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, Carl Lueders. Sir, the floor is yours.

Thank you very much. Good day, everyone, 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 yesterday, Monday, May 2. The purpose of this call is to provide an update on Omni-Lite's financial performance and operations as we filed our total year 2021 results yesterday evening, May 2. After our remarks, we'll open the line up for Q&A. If you've not received or seen a copy of our press release, which we issued yesterday, you can find it on our website at www.omni-lite.com or e-mail us [email protected] or [email protected] to request a copy. Before we get started, I'd like to remind you that today's discussion will be 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 changes in the health of the general economy, including the effects of the current COVID-19 pandemic, which hopefully is trailing off, the 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, pro forma adjusted EBITDA, free cash flow and adjusted free cash flow. A reconciliation of these nonfinancial IFRS metrics, if applicable, are 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 thanks for joining us. I'd like to make a few comments about our fourth quarter and full year 2021 performance and provide some preliminary remarks on our first quarter 2022 results, followed by comments on our current business climate. We ended the challenging 2021 year at $5.8 million in revenue, down 14% from our 2020 revenue mark, but ended the year with stronger fourth quarter sales and strategical factors. Our fourth quarter revenue of $1.7 million, up 29% year-over-year, reflects the start of recovery in commercial aerospace and positions the company to benefit for continuing recovery in the commercial aerospace, stable domestic defense spending and growing international defense spend. In the fourth quarter, we closed the sale leaseback of our California facility which strengthened our liquidity and helped fuel the acquisition of DP Cast at the end of the year. Our ending backlog of $2.3 million represents another sequential increase in the inclusion of DP Cast backlog. In summary, we ended the year positioning ourselves to deliver some top line growth. If I look at the first quarter 2022, revenue was $2.4 million, which represents an 86% increase year-over-year and reflects stronger backlog and the inclusion of DP Cast revenue. In the quarter, supply chain and logistics pressures both negatively impacted our ability to deliver products but positively added to our funded backlog growth rate and new client acquisition prospects. These supply chain uncertainties are driving strategic planning on OEMs to expand the supply base and the need for an agile, responsive domestic precision manufacturing as well as onshoring of precision metal forming and casting products for these high-value platforms. And lastly, I'm happy to announce that Amy Vetrano-Palmer will be named Chief Financial Officer for Omni-Lite with the retirement of Carl Lueders. Amy's experience creating and leading high-performance financial and operational structures within a growth-oriented business, very similar to Carl's background gives me great confidence that she will highly contribute to our mission. Also want to thank Carl for his contributions here at Omni-Lite, and previously with me and successful prior senior leadership teams. With that, I'd like to turn the call back over to Carl. Carl?

Thanks, Dave. Dave addressed revenue in the business front. So I'll limit my comments to cash and adjusted EBITDA. In December, we completed the sale and leaseback of our facility in Cerritos, California. The sale generated approximately $6.6 million in cash before taxes and a gain of approximately $1.767 million, approximately $1.5 million of the proceeds were used to pay off our bank debt. Also in December, we used approximately $3.46 million in cash and issued 3,079,000 shares valued at $2.062 million to purchase Design Precision Castings, Inc., or DP Cast, an investment casting operation based in Brampton, Ontario. In early 2022, an affiliate of the sellers of DP Cast purchased an additional 1 million shares of Omni-Lite stock at CAD 1.25 per share. Also during the year, we received approximately $400,000 in PPP-2 loan proceeds. This loan was forgiven by the SBA and recorded as income in the fourth quarter of 2021. Free cash flow, defined as cash flow before operations minus capital expenditures, included $404,000 of onetime DP Cast-related transaction expenses and $293,000 of onetime capitalized rent expenses associated with the Cerritos facility leaseback. When adjusted for these amounts, adjusted free cash flow was a use of approximately $461,000 as compared to a use of $19,000 in fourth quarter 2020. We minimized the adjusted free cash flow usage to $461,000, and the adjusted EBITDA decline to only $130,000 in spite of a 14% or approximately $900,000 reduction in revenue. Also worthy of note is that we were able to reduce our inventory pre-DP Cast acquisition by approximately $500,000 during the year, bringing our 2-year inventory reduction to approximately $1.1 million. While the inventory reduction had a negative effect on adjusted EBITDA for the fourth quarter, EBITDA as a percentage of sales improved significantly over last year's fourth quarter. At year-end, we had $2.4 million in cash and added another approximately $985,000 in early 2022 as a result of our private placement. This completes our prepared remarks, and we'd now like to open the call for questions.

[Operator Instructions] And our first question comes from [ Emmanuel Kramer ].

Thank you for the good quarter and year-end. You mentioned some new orders. Is that from DP Cast or regular Omni-Lite. And in which area is that in defense or in the regular commercial?

Well, there's been several new orders. We're referring to some commercial aerospace orders performing, and defense orders have been fairly strong.

