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 Group Q4 2019 Analyst Conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Brad Bourne, President and CEO. Thank you. Please go ahead, sir.
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. Well, the anticipation is over, our results are out. 2019 was a great year for FTG. While we had some challenges in the fourth quarter, for the full year, we achieved record sales, we achieved record EBITDA and earnings, we completed the acquisition of Colonial Circuits, and then we ended the year in a net positive cash position for the first time in my 18 years at the company. While we are very pleased with these results, we believe we can and will take actions to further improve our results going forward. But before I get into that, let me summarize some key accomplishments in 2019. We achieved record full year sales of $112.7 million, an increase of $8.2 million after excluding the $5 million onetime revenue adjustment on our development contracts from Q1 last year. We achieved EBITDA of $14.6 million, an increase of $4.1 million or 39% over last year. We achieved net income of $6.2 million and diluted earnings per share of $0.25, an increase of 116% over 2018. We generated $8.5 million in free cash flow after CapEx, but exclusive of the $3.8 million of net cash paid for Colonial Circuits. At year-end, FTG had net cash of $2.2 million on the balance sheet. Some nonfinancial accomplishments included: we received Canadian Technical Standard Order, or TSO, approval for our Cursor Control Device, enabling FTG to begin production of this product under development over the past 3 years. On July 15, 2019, FTG successfully closed the acquisition of Colonial Circuits Inc. in Fredericksburg, Virginia. We achieved sales from Colonial of approximately $3.6 million from July to November. We began certification process for the Colonial facility to the Aerospace AS9100 certification with completion achieved in early 2020, opening up new market opportunities for that site. We've worked with key suppliers to achieve material cost savings for the Colonial site in line with costs and other existing FTG sites. In November, FTG reached agreement with its representative staff at FTG Aerospace-Toronto. The contract is for 4 years, with improvements and benefits and wages in line with typical collective agreements in Ontario this year. We maintained revenue from the simulator market by more than 10% of total revenue, but was a bit of a temporary dip in activity in our fourth quarter. And we won the next phase of the contract to design and build cockpit panels for the Orion manned spacecraft being developed for NASA. Now let me briefly update the overall market situation. Whilst the overall demand in commercial air transport remains strong, the challenge at Boeing are definitely impacting production rates and demand within the industry. In 2019, Airbus reported record shipments of 863 aircraft, an 8% increase from 2018. They reported 768 new orders. For Boeing, however, they shipped only 380 aircraft, a drop of 53% from 2018. But the impact of the supply chain was minimal as they kept building 737 MAX aircraft specifically at 42 per month through December. In January, they announced plans to stop all 737 MAX production temporarily, and this will impact the industry much more substantially. Also in 2019, Boeing reported negative 87 new orders due to some cancellation of the 737 MAX aircraft. So definitely not a good year for them. As this relates to FTG, our content on the 737 MAX is small at approximately $2 million per year. Our downside risk is not substantial. There is expectation that Boeing will reach their production in 2020, with an estimated 200 aircraft being built. This is about 40% of the historic run rate for that aircraft. They still do have over 400 planes finished and parked waiting for finalization of the upgrades before delivery to customers. In the longer term, Boeing has a backlog of orders of over 5,500 aircraft and Airbus has over 7,500 aircraft. So the long-term demand does remain strong. The largest segment of this market is still single-aisle aircraft, such as the Boeing 737 and the Airbus A320, representing between 70% to 80% of the total units in the air transport market. There are also new entrants into this market segment with aircraft still under development or just entering production. And while they have experienced some delays, they are still progressing. Specifically, the new programs are the Airbus A220 and the C919 with COMAC in China, both of which FTG has content on. If the forecast for the C919 remains true, that full production rate or content on this program should be on the order of $5 million annually. The C919 continues through flight testing with 6 test aircraft. In 2019, we continued our development efforts. We expect our efforts to finish in 2020, and COMAC is estimating and entering the service date for that aircraft in 2021. For the A220 aircraft, the formation of the joint venture