Firan Technology Group Corporation (FTG) Earnings Call Transcript & Summary

Good morning. Welcome to the Annual Meeting of the Shareholders of Firan Technology Group Corporation. My name is Edward Hanna. This year, to address the public health impact of COVID-19 and to mitigate risks to the health and safety of our communities, shareholders, employees and other stakeholders, the meeting is being held completely virtual. As in past years, we expect that the vast majority of all votes will be cast in advance of the meeting by proxy. That said, registered shareholders and newly appointed proxy holders will be allowed to vote online at the meeting by clicking on the voting icon. I'd like to introduce the current officers and directors of the corporation who are attending today's proceedings via live webcast: Bradley C. Bourne, President, Chief Executive Officer and Director; Jamie Crichton, Vice President, Chief Financial Officer and Corporate Secretary; David F. Masotti, Director; Mike L. Andrade, Director; Kumail Gangjee, Director; and myself, Edward C. Hanna, Director. We have 3 items of business to conduct today: the presentation of the financial statements of the corporation and related auditors' report, the election of the directors and the appointment of the corporation's auditors. As we will be conducting a ballot on the election of directors and the appointment of the company's auditors, I will explain the voting procedure for the online platform. The voting in today's meeting will be conducted by online ballot. If you have already voted by proxy, there will be no need for you to vote online since your vote will be recorded in accordance with your proxy instructions. The polls will be open for all items of business to be voted on at the same time. This will allow you to vote on each item immediately or, if you prefer, you may wait until the conclusion of discussion on each item prior to casting your vote. The items of business to be voted on and your available voting options will be visible on the voting panel on your screen. To submit a vote, please click on the voting choice displayed on your screen. Once discussion is concluded on all items of business, you will have a few minutes to enter your votes. I will then declare voting closed on all matters of business. Each of the matters to be voted on today is described in the corporation's management information circular dated February 24, 2021, sent to shareholders with the notice of this meeting. After voting, Brad Bourne will review the past year and give us a brief look at the future of the corporation as he sees it. We'll then have a question-and-answer session. You'll be able to submit questions by clicking on the question icon, typing in and submitting your question. Given the virtual format of the meeting and in order for us to expediently address as many questions as we can, we would encourage anyone who has a specific question on an item of business to be discussed at today's meeting to submit your questions now. If you have any questions about the company and not specifically relating to an item of business to be discussed in today's meeting, please feel free to submit those questions at any time, and they will be addressed at the conclusion of the meeting. We'll do our best to answer questions. But if, for any reason, we're unable to do so during the meeting, we'll do our best to engage afterwards. Again, to submit a question, please click on the question icon, type in and submit your question. I'll now call this meeting to order. I'll act as chair of the meeting, and I'll ask Jamie Crichton to act as secretary. Also, with the consent of the meeting, I'll ask the representative of AST Trust Company to act as scrutineer. As everyone should have received a copy of the notice calling this annual meeting of shareholders, with the consent of the meeting, I'll dispense with the reading of the notice. There's a statutory declaration and attesting to the due mailing of the notice of this annual meeting, together with the form of proxy, the related management information circular and the annual report containing the consolidated financial statements of the corporation for the year ended November 30, 2020, and the auditor's report thereon. Copies of the mailed documents are available on www.sedar.com. I have reviewed the scrutineer's preliminary report on attendance, which indicates that the requisite quorum for the transaction of business is present, and I therefore declare the meeting to be properly constituted and I now declare the polls open on all resolutions. The secretary has the minutes of the last meeting of shareholders of corporation, and these can be examined at any time upon request. With the consent of the meeting, I will dispense with the reading of these minutes. The first item of business for the meeting is the presentation of the financial statements for the corporation and the related auditor's report for the years ended November 30, 2020 and 2019. Since copies of the financial statements and the related auditor's report were included in the corporation's annual report, unless there is an objection, it's appropriate to dispense with the reading of these items. And accordingly, I'll direct the secretary to table the audited financial statements and attach them as is scheduled to the minutes of this meeting. The next item of business is the election of the directors of the corporation. I now call for the nomination as directors of the corporation those persons who have been nominated by management as set out in the corporation's management information circular dated February 24, 2021. In addition to myself, Edward Hanna, management's nominees are Bradley C. Bourne, Kumail Gangjee, David F. Masotti and Mike. L. Andrade. May I have a motion for the nomination of those nominees?

