Firan Technology Group Corp
TSX:FTG
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Firan Technology Group Corp
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Good morning, ladies and gentlemen, and welcome to the FTG Q3 2023 Analyst Call.
[Operator Instructions] This call is being recorded on Thursday, October 12, 2023. I would now like to turn the conference over to Mr. Brad Bourne, President and Chief Executive Officer of FTG. Mr. Bourne, you may proceed.
Thank you. Good morning. I'm Brad Bourne, President and CEO of 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.
The third quarter turned out well. We certainly had some challenges in the quarter. And of course, our third quarter covers the summer months of June, July and August, so we lose production days due to summer holidays. But the team with FTG overcame the challenges, and I am proud of the results. During the quarter, the company continued to see solid bookings, and we made progress in ramping production to support the demand.
Within the third quarter of 2023, FTG accomplished many goals to continue to improve the corporation and position it for the future, including our third quarter bookings $35.7 million were up 28% over Q3 last year. Our third quarter revenues of $36.6 million were up 59% over Q3 last year as FTG ramps production to meet customer demand. Revenue included $9.2 million from the newly acquired sites in Minnetonka, Minnesota and [ Haverhill ], Massachusetts. We achieved net earnings in Q3 of this year of $1.3 million, which was up $600,000 from Q3 last year.
Our net debt on the balance sheet as of the end of Q3 is $5.7 million, which is down $700,000 from last quarter and is 0.36x adjusted EBITDA. We made significant progress in integrating our 2 new acquisitions and follow through on the plans to drive performance and achieve the desired operational financial results. We ended Q3 with a backlog of $98 million compared to $65.5 million at the end of 2022. Backlog as of the end of Q3 included $18.2 million at the newly acquired sites. FTG now employs about 700 people after adding staff through the first 9 months of 2023 and including some executive leadership at the Circuits Minnetonka site to help increase throughput and improve operations. I'll touch more on this later.
FTG received $700,000 in the quarter for a total of $4.4 million received to date under the Canadian Aerospace Regional Recovery program. In June, FTG was approved for a second NCIB following on from the one in place over the last 12 months. During Q3, FTG bought back 6,200 common shares. Our end market demand remains strong. Air travel continues to rebound. When looking at aircraft deliveries, Airbus are working to ramp production and are targeting 50 planes per month in 2023, rising to 65 planes per month in the future. They would like to ramp faster to meet their customer demand, but supply chain limitations are constraining their growth. At Boeing, they have plans to ramp their 737 production from 31 aircraft per month currently to 38 in the near future and then to 50 in the next few years.
In the [ BusinessChat ] market, Bombardier provided guidance for a 15% to 20% increase in 2023. All of this bodes well as we look to the future demand in the last quarter of 2023 and beyond. We've also looked at results from key defense contractors and one example, Lockheed, the largest defense contractor, has seen sales ramp up 5% so far in 2023. The defense market is government-funded and appears well supported in the near term due to the increased geopolitical tensions across the globe. Of course, there is some uncertainty in the U.S. in the short term as the government there grapples with their debt ceiling.
Looking at the longer term, Boeing's most recent 20-year forecast shows long-term industry growth and continues to show 40% of all new aircraft deliveries going to Asia as has been the case in their recent forecast. The business jet market has already seen traffic recover. Our 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 remind everyone about this market, it is lumpy. So we do see large year-to-year variations. 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.
Beyond all of this, let me give you a quick update on some key metrics for 2023 -- Q3 2023. First, as already noted, the leading indicator of our business is our bookings or new orders. The third quarter bookings were up 28% over Q3 last year, and we have the total backlog of $98 million. In Q3 '23, sales were $36.3 million, compared to 23.1% in Q3 last year. This is a 59% increase. Approximately 39% increase is due to the 2 acquisitions and the balance of growth, which is approximately 19%, was organic growth from the rest of our business.
