Firan Technology Group Corp
TSX:FTG
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Firan Technology Group Corp
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Good morning, ladies and gentlemen. Thank you for standing by. My name is Michelle, and I will be your conference operator today. I would like to welcome everyone to the FTG Q2 2023 Analyst Conference Call. [Operator Instructions] Please note, this call is being recorded today, Thursday, July 13, 2023. It is now my pleasure to turn the conference over to Mr. Brad Bourne, President and Chief Executive Officer of Firan Technology Group. Please go ahead, sir.
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 and 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 may be made from time to time by or on its behalf, whether as a result of new information, future events or otherwise.
If you have seen in our press release, you already know the quarter was great. It was great operationally and great strategically. FTG is playing offense, and it shows in our results. During the quarter, the company invested in technology, invested in new equipment, grew the business organically, received U.S., Canadian and Ontario government assistance, won some significant new programs and closed our 2 previously announced acquisitions.
Through all these actions, FTG is strategically deploying our very strong cash balance in ways that will drive increased shareholder returns for the future in both the near term and the long term.
Within the second quarter of '23, FTG accomplished many goals that continue to improve the corporation and position it for the future, including our second quarter bookings of $40.3 million were up 48% over Q2 last year and up 22% over Q1 this year. FTG's second quarter revenues of $34 million were up 52% over Q2 last year as FTG ramps up production to meet customer demand.
Revenue included $3.4 million for the newly acquired circuit sites in Minnetonka, Minnesota; and Haverhill, Massachusetts. FTG achieved net earnings in Q2 '23 of $2.4 million or $0.10 per share. Net debt on the balance sheet, including government debt, is now $6.4 million, of which -- which is 0.46x adjusted EBITDA for the trailing 12-month period ended June 2, 2023.
On April 28, 2023, the corporation completed the acquisition of Holiday Circuits LLC based in Minnetonka, Minnesota. The business is now operating as FTG Circuits Minnetonka. Also on April 28, the corporation completed the acquisition of IMI Inc. based in Haverhill, Massachusetts. This business is now operating as FTG Circuits Haverhill.
We achieved a 1.19:1 book-to-bill ratio for Q2 '23. Our backlog increased to $98 million compared to $65.5 million at the end of 2022. Backlog as of the end of Q2 includes $18.2 million at the newly acquired sites. FTG added 17 staff in Q2, excluding the acquisitions, to help increase throughput.
FTG now employs approximately 680 people across its 9 operating sites. FTG received funding of $1.1 million in the quarter for a total now of $3.7 million under the Canadian Aerospace Regional Recovery Initiative, or ARRI program.
FTG also received $0.5 million as the initial draw on a conditional loan provided by the Ontario government under their advanced manufacturing and innovation competitiveness or AMIC program.
Our end market demand is strong. Air travel continues to rebound. Just last week, it was announced that July 4 travel in the U.S. was the highest 1-day travel there ever. When looking at aircraft deliveries, Airbus are working to ramp production and are targeting 60 planes per month in '23, rising to 65 planes per month by early '24. They would like to ramp faster to meet their customer demand, but supply chain imitations are constraining their growth.
At Boeing, they have plans to ramp their 737 production from 31 aircraft per month early this year to 38 per month in the near future and then to 47 per month by 2024. Both Boeing and Airbus continue to book orders faster than they are delivering aircraft.
In the business jet market, Bombardier provided guidance for a 15% to 20% increase in 2023. All of this bodes well for us as we look to future demand in 2023 and beyond. I've also looked the results from some key defense contractors the largest defense contractor, provided guidance for continued strong sales in '23, but with negligible growth.
Northrop Grumman provided guidance of 3% to 5% growth for 2023. The defense market is government-funded, and it appears to be well supported in the near term due to increased geopolitical tensions across the globe. Looking at the longer term, Boeing's most recent 20-year forecast shows long-term industry growth, and it continues to show 40% of all new aircraft deliveries going to Asia as this has been the case in the recent forecast.
The business jet market has already seen traffic recover. The recent business jet market forecast from Honeywell similarly predicts growth in this market in the coming years. The simulator market mirrors the end market application. But as we always remind everyone about this market, it is lumpy, so year-to-year variations do occur.
So if we -- 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 cycle. This continues to prove effective.
Beyond all this, let me give you a quick update on some key metrics for FTG from Q2 '23. First, as already noted, the leading indicator of our business is our bookings for new orders. First quarter bookings were up 48% over Q2 last year and total backlog at the end of Q2 was $98 million, the highest it has ever been in the history of FTG.