Okay. A follow-up the report that Boeing had the problems with the production of snafu, which was mentioned in the Wall Street Journal, and mentioned it was around these titanium parts and glue and fasteners. How does this affect you, if any?

Our -- the fasteners that we're supplying to Boeing and Airbus through large OEMs are both titanium and steel products, and they're highly engineered. I'm not aware that this article that you're referring to is anything to do with the fasteners that we're producing.

[Operator Instructions] And our next question comes from [ Frank Wisnewski ].

You guys have a busy couple of months here, obviously, and very successful, I think. A couple of questions. The preliminary revenues for the first quarter, that includes all of DP in there for the first quarter?

Yes, it does.

And how would the non-DP business have fared in the first quarter? It sounds like you had a reasonably robust period then with the old Omni-Lite also. Is that correct?

So the revenue for -- the breakout of revenue for Q1, as my comments sort of suggest, is fairly strong for all 3 in the sense that there's been some booking activities, strong needs and booking activities for all 3 groups.

Okay. All right. And that's -- and just a question, I think I know the answer, but would you be breaking out in more detail, you have 3 different areas at any point in time?

From a formal -- from down to -- top line revenue, I think there's going to be -- there'll be some more specifics, I think, not break out down to every P&L line, but there could be more references towards different products. So casting products versus form and metal forming versus electronic. So we've done that in the past. We've talked about electronic defense, electronics bookings as well as some metal forming. So we'll continue. And with another -- with casting now in the mix, I would expect that they'll be made references to these different technologies from time to time, for sure.

Good, good. You've -- what was the number was. You had over $2 million on the balance sheet in cash now?

Correct. Yes.

And that's as of the year-end? Or is that as of right now?

As of year-end, it was $2.4 million, and we added another approximately $1 million with the private placement in the fourth quarter. Then, of course, we have the usage of cash. But yes...

What are your plans? Are there more acquisitions that you're looking for? Or ae you going to play low for a while to consolidate and get a feel for DP?

No, we're certainly going to working with DP Cast to help leverage their pipeline of opportunities and get some synergies, back-office synergies, which is ongoing, which we expect to be able to leverage. But that won't stop -- that's not stopping us from continuing to pursue other acquisition opportunities. I think the landscape and the environment is very rich for that, given a lot of factors including COVID. And that's actually one of the benefits, I think, of Amy now coming in and her experience with acquisitions was kind of a key element in what we wanted in our CFO. So that portends -- I expect to be active in that area. We're very continuing on.

[Operator Instructions] And we have a question from [ Emmanuel Kramer ].

David, any way you can -- when you can expect DP to be accretive to earnings?

So we had previously announced it and would sort of resonate that same thought that we have a positive contribution near the end of -- middle to the end of 2022. There's a strong pipeline which we need to convert, but that's our -- what we're pointing towards that time frame.

And our next question comes from [ Frank Wisnewski ] again.

The private placement debt, congratulations, whoever accomplished that, it was a huge premium to market price, obviously. What can you tell us about that acquirer? What's their background? What's their interest? Just give me some color on them.

So Jan, as you know, well, I think you know is on the Board of Directors Omni-Lite, a very big supporter. I think we saw this -- they saw, but collectively, we saw this as an opportunity. So Omni-Lite presented a platform for DP Cast to really leverage there. Their own casting platform, which has a very good customer base and a launchpad for some very interesting products in its pipeline for long-running programs on whether jet engines or other programs in electric distribution, gas and oil, a broad portfolio of platform. So I think that placement was done with very much in a supportive way collectively for where we're going. And Jan and other family members that have joined are very supportive of the combined entity.

Currency translations, is that a big worry for you? Or is that something you have to monitor closely? Because now with DP, you were a Canadian company, obviously, although actually in the United States, but now I assume a lot of their revenues will be Canadian-based. I may be wrong in that, but give me your thoughts there.

So they have -- they're a Canadian dollar functional currency company. They do a fair amount of their sales in U.S. dollars, and they generate a fair amount of U.S. dollar payables. But there is exposure, Canadian dollar exposure, and they are a U.S. dollar-reporting company. So we will be experiencing translation effects as we go forward. And obviously, we'll be monitoring that and trying to manage the net exposure as actively as we can. And if it becomes necessary, we'll begin hedging. But at this point, we don't see I think natural hedges is the way we can handle it.

All right. Good. Again congratulations. You've done a great job over the last 4 or 5 months. And fulfilling basically, what you had said 6 or 7 months ago, you were going to do so. I congratulate you. Thank you. Thank you very much.

Thank you.

[Operator Instructions] And there appear to be no further questions at this time. One more question from [ Frank ]. Hold on 1 second. Go ahead.

I probably should get these all out of the way, but there's not much of a queue, I guess. Raw material import costs, there's been a lot of inflation in materials both those used by old Omni-Lite and I assume by DP too. What's the current status of that from your standpoint? Are you having any trouble securing or more likely probably the inflationary impact of some of those input costs?

