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. Before proceeding, I'd like to introduce the current officers and directors of the corporation in attendance. Bradley C. Bourne, President, Chief Executive Officer and Director; Jamie Crichton, Vice President, Chief Financial Officer and Corporate Secretary; Mike L. Andrade, Director; Robert J. Beutel, Director; Kumail Gangjee, Director; David F. Masotti, Director; and myself, Director. We have 3 items of business to conduct today. The presentation of the financial statements of the corporation and related auditor's report, the election of the Directors and the reappointment of the corporation's auditor. Each of the matters to be voted on today is more fully described in the corporation's management information circular dated February 23, 2022, sent to shareholders with the notice of this meeting. At the conclusion of the formal part of this meeting, Brad Bourne will review the highlights of the past year and give us a brief look at the future of the corporation as he sees it. We will then call for your questions. I'll now call this meeting to order. I will act as Chair of this meeting, and I'll ask Jamie Crichton to act as Secretary. Also, with the consent of the meeting, I'll ask the representative of TSX 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 is on hand the statutory declaration 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 to the corporation for the year ended November 30, 2021, and the auditor's report thereon. The statutory declaration will be open for inspection during the course of this meeting, and copies of the mailed documents are also available by contacting the corporation at [email protected]. or by phone at 416-299-4000. The scrutineers' report has been received, and it shows that there are present at the meeting in person or by proxy, 38 shareholders holding or representing by proxy 16,187,419 shares of the corporation. I therefore declare this meeting to be properly constituted with a requisite quorum for the transaction of business. Given that this is a virtual meeting, the voting at today's meeting will be conducted by online ballot for all matters. Only shareholders and duly appointed proxy holders are permitted to vote. If as a registered shareholder or a duly appointed proxy holder, you are using your control number to log into the meeting and you accept the terms and conditions, you will be provided the opportunity to vote by online ballot. If you've already voted by proxy and you vote again during -- by ballot during the meeting, your online vote will revoke your previously submitted proxy. If you've already voted by proxy and do not wish to revoke your previously submitted proxy, do not vote again during the online ballot. 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 the screen. Once discussion has concluded on all items of business, we'll provide a few additional moments for you to enter your votes. I will then declare voting closed on all matters of business. I now declare the online voting polls open on all items of business. The Secretary has the minutes of the last meeting of the shareholders of the corporation, and these can be examined at any time. With the consent of the meeting, I'll dispense with the reading of those minutes. The first item of business for this meeting is the presentation of the financial statements of the corporation and the related auditor's report for the years ended November 30, 2021 and 2020. 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 a schedule 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 23, 2022. In addition to myself, Edward Hanna, management's nominees are Mike L. Andrade, Robert J. Beutel, Bradley C. Bourne, Kumail Gangjee and David F. Masotti. May I have a motion for the nomination of those nominees? In addition to myself, Edward Hanna, management's nominees are Mike L. Andrade, Robert J. Beutel, Bradley C. Bourne, Kumail Gangjee and David F. Masotti. May I have a motion for the nomination of those nominees?

I so move.

Are there any further nominations? Or is there any discussion of this matter? Hearing none, 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.

