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

Good day, ladies and gentlemen, and welcome to the Omni-Lite Industries Investor Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, David Robbins, CEO of Omni-Lite Industries. Sir, the floor is yours.

Thank you, and good day, everybody. Joining me on today's call is Jan Holland, former Chairman and CEO of DP Cast, now a member of the Omni-Lite Board of Directors. Before I set the agenda for today's call, I would like to alert you that we posted a slide deck on the Investor Relations page of Omni-Lite's website at www.omni-lite.com in connection with today's conference call. I would 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 impacts of the changes in the health and general economy, including the effects from the current COVID-19 pandemic, U.S. and other global commercial aerospace markets and the U.S. Department of Defense budgets. This conference call may contain expressed or implied forward-looking statements related to the company's financial results, operations and performance, including expectations regarding market conditions, the introduction of new products or new capabilities and features to our products, our expectation regarding the sales, marketing and operations synergies associated with the DP Cast business, the future financial performance of the DP Cast business included. All forward-looking statements should be considered in conjunction with the cautionary statements contained in our press release and the risk factors, including on Omni-Lite's SEDAR filings. The company disclaims any obligations to update any forward-looking statements that may be discussed during this call. I'd also like to mention 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, 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. With that said, for today's call, our agenda will be as follows: I will summarize the terms of DP Cast transaction and share my perspective on the strategic rationale behind the acquisition in context of Omni-Lite's long-term business objectives. Jan will then provide his insight on the transaction and provide an overview of the DP Cast business. I will conclude our commentary with some closing remarks. And after that, we'll open the call for questions. So let me begin with how I'm excited to discuss the announcement we made on December 20 that we have acquired DP Cast. A Brampton, Ontario-based company that designs and sells a range of precision investment casting products to aerospace, defense, industrial and transportation, Tier 1 and Tier 2 OEMs in Canada, United States and Europe. The DP Cast transaction embodies 2 major elements: acquisition of DP Cast, followed by private placement to be closed by the end of this month. In terms of the acquisition, Omni-Lite issued approximately 3.1 million common shares and approximately USD 330,000 in cash and assumed in our repaid DP Cast net indebtedness of approximately $3 million, translating to an enterprise value as of the closing date of approximately $5.7 million. With respect to the private placement, an affiliate of DP Cast has irrevocably agreed to subscribe for 1 million shares of Omni-Lite common stock at a price of CAD 1.25 per share, representing approximately a 32% premium to our closing price on December 17, 2021, which we expect to return in gross proceeds of approximately USD 1 million based on the U.S.-Canadian exchange rate at the time of the closing of the DP Cast acquisition. As a result of these transactions, the Holland family and its affiliate collectively will have an ownership stake in the combined company of approximately 26.4% and as I remarked earlier, Jan Holland has been appointed to the Omni-Lite Board of Directors. By acquiring the DP Cast investment casting technology and customer base, we have taken a small but important step to help realize Omni-Lite's vision to becoming a leading precision manufacturing platform, supporting valuable long-lived [ ruggedized ] assets in aerospace, transportation, natural defense and industrial automation markets. With DP Cast, we immediately and seamlessly capture a Pratt & Whitney Canada relationship that spans over 50 years and is designed in on 13 different Pratt engine platforms. I'd like to spend the next several minutes outlining our rationale for this acquisition. Investment casting is an attractive manufacturing capability to augment our portfolio of manufacturing technologies of metal forming, alloy reflow and fine wider bonding. Investment casting has been identified as an important technology to produce high-strength structures that can be formed into shapes that cannot easily be produced by subtractive manufacturing and can be done more efficiently than additive manufacturing. As we build our platform of manufacturing and engineering competencies, we broadened our scope to engage with our customers and give more ability to solve critical product needs. Just as important, we plan to market the DP Cast products directly to our existing customer base and cross-selling opportunities across our combined aerostructure and jet engine propulsion installed base perfectly fits into our strategy to increase our content per platform with existing customers, thus driving revenue growth. We also see opportunity to further expand into Europe through our technology reseller relationships. Over the past 3 months, in 3 years, DP Cast has made substantial investments in people, processes and technology infrastructure valued at over $1.5 million to deliver capacity and scalability. DP Cast 2021 revenue were $4 million represented over a 20% increase over its 2020 revenue. As we begin to integrate DP Cast into our organization, we also expect to advance initiatives aimed at optimizing infrastructure synergies and lowering overall production costs. We expect that the investment we made to drive growth from this business in combination will enable this transaction to meet our rate on invested capital totally within a 2-year time horizon and expect to be a contributor to our earnings in the same time frame. In summary, we're excited to welcome the DP Cast team into the Omni-Lite family. This transaction accompanies a number of important objectives. It supports our specific precision product portfolio ambitions and expands our total addressable market. It also presents us with substantial opportunities to help provide a solution to our customer component manufacturing problems in ways that will elevate our value proposition. And finally, as we execute our go-to-market and integration plans, we expect this to help drive solid revenue growth and therefore, meet our growth and profitability goals over the coming years. At this point, I will pass the call over to Jan for remarks and overview of DP Cast business and strategic fit and potential opportunities with Omni-Lite. Jan?