I so move.

Are there any further nominations? Or is there a discussion of this matter? If so, please click on the question icon, type in and submit your comments. No comments have been received on this motion. If any comments on this motion are subsequently received, they will be addressed prior to completion of voting at the end of this meeting. Would someone please move that the nominations be closed and that each of the persons nominated be elected as directors of the corporation to hold the office until the next annual meeting of the corporation or until a successor is elected?

I so move.

I second.

As mentioned earlier, we will be conducting the election of directors by online ballot. Only registered shareholders and proxy holders are permitted to vote. We will now vote on this matter. Would those shareholders who have not already voted by proxy, please now submit their online ballot for the election of directors by selecting a voting option on the voting panel displayed on your screen? The final individual votes for each director will be reported as part of the voting results filed under applicable securities legislation. [Voting]

The next matter to be considered is the reappointment of the auditors of the corporation. Would someone move that MNP LLP, chartered professional accounts, be reappointed as auditors to hold office until the next annual meeting of the shareholders of the corporation or until a successor is appointed and to serve at such remuneration as may be approved by the directors of the corporation.

I so move.

I second the motion.

Is there any discussion of this matter? If so, please click on the question icon, type in and submit your question. No comments have been received on this motion. If any comments on this motion are subsequently received, they will be addressed prior to completion of voting at the end of this meeting. We'll now vote on this matter. Only registered shareholders or their duly appointed proxy holders can vote by online ballot. Would those shareholders who have not already voted by proxy please now submit their online ballot for the reappointment of MNP as auditors by selecting a voting option on the voting panel displayed on your screen? [Voting]

Is there any further business that may properly be brought before the meeting? It's now 10:39, and the polls on all items of business will close at 10:40. For those of you who have not voted on all of the items of business, please do so now. [Voting]

Based on the proxies received before the meeting and confirmed to have been voted at this meeting, I declare that Bradley C. Bourne, Kumail Gangjee, David F. Masotti, Mike L. Andrade and myself, Edward C. Hanna, are elected as directors of the corporation. Based on the proxies received before the meeting and confirmed to have been voted at this meeting, I declare MNP LLP, chartered professional accountants, reappointed as auditors. That concludes the voting in today's meeting. This also concludes the formal business of the meeting. I will now ask for a motion that the formal portion of the meeting be terminated. May I have a motion?

I so move.

I second the motion.

I declare the formal portion of the meeting is now terminated. I would now like to call upon Brad Bourne to review the past year and give us a brief look at the future of the corporation as he sees it.

