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

Welcome, everybody, ladies and gentlemen, welcome to the Annual and Special Meeting of the Shareholders of Omni-Lite Industries, Inc. My name is David Robbins, CEO of Omni-Lite Industries Canada, Inc. and I would like to welcome all of you here today on behalf of the corporation, and thank you for attending. I would like to introduce Roger Dent, who will act as the Chair of the meeting.

Hello, everyone. Just want to make sure that everyone can hear. If someone could just indicate that they can hear us, that would be great.

I hear you.

Yes. I hear you.

All right. Meeting will now come to order. I will ask Andrew Armstrong of Peterson McVicar LLP to act as secretary of the meeting. I requested that Elissa Rojo, representative from Computershare Investor Services, the registrar and transfer agent of the corporation shares, serve as scrutineer for the meeting. If there is anyone here who has not registered with the scrutineer, please do so now. I have the scrutineer's preliminary written report on attendance, which indicates a quorum of not less than 2 persons who are entitled to vote as required by Section 10, 11 of the corporation's bylaws. As for any objections, I will dispense with the reading of the report. Before commencing with the business of the meeting, I would like to comment on the voting procedures. Shareholders will be asked to pass certain resolutions. A simple majority of affirmative votes cast in person or by proxy will be required to pass the ordinary resolutions to be heard today at the meeting. A super majority representing 2/3 of affirmative votes cast in person or by proxy will be required to pass a special meeting resolution -- special resolutions to be heard today at the meeting. Voting will be conducted either by poll for certain resolutions or requested or otherwise required or by show of hands and each shareholder entitled to vote will have one vote. Shareholders wishing to raise questions or comments pertaining to the business of the meeting should speak up and when recognized by the Chair, address their comments to the Chair. There will be additional time for questions and comments following the conclusion of the formal meeting. The notice calling this meeting was sent on September 25, 2024, to registered shareholders and non-objecting beneficial owners of record as of September 11, 2024. I have proof of mailing, and it is available for inspection on request. Unless there are any objections, I'll dispense with reading of the notice of meeting. I now declare the meeting to be regularly called and properly constituted for the transaction. If there are a couple of people who aren't muted, perhaps if they could mute just unless they have something to say, please. As set out on Page 14 of the corporation's information circular, the first item of business is for the shareholders to receive the audited financial statements for the financial year ended December 31, 2023, together with the auditor's report thereon, copies of which were mailed to shareholders who so requested. I now place these before the meeting. Unless anyone objects, I will now ask that someone now move and someone second the resolution that the auditor's report be taken.

I so move.

I second the motion. I will ask all in favor to signify by raising hands. Opposed, if any? [Voting]

The motion has been carried. As set out on Page 14 of the circular, the next item of business is to fix the number of directors at 5. I will now ask that someone move the number of directors be fixed at 5.

I so move.

I will ask all those in favor to signify by raising their hand. Opposed, if any? [Voting]

The motion has been carried. As set out on Pages 14 and 15 of the circular, the next item of business is the election of directors. The names of the 5 nominees to the Board of Directors for the ensuing year are set out in the corporation's information circular. I declare that David Robbins, Charles Samkoff, Roger Dent, Patrick Hutchins and Jan Holland to be nominated for election to the Board. Only the election of those persons named in the corporation's information circular may be voted for by proxy. Registered shareholders present at the meeting may cast their votes for the election of any other person nominated from the floor. Other than management's nominees named in the information circular for this meeting, no one has been nominated in accordance with the procedures set out in the company's bylaw 2. Accordingly, no further nominations will be accepted. I hereby declare the nominations closed. Would someone move a resolution for the election of the person nominated as director?

I so move.

I second the motion. The motion is now open for discussion. If there's no discussion, I will now conduct the vote. So by show of hands, all those in favor of the motion? [Voting]

The motion has been carried. There being only 5 nomination -- nominees for the 5 positions to be filled, there being sufficient proxies to elect these nominees, I now declare David Robbins, Charles Samkoff, Roger Dent, Patrick Hutchins and Jan Holland to be elected as directors of the corporation to hold office until the close of the next Annual Meeting of Shareholders of the corporation or until their successors are duly elected or appointed in accordance with the provisions of the corporation's bylaws. As set out on Page 16 of the circular, the next item of business is the appointment and remuneration of auditors. May I have a motion that MNP LLP be hereby appointed the corporation's auditors until the next Annual General Meeting of Shareholders following this meeting with remuneration to be approved by the Board of Directors.

I so move.

