related activity. On the circuit side of our business, sales were down $4.5 million or 27% on a year-over-year basis. Circuits Toronto was off the most. The Circuits-Chatsworth operations were severely hurt by the COVID-19 event there as well as the organization changes made at that site during the quarter. I'm sure these changes will benefit that site in the longer term. Overall at FTG, our top 5 customers accounted for 52.1% of total revenue in the quarter. The percentage is down about 4% from Q1 last year. This is particularly good to see as there was ongoing industry consolidation, such as a combination of Raytheon with United Technologies, that was completed in the last year. Also interesting to note, of the top 10 customers, 8 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 printed circuit boards. In Q1, 2021, 37% of our total revenues came from our Aerospace business compared to 33% in Q1 last year. I would like to turn the call over to Jamie, who will summarize our financial results for Q1, 2021. And afterwards, I will talk about some key priorities we are working on. Jamie?
Thanks, Brad. Good morning, everyone. All references to dollar amounts are with my comments would refer to Canadian currency. I'd like to provide some additional detail on our financial performance for Q1, 2021. On sales of $19 million FTG achieved a gross margin of $3.7 million or 19.3% in Q1, 2021 compared to $4 million or 16.1% on sales of $24.5 million in 2020. The decrease in gross margin dollars is the result of reduced operating leverage on lower sales volume. Funds received from the Canadian wage subsidy program during the quarter amounted to $0.9 million or 4.7% of sales, which, combined with FTG's actions to control costs, resulted in an increase to the gross margin rate. Cost control efforts in Q1, 2021 included reduced overtime and a series of 1 week shutdowns at the sites most affected by the commercial aerospace slowdown. From a geographical standpoint, combined sales into the U.S. and Canada were approximately 90% for Q1 2021 as compared to 82% for Q1, 2020. Weakness in the commercial aerospace market has a disproportionate impact on sales to customers in Asia. However, continued sales to the military and simulator markets, which is based in the U.S. and to a lesser extent, Canada, has provided a stabilizing offset. SG&A expense was $2.7 million or 14.2% of sales in Q1, 2021 as compared to $3.4 million or 14% of sales in the prior period. The reduced expense level was due to reduced travel cost, headcount reductions through attrition and reductions in bad debt reserves. R&D costs for Q1, 2021 were $1.4 million or 7.3% of net sales compared to $1.1 million or 4.4% of sales for Q1, 2021. R&D efforts include product and process improvements at the Circuit segment and efforts to develop and qualify products for future aerospace programs. The increased level of investment reflects a high level of new initiatives in place at FTG. The average exchange rate experienced in Q1, 2021 was $1.27 as compared to $1.32 in 2020. Further, during Q1, 2021, the Canadian dollar appreciated from USD 77. 1 to the end of 2020 to U.S. -- to USD 78.9 by the close of Q1, 2021, which is an increase of 2.3%. FTG's balance sheet includes assets and liabilities denominated in U.S. currency. With a net balance of approximately USD 12.5 million at the start of Q1 and USD 9.5 million at the end of Q1. Realized and unrealized foreign exchange losses in Q1 amounted to $0.6 million, whereas this was not a factor in the prior year quarter. Although FTG does maintain an active foreign exchange hedging program for sales and purchases in foreign currency, we currently have an unhedged balance sheet position as we're holding cash in U.S. dollars. In 2020, FTG's U.S. subsidiaries received 3 separate payroll -- paycheck protection program, or PPP loans, aggregating USD 2.4 million to support the continued employment of our U.S. employees during the uncertain economic conditions caused by COVID-19. In accordance with the program, the corporation's U.S. subsidiaries submitted forgiveness applications for each of the loans in Q4 2020. In Q1, 2021, 2 of these loans were forgiven by the SBA. And as a result, a gain of USD 1 million or CAD 1.3 million was recorded in our Q1, 2021 operating results. Earnings before interest, taxes, depreciation and amortization, EBITDA, was $14.5 million for the trailing 12-month period ended Q1, 2021 compared to $12.9 million for the trailing 12-month period ended Q1, 2020. The EBITDA margin for the trailing 12 months Q1, 2021 is 15% as compared to 12.9% for the comparable period ended last year's quarter. For Q1, 2021, FTG recorded EBITDA of $0.1 million as compared to a loss before tax for Q1, 2020 of $2.2 million. The Q1, 2021 income tax provision of $0.5 million reflects that the corporation's Canadian operations were profitable and net deferred tax assets on foreign exchange -- foreign operating losses, sorry, were not recognized in the quarter. Our net cash position as of Q1, 2021 is $13.4 million as compared to a net cash position of $12.6 million as of Q4, 2020. Although free cash flow, defined as cash from operating and investing activities, excluding