Thank you, Ed, and good morning, everyone. Next slide, please. Before I proceed in the presentation, I must caution all listeners that the presentation will contain some forward-looking statements, and please consider other sources of information and consider these forward-looking statements cautiously when considering the future of FTG. Next slide. A quick overview to remind everyone about FTG. Next slide. So FTG has not changed. Its market focus which is the aerospace and defense market and have not changed our product offering within this market. We continue to supply cockpit products and run those under the name FTG Aerospace, and we continue to supply printed circuit boards and run those under the name FTG Circuits. Next slide. Again, a little bit of the FTG of today. So we have 7 operating sites in Toronto doing circuit boards and cockpit products to -- in Chatsworth, California, doing circuit boards and cockpit products; to -- in Tianjin, doing circuit boards and cockpit products. And in 2019, we added FTG's Fredericksburg in Virginia doing circuit board. Full year sales last year were $102 million, just under 500 employees, and now we have 24.5 million common shares. That is a little bit different from prior years as the convertible preferred shares that used to exist for FTG have been converted to common shares. So we now have a simple, clean share structure. Next slide. A little bit on the key customers for our Aerospace business. Again, not a lot new here that the core of our business remains the avionics manufacturers, Raytheon Technologies, Honeywell, GE, AVIC in China. Maybe the one change you would note is that Raytheon Technologies over the last couple of years ended up acquiring both Rockwell Collins and United Technologies. So there's definitely been some consolidation in the industry, which so far has not impacted FTG and might have actually created some opportunities for us. Next slide. The same sort of description of our customer base for our Circuits business, again, the heart of our business and the key customers are the avionics and electronic manufacturers. Again, Raytheon Technologies, Honeywell, GE show up at the top and so on across our customer base. We also address the space market on our circuit board side. And maybe you noticed one new customer. That would be MDA, which is Indian company that spun off from Maxar and has now been listed in Canada. But we have done business with them for many, many years under the variety of names they have had. Next slide. Now absolutely, the economics of FTG, nothing has changed on this slide. From a cost perspective, about 30% of our costs are fixed and the remaining 70% are variable. This is good news and bad news. Historically, we've always talked about this as good news. And that as we grow the revenue, the fixed costs remain fixed, and so it adds to our profitability. Of course, the opposite is true. When revenue goes down, the fixed costs remain fixed. So this impacts us more as we went through some of the challenges we went through in 2020. But as I'll talk more about momentarily, I think we did a pretty good job of managing that. And then lastly, the exchange rate is important to us in that 70% of our activity is in Canada, but almost all of our revenues in U.S. dollars. So as the exchange rate moves, that can impact our profitability. But the exchange rate has moved around a little bit over the last 5 years but is remaining at a level that, for sure, is a level that allows us to be profitable out of our Canadian operations. Next slide. A little bit about 2020, which obviously was all about the COVID-19 pandemic. Next slide. So this comes from IATA, which is -- tracks air travel internationally or around the globe. In 2020, air travel was down over 70 -- international air travel was down over 75% compared to 2019. Domestic air travel was down about 50% compared to 2019. So it was obviously a tough year. And as that air travel comes down, that does impact the aerospace industry as we support the airlines directly. The forecast, interestingly enough, for 2021 is for a significant improvement over the 2020 demand, about a 50% improvement, but that would still leave air travel at about 50% of the 2019 levels. Next slide. More directly relevant to us is the aircraft deliveries. This is just looking at commercial aircraft deliveries and simplifying, really just looking at Airbus and Boeing. So if you go back to 2018, both companies delivered -- each company delivered about 800 aircraft. It was a great year. 2019 was actually a similar year in this -- this graph is about deliveries, but Boeing continued to produce the 737 in 2019. So really in 2019, again, Airbus and Boeing both produced about 800 aircraft. Boeing just could not ship their 737. We move to 2020, Airbus deliveries were down about 1/3 and Boeing deliveries were down dramatically, as you can see there, and they stopped producing the 737. So from a production point of view, the drop in production was more than 60% in the year, which was a huge impact to the industry and certainly is something that we had to deal with at FTG. Next slide, please. So what did we do to deal with these challenges in 2020? We really had 3 key strategies or actions that we follow. First one is something that did not start in 2020. It's been in place for a long time. FTG has always said we want to be in a range of different aerospace and defense markets. So we're definitely in commercial air transport, which was the segment that was hard hit. But we're also involved in the defense market, which remained robust and actually grew slightly in 2020. And we remain in other segments of the market. We also do business jets. We do general aviation. We do helicopters and we do simulators for all of the above market. So the fact that we had a diversified revenue stream enabled us to mitigate the downturn in the commercial air transport market. Second action, clearly, we're going to be impacted on revenues, so we carefully