Thank you, Dave, and good afternoon, and thank you to our investors and for the privilege to present today. I'm going to start on Page 13 of the investor deck. As Dave mentioned, it's on the Omni-Lite Investor Relations page on www.omni-lite.com. In terms of DP Cast, where design precision castings is the name of the company, we branded DP Cast. We were founded in 1958, and we are an AS9100D and ISO9001 certified aerospace company. The business that we're in is the metal forming business of investment casting, where we build molds, melt metal, ingot and pour molten metal into molds to form parts. Our first client -- or 1 of our early clients in 1963 was Pratt & Whitney Canada, and we started making parts for the engine, the PT6, and we still make those parts today. And with customer focus, quality, delivery and service, you get to produce parts for the life of the tool. And so whenever we gain customers, as long as we observe our customer-focused characteristics, we do very well. And so we're, as Dave mentioned, on 13 engine platforms for Pratt & Whitney. In the last decade we spent transforming the business to expand our capability from the production of small hardware components to larger, more complex structural investment castings across a very broad range of markets. We have a very strong management team with a large breadth of knowledge and technical experience in engineering, quality assurance and best-in-class capability and procedures. These last 10 years, we've made long-term investments needed to replenish the technical and operating capabilities, and we focus on the elimination of oxide by films. An oak tree grows deep strong routes before it goes into a tall mighty oak tree. I'm now on to Slide 14. We have a very proven experience of working with large reputable Fortune 500 companies and manufacturers. A lot of them are OEMs. We also continue in with the maintenance, repair and overhaul across a broad spectrum of our client base. We're in 6 countries around the world, primarily Canada and the United States, but we get to Poland, Spain, Turkey and Brazil. And when you look at some of our customer logos in the aerospace industry, not only do we have Pratt & Whitney, but we provide product to EMBRAER; L3Harris in the mining industry; Boart Longyear, it's a publicly listed Australian company. In the military sector, J/E Bearings with an end customer of General Dynamics Land Systems and to Seiler. In the industrial sector, it includes such companies as S&C Electric and others. Many of our customers are considered essential for things like we make parts that go on the F-35 in the U.S. Department of Defense program. We make electric switches for the electronic transformers for S&C Electric, and we make handles for paramedic gurneys. So we cover a very wide broad spectrum of parts. I'm now on to Slide 15. We have a broad capability from the front end to the back end, including project management. We have complete in-house capabilities for parts production from concept to completion. We provide design assistance. We make molds, we melt metal, we pour metal and we have nondestructive testing, which includes things like x-ray, fluorescent penetrant inspection and other designations. The use of investment casting largely helps with things with parts consolidation. You can combine multiple parts that are currently machine from stock and welded together. Instead, you can make 1 investment casting of all those 3 parts, and it has much higher, better quality than metallurgy and less weight and often contributes to a cost saving for the client. In terms of alloy capabilities, we have a very broad range. We probably concentrate on 24 different metals, but we can go well beyond that. The main ones, of course, are aluminum, stainless steel, steel and cobalt. We have spent a lot of time on automation and robotics and putting in top of the line equipment over the last 10 years. And we've also spent a lot of time developing our ecosystem of specialized processors around our Brampton area and otherwise. On Slide 16, with the focus on the elimination of oxide by films, we stopped the entrainment of air in the metal preparation, pouring and filling. And what that does is that we are able to achieve mechanical results on our products that may exceed industry minimum standards by up to 2 or 3x. And this gives us a huge competitive advantage. It allows us to make parts that many of our competitors are unable. Slide 17. We've built a strong foundation to support growth. So while we've only maybe spent $1.5 million in the last 3 years, we probably spent $8 million in the last 10 years. And our sales in 2021 were USD 4.1 million with 55% in aerospace, 25% in military, 20% in industrial, making up a group -- a broader group. In the pipeline, we have some really wonderful opportunities we are quoting for some really great potential customers and OEMs that are currently not customers of design precision castings. In 2021, we have approximately 4.5 million or 180 quotes out there. In 2020, we had 4.2 million of quotes, over 188 quotations. In 2019, we had 4.7 million worth of quotations over 176 quotations. So CAD 13.4 million over the last 3 years. What we find is that we actually did get quotations that go back 10 years, and they come to life at very odd times, and they surprise you sometimes. But at least it gives you a flavor of where we are. So we're looking to grow strategically by segment, by customer to balance our portfolio, and we think the future is really bright and very strong. So thank you for your time today, and thank you for investing with us. Dave, back to you.

