Firan Technology Group Corp
TSX:FTG
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Firan Technology Group Corp
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Good morning, everyone. My name is Rayne, and I will be your conference operator today. I would like to welcome everyone to the FTG Q1 2022 Analyst Call. [Operator Instructions] 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 Firan Technology Group. Mr. Bourne, you may proceed.
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 has no specific intention to update any forward-looking statements, written or oral, that have been made from time to time by or on its behalf, whether as a result of new information, future events or otherwise.
Well, finally, FTG has returned to growth. The impact of the pandemic is waning after a tough couple of years. We are not back to pre-pandemic levels, but the bookings trend is very positive and sales are increasing. And our sales increase in Q1 is in spite of an amazing list of unusual challenges we experienced in the quarter. I will explain some of these challenges later, but I do want to say again that I'm so very proud of the efforts of everyone at FTG in doing whatever it takes to overcome these challenges. In the face of such a difficult period for the aerospace industry and so much adversity, everyone buckled down, worked together and did what was needed to be done to get us through another quarter in good shape. I'm sure that this team is up to any challenge we may face in the coming years.
Before I get into details, let me talk about a very important topic for the future of FTG. It is our mindset. For the past 2 years, we have been playing defense. We played great defense. We took many actions to ensure we got through the pandemic, but defense is only half the game. As of the start of 2022, we are consciously taking actions to play some offense as well. We have a great balance sheet and the market is coming back. We are taking advantage of our balance sheet to increase capital spending to support higher technology, improve our operations and to grow. We will continue to do this, but we can and will do more.
Our balance sheet puts us in a great position to grow through acquisitions or other corporate development activities. We are putting a lot of effort in this area now. And we can and are looking at other capital allocation options that can benefit our shareholders. We believe that investing for the future growth of FTG is most important. But in the short term, we believe there are other capital allocation plans we could undertake to the benefit of our shareholders until we see a stronger valuation for the company and its results.
Now let me summarize some key accomplishments from our first quarter of 2022. FTG achieved a sequential quarter of increased bookings as the aerospace industry recovers from the COVID-19 pandemic, and we achieved a 1.27:1 book-to-bill ratio in the quarter. FTG's first quarter bookings of CAD 26 million are up 10% over Q4 2021 and up 43% over Q1 2021, and is the best booking quarter since 2019. This represents an annualized run rate of just over CAD 100 million. With these new orders -- within these new orders, we booked an order valued at CAD 1.3 million for Simulator products on a military program, with delivery expected in the second half of 2022. So, we are seeing our first uptick in this market in a few years.
Total backlog at the end of Q1 2022 is CAD 45 million, which is up 26% from Q1 last year. Sales for Q1 2022 were CAD 20.5 million, which is an increase of 7.9% over Q1 last year. Sales improved compared to Q1 last year and sequentially from Q4 of last year despite numerous business disruptions, including high COVID-related employee absences at all FTG sites, government-mandated production suspension in Tianjin during the Winter Olympics, a winter storm at our Circuits Fredericksburg site and a small fire on one piece of equipment in our Circuits Chatsworth facility.
FTG achieved a trailing 12-month EBITDA of CAD 9.1 million. And finally, FTG maintained strong liquidity with net cash on the balance sheet of CAD 16.2 million after investments in the quarter of CAD 2.1 million for CapEx and CAD 1.4 million for research and development. Jamie will talk about the financials shortly, but I'd like to highlight what we are seeing in future market demand.
The aerospace industry is recovering. US and global air traffic -- travel continues to rebound. And we are seeing the easing of travel restrictions and border restrictions. There are many predictions regarding the length of time for the aerospace industry to recover, but all of them indicates a strong commercial aerospace market in 2022, even if not back to pre-pandemic levels and a full recovery by 2023.
When looking at the performance and plans from the large airframe manufacturers, Airbus is projecting a production rate in 2022 that will be 15% to 20% above last year. And for 2023, they are planning another 40% increase, which would put them above pre-pandemic production rates. Over the next few years, they are also projecting a 180% increase in the production rate of the A220, where we have significant content.
The story of Boeing is a little more complex that they have not shipped any Boeing 787 since May last year due to certification issues with the FAA. But for the Boeing 737, they are now at a 27 plane per month production rate and are targeting ramping to 47 planes per month by the end of '23, a 75% increase from the current rate. Later in my presentation, I will further elaborate on how we are benefiting from renewed production of the Boeing 737 aircraft.