manage our costs across the company. But we also took a balanced approach. We managed our cost reductions in a way that we could ensure we retain critical skills so that we could recover fast as the industry recovers in the future. We are able to do this definitely as a result of some of the government support programs available to us in Canada and in the U.S. And lastly, we carefully managed investments. As we went into 2020, we were not sure what was going to happen at all. We had no idea of time frame, of how the pandemic would play out and when it might start to recover. So we were very careful in managing any investment. And as a result of that, as we ended 2020, we had the strongest balance sheet that FTG has ever had and definitely a balance sheet that was stronger than before the pandemic started. Next slide. So looking forward, what do we see? Definitely, we are seeing the beginning of a recovery. Next slide. This is some data from TSA in the U.S., and it's just an indication of air travel. So the blue line across the top was number of millions -- millions of passengers going to a TSA checkpoint per day. So it was ranging about 2 million to 2.5 million people per day through a U.S. TSA checkpoint. They could be traveling anywhere. They could be traveling in the U.S. domestically. They could be traveling internationally. But if they go through a checkpoint, they're on that chart. Orange line is what happened in 2020. So it started out for the first couple of months very similar to 2019, and then it went almost to 0. As the pandemic hit and the world shut down, air travel and passengers through TSA checkpoint went to under 200,000 people per day, so a 90% reduction. Through the remainder of 2020, slowly, air travel recovered in the U.S. And then lastly, the bar that just goes from January to April in the middle is what's happening so far in 2021. It's really picking up where 2020, and there's a slow increase continuing in terms of air travel. So U.S. air travel is now at about 50% of where it was in 2019 before the pandemic. And I guess my expectation is as vaccines continue to roll out, the more people get vaccinated, we will continue to see air travel slowly ramp up. It may take a while to get back to 2019 as the key still is to have international air travels recover in a significant way. And that's more complicated due to various country restrictions around the world. And then lastly, not on the slide, but just as a note, air travel in China, just domestic air travel, has now recovered to pre-pandemic level. So different countries are recovering at different rates. But overall, there is a trend towards a recovery in overall air travel in the world. Next slide. So what are we doing? As we look forward, we recognize we're not past the impact of the pandemic, for sure, but the trend is now upwards. In 2020, we spent much of the year not sure what was going to happen and slowly getting -- working our way down as the inevitable slowdown impacted us, but we now see an upward trend. But because the pandemic is not behind us, we are going to continue to pursue government assistance where it is available. The Canadian wage subsidy program remains in place. And announced in the budget yesterday for Canada, they are looking to extend it at least to the fall of 2021. It has not been passed yet, but it's in the budget. And in the U.S., we did receive funding under the U.S. Paycheck Protection Program. Some of it has been forgiven now, and we're hoping that the remainder will be forgiven in the coming months. So we will continue to pursue that. But lastly, we're going to take advantage of our very strong balance sheet. We are aggressively pursuing new sales opportunity. We have not slowed down in that area during the pandemic. We actually added a new salesperson in the U.S. Northeast recently to add to our sales team. And we've had some significant wins I'll talk about momentarily. We're also taking advantage of our balance sheet to address some equipment needs to improve our operations, particularly in our circuits Chatsworth facility, where we have some plans this year to in-source some processes and improve the overall operations, equipment additions. And we will continue to invest in R&D and new programs to grow our revenues in the future. And finally, we would now consider acquisitions. During much of 2020, as we were just protecting the balance sheet, we were not even considering such a thing. But given our feeling the trend is now upward and the strength of our balance sheet, this is certainly something that would be of interest to us if we find the right opportunity. Next slide, please. This was mentioned in our first quarter press release, but I thought I would just highlight this again. And this relates to the previous slide where we are aggressively pursuing sales and growth opportunities and investing in technologies that I think will help us grow faster than the market can recover. First one is we received a development contract from a Tier 1 avionics company for a family of cockpit assemblies. Cockpit assemblies is a higher level of technology that we now do. This is actually a very interesting program that we have secured as the products go on to Boeing aircraft, Airbus aircraft as well as military aircraft. And as we've talked about for the last few years, we want to grow our aftermarket activity. All of these products are for aftermarket applications. So this is quite an exciting program for us. It has started. Development will be through much of 2020, and it will convert to production revenue in 2022. Next, we received a customer approval from a major Tier 1 aerospace company for our aerospace Tianjin facility. This is going to open up new opportunities for us. And interesting to note and good timing, we actually received our first RFP from them this morning. So we believe we can convert this to some revenue in the coming months. So it's happening fairly quickly. Thirdly, we received a new customer approval