with Airbus a few years ago has been positive for the future. At the end of 2019, there were over 600 orders, and there have been just over 100 deliveries. Production is expected to continue to ramp up in 2020. We continue to see mixed signals in the business in regional jet segment in the near term, an area where FTG has a long-term established space. The impact of Bombardier's exit of the regional jet market with their sales in Mitsubishi is unclear at this time, although we do not expect any dramatic changes. On the business jet side, the new Global 7500 remains sold through 2021. In the longer term, the business jet market forecasts are positive and are influenced by GDP growth, the emerging market demand and the introduction of new aircraft models. The helicopter market in 2019 was stable. Looking forward, we believe there will be growth as the resource industry recovers and due to growth in other applications, such as emergency services. The defense market is strong. U.S. defense spending has increased in the last few years. Our acquisitions in 2016, and again in 2019, increased our exposure to the defense market, and this should bode well for us going forward. The ramp-up in production of the F-35 is a growth opportunity, and we have content on this aircraft. Our acquisitions in 2016 have increased our content on that program. The acquisitions also increased our activity in aftermarket support across a number of aircraft from the B-52 and B-1 bombers through almost all fighters. Primarily through our PhotoEtch acquisition, we have become a much bigger player in the aircraft simulation market. The overall market is estimated at over $7 billion annually. The key systems providers are CAE, FlightSafety, Boeing, Rockwell, L3, Lockheed and Thales. We are engaged with 5 of these 7 companies. We have captured some significant contracts, and simulation-related revenue was over 10% of FTG's total revenues in 2018 and again in 2019. But as we have said for the past 2 years, the simulator-related revenue can be more lumpy, and our fourth quarter 2019 saw a drop in activity relative to previous quarters. While we ended the year with a backlog of over $8 million in simulator work, we do not expect to shift much of this in the first 2 quarters of 2020. FTG has thrived and will continue to find the balance of sales between these various market segments. This should help maintain a stable revenue stream as each segment goes through its normal cycles. Now let me turn back to FTG's results. We started 2019 with $49 million of backlog and we ended the year with virtually the same amount. But going into 2020, keep a few things in mind. First, as always, Q1 is a bit lower than other quarters due to lost production days through the Christmas holiday period. Also, as noted, while we have a large backlog of work in our simulator business, we will not be able to shift much of this until late Q2 or into Q3. And finally, while it's still a relatively small part of FTG, our facilities in China remain closed after the Chinese New Year and the coronavirus issues there. We did expect to open this week, but we have not yet received the government approval to do so, and it is uncertain when this will happen. Overall, for 2019, FTG sales were $112.7 million, an increase of 3% from last year. But remember, 2018 had a onetime revenue adjustment on our program in China. And excluding this, growth was 8%. And in Q4, we were the victim of a cyberattack which halted operations across our North American sites for a period of a few days to a few weeks. This impacted shipments by an estimated $3 million. So if you factor this in, our growth in 2019 would have been 11% year-over-year. Of this growth, $3.6 million or 3% came from the acquisition of Colonial Circuits in July 2019. Overall, at FTG, our top 5 customers accounted for 53.9% of total revenue in the year compared to 48.1% for last year. The composition of the top 5 did change compared to last year. The biggest change was the combination of United Technologies with Rockwell Collins as they were both important customers. And together, they are now our largest. The industry consolidation is definitely increasing our customer concentration. Also interesting to note, of the top 7 customers -- of the top 10 customers, 7 are shared between Circuits and Aerospace. We particularly 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. Also, we had 2 simulator customers and 1 customer in China within our top 10 list. In 2019, 36.6% of our total revenues came from our Aerospace business compared to 41.4% last year. The drop is partly due to the onetime $5 million revenue adjustment in Aerospace last year that inflated last year's percentage, as well as the acquisition of Colonial that added to the circuit sales in 2019 post the acquisition. I'd like to turn the call over to Jamie, who will summarize our financial results for 2019. And afterwards, I'll talk about some site-specific items and other key priorities we are working on. Jamie?