Looking at the longer term, Boeing's most recent 20-year forecast does show growth beyond the COVID downturn as air travel recovers, and it continues to show 40% of all new aircraft deliveries going to Asia, as has been the case in all of their recent forecasts. For the defense market, the defense budget request in the US for next year has a small increase. So, this market remains strong. And unfortunately, the conflict in Ukraine is increasing the focus on defense spending around the world.
The business jet market has already seen traffic recovery. A recent business jet market forecast from Honeywell predicts growth in this market in the coming years. The simulator market mirrors the end market application. So commercial aerospace simulator activity is down but recovering, whereas the defense simulator market remains strong. But as we always remind everyone about this market, it is a lumpy business. So year-to-year variations are large.
As we have said for many years, FTG's goal is to participate in all segments of the aerospace and defense market as each moves through their independent business cycles. With FTG, our Canadian and China sites are more focused on the commercial aerospace market, where U.S. sites are more focused on defense market. Beyond all this, let me give you a quick update on Q1 2022 for FTG.
First, as already noted, the leading indicators of our business is our bookings or new orders. For the last 5 quarters, bookings increased and Q1 2022 saw bookings up 43% compared to Q1 last year. In Q1 '22, sales were up 8% compared to Q1 last year. We expected the sales to be higher, but we had to deal with a surprising number of external challenges. Employee absenteeism across the company was high due to COVID and pulled a close contact in the quarter across all sites. And then Tianjin, all businesses were shut down a few times due to COVID cases in the city. And staying with Tianjin, our aerospace Tianjin facility lost a full month of production in the quarter due to COVID shutdowns, Chinese New Year and a shutdown for the Beijing Winter Olympics, where most industry was closed to ensure good air quality.
Beyond this, our Fredericksburg site lost a week of production in January due to a winter storm in the area. And in Chatsworth, we had a production disruption where we had a small fire on one piece of equipment that shutdown that process for about 10 days. Sales were up for us into the US, Europe -- European and Asian markets in the quarter, but were down in Canada. The decline in Canada was due to lower simulator sales.
In our aerospace business, Q1 sales were down 10% or CAD 700,000 compared to Q1 last year. The decline is due to the decline in our simulator business year-over-year, which was down CAD 2.4 million. So excluding the impact from our simulator business, sales were actually up a robust CAD 1.7 million, or 39% for our traditional products.
On the Circuits side of our business, sales were up CAD 2.3 million or 18% on a Q1-over-Q1 basis. All sites were up, but the Circuits Toronto and Tianjin sites were up more, as they were more focused on the commercial aerospace market. Overall, at FTG, our top 5 customers accounted for 58.2% of total revenue in the quarter. The percentage compares to 52.1% last year. Last year, the top 5 included the simulator customer, whereas this year it does not.
Also interesting to note, of the top 10 customers, 7 are customers shared between Circuits and Aerospace. We like to see the shared customers as that means we are maximizing our penetration of these customers by selling both cockpit products and circuit boards. In Q1 2022, 36.8% of total revenues came from our aerospace business compared to 30.7% last year. The drop -- sorry, I reversed those numbers, compared to 30.7% this year. The drop is due to reduced simulator activity.
I'd like to turn the call over to Jamie, who will summarize our financial results for Q1 '22. And afterwards, I will talk about some key priorities and activities we are working on. Jamie?
Thanks, Brad. Good morning, everyone. I'd like to provide some additional detail on our financial performance for Q1 2022. On sales of CAD 20.5 million, FTG achieved a gross margin of CAD 4.2 million or 20.7% in Q1 2022 compared to CAD 3.7 million or 19.3% on sales of CAD 19 million in Q1 '21. The increase in gross margin dollars is a result of increased operating leverage on higher sales volume, operational improvements and reduced provisions for obsolete inventory. Government assistance within gross margin in Q1 '22 included $0.3 million from the aviation manufacturing jobs program, AMJP, in US, whereas Q1 2021 included CAD 1 million of wage and rent subsidies in Canada. Excluding the impact of government assistance, gross profit increased in Q1 2022 by CAD 1.2 million on incremental sales of CAD 1.5 million.