acquisitions, less -- lease liability payments, was negative $0.4 million for Q1. This was offset by the debt forgiveness of $1.3 million, resulting in the improved net cash position. In Q1, 2021 and FTG experienced a delay in cash payments from the Canada revenue agency in the amount of $1.4 million as a result of administrative issues within the CRA. These payments were comprised of HST refunds, wage subsidies and rent subsidies and were receive subsequent to the end of Q1. As at quarter end, the corporation's primary sources of liquidity totaled $51.1 million, consisting of cash, accounts receivable, contract assets and inventory. In addition, FTG has access to approximately USD 18 million in credit lines. Working capital as at quarter end was $39.6 million as compared to $39.4 million at the end of the 2020 year end. Accounts receivable DSO were 60 days at quarter end compared to 62 at the 2020 year end. Inventory turns were 3.0 at the end of Q1 as compared to 3.8 million at the 2020 year end. And accounts payable days outstanding were 77 at quarter end as compared to 74 for the 2020 year end. Investment in plant and equipment for Q1, 2021 was $0.4 million, reduced from $1 million in Q1, 2020, and could be considered primarily maintenance capital. We will continue our focus on cash management and the balance sheet, cost control and operating efficiency, which, combined with improved market conditions, causes us to expect improved financial results on a sequential quarterly basis. Our complete set of Q1, 2021 filings are now available on sedar.com. With that, I would like to turn things back over to Brad.
Thanks, Jamie. Let me delve into some important items for the future performance of FTG. For me, the important developments in Q1 were more about the recovery we are starting to see in the market as well as some key qualification successes as well as some key new program wins. During the last month, we had participated in supplier conferences with a number of our key customers. And across the board, they are projecting growth in 2021. It won't be back to 2019 levels, but the downward trend has ended, and the recovery has begun. We also now have customers asking for capacity ramp plans to support their expected recovery, so this, obviously, is encouraging news. In our segmented results, you will see a dramatic improvement in profits in our Aerospace segment in Q1 compared to the same quarter last year. Our Toronto facility has done a great job in managing costs down over the last 12 months, while improving our performance to customers. And to support future sales, they've made some good inroads, increasing activity in the defense market. They have won some exciting new programs in the [indiscernible] market, including a [ bezel ] for a new U.S. military trainer aircraft just now starting production. Our Chatsworth facility had lower than hoped sales in Q1, but this was driven by component delivery issues and not demand. They have the largest backlog of orders of any FTG site, and they have a long list of new sales opportunities, almost all coming from the defense market. I will also mention that a number of their opportunities are for aftermarket parts, again, for military applications. In our Circuit segment, as noted previously, sales in Toronto were down due to the reliance on the commercial aerospace market. But even at reduced revenues, they have managed costs carefully and remain profitable. But like our other Toronto facility, we are working to pivot our focus to defense opportunities for this site with some successes. We've also moved some work from our Chatsworth facility to Toronto to help manage the load of both sites. Fredericksburg started Q1 slowly, but have had a very strong booking recently, and things appear to be on track looking forward. During the quarter, the General Manager at the Fredericksburg site resigned for family reasons, but we have found a strong replacement candidate that we expect will start in the coming weeks. Circuits-Chatsworth continues to see strong demand, but has yet been able to ramp production to benefit from this demand. We have further strengthened the management team there. And while the transition hurt Q1, we believe the changes will improve results going forward. We fully expect they will write the shift in the coming months. To assist in the recovery at Circuits-Chatsworth, we are investing in some key new pieces of production equipment to in-source some processes, which will save costs and improve cycle time. The first of the equipment arrived at the end of Q1 and the balance is expected in the coming months. Both our China sites are exclusively focused on the commercial aerospace market, so both saw a drop in activity. But as noted from the Boeing market forecast, Asia remains a key market for commercial aerospace activity in the long term. So we believe these sites will be valuable. Some of our sales qualification accomplishments in Q1 will greatly benefit our aerospace Tianjin facility. And progress continues on the C919 aircraft development in China. And while we have not quite completed our qualification activities, we now have our first production orders for cockpit assemblies for this