I second the motion. The motion is now open for discussion. If there's no discussion, I'll ask those in favor to signify by raising your hand. Opposed, if any? [Voting]

The motion has been carried. As set out on Page 16 of the circular, the next item of business is to ratify the continuation of the corporation's stock option plan. The option plan is a 10% rolling stock option plan, whereby the number of common shares available for issuance is equal to 10% of the issued and outstanding common shares. May I now have a motion to the approval of the corporation's option plan?

I so move.

I second the motion. The motion is open for discussion. If there's no discussion, I will ask for a vote on the matter. Please raise your hand if you're in favor of the motion. Opposed, if any? [Voting]

The motion has been carried. We've now concluded the formal business of the meeting. Is there any other matter a shareholder wishes to raise before we move into the informal presentation? There's no further business to be brought before the meeting. I will now call for a motion that the meeting be terminated, following which we'll be able to address shareholders' questions.

I so move.

I second the motion. The motion is open for discussion. If there's no discussion, I will ask all those in favor to signify by raising your hand. Opposed, if any? [Voting]

I declare the motion carried and the meeting terminated. Thank you for attending.

So I'd like to take the opportunity to say a few words in light of a few weeks from now or early mid-November to be releasing our Q3. I think take a moment in time, this snapshot kind of captures, I think, the Omni-Lite story in many ways, and tells who we are and where we're going. Can we have it up on the screen? Yes, it's somewhat of an informal presentation. So this is all from the deck that I've recently put on our website and distributed. So it's nothing new.

Okay.

So the -- just a bit of the numbers is our trailing 12-month revenue is USD 15.2 million. Our adjusted EBITDA is nearly $1.8 million, and our free cash flow is $1.1 million. We've got 15.9 million diluted shares, market cap in U.S. of nearly $18 million, cash of 2.1 -- net cash of $2.1 million, our Cal Nano investment worth somewhere between $8 million and $9 million. And a share price -- our share price, I think today, it's around CAD 1.50. So who we are, we're a consolidator of aerospace and defense components in a growing aerospace and defense market and a little more specifically, very specialized components that are used in advanced aircraft and other long-lived assets that have long useful life. And that's really the niche. And being a consolidator, what that really means is that we're really focused on profitable growth and redistributing that growth and those earnings into growing and consolidating more technologies to build a platform that has values really for our customers and value as a company, as a producer of component -- very precision aerospace type components. So -- and today's performance, I think, does highlight maybe the history of the company and that the company was founded producing very complex parts, very hard to manufacturing parts but did it at a good profit and decided to reinvest that profit into namely capital equipment for the early years of its life. But it goes to the business model that if you're building really precision, high-performance components, what comes with that is a very exciting profit margin capability. So that's our model and our theme is to focus on those kind of components that have that kind of margin and expand on that. And so a little bit of that was demonstrated with the acquisition of Monzite in 2018. That's how I became involved with the company through that acquisition. And it brought to the table electronics, highly integrated electronics, which again, went to the thesis of a high-performance component on high-value assets and at the same kind of a profit margin. We expanded that in DP Cast, with the acquisition of DP Cast in 2022, and has continued to, again, with that breadth of competencies has delivered some revenue growth and some earnings profile that we're steadily attaining our target of 25% organic growth, a 25% kind of EBITDA contribution. And our numbers, at least on trailing 12 months is at 26% organic growth and a gross margin of 19.7% and an EBITDA margin of 11.8%. So we're on track to at least continue to improve on those numbers. But at those numbers, they're generating cash. And we're looking to continue to generate cash and have our eyes on the next acquisition that would -- we look to augment what we have, build on that portfolio that we have, in order to continue on that track of creating some value and attaining those kind of growth -- those growth aspirations. And our recent performance, I think, at least demonstrates, to a large extent, a track record of being able to deliver on that promise. So that's a little bit of the story, the Omni-Lite story. So with that, I'd like to -- if there's any comments or questions or interests.

[indiscernible] Cal Nano stake.

So a little bit on the Cal Nano stake. Well, we did sell a few shares back a month ago. And that's part of our long-term strategy of it, at some point, taking and converting that. We're not in any -- I mean, it's been a good investment for us. It continues to be a good investment for us, and we're taking the opportunity when we can to convert some of that. But it's -- it remains a good investment for us. So we're being prudent in how we manage that.

Are there any operational synergies between Omni-Lite and Cal Nano? Or is it purely a financial?

