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

Good day, ladies and gentlemen, and welcome to your Omni-Lite Industries Incorporated Investor Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Chief Financial Officer, Mr. Carl Lueders. Sir, the floor is yours.

Thank you very much. Good afternoon, and thank you for joining us. 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 contained in our press release issued on Wednesday, November 25. The purpose of the call is to provide you with an update on Omni-Lite's financial operations as we recently filed our second quarter 2020 results last Wednesday. After remarks, we'll open the line up for questions. If you've not received or seen a copy of our press release we issued last Wednesday, you can find it on our website at www.omni-lite.com or email us at d.robbins@omni-lite.com or c.lueders@omni-lite.com to request a copy. 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, including the effects from the current COVID-19 pandemic, 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, including adjusted EBITDA, pro forma adjusted EBITDA and free cash flow. A reconciliation of these non-IFRS metrics, if applicable, 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'd now like to turn the call over to Dave. Dave?

Thanks, Carl. Good afternoon, everyone, and thank you for joining us on today's third fiscal quarter investor call. Our agenda for today's call is as follows: first, I will make a few comments about our third quarter fiscal 2020 results. Followed by some remarks about our current business and strategy. 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 recently reported financial results. First, I want to comment on how we have repositioned and rightsized the company to operate more efficiently to respond to current market conditions, especially to the disruption in commercial aerospace marketplace and the level of commercial transport traffic, both domestically and internationally. Heading into 2020, Omni-Lite was poised to grow at 25% plus in response for then expected increases in demand for precision components for defense and commercial aerospace applications, supported by industry record backlog levels and aircraft production rates. Such visibility was dramatically altered by the COVID-19 pandemic and such an exogenous shock to the commercial air transport industry has been profound on so many levels, one that impacted a strategic growth driver for Omni-Lite. At its core Omni-Lite's value proposition is in its ability to efficiently design and manufacture, precision components and high volumes. Specifically, in our metal forming operation, the ability to form aerospace metals to complex shapes is amongst the best anywhere in the marketplace. Precision metal manufacturing on scale requires disciplines in engineering, tooling, materials and process controls. We streamlined those functions by giving direct access to data and interface between these functions. Frontline decision-making was engaged by availability of actionable data. The result is the leaner but fully capable workforce in the metals forming operation that can sustain high level of productivity and engage and capture new business opportunities. The new opportunities fall into the new products for existing customer/platform, new product for new customers/platform and current product for new customers. New opportunities will almost certainly demonstrate Omni-Lite's value proposition of reducing cost and lead times to its customers. Our results in the quarter and the year-to-date period reflected the impact of COVID-19 pandemic on our commercial aerospace revenue, which contributed to a decline in our fiscal third quarter revenue of approximately 23% on a year-over-year basis and the fiscal third quarter adjusted EBITDA loss of approximately $271,000. Against the backdrop of our realigned lower operational cost profile and commercial aerospace market recovery in 2021, we look to cash generation, margin expansion and new engineering orders as key indicators. An early positive sign is evidenced for over $750,000 of funded backlog for 2021. 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. Irrespective of the product type, Omni-Lite business proposition entails, offering engineering solutions, a wide range of those solutions and available low to high volume. And ultimately deliver cost competitive with a performance premium. Our metal formed products offer engineering solutions and cover a wide range that are only found at the largest OEMs. Our engineered electronic solutions serve the growing need for small, high-speed long wave sensors, using wide bandwidth technology, RF to millimeter wave spectrum. Our electronic components are found in notable military aircraft, commercial aircraft, missile systems, diesel engines, air traffic surveillance systems, and satellite mobile communications and military self-protection systems. We will continue to invest and allocate capital towards the fulfillment and execution of our current bookings pipeline and growth opportunities both in defense aerospace fasteners and our electronic RF components, as we believe we are strategically situated to exploit the cost reduction capability enhancements required in aerospace and defense. New opportunities in our defense electronics product line has been strong, notably with The Patriot, Navy's electronic warfare improvement program, Joint Strike Fighter and our short-range missile defense program. Demand for highly integrated electronics that meet the power consumption requirements for airborne applications dominate the activity. Additionally, and there's development for new fasteners for automotive engine components and advanced high-strength military aerospace fastener. With that, I'd like to turn the call back over to Carl. Carl?