aircraft. During the fourth quarter last year, control of our joint venture partner was passed to a new private company in China who acquired the parent company of our partner. They have made significant organizational changes at our partner. This has created some uncertainty regarding the path forward for our joint venture, but we hope to resolve this during 2021. Also, the U.S. government is moving forward with requirements for reassuring our U.S. sourcing of aerospace and defense electronics over a period of years, and this could impact our plans in China, but would create increased demand for our North American plants. It is early in this process and any longer term implications will play out in the coming years. We continue to manage our balance sheet. In Q1, 2021, our net cash on the balance sheet increased from $12.6 million at year-end last year to $13.4 million at the end of Q1. This would have been even better if the wage subsidy funding in Canada had arrived before the end of the quarter. We are seeing a number of acquisition opportunities arise that could hit with either of our business. Given our increased confidence in our performance that would reduce revenue levels, our very strong cash position, we are evaluating these opportunities. Criteria for any such transaction would remain what we have always said. They would need to meet a number of the following objectives: be aligned with our current market focus and product focus, expand our technology offering, expand our geographic coverage to Europe for commercial aerospace or defense markets, accelerate FTG's penetration of the aftermarket segment, drive up plant utilization, have an attractive price from multiple and be accretive to earnings. And finally, looking forward into the balance of 2021 and beyond, there are reasons for optimism. As already noted, the industry is talking about recovery and ramping production. Our sales team has been doing a stellar job, and we are seeing and winning new programs and adding new customers. During the quarter, we increased our sales team in the U.S. Northeast to drive additional growth. As previously mentioned, our Aerospace Toronto and Tianjin facilities were qualified by a major airframe manufacturer. This was a multiyear effort. It now opens up huge new markets for us to penetrate. And even in Q1, we shipped our first production order resulting from this qualification. And this is very exciting for us and a huge accomplishment for FTG. Also, in Aerospace, our Tianjin facility was approved by a major Tier 1 avionic company, opening up another new market segment for them. The word has traveled fast through this account, and we are seeing new opportunities within days of the approval. And lastly for Aerospace, our Toronto facility has won a new family of cockpit assemblies from a Tier 1 avionics company. The development effort is fully funded by the customer and will be completed in 2021, leading to production revenues forecasted around $2 million annually in 2022 and beyond. This is exciting work for us as it spans many aircraft platforms for Boeing, for Airbus and for military cargo aircraft. All of this work will be to support the aftermarket for these aircraft. As we have said over the past few years, we have a goal to increase our activity in the Aftermarket segment of the business, and this will help us achieve this goal. We have opportunities to span all FTG sites and are expected to lead to increased future revenues. At Circuits Toronto, we are pursuing 2 significant opportunities related to restoring of product that this site previously supplied, and we are very close on adding some new defense customers that need the technology we can offer. And finally, we expect to see continued benefit from the wage subsidy program in Canada as this program runs through June of this year, and we still have about USD 1.3 million in U.S. PPP funds that are expected to be forgiven. In the U.S., there's also a new fund for aerospace manufacturers that we are investigating. These programs together will help us remain financially strong until we see the recovery fully take hold. With a focus on operational excellence in all parts of FTG, our demonstrated financial performance at lower revenue levels, we are confident we can weather the storm and return to growth in the longer-term in the coming years. This concludes our presentation. I thank you for your attention. I would now like to open the phones for your questions. Sharon?
[Operator Instructions] First question comes from Nick Corcoran with Acumen Capital.
This is a more general question, but has the global chip shortage affected Firan at all?
Good question. And at this point, it has not impacted us. And I guess what I would say is, I've certainly seen reports on it impacting things like the automotive industry, but volumes are very different in automotive as compared to aerospace and so bottom line, we have seen and we have heard of no impact from the chip shortage in any aerospace customer or activity.
Great. And then switching gears to Circuits-Chatsworth. Can you quantify the impact of the COVID events on production there? And do you expect those orders to slip to Q2? Or are they just lost revenue?