Thanks, Brad. Good morning, everyone. All references to dollar amounts within my comments refer to Canadian currency, unless otherwise noted. I'd like to provide some additional color on our financial performance for 2019 and also Q4. On sales of $112.7 million, FTG achieved a gross margin of $30.3 million or 26.9% compared to $25.3 million or 23.1% in 2018. The increase in gross margin includes several factors. Firstly, cost reductions and increased yields across the corporation contributed to improved margins. Increased volume of $7.4 million in the Circuits segment had a positive impact on gross margin through better utilization of fixed costs. The volume decrease in the Aerospace segment of $4.1 million is net of $5 million of reduced revenues on the C919 program as we approach completion of the development phase. The impact of reduced revenue in Aerospace had a minimal impact on gross margin dollars, as the C919 development phase program has a modest gross margin. Partially offsetting these positive factors is the impact of the cyberattack, which reduced productivity in Q4.FTG's fourth quarter gross margins in 2019 were reduced to 21.7% from 25.9% in Q4. And gross margin dollars were $1.3 million lower in Q4 as compared to the prior year. The decrease was the result of lower productivity immediately following the cyberattack, which resulted in deliveries being delayed beyond the end of the quarter. FTG was the subject of a cyberattack that impacted our systems across North America with the exception of Fredericksburg. Each site was impacted differently, with reduced operations which ranged from a few days to a few weeks, depending on the impact of the site's infrastructure. Overall loss production is estimated at 10% of normal quarterly sales. In response to the cyberattack, FTG hired experts to determine the methodology used in the attack and steps to be taken to reduce the chances and impact of any future attacks. There is no evidence of the loss from usage of data, which has been stored within our network at the time of the event. We have made and are planning investments in the security and recoverability of our network and systems as well as user awareness and training. Costs incurred as a direct result of the cyberattack during Q4 2019, including $0.2 million, which is primarily in G&A expense. We also incurred additional costs of $500,000 to $600,000 in the first half of 2020, which can be primarily -- primarily in the capital expenditures to address the security and recoverability of our networking systems. From a geographical standpoint, 74% of FTG's 2019 sales were derived from customers in the U.S., which is up from 69% in the prior year. This shift is attributable to the continued strong demand from the U.S. defense market, and the acquisition of FTG Circuits-Fredericksburg. The Fredericksburg site, which contributed $3.6 million to 2019 sales, currently sells primarily into the U.S. Northeast region. SG&A expense in fiscal 2019 at 12.1% of sales was essentially flat to the prior year at 12.2%. The dollar increase of approximately $0.4 million includes $0.2 million of expenses following the cyberattack and 4.5 months impact of the Circuits-Fredericksburg site. SG&A in Q4 2019 was reduced by $0.6 million from Q4 2018, which is attributable to lower personnel costs, including performance compensation partially offset by the cyberattack cost of $0.2 million. R&D costs for fiscal 2019 were $4.8 million or 4.3% of net sales, which is essentially flat with the prior year. Our R&D efforts are focused on process and product improvements, led by our Circuits-Toronto site which has specific projects focused on development and integration of robotic manufacturing equipment. Earnings before interest, tax, depreciation and amortization, also as EBITDA, calculated as described in our press release, was $14.6 million for the trailing 12-month period ended November 30, 2019, which is a 39% increase from the trailing 12-period in 2018. The increase in EBITDA of $4.1 million as compared to 2018 is driven by growth of the business and increase in the gross margin rate. Our net cash position after 2019 year-end is $2.2 million as compared to net debt of $ 2.4 million as of the 2018 year-end. The net increase of $4.6 million is net of the $3.8 million cash consideration paid for the Circuits-Fredericksburg acquisition, which closed in Q3. Free cash flow, cash from operations less cash used in the investing activities excluding acquisitions, was $8.5 million for the full 2019 fiscal year and $2.4 million for Q4. Although we were able to reduce inventories during the year, there was an increase in accounts receivable which is the result of adding the Circuits-Fredericksburg site and Q4 revenues being skewed to the latter part of the quarter as we recover from the cyberattack. As at the 2019 year-end, the corporation's primary sources of liquidity totaled $51.2 million, consisting of cash, accounts receivable, contract assets and inventory, but excluding USD 9 million availability on the revolving line of credit and approximately $2.7 million of availability on the revolving U.S. -- on the revolving term loan with our primary lender as at November 30, 2019. Our card banking facility expires in November 2020, therefore, outstanding net debt of $5.4 million as presented on the balance sheet has a current liability. We expect that we'll be able to conclude on our new banking facility with terms comparable or, better yet, with improvement.Working capital at November 30, 2019, was $28.6 million as compared to $28.7 million at November 30, 2018. Accounts receivable days outstanding were 70 as at November 30, 2019, compared to 59 for the prior year. Inventory turns were 3.7 as at November 30, 2019 as compared to 3.2 for the prior year. And accounts payable days outstanding were 81 as at November 30, 2019 as compared to 78 for the prior year. Investment in plant and equipment for fiscal 2019 includes acquisition -- an addition, sorry, of $5.5 million, including $2.4 million of plant and equipment included as part of Circuits-Fredericksburg acquisition. Current year capital expenditures were predominantly for our Circuits segment and targeted to increase capacity, efficiency and productivity. We entered Q1 2020 with a strong backlog of $49 million, and we are focused on a strong year. Our complete set of 2019 filings are now available on SEDAR.com. With that, I would like to turn things back to Brad.
