Firan Technology Group Q2 2024 Earnings Call Transcript

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July 11, 2024

There are 4 speakers on the call.

Operator

Good morning, everyone. My name is Rochelle, and I will be your conference operator today. I would like to welcome everyone to the FTG Q2 20 24 Analyst Call. All lines have been placed on mute. There will be a question and answer session following the call.

Operator

Please note that this call is being recorded. I would now like to turn the call over to Mr. Brad Born, the President and Chief Executive Officer of FTG. Mr. Borne, you may proceed.

Speaker 1

Thank you. Good morning. I'm Brad Borne, President and CEO of Fram Technology Group Corporation, or FTG. Also on the call today is Jamie Creighton, our Chief Financial Officer. Before we go any further, I must caution you that this call may contain forward looking statements.

Speaker 1

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 and the company's industry generally. The proceeding 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.

Speaker 1

We continued with our positive momentum in our Q2. As always, we had a few challenges to overcome, but we succeeded thanks to the efforts of the people across FTG. I would like to thank everyone at FTG for their hard work and their contributions to our success. Our success is a team effort among all 6 70 staff across the company and around the world. In Q2 20 24, FDG achieved some strong financial metrics, including our 2nd quarter bookings of $58, 700, 000 were up 46% over Q2 last year.

Speaker 1

Our 2nd quarter revenues of $38, 800, 000 were up 14% over Q2 last year. Our adjusted net earnings in Q2 2024 of $2, 600, 000 were up 13% over Q2 2023. We achieved 2nd quarter adjusted EBITDA of 6, 500, 000 dollars which was up 25% over Q2 last year. And we achieved free cash flow of $2, 000, 000 in the quarter, an increase of $2, 400, 000 over Q2 2023. Other accomplishments in Q2 include orders received in the quarter totaled $58, 700, 000 resulting in a book to bill ratio of 1.51:one.

Speaker 1

Within this, we were awarded a contract value at approximately $17, 000, 000 to supply cost tested assemblies for the C919 aircraft in China. Deliveries will start in the second half of 20 24 and continue through 2026. Production will take place in STG's manufacturing facilities in Toronto, Canada and Tianjin, China. Production will start in Toronto and transition to Tianjin during the contract period. This is after 12 years of development efforts on this program.

Speaker 1

As of May 31, 2024, our quarter end, we had a total backlog of about $120, 000, 000 which is a 22% increase over Q2 last year. Integration activities in Circus Minnetonka progressed well in the quarter, including going live with the FTG ERP system. There were some production impacts from the ERP transition in March April, but may saw a return to expected throughput. Circus Minnetonka also renewed a multiyear contract with 1 of their largest customers at improved prices in the quarter. Integration activities on Circuit Haverhill advanced with the receipt of new drill and electrical test equipment.

Speaker 1

The expansion of the customer base progressed well in the quarter. The site installed new servers and the FTG ERP software in the quarter. The full implementation of our ERP system is targeted through the second half of this year. Jamie will provide more details on our Q2 results shortly. But first, let me turn to some external items.

Speaker 1

Our end market demand remains strong. Last year, Airbus delivered 735 aircraft. Through June 2024, they have shipped 323, which is up slightly from year to date 2023 June, but below their target rate for the year. But within this, for Q2, they delivered at an annualized rate of 7 24 aircraft, which is very close to their target. Q2 shipments at Airbus were 27% higher than in Q1.

Speaker 1

They are looking to ramp to almost 1, 000 aircraft annually in the next few years and this is a 35% production rate increase. Airbus has a backlog of over 8, 000 aircraft on order, which is over a decade worth of production at current production rate. At Boeing, last year they shipped just under 500 planes and plans to ramp their production by 40% to almost 700 planes per year in the next few years. Boeing's backlog is almost 6, 000 planes, so also over a decade's worth of orders at current production rates. But the FAA has told Boeing to limit production while they ensure there is sufficient focus on quality.

Speaker 1

In Q2, Boeing delivered only 92 aircraft, which surprisingly is up 11% from Q1. For the 1st 6 months of 2024 shipments at Boeing were down 33% from the first half of last year, primarily due to the impact of the incident with Alaska Airlines. In the business jet market, Bombardier reported low single digit shipment growth for 2023 and the productions 2024 are for similar level growth. It was good to see that they settled their labor dispute yesterday. Gulfstream is projecting high single digit level growth 4.