Thanks, Dave. Third quarter revenue was $1.6 million as compared to $1.6 million in the second quarter of 2020 and $2.2 million in the third quarter of 2019. The decrease in revenue versus the third quarter of 2019 was due in large part to the COVID-19 pandemic. Revenue was flat versus the fiscal second quarter of 2020. Adjusted EBITDA, defined as earnings before interest, taxes, depreciation, amortization, stock compensation and nonrecurring items, was a loss of $272,000, as compared to a loss of $143,000 in the second quarter of 2020 and a loss of $29,000 in the third quarter of 2019. The third quarter 2020 EBITDA was adversely impacted by a $55,000 severance charge related to our workforce reduction plan implemented halfway through the quarter, and a $225,000 adverse impact on adjusted EBITDA associated with the 2 week COVID-19 related shutdown of our California facility. Factoring this supplemental information in, we have indicated a near breakeven performance on adjusted EBITDA in the third quarter. Free cash flow defined as cash flow from operations minus capital expenditures, was a use of approximately $217,000 in the third quarter of 2020. This brings our year-to-date September 2020 free cash flow to a use of $242,000. I would note that despite the impact from COVID-19 pandemic, which contributed to a year-to-date revenue decline of approximately 24% compared to the year ago period, we have been able to mitigate the impact on our free cash flow. In this regard, we've taken strong measures to manage cash and the elements of our costs that we can control. We've implemented a restructuring of the business, including a workforce reduction program and other related cost actions, we vacated a sublet facility and subleased it that collectively will yield annualized savings of approximately $1 million. In connection with these changes, we've realigned and streamlined our operating processes, which will enable us to operate in a more efficient manner. We believe these changes will allow us to support higher levels of revenue post COVID-19 in a cost-effective manner. Also worth noting, in the 9 months ended September 30, we have reduced inventory by approximately $200,000 and held capital expenditures to $26,000. In addition, we applied for and received $820,000 in Paycheck Protection program loans and have submitted our application for loan forgiveness under the CARES program. As a result, our liquidity at the end of the third fiscal quarter was approximately $2.9 million, comprised of $1.4 million in cash and $1.5 million available under our revolving line of credit facility. Lastly, it is worth noting that we possess a substantial asset base, including our company-owned facility -- manufacturing facility in California and our state of the art cold and hot forging systems, which together, we believe have worked well in excess of book value. This completes our prepared remarks. We would now like to open the call for questions.

[Operator Instructions] And our first question comes from private investor, [Frank Wisneski].

Dave, certainly been a challenging year for you guys. How much of your third quarter sales actually went to the commercial aerospace business or the market?

Well, it's hard to pinpoint exactly because we're -- we support the large OEMs in the product mix. But it's approximately -- it's a smaller -- it's disproportionate towards commercial versus military aerospace. So I don't have an exact number for you.

All right. Yes, I'm just wondering because according to our MD&A, that business was down 55% during the third quarter. And I'm assuming the munitions business, hasn't improved. You still got that issue there, which implies to me that you got some parts of the business that are growing very, very rapidly. To only be down, what, 23% in total. Could you flush that out for me a little bit? What businesses are doing very well?

The aerospace, it was the aerospace fastener business, it was down 55% in total, right? That's -- I just want to clarify. It wasn't just...

That's not just the commercial?

No. It was aerospace fasteners.

Commercial aerospace.

Aerospace fasteners total.

Total we're down 55%?

Yes. And so what was up? Because your total sales were only down, what, 23% or so?

Yes in the quarter, we had munition split.

A munition what?

Munitions short term increase.

Okay. So sort of ammunition business...

Business one-off.

One-off shift, okay. What is your -- you've restructured the business, obviously, or resized, it's say, what is your expectation for next year? Are you assuming any recovery in the commercial aerospace business?

We're seeing signs that there is some slow recovery in the commercial air transport side of the business. But we're also looking to -- there are holes that have cropped up in manufacturing on the large OEMs on their ability to manufacture. So there is opportunity for more fastener business from new products on existing platforms due to disruptions in some of the large OEMs ability to manufacture their own parts. So that's an opportunity as well as more the defense -- there was some sluggishness on the defense fastener side of things. The overall demand is still remains strong. So -- and there's new opportunity for defense-related components too. So those are 2 areas, but the recovery as we're seeing it, and our customers are seeing it is starting in 2021 and a slow recovery.

Okay. You mentioned your facilities in California, what kind of volume could you get through those facilities without significant capital expenditures? I know it depends a little bit on product mix and everything, but just to have an idea. Are we running half of capacity now? Or...

Well, we tried -- what the intent of the reorganization was to not impact materially the ability to produce parts. Of course, that it had some impact, but it really was a more efficient -- a way to be more efficient and to still have capacity. So we believe we have significant capacity at our operation in California to support the kinds of fastener business and other high-performance precision components. So there still is -- significant capacity remains.

Yes. Yes, I would suspect. One final thing. You called out Cal Nano in the press release. Saying that -- I mean, they've been mentioned before, but you've been usually writing things off there rather than giving any optimism. Are you more optimistic on that investment now?

