Omni-Lite Industries Canada Inc. (OML) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to your Omni-Lite Industries investor conference call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Carl Lueders. Sir, the floor is yours.

Thank you very much. Good morning, and thank you for joining us. With me today is our Chief Executive Officer, Dave Robbins. Our call is being recorded and will be available for playback, the details of which are in our press release issued on Thursday. The purpose of this call is to provide an update on Omni-Lite's operations as well as we recently filed our fiscal 2019 results. After our remarks, we'll open the line up for questions. If you've not received or seen a copy of our press release we issued on Thursday, you can find it on our website, www.omni-lite.com. Before we get started, I'd like to remind you that today's discussion will or may include forward-looking statements, including information regarding Omni-Lite's performance based on our views of the company's business and the environments in which they operate, our future plans, objectives, business prospects and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. We are also mindful of the risk and impacts of changes in the health of the general economy, U.S. and global commercial aerospace markets and the U.S. Department of Defense budgets. All forward-looking statements should be considered in conjunction with the cautionary statements contained in our press release and the risk factors included in Omni-Lite's SEDAR filings. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. I'd also like to mention that in addition to reporting financial results in accordance with the international financial reporting standards or IFRS, during our call, we may also discuss or reference non-IFRS financial measures, specifically adjusted EBITDA, free cash flow and organic revenue. A reconciliation of these non-IFRS metrics is included in our applicable SEDAR filings and press release. Lastly, unless noted, any reference to discussion of our financial results or metrics are in U.S. dollars. With that, I'd like to turn over to Dave.

Thanks, Carl. Good morning, everyone, and thanks for calling in. Our agenda for today's call is as follows. First, I will start off with a few comments about our 2019 year-end results and provide some preliminary remarks on our first quarter fiscal 2020 performance, followed by some comments on current business, strategy and overview of our efforts in response to the COVID-19 pandemic. And Carl will expand upon our reported financial results. Our fiscal year 2019 revenue of over $9 million reflected growth in our portfolio of aerospace and defense products, including the contribution of our Monzite defense electronics business. Revenue in the final quarter of the fiscal year was down largely as a result of low volumes in our military munitions business and partially offset by incremental increases in aerospace end market products. Most notably, we ended 2019 with the delivery of initial preproduction quantities on the first standards that will encompass a new family of highly engineered structural fasteners, which have been in development for the past several months. These new fasteners will broaden out our portfolio of engineered fasteners and when complete, could represent over 10% increase over our current fastener production volumes. Revenue from our defense electronics product lines increased as we made initial deliveries of electronic system upgrades on the Eurofighter platform. The outlook for Eurofighter new builds and modernization has a multiyear forecast through 2023. With respect to our first quarter of fiscal 2020, revenue will be approximately $2.1 million, and expect to deliver adjusted EBITDA in the range of $200,000 to $250,000. Q1's revenue was anchored by strong defense aerospace fastener and electronics deliveries offset by weaker automotive and military munitions sales. I will point out that our munition volumes can be lumpy when measured on a quarter-to-quarter basis as our customer's requirements vary as it cycles through its DoD contract period of performance. Lastly, I would note that the increase in fastener sales was primarily driven by new products and engineered fasteners that are compatible to robotic installations. With respect to the current business climate, it is impossible without stepping through some of the effects of COVID-19. First, both of our facilities are deemed essential businesses and remain nearly 100% operational staff. I am particularly gratified by the dedication and tremendous effort of our employees in support of our customers in these challenging times. The health and safety of our employees is our top priority, and we've moved swiftly to implement protective measures to mitigate the spread of COVID-19 virus, including, among others, mandating social distancing standards throughout our manufacturing and office workspace, temperature checks, face masks, and we've continued to deep clean and sanitize our workspaces, which may have potential exposure. Finally, we continue to support and are a reliable partner to our customers who are critical to our national security interest. So segueing to make a few comments regarding our end markets. Let me say that while the aerospace industry as a whole is experiencing unprecedented stress and uncertainty, there are certain segments within the overall market that are currently experiencing a much attenuated negative impact, including defense aerospace and defense non-aerospace market segments. Omni-Lite derives a balance of its revenue from defense aerospace and defense-related systems, which, to a degree, insulates Omni-Lite to a great extent from the effects of severe reductions in the MRO and aftermarket sectors and the expected reductions in OE new aircraft build rates. At the beginning of Q2, as the effects of COVID-19 were starting to impact the global economy, we aggressively instituted cost-saving actions at both of our facilities, including reducing our capital expenditure budget over time and nonessential discretionary expenditures and purchases. The effect of these cost-saving measures is to position Omni-Lite to be cash flow neutral to cash flow positive on the basis of a revenue run rate that is 10% to 20% below our pre-COVID plan. There is lots of uncertainty in the market, but because of our size, we can react quickly for both opportunities and changes in the marketplace as they occur, and we will adjust accordingly. At this juncture, we have continued to receive new orders in our second quarter and are cautiously optimistic about our second quarter outlook not being adversely affected to any great extent. With that, I'd like to turn the call back over to Carl. Carl?