Well, [ Frank ], it's both. And it's electronics, too. So it's something we'd happen to manage. We have, we continue now to -- we have good relationships with a lot of our suppliers that we've been buying materials for a while. And we're seeing our customers have as big a problem or bigger. So it's something we're managing. We're putting it in costing. So we're bidding with that in mind. So we've done -- and it's safe to say in this previous quarter, it's affected our pricing. And there's understanding in the marketplace because everybody is in the same position. And for the metal -- the delivery, we've seen deliveries from, go from 8 weeks of raw wire to 24 weeks. And we've seen price increases upwards of 30%. So our percentage of -- in our cost of goods, our percentage of raw material can be 5% to 10%. So we are -- or a bit more. We're reflecting that in pricing to our customers.

Okay. Any problems with their current backlog, the pricing in that, or have you got enough inventory, I see your inventory went down, and I was just wondering whether you had the bad enough inventory at the right price to fulfill your current backlog at the margins you originally expected?

Yes. We're not anticipating any margin compression. We've been looking at this. It's more delivery impact. As I alluded to in Q1, it just physically the wire wasn't there in time. We couldn't ship. But -- so it's more of the delivery than the pricing we've been watching very carefully, and we had some inventory. So we were able to manage any pricing increases. But the delivery is something that still -- we're very cognizant of it and working closely with our suppliers and our OEM partners here to manage that as best as we can, but it's something that the whole market is dealing with.

Yes. That's true. It's -- you're not a disadvantage there. What are the major materials -- raw materials at DP? I know pretty much an Omni-Lite. But is the raw material input higher at DP, and what is it primarily?

Raw materials at DP are similar in the sense their percentage of sales -- cost of that raw material is similar to Omni-Lite and electronics for that matter, the pricing profile. And interesting enough that part of what DP Cast fit the Omni-Lite family was it was high performance, high strength components. So they are very much in stainless steels, high-strength steels, cobalts and other material that they use. So similar materials, different form. It comes in powder versus wire, but very similar materials between DP Cast and Omni-Lite.

And you say the raw material input into the final product is similar as a percentage as the old Omni-Lite?

Yes.

Okay. Great. Well, yes, it's a problem for everyone, obviously, and it's just -- that's why you manage the company, right?

Well, that's true. And as I alluded in my comments, I think that there's opportunities. This is hitting a worldwide problem. And we're seeing the signs of the need for more -- an agile, responsive domestic producer of these high-value, high-performance components are in more demand. The past 2 decades have seen a lot of sourcing in China, in Mexico, Far East, and that trend has started. But everything that's happened in the last 3 to 6 months has even expanded that process.

Yes. Okay. That's interesting. You actually had some competitive components that were being surest to offshore then?

Absolutely.

Really. Okay. Interesting. Okay. Yes, that would be a good -- obviously, a good trend in your favor because supply chains are coming back.

Yes.

And we do have a question from [ Emmanuel Kramer ].

Yes. How, if any, does the war in Ukraine affect you on pricing and getting more defense orders and the Russian sanctions has anything that affects you?

Well, what we can see for sure is that the war has affected the supply chain in a very meaningful way in electronics and in raw material, metal raw materials. So it's just to [ Frank's ] point before, that's been a very big impact on supply chain and just the availability of materials. But having said that, I think it has increased the focus especially in the European model on defense, European defense spending. We have seen some activity directly related to missile defense and defensive systems, both for deployment in Europe and as self-protection. So we have a fairly strong presence and focus on missile defense, some of our electronics technology has a particular advantage there. So we've seen some activity related to that theme of missile defense and the advanced electronics that are needed there. And specifically with electronic components, I think the war in Ukraine has really exacerbated what was already a supply chain problem with electronics and the supply of electronics component is, in some cases, have gone from 12-week supply or 8-week delivery to 52 weeks and more. So what that has created is again, OEMs are looking to secure material place orders in advance of what they might have before, especially for defense-related products and just obsolescence. So it's created the need to redesign and an opportunity to put new components on systems because of obsolescence issues. So we have definitely seen increases in those themes since the war in Ukraine.

And you're in a position to deliver on demand like the U.S. government is sending some more military supplies if you...

Well, our electronic components are designed to -- we have replacement technology for single source, let's say, ICs and chips. So we are positioned to be able to deliver related of a placement to an obsolete part replacements using our highly integrated electronic technology and packaging. So we're hopeful that these things could help and we are seeing signs that is helping drive some opportunity, specifically in our electronic.

It should affect your bottom line also, I guess.

Of course. So we're -- we've got operating leverage, and we've got capacity. So as we grow, we'll enjoy an even better operating margin.

[Operator Instructions] There appear to be no further questions at this time. I'd like to turn the floor back over to Carl Lueders, sir, for any closing remarks.

Thank you all for joining the call, and I certainly appreciate your support and interest and questions. Have a great rest of the day.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.