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

Good day, ladies and gentlemen, and welcome to your Omni-Lite year-end December 31, 2022, investor 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 all yours.

Thank you so much. Good morning, 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 are contained in our press release issued yesterday, April 20. The purpose of this call is to provide an update of Omni-Lite's financial performance and operations as we filed our total year 2022 results yesterday morning. Our remarks will be open for the line for question and answer after the call. If you have not received a copy of our press release, which was issued yesterday morning, you can find it on our website, www.omni-lite.com, or e-mail us at [email protected] or [email protected] to request a copy. Before we get going, 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, 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 and change in the health of the general economy, including the effects of COVID-19, U.S., global commercial aerospace markets, 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 Standards, or IFRS, during our call, we may discuss or reference non-IFRS financial measures, specifically adjusted EBITDA, pro forma adjusted EBITDA, free cash flow and adjusted cash flow. A reconciliation of these non-IFRS metrics is available and included, if applicable, in our SEDAR filings and press release. Lastly, unless noted otherwise, any reference or discussion in our financial metrics are in U.S. dollars. I would now like to turn the call over to Dave. Dave?

Thanks, Amy. Good morning, everyone, and thanks for joining us. I'd like to make a few comments about our fourth quarter and full year 2022 performance and provide some preliminary remarks on our first quarter 2023 results, following comments on current business. We ended the busy 2022 year of $11.1 million in revenue, up 93% from our 2021 revenue mark and ended the year with a strong fourth quarter sales. Our fourth quarter revenue was $3.1 million, up 83% year-over-year and consistent with Q3 2022, reflects increasing commercial aerospace and defense electronics. Our ending backlog of $3.7 million represents another strong quarter with increases in casting products for both new industrial products and core aerospace engine components. The $2.9 million in year-end bookings was consistent with Q3 2022 and included new titanium aerospace forgings and new industrial casting products. From a revenue perspective and bookings perspective, Q4 results were directly in line with our organic growth targets, and that's based on the composition of mature product increases and new product starts which is a good barometer for us. From a profitability point of view, our Q4 results were not representative of our profitability targets but a reflection of our investment in business improvement initiatives and castings and new product engineering and castings and titanium forges. The business systems deployed in castings operations have driven positive product rationalization and supporting the high demand for precision castings in current and anticipated future environment. If you look at the first quarter of 2023, revenue was $2.7 million, which represents a 13% increase year-over-year and another $3.2 million in bookings, leading to Q1 2023 backlog over $4.1 million. Underlying this revenue and bookings activity has been nearly a 50% increase in revenue quoting on a year-over-year basis, which is an indicator of pointing towards continued growth. Drivers for this business activity is a combination of growing demand for our precision aerospace metal components and highly integrated defense electronics and our specialized industrial forgings and castings across the board. So with that, I'd like to turn the call back over to Amy. Amy?

Thanks, Dave. Dave has addressed revenue and adjusted EBITDA, so I'll make a few comments regarding cash. Adjusted free cash flow, which is defined as cash flow from operations minus capital expenditures, included approximately $29,000 of a onetime DP Cast-related transaction expense as well as a onetime capital gains tax payment of approximately $560,000 which was associated to the sale of Cerritos facility, which took place in 2021. When adjusted for those amounts, the adjusted free cash flow for the end of the year was a use of approximately $639,000 as compared to a use of cash of $461,000 in 2021. We finished the year strong with a source of cash in the fourth quarter of approximately $125,000 in both adjusted and free cash flow. Also noteworthy is we did reduce inventory by approximately $300,000 during the year, bringing our 2-year total of almost $750,000. At the end of 2022, we did end with $1.3 million in cash and no debt on the books, and we will be closing Q1 2023 still debt-free with approximately $1.3 million of cash, indicating we are able to maintain a strong cash balance. This completes our prepared remarks. We would now like to open the call for questions.

[Operator Instructions] And we'll take our first question from [ Emmanuel Kramer ].

Thanks for a good quarter. Hopefully, we'll have -- do better in the first quarter. My question is as follows: The news items that we see every day about Ukraine and the Middle East is basically about whoever controls the sky wins, drones, missiles. How are we participating in this? And how does this affect us?

So [ Manny ], we do have, as I've mentioned in previous calls and disclosures that we do have a pretty good -- our defense electronics is supporting a lot of airborne missile defense, both in theater and wide theater environments. But -- and specifically, we have some defense electronics in the form of some highly integrated [ GaN ] drivers that serve the need for very, very small, precision missile systems. So very efficient for -- in the mobile environment that Ukraine does represent. There's been a broad need for that kind of a system even before Ukraine, but certainly, current conditions have furthered that. So our highly integrated defense electronics serve that market pretty well because of the need for size, weight and power. And we've actually -- some of our increased backlog currently in our defense electronics is for that exact kind of system.

There is -- I mentioned in the news about Lockheed Martin and the partner defense doing block orders. It means that they're not giving -- really they're spreading it out in several years. That have any effect on you?

We have seen some evidence that we will have -- we will participate in that. In my comments, I mentioned quoting activity being significantly up, and that phenomenon is part of that. So -- and that quoting activity that we've seen is both in castings, especially actually in castings and forgings and electronics. And some big numbers on that quoting activity, I do feel is part of that initiative by the Department of Defense to get sort of longer-term, bigger contracts and not the small yearly ones. So yes, we expect to benefit from that kind of a buying strategy.