Speaker 1

This industry remains in a growth mode. In the helicopter market, Delta Helicopter reported 31% revenue growth in 2023 and are projecting near 10% growth for this year. However, shipments of new aircraft were down slightly in Q1 2024. We remain positive as we look to future demands in various market segments in the coming years. I also look to results from key defense contractors.

Speaker 1

And as of now, Lockheed Martin revenues in Q1 this year were up a surprising Q2 this year were up a surprising 14% over last year. The ongoing political challenges in the world will keep defense spending high for a period of time. Looking to the longer term, Boeing's most recent 20 year forecast shows long term industry growth and it continues to show 20% of all new aircraft deliveries going to China and close to 40% going to Asia, as has been the case in all of their recent forecasts. The business jet market has already seen traffic recover A recent longer term business jet forecast from Honeywell similarly predicts growth in this market in the coming years with near double digit growth rates for the sector. The simulator market mirrors end market application, but as we always remind everyone about this market, it is lumpy, so large year to year variations do occur.

Speaker 1

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. It is not often all segments are growing together, that seems to be the case right now. Beyond all of this, let me give you a quick update on some key metrics for FTG for Q2 2024. First, the leading indicator of our business is our bookings and new orders. As noted earlier, our bookings were $58, 700, 000 in Q2.

Speaker 1

This resulted in a backlog of $120, 000, 000 at quarter end. Again, the large order for cockpit products for the C919 aircraft drove the orders in the quarter and the increase in our backlog. In Q2, 24 sales were up were $38, 800, 000 which is $4, 800, 000 or 14% above Q2 last year. Our aerospace business was down $3, 600, 000 in Q2 versus Q2 last year due to a combination of lower simulator sales in the quarter and some customer driven delays on new assemblies that we cannot ship in Q2. The backlog remains strong in this business.

Speaker 1

Our circuits business grew by $8, 400, 000 or 40% in the quarter, primarily due to the acquisitions as we own them for 1 month in Q2 last year and the full 3 months in Q2 this year. At Circus Minnetonka, the run rate in Q2 was approximately US27.5 million dollars annualized. This is showing good progress towards getting them to revenue levels, while they will materially contribute to FTG sales and profitability. This is more impressive given the fact that they went live with the new ERP system in the quarter. While this did impact production levels early in the quarter, sales in Q2 were up 6% from Q1 to Q2.

Speaker 1

They had strong bookings again in Q2. After a bit of a slow start to 2024, Circa's funeral ramped 60% in Q2 compared to Q1 this year. Overall at FPG, our top 5 customers accounted for 55.9% of total revenue in the quarter. This compares to 52 0.6% last year. But of note, 2 of the top 5 are new this year and both are as a result of sales from our Minnetonka site.

Speaker 1

1 was an existing customer that grew with the acquisition of Minnetonka and the other 1 is a new customer at SDG. Also interesting to note, of the top 10 customers, fiber customers share between circuits and aerospace. We like to see the shared customers as it means we are maximizing our penetration of these customers by selling both pocket products and circuit boards. Also of interest is 1 of our top 10 customers in Q2 this year is a customer for aftermarket defense items. In Q2 'twenty 4, 25.5 percent of our total revenues came from our Aerospace business compared to 39.2% last year.

Speaker 1

The Aerospace business share decreased partly due to the impact from the acquisitions, which were both in the circuits business, as well as the decrease in simulator business. I would now like to turn the call over to Jamie, who will summarize our financial results for Q2 'twenty 4 And afterwards, I will talk about some key priorities we are working on. Jamie? Thanks, Brad. Good morning, everyone.

Speaker 2

On the sales of $38, 800, 000 FTG achieved a gross margin of $10, 800, 000 or 27.9 percent in Q2 2024 compared to $10, 000, 000 or 29.4 percent on sales of $34, 000, 000 in Q2 2023. The increase in gross margin dollars is the result of increased sales volumes at the newly acquired circuit sites and operational improvements. The gross margin rate for Q2 2024 was 0.7 margin points lower than the prior year quarter adjusted for government assistance of $300, 000 The gross margin rate in Q2 2024 was negatively impacted by lower sales of simulator product sales, which tend to be lumpy and lower productivity in the early part of the quarter at Circuit's Minnetonka during an ERP system implementation. By the 3rd month of Q2 20 4, the ERP implementation was substantially complete and weekly productivity at the Minnetonka site exceeded the levels which have been delivered prior to the system implementation. On a sequential basis, Q2 2024 gross margin increased by $1, 900, 000 or 2.4 margin points relative to Q1 2024 on a sales increase of 3, 800, 000 dollars q1 2024 gross margin was negatively impacted by a 6 week strike at ARO Toronto, which was resolved in January 2024.