Thanks, Dave. Total year revenue was approximately $9.3 million or an increase of 32%, as per Dave's explanation, as compared to prior year. Adjusted EBITDA for the year was approximately $960,000 or a decrease of approximately $300,000 as compared to prior year. As Dave mentioned, the decrease was due to investments in senior management, business development, new product development activities and product mix. Net loss for the year was $1.873 million as compared to last year's net loss of $4.5 million. In 2019, we wrote down a legacy loan to California Nanotechnologies of approximately $1.1 million and recorded a $250,000 other expense charge for the repayment of a legacy loan guarantee to California Nanotechnologies Corp. as well. Cash at the end of the year was $693,000, and bank borrowing was approximately $1 million, for a net debt position of approximately $300,000 as compared to a net positive position of $321,000 at the end of the prior year. Reduction in cash of approximately $1 million was due principally to 4 things: an increase in inventory of approximately $1.1 million, associated with our build for stock program; an increase of $264,000 associated with the timing of fourth quarter sales, resulting in increased receivables; capital expenditures of approximately $300,000, which is down from $759,000 in the prior year. This was all offset by the collection of approximately $400,000 related to amounts received from a loan from our former CEO. With regard to liquidity, we have a $3 million line of credit with City National Bank, which we entered into in December of 2019. In April, we received approximately $819,000 in additional cash from loan proceeds associated with the Paycheck Protection Program of the CARES Act. In addition, we have -- as Dave mentioned above, we've made selective reductions in spending as a response to the current environment. As a result, we feel that we have positioned ourselves well for the current situation, and obviously, we're currently monitoring on an ongoing basis. That completes our presentation. We'd now like to open the call up for questions.

[Operator Instructions] Our first question comes from William Powell with Boeckh Investments.

I hope you guys are doing well through this terrible time. I just had a couple of questions. The first was with Cal Nano. What is the go-forward position with respect to that?

So this is -- at this point, we've -- their line of credit balance is -- has been paid by us, and we now have a loan with them in the amount of $250,000. And we have also a guarantee -- legacy guarantee on their term loan of now approximately $300,000 and some odd, which they continue to make payments on, and we expect that they will pay that down. We continue to hold our position in their shares, and that's really the status of it, Bill.

Would it be worthwhile just turning that into 100% ownership? Or does it make sense?

So we have discussed this, but really, it's not consistent with our strategic objection -- objective. So at this point, we don't anticipate that.

Okay. And I just had another question on the build for stock program. I'm a little bit late on the call. I understand that you have new fasteners that are going to be reshaping the business going forward. I just wanted to understand how that affects the build for stock program if you have other obsolete inventory as a result?

No -- oh, go ahead, Dave.

