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

Good day, ladies and gentlemen, and welcome to the Omni-Lite 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 afternoon, 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 contained in our press release issued this morning. The purpose of this call is to provide an update on Omni-Lite's financial performance and operations as we filed our total year 2020 results this morning. After our remarks, we'll open up the line for Q&A. If you've not received or seen a copy of our press release, which we issued this morning, you can find it at our website, www.omni-lite.com or email us at [email protected] or [email protected] to request a copy. 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 environment in which they operate, our future plans, objectives, business prospects and anticipated future performance -- future financial performance. These forward-looking statements are subject to future risks and uncertainties that cause our actual results to differ materially. We are also mindful of the risks and impacts of changes in the health of the general economy, including the effects of 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 international financial reporting statements, or IFRS, during our call, we may also discuss or reference non-IFRS financial measures, specifically adjusted EBITDA, pro forma adjusted EBITDA and free cash flow. A reconciliation of these non-IFRS metrics, if applicable, is included in our 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 year-end fiscal 2020 investor call. Our agenda for today's call is as follows: first, I'll make a few comments about our fourth quarter results, followed by some remarks about our current business and strategy, and then Carl will conclude our portion of the call with a review of our recently reported financial results. First, I want to emphasize our ongoing priority on our employee workplace safety and continuity regarding COVID-19. And as a manufacturer, we don't have a remote workplace options. As we operated through the multiple effects of COVID on our business during 2020, our commitment was to preserve our core engineering, manufacturing competencies and capacity leverage as we rightsize the company. Fiscal Q4 financial performance result reflect the effects of our operational strategy, which is closely focused on all aspects of operational performance and cash generation. Our results in the fiscal 2020 fourth quarter reflected the impact of COVID-19 pandemic on our commercial aerospace revenue, which contributed to a decline in our fiscal fourth quarter revenue of 41% on a year-over-year basis and an adjusted EBITDA loss of approximately $615,000. Against the backdrop of our realigned lower operational cost profile and free cash flow focus, we generated $221,000 free cash flow in the fourth quarter. Along this cash generation theme heading into 2021, with recovery of the commercial air transport unfolds, we are positioning the company to have an opportunity to dramatically increase available capital to enhance and support growth initiatives and ongoing M&A program. The current and near-term business climate and conditions, we believe, will stimulate opportunities in this area. We'll 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 microwave RF electronic components. An early indication of signs of recovery is a current funded backlog of approximately $1.1 million in fiscal 2021. We're also purposely engaging with new opportunities and new products for industrial applications that utilize aerospace technologies. New opportunities in our defense electronics product line has been strong, led by missile defense programs. In addition, there are development of new fasteners for automotive components and advanced high-strength military aerospace fasteners, all of which fulfill Omni-Lite's value proposition of reducing costs and lead times for our customers, while in some cases, adding key performance metrics. With that, I'd like to turn the call over to Carl. Carl?

Thanks, Dave. Fourth quarter revenue was $1.3 million as compared to $1.6 million in the third quarter of 2020 and $2.2 million in the fourth quarter of 2019. The decrease in revenue was due principally to the impact of COVID-19 on the commercial aerospace and other markets. Adjusted EBITDA, defined as earnings before interest, taxes, depreciation, amortization, stock compensation and nonrecurring items, was a loss of $615,000 as compared to a loss of $121,000 in the fourth quarter of 2019. The fourth quarter of 2020 adjusted EBITDA was adversely impacted by $243,000 inventory write-off. And in addition, we experienced approximately $187,000 of unabsorbed manufacturing costs due to our lower production volumes. Free cash flow, defined as cash flow from operations minus capital expenditures, was a positive $221,000 in the fourth quarter. This positive cash flow was accomplished through disciplined control over capital expenditures, combined with a strong focus on working capital, which generated approximately $800,000 in improvement in our working capital in the quarter. For the total year, revenue was $6.7 million, down 28% as compared to 2019. Again, due principally to the impact of COVID-19 on the commercial aerospace and other markets. As we saw the effects of the pandemic unfold in 2020, we initiated a number of actions focused on cash management. These include a restructuring resulting in $1.1 million of annualized savings; a disciplined approach to capital expenditures, which resulted in limiting CapEx to $24,000 in 2020; a strong focus on working capital management, resulting in $0.7 million of improved working capital position during the year. In addition, we applied for and received in the second quarter of 2020, $820,000 of PPP-1 funding. This amount was recorded as income in the fourth quarter of 2020 as we believe we have met all conditions required for forgiveness. As an aside, we applied for and received an additional $400,000 of funding under the PPP-2 program in the first quarter of 2021. The result of these actions has enabled us to achieve our breakeven cash flow in 2020 despite our 28% decline in revenue. As we implemented our restructuring, we had 3 main objectives: reduce costs, preserve our ability to respond to current and future customer needs as business ticks back up. Our personnel has specialized skills that are very hard to replace once gone. And three, reengineer our processes to operate efficiently in a reduced personnel environment. This will enable us to support sales growth at our current smaller workforce levels as the market rebounds. As a result, we ended the year with a strong liquidity position, $1.5 million in cash and an additional $1.5 million in availability under our evolving line of credit with City National Bank. Given the lower variability cost nature of our business structure, when sales are increasing, we have a lot of adjusted EBITDA upside. Conversely, when sales are declining, there is little room to offset declines with cost reductions. We believe our current structure leaves us well positioned for growth when business conditions improve. This completes our prepared remarks. We'd now like to open the call for questions.