Speaker 2

The average foreign exchange rate in Q2 2024 was 0.07 dollars or 0.5 percent more favorable than Q2 2023. So it was not a material factor in our results. Annualized revenue per employee in Q2 2024 was $234, 000 which was down by 0.4% from Q2 2023. Again, the simulator products revenue was lower in Q2 2024 and those assemblies include a high content of purchase components. SG and A expense was $4, 800, 000 or 12.3 percent of sales in Q2 2024 as compared to $4, 400, 000 or 13.0 percent of sales in Q2 2023.

Speaker 2

The increase in SGA is primarily due to picking up 3 months of SG and A at the acquired sites this year as compared to 1 month in the prior year quarter. The SG and A percentage of sales has declined with the increase in sales. R and D costs for Q2 2024 were 1 point $6, 000, 000 or 4.1 percent of sales compared to $1, 600, 000 or 4.8 percent of sales in the prior year quarter. R and D efforts include process development in the circuit segment and efforts to develop and qualify products for future aerospace programs. Adjusted EBITDA was $6, 500, 000 or 16.7 percent of sales for Q2 2024 as compared to $5, 200, 000 or 15.3 percent of sales for Q2 2023.

Speaker 2

EBITDA adjustments were limited in the prior year quarter for government assistance and acquisition costs. Adjusted EBITDA for the trailing 12 months period ended Q2 2024 is $22, 000, 000 or 14.6 percent of sales

Speaker 1

on sales

Speaker 2

of $150, 400, 000 with net debt now reduced to 0 point 2 4 times adjusted EBITDA for the $1, 000, 000, 000, 000 12 month period. Free cash flow, defined as net cash from operations and investing activities, including activity effects of foreign exchange, excluding acquisitions, less lease liability payment was $2, 000, 000 for Q2 2024 as compared to negative $400, 000 dollars for the prior year quarter. The increase in free cash flow is a result of increased operating cash flow and lower capital expenditures. CapEx investment for the second half of 20 24 is expected to be in line with our long term target of 8% of revenue, excluding approximately $1, 000, 000 for a partial roof replacement at the Circuits Toronto facility.

Speaker 1

We are entering the second half

Speaker 2

of 20 24 with record backlog of nearly $120, 000, 000 Our focus will be delivering quality products to our customers on a timely basis and improving the efficiency of our operations. Our complete set of Q2 filings are now on sedarplus.com. With that, I will turn things back to Brad. Thanks, Jamie.

Speaker 1

Let me delve into some other items in the quarter and or for the future performance of FTG. We continue to believe our staffing levels are about the right level to support our current demand. While we might tweak it slightly from site to site going forward, the majority of our staffing challenges are behind us. We always remember that we make money by building and shipping products, so we do spend significant amount of time and money driving process and productivity improvements at all sites. This can include manufacturing process improvements, but it can also involve things like automation.

Speaker 1

We now have a number of robotic systems operational at our Circuits Toronto facility and maybe surprisingly at our Aero Tianjin facility. We are adding robotic process in our Aerospace Toronto facility and in the quarter it made some production parts, but it's not yet fully operational. While automation goes well beyond robotics, we have a lot of very automated equipment across our circuit sites that help to drive both productivity and process control. Automation will continue to be a key area for investment across the company. Looking forward, the key item for us remains the integration of our new sites.

Speaker 1

For Hayworth, we acquired them to grow our presence in the RF circuit board market for aerospace and defense applications. While they are small, with an historic run rate of about $4, 000, 000 to $5, 000, 000 we like their capabilities. The integration is relatively straightforward as we intend to continue to operate it in this 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 1 where we can generate incremental margins and profitability to the benefit of FTG.

Speaker 1

Going along with this will be some focused CapEx to address a few production constraints to enable future growth. 2 new drills and an electrical test machine have been added to the site during the quarter. We did achieve some targeted material savings which will benefit us going forward as well. And finally, we will move them on to FTG's ERP system in the future. This project is just getting underway.

Speaker 1

FTG Circus Minnetonka was the larger acquisition. Their sales were over US31 $1, 000, 000 before the pandemic. They were hurt in the pandemic like we were. We see the long term positioning of Minnetonka be a source of high technology circuit boards similar to our Toronto facility, but with the U. S.