From a geographical standpoint, combined sales into Europe, Asia and other Americas increased to CAD 3.1 million, which is up 57% from CAD 2 million in Q1 '21. FTG sales into these markets is for commercial aerospace applications, which is recovering as governments reduce travel restrictions.
SG&A expense was CAD 3 million, or 14.8% of sales in Q1 2022 as compared to CAD 2.7 million, or 14.2% of sales in the prior period. The increased expense level is due to increased travel costs as business travel begins to normalize and the inclusion of CAD 100,000 of wage subsidies in Q1 2021.
R&D costs for both Q1 2022 and prior year were CAD 1.4 million, which was 6.8% of sales in the current quarter as compared to 7.3% in the prior year quarter. R&D efforts include product and process improvements at the Circuits 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.
The average exchange rate experienced in Q1 '22 was 1.27%, which was the same as in Q1 2021. During Q1 2022, the Canadian dollar appreciated by approximately 0.3%. FTG's balance sheet includes assets and liabilities denominated in US currency, with a net balance of approximately $8 million at the start of Q1 and $5.4 million at the end of Q1. Realized and unrealized foreign exchange losses in Q1 amounted to CAD 0.2 million as compared to CAD 0.6 million in the prior year quarter.
Earnings before interest, tax, depreciation and amortization was CAD 9.1 million for the trailing 12-month period ended Q1 2021 -- 2022, sorry, as compared to CAD 9.6 million for the trailing 12-month period ended Q4 2021. The EBITDA margin for the trailing 12-month sales ended Q1 2022 is 11.2% as compared to 12.2% for the comparable period ended Q4 2021. EBITDA in Q1 '22 was CAD 1.3 million for an EBITDA margin of 6.5%, however, 5.3%, excluding government assistance.
By comparison, the trailing 12-months period ended Q4 2021, the EBITDA margin was approximately 4.5%, excluding government assistance. We do expect EBITDA margins to increase as commercial aerospace revenues recover. For Q1 2022, FTG recorded a net loss before income tax of CAD 0.4 million as compared to income before income taxes of CAD 0.1 million in 2021.
The Q1 2022 income tax provision of CAD 0.3 million reflects that the corporation's Canadian operations were profitable and that deferred tax assets on foreign operating losses were not recognized in the quarter. Our net cash position as of Q1 2022 was CAD 16.2 million as compared to net cash of CAD 17.9 million end of Q4 2021. Free cash flow, defined as cash from operating and investing activities, excluding acquisitions, less lease liability payments, was a usage of CAD 1.6 million for Q1, which included CAD 2.1 million in CapEx during the quarter.
CapEx is expected to be higher in 2022 than the 2 previous years to support our business growth. Equipment investments are driven by insourcing of certain manufacturing and test processes, productivity improvements and replacements. Further, these investments are skewed towards the Circuits segment. As at quarter end, the company's primary sources of liquidity totaled CAD 50.7 million, including cash, accounts receivable, contract assets and inventory.
In addition, FTG has access to approximately $18 million in credit lines. Working capital as at quarter end was CAD 38.8 million as compared to CAD 40 million as of the 2021 year end. Accounts receivable days outstanding were 66 at quarter end compared to 72 at the 2021 year end. Inventory turns were up to 3.7% from 3.4% at the 2021 year end. And accounts payable days outstanding were [ 85 ] at the end of Q1 as compared to 86 for the 2021 year end.
Our lease for the Aerospace Chatsworth facility expires on June 30, 2022, and the owner has advised us of their intention to sell the facility. To secure the facility for continued occupancy, we have entered into a purchase and sale agreement to purchase the facility for $6.7 million. Our intention is to secure a new owner for this facility prior to the closing date from whom FTG would lease the facility as we deal with all of our production facilities.
In the case of agreement has not been assigned to a third-party prior to closing, the corporation will complete a purchase of the facility using a combination of cash, credit lines or other financing. Backlog at the end of Q1 was CAD 45.1 million, which is up CAD 5.3 million from Q4 2021. With an improved market situation for commercial aerospace and robust defense spending by NATO countries, FTG will focus on both, growth and profitable efficient operations in future quarters. Our complete set of filings are now available on sedar.com.
With that, I'll turn things back over to Brad.
Thanks, Jamie.
