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 Carl Lueders. Sir, the floor is yours.

Thank you very much. Good afternoon, and thank you for joining us today. With me 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 the call is to provide you with an update on Omni-Lite's operations as we recently filed our second quarter 2020 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 at www.omnilite.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 risks and the 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 the 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 releases. Lastly, unless noted, any reference or discussion of our financial results or metrics are in U.S. dollars. I would now like to turn the call over to Dave. Dave?

Thanks, Carl. Good afternoon, everyone, and thanks for joining us on today's second quarter investor call. Our agenda for today's call is as follows. First, I'll make a few comments about our second quarter fiscal 2020 results, followed by some remarks about our current business, strategic drivers and an overview of our efforts in response to the COVID-19 pandemic. And then Carl will conclude our portion of the call with a review of our reported financial results. First, let me paint you a picture of Omni-Lite and draw out the colors for the quarter and where we stand today. Omni-Lite is a diversified manufacturer of precision components serving a broad range of applications and industries utilizing high-value assets and longevity of service and performance. Our metal formed products and electronic components are found in notable military aircraft, commercial aircraft, digital systems, diesel engines, air traffics, surveillance systems, satellite, mobile communications and military cell protection systems. The addition and integration of Monzite has yielded a significant balance to the Omni-Lite portfolio of assets, while making significant financial and operational contributions to the overall picture of Omni-Lite. As you recall, from our year-end fiscal 2019 investor call, we began to experience the impact of market dislocation related to COVID-19 during the fiscal second quarter, such effects ranging from quarantine-related disruptions and facility shutdowns with certain commercial aerospace customers through adjustments and changes in inventory levels at such customers. However, our Monzite operations saw minimal effects, and we are maintaining strong continuity with those customers meeting milestone deliveries of product and services. Our results in the quarter reflected this impact showing a revenue decline year-over-year by approximately 35%, reflecting over 30% reduction in commercial aerospace products and services impacted by COVID-19, and an adjusted EBITDA loss of approximately $140,000. Nevertheless, we did not remain still and have been and will continue to be on the offense and defense. We generated free cash flow in the quarter of approximately $320,000, a significant improvement over the year ago quarter and maintain a liquidity position of in excess of $3 million. We took swift action early in the second quarter to implement cost containment actions, followed by significant repositioning and realignment plan in our current quarter that we expect to achieve annual cost savings of approximately $600,000, in addition to reduced capital expenditure levels. On the other hand, we continue to invest and allocate capital toward the fulfillment and execution of our current bookings pipeline and growth opportunities, both in defense aerospace fasteners and microwave and RF components. And the picture wouldn't be complete without adding some color on our bookings. New orders in our defense electronics product line has been strong, notably with Patriot Advanced Capability, or PAC-3 program, engineering development orders for military radar upgrades and Eurofighter. Demand for highly integrated electronics that meet the power consumption requirements for airborne applications dominate activity. And additionally, there is the development of new fasteners for automotive engine components and an advanced high-strength military aerospace fastener. Next, I'm happy to report that our California manufacturing operation resumed as planned on August 4 after the shutdown for COVID-19 cleaning and sanitization. The health and safety of our employees is our top priority, and we've moved to implement additional protective measures to maximize social distance to mitigate the spread of the COVID-19 virus, while maintaining streamlined workflow. Lastly, let me provide color with respect to our repositioning and realignment plan. We reshaped our workforce in our metal forming California manufacturing operations and have an increase in our electronics manufacturing business workforce. The realignment in the metal forming operations included workforce reductions and other measures, which reduces the operating cost, but preserves core manufacturing capability and productivity to support all of our business, including those in support of commercial aerospace as it returns. Our operating goal of the California operation is to be cash flow positive on the basis of current revenue run rate, leveraging our strong inventory levels. We look to make continued investment by expanding our product footprint with our key customers where our technology saves cost and helps them navigate varying demand cycles. In electronics operations, we continue to respond to growing demand by investing in manufacturing operation and product development. With that, I'd like to turn the call over to Carl. Carl?