Speaker 1

Footprint. This U. S. Footprint is critical as we will look to grow our share of the U. S.

Speaker 1

Only advanced circuit board market in the defense area. In the short term, we have 3 priorities as we integrate Minnetonka into FTG. First, we need to ramp their production and throughput. They have closed the gap by about 50% to get back to their pre pandemic run rate. We continue to see strong demand, so ramping throughput remains our priority item for this site.

Speaker 1

In Minnetonka, the second priority is to reduce material cost. We have identified cost saving opportunities that can benefit the site as they are now part of a larger company. It is taking some time to achieve the savings and as in some cases it require customers approvals and internal engineering efforts. But when complete, we expect to achieve savings on the order of $1, 000, 000 annually. Our third priority is to improve pricing.

Speaker 1

We have had some successes already 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 to our customers and not squeeze our margin. We did renew a contract with 1 of our key customers with increased pricing and incremental revenue during our Q2. Beyond these actions, we had plans to move them to FTG standard ERP system and at the start of Q2 this year, we went live. There is a transition period as we run out old jobs from the old system and ramp up jobs in the new system.

Speaker 1

We did experience some inefficiencies that struggled with throughput in March, but April improved and May was back to effective throughput in revenue levels. There's also some noise in our results because we moved from a fairly simplistic WIP and finished goods evaluation methodology to a more sophisticated standard costing model as part of this implementation. And lastly, while not an immediate integration item, when we bought the site, we believe that we could expand and grow their customer base focused on the U. S. Defense market.

Speaker 1

This has already started. We are seeing some real interest from numerous customers in adding this site to their approved supplier list. That's the good news. The bad news is that it's typically a long process to get a new site approved, but we will stay focused on this to grow this site in the coming years beyond the pre pandemic high point. In Q2, we see continued we saw continued strong demand across most sites.

Speaker 1

Our total backlog is $120, 000, 000 with over $50, 000, 000 due in Q3. While it's not a good metric, we ended the quarter with just over $12, 000, 000 in past due orders, but this is down from $14, 000, 000 at the end of Q1 and down from $18, 000, 000 at the end of Q3 last year. Over half the past due orders are at our Aero Toronto facility. The strike hurt their deliveries in Q1. They also showed some past due assembly orders where our customers asked for some design changes.

Speaker 1

So while they are showing weight, this is driven by customer decisions. For other work at our Aerospace Toronto facility to help drive down the past due orders as fast as possible, we have worked with our customers to shift some production from Toronto to our other aerospace site, at least for the short term, and we have decided to add some additional staff. This should help in Q3 and beyond to recover back to strong on time performance there. Our challenge in Q3 is available production days. Our Q3 covers June, July August, where we have some plants shut down for a week and others see higher vacation absences.

Speaker 1

Typically, we estimate we lose about 1 week of production in our quarter or about 8%. We are expecting to grow in 2024 as compared to 2023, like we did in the first half. The easiest aspect of our growth will be having the acquisitions for the full 12 months as compared to 7 months in 2023. This should add an estimated $12, 000, 000 in sales to this year. If we can ramp production and sales at the newly acquired sites, this would further add to the growth.

Speaker 1

And we continue to win new programs across the company that will layer on incremental organic growth. At our U. S. Sites, we have won some initial orders for a new defense program where the initial orders are valued at about $1, 000, 000 deliverable in 2024. This program should ramp the full scale production in 2025 and beyond.

Speaker 1

And we will see further benefit from the higher value cockpit product assembly orders first booked in 2023 after we complete the customer requested redesign. These assemblies go on Boeing and Airbus aircraft And we will see the benefit of the C919 program in China moving into production. We shipped our first production orders last year and we now have over $17, 000, 000 in orders due through 2026. With the more complex geopolitical situation in China, there might be concerns about our activities there. But in 2023, both our operations have the best sales year ever.

Speaker 1

This continued in Q2 with the sites seeing 30% 66% growth compared to Q2 last year. As I had mentioned in previous quarters, we repatriated cash back to Canada during the last 2 years and in total we've now brought back $2, 200, 000 in cash. By doing this, we don't have surplus cash stranded in China and reduces our exposure of things deteriorated between China and the West. We are working to bring back more cash in Q3 this year. But we are 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.