Let me just delve into some important items regarding our future performance across FTG. For me, I thought our first quarter had a strong operational performance in the face of a myriad of the headwinds. If you look at Q1 this year versus Q1 last year and exclude the government assistance received in each of the quarters, the revenues increased CAD 1.5 million and the bottom increased -- bottom line increased CAD 1.8 million.
While I know we have a high contribution margin, it takes an amazing effort by everyone in FTG to improve profitability by more than the increase in sales. If we had not had all of the operational headwinds, we would have had even better sales and bottom line. And as I and many others in the aerospace industry have suggested to many people in the government, support to the aerospace industry was withdrawn before the industry had recovered sufficiently. There's an indication this message is being heard as there are new programs in Canada and in the US that have been established to help the industry invest for the future, and we are actively pursuing these programs.
In our aerospace business, our Toronto facility has done a great job in managing through the pandemic, but now the focus is on growth. They have made some good inroads in increasing their activity in the defense market. They are involved in some exciting new programs in this area. And as I mentioned, they booked a new simulator order for a defense program that will be deliverable in the second half of '22.
We have had a few supply chain challenges due to chip shortages this year. But so far, we have mitigated the impact down to a manageable level. Our Aerospace Chatsworth facility was also impacted by pushouts of suppliers for some military components, but they continue to have a long list of new sales opportunities, almost all coming from the defense market. They continue to see and win US defense aftermarket opportunities.
Our Aerospace Chatsworth facility operating performance was significantly improved in Q1 this year compared to Q1 last year, with sales up more than 25%. In our Circuits segment, bookings in our Toronto facility have been very robust this year as the commercial aerospace industry recovers. We are taking actions to ramp production in line with this increased demand.
Circuits Fredericksburg was impacted by a very difficult snowstorm in January. The site has not performed to expectations and subsequent to quarter end, we have made some organizational changes to improve things going forward. Circuits Chatsworth had improved operating performance in Q1 this year, with sales up more than 15%, which was nice to see. We continue to invest in the business to further improve performance, including additional CapEx, process improvements and strengthening that organization.
Both our China sites are exclusively focused on the commercial aerospace market. As noted from the Boeing market forecast, Asia remains a key market for commercial aerospace activity. So, we believe these sites will be valuable in the long term. Our Aero Tianjin facility has seen orders increased consistently since the start of 2021 as the commercial aerospace market recovers, and they win new work.
Subsequent to the end of the quarter, we received a new order for cockpit products for Boeing 737 aircraft, with production to be shared between our Toronto and Tianjin facility. And our total backlog of panels for the 737 aircraft is now approaching CAD 2 million. These orders are showing the results or return on investment of having these sites approved to supply cockpit channels to Boeing that we completed last year.
Tianjin is also seeing strong demand from the business jet customers and in general aviation. We now have a hiring plan in Tianjin that would see us add 40% to 50% more production staff as fast as possible. At their current capacity, they [ have ] sold it through September. But of course, our goal is to add capacity so they can continue to grow. And progress continues on the C919 aircraft development in China. And while we still have not quite completed our qualification activities, we have shipped our first production orders and are starting to see some new orders for 2022. At our Circuits joint venture in China, the uncertainty regarding the owners of our partner are settling down in a positive way. We see -- we saw new wins and increased demand at that site in Q1 and in the coming quarters.
We continue to manage our balance sheet, but also to leverage its [ breadth ]. Our net cash on the balance sheet remained above CAD 16 million at the end of Q1, and we did invest in CapEx above our normal rate to improve operations, primarily in our Circuits business. We are seeing a number of acquisition or corporate development opportunities arise that could fit with either of our businesses, but we are currently seeing more on the Circuits side of our business.
Given our commitment to playing some offense, our very strong cash position, we are evaluating and pursuing. Our criteria for any such transaction would remain what we've always said. They would need to meet a number of the following objectives. They need to be aligned with our market and product focus. They need -- where they could expand our technology offering or expand our geographic coverage, such as Europe for commercial aerospace or Europe, India, or other top 10 western defense countries for defense. It could accelerate FTG's penetration of the aftermarket segment. It could drive up our plant utilization. And of course, it would need to have an attractive price and multiple and be accretive to our earnings.
