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

Good day, ladies and gentlemen, and welcome to the Omni-Lite Industries Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Amy Vetrano-Palmer, CFO. Ma'am, the floor is yours.

Thank you so much. Good afternoon, and thank you for joining us. With me today is Chief Executive Officer, Dave Robbins. Our call is being recorded and will be available for playback, the details of which were in our press release issued yesterday. The purpose of this call is to provide an update on Omni-Lite's operations as we recently filed our first quarter 2022 results. Our remarks will open up at the end for Q&A. If you have not received the copy of our press release we issued on Thursday, you can find it on our website, www.omnilite.com. Before I start, I would like to remind you that today's discussions 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 we operate, our future plans, objectives, business perspective 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 our 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 risk factors included in Omni-Lite's filings. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. I would also like to mention that in addition to reported financial results in accordance to 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 metrics may be included during our filings and press releases. Lastly, unless noted, any reference or discussion of our financial results or metrics are in U.S. dollars. I will now turn the call over to Dave for his remarks.

Thank you, Amy. Good afternoon, everyone, and thanks for joining us. I would like to make a few comments about our first quarter 2022 performance, followed by comments on our current business. First quarter 2022 revenue of $2.4 million marks the beginning results of our strategic growth plans through organic and acquisition means. Bookings of organic business in Q1 was sequentially up nearly 90% driven from faster demand in commercial aerospace and from U.S. and European defense electronics program content. Supply chain and logistics pressures for raw material did affect our ability to deliver approximately $200,000 product sales in the quarter. We expect this tough supply chain environment to continue and something we have started to address with advanced raw material purchases. Our ending backlog of $2.5 million, the majority shippable in fiscal 2022, represents another sequential increase in points towards continued revenue growth. Market demand in commercial aerospace from robust domestic travel and narrow-body production is pushing faster demand at a steady growth rate. Supply chain disruptions from international and domestic fronts at our customer level is opening new product opportunities for Omni-Lite, for both metal forming and casting, leveraging our ability to respond and the security of domestic supply of brands. The global security concerns and world unrest is further fueling some robust defense electronics platform development and in particular, short- and long-range missile defense systems. With that, I would like to turn the call over to Amy. Amy?

Thanks, Dave. Dave has addressed the revenue, so I would like to make a few comments regarding our cash and EBITDA. In early 2022, an affiliate of the sellers of DP Cast purchased an additional 1 million common shares of Omni-Lite stock at a Canadian price of $1.25 per share. This generated approximately $986,000 of cash. Our free cash flow, defined as cash flow from operations minus capital expenditures, which also included a $29,000 onetime DP Cast-related transaction, when adjusted for these amounts, our free cash flow was a use of approximately $154,000 as compared to a use of $127,000 in the first quarter of 2021. Although we saw an increase in usage of free cash flow, this was attributed to us investing in capital expenditures to improve the manufacturing process in multiple locations. We continue to maintain a strong cash balance and saw a slight increase in EBITDA over the first quarter 2021 compared to fourth quarter -- or 2022 compared to fourth quarter 2021. We do expect to continue to see improvements as revenues increase throughout the year. Cash from operations was an increase of approximately $41,000 as compared to a use of cash in first quarter 2021 of approximately $127,000. We continue to work to reduce our WIP and finished goods inventory and did see a reduction of approximately 56,000 in the first quarter. And finally, we are happy to announce that we did agree to reprice our $1.2 million agreement, loan agreement, with CalNano. This will be set with a 7.5% interest rate, with interest payments starting in June of 2022 and principal payments beginning in early 2023. This does wrap up our prepared remarks, and we now open up the call for questions.

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

I would like to know, on the DP Cast customers, are they military or commercial, as a percentage of them and the businesses in Canada only? Or do they have a worldwide, United States business?

So the mix is across both aerospace and defense, industrial and some automotive-type application. So it's a good broad spectrum. They do business in the United States and in Canada and some in Europe.

Also, can you break out the overall percentage of military against commercial and Omni-Lite, please?

For Omni-Lite completely?

Yes.

Well, it's approximately 50% commercial. And if you combine the different defense areas, generally around 50% a split. And industrial is a subset of the commercial of maybe 25%.

What do you expect in the future? Is it going to stay the same, or is it going to change?

Well, we're expecting some growth in defense electronics, in particular. But then, fasteners could also see some defense pickup in the coming years. So I think, on balance, we're going to see growth in both sectors.

And our next question comes from [ John Tickams ].

Just a question as it relates to kind of business through first quarter. I watched a recent interview with Elon Musk and he talked about kind of the keys to successful manufacturing or scaling at IP. And as it relates to IP, I know that there was a lot done with the previous owner in terms of IP and getting patents. Is there any kind of additional work that the company is focused on right now? Or is it kind of just the focus on growing the business?