The new sites contributed $18 million to FTG's total backlog. But I should mention that our bookings are somewhat inflated by the tight supply chain, causing customers to place orders out further than they have historically done.
In Q2 2023, sales were $34 million compared to $22.3 million in Q2 last year. This is a 52% increase. Approximately 15% of the increase is due to the 2 acquisitions. Also, approximately 19% of the increase was due to increased simulator product sales. Simulator product sales were up $4.2 million from Q2 last year.
And the balance of the growth was approximately 18% and was organic growth across the rest of our business. In our aerospace business, sales were up 71% or $5.7 million compared to Q2 last year. Of this, $4.2 million or approximately 52% of the growth was due to the rebound in our simulator business, and the balance was organic growth in other areas.
On the circuit side of our business, sales were up $5.7 million or 37% on a year-over-year basis. 22% of the growth came from the 2 acquisitions that closed at the end of April and were part of FTG for the month of May.
Overall, at FTG, our top 5 customers accounted for 52.6% of total revenue in the quarter. This compares to 55.6% in the same quarter last year.
Well, the percentages are similar, the companies have changed. Back in the top 5 this year is a simulator customer. It's also interesting to note of our top 10 customers, 6 are customers shared between our circuits and aerospace business. We like to see the shared customers as it means we are maximizing our penetration of these customers by selling both cockpit products and circuit boards.
Within the top 10 customers, 2 are simulator companies, again, due to the rebound in the activity in this market. In Q2 2023, 39.2% of our total revenues came from our Aerospace business compared to 34.1% last year. The aerospace business ramped faster in this quarter, but this was substantially offset by the increased revenue from the 2 acquisitions that were on the circuit side of our business for the month of May.
I would now like to turn the call over to Jamie, who will summarize our financial results for our second quarter 2023. And afterwards, I will talk about some key priorities we are working on. Jamie?
Thanks Brad, and Good Morning everyone. I would like to provide some additional detail on financial performance for Q2. On the sales of $34 million, FTG achieved a gross margin of $10 million or 29.4% in Q2 '23 compared to $5.6 million or 25.2% on sales of $22.3 million in Q2 last year. Excluding the impact of government assistance included within cost of sales, gross margin dollars increased by $4.1 million on a sales increase of $11.6 million, and the gross margin rate increased by 3.7 margin points.
The increase in gross margin dollars is the result of increased operating leverage on higher sales volumes; operational improvements, including pricing actions and favorable foreign exchange rates. The Q2 2023 financial results include the newly acquired sites in Minnetonka in April for a 5-week period from the closing date on April 28 to the end of Q2 2023.
Revenue and gross margin from the acquisitions amounted to $3.4 million and $0.4 million, respectively, which is included within the circuit segment.
The sales increase for Q2 2023 also included incremental simulator product sales of $4.2 million. Specific contracts contributing to similar revenue in Q2 2023 were for repeat part numbers, which are now close to completion.
The average foreign exchange rate in Q2 2023 was $0.085 or 6.7% more favorable than Q2 2022, with a positive impact to sales of $1.6 million, with most of that impact also flowing down to gross margin dollars. On a sequential basis, Q2 2023 gross margin dollars excluding the impact governing systems are up $2.8 million and 0.6 margin points relative to Q1 2023 on a sales increase of $9.3 million.
From a geographical standpoint, although sales increased in each of our named regions, sales to U.S.-based customers grew by $10.6 million in Q2 compared to Q2 last year. Our simulator product customers are largely located in the U.S. and the customer base of the newly acquired circuit sites is U.S.-centric.
SG&A expense was $4.4 million or 13% of sales in Q2 '23 as compared to $3.3 million or 14.6% of sales in Q2 2022. The current quarter included $246,000 of SG&A from the new sites for the 5-week period and $179,000 of acquisition-related professional fees.
R&D costs for Q2 2023 were $1.6 million or 4.8% of net sales compared to $1.6 million or 7.3% of sales for Q2 2022. R&D efforts include process development in the Circuit segment and efforts to qualify and develop products for future aerospace programs.
From a balance sheet perspective, the Canadian dollar strengthened relative to the U.S. dollar by approximately 1.3% from the end of Q1 2023 to the end of Q2. The $203,000 foreign exchange loss identified in our Q2 operating results -- operating expenses is primarily related to losses on the translation of U.S. dollar-denominated balance sheet items.
EBITDA was $5.3 million for Q2 2023 as compared to $2.1 million for Q2 2022. Adjusted EBITDA, which for Q2 included adjustments for government assistance and acquisition costs, was $5.2 million or 15.3% of sales as compared to $2.1 million or 9.2% of sales in Q2 2022.