So we don't feel like there's any obsolete industry -- obsolete inventory or if there is, it's a very minuscule value. On the new parts, we're going to be building those -- this particular type because they're new, for orders. More of the build for stock is for legacy parts that have been in production for many, many years. So at some point in the distant future perhaps, it would be more of a standard product, but all of the new parts would be built to order on a year -- on an annualized anticipated build rate.

Okay. That's great. And just one other thing. On the commercial airline space, it seems to be falling apart a little bit. So do you figure that the defense airline and non-airline space will make up for things like the Boeing MAX and all the Boeing contracts?

Well, it certainly is a period of unprecedented uncertainty, but we are seeing strength in the defense aerospace and defense in general. So that will temper any reductions that we see in the OE aerospace, commercial aerospace. So difficult -- it's really difficult to predict, although as I mentioned in my opening comments, we are seeing orders continue in our Q2. And -- but I think it would be safe to say that there will be some impact due to the OE aircraft space.

[Operator Instructions] Our next question comes from [ Emmanuel Cramer ], private investor.

Thanks for the good quarter -- I mean the year and outlook on the quarter. I'll continue on the previous question. Can you break out non-military and commercial versus the military? And when did it change? Was it because of the COVID-19 or...

So we -- it's difficult to break it out exactly because it's a very complex distribution network into the original equipment commercial aerospace. It's a little easier on the military, but even then, it's -- especially on the fastener side. But we believe more of our revenue is derived from defense and defense related. Especially on the Monzite side, on the electronics business, it's nearly -- it's a disproportionate -- very high percent is defense. And on the fastener side, it's balanced. But our fasteners are the highly engineered type, which end up more on military and high-performance aircraft. So aircraft will tend to -- military aircraft will tend to use those fasteners more. So while we don't have an exact breakout, we believe it's more in the -- and the buys have signaled more in the military or defense aerospace sector.

[Operator Instructions] Our next question comes from [ Frank Wisneski ], private investor.

I noticed last year with some interest that your R&D went up almost $200,000, which is unusual for Omni-Lite. I assume that's mainly Monzite, and it was mentioned that they were in high-voltage components. So could you delve into that a little bit for me? And also what kind of R&D budget do you see going forward?

So I'll comment quickly on the -- so the R&D is both on the electronics business and on the fastener business. On the electronics business, as you've said, it's higher performance electronics that's derived from range and accuracy, which is directly proportional to power or voltage. So our R&D spends are in that area. And on the fastener side, it's on these highly engineered structural fasteners. So when we talk about Q4 had some new revenue and heading into 2020, that R&D was spent on developing those processes to -- for those new fasteners. These are equivalent, to some degree, of some of the things that Omni-Lite has manufactured in the past. But a new fastener, these are larger fasteners, they have different geometries, and that took significant amount of R&D. But the result is this production -- we'll head into production volumes on these new highly engineered fasteners. So -- and we would expect to invest in 2020 to continue that investment into the new fastener family.

At about the same level, $269,000 or so?

Yes, I would say approximately the same level. It may increase a touch.

Okay. Good. I also noted that -- and this is probably maybe the build for stock program or the [ ERP ] program. But work in process inventory was quite high, $1.5 million at year-end. Is that a normal level of work in process? Or does that reflect this build for stock program?

No, that is -- we would expect it to be lower than that. So as an example, when we build munitions, there's a second step process which is performed outside. So we stage the parts and don't spend the extra money to have them converted or completed until we get the order, but then that allows us to turn it around very quickly. So it is high for that level. But it is going to be higher than what it historically had been because now there's labor and overhead included in there, which historically, there really wasn't.

Okay. That's because of the [ ERP ] program?

Yes.

Yes. And finally, I noticed that you closed or you got rid of the CGU for Barbados. Is that going to have any impact on your sales, particularly since you -- I guess you were putting a lot of international sales through Barbados. Does that have any impact? Or was that sort of just a legacy CGU that you're not missing at all, just cleans up the operation?

Yes. No, you said it right, cleans up the operation, won't affect sales at all and we'll save some costs.

