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, Amy Vetrano-Palmer. Ma'am, the floor is yours.

Thank you. 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 in our issued press release. The purpose of today's call is to provide an update on Omni-Lite's operations as we filed our third quarter 2022 results. After our remarks, we will open up the line for Q&A. If you have not received a copy of our press release we issued Tuesday, you may find it on our website, www.omni-lite.com. Before we get started, 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 environment 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 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 -- 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 reported financial results in accordance to the International Financial Reporting Standards, or 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 non-IFRS measures 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 like to now turn it over to Dave.

Thanks, Amy. Good afternoon, everyone, and thanks for joining us. I'd like to make a few comments about our third quarter 2022 performance followed by comments on our current business. Third quarter 2022 revenue of $3.2 million marked an increase from third quarter 2021 and up sequentially from Q2 2021. The bookings for the third quarter remained solid, keeping backlog at a strong $3.7 million with approximately 80% expected to ship in Q4 2022. Growth in the quarter was driven by a combination of increase in commercial air transport products and newly designed products, notably titanium structural fastener components. Contribution improved on increased sales but was offset by product mix and integration costs in the castings business. Market demand in commercial aerospace from robust domestic travel and narrow-body production is pushing structural fasteners and engine components demand at a steady growth rate into 2023 and beyond. New component bookings in the quarter continues to validate our competitive mode of agility and relatively short lead times with the ability to engineer and manufacture high-performance components. The persistence of these lengthening of lead times and uncertainty of delivery from our domestic and international competitors signal to us the robust need for our manufacturing into 2023. So to summarize, really, our Q3 performance trajectory underpins the strength in our marketplace and the opportunity we intend to further improve on. With that, I'd like to turn the call over to Amy. Amy?

Thanks, Dave. Dave has addressed revenue, so I will make a few comments regarding cash and EBITDA. Adjusted cash flow, defined as cash flow from operations minus capital expenditures, was a use of approximately $615,000 as compared to a use of $236,000 in the third quarter of 2021. We continue to maintain a debt-free balance sheet. And although we did see an increase in the use of cash, this was mainly attributed to the timing of some of our accounts receivables, and we do expect the majority of these balances will be paid in the fourth quarter of 2022. Cash from operations was a use of $551,000 compared to $236,000 in the third quarter of 2021, and we did see a positive EBITDA of approximately $4,000 in the third quarter 2022, which was a vast improvement of our loss of $487,000 in Q2 of 2022. We do expect to continue to see improvements in EBITDA as we continue to maintain strong revenue. We also have continued to push to reduce WIP and finished goods inventory and saw a reduction of approximately 10,000 in the quarter. This completes our prepared remarks. We will now like to open up the call for questions.

[Operator Instructions] Our first question comes from [ Frank Wisneski ].

A couple of questions. You highlighted in your press release 12 new programs, and you talked about them in your prepared remarks also. I assume that was an unusually -- or a typically large amount of new programs for a quarter. Did they represent programs or new platforms or new products on existing platforms?

That's a good question, so a little color there. It's a combination. So from a market point of view, it was in both commercial air transport and some commercial platforms. And it was also a combination of some -- at least four of them were new customers and new platforms. So there was a combination of existing customers, existing platforms and in a couple of cases, some new customers that had been -- they weren't out of the blue. These have been in various stages of sort of communication, but they did book in the quarter. So it was -- that's why we mentioned it in the release and in remarks is that, that is an uptick from maybe a historical or an average number of new starts. And it appears to be also something that will continue. So I'm alluding to that is that we're seeing a lot of activity, and to actually secure 12 new ones. I mean that was -- that's a tick-up for sure.

Yes, that's terrific. Now how does that flow through the backlog? Whether these initial -- I mean they're not multiyear orders. I think you implied that there'd be continuing orders, so the initial order goes into backlog, but you'd expect different incremental orders going forward, particularly on the new platforms and new customers.

Right. I mean at this point, not that we wouldn't entertain it, but we really price and engaged with the -- with only recurring type platform products. We're not in the job shop business. So that's not fun. But -- and in the quarter, so I would phase is you book -- in most cases, there is some engineering involved to at least get it to the point where you can produce it. So a booking in the quarter, some can translate to some revenue, but it portends future growth because to be -- to design it and ship it in the quarter. The notable exception for that was -- why I mentioned it was the titanium fastener. There was some contribution from -- to revenue in there. So I think you've got the mix there, though. The thought process is recurring, and it starts with relatively low revenue, but will increase.

Good. Good. The SG&A expense during the 3 months was about 14.6% versus the 9 months of 19.1%, which is really good. Is that 14.6% or 14%, 15% SG&A percentage, something we should look forward to going ahead?

So there's always going to be some puts and takes. We are trying to obviously control the SG&A expenses, but we did have a few items fall off in this quarter within SG&A. So we should see a continued improvement on the SG&A going forward, and we should start to see that level out as we go into 2023.

Terrific. Terrific. CalNano, you didn't call that out, but obviously, the loan has -- it was renegotiated. And I did notice in your footnotes that you did put the new interest rate in. And what their press release said several months ago was that they would start interest payments in June and then expect it to have interest in principle payments, as I remember it sometime in 2023. Is that -- did that -- is that -- have I read that correctly on the release?

Yes, that is correct. We are expected to start seeing some principal payments probably after the first quarter of 2023. They did pay off a part of their term loan a little early, so we're hoping to start seeing that come in here. And we have -- I just actually was recently looking into that. We have received some cash for them recently in regards to the interest payment, so that's -- it's a move in the right direction.