[Operator Instructions] And we'll take our next question from Jason Senensky from Chapter Twelve.

Just on that point around the quoting activity, what the typical lag time would be from when you issue quotes to when we would actually see that in bookings or revenue?

That can vary. But typically, from the time you have an actual quote to an order is typically 3 to 6 months. It can be a little quicker. And generally, what happened on a new product, which we're mostly talking about, they start with a relatively small order. So for example, we may quote a start -- the product start and then also the quote what a production -- an initial production volume may be. So the delay could be 3 to 6 months from the time you quote it to the booking, although you will -- we could book inside the 3 months that initial engineering release, which dollars-wise may not represent too much. It may be a small percentage of the total that you quoted, but it means you've started. So -- and the time that you would book more of a production volume would be more in the 9 months' range.

Okay. Okay. That's helpful. And I think in the quarter, you talked about there were like $100,000 of start-up product costs. I mean, is that sort of a normal part of the business? So like with the increase in quoting activity, would you expect to have some sort of onetime costs over the next, whatever, to 6, 9, 12 months as you're rolling out these new products?

Well, so in -- particularly in Q4, that was a little bit on the high side worth noting. I think in the case of the forgings, it was a whole titanium product line series. So there was maybe a bit more than -- there's always some expected start-up costs, tooling and other associated sort of start-up costs. It was a bit more because in this particular case, it was a line of titanium forgings. So a little bit more than normal because -- and in castings, there is -- they're really -- we've seen it in the demand for a reliable domestic supplier of castings both from new products from our existing customers, but we have some new industrial partners that are looking for enough volume that -- yes, there was a bit more start-up costs related to the volume, right? So there's always some, but that represents a little bit more than normal costs.

Okay. A number of companies in your space are talking about issues with cost inflation or the reliability of the supply chain, I guess, driving margin pressure or revenue issues. I mean it doesn't seem like you're not talking about that too much, like is cost inflation/supply chain reliability an issue for you guys right now?

Well, I have talked about it in Q3 a bit or specifically with wire in forgings that the supply of wire has impacted our business. So what we've done to mitigate that is to place orders for long term -- for wire ahead of time. We're careful about that because use of capital, but it has helped us mitigate some of that supply chain issue. So we've been affected probably not enough to really mention it other than in a call like this that has -- we're managing it. We're working with it. On the electronics side, we did place orders for long lead electronics early last year when really supply chain was looking like it could have an effect. We placed some long-term quarters. And that did -- we have made that a little bit of a priority, and it shows up a little bit in our raw material, not in a major way, but that's how we're mitigating real supply chain issues. And I think in castings, because of the raw materials there, we stay within a fairly defined mix of materials that we buy. We've been able to not have a big impact there either and that's how we're managing.

Okay. And the quarter is just cost inflation, like it sounds like it's -- that's not really top of mind for you?

Well, so we are watching that very carefully. And price adjustment is probably the best way to -- that we can stay on top of it and price adjust. To a small degree, I think we've had some impact where you've got backlog items that -- in our casting operation where it was priced before, increases in cobalt, let's say, or stainless steel, and we've probably taken a little bit of a hit only because maybe the timing of that backlog early in the year. But as we've put business systems in, as we're putting that in castings, it's allowed us to be ahead of that curve a little bit and price it in as we see it instead of a lagging issue. So look, it hasn't been enough of it for us to comment. But having said that, it has had some effect, but no, we try to price that in real time to mitigate.

Great. And then maybe just last one for me. It looked like the $3 million line of credit you had with, I think, it was City National or RBC that it's -- I guess it's not available or you kind of let it lapsed. I guess can you talk about whether there are plans to put in some kind of replacement credit facility and whether you might need access to capital at some point over the next 12 months, even if it's just to fund working capital?

Yes. So it did lapse in that was a planned activity to let that lapse. We do have options available if we were to need a source of cash. We've got contacts available to start that process. We don't envision for any need for 2023 to go to any type of line for working capital or anything of those sorts. But we do have relationships with the various different people in case there would -- did a rise a need, whatever that need may be.

Okay. So like the sort of $1 million or so of cash you have on the balance sheet right now feels like enough liquidity to sort of operate the business normally.

Correct. Yes.

And we have recent engagement with banks, so we're in a good position. We haven't put it in place, but we're very -- we have that ability quickly.

[Operator Instructions] And we'll take another question from [ Emmanuel Kramer ].

Yes. Talking about liquidity, how is Cal Nano doing with -- I know we had an improvement for them paying off the debt. How are they doing on an ongoing basis on that? And also, do you have a date for your first quarter earnings report, please?

So Cal Nano is doing well. They did pay us advanced $120,000 in the first quarter of 2023, which was a pay ahead of a year's worth of debt payments, and they have stayed on top of interest payments as well every single month. So that has been a good initiative there and very positive to see that they are paying that back. We don't have a date as of yet for Q1. I would think probably towards the middle of May, but we don't have a specific date as of yet.

[Operator Instructions] And there appear to be no further questions at this time.

All right. Well, thank you, everyone, for joining us, and have a great afternoon.