[Operator Instructions] Our first question comes from Emmanuel Kramer.

Dave, thanks for a good quarter. Despite the circumstances, I think you did well. I just want to know what's your take on the vaccines and the airlines are starting to fly in Delta, said they are skipping seats in the middle, saying that the ventilation is good. How would that have an impact on the further quarters? What's your outlook?

So as you can see from the news, there is an increased traffic and which is resulting -- we are seeing, through the Tier 1 subcontractors to the air transport market, some visibility into Q3 and Q4, some optimism and even order book into the third and fourth quarter of 2021. There still is kind of a pipeline of inventory that has to get used within the early part of this year, but there's -- the signs are already evident that things are looking better for the second half of the year and the turnaround in place.

[Operator Instructions] Our next question comes from Dan Marks with Stonehouse Capital.

Dave, you mentioned just at the start of the call that you -- the company has a $1.1 million backlog at this point. I'm just wondering, how is that compared to sort of the last couple of quarters?

Yes. So we reported in Q3, Dan, about the same metric of $750,000. At the time of our last conference call in November, it was 750 -- approximately $750,000.

Okay. Great. Nice to see that improvement. Carl, these might be a couple of questions for you. Just on the statements trying to work my way through a few things here. I noticed on the balance sheet, deferred tax asset, deferred tax liabilities have been zeroed out predominantly. Can you just tell me what went into that? What led to that?

Sure. So we determined that a more appropriate presentation was to just net them. If you go to the footnote, you can see the components, but rather than gross them up, it's a big positive number on the asset side and a big liability on the liability side to net them down, and that's really all that's happened. There was some positive movement, but in essence, it's just taking the netting approach and that's it -- that's all there is to it, Dan.

Okay. So there wasn't any view that -- any change on the prospect for profitability go-forward that necessitated taking the asset off or anything of that nature, it's just a netting?

Just a netting. No, we still have a lot of confidence that, that asset will be realized.

Okay. Great. On the cash flow statement, cash flow from operations, you've backed out the $819,000 of payment protection loan and it's essentially added back in -- from financing activities. If you've determined that it's -- that it's going to be forgiven and I thought it would go through the income statement and it be 0 in each place. Can you just help me understand why it shows up the way it does?

Sure, sure. It's really just accounting, Dan. Honestly, a netting of that up in operations would have been my most useful approach to it. But from an IFRS accounting perspectives, this was the appropriate way to display it on the cash flow statement.

Got it. So as a guy who really relies on cash flow from operating activities and before working capital changes, I'm looking at that saying, okay, you're showing negative $712,000. But if I assume you did earn that 800 -- did not earn, but you received that $819,000 then overall, you're plus 100-ish. Is that the way I should be looking at it?

So from sort of an operating -- that $800,000, we think of it as it helped us offset the adverse effects of COVID. So we view it as an operating benefit truly, so not in the financing section. So in that approach, you could take your cash flow from operations and add that $819,000 that's down below in financing to it, leaving you with around $825,000-ish or so.