Well, the focus is on growing the business and the commercialization of manufacturing our products. So there is some proprietary IP in the sense of manufacturing know-how, but no intention of trying to formalize that, the patent, but leverage it in our ability to produce parts. So really, the focus is on the manufacturing and the commercialization of that.

Perfect. And just a second follow-up question. It kind of relates to the 3 pillars, DP Cast, kind of the legacy business, plus electronics. Do you kind of view that through quarter 1 as kind of the 3 pillars of where you would look to expand, if you think of like almost the business units over time growing and strategic acquisitions? Or is that, there's still lots of room to kind of, to rethink that?

So the -- I think the -- our perspective on the different manufacturing is that they're -- we're all supporting defense and aerospace, high-value assets. And so we're looking at, in very many cases, the different manufacturing competencies that can support the same customer at the same platform. So as far as acquisition, I think we're looking to be opportunistic to see if there's a competency, a manufacturing competency, that blends with that same high-performance manufacturing for high-value assets to complement what we have. We're looking to expand there, but not unless it sort of -- it has to fit, and we certainly wanted to blend and leverage what we have. So we're not looking to bolt on a separate business. We're looking for complementary businesses that can blend in what we're already doing.

Perfect. And I have a quick follow-up question, and then I'll jump back in queue, if needed. As it relates to CalNano, at this stage, it sounds like there's been definitely some progress in terms of their underlying business and also just the ongoing, probably, discussions you've had with CalNano. With -- through Q1, is it really sort of the thought of the company, and I think a lot of the investors are thinking the same thing, of kind of when you kind of look for that next acquisition. Would it be post getting money out of CalNano? Obviously, you're looking for strategic timing. But I'm just trying to get a sense, and it doesn't have to be specific, of kind of how you're looking at kind of when that next wave, potentially, of an acquisition, strategic, et cetera.

Well, we're certainly looking to integrate and -- the DP Cast business and that's ongoing, independent of us being -- looking for other acquisition targets. But it's more the fit than a specific timing. But we -- and we are in the midst of integrating in DP Cast. So to a certain extent, there's some period of -- time period here where we're involved with that. But generally, our -- we're out there active and looking and trying to be opportunistic and not time-driven as much as being opportunistic. And that's why we're out there looking because if you're not out there actively looking, you may miss something. So I would characterize it that way.

And our next question comes from [ Frank Waznewski ].

The CalNano development, I find very interesting. Interest payments starting this month, June, and what, interest and principal starting sometime next year. How, from a balance sheet standpoint, since you've written that loan totally off, what are you -- when do you reverse that charge, since essentially, at least, when they stop paying principal and interest, it will be a performing loan?

Yes. So we'll be working during this quarter to figure out the right method to get that back on and what we want to do once payments do commence.

Okay. What's the interest payments [ connected to, guys ]?

Yes, we want to start those going first, and then we'll take it from there.

Okay. Okay. Good. You had kind of a large translation gain in, what, $150,000 or so in the first quarter. That's against the Canadian dollar, I assume, right?

Yes.

And if the Canadian dollar goes down, you take a loss, and if it goes up, you take a profit? Or is it the other way around?

What -- sorry, can you repeat that?

Yes. So from an income statement standpoint, would you rather have the Canadian dollar go down or go up?

We would rather see it go up.

Okay. Would -- is there any thought -- and that's a pretty sizable number, $150,000 for 3 months. And currency markets have been kind of wild lately. Has there been any thought of hedging out that exposure?

We have had a few discussions in regards to it, and we're going to continue to look at that as we go throughout the year and see how the rates change. It was just, at the end of the year, the rate was significant -- not significant, but right when we closed the year, it was based on the rates, that's why we ended up with the big change for the first quarter. So we'll be watching it as we go through the second quarter here to see if it does make sense for us to start hedging, or we're just going to see slight fluctuations throughout the year.

Okay. I also noticed you had $501,000 in taxes payable. Is that from the real estate transaction?

Yes.

Okay. And those will be paid, what, during the current quarter?

Yes.

Okay. The CARES Act, $400,000, did you take that in the first quarter?

The CARES Act...

The payroll production was taken last year, I know. But you had a negative $400,000 from the CARES Act, and I was wondering if that came in the first quarter.

The only thing that would have been is the forgiveness.

Yes, the forgiveness, that's...

That's why you're -- forgiveness. So you didn't take it into income or anything?

No.