Delving into each of the segments. In our Aerospace business segment, sales were up 4% or $400,000 in Q3 this year compared to Q3 last year. The Toronto and Tianjin sites were both up 13%, while component delay has caused the Chatsworth site to be down 13% compared to Q3 last year. Q3 last year in Chatsworth was one of their best quarters, but this was also a tough comp for them to exceed.
On the Circuit side of our business, sales in Q3 were up $12.7 million or 87% on a year-over-year basis. 63% of the growth came from the 2 acquisitions and 24% of the growth was organic. Overall, at FTG, our top 5 customers accounted for 55.6% of the total revenue in the quarter, which is the same as Q3 last year. While the percentage is constant, the companies have changed. Also interesting to note that the top 10 customers, 7 customers are shared between circuits and aerospace.
As we always say, 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 products. In Q3 2023, 26.9% of our total revenues came from our Aerospace business compared to 39.8% last year. The Aerospace business share decreased partly due to the impact from the acquisitions, which are both on the circuit side of the business and partly due to their slower growth in the quarter.
I would now like to turn the call over to Jamie, who will summarize our financial results for our third quarter. 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 our financial performance for Q3. On sales of $36.6 million, FTG achieved a gross margin of $8.8 million or 24% and compared to $5.7 million or 24.7% on sales of $23.1 million in Q3 2022. The increase in gross margin dollars is driven by increased sales volumes. However, the gross margin rate was weighted down somewhat by the lower gross margins at the Circuits Minnetonka site. Margins at that site are expected to increase over time as we ramp up throughput, achieve material cost savings and adjust price. The average exchange rate experienced in Q3 2023 was $1.33 as compared to $1.29 in Q3 2022, which is a 3.3% increase.
We continue our focus on operational efficiency. One metric to measure this is revenue per employee. For Q3 2023 annualized revenue per employee is approximately $211,000, which is an increase of 3% over the comparable quarter of 2022. In light of the current pressures on both the supply and cost of labor in all of our manufacturing sites, we will continue this focus through the automation of manufacturing processes and investment in capital equipment.
From a geographical standpoint, FTG experienced revenue growth in all of its regions. In dollar terms, Q3 2023 sales to U.S. customers grew by $11.3 million as compared to the prior year quarter, primarily as a result of the 2 U.S. acquisitions. However, the overall percentage of sales to U.S. customers increased only marginally to 79% from 76%. In percentage terms, sales into Asia increased by 95% as compared to Q3 2022. Activity in Asia is increased as the integrated supply chains for commercial aerospace continue to grow offshore.
SG&A expense was $4.1 million or 11.1% of sales in Q3 2023 as compared to $3.3 million or 14.1% of sales in the prior period. The increased expense level includes $635,000 of SG&A incurred at the newly acquired sites and $79,000 of field costs for the acquisitions. R&D costs for 2023 were $1.6 million or 4.4% of sales compared to $1.4 million or 6% of sales for Q3 2022. R&D efforts include product and process improvements at the Circuits segment and efforts to develop and qualify products for future aerospace programs.
The exchange rate at Q3 '23 close was $1.36 as compared to $1.34 at Q2 2023, which is a weakening of the Canadian dollar. FTG's balance sheet includes assets and liabilities denominated in U.S. currency, with a net asset balance of approximately USD 3.6 million. The translation of our net U.S. dollar assets and liabilities [indiscernible] currency at the end of Q3 '23 resulted in foreign exchange losses for the quarter of $100,000 compared to foreign exchange gains of $300,000 in the prior year quarter. EBITDA, as described in the press release, was $4.9 million for Q3 '23 as compared to $2.8 million in Q3 2022. Adjusted EBITDA was $5 million for Q3 '23 and $2.8 million for the prior year quarter, with adjustments in both periods, limited to deal costs. Adjusted EBITDA for the trailing 12-month period ended Q3 '23 was $15.9 million, which equates to an adjusted EBITDA margin of 13.3% on sales.