from an airframe company, so that's someone who manufactures complete aircraft for our aerospace Toronto and aerospace Tianjin facilities. This is something we've been working on over the past number of years. It's a significant accomplishment for FTG, and it opens up a significant new market for us. And it also is moving fast. And that first production parts, as a result of this approval, were actually shipped within the first quarter. So we hope to see that continue to progress through the coming months and quarters. As we had talked about earlier in 2020, we continue to pivot towards the defense market where we could to offset the drop in commercial aerospace. And we have really had 5 customer qualifications or approvals at various customers that these can benefit either our plants in the U.S. or our plants in China. So it's been some good successes there, and we're starting to see revenue as a result. Not so much related to the pandemic but related to some new U.S. regulations where they are concerned about being overly dependent on really Asia as a source of supply for electronics. They have begun to put in regulations forcing U.S. companies to reshore some of their electronics activity. And we are seeing opportunities for our North American plants to support that initiative and support those regulations. Finally, from a technology perspective, we have signed a licensing agreement with Averatek for semi additive circuit board manufacturing. The equipment is installed in our Fredericksburg facility. They actually made some first parts a few weeks ago. They were very impressive in terms of what we can achieve with this new technology. But this is something where I do believe semi additive or additive manufacturing processes will happen in circuit board manufacturing. And we are really just using this to learn the processes and work with customers. So that as it becomes something that is acceptable, we are positioned to be able to support this technology requirement. Next slide. So all this leads to financial performance, and I will summarize a few of the key items. Next slide. So this is 5-year trend in terms of revenue and EBITDA. Our goal is to try to double every 5 years. Obviously, given the pandemic, that has made it challenging. We did not achieve that. But nevertheless, over the last 5-year period, our revenue has still grown about 42%. And from a profitability or EBITDA perspective, this still demonstrates that our fixed costs do benefit over the long term. As revenue grows, EBITDA grows faster. So while revenue went up 42% over the last 5 years, EBITDA grew 89%. And within -- just as a note, within 2020, there is just over $3 million of Canadian government's assistance in the profitability or in the EBITDA calculation, but the U.S. Paycheck Protection loans that we received in 2020 are not in those numbers as they were received as loans and did not impact the P&L. Next slide please. FTG has always and will continue to invest to improve the business and to position for future growth. We did cut back in 2020 a little bit. But from a capital perspective, anything that was on order we continued forward with. And we continue to invest in R&D in support of ongoing programs. And then over the 5-year period -- actually, 6 years, I guess, technically, we have invested $72 million back in the business either in terms of R&D capital or corporate development. And of that, only $6 million was funded with new equity. The balance was funded from cash from operations. Next slide. Speaking of cash from operations, we had a great year. Again, last year, FTG has always done a good job in generating cash from operations. Last year, at the end of the year, we ended with over $12 million net cash on the balance sheet, which is definitely the best we've ever achieved. And again, that's partly us managing our costs, managing our balance sheet through the pandemic. It's also important to note that the working capital, which went up last year and was also very strong, that is not as a result of building inventories or having high receivables. Our receivables actually went down over $4 million. Our inventories went down almost $3 million. The buildup in working capital is primarily as a result of our buildup in cash and the reduction of debt. Next slide. So probably one of the more disappointing items for us over the last year as shareholders indeed, the price -- the FTG stock price is down by about 50% over the last year. It definitely dropped precipitously as the pandemic hit. And it has recovered a little bit, but it has not stayed in line, in my humble opinion, with our overall performance. As of this week, we're trading at about 3x as enterprise valued EBITDA, which is very low multiple and we're trading at about 11x earnings per share. When you take cash out of it, we are now sitting on just over about $0.50 of cash per share. So these are low multiples. We do believe that we can continue to perform. We will eventually get recognized for our overall financial performance and get recognized in our share price. Next slide, please. So in summary, 2020 was definitely all about the COVID-19 pandemic. It definitely impacted our end customers. It impacted travel, it impacted aerospace, it impacted us. And impacted really in 2 ways: reduced market demand, as we've talked about; and also operational challenges. We spent a lot of last year trying to identify ways to keep our operations running while keeping everyone safe. We certainly had some challenges in that regard, but we worked our way through them. At this point, I think we have managed through the pandemic so far successfully. And going forward, as mentioned earlier, we will leverage our strong balance sheet to invest in our operations to continue to improve them, to invest in technology and to invest in growth, growth either organically or through acquisition. So that is my presentation. I thank you very much. If there are any questions, I'd be happy to answer them for you.

