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

Good day, ladies and gentlemen, and welcome to the Omni-Lite Industries Third Quarter 2024 Investor Call. Our host for today's call is Amy Vetrano-Palmer, Omni-Lite's Chief Financial Officer. [Operator Instructions] I would like now to turn the call over to your host, Ms. Vetrano-Palmer, you may begin.

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 press release issued yesterday. The purpose of this call is to provide an update on Omni-Lite's financial performance and operations as we filed our third quarter 2024 results on November 6. After our remarks, we will open up for any Q&A. If you have not received a copy of the press release, which was issued yesterday, you can find it on our website at www.omni-lite.com or e-mail at [email protected] to request a copy. Before we get started, I would like to remind you that today's discussion will or may include any 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 can cause our actual results or performance to differ materially. We are also mindful of the risks and impacts and changes to the health of the general economy, including the effects on the current U.S. financial market, 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 reported financial results in accordance to International Financial Reporting Standards, or IFRS, during our call, we may discuss or reference non-IFRS measures, specifically adjusted EBITDA and free cash flow. A reconciliation of these non-IFRS metrics, if applicable, is included in our SEDAR filings and press releases. Lastly, unless noted, any reference or discussion of our financial results and metrics are in U.S. dollar. I would like to now turn the call over to Dave. Dave?

Thanks, Amy. Good afternoon, everyone, and thanks for joining us. I'd like to make a few comments about our third quarter and year-to-date 2024 performance, followed by comments on our current business. Third quarter 2024 revenue was $3.8 million, which marks an increase of 14% from fiscal year 2023, and year-to-date revenue was $12.4 million and a 36% increase year-over-year. Revenue growth continues to be driven by a combination of increases in commercial air transport fastener products and missile defense electronics. Adjusted EBITDA for the second quarter 2024 was $187,000 with a year-to-date adjusted EBITDA of $1.6 million, which is also a record for Omni-Lite. EBITDA and revenue in the quarter was affected by an unexpected outage of an automated casting equipment, which, while transitory and resolved, resulted in a manual-oriented manufacturing workaround, extended operating hours and lost throughput that, in aggregate, negatively impacted adjusted EBITDA by an estimate of more than $150,000. This circumstance gives me a perfect opportunity to highlight that we're committed to and continue to invest in automation and the importance of redundant resilient systems to support our growth aspirations and ability to reliably produce high-quality precision components. Equally important thematically is our effort to utilize proven cost-effective automation tools to provide capacity expansion to the significant established investment base. Bookings for the third quarter were $3.9 million, which keeps backlog at $5 million as we go into the fourth quarter. Near-term demand for structural fasteners, jet engine castings and short-range air defense sensor electronic components are all high and is driving our bookings. We are hopeful to land some meaningful long-term bookings overlaying the near-term demand profile. These anticipated longer-term bookings are in the area of defense electronic components for critical system sensor modernization efforts to support current national naval and airborne defense initiatives. With that, I'd like to turn the call over to Amy. Amy?

Thanks, Dave. Dave addressed our revenue and our outlook, and I will make some comments regarding cash. Adjusted free cash flow, defined as cash from operations minus capital expenditures, was a source of approximately $636,000. We did see a significant increase in cash in the quarter of approximately $834,000, which resulted in a strong cash balance of $2.6 million, while we remain debt-free. We did sell a small portion of our Cal Nano stock. We sold approximately 60,000 shares, which generated about $44,000 in cash, and we also received payments from Cal Nano of approximately $338,000 against their outstanding loan. We do expect to continue to see a strong cash balance as we close out the remainder of 2024. This completes our prepared remarks. We would like to now open the call up for any questions.

[Operator Instructions] Your first question comes from [ Emmanuel Kramer ], a private investor.

Thanks, Dave, for a good quarter despite the problem with the automated system. Hopefully, that's past us. And my question is, does the change of administration in Washington has any effect on our operations? If any, how would it affect it, better or worse?

Yes. So I think my comment regarding expectation of some larger orders that are going to overlay in the next quarter or 2 is -- as a result, there has been anticipation of some large orders. And some of that might have been due to sluggishness in just any administration change and the budget changeover year-over-year, which happens in October in the United States. So I think that it -- the fact that the election is over is -- bodes well regardless of the administration. It's just that is done. So it -- that's part of the calculus in defense budget releases.

[Operator Instructions] Your next question comes from [ Frank Wisneski ], a private investor.

One question on the forging operations. It looks from your filings like you reduced the Canadian loss almost probably $900,000. Is that reduction primarily due to better operations at the forging facility? And if so, when do you expect that operation to reach breakeven?

I think -- okay, Frank, I think your -- when you mentioned forging, you meant casting. I'm thinking...

Yes, DP Cast. Yes, I'm sorry, DP Cast. Yes.

Yes, yes. So well, it had been contributing. This -- it had -- for 3 quarters or almost 4 quarters now, it had some small contribution. This quarter was a small setback, but very much contained and was able to -- we were able to overcome and put in place protective measures that we shouldn't have that kind of an event again. But it was on pace to -- and can contribute now. It's -- and a lot of that is largely due to maybe 2 initiatives: one on the side of just efficiently manufacturing and reducing waste; and on the other side is a result of product rationalization, exiting businesses that were low margin or negative margin businesses. So that's probably the biggest difference between, let's say, last year and this year, those 2 major initiatives.