Okay. It just went off -- it went off the balance sheet, right, or yes. All right. One final thing, and then I'll jump back in the queue, too. You mentioned in your filings, you're still under absorbing manufacturing overhead. Is that mainly in California? Or is it California and Canada? And relatedly, the lease payments that you're responsible for now on the California facility, I assume that you're concluding that in manufacturing overhead. Am I correct or...

Yes, you are correct. And it is at both locations that we are currently working to get that under absorption fixed. But as revenues start to grow at both locations, we should start seeing that under absorption results.

Okay. Do you have any -- I mean, how much do revenues have to go -- grow to take care of that under absorption roughly? I mean are we talking millions of dollars or hundreds of thousands of dollars?

No, it would be more in the hundreds of thousands of dollars. DP is still a new acquisition for us, so we're still working to see what the sweet spot is there, where they flip and start generating income. On the -- we just feel confident here that with the revenues throughout the year, we should start seeing that under absorption as well as the EBITDA grow there.

And they have already in the last couple of quarters, [ Frank ]. It's already -- you can see that sequential improvement is indicative of that. And on the castings business, the pipeline, when we announced the deal, part of the investment thesis was the expectation that there was a healthy -- and there is a healthy pipeline of opportunities out there. So it's the one question to ask.

Yes. The $200,000 that you mentioned you couldn't ship this year because of supply constraints, was that mainly California?

I think that happened to be mainly in California. But I would say that supply chain issues are factoring all, with castings, electronics and the forming business. In that particular case, it had a -- that was the most significant one, happened to be in the forming business, the fastest.

And our next question comes from [ Manny Kramer ].

You mentioned the decline of the adjusted EBITDA was a result of the acquisition of DP Cast and additional rent expense associated with the leaseback. Is CalNano contributing to the rent? And you should have -- you have an increase in rent, but you should have no taxes on the building.

Yes, they are contributing to that rent, and it was flat with the taxes.

Are you considering to go to an industrial complex or somewhere where the rents are not so high as in Cerritos?

Not at this time, no.

And our next question comes from [ Frank Waznewski ].

A couple of things. You mentioned, and I wasn't sure, the last question said about taxes being paid. You're still responsible for taxes and insurance at the California facility, right, about $200,000 a year?

Yes.

And the lease payments are about, what, $600,000 or so?

A year?

Yes.

Yes, about, yes, [ $40,000 ] of that...

Yes. Okay. The $400,000 in transaction costs, does that just get rolled into the DP cost or was it -- or was that -- those separately stated?

I believe it went into the cost.

It went into cost. Okay. And a final thing, I'm looking at your breakdown here. And although you don't like to give breakdowns, your IFRS filings give us a little hint. And I was a little surprised. Is the DP Cast business seasonal? It looked like you only had $1 million in sales in the first quarter, I'm assuming. You break it down in U.S. and Canadian, and Canadian is primarily DP Cast, I guess, right?

Yes. So we -- there is some seasonality to it. It's not necessarily on an annual basis, but there's some seasonality. But we described that the business is of roughly USD 4 million-type operations. So you can see almost a -- at $1 million, that's sort of at its rate, that we've characterized it as. We're expecting to grow it from there.

Now I realize there are other things in the Canadian net income. But it showed that you lost $400,000 in Canada. Now there's accounting fees and other things. I've never really understood even before DP why Canadian costs are so high. But that seems like a sizable loss in the DP Cast. Is there something special in that? Or is that the run rate?

There are some other costs in that Canadian. It isn't just straight DP. But we are obviously in the process of getting them integrated, getting them using our processes, our standards. So we do expect that to start to rebound as we integrate them into our business model here as well as looking at cost savings and different initiatives out there to help with that as well. And the other piece of it, as Dave has mentioned, is the revenue piece and working to grow the business there and get those revenues up to cover some of that under absorption and that type of stuff there. But there are other costs within that Canadian and...

What is that, mainly accounting cost, legal cost, things like that?

Yes. All that is in there. Yes, yes.

And one other thing that struck me is, and I think I'm obviously -- I'm looking at your major customers, your breakdown of major customers. And you had one customer in the first quarter that was about $390,000, $400,000. And in the whole year, I think, last year, you had 2 customers, if I read this correctly, that it had $2.4 million. Tell me, are there large customers that have orders that you expect that haven't come in yet? Or it seems like quite a falloff. If you annualize this, the first quarter, one customer at $400,000, you only get half of what you did for 2 customers last year. Could you walk me through that and make sure I'm understanding that correctly and tell me what the reasons are?