The acquisitions of the Circuit Segments in Minnetonka and Haverhill added approximately $0.3 million to EBITDA for the quarter. On a trailing 12-month basis, EBITDA was $16.8 million and adjusted EBITDA was $13.7 million for an adjusted EBITDA margin of 13.0% of trailing 12-month sales.
For Q2 2023, FTG recorded earnings before income taxes of $3.4 million as compared to $0.5 million for Q2 2022. The increase in pretax earnings is driven by strong top line growth and gross margin expansion. The acquisitions contributed $3.4 million of revenue and $44,000 of earnings before income taxes.
The Q2 2023 income tax provision of $1.0 million or approximately 29% of pretax earnings is about the estimated statutory income tax rate of 25% and reflects that deferred tax assets on foreign operating losses were not recognized in the quarter.
As of Q2 2023, FTG has a net debt position of $6.4 million as compared to net cash of $16.8 million as of Q2 2022. During the quarter, $26.3 million of cash was used for acquisitions and $2.1 million for capital expenditures.
These investments were funded with cash on hand and $4.1 million of new bank debt. FTG also received proceeds of $1.7 million between the ARRI program sponsored by the Government of Canada and the AMIC program from the Ontario government. Net debt is 0.46x adjusted EBITDA for the trailing 12 months period.
Regarding the acquisitions of Holiday Circuits and IMI, FTG's balance sheet reflects an allocation of the purchase price to assets acquired and liabilities assumed as at April 28, 2023, based on management's provisional estimates of fair value.
Provisional values used may be adjusted retrospectively in subsequent periods up to 1 year following the acquisition date. Free cash flow, defined as net cash from operations and investing activities and including effects of foreign exchange, but excluding acquisitions and adjusted for lease liability payments was negative $0.4 million for Q2 '23 as compared to $0.7 million for Q2 2022.
The reduction in free cash flow of $1.1 million is a result of increased levels of working capital and increased CapEx, partially offset by increased earnings. Investment in plant and equipment for Q2 2023 was $2.1 million, and will continue at levels above our long-term target of 3% of revenue for the remainder of 2023 and into at least the first half of 2024.
As at quarter end, the corporation's primary sources of liquidity totaled $61.9 million, consisting of cash, accounts receivable, contract assets and inventory. Working capital at Q2 2023 was $34.5 million as compared to $30.5 million as of the 2022 year-end.
Accounts receivable days outstanding were 69 as of Q2 close compared to 62 as of the 2022 year-end. Inventory turns were 2.9 as of Q2 close as compared to 3.7 at the 2022 year-end and accounts payable days outstanding were 84 as of Q2 close as compared to 73 for the 2022 year end.
We are entering the second half of 2023 with a record backlog of $98 million, which includes $18 million at the newly acquired sites. Backlog within the Aerospace segment includes a number of newer products which must be qualified with customers prior to shipment of production quarters.
Our complete set of filings, quarterly filings are now available on sedar.com. With that, I will turn things back to Brad.
Thanks, Jamie. Let me delve into some important items in the quarter and/or for the future performance of FTG. The first half of 2023 has been strong. Our sales ramp nicely. We continue to work hard to ramp further in support of the demand we are seeing. This includes the need to continue to add staff.
While hiring is tougher than what it used to be, we are making progress, and we are being aggressive. Looking forward, a key item for us is the integration of IMI and Holiday.
For IMI, we acquired them to grow our presence in the RF circuit board market for aerospace and defense application. While they are small with a historic run rate of about $4 million to $5 million, we like their capabilities. The integration should be relatively straightforward as we intend to continue to operate it in its current facility with its existing staff.
Our focus will be to engage our sales team with them to find new customers and to grow the business. This is not an overnight process, but one where we can generate incremental margins and profitability to the future benefit of FTG. Going along with this will be some focused CapEx to address a few production constraints to enable future growth.
Holiday was a larger acquisition. Their sales were over USD 30 million before the pandemic. They were hurt by the pandemic like we were. We see the long-term positioning of holiday to be a source of high-technology circuit boards, similar to our Toronto facility, but with the U.S. footprint.
This U.S. footprint is critical as we will look to grow our share of the U.S.-only advanced circuit board in the defense market. In the short term, we have 3 priorities as we integrate Holiday into FTG.
First, we need to ramp their throughput and sales. While they have seen demand ramp up, they've struggled to add back staff and this has limited their ability to ramp sales. since February, they've added 25 -- 20 to 25 staff going from about 150 people to 175. We need to get the new employees trained and as this is accomplished, we expect to see sales ramp.