Is DP more of a backlog business than the components?

I would -- maybe by a slight margin. It still is -- our bookings are usually within a year. So there's no demand bookings out 2 years or anything like that. So it's still in that same zone that the electronics and the fasteners, which happen to be right now really largely driven by bookings and backlog that ship within 6 months and not even a year.

All right. And when you talk about the hope for longer-term orders, those sound like they're at Monzite. Is that true?

Yes. Well, I said electronics, right, specifically for some defense electronics modernization efforts that we've been working on and are in the bid cycle. And they get -- they tend to get released in some large bookings and with some visibility longer term.

Would the margins on those kinds of orders be similar to normal margins?

Yes. So all of our businesses have a similar profile. The question a little bit can be in execution at any given time. But certainly, those electronics kind of backlog and bookings would be for our 40% to 50% gross margin targets. Yes.

Okay. And the size of those larger orders, could you range that for me?

Well, I think -- so last year, the revenue increase from this year over last year, double digit, 14%, 15%. So the type of contract that could give that kind of an increase again heading into next year, if you wanted to think about it on a scope.

Okay. And it came up a little at the annual meeting, but the Cal Nano sales, is that a program you have in? Or do you just sort of decide when you want to sell some?

There's no formal program. We've taken the opportunity to convert some to cash. We're trying to be very judicious with this investment, but it's not a formal program. And certainly, we're not trying to hurt the stock in any way.

[Operator Instructions] Your next question comes from Chris Wardle with Leede.

Do you guys break down your revenues between casting and the electronics side?

No.

Can you give us a bit of an overview as far as how that split typically is?

In general, the split is roughly, again, very roughly -- they're roughly equal to each other in magnitude.

And do you expect that trend to remain? Or are you seeing better growth in one of the areas?

Well, like I mentioned in the opening comments, growth -- recent growth for this year has come more in electronics and in forging, but there's a lot of booking activity. There's a strong backlog, and we do see demand for castings. So I think this year, perhaps it wasn't as big a growth projection. But going forward, we expect castings to contribute to growth in the same way. This year, again, was more of the profile was to -- before you push the button for higher growth, let's have it contribute consistently before really pushing for too much growth is kind of the -- where they are.

Okay. And then how are the margins in the different divisions?

So the margin profile within all the different divisions is very similar if you look at, let's say, the core parts of the business. So where we may see differences in contribution at any given time is how well we're focusing on that -- the core business and, as I mentioned earlier, effectively staying away from noncore businesses that can have a good revenue prospect, but don't really deliver on the margin. So we're committed to developing and producing components that are very specialized, that are very rare and have the premium that we're targeting and staying away from more commoditized business. So that's -- it's an ongoing effort. But -- and we've been consistently improving in that area and notably at DP Cast. I mean that's been a big part of integrating them into Omni-Lite is that process of rationalizing the businesses that fit that profile and of which they have many.

Okay. And then -- so you speak of core versus noncore, are you talking across all divisions? Or is there certain divisions that you would -- that you're classifying as noncore?

Well, so -- and I'm saying core is this very specialized components that are rare, that serve a particular function and get a good margin profile. That's really what we're defining as core. So there's less of that at our forging operation and in electronics because we've been on that path for a while. For DP, it's been a little bit new, but that's the same across all divisions.

Okay. And so you're -- and then -- so you're getting like in the low 20% gross margins in all the divisions?

No, no, no. That -- right now, that's the blended rate if -- it is the average of all of them. Our margin profile, the casting profile has been the one that has been improving, but starting from a place where it wasn't contributing 1.5 years ago. And it's starting to contribute, and it will continue to improve that margin. So as that margin improves, I would expect that the overall margin will improve.

Okay. So casting historically was a drag on margins. So the other divisions, forging and the electronics side has had higher than 20% margins. Is that fair?

Well, the average -- yes, if the average is in that, yes, the other 2 have to be higher.

Yes. Okay. And then what do you see the trend on the electronics side? Are you seeing greater demand here? Or...

Well, there is a lot of opportunities. I've mentioned it several times that specifically in missile defense, there's a lot of modernization efforts and new systems being put in place for, obviously, for defense purposes and -- but for international application, too. So -- and there's a lot of opportunity because of new technologies like gallium nitride and some others that there's advanced electronic sensors that are being designed in, everything from drone and airborne systems to some ground-based naval systems where they like a sensor that's got higher range and better performance. So that's some of the -- that specifically is an area that Monzite is looking to exploit.

Okay. Okay. And so fair to say the increase in global tensions is -- would help drive growth?

Yes, that's a fair statement, for sure.

Okay. And then last question. Does that division also sell into the commercial market, commercial aviation market?

Very little. The electronics division is 80% to 90% defense. And even in that is a very specific part of defense is driven a lot by missile and radar applications.

At this time, it appears there are no further questions in queue. I'd like to turn the call back over to our speakers for any further remarks.

Again, thank you for joining us for the third quarter review. We look forward to having you all back for the end of the year. Thanks again. Bye-bye.

This concludes the Omni-Lite Third Quarter 2024 Investor Call. Thank you for attending, and have a wonderful rest of your day.