Well, yes, and what I wouldn't change it because you fully reserve those loans, but that would suggest to me that that's a very -- having those loans fully reserved is an extremely conservative approach. Do you want to see a couple of principal payments before you readdress that?

So we'll be readdressing it as we go through our Q4 audit here in 2022 audit if we should adjust that reserve. But generally, we'd like to see some of the -- interest is one thing, but we would generally like to see some principal payments, one or two, at least to say, okay, yes, we're starting to see these payments come through and let's reevaluate that reserve. But it will be part of our audit this year just to see we have -- we're getting [indiscernible], we're going to start receiving principal early next year, is this something we should, at this point, readjust?

Yes. No, I'm all for conservative accounting, so -- but I just -- it's nice to see that, that might be a source of some cash for you over the future. Look, I have a couple of other questions, but I'll get back in the queue and hopefully ask them a little rate.

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

Thank you for a good quarter, Dave, and keep going with it. How is inflation affecting your cost of goods and your pricing? And number two, how the labor you're getting increased sales? How does it affect you? Do Have a problem hiring people? Or do you have enough people?

So inflation has affected the business, I think going back a few quarters, along with just supply chain issues. But it certainly has -- we have raised our price, not necessarily specifically with -- in connection with the broad inflation rate, but in response to what we think are our value that we're providing our customers, but more notably, too, because raw materials prices have increased dramatically. I think I mentioned that in Q1, in Q2. And the labor, we have had to -- on specific cases, not across the board, but we have to be very mindful of our labor force. We've been relatively, I would say, fortunate to have a pretty stable workforce. We worked hard to cultivate that. But -- and as we are starting to see revenue pick up and the signs that this is going to continue and grow further, we are looking to add to our labor pool. So I would say that they have had some effects, but largely, our price increases, and we're continuing to look at that is most notably what we're doing to combat just the inflationary pressures.

Also is the Canadian dollar going up significantly. Does that have an effect on your bottom line?

It really hasn't had too much of an effect. I actually did put an analysis here to see the changes just quarter-over-quarter, if the rate had remained static versus what it was at the end of Q3, the difference. And it's really only a difference of about 3,000 to the bottom line. Our Canadian company does have about 48% of the business depending on the quarter that's U.S. denominated. So sales orders go out in U.S. Cash is received in U.S. So that does help the burden there that they have a lot of U.S.-to-U.S. transactions. So at the end of the day, really it didn't affect us too much. We continue to look at ways to ensure that we're hedging if we need to hedge and just don't stay on top of that rate as we move forward into 2023.

Our next question comes from [ Frank Wisner ].

It's still [ Frank Wisneski ] but that's okay. I have a foreign currency question. I saw you had a pretty sizable, what, $400,000 comprehensive loss. And then looking at the cash flow statement, there was also a -- I forget what the number was, like 80,000 or so that went into the cash flow statement. Are those -- could you enlighten me in the accounting there because you said there was only a $4,000 charge that went through the operating statement if I heard you correctly.

Yes. It's the operating statement. The majority of that exchange rate that you're seeing actually has to do with historical values from the balance sheet within DP Cast. So we've got 6 assets on the books that the exchange rate has changed pretty -- a significant amount from quarter-to-quarter. So we obviously see that effect on the balance sheet as we flow those transactions through and then some of that through in the translation on the cash flow.

Okay. So it's basically a balance sheet item rather than an income?

Yes, exactly. Yes.

Yes. Now looking at geographical breakdown, and realizing there are other expenses up in Canada besides DP, but hearing that your geographic breakdown is a reasonably good proxy. It looked to me, looking at what revenues have come from DP over each quarter, that you probably about $200,000 or so away from a breakeven in DP. In other words, $1.5 million quarterly revenue would get you pretty close to breakeven at DP. Is that analysis in line at all?

I do think we have to continue to see improvements of revenue there, but we're also part of taking ownership is to ensure that we put the right methods in place to ensure as we go forward that the right pricing is assigned to orders, and we're getting the right margin return. So part of what we've been working on is at that 1 2 that they had this quarter, can we get a nice return on that to bottom line from there as we tighten up pricing, tighten up cost structure there? So I would like to see that more in the 1 3 to 1 4 range to start seeing a number flip, but a part of that is also...

All right. And you did 1 2 in the third quarter, right, roughly?

Correct.

Pardon me.

Correct.

Yes. Okay. Okay. So you're close there. That's great. One final thing, and that is the -- I'm going through the lease interest accounting, the IFRS, what, 16, the lease depreciation. It looks like the cost for the lease depreciation is about $280,000. And then you have the interest expense of $145,000, which would be kind of the total quarterly number for the sale leaseback you did in the California facilities. Is that roughly correct calculation? And going forward, does that increase or is that pretty stable?

It does increase slightly, but it does remain pretty stable. It doesn't -- as these leases go forward, it does not change. We don't have any huge step-up in year 3 or anything crazy like that. It does go up a little bit year-over-year, but nothing too dramatic. And your numbers are pretty close.

All right. Well, that's great. Yes, I do expect things are picking up. I'm very glad, as I'm sure you are, too. I mean, I'm sure it's all attributable to Amy coming on board, but Dave, you're doing a good job, too. Thank you very much.

Appreciate that.

It looks like that was our final question.

All right. Great. Well, thank you, everyone, for joining us, and we look forward to talking to you next quarter.

Thank you.

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.