There are some modest -- very modest synergies. Omni-Lite made the investment in Cal Nano many years ago. And the reason it's not under the Omni-Lite umbrella and it's its own separate entity, it has the same theme of producing very high performance, very specialized components, but it uses a different technology. It's -- Cal Nano is more of a disruptive -- potentially disruptive technology, very interesting and exciting. But that's different from Omni-Lite, which takes very well-established techniques and manufacturing techniques, perfects them and then scales them to produce a component. So in a sense, they're a little bit different. And with that thesis, that's why Omni-Lite and Cal Nano are separate entities. So they're -- in the sense that they're producing components, high-performance components, there is a little bit of synergy. It's mostly an investment that was made because there was a thought that there was a future and a need for that type of component, and it's proven out to be that case.

And sorry if I missed this, but where are you with the capacity and utilization? You had mentioned on your last call that selling some of the Cal Nano might be there to fund growth. So just wondering whether the existing footprint might be able to grow with that.

We estimate in our 3 locations that they're about the same and above. They're less than 50% of capacity. So -- and for the most part, well capitalized in terms of CapEx. So our CapEx requirements, we think, are fairly modest, at least to double our revenue.

And [indiscernible] your capital gains [indiscernible] have offset that?

Well, we're looking at every -- there are some. I haven't really done an in-depth analysis of all the tax implications, but we'll utilize any that we have.

[indiscernible] is getting to a big number. The shares are held by the Canadian parent. So the Canadian parent in the normal course generates tax losses because it has overheads and historically didn't have revenue. So there's some shield there. And there may be some shields potentially [indiscernible] U.S. operations [indiscernible].

You mentioned looking at potential acquisitions, but with $2 million in cash and a market cap of $20 million, I'm assuming you're thinking small -- relatively small incremental rather than transformational acquisitions.

Yes, 100%. I wouldn't leave out, but I think the target is small, one that's digestible and one that fits the profile that I laid out, which is that is producing parts already in -- is aerospace either qualified or close to it that has a profile similar to what we're doing. I think the opportunity that we have is we've got a great base. We've covered the majority of the -- between covering electronics, forming material -- forming metals and casting metals is a great base to build on kind of moving up the food chain. If we didn't have such a wide base, it may be a little bit niche. So we have a great platform to kind of expand vertically, but it would be, I would say, strategically and one that's digestible. One of the things that I think allowed us to leverage DP Cast, it's been a process, but a continuing one that continues to grow in the right direction is its size and the ability to put in business systems that can help leverage whether it's sales channels, whether it's operational performance, running the business. And so that's more attainable on a small size. So yes, our targets are well -- it's strategic in nature and not based on breadth.

Challenges that Boeing is having and Airbus is having ramping their supply chain. Like, you've still been able to grow revenue nicely this year. Do you see those having presenting problems going forward or you're kind of insulated from that?

Well, so we -- a lot of our components, we're not too captive to any one particular customer, although Boeing is our customers or a customer of our customer. And so to have -- say that it would have no effect, wouldn't probably be saying has no effect, but it hasn't had a big effect. Again, a lot of our components are not one platform by design. When you're putting -- I think the effort it takes to develop highly engineered, whether it's highly engineered fasteners or a component, a form component, a cast component that goes on a jet engine or a sensor for a missile is typically those kinds of components are -- if you put -- spent the money to develop components like that, you're going to put it on multiple platforms because it has a legacy. So we have the luxury a little bit that we're not one platform-centric or not one customer-centric, part of that is by design. And the need for components, there's still a very much an ongoing need. So I think the Boeing -- and we'll see how this whole Boeing thing works out. But to a large extent, it hasn't had much of an effect on us.

Any questions from online?

When you break down geographically, are you able to do much in breaking down by segment, sort of where the growth has come from or where do you see sort of that?

So I would say the breakout that we've been -- we've talked about still remains, which is on the forming side, it tends to be faster and structural type of components and will continue just by its nature. I think a little bit of exciting kind of opportunity there, as I've mentioned in one of my recent press releases is that a bit of the -- it's not directly related to cross-selling, but is the opportunity to put Inconel fasteners, which are more used on a jet engine versus structural on a fuselage. And as you know, we're putting castings on jet engines also. So that -- there's a bit of geography, but also where it goes on a plane. So that's been a good opportunity. And I think driven -- there's just fewer manufacturers working with these specialized metals and the jet engine business has been plagued with supplier problems due to that same very nature of -- they're rare. There are not that many suppliers. And on the electronics side, there's a new technology called gallium nitride, which I've made mention of, which is a newer semiconductor. It's not completely new, but it's starting to find its way into a lot of systems where range of performance and power efficiency are important. So things like drones or things like autonomous vehicles. So GaN technology is an exciting area that most notably has an effect with -- for electronics, but other lightweight materials that we form and cast can have an application of the same type of lightweight, very efficient sensor kind of electronics. And then on -- again, on the casting side with just the problems with supply chain in general with very complex shaped, whether tubing or fluid handling on jet engines, again, specialized material, very few manufacturers that are qualified and can't. So delivery -- long, long delivery for our competitors there have given a real opportunity at, let's say, for our casting to get -- gain market share. Those 3 areas really are driving a lot of growth.