For Q3 '23, FTG recorded earnings before income taxes of $2.3 million or 6.3% of the sales as compared to EBIT for Q3 '22 of $1.3 million or 5.4% of sales. The Q3 '23 income tax provision of $0.9 million or 40% of pretax earnings reflects that the corporation's Canadian and Chinese operations were profitable and that deferred tax assets on certain foreign operating losses were not recognized during the quarter.
Working capital at Q3 quarter end was $35.2 million as compared to $30.5 million at the 2022 year-end. Accounts receivable days were 68 at Q3 compared to 64 in the prior year -- sorry, in the '22 year-end. Inventory turns were 3.1 at Q3 quarter and compared to 3.7 at the '22 year-end. And accounts payable days outstanding were 79 as compared to 73 at the '22 year-end. We completed Q3 '23 with a backlog of $98 million. A significant portion of this backlog is scheduled for Q4 '23, setting up the potential for a very strong quarter. We continue to focus on cash management and the balance sheet, cost control and operating efficiency. Our complete set of Q3 filings are now available on sedar.com.
With that, I will turn things back to Brad.
Thank you, David. Let me delve into some important items in the quarter and/or for the future performance of FTG. First 9 months of 2023 have been strong. Our sales ramped significantly. We continue to work hard to ramp further in support of the demand we are seeing. This includes the need to add staff. We are now nearing our target head count across the company to support the current demand. Well, we might tweak head count slightly from site to site going forward, but we don't see it as one of our major challenges in the future.
Looking forward, a few key items remain for us to focus, the Q1 being the integration of IMI and Holaday. For IMI, we acquired them to grow our presence in the RF circuit board market for aerospace and defense applications. While they are small with a historic run rate of $4 million to $5 million, we like their capabilities. The integration should be relatively straightforward as we intend to continue to operate in its current facility with the 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 margin and profitability to the benefit of FTG. Going along with this, we will -- there will be some focused CapEx to address a few production constraints and to enable this future growth. And finally, we are converting them to our standard ERP system in the first part of next year.
Holaday 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 Holaday's to be a source of high-technology circuit boards similar to what we offer from our Toronto facility, but with the U.S. footprint. This U.S. footprint is critical as we look to grow our share of the U.S.-only advanced circuit board market for defense applications.
In the short term, we do have 3 priorities as we integrate Holaday into FTG. First, we need to ramp their throughput and sales. Since February, they've added about 20 staff going from 150 people to about 170. But we did have a bit of a setback early in Q3 as their VP of Operations at the site encountered some medical issues and has now retired. We did react fast and decided to bring in some known and proven operations management skills to that site.
We hired back Paul Godbout, who had run our Fredericksburg Facility until early in the pandemic. He is back on a temporary basis, but his operational skills have already been felt. And in August, his first full month on the job in Minnetonka, a shift at a $28 million to $29 million annualized run rate, which was great to see. This was the best month since before the pandemic. But as I said, Paul is back on a temporary basis. It will give us time to find the right person to run that site for the long term.
In Minnetonka, our second priority is to reduce material costs. We have identified cost savings that can benefit the site as they are now part of a larger company. It will take some time to achieve these savings as in some cases, it will require customer approvals, and it will require some internal engineering efforts as well. But when complete, we expect to achieve savings on the order of $1 million annually. We continue to make progress on this initiative.
And our third priority is to improve pricing. We believe Holaday had not been sufficiently proactive in adjusting prices up as possible enough over the past few years. We have already had some successes in adjusting prices upward, and we will continue to address this. We want to ensure any inflationary costs incurred at that site over the past few years, whether material, labor or other are passed through the customers and not squeeze our margin.
And lastly, we have decided to convert them to our standard ERP system, and this initiative is already underway. 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. Across FTG, we have done a good job in avoiding any margin squeeze from increased costs due to the recent period of high inflation.