[Operator Instructions] Our next question comes from [ Dean Trottier ], private investor.

I just had a couple of quick questions. The build for stock inventory program, was that pretty much done at the end of 2019? Or do you still have further investments to make in that?

So we don't expect significant increases. It could fluctuate up and down depending upon what our order base looks like and what's coming short in. So long term, yes, we would not expect significant increases in that, but there could be interim ups based upon our order backlog.

Okay. And so can you help me understand just a little bit more about is there a specific product or vertical that requires a little bit more of the build for stock?

Well, as an example, we have a customer that the company was not really historically performing in accordance to the contract, but that is a customer that requires that we maintain 1 year supply on hand because of the critical nature of the supply chain. So we have now -- that's an example of sort of a structural increase in our inventory levels. And the rest of it is really as Dave mentioned. So we've looked at our history, and obviously, we can produce a lot more efficiently if we have long runs instead of short order runs. So we've taken that on and -- based on our historical sales and built our inventory to enable us to respond quickly. So it brings in the sales cycle. The incremental cost of that inventory is very little. The labor and overhead portion, of course, is there and really, just the materials. And more and more, our customers are providing materials, so it's just a very good efficiency move.

Yes. Yes. And the -- I'm trying to remember. I toured the facility several years ago. And there was a long time for, if I remember, kind of tooling up for the CNC machines. Is that still sort of the case that it takes several weeks to get the -- and then that's probably the reason for some of the inventory build for stock program, is just how long it took the tool up for the production run.

Yes. Tooling can be a bottleneck. And so we try to ensure that it is not by ordering ahead and building ahead, too. It just speeds up our sales cycle, yes. But that is -- you are correct, yes.

Okay. One last question and then I'll jump back in the queue. Is -- had -- I remember last year, you guys were saying that a lot of the costs that were traditionally allocated to operational costs should have been in the direct cost. And so the gross margin was kind of coming down. Have all the costs been allocated appropriately for, let's say, the last 2 or 3 quarters? And is this kind of like a reasonable expectation for gross margins moving forward?

Yes. Yes. And we've got -- and they're in the right pockets, yes.

[Operator Instructions] And [ Dean Trottier ], private investor, has another question.

Sorry, one last one for me, guys. I know you don't break out any backlog or anything like that. You mentioned there has been some orders into Q2. For the balance of 2020, is there -- I guess what's kind of your biggest concern given how COVID is affecting everything? Are you worried about running out of orders by the end of the year or anything like that?

Well, I think the vertical that's most concerning is the MRO commercial aerospace sector. So that's a little difficult to predict, although as I stated earlier, that's only a piece of our business and offset by what we've seen as relatively good strength -- very good strength on the defense aerospace and defense electronics or other defense. So that's the effect mostly from MRO commercial aerospace vertical. And again, we believe that our products generally are more of the high-performance engineered fasteners. So to some extent, that isn't the biggest usage of those fasteners, but that's the most worrisome.

Yes. So I probably just would add that we -- the origin of the company was spikes really. And now it's a very small part of the business, but it is still a meaningful part. And that business is -- there's really nothing going on there right now, so...

[Operator Instructions] And sir, there appear to be no further -- my apologies, we have another question from William Powell with Boeckh Investments.

Sorry, I just had one more question concerning the automotive sector. It must be pretty dried up right now, but could you give me a little bit of color as to what percentage of the orders it had represented in the past? And maybe that could come back later in the year.

So we've had very, very slight effect, but not 0 in the automotive sector. And so we are -- and things have actually continued to operate recent -- very recent. So I think there is an expectation that as things start to normalize, that we would fall right into that. We're on a very couple of niche applications, and these are very high usage. So we feel pretty good about the recovery, which it's a little difficult to say when, but we didn't really have -- it was a small impact that we actually have -- it was a small impact that we already had.

[Operator Instructions] And sir, there appear to be no further questions at this time.

Well, thank you all very much, and stay safe.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.