Thanks, Jamie. Let me delve into some details at the site level. At Circuits-Toronto, they had another great year with increased revenue and profit. But as discussed previously, they're approaching capacity. We did invest in some new capital equipment in 2019 to add capacity and improve capability. And our acquisition of Colonial gives us the opportunity to offload some medium technology work from Toronto and free up capacity for new higher-tech opportunity. At Aerospace-Toronto, revenue was up slightly, excluding the onetime adjustment in 2018. The site was impacted by the cyberattack in Q4 2019. Profit of that site was down, partly due to a change in our intercompany accounting process, which is not an operational issue and partly due to the drop in revenue. Our engineering and development programs at that site were in full swing in both 2018 and 2019. In Aerospace-Tianjin, sales were up 20% in 2019 and profit was up 160%. They benefited from some significant simulator orders in China earlier in the year. While we hope and expect to do more of this in 2020, we do not have them booked at this time. In the Circuits joint venture in China, sales were similar to last year, while profitability was down a little bit as we incurred extra costs for outer layer facility and some significant qualification activities in 2019. These qual activities are leading the growth opportunities in 2020 and beyond. We continue to see growth opportunities at both China sites, but the trade situation between U.S. and China and the dispute between Canada and China is causing us some uncertainty as we look forward. The recent U.S. -- or the U.S. tariffs on Chinese goods could impact our circuit board business. We have not just seen any impact, but we are watching this closely. For our Aerospace-Tianjin facilities, they are seeing some Chinese retaliatory tariffs impact on goods they're buying from the U.S., and this is driving up their cost. Again, this amount is not material as of now, but it also is an area we are watching closely. At Circuits-Chatsworth, activity was down 4% year-over-year primarily due to the impact of the cyberattack in our fourth quarter. Bottom line performance was slightly improved year-over-year due to some cost-saving initiatives completed in 2019, but there's still more we can do and we'll do to further improve their operational and financial performance. In Aerospace-Chatsworth, activity was down about 6% year-over-year, due in part to the cyberattack and in part to ongoing lead time challenges on key components. But again, their bottom line performance improved, in this case significantly year-over-year, due to many cost-saving and operational improvement initiatives. And since July 2019, the addition of Colonial Circuits added $3.6 million in sales and about $300,000 in net income to FTG. In the area of staffing, I'm very pleased with the key changes we made in 2019 and the impact the additions are making to our performance. Specifically, the addition of Paul Godbout to take over the Fredericksburg site as general manager is important as the previous owner and operator retired. I've known Paul for many years, and I am confident he will drive great success in Fredericksburg going forward. Overall at FTG, the staffing level in 2019 increased to 524 employees from 488. The Colonial Circuits acquisition added 48 people. So excluding this, the headcount at FTG was down 12 people as we improve efficiencies while growing revenues. Some of the headcount adjustments resulted in termination costs in 2019 of about $0.5 million, impacting profitability and EBITDA in the year. We continue to manage our balance sheet. Working capital was essentially flat in 2019 as we grew our sales and acquired Colonial Circuits. In particular, we did a great job in getting our inventories down in the year. We also continue to make good progress in a number of technology areas. We continue to explore semi- and fully additive manufacturing processes for our printed circuit boards. We do believe the industry will move to an additive process, and we want to engage now with our customers and participate in the technology as it progresses. During 2019, we received new equipment for an additive solder mass process for our Circuits-Toronto facility. The equipment is expected to be operational in 2020. And we made further progress in our automation and robotics initiatives in Circuits-Toronto, which includes some Industry 4.0 functionality. We have 2 robotic systems implementations underway as we enter 2020. Looking forward, our balance sheet is the strongest it has ever been, and there's a solid flow of possible acquisition opportunities. So we hope to remain active in this area in 2020. With a focus on operational excellence in all parts of FTG, our increased product offerings and cost of products and high-technology circuit boards, our positions on key new programs, our initiatives in China and the acquisitions, we expect to see continued long-term growth and improving financial metrics going forward. The management of FTG has been and will remain fully committed to creating shareholder value through developing and implementing revenue and profit growth strategies for the company. This concludes our presentation. I thank you for your attention. I would now like to open the phones for your questions. Jason?