In May, their throughput was improved, but it was around USD 24 million on an annualized basis. So more work is required to get them back to $30 million and beyond.
The second priority is to reduce the material cost. We have identified cost-saving opportunities that can benefit this site, as they are now part of a larger company. We'll take some time to achieve the savings as in some cases, it will require customer approvals and internal engineering efforts. But when complete, we expect to achieve savings on the order of $1 million annually.
And our third priority is to improve pricing. We believe Holiday has not been sufficiently proactive in adjusting prices as costs went up. We are intending to work with our customers to address this and ensure margins are not squeezed as a result of supplier and labor cost increases.
While I'm on the topic of pricing, I've been very impressed with how everyone involved in this at FTG has proactively pursued improved pricing at customers. We have done a good job in avoiding any margin squeeze from increased costs due to the recent period of high inflation. And while not specifically pricing, we did benefit from some customer urgent needs for our products in our second quarter that resulted in expedite fees that grew margins on those opportunities.
And lastly, just a note of interest from our second quarter where we shipped cockpit panels for the Orion spacecraft. This is our first program where our cockpit products will be used in over space. We are proud of our ability to meet the very stringent technical and quality requirements of manned space flight.
Looking forward into Q3, we see continued strong demand. Our backlog during the quarter is well over $40 million, including the new sites, but our Q3 includes the summer months of June, July and August, and our history shows that we lose about a week of production in this quarter due to vacation.
When weaker production in the 13-week quarter is about 8%. The Canadian dollar has also recently strengthened, which is a headwind on sales as almost all our revenue is denominated in U.S. dollars.
And lastly, our volume of simulator product sales will be less in Q3, and this will result in a less favorable product/mix for us overall. So notwithstanding our strong demand and having 2 new acquisitions for the full 3 months in Q3, we are not expecting any material growth in our sales in the quarter.
Beyond the revenue, I do see a few other headwinds for Q3, including no further ERC funds for any of our U.S. sites, some interest expense rather than interest income and higher amortization of intangible assets resulting from the acquisitions. And of course, we will have a higher cost base with 2 additional sites.
Beyond Q3, we are expecting to grow. This is resulting from our strong customer demand, progress on ramping throughput at Holiday and all site, some improved pricing and some important program wins across the company. A couple of examples of sales successes include winning new cockpit panels for the Boeing 737 program and winning new cockpit assemblies for both Airbus and Boeing aircraft.
These and other wins are increasing our market share and could represent $5 million to $10 million in incremental sales in 2024 and beyond. With the more complex geopolitical situation in China, ensure there are some concerns about our activities there.
In 2022, both our operations in China have their best sales years ever, both were profitable, and this continued through the first half of 2023. We have, however, repatriated cash back to Canada during 2022, and we brought more back in Q2 '23. In total, we have now brought back about $2.2 million in cash. By doing this, we don't have surplus cash stranded in China and it reduces our exposure if things deteriorate between China and the West.
On a more positive note in China, the C919 development program achieved CAAC certification last year, and we are finally in a position to see production orders after the 10 years of development. We've received our first production orders in early Q2 valued at about $2.8 million and all are deliverable in 2023. It's nice to see the fruits of our 10 years of development efforts on this program.
This will benefit our Chinese operations going forward and will be less susceptible to geopolitical uncertainties. But notwithstanding this good news, we are being cautious about our operations in China as any further increase in tensions between China and other countries could impact our operations there in the future.
We do continue to see further acquisition opportunities that could fit with either of our business. But our near-term priority is to integrate our IMI and Holiday acquisitions. So with a focus on operational excellence in all parts of FTG, our strong financial performance in Q2 2023, our recent acquisitions, our key sales wins, we are confident we are on a strong long-term growth trajectory.
This concludes our presentation, and thank you for your attention. I would now like to open the phones for any questions. Michelle ?
[Operator Instructions] Your first question will come from Nick Corcoran at Acumen Capital.
Good Morning, Congratulations on a great quarter.
Great. Thank you, Nick.
Just a few questions for me. The first is on Holiday. I think you mentioned that sales were about $24 million or annualized sales are about $24 million right now. Pre-pandemic, they were in the kind of mid- to mid-30s. How long do you expect it to take to ramp production in that facility?
Yes. Two minor details first. Our throughput was $24 million in May. I do track throughput separately from sales. So -- anyways, the run rate of throughput was $24 million and pre-pandemic, they were low 30s. I think they peaked at $31 million and change. So having clarified that, to your question of how long is it going to take?