You've got pretty ambitious goals for gross margin 50%, EBITDA margin 25%. You seem to be making good progress. But essentially, if you're a third-tier supplier, so in an industry where the big guys dominate, is the business capable of being highly profitable? I'm thinking in the automotive industry where the big customer says, this is how much we'll pay this year. Next year, we'll pay 10% less. The year after that, we'll pay 10% less. They determine the price to supplier. And I'm thinking of Avcorp in Vancouver, I think of [indiscernible] aerospace. They are always getting these orders, but they never seem to work out to be as profitable as they hoped for.

So that's a very good question. I think it comes to -- when I mentioned sort of niche applications and not commoditized even within the aerospace is if you really build the niche, the ones that are very difficult to manufacture, the ones that are Inconel fastener, for example, or a highly engineered fastener, 5-part fastener that includes being able to produce complex shapes in a certain volume to the type of quality, you can demand that profit margin. But it means staying true to that thesis. So staying away from -- so the balance would be maybe sacrificing a potential growth opportunity at the sacrifice of margin. Our choice is we're going to take the margin first, right, and not get into that commoditized. So almost by definition, and it will -- but there -- our calculus is that there's enough opportunities for growth within those niches. So again, it comes down to staying focused on that and then having -- producing reliably to our customers. So our best chance at the next win is to demonstrate on-time delivery quality from your previous one. And again, the cycle time when we're talking about these types of components, the downside can be it takes a year, 18 months to get -- to produce the initial parts to get qualified. But again, then it has a useful life. These systems have very long lives measured in decades. So you get the annuity of that part. So some of it is just discipline in staying to that thesis, and we are committed to that because that drives our whole -- generate cash, drives our growth. So it kind of goes hand-in-hand with our very -- our thinking.

How does Omni-Lite stand fair in a more protectionist United States and globe, just thinking if the election goes a certain way and tariffs type of deal, would that stand to affect Omni-Lite in a major way?

So we don't source anything -- any raw materials from internationally. So it's all domestic. Most of that is driven for the fact that high -- a disproportionate amount of our components are either aerospace or defense and control. So we were limited by supply chain in that sense. And all of our manufacturing is onshore. We're doing ourselves, and that's our -- is what we do. So we have -- in fact, if anything, the bit of the onshoring really stands to benefit or those kind of geopolitical kind of things stand to help us, not hurt us. Any further questions? Not to call out Frank, but I've never heard Frank be as quiet as he is.

Well, maybe I can ask one?

Sure.

And maybe that has been addressed, but I think in terms of our largest financial asset on the balance sheet is our stake in Cal Nano. So I'd like to spend a little bit of time just to understand how the stake has been managed. So who on the Board would be responsible for making decisions on when we convert some of that position into cash?

So the Board decides. But in terms of...

When you say the Board, everyone on the Board makes the decision.

Well, the Board as a group makes a decision.

Got it. Got it. So Roger will participate in the decision as well on whether we sell or keep the stake in Cal Nano?

Well, if there's a reason to -- any time if there's a self-interest, then it's not -- then you're not included in the vote.

But it is a discussion. Like -- it's not like there's a resolution at a vote.

Yes. Yes. Yes.

It's really just a discussion.

But I assume someone responsible for having a model doing some type of valuation or analysis on where we think the business is worth and when it's the right time to sell it. And I assume you participate in that discussion.

Yes. I mean I'm not sure that we have a model, but the Board has discussions about it, and Dave is in charge of the trading decision.

Got it. Well, I guess, how is it valued then if you don't have -- like what's the valuation process for deciding when it's the right time to sell?

Well, I mean, the Board has spent quite a bit of time analyzing that. So without getting into detail, we've had several thoughts. It's been an investment that goes back several years. And so it's an ongoing discussion. The Board takes seriously. And I think evidenced by us making a small sale means that we're not -- we're paying attention to it.

Well, that's what I'm trying to understand, right? So...

The other thing that's important is the urgency of disposal. if we had an acquisition that we were wishing to make...

Sure.

Then that creates a sense of urgency and then you can make a comparison one versus the other, which alternative you prefer.