Speaker 1

We continue to assess possible corporate development opportunities that could fit with either of our businesses. There are opportunities out there, but it's too early to know if they would be a good fit and a good deal for STG. With a focus on operational excellence in all parts of STG, our strong financial performance last year and the first half of this year, our 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.

Speaker 1

I would now like to open the phone for any questions. Rochelle?

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Nik Karkaran from Acumen Capital. Your line is now open.

Speaker 3

Congrats on a strong quarter and the record backlog.

Speaker 1

Thank you.

Speaker 3

Just my first question has to do with the bookings with the 919 or C919. Is this tracking in line or ahead of where you might have originally expected it to?

Speaker 1

Interesting question. When we started that program 12 years ago, it was definitely tracking behind our expectations by about 7 years. But on a more recent basis, it is tracking ahead in terms of the ramp in production. It's and I forgot the exact number. I'm going to say it's between 100 it's about 170 shipsets over the next 2 and a half years, which is a faster ramp than they had been projecting for a long time.

Speaker 1

And for sure, COMAC is looking for ways to ramp their production faster to get more aircraft in the field.

Speaker 3

Good. And then how should we think about that contract? Is that loaded up front and then drawn down over the 2 years? Or is there potential for additional renewals before it is completed?

Speaker 1

Yes. I guess 2 things. For sure, it's a 2.5 year booking. So we will be drawing it down during that period. But there are some that's not in production orders.

Speaker 1

They are talking about there will be a need to add some spares orders during this period. So there will be some add ons as a result of that. And then for sure before this contract runs out, they will be adding additional years on the back end of this. This is 1 of those annuity programs that should see ongoing revenue for the next 20 years if everything goes according to the plans.

Speaker 3

Good. And then maybe switching gears to staffing levels. How are you feeling about your productive capacity right now?

Speaker 1

Yes. I'm good with the staffing levels we have. But we tweak them a little bit as we look at the situation on various sites. And for sure, we just agreed we're going to add some additional staff in Aero Toronto right now, because we just we have the biggest pass throughs there and the only way to solve that is to build more and to build more, we're going to add some staff. And so we're looking to add there.

Speaker 1

There will be, I think, small adds across some other sites in the near future. We are pushing Minnetonka to do a further ramp of their production in Q3. And definitely, they have the backlog to support it. So there might be a few adds there. But we're not talking about 10 or 20s 30s.

Speaker 1

We're talking about relatively small numbers at each site. And in terms of overall capacity, and again, I can't achieve this overnight, but for sure at FPG based on equipment, plants and equipment across the company, we have a capacity of more than $200, 000, 000 We would definitely need to be adding staff to get to those sorts of numbers. But that's not something that would happen overnight.

Speaker 3

Good color. And then there's been a lots of news on Boeing, and I think you mentioned in your prepared remarks that deliveries have slowed down year over year. Is there any indication that the supply chain has started to slow down?

Speaker 1

Yes. I mean, there's a little bit of noise in the supply chain. Boeing is not keen to reduce production rates, because it's a big effort for a company like Boeing to increase or decrease production rates. And if they drop them down, then to ramp them back up would be a challenge for them. And so they're being cautious about it.

Speaker 1

But this has dragged out a little bit longer than they and I think everyone had hoped. So we are seeing noise in our backlog of where we're supplying into Boeing programs. But it's I'm going to say it's not something that I'm worried about at this point because we have so much else going on. I think it's not going to materially impact our results in the coming quarters. That's helpful.

Speaker 1

And maybe 1

Speaker 3

last question for me. How do you think about M and A for the remainder of fiscal 'twenty 4 and 'twenty 5?

Speaker 1

Yes. I'm feeling comfortable with the way the company is running right now. There's always a few challenges that we're working on. But now that's giving me time to be a little bit more serious on the M and A front. There's not really opportunity.

Speaker 1

We've investigated and heard about a number of them in the last quarter. For sure, some of them are not a great fit. So they've fallen by the wayside. Some others look interesting. So we're going to continue the process forward.

Speaker 1

But as I always say, these are binary events in the end, right? You can't do a 50% acquisitions, either a 1 or a 0. So we'll see. But there are some opportunities and I think we have some time available to really focus on them. And for sure, we have the balance sheet to be able to pull the trigger if we get to that point.

Operator

And there are no further questions at this time. Mr. Bourne, please continue.

Speaker 1

Okay. Thank you. A replay of the call will be available until Sunday, August 11 at the numbers shown 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 participation.

Speaker 1

Thank you.

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Firan Technology Group Q2 2024
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