[Operator Instructions] Your first question comes from the line of Nick Corcoran from Acumen Capital.
Good. Yes. The first question just has to do with the impact of the coronavirus. You said in your prepared remarks that the manufacturing facility isn't up and running yet. Is -- what steps are needed to reopen that?
The very simple step is you need government approval to open the facility. But within that, you have to submit a plan to the government, essentially steps you're going to take to try to contain or minimize the risk of any spread of the coronavirus within your business. That includes plans to sanitize your plant on a regular basis. It includes plans to provide masks to employees. And this is going to include plans as to how you will provide enough space for people to have lunch without having to sit close to other people. And so we have been working on these plans. We have submitted them. But virtually every company in China needs to be doing this. And so we are waiting for feedback and hopefully approval on our plans. And so it does makes the timing a little bit uncertain. The parts we need to do we have done, but we now need feedback from the government. And this might be a bit of a detail, but just to give you an example, one of the biggest challenges on this is, as I said, you need to be able to provide masks for all your employees. Masks are really in short supply in China because virtually everyone is trying to get them. And we've actually purchased and shipped our masks from the U.S. to China to make sure we had them available when the government says go. So we are waiting on the government.
Okay. And then once the plant is back up and running, is there any -- what are the chances you can catch up, by increasing the number of shifts or number of employees working at any given time?
It's going to be tough to add employees quickly. But the one thing we can definitely do is work some overtime or have people work more hours per day or per week to try to catch up. And I guess, to be clear, at this point, our plans are around -- our expectation is this is not going to be a long delay to get approved to open. But if we start to see this delay into a longer period of time, we're also looking at could we take some of the work and then bring it back to Toronto or Chatsworth or somewhere to build it here rather than wait for China. We're definitely not doing that at this point, but it's something that we are evaluating in case we need to do it.
And then just the last question from me is have you seen any impacts on the supply chain from the coronavirus?
Nothing yet. And I guess, the one thing I would say in our Circuits business, a lot of the materials we buy from that come from China. But we have and are working with our suppliers at this point. And I'd say, generally, we're looking at a situation where the materials we would need for the next few months are already in North America. So again, if the delays remain reasonably short -- or the shutdowns remain reasonably short, I think we're in good shape. If they dragged it longer, that might impact our supply chain. And the last that I would say on that is -- and a few of our suppliers have actually received their approval to reopen, in which case, the risk has gone away.
And then will there be any issues getting product out of the country?
It doesn't seem like it. Just we have -- we haven't shipped anything yet since we shut down, obviously. But going the other way, as I said, we had to ship masks into China, the shipment had no issues. So it does appear that the couriers and their various services, they're still operating. And again, with our suppliers, or the ones that are coming back online, they are indicating no issues around shipping product out of China at this point.
There are no further questions at this time. I turn the call back to the presenters.
Okay. Thank you. An instant replay of this call will be available until March 13. The call-in numbers provided on our press release, a replay will also be available on our website in a few days. I thank you all for your interest and participation. Thank you.
That concludes today's conference call. You may now disconnect.