So there was major falloff in -- with the pandemic in aerospace, with almost all the major customers. And I would characterize it as things have come back, and that's including automotive, too. There was disruptions in automotive. I think the most stable pieces has been more defense electronics was somewhat insulated from any more in particular. But certainly, the aerospace, commercial aerospace, all the major customers got hurt. And what is happening is they're kind of coming back in different phases. They are showing different signs. So I wouldn't draw too much conclusion from that just because at any given slice of time, you may see -- we may be off a decimal point and maybe a small amount, it just doesn't enter into the report. So I would say this, is that all the major customers are coming back. Some are coming back with a series of, let's say, a lot of small orders, but starting to shift it out and to give some visibility into our third and fourth quarter, not so that won't show up in the revenue, right, you're looking at revenue, not necessarily bookings or backlog. And some are coming back a little aggressive with immediate demands, immediate demands for parts. So in the example of the $200,000 that we weren't able to shift, that was a hope, that was an immediate demand, and there just wasn't wire available. So it was missed, but the demand was there. So at this point, all the major customers are back at least talking about demand, if not booking orders for the third and fourth quarter and showing signs of coming back. So interpret that, I think that's the best way to interpret that. Don't...

Yes. Dave, I was looking at them almost as a positive. Last year had a lot of disruptions, but when you have 42% of your business coming from 2 customers, that presents a risk. I assume, that going forward, we won't have any kind of situation where we'll have that much of a concentration of customers, particularly with DP Cast.

Yes. Right. Well, most -- well, the DP Cast adds to that, about the balance of their portfolio, should -- certainly adds to that. And it's always a dynamic of, on one hand, having some concentration. There can be some leverage there, but also, it does pose a risk. So -- but I think on the, I guess, the point I -- there's no customer, large customer that appears to be reducing over time. So that -- you look for that, too, right? You look for...

Yes.

And we're not seeing that at all.

Yes. Good. Good. One final thing, and that's Amy is new to the company. Amy, what attracted you to Omni-Lite besides Dave's great personality? Tell us -- could you give us a little thumbnail on what you have been doing before and what attracted you?

Yes. So what attracted me, well, of course, is Dave's personality. We [ always want ] someone that is good to work with. I think that is huge. But I also think that it's a great company to join. They're looking to grow. They're looking to start acquiring additional businesses as they grow, but also grow organically, which I also think is important. And I think my background will help get that to the next level, which is why I thought it was a good pairing. I come from a private-owned company, that in my 4 years there, they acquired 9 companies. So I have been in heavy acquisition mode for the past 4 years and really have been involved with integrating them into our financial models, helping find the right fits for companies. So I really think that background was huge as well as strong controllership, keeping the books, making sure everything, from an audit perspective, is ticked and tied and really keeping all that background there. So I think my background and the company here was a great fit together.

Terrific. And welcome to the company.

Thank you.

And Dave, you've done pretty much everything you said you were going to do over the last couple of years. So I still would like to see you buy some shares back. But you obviously consider that as you go along. But anyhow, thank you very much.

Yes, just a comment on that. We would like to believe that we're going to put that capital to slightly better use, right? So that goes into that algorithm of that, but because we're pretty bullish that we can put that capital to work in a very meaningful way. So that's the rationale there.

Yes. Not to expand too much on this. But you had a buyer come in and he paid CAD 1.25, double or so what the price is now. You're selling under book, particularly if you reverse the CalNano write-off. I look at a lot of smaller companies, private and public, and I'm kind of -- I'm hard-pressed to come -- to be -- I'm hard-pressed to see how you could acquire another operation that is more attractively positioned and priced than your own. That's just my opinion, but you probably see more than I do.

Well, no, we get your point. It's probably not worthwhile debate, but it's certainly a perspective that we appreciate, [ Frank ].

And the next question comes from [ Manny Kramer ].

Just based on the world situation with Russia and China [ and the war ], do you see, foresee any more business coming from in the military for increasing the military demands and we can gain from that on further revenues in that area?

Well, I spoke about, [ Manny ], of the -- particularly in defense electronics, leading up into certainly what's happening in the Ukraine. But prior to that, is there's a lot of world unrest, a lot of worries about domestic security, missile strikes, drones. So there's a lot of activity. Some of it hasn't matured into an order, but a tremendous amount of bidding. And some of our backlog that we currently have is directly from defense systems, particularly for short- and long-range missile defense. So it is -- unfortunately, that's the world we live in, is that domestic and protection is -- governments are spending a lot. So it is -- there is a lot of defense electronics business. And we see that continuing to be an area that is going to fuel some growth.

[Operator Instructions] And there appear to be no further questions at this time. I would now like to turn it back to Amy for any closing remarks.

All right. Well, we would like to thank you all for joining us today, and we'll look forward to the next quarter here.

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.