We did a detailed dive into some of our key contracts and the price changes achieved and the overall increase was on the order of 30%. This analysis was done on approximately 20% of our total revenue. While not specifically pricing, we have received some significant expedite purchase orders from customers to meet their urgent needs for our products. We have not seen the benefit of the majority of these expedite fees in our P&L, but we do expect to see more of them being realized in Q4.
Speaking of Q4, we continue to see strong demand across most sites. Our backlog due in the quarter is over $50 million, including the new sites. But while not a good metric, we entered the quarter with over $18 million in past due orders. We certainly hope and expect to bring the past due orders down in Q4. As always, there are possible downside or headwinds that could impact our quarter. First, our backlog in Q4 of simulator products is relatively low. But given the overall backlog, this should not be too concerning.
Also the contract with our represented staff in Aerospace Toronto has expired. We have entered into negotiations, but the timing and outcome is always uncertain, and there is a risk of disruption in production. Also maybe just to ensure everyone is aware, we have now increased our financing costs and amortization of intangibles in our P&L as a result of the acquisition. The combined impact of amortization and interest costs are about $350,000 in the quarter, higher compared to what we had in Q1. This impacts our earnings, but does not impact our EBITDA.
Beyond Q3, we are obviously expecting to grow. This is resulting from our strong customer demand, progress and ramping throughput at Holaday and all the other sites, some improved pricing and some important program wins across the company. A couple of examples of our sales successes, including 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, I'm sure there are still some concerns about our activities there. As I've mentioned previously, in 2022, both our operations in China had their best sales year ever, and both were profitable, and this has continued through the first 9 months of 2023. We have repatriated cash back to Canada during last year and some more this year. And in total, we have now brought back $2.2 million in cash. By doing this, we have reduced our surplus cash stranded in China, and it reduces our exposure if, for any reason, things deteriorated between China and the West.
On a more positive note in China, the C919 development program achieved CAAC certification last year, and we are seeing production orders after a 10-year development program. We received our first production orders in early Q3 this year or Q2 this year, valued at about $2.8 million, and all of this is deliverable in 2023. It is nice to see the fruits of our 10 years of development effort on this program. This will benefit our Chinese operations going forward and it will be less susceptible to the geopolitical uncertainties. But notwithstanding this good news, we are still being cautious about our operations in China and any further increase in tension between China and other countries that could impact our operations there in the future.
We continue to assess possible corporate development opportunities that could fit with either of our businesses, but our near-term priority is definitely to integrate our IMI and Holaday acquisitions successful. With a focus on operational excellence in all parts of FTG, our strong financial performance in the first 9 months of this year, our recent acquisitions and our key sales wins, we are confident we are on a strong long-term growth trajectory.
This concludes our presentation. I thank you for your attention. I'd now like to open the phones for any questions. Lara?
[Operator Instructions] Your first question comes from the line of Nick Corcoran from Acumen Capital.
Congratulations on the third quarter and definitely good color in the prepared remarks. Just to maybe start the backlog was flat sequentially, and the book-to-bill ratio was hovered around 1x. Is that due to timing of orders? Or is there anything else that we should maybe consider?
Yes. I mean it's -- definitely, there's always a little bit of lumpiness in orders. The big one is simulators. When I see simulator orders come in, that can skew the book-to-bill. But I guess I'm looking at this more from a positive perspective right now. So for the past number of quarters, we've always reported bookings above our sales, but we also report that we're struggling to ramp production. But when I look at Q3 this year, I'm interpreting this as we have ramped our production in line with the orders we're booking and therefore, you get a book-to-bill of 1. But I can look at more maybe, as I said earlier, we've got about the right headcount, maybe we got the right production level, and we can support our customer demand going forward.
And I guess the related question is, like how much do you think we can see the backlog grow from where it is now?
Well, I don't know, honestly, I'm less concerned about how much more of the backlog can grow. I am more concerned about -- as I said, for Q4, I got more than $50 million in backlog, which is a lot, but I have $18 million cash. My goal is to try to bring down the past due orders. And as I do that, it will actually drop my backlog, but it could also mean I have some increased sales.