Got it. Okay. That makes sense. Then, I guess, the inventory write-off, what -- can you give us any flavor as to like how old is that inventory? Is it -- what necessitated it to be written off?

So most -- it was predominantly in finished goods. And what we did, this is all a post-pandemic COVID and the response in the aerospace industry to take a hard look at not only the valuation of individual parts, but on the likelihood of how long some of our inventory could be there, given the new recovery, the fact that not all platforms will come back the same -- at the same rate. So we rationalized that inventory valuation, in some cases, just writing down, not completely writing off the price. And in some cases, just looking at what's the likelihood of really selling it in the next year or 2 and taking a sort of a conservative approach there and writing it off. Because all platforms aren't -- won't be coming back at the same rate. So one of the interesting things that's happened in this airline recovery is that platform, you can even see it in some of the recent news. You read about 737 MAX and other more modern platforms that are more efficient. They cover roots, allow airlines flexibility is that some more modern platforms will have increased production at a different rate than some older aircraft. So that's really why we took the opportunity to say, this really represents good valued inventory that we expect to sell. And so that's the thesis in writing down that select bit of finished goods inventory.

And would that be -- would it be specific SKUs that are -- you've decided we're going to write those down to 0? Or was it more of a basket, let's reduce a group of them? Perhaps...

So it was specific SKUs. In some cases, we wrote it down to nearly 0. And in some cases, we just devalue them, depending on what we thought was -- its -- what its demand cycle would be.

Okay. Got it. The loan to Cal Nano, in your statements, you disclosed that it's been impaired and carried at 0, but you don't even show the ongoing amount or the interest that's being accrued. Can you tell me why you don't disclose that in the notes? And obviously, we know it's been impaired to 0, but why no disclosure as to what the amount of principal is and what the ongoing interest is?

So that's a good question, Dan. I mean, we could do that. We continue to accrue the interest. We obviously don't show it on our financial statements because of our -- we don't really want to characterize it an asset at this point because the chances of recovering it, we do not think, are high. But we continue to accrue interest off-books. So I mean, there's no reason why we couldn't put that in there as a disclosure.

Okay. I think it would be beneficial to potential investors to at least know it's there. And related to that, your occurring interest, is it safe to presume that the company is taking steps to ensure that they're receiving confirmation of the debt from Cal Nano, so there's no attempt to -- by them to consider a statute bar at any point and question the legitimacy?

Yes. Yes. You can assume that. Yes.

Excellent. One last question for me. Just saw in the press release that the company received a waiver on missing some bank covenants. Is there any flavor you can give us on the severity of that miss or that being outside of those covenants? And just how solid is that $1.5 million of bank availability, like is there any -- do you feel there's any risk to the bank eliminating that facility or capping your current drawings?

So -- so the covenant was not missed by extremely large amount. If you read the covenant by the letter of the law, it would not allow us to include the COVID -- the PPP-1 loan as income. But as the bank looked at it, they chose to say, yes, let's include it. And when it is included in the calculation, the shortfall is modest, let's say. So now your question on do we risk impaired availability, I think if things -- it's always a possibility. We have a waiver, but we will -- if -- until things come back, we will still remain not compliant. So there is a chance that they could say, we don't really want to advance further funds until we see that cash flow returning. However, it is secured by the value of the land and the building at this point. And in addition, we have substantial machinery and equipment available as collateral. So it's not a question we've had a conversation with them about, Dan. So I can't really comment on what their position on it is, but we have not had a conversation that says we're relegating your availability to something less than $3 million.

Our next question comes from Frank Wisneski.

Following up on the inventory question, a couple of follow-ons. You mentioned you went through all the platforms that you're involved with. I assume they're mainly commercial in the old Omni-Lite business. What -- can you share with us which platforms are the most important for you?

So the most important platforms and this crosses over -- and the crossover is in the newer, more modern platforms that use composite structures. They use highly advanced fasteners, which Omni makes. So as a general statement, the newer platforms, including the 787 and Airbus' equivalent and 787, ones that use that change the trajectory of the range and fuel consumption that those are the platforms that Omni-Lite is better positioned, it has -- because of its use of highly engineered fasteners. Some of those highly engineered fasteners have and will continue to be used on defense platforms, too, because they're some of the most advanced aircraft in the world, less for range issues but more for strength. So it's just a different reason. So those same fasteners are used on both platforms for those defense and for these more modern platforms that use composite materials.