Thank you. We'll now conduct the vote by way of online ballot. As previously noted, registered shareholders or their duly appointed proxy holders can vote by online ballot by selecting the applicable voting options on the voting panel displayed on their screens. If you've previously submitted a completed proxy, you'll have to vote in respect of this item of business, and it's not necessary to vote again on this ballot. Although the scrutineer continues to tabulate the final report, based on the proxies received before the meeting and confirmed to have been voted at this meeting, I declare that Mike L. Andrade, Robert J. Beutel, Bradley C. Bourne, Kumail Gangjee, David F. Masotti and myself, Edward C. Hanna, are elected as Directors of the corporation. The final individual votes for each director will be reported as part of the voting results filed under applicable securities legislation. While the scrutineer counts the ballots, let's proceed to the next matter, which is the reappointment of the auditor of the corporation. Would someone move that MNP LLP, Chartered Professional Accountants, be reappointed as auditor 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? Thank you. We'll now conduct the vote by way of online ballot. As previously noted, registered shareholders or their duly appointed proxy holders can vote by online ballot by selecting the applicable voting options on the voting panel displayed on their screens. If you've previously submitted a completed proxy, you will have voted in respect of this item of business, and it's not necessary to vote again on this ballot. 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. The final vote will be reported as part of the voting results filed under the applicable securities legislation. Is there any further business that may properly be brought before the meeting? I declare the formal portion of the meeting is now terminated. I'd now like to call on 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. Good morning. [indiscernible] to get myself organized here. So let me give you a quick summary of things that are going on at FTG. Before I do so, I'd like to just point out the disclaimer that we have that there will be forward-looking statements made as part of this presentation and people should take due care and caution in how they interpret and use these forward-looking statements. With that said, let me do a quick overview of FTG. So as a reminder, for all shareholders, FTG -- our market focus is in the aerospace and defense industry. And within that industry, we have 2 product offerings. We build cockpit products that runs under the name FTG Aerospace, and we build printed circuit board that runs under the name FTG Circuits. If you look at the FTG of today or of last year, we have FTG Circuits-Toronto, FTG Aerospace Toronto, both sites were where FTG originated. Again, each building the specific products of either cockpit product or circuit boards with 2 sites in Chatsworth, California, again, one doing circuit boards, one doing cockpit products. I show FTG Circuits Fredericksburg that was an addition that we have as of 2019, doing circuit boards in Fredericksburg, Virginia. And we have a joint venture in China doing circuit boards and a wholly owned subsidiary in China doing cockpit products. Last year, our sales were about $80 million, which was down from the last few years due to the COVID-19 pandemic. I'll talk more about that in a moment. Our employees were about 450. And of the 24.5 million outstanding -- 24.5 million common shares outstanding insiders or Board members and management owned, what you see on the screen, [indiscernible] about 4.4 million. I own about 2.6 million and other management and Directors own about another 600,000. Not going to go through all of this, but for our FTG Aerospace, our key customers is really that center bucket on the screen. It's the avionics manufacturers. Raytheon has definitely become a key customer for us. Over the past few years, Raytheon has been the combination of what was Raytheon plus United Technologies plus Rockwell Collins. So through that combination of companies, they have definitely become a very key customer for us. Honeywell, it's a key customer. GE is a key customer. And I guess beyond that, you will see on the left, we do deal direct with some airframe manufacturers. I'd say all of the key airframe manufacturers. And on the right, we deal with the other types of customers that include simulator customers and such. This next slide is the same thing for our Circuits business. Again, the center bucket is really the heart of our business. It's, again, the avionics and [ electronics ] manufacturers. Raytheon is, again, at the top of the list with -- along with Honeywell, with GE and the other companies you see there. Also in our Circuits business, if you look at the left-hand side, the left-hand bucket, it's the space companies. Space is a key component of our Circuits business. And on the right-hand side, although most of our contracts originate with the OEM manufacturers, we do business with the contract manufacturers that support them, and you can see the list of contract manufacturers in that right-hand bucket. A reminder of the FTG economics. This can be good news and bad news. On the left-hand side of the page, it shows you the split of our cost. About 30% of our costs are fixed, 70% are variable, which is what I would say, typical for a manufacturer. The good news is, as you grow, you can spread that fixed cost across a bigger base, and that helps drive