That's helpful. And then in the news there has been some commentary on Boeing delaying deliveries of aircraft. Has that impacted Firan at all?
No, not at all. And it's -- Boeing's general objective is to insulate their supply chain from deliveries. And so their production rate and their delivery rates are not one-to-one exactly connected. So they try to maintain a stable production rate independent of what's happening with deliveries.
That's helpful. Any commentary on what the outlook for [ sim ] orders is like?
We are seeing some smaller orders. I'm not seeing any significantly large orders that I expect to materialize in the near term. But I am just kind of comment a little bit the [ sim ] orders are good, obviously, and they tend to be high-value assemblies. But what I'm starting to see, which I actually like even better, is I mentioned we won some new orders this year that were for some cockpit assemblies for Boeing and Airbus, these are also high-value assemblies. They go into production aircraft, and it actually becomes a more stable revenue stream because I'm supporting a product in line, not a simulator individual orders. So I'm seeing more aircraft, high-value assemblies as opposed to simulator high-value assemblies. And I think that's better for FTG for the long term.
That's helpful. Any color you can give on how many people you added in the quarter?
No, maybe Jamie can. We had a number. I just don't remember what it was.
About 12, Nick. So we were at 680-ish, and we're now we're just under 700.
Okay. That's helpful. And just a last question for me. You've indicated that $50 million of backlog is due in the fourth quarter. How should we think about revenue and EBITDA in the fourth quarter?
Yes. And you always asked me this, and I always try to avoid it. But, I mean, the way I'm looking at it, and this is just math right now, right? So I have $50 million in backlog. You have $18 million past due orders. If at the end of Q4, I still have $18 million of past due orders, I'll ship $32 million, which is not a great number. And conversely, magically, I can get all of my past dues, I would ship 50. But I'm not going to do either. It's not going to be 32 and it's not going to be 50. And so that -- the million-dollar question is how much of these past order is going to burn down in Q4. For sure, I expect to burn it down. Generally, Q4 is stronger than Q3. Q3, 36 and change. So what does that mean? I don't know, we're going to be above 36, below 50.
[Operator Instructions] Your next question comes from the line of Paul Steep from Dunlop Capital.
Just to quickly touch on Nick's last question. What's the gating factor? Because presumably, there's always some level of past due orders sort of in the system. Is it related to the component issue you talked about earlier? And then I've got one quick follow-up as well.
Sure. I can say there's definitely more than one gating item. There's different situations and different parts of the business. And I -- as I talked about for Aero-Chatsworth, definitely component deliveries to us are impacting our shipments to customers. So that impacts them. In Aero-Toronto, I have some -- what I just talked about some of these new cockpit assemblies that are going into aircraft, I've basically done development, but I need Transport Canada, TSO approval before I can ship production units. I am waiting on TSO approval. I'm hoping I get that in Q4, but I don't control Transport Canada. So that could be a gating item, and it's definitely held up some revenue at this moment in time. It's just those sorts of things. The one thing I'd say it's less of now is due to staffing. As I said, I think we're at a reasonable staffing level, so that is not impacting or not a gating item for what we get out the door in the near future.
Great. And then maybe the follow-up to, I guess, either of you, maybe more Jamie. How should we think about the working capital unwind? Obviously, you added the acquisitions, but Brad just briefly touched on how we're going to see shipments and that presumably unwind some of the working cap. If you could talk through that? And then maybe CapEx as well. I know Brad called out earlier some investments as well on that front, if there's anything unusual or noteworthy there?