Thank you, Jan. This acquisition is a very exciting step forward into building a world-class producer of engineering precision components. The guiding principle for Omni-Lite has been about using our technology to efficiently produce rugged custom precision components that help our customers support their valuable platforms and assets. Adding the DP Cast products extends Omni-Lite into some exciting new segments, including jet engines and mining and heavy industrial applications. We expect that these growth prospects will help attain our 50% compound annual growth rate target and can deliver on the target 25% adjusted EBITDA returns. In addition to pursuing partnerships and M&A to expand our portfolio of technologies, including verticals to enter new markets, we are committed to supporting our engineering resources in ways that help us drive innovation and move into new categories. We are happy to answer questions about this transaction during QA. This concludes our comments. We are now -- we can now take questions.

[Operator Instructions] We have a question from [ Emmanuel Kramer ].

Yes, this is for you, Dave. And how do you see inflation and the supply chain affecting both of your businesses?

Well, they are definitely affecting raw material costs and related the supply chain delays, so it's longer to get these raw materials. However, we have been in the mode of anticipating and managing that real time. So that includes price escalation where we need to pass on those costs. So we're not in many long-term agreements that have fixed pricing agreements where we can't adapt. So we are adapting to manage for those on the ground realities right now.

Our next question comes from [ Frank Linette ] with [ Meski ].

Interesting acquisition, interesting presentation. Thank you for that. It is a bit complicated. Could you let me know after the transaction to sales, what does your -- what would be your total shares outstanding? And what will your balance sheet look like?

Well, I don't have exact numbers, but really roughly -- well, I hate to -- I need to do that on the fly. But I mean, if you look at our press release, I mean, we do $3 million common shares and approximately $11 million, we have $11 million. So just really roughly, you're in that range of -- I would just simply add those shares. But roughly, that's it. And I think we -- I don't have the balance sheet -- all the balance sheet adjustments off the top of my head here. But certainly, going forward, as we make public releases, it will be disclosed.

Okay. Is there a lockup on the new shares?

There is. Yes, there is, but I don't have details off the top of my head.

Okay. And when you report your full year for 2021, will you be releasing pro forma income statements and balance sheets?

To a certain extent, yes. There will be some pro forma information in there, yes.

Okay. And just to go back one more. So after these transactions, how much cash will you have on the balance sheet?

Yes, I don't have that number on the top of my head.

I don't know if you can hear me. Am I still there? Am I able to jump in? Can you hear me?

Yes.

I guess the only thing I would add on the inflation question was the -- sometimes there's efficiencies that we can drive in our manufacturing that allows us to reduce the cost. And so that helps to offset some of the inflationary pressures we've been seeing. And so that is another factor.

[Operator Instructions] We have another question from Frank with Meski.

Yes. Just a follow-up. So you're obviously on the Pratt & Whitney engines. Does that automatically exclude any participation in the other engine manufacturers?

Do you want me to take that, Dave?

Sure.

So yes, there seems to be a bit of jealousy across platforms. I think it's the best way I can answer it. We've had some inquiries from Rolls-Royce, but never from GE.

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

Yes. [ Mike ], if you can answer on the -- when do you expect to be fully integrated with DP Cast and when do you think it's going to be accretive to earnings?

So the integration, we feel, will be fairly accelerated certainly within 2022. There -- it's a very well-established company, but there's opportunities to leverage infrastructure, things related to AS91 certification and information systems that can help reduce our overall cost in which we're going to aggressively pursue. But that's all within 2022. And as I stated in my prepared remarks, we expect over the next year or 2, this is going to be -- have a positive contribution to earnings. And as the pipeline of opportunities materialize in 2022, there's an opportunity at the end of 2022 to have a contribution.

Okay. And it looks like that was our final question.

Thank you, everybody. Appreciate it.

Thank you, and I appreciate your interest and your time on this call.

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.

Thank you.