Yes, for sure, they're not lost revenue. They have pushed out. And in terms of quantifying, honestly, I don't have a firm number. I would say we were -- a lot of what drives our production is having the production days and having people in the plant. As I said in my speech, at the peak, we were about -- we're down over 50% of production operators showing up for work. So that was a huge impact, and that carried on, not quite at the peak, but I'd say we had about a month where we had dramatic and significant lower people in attendance to build parts. So whatever that might work out to in terms of a percentage impact is what we saw there.
Sorry, I was just going to add as well that there was also part shortages from other suppliers within our supply chain.
And just looking at Q2, have you seen those part shortages and just general issues with your labor resolve themselves? Or is there being any kind of follow-on effects from that?
Yes. It's still -- there's lingering effects in Chatsworth. If you talk about the labor side of things, they're still running, I'd say, in the 10% to 15% down in people showing up for work. And so we're trying to find ways to mitigate that, but it's definitely still a bit of an impact at this point in time. And in terms of the part shortage, that's more on the Aerospace side in Chatsworth, and it's it's just delays in deliveries, but it's dragging into Q1, or Q2 as well, for sure.
Good. That's helpful. And then you highlighted a number of significant customer approvals and parts orders you're getting. When do you expect revenue from those to start hitting your top line?
To some -- at some level, it starts right now. As I said, one of them is a program of a family of cockpit assemblies. Production revenue starts next year, but it is fully funded development. And so the development revenue will be in this year's numbers. The approval at the major airframe customer, we had orders, and we had our first deliveries at the end of Q1. So that started. It's certainly not going to be at the rates we hope for the long term, and it's going to ramp up over time. But it started right away. And then lastly, we had maybe 1 company approved our Aero Tianjin facility. There is definitely no orders at this moment, but the discussion seems to be going through that company very fast, and we're having people reach out to us from a range of different programs there about how Tianjin could help them. So I expect revenue from that approval will start in 2021. Again, I won't get to the levels that we would hope for the long term, but there will be some level of increased revenue across all of those in this year.
[Operator Instructions] Next question comes from Dean [indiscernible] with -- a private investor.
Could you maybe give a little bit of context on how the delayed Canadian emergency wage subsidies will be impacted on the income statement? Is it mostly direct cost? Or is it operational cost?
No. The -- when I spoke of a delay on the wage subsidy, this is merely the cash collection side, okay? So the P&L treatment is to recognize the subsidy as we effectively earn it, if you will. But this was just a cash issue.
Okay. And are you able to give a split, I guess, between whether it was operational or direct cost?
I'm not sure of the question, but it's a percentage of direct wages. So the -- of the $1 million of the wage subsidy, $900,000 goes into our cost of sales and $100,000 goes into our G&A, if that helps.
Okay. Yes, that's what I'm asking. And then this I remember in the last call, you had sort of maybe not a ton of visibility on the simulator market. Has that changed much in the last quarter?
Not a lot. We are -- Q1 simulator activity was not too bad, but that was from orders from the prior year. We are seeing some smaller opportunities right now, but we're not seeing any significant opportunities in the coming quarter or so. So it remains uncertain, and we're not sure how it's going to play out through the full year. I guess the other thing to note, if you look at the simulator market recently, CAE based on Montreal, has gone on an acquisition spree. And they bought a few smaller simulator companies, and then they just bought the simulation business from L3 Harris. I don't think that impacts us. I would say we do a lot of work with CAE, and we were doing a fair amount of work with L3 Harris last year. They're now being combined, and I don't think that deal is closed, but they're being combined into 1 entity. Maybe it creates some upside for us, but we'll have to wait and see.
Okay. That was actually going to be the next question. Have you -- how have -- I'm not sure if you have the numbers if you're able to share, but have bookings remained fairly stable since the end of the quarter?
Yes, we -- I don't have the numbers in front of me, but yes, they have.
[Operator Instructions] And we do not have any telephone questions at this time. Mr. Bourne, I will turn the call over to you.
Okay. Thank you. A replay of the call will be available until May 15, 2021, and the call-in numbers are on the press release. The replay will also be available on our website in a few days. I thank you all for your interest and participation. Thank you.
This concludes today's conference call. You may now disconnect.