Okay. Just to make sure I understood you. Did you say the MAX was an important platform for you? Be it a more...

We're on the MAX. Yes. It's one of the platforms that use these -- use composites and use some highly engineered fasteners. Yes.

Okay. Not to get too much into the reads here, but I did notice that your finished goods -- even with the write-off, your finished goods inventory went up about $0.5 million. And assuming that's all very good now, I can see why you would have some optimism for the second half of the year. That's already in inventory, it doesn't have to be produced, correct?

Finished goods do not have to be produced, right.

Right. And you got $1.8 million versus $1.3 million last year. So you would seem to be well positioned for when the -- your customers decide to order more?

Yes, so going back -- yes.

Yes. So the only thing I would just add to that is that if you look at last year's WIP, and you combine WIP and finished goods for the 2 periods, I think you'll see -- you get a better picture because a lot of WIP was converted to finished goods. So what -- whatever that is, $2.9 million last year and $2.4 million this year.

Okay. Now your work-in-progress is quite a bit down as are your raw materials. When did -- I assume that refers a little bit to the WIP too, but when do you expect to be increasing your work-in-progress? Is that something that we're going to see, say, at the 6-month report?

So I really don't think so. So again, just to sort of clarify on the raw materials last year, raw materials and tooling were together up in that raw materials line. Okay. And now the -- we've -- it's a big enough number for tooling that we've created a separate line for it in 2020. So to do an apples-to-apples, you'd almost want to put those 2 together and you'd be around whatever, just under $900,000 versus $968,000 last year. So that's just one partial response. The other is that we've made -- we did have a lot in WIP at the end of last year. We've made a concerted effort to convert and get it into finished goods. So that's sort of a shift there between WIP and finished goods. When it's in finished goods, it's easy to -- much easier to ship. The reason we had a lot in WIP last year was we didn't really want to spend the money to convert some of it until we absolutely needed to. And so we did that and it's converted. Now going forward, I don't think we expect to see major increases. There will always be ups and downs, but it shouldn't return to $1.5 million going forward. There's always like -- you always have to put the 2 together to really get a good picture of what's going on.

Got you. Got you. I was looking at your breakdown by CGU, particularly the Monzite operations. You seem to be have pretty good EBITDA margins out of Monzite. When is -- and I assume maybe incorrectly, correct me if I'm wrong, that Monzite was not affected by the commercial aircraft slowdown as much as the old Omni-Lite because I assume it's more military. When do you suspect that you're going to be breaking out those 2 components as separate business units from a disclosure standpoint?

Yes -- go ahead, Dave.

Yes. So the businesses are -- we think of the businesses as very similar in a sense because they're both high-performance components for, whether it's aerospace or defense or commercial air transport, it's -- they're similar in that sense. Their margin profile is very, very similar. So -- and I think if you historically look at what the fastener components match very closely to what you're seeing for Monzite. And I think it's -- the reason is just because they're very similar businesses, although one is electronics manufacturing and one is metal forming, their value proposition in the application is very similar. So we don't have any plans to break it out. There would be a lot of costs associated with that. And to some degree, I'm not sure we would really add much. But to your other point, Frank, the other point, though, is that Monzite, the electronics business was less affected. I think the only thing it was affected a little bit is a slowing on the supply -- on the material supply side as a side effect of COVID-19 has slowed some things on the material acquisition side that have just kind of slowed things up, but the demand side is strong and continues to be strong.

Good. Dave, would I be right in assuming that Monzite has more of a defense orientation than the fastener business?

Yes, you would be 100% right.

Our next question comes from Emmanuel Kramer.

Yes. You mentioned M&A, can you break out, is it going to be in the Monzite or in the Omni-Lite or in both, so areas that you're looking at? Also...

We're looking at...

Yes. Go ahead.

Yes. I was saying, we're looking at both the electronics side and the fastening side, there's opportunities and we're looking at.

So and how is then the buildings in L.A. are going up in value according to the news articles? Are you -- any success in getting rid of the building in Cerritos?

I alluded to that in my remarks about dramatically increasing the available capital to the company, and it's along those same lines of thinking that.

And it doesn't look like we have any further questions.

Okay. Well, thank you all for your participation and interest and great questions. We look forward to speaking with you again.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.