Tough to say. Certainly, adding the staff back is a critical step. And I think we've done a reasonable job of that or they've done a reasonable job of that, but still got to get people trained and that's going to be a little bit of a process.
Not everyone works out, so then there's a little bit of churn. And then -- so at the end of all that, I'd say easily, it's more than a year and hopefully less than 2 to get back to that run rate of 2019.
And you said there's about 175 staff in that facility right now. What is the peak headcount there?
Yes. It peaked at around 190.
So about 50 more people is what you have to add to get back to the historical...
Yes. And again, I mean, there's -- it's not that simple. And when they were at 190, I'm going to say it was 190 well-trained seasoned staff that they're trying to add back 40, but those 40 are going to be newbies. And going to take a little bit of effort to be as good as the guys they had pre-pandemic.
That's fair. And then maybe thinking about the simulator orders, really strong quarter. Are you expecting any large orders through the remainder of the year?
Not really. I mean we still have some stuff in backlog, and I honestly didn't look it up. But I think we have kind of $1 million to $2 million of orders in backlog for the balance of the year, somewhere in that order of magnitude over the 2 quarters.
And do you have anything for next fiscal year?
Not yet. No. There are some discussions with customers, but nothing is firmed up yet for 2024.
Good. Maybe going back to the whole corporation as a whole, you added 17 staff in the quarter. How many of those were at Holiday and how many were at other sites?
See, I mean those were -- the 17 were at the 7 legacy FTG sites that was not counting Holiday and IMI.
Good. And then how much more hiring do you think you have to do in upcoming quarters?
Cool. I need to think about that 1 a little bit. It's is probably on the order of about that same amount again in the next quarter or so.
And do you still see labor as being what the main bottlenecks to increase production?
Yes. I'd say first bottleneck, our first challenge is labor and ramping things up. And then in some cases, we're still seeing our own supply chain challenges or longer lead times on some materials, particularly electronic components. And so those are the top 2.
And the last question for me, were there any supply chain constraints in the quarter that you think impacts production?
For sure, there were. I'm not sure -- so there were some constraints in Q1 that probably pushed some revenue into Q2. And there's no doubt there are some constraints in Q2 that pushed revenue into Q3. So is it kind of wash maybe, but there's still definitely constraints that delayed deliveries.
Your next question comes from Paul Steep, a Private Investor.
Great quarter. The question, I guess, is if we think out maybe a year or 2 from now in terms of where you'd want to deploy capital, what you'd be looking for to add incrementally to M&A? And then maybe as a follow-up, could you talk a little bit about the potential for you to do more in the space area or add parts to the mix on the space side?
Sure. I've been involved in the space business, off and on in my career for a long time. And it's an interesting market, but it's not a high-volume market. And I'll give you my simple example from Q2. So we're involved in Orion spacecraft pretty exciting stuff for sure, pretty impressive what we're doing. But we shipped or our order was for 14 panels.
Across FTG, I'm probably doing, I don't know, close to 100 panels a day for aircraft. And so it's an interesting market. Again, proud to be part of it, but is it going to be a huge chunk -- a huge percentage of our revenue going forward? Not really. We'll participate in it. We will take credit for the cool things we're doing, but it's not going to drive my revenue for the future.
Sorry, I'm going to slide one last one in. How about certifying facility for Holiday once you get it up and obviously focus near term on getting more staffing, but in terms of adding new maybe U.S. defense programs into the facility, how should we think about that maybe out in the thinking more like the '25-'26 timeframe?
Right. No, it's a good question. And here's the way I look at Holiday right now. In terms of capability, very similar to the Toronto facility. So both are very capable. Both can do high-end advanced technology circuit boards, both have pretty solid approvals from the U.S. Department of Defense because you need to be approved by technology.
So that's good. For sure, our Toronto facility has a wider customer base than Holiday. And I guess that's where I see an opportunity. And I mentioned it for IMI, I really should have mentioned it for Holiday as well, that there's a number of customers where we're engaged, and again, at the high end from Toronto, but then there's a segment of the demand we cannot address because we're not in the U.S.
And so that's where Holiday comes in. We're going to need some customer approvals. I don't think we need any more government approvals. But with some customer approvals and working with our sales team, I think we can grow our share of the U.S. defense market for product that really needs to be manufactured in the U.S.
[Operator Instructions] There are no further questions, so I will turn the conference back to Mr. Brad Bourne for any closing remarks.
Thank you. A replay of the call will be available until September 13, 2023, at the numbers listed 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.
Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.