A few questions have been received. So let me address them as I see them. So first question I have says, "Do you believe your competitive advantage has changed since the start of COVID?" I don't think so. I think our competitive advantage has really been a few things in the past. Our global footprint was a competitive advantage. I still see it as a competitive advantage, notwithstanding what I said about what I see some push to reshore or onshore electronics in the U.S., at the same time, I also see pushes to try to move other work out to Asia. So I still see it as an advantage. We've said for the last number of years, our strong balance sheet has been an advantage. That certainly continues to be the case. Our investments in technology have been an advantage for us. We definitely like to win work based on our technology and our performance. And so I think all of those advantages remain in place as we come out the other side of the pandemic. Next question I see is how do you think about mitigating your customer concentration risk. And that's a really good question. We are seeing consolidation in the industry. As I mentioned during the presentation, Raytheon Technologies is now a combination of the old Raytheon plus United Technologies plus Rockwell Collins. We were doing business with all of them. So it's a concern, but it's also an opportunity for us. So I'll give you 2 points on that. First one is that while the customers are -- in that example, is more concentrated, we tend to do business site-by-site from FTG sites to their sites. And when you look at it on that basis, all of a sudden, we might be doing business from each of our 7 FTG sites to maybe 20 or 30 of their sites. Even when we contract with them, we almost always contract on a site-by-site basis. And so we have multiple contracts in place. So it definitely reduces the risk of customer concentration. And the last thing I would mention on that also a benefit is as these companies consolidate, they definitely look to consolidate and simplify their supply chain. They look at the supply chain across the acquired companies and then they look to try to do business with -- do more business with fewer suppliers. It seems so far that FTG has met the minimum size threshold to be considered as a viable supplier in the new larger company. And so we're actually seeing new sales opportunities from some of these consolidation opportunities. Having said that, there is certainly risk, still some risk with customer concentration. If something goes wrong, it could certainly impact us more than we would like. Next question I see is provide an update on the M&A climate and what kind of opportunities are out there. Yes. It's a good question for us. So there's I'd say good news and bad news in this. One thing I expected to see more of is -- I thought some companies might struggle a little bit financially and they could become M&A targets. We have not really seen that up until this point in time. Another comment I would make from a negative perspective is there are some public companies that could be of interest, but for sure, other than FTG, public company market cash seemed to be -- trade very high and multiples are very high. So that becomes a bit of a stumbling block for us if we're looking at other public companies. But beyond that, we are seeing a regular full of opportunities towards us. We have obviously not seen something that was of interest enough to move forward. But the full is similar to what we saw before the pandemic. And beyond that, we are now trying to be more proactive and look for companies that fit what we want to do in terms of growing our business for the long term. Again, aftermarket would be an opportunity. At some point, Europe might be an opportunity to support the European defense market and to support the Airbus supply chain. So we know what we're interested in, and we are proactively reaching out to people. But again, as you can tell, we have not identified something that has met our needs and met our expectations to the point where we could move forward. Those are the questions that I have received. Is there any other questions from anyone? All right. There are no further questions. So that concludes our Annual General Meeting for this year. I thank you for your attendance. Thank you all.