Thanks, Dave. Second quarter revenue was $1.6 million as compared to $2.1 million in the first quarter of 2020. The decrease in sales versus the first quarter was due to the COVID-19 pandemic. Adjusted EBITDA, defined as earnings before interest, taxes, depreciation, amortization, stock compensation and nonrecurring items, is a loss of $143,000 as compared to a positive $197,000 in the first quarter. The decrease in adjusted EBITDA in the second quarter was minimized by the cost reduction initiatives implemented early in the second quarter that Dave has already mentioned. Free cash flow, defined as cash flow from operations minus capital expenditures, was positive at $220,000, in spite of the reduction in sales due to cost reduction initiatives we have taken, combined with reductions in working capital and strong control of capital expenditures. We applied for and received $820,000 in the Paycheck Protection Program funding in the second quarter. And in July, we applied for forgiveness of those loans. As a result of these measures, we had $1.6 million in cash at the end of the quarter and an additional $1.5 million available under our line credit facility. This completes our prepared remarks. We would now like to open the call up for questions.

[Operator Instructions] And we do have a question from [ Frank Woodmiski ], a private investor.

First of all, I want to say there aren't too many small companies that are diligent in keeping up quarterly conference calls in this environment, so I want to congratulate you and applaud you on continuing that program. The transparency is very helpful for long-term investors. Second, this is sort of an accounting question and it may reflect something -- the difference between IFRS and GAAP accounting. But I noticed that you have, for the 6 months, $170,000 loss allocated -- or attributed to the Canadian operations. Could you -- in order -- and help me understand it, how does that loss get allocated up there?

That is -- if you think of Omni-Lite Canada, the parent company, it has no revenue. All of its revenue-generating entities are based in the U.S., but it has cost as a public company. So that's essentially what those represent.

So that would be what, accounting costs, listing on the Toronto cost and things like that?

Correct.

Okay. And is that -- so that would be like a $300,000 a year charge for those costs?

A little bit less than that.

Okay. All right. And I suppose that you're up there, it's probably cheaper to be under IFRS and the U.S. reporting with the SOX accounting and everything. I'm sure you run that calculation. Is that the case?

Well, the company was formed as a Canadian company, and changing it to a U.S. company would be an expensive proposition. So as a Canadian company, we're required to report under IFRS instead of U.S. GAAP.

I realize that. Yes. It just seems like a lot of money for a Canadian listing or a Canadian domicile.

Yes. We would probably -- if we were, say, listed in the U.S. as a U.S. public company, we would -- it would be the same cost level.

Okay. Yes, that's what I figured. Yes.

We would just be showing in the U.S. as opposed to in Canada.

Okay. And the other sort of accounting question, it goes back to the Cal Nano. During the quarter, it looks like you paid the finance guarantee liability to $250,000. And it says you now have a loan receivable from Cal Nano for that. Now that's nowhere on your balance sheet. Is that because it's been written off?

That's correct. So at the end of the year, when we did our audit, our auditors view of it was that we would be required not to record it as an asset, but to take it as a writeoff, which we did. Now we view it as an asset, so we carry it as a loan receivable from Cal Nano. There's an interest charge associated with that. And if you look at our interest income, that's what that reflects, Cal Nano pays down on a monthly basis.

Okay. So even though the loan is technically still performing, you've written it all off.

Yes, yes. It was an IFRS requirement.

I applaud the conservatism. Maybe it will come back at some point in time. Now the other thing, the $600,000 cost savings from the restructuring, is that calculated from a 6/30 run rate? Or you seem to imply in the -- in your commentary that some of that was already included in the second quarter.

So that $600,000 is the annualized number. We would expect to see the full quarterly impact of that in the fourth quarter.

Okay. In the fourth quarter, okay. And we would receive that. Would that be -- coming out -- would it be out of cost of goods or SG&A?

You'd see most of it through the cost of goods sold line.

Okay. All right. That's a very impressive number, I have to say, particularly if you don't reduce any of your capabilities.

And our next question comes from [ Manny Kramer ], a private investor.

I'm impressed with the Monzite operation and the California operation. Can you break it out for me how much is defense and how much is commercial on both of them we expected to change due to the pandemic, COVID?