up margins. But if a pandemic hits, as we saw in the last 2 years, the opposite effect can happen, whereas the revenue shrinks, you have to spread those fixed cost across a smaller base. And that's certainly been something we had to work through in the last couple of years. And on the right-hand side, we do track and important to us is the exchange rate. The aerospace industry around the world essentially is -- operates in U.S. dollars. So the exchange rate between U.S. dollars and Canadian dollars matters to us. It has fluctuated wildly over my time at FTG. But I'd say where it's been for the last -- almost the last decade, now of above $1.25 is good news for FTG. Talk a little bit about the pandemic. So this first slide really just shows the impact on air travel. This is based on what happened in the U.S. So the baseline is the blue line at the top. That was air travel or number of people through U.S. TSA checkpoints in 2019. The orange line is what happened in 2020. If you can see travel went almost to 0 and started to climb. 2021, is the black line in the middle, and that's what happened last year. You can see recovery continued. And by the end of 2021, while not quite back to 2019 levels, U.S. air travel has recovered to close to 90% of where it had been. Probably more directly relevant to FTG, this is commercial aircraft deliveries from 2018 through 2021. The blue bar is Airbus, the orange is Boeing. So 2018, you might think of as a baseline, 2019 should have been good, and it was good for Airbus. Boeing had their challenge of the 737 accidents. And so they stopped shipping aircraft partway through the year. It didn't really impact the industry until 2020 where they then stop production of that aircraft. And 2020 was a very tough year. 2021, you can see deliveries recovering and going along with that production rate started to recover. And the good news, if you look -- going forward, both Airbus and Boeing are predicting increased production rates in 2022 and beyond. So what did we do through the pandemic? We had a 3-pronged approach or strategy to get through the impact to us. First one, FTG has always said, we want to diversify not just be involved in commercial aerospace, we want to be involved in defense. We want to be involved in helicopters. We want to be involved in business jets, in general aviation. And so we're not totally dependent on the cycles of any one of those industries. We did that. It definitely helped mitigate the downturn in commercial aerospace, but it was such a significant downturn. It still did impact us. Secondly, we managed costs very carefully across the company. We've tried not to lose skills, but we tried to manage other costs to protect the company. And as it relates to not losing skills, we definitely put advantage of government support, both in Canada and the U.S. to be able to retain employees and maintain our skill set, so we could recover after the pandemic. And lastly, we managed the balance sheet. And at the end of 2021, our balance sheet was the strongest it has ever been in the history of FTG. But we did find, through these 2 years, we played defense. And we played great defense, but defense is not a complete game for anyone. So looking forward, beyond COVID-19. Most important thing is this, is the FTG mindset. As I said, we played defense. We've played great defense for the last 2 years, but you can't win if you only play defense. So after 2 years of being on the defensive, we know we need to move forward. The world is moving forward. The pandemic is in our rear-view mirror now. So we are playing offense. We are playing offense and chasing and winning new work. and we're playing offense in corporate development. Specifically related to these things, we're taking advantage of our incredibly strong balance sheet. We are pursuing new sales opportunities. We added salespeople to help drive that. We're investing in equipment in our operations to improve performance where we need it. And we're investing in R&D and new programs, again, to the future benefit of FTG. On corporate development, we're pursuing acquisitions. We're going to be aggressive in this area. And lastly, we are reviewing our capital allocation approaches to support our shareholders in the near term. And you might have seen a press release come out this morning saying TSX has approved a normal course issuer bid for FTG, which means we can, in the near future, look at something along those lines. Financial performance over the last number of years, it's a little frustrating because we were on a great trend from 2015 to 2019. We had a great trend. We're growing every year. Our goal was to grow between 10% and 15% every year. We were close to that. The pandemic hit. It took away much of our effort over those past 5 years, but we do know things are going to recover, and we believe things are getting better. Obviously, as we -- as the revenue went down, our EBITDA and income went down. We definitely protected those with the government assistance. I mentioned earlier. But nevertheless, it was an impact to the company. But where we could, we were careful, but we did continue to invest in the company. We did still undertake some R&D in the last 2 years. We did undertake a little bit of reduced CapEx in the last few years, but we continue to invest in the company, and we continue to -- notwithstanding investments have great cash flow coming out of it. We've always had great cash flow, and we've always been able to use that to reinvest in the company to make it better. Our balance sheet, as