Maybe I'll talk to CapEx. Maybe Jamie can talk to the working capital. But just starting on the CapEx side. So this year, our CapEx has been increased really as a result of our funding we received from the Canadian Federal Government and from the Ontario Provincial Government. They've supported us with some interest-free financing, but we have to spend the money. These programs wind up next year. So as a result of that, we are accelerating some CapEx, particularly in Canada. So it's higher this year. After this year, I'm anticipating -- for sure, we started planning for next year already trying to go back to our more long-term target of 3% of sales as our CapEx number. That's not a precise number, but it's a target that we use for planning CapEx. And I guess, over to you, Jamie, in terms of working capital.
Sure. Thanks, Paul, for your questions. So I guess I would look at it that, I think working capital in Q4 will come down. I think it will come down because strong revenues in Q3 are going to drive good collections in Q4. I think in Q4, inventory will come down because as Brad described, we're going to have a pretty good quarter from a shipment standpoint. That's going to drive inventory down, but it's probably going to get mostly hung up in higher accounts receivable at year-end. So it will work itself down a little in Q4, I think more so in the first of 2024.
Your next question comes from the line of Peter [ Imhof ], one of your private investors.
Brad, It's Peter [ Imhof ] here. I used to own your stock in the funds that I ran [indiscernible] still own it. So yes, good quarter for you guys. Just most of my questions have been answered. But just on Minnetonka, like what do you think the capacity utilization is there in terms of like the ramp up? I think you said what month was it that was a record for you guys in terms of throughput. Was that September? Or was that -- that was August?
That was August. Okay. So it's a good question. And just go back on a little bit of historic data for a second. And by the way, it's good to hear from you Peter. So the -- in Minnetonka, their peak revenue year was in 2019 before the pandemic, and it was USD 31 million in sales. I don't think they were at capacity, but for sure, they've demonstrated they can ship USD 31 million. So then as I look forward, my other metric -- and I'm sorry, in terms of utilization, the last couple of years, their revenue was kind of in the $22 million, $23 million annual sales. So similar to what happened to us in the pandemic, their revenue dropped to 30%. So that drops their utilization pretty significantly. A run rate of $22 million, $23 million is not a good run rate for them. It's not a winning business with that sort of run rate.
So we got to get them back into the 30s. And then I just -- I compare Minnetonka to Toronto, very similar plant sizes, very similar headcount, very similar equipment set. And Toronto, now I'm going to switch currencies, just complicated, but Toronto can ship $1 million a week, and they've shipped in low 50s. Again, in 2019, they shipped, I think, $52 million, $53 million in sales. I believe with a little bit of work and a little bit of improved operations and management, I think they could produce what Toronto had produced.
Okay. And then just in terms of Toronto, in terms of the Aerospace, you said you guys were negotiating. So I'm not sure if it's unionized like or how long have you guys been negotiating? And how close are you guys in terms of maybe getting something done there?
Yes. The surprising process, our contract expired in August, and it is unionized, it's [ Unifor ]. We did no negotiation, and it was actually more driven by [ Unifor ] than us. They request meeting dates, but we did no negotiation before the contract expired. We've now initiated negotiation. We had a couple of meetings in September, but we are still early on in the process.
Okay. And then just in terms of you guys have made a bunch of acquisitions over the last couple of years and stuff. So are you guys still seeing other opportunities there? Or are you just trying to consolidate what you've already done? Or I'm not sure what the landscape is and what kind of multiples you'd have to pay?
All right. And yes, there are opportunities out there these days. But for sure, to the extent I can control things, I am not looking to close any more deals until I get comfortable, particularly with Minnetonka, that we have that one under control that we've got the right management team in place there that we've moved forward on our 3 initiatives of driving up the operations, getting material saving, getting price increases. After I'm comfortable that that's happening and well underway, then I'd be more interested in looking at the next deal. So there are some out there, but if I can slow play them or get people to delay, that's my first choice for sure.
[Operator Instructions] There are no further questions at this time. I'd now like to turn the call back over to Mr. Bourne for any closing remarks.
Okay. Thank you. A replay of the call will be available until November 12 at the numbers listed on our press release. The replay will also be available on our website in a few days. I thank you all for your interest and for your participation. Thank you.
Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.