Well, I would -- Monzite is 90% defense already and continue to see strong defense bookings, regardless of -- irrespective of COVID-19. To a large extent, Omni-Lite is closer to half, a little more than half defense. Of course, it's been impacted by the COVID, but there's still a lot of defense applications for forming and fasteners and a pretty robust automotive sector within Omni-Lite as well as some select sort of industrial applications. So we see growth. We still see continued growth, especially on the Omni-Lite forming for newer fasteners that are highly engineered for specific applications. Expect some continued growth there.

Okay. One more question and it was mentioned before about Cal Nano. Do you expect that loan to be paid back? And what time frame do you think it's going to take?

We -- yes, we do expect it will be paid back. The time frame is uncertain. They have a term loan, which is -- has a first lien on their assets, so that is their priority. And so that makes it -- it just makes the timing uncertain. It just depends on their business performance, but we would not expect it to be repaid in the next couple of years.

Our next question comes from William Powell.

Just a couple of questions. Number one is the $820,000 Paycheck Program, what is the prospect of getting that forgiven?

So in filing the application for forgiveness, Bill, I feel that we complied with all of the requirements. What we've been told is that the SBA is not entertaining forgiveness applications at this time. I think they're still tied up, either issuing or getting caught up from just issuing forms. And so I guess, all we really can say now is that we feel we've met all the requirements, and it really is when does the SBA begin to review forgiveness applications. We believe we're at the front of the line, but timing is uncertain there.

And is there more money where that came from? Or is the -- I mean, obviously, operations are still not performing. Is there a possibility of getting more money from that program?

Not that I'm aware of at this time. Obviously, we continue to monitor programs that the government offers.

Okay. And on the free cash flow, could you give a little bit of color on the $320,000 of free cash flow? I mean, that sounds like it's a pretty good number relative to the past.

Sure. Yes, yes. So it's largely attributable to receivables collections and, to a much lesser degree, inventory is down just a touch.

Yes. I noticed that. Are you still building your inventory? Or are you still doing the inventory build program? Or are you sort of leveled out there?

No, we've -- obviously, as we look at the business landscape, we're being extremely cautious. A lot of our customers' business is down, and so we are in the mode of liquidating inventory as opposed to building for stock. So that's our approach going forward.

Okay. Just last question. On the $600,000 annualized cash -- or cost reduction, is that something which is going to be a permanent reduction or you expect that to come back when and if the COVID subsides?

I'm sorry, could you just repeat that, Bill?

On the $600,000 cost reduction, which is an annualized number, do you expect that to be something that is going to be embedded for future? Or is that going to be sort of reversed when COVID subsides?

Well, so we believe it's in place for the long term. That obviously is subject to our business turning up. And at some point, we would have to add back. But we think, for the foreseeable future, it's a level at which we will be able to operate and continue to grow.

And our next question comes from [ Frank Woodmiski ], a private investor.

A couple of follow-ups here, if I could. One of the numbers that really struck me in your filing was the concentration of customers. 47% of revenues in 2019 and 83% in 2020 from 4 companies. Could you give me a little color on that? It seems like an awfully big switch.

So I would say, as we -- as COVID-19 has taken hold, we are seeing our smaller customers pull back and not have as much business or not ordered as much, so that has left more of our larger customer base, which continues -- which continue to place orders but at a lower level as the prime source of revenue at this point.

Okay. So that's not a permanent change that you think. It would be something that would, as the pandemic effect lessens, go back to a more typical mix.

Yes, we would expect that, especially with what's happened is inventory levels are being used, so that disproportionately hit some of the smaller customers. But we would expect that to reverse as inventory levels bottom out.

Okay. And one final question, if I could. The munitions business hurt you a little bit, I assume, obviously, in the first quarter and assuming the second quarter, too. Anything new on that? Or is that a sort of at least for the near-term at permanently reduced level?

Well, it appears to be somewhat reduced, but not 0. And we are in talks with ongoing new needs. So it has been reduced over the last few quarters, but there are ongoing needs, which we're in communication with.

And I'm showing no further questions at this time.

All right. Well, thank you all for participating, and thank you for your questions, and stay safe. We'll speak to you in the future.

And that does conclude today's conference call. We appreciate your participation. You may disconnect your lines at this time, and have a great day.