And finally, looking forward into the balance of 2022 and beyond, there's reasons for optimism. As already noted, the industry is recovering and ramping production. Our sales team has been doing a stellar job and we are seeing and winning new programs and adding new customers. We are playing offense to capture new work. With a focus on operational excellence in all parts of FTG, we are confident we will remain on a growth trajectory in the coming quarters.
And lastly, the FTG Annual General Meeting is next Wednesday, April 20, at 10:30 a.m. Eastern Time. It will be a virtual meeting again this year. The information to log-in and participate was included in the management proxy circular mailed a few weeks ago. We look forward to seeing everyone there in the next week.
This concludes our presentation. I thank you for your attention. I would now like to open the phones for any questions. Rayne?
[Operator Instructions] Your first question comes from Nick Corcoran from Acumen Capital Partners.
Just a few questions for me. The first has do with the business disruptions in Q1. Can you quantify the impact in the quarter of all those events?
Yes. It's not a precise number, but -- it's all the different things we saw definitely impacted revenues by more than CAD 1 million, I would say, less than CAD 2 million, so somewhere in that range. And of course, as our top line impacts bottom line, there's definitely an impact on both.
And then was there any impact on gross margins from either higher employee absenteeism or any of the other headwinds that you face?
Yes, definitely. And it's just -- every one of these things cause us to have -- to do work around, to try to mitigate the impact. But for instance, you talked about COVID absences. When we have people absent, our first line of defense to mitigate that is to have other people work over time. But obviously, over time costs drive up our costs. So that would be an example.
I talked about one piece of equipment down in Circuits Chatsworth end up being the same sort of thing that is right in the middle of our production process. So, we had to run product out to that point and then hold it. And as soon as we got the equipment up and running, we did everything we can to get as much through as fast as possible. But that meant, again, that people working over time and just a less productive, less efficient manufacturing flow than we would have liked.
And then thinking about EBITDA margins, we were down sequentially. What do you think the driver of that was?
Yes. You really need to look at EBITDA margins. And Jamie sort of touched on this in his part. But EBITDA margins, you got to look at them, excluding the government support that we received. And the reason I say that, and if you go back to 2019, which was pre-pandemic, our EBITDA margin was 13%. If you look at 2020, our EBITDA margin was still 13%, but we had some government support there. If you take that out, it was actually only 10%.
In 2021, it's even more dramatic. This is for the full year, but our reported EBITDA margin was 12%. Taking the government support, it was actually more like 4.5%. And then you go forward to Q1 this year, if you take the government support, we were around 5.1%. So not a great number, but up from full year last year. And I guess, I think the key on this is our EBITDA margin increases, the percentage increases as revenue goes up, it's not a linear function. So, we are trending up from where we were last year, but the drop-off on the government funding makes it look like sequentially, we were down. But on a normalized basis, it is trending in the right direction.
And then for full-year '22, do you have an EBITDA target in mind for the year?
We don't provide guidance, as you know. But I guess if you look at the historic numbers, and again, assuming we're not getting government support, I would love to see a grant back up towards the 2020 numbers where 2020 was CAD 100 million in sales and a 10% EBITDA. So, I think that -- we're aiming for that sort of number. But again, that's not guidance.
That's fair. And then another question just -- [ there may have been ] broad inflationary impacts. Have you been able to take any price from your customers?
Yes. That's a good topic. It's getting a ton of attention at FTG. Obviously, our customers are sophisticated organizations. They would love us not to pass on any impact of inflation. And there's definitely some situations where we can't, but there's also many situations where we can. And for sure, the sites and the sales team are looking to adjust pricing to reflect reality. And after, say, some initial pushback from customers, generally, they acknowledge there is true cost increases, and therefore, prices need to be adjusted. And we have definitely had some significant price wins with our customers in the first 3 months of this year.
Great. And then last question for me. How much do you expect to spend in CapEx in fiscal '22?
Definitely more than we have spent in the past. Our historic target has been about 3% of sales. I think this year, we're probably targeting something closer to double that, around 6% of sales.
[Operator Instructions] There is no further questions at this time. I would now like to turn the call over back to Mr. Bourne for closing remarks.
Thank you. Again, a reminder, our Annual General Meeting is next Wednesday at 10:30 a.m. A replay of this call will be available until May 15, 2022, at the numbers noted on the press release. And 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. Thank you all for joining. You may now disconnect.