I said, at the end of 2021 was the strongest it has ever been. We have great working capital and our net cash on the balance sheet was the highest we have had in the history of the company. Looking forward, operating performance continues to be a very important item for FTG. We have developed a 4-pronged approach to driving financial performance. First one is overall operating performance, manage the sites as best we can, make them efficient, reduce costs where we can. Second thing is to grow, as I said at the beginning, if we can grow our top line with maintaining our fixed costs, we can drive and expand our margins. So we're focused on that. Market positioning is important to us. We are looking to pursue higher-margin business where we see it available. And then lastly, in terms of driving financial performance is acquisition. It can be to expand technology, geography or capacity. Speaking specifically of growth. This is not a new slide, but we've had this 6-item growth initiatives at FTG for many years. The first one is just grow with the market. We did not have that opportunity in the last few years. But going forward, we believe the industry is going -- is back on a growth curve. So we will grow with that. Important to us is to win new programs. That is how you can change your market share in a positive way. So we put a lot of effort into that. Operational performance or operational excellence is important. Our customers tell us consistently. If you perform, you get more work. If you don't, you get less, so we focus on performing for our customers. We invest in technology to increase our product offering and make sure we have what's needed for the new platforms as they're being developed. Globalization is key. All of our customers are global aerospace and defense companies. They are looking for global solutions. The fact that we can offer them a solution, including Canada, the U.S. and China, is important to them. And then lastly, acquisitions. On -- specifically on technology, on the circuit board side of things, our goal has been to offer the complete range of circuit boards to our customers. Generally, the aerospace and defense customers are looking to simplify their supply chain. They want to spend more with fewer companies. And if we can provide a complete set of offering to them that they need that positions us best to be able to grow with them and support their need to simplify their supply chain. On the Aerospace side, our cockpit products, our technology strategy is to move up the value chain. Many years ago, we started as a panel supplier. That's a relatively low value item in a cockpit. Maybe you can get a few thousand dollars of revenue from a cockpit if you're doing cockpit panels. We have been moving up the curve, up to and including electronic assemblies. If you're supplying electronic assemblies into an aircraft, you can have a much higher revenue per aircraft more in the $30,000 to $50,000 range. Acquisitions. Our history has been every few years, tried to do an acquisition for a variety of reasons. You can see on this time line, the various things we've done over the past years. And we've done it for different reasons. Sometimes it's to add a geographic location like China, some of it's to add capacity. Sometimes it's to add revenue. But whatever is appropriate at that point in time is what we look to focus on to help drive FTG's growth. And as we look at future acquisitions, we have key criteria. These do not change much. At this moment and through my time here, we've always said we want to stay aligned with our market and product focus, so stay focused in aerospace and defense. And within that, stay focused on cockpit products and circuit boards. You can -- a reason for an acquisition can be to expand our technology offering or it can be to expand our geographic coverage, like we did in China. But looking forward, at some point, we do believe having a footprint in Europe would be good for us for the commercial aerospace market, specifically around opportunities from Airbus, but also Europe or India or other top 10 defense countries would be of interest to us on the defense side of our business. We might look for an acquisition to accelerate our penetration of the aftermarket segment of the industry. This is a segment that does have higher margins. So that's of interest to us, and we're working on it internally. But an acquisition could accelerate that. And as I've said, could drive up utilization and the key to us, would be still opportunities that have attractive price and multiples and would be accretive to our earnings. So in summary, the COVID-19 pandemic did impact us in the last 2 years. It reduced the overall market demand for our product, and it definitely created operational challenges for us as we had to deal with COVID outbreaks across all our facilities. But we have successfully managed through the pandemic. And here we are in 2022, we will leverage our very strong balance sheet, as I've said, to invest in operations, invest in technology, invest in growth and to allow us to look at near-term capital allocation strategies to support shareholder value. So we are going to play offense going forward. So with that, I would be happy to address any questions, if you post them on the Lumi app. There does not appear to be any questions. So if that is the case, I do thank you all for your attention today. Look forward to enrolling FTG in the coming years and look forward to returning to our growth curve that we had been experiencing. Thank you very much.