Well, I think we felt it was appropriate to at least comment on it. And things have been a little more recently. They had their ability to pay bills and take care of their current obligation. So we decided that it was worthwhile to say something about that. But that's the reason is just to give a little bit more color there.

Next, we go to the line of Daniel Marks with Stonehouse Capital.

Just a clarification, if I could, on the Paycheck Protection amount. Given that it's still on the balance sheet, am I correct in assuming it hasn't hit the income statement yet? And if so, when it is -- assuming it is forgiven, would that result in a boost to income in the quarter?

You are correct. It is still on the balance sheet. It has not hit the income statement. And when it is forgiven, if and when it is forgiven, then at that time, that's when it would hit the balance sheet as a other income credit.

Okay. So if I'm looking at year-to-date net loss of $760,000 theoretically, if we assume that it was forgiven, you're pretty close to breakeven with the benefit of that forgiveness.

Yes. Yes.

Okay. Good job being -- managing to get to that kind of breakeven level in this environment. Well done. You -- and just on the savings side, you -- I didn't quite catch it. You said with cost savings and the sublet that you've gotten out of that you're looking at an annualized $1 million in savings. Can you just give me a little more flavor on that? I'm not sure which -- what facility that is?

Yes. So that sublet. It's just an example of some of the things that we've done. But basically, it was a leased facility, which we were using to store inventory and other items in. And we felt that we could consolidate out of it and make it available and sublet. Our lease runs there through the end of June, at which time we would not have redo it. But we decided to get out in front of it and see if we could generate a little savings by not having to pay the lease expense for the remaining 6 months or so. So with that, that's really the essence of that. The rest of it, it's in essence, payroll-related costs that we've taken out. As Dave mentioned earlier, we had been gearing up for substantial growth and this was just retrenching to the current condition.

Got it. Perfect. Just 1 -- 2 more questions. First one is a quick one. You talked about the electronics business and the fastener business. What's the split between those 2 businesses? And is there one or the other that, as you look forward to 2021, that you're perhaps more optimistic about?

Well, we don't break out disaggregated financials between the 2 groups. But certainly, the electronics group has been -- well, certainly wasn't directly impacted by the COVID-19 pandemic. Majority of its business is on very high-value asset, electronic systems for defense, which it's still very strong and continues to be strong in the outlook of 2020, 2021. So it's growing. Right now, the forecast for 2020 would be more weighted towards the electronics. But having said that, there really are some very significant opportunities on the fastener side, too. So I wouldn't want to count that out. But that could give you a little bit of an idea about the difference between the 2 product lines.

Got it. But typically, the same customers in both segments, just one perhaps higher end componentry. Is that what I should take that out?

Yes. So in electronics, it's -- you're selling thousands or hundreds of parts for tens of dollars and on the fastener side of things, you're selling millions of parts for pennies or in some case, cents, $0.20, $0.15. So yes, it is the same customer, but on the electronic side of things, there is a little bit more higher value add, although part of our strategic road map on the fastener side is to move up that value proposition and be selling little more higher value components. So that's part of our growth strategy there.

Got it. Would that be some sort of assembled component or just higher end fasteners?

Just -- I would say, more of a finished product. So there is some more value-added steps to it. It's not necessarily a higher value component. But more manufacturing steps to it.

Okay. Got it. Last question and your earlier shareholder asked a similar -- something similar. In terms of -- in your press release, you did talk about how you've got the company-owned manufacturing facility, which given how long you've owned it. I think it's safe to assume it's worth at least 2 or 3x worth on your books for. You've got Cal Nano, which you previously said, isn't a strategic fit and when I add those 2 things together, I almost get the market value -- market cap of the company is contained in real estate and in investment. And the business itself is for free. Is there any plan or is the Board and management considering how to get cash and monetize those 2 assets, so they might be either returned to shareholders or used for the aerospace and defense business that is the reason people, I think, are typically shareholders of Omni-Lite. Any thoughts on that?

Well, we have, and we continue to look at that strategic -- at the Board level as an ongoing action. Sure.

Okay. It just seems -- typically, you don't expect a manufacturing business to own its own facility. And if you've got something that's worth $5 million, $6 million, $7 million, that's a big chunk of the asset base of the business tied up in its real estate as opposed to having it in operations and leasing a facility. So I just -- I can see whether there's growth potential there.

Right. It's tied up capital. It's not really working. We're not meant to be in the real estate business. So -- And that's the reason we have looked at and continue to look at how to best do that, put that capital to work.

And any thoughts as to when that might or how that would play out? Is that the type of thing you're holding in your back pocket until there's an acquisition type thing or something in that nature?

Well, that's something we've commented in the past about that we are active in the acquisition area. And it is something that is ongoing. So we're taking that all into consideration in terms of timing and how.