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

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

Thank you, and good afternoon, and thank you for joining us. With me today is our Chief Executive Officer, David 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 operation as we filed our 2024 year-end results yesterday, April 21. After the remarks, we will open up the line for Q&A. If you have not received a copy of our press release, which was issued yesterday morning, you can find it on our website at www.omni-lite.com or e-mail us at [email protected] to request a copy. Before I get started, I would like to remind you that today's discussion will or may include forward-looking statements including information about 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 could cause our actual results or performance to differ materially. We are also mindful of the risks and impacts in the health of the general economy, including the effects of the current U.S. financial market, the U.S. global commercial aerospace market, the U.S. defense budget as well as the U.S. and international markets. All forward-looking statements should be considered in conjunction with the cautionary statements contained in our press release and the risk factors 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 also would like to mention that in addition to the reported financial results in accordance to International Financial Reporting Standards, or IFRS, during our call, we may discuss or reference non-IFRS financial measures, specifically EBITDA, adjusted EBITDA and free cash flow. A reconciliation of these metrics is available in our SEDAR filings. Lastly, unless noted, any reference or discussion of our financial metrics is 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 share a few highlights from our fourth quarter 2024 performance and provide an update on our current business momentum. Revenue for the fourth quarter was $3.5 million, bringing full year revenue to a record $15.9 million, a 29% increase over fiscal 2023 and a 5% improvement over Q4 last year. Growth during the quarter was driven by continued expansion in commercial air transport fasteners and jet engine casting programs. One important dynamic in Q4 was our product mix. Approximately 20% of revenue came from engineering and new product development. While this mix typically carries lower margins, it does reflect strategic investments in new programs. We took advantage of customer demand to qualify a new high-performance fastener type, which we believe will translate into repeat orders. Our usual target is closer to 10% for engineered related revenue, but this was a timely opportunity we chose to accelerate. We also made a proactive decision to convert slow-moving inventory into cash ahead of planned write-downs. We also hired new manufacturing staff in our metal forming operations to support increased production capacity. Bookings for Q4 totaled $3.2 million, resulting in a $4.6 million backlog at year-end. While these bookings primarily reflect ongoing programs, several larger orders did not convert until early Q1. One of these was a major contributor for a record-breaking in excess of $5 million bookings in Q1 of 2025. Other expected large bookings are driven by demand for U.S. missile defense modernization efforts and newly qualified fastening components. For the full year, adjusted EBITDA reached $1.6 million, up from $445,000 in 2023, a gain of more than $1.1 million. The improvement came from stronger operating leverage and a disciplined focus on product rationalization and pricing, a strategy we intend to carry forward in 2025. Right back to you, Amy.

All right. Thanks, Dave. Dave has addressed the revenue and the outlook, and I'll make a few comments regarding cash. Adjusted free cash flow is defined as cash flow from operations minus capital expenditures was a source of approximately $248,000 in the fourth quarter as compared to a use of $93,000 in the fourth quarter 2023. Year-to-date free cash flow was approximately $1.8 million compared to $530,000 in 2023. We did use approximately $150,000 for CapEx purchases during the year for the manufacturing process. We did receive full payoff on the Cal Nano note that we had on our books of $852,000 approximately as well as $250,000 for a note we had fully reserved. We finished the year with approximately $3 million in cash and no debt, which is an increase of approximately $1.9 million over the year 2023. We will continue to maintain a strong cash balance. This does complete our prepared remarks, and we would like to now open up the call to any questions.

[Operator Instructions]. Your first question comes from Alexandre Ryzhikov with LionGuard Capital.

I mean, Dave, maybe I'll just start off on the inventory charge. Can you help us understand why this wasn't provision for previously? And then how much of aged inventory do you think remains on the book. So do you think this is sort of the final supply we can expect on this part of the balance sheet?

Yes. We certainly feel like we have a good handle on our inventory, and it's very current. This particular inventory item, we had hoped it was a remnant of a previous type of build that we haven't participated in, but it was still functional and it was still the correct rev, but questionable how much demand there was going in the future. So it was difficult to really predict. So we saw an opportunity to move it and we did.

Got it. So it sounds like that's behind us, which is very encouraging. The other question, just trying to understand the relative performance of the different businesses. I mean you provided quite a bit of detail on your Monzite business unit, in your financial statements. And frankly, I think that business is performing remarkably well. But I think if that business has margins approaching 50%, it seems like it probably represents more than 100% of the overall EBITDA for the business. So it seems like the other two businesses are not contributing. So maybe help us understand how the other two business units are performing and what's sort of driving their performance down.

Well, okay. So I think if you want to sort of characterize the year, yes, we -- Monzite did have a bit of a revenue boost on two large programs, which we've talked about. And that was somewhat driven by bookings that happened in the previous year, at the end of 2023. You could see the bookings build up. And I would characterize the other two divisions that we've talked about, DP Cast has had incremental improvement on its margin. We believe that it can and will contribute to the same level that 40%, 40% to 50% gross margin level. In the future, we're working incrementally towards that. It made improvement this year. And the reason that we believe that it can and will is because specific part numbers on programs deliver that kind of margin. So it's a bit of product rationalization and pricing and to get us to where it contributes. And we made good progress this year. And we look to make what I'll call incremental progress. In Aerospace, it sometimes takes a bit of time to product rationalize and to increase price. One factor that we've talked about holding us back a little is long-term agreements and our long-term agreement, which doesn't allow for pricing elasticity other than on a case-by-case basis. So as we move forward and negotiate a new contract, that will have an impact on that significant impact, I think, on the DP Cast performance. And I would characterize Omni-Lite's, the forging business this year was a lot of product development, notably in the Q4, significant product development, which carries a lower margin. And I believe, and I've made notice of it in this release and in prior one that there's an expectation that heading into 2025, that perhaps there'll be more production ratio will be a higher production than it was in 2024. 2024 had maybe a disproportionate amount. So -- and I released that 2025 Q1 bookings, a big significant bookings in fasteners came as a result of work that was done in the end of 2024 to qualify some new parts. And their margins again in the production environment show that same 40% to 50% margin profile.

Got it. Dave, this is a very helpful answer. I think just to highlight, and to congratulate you on the job that Monzite is doing. I think there are very few businesses with 50% EBITDA margins that are expected to grow 70% on average over the next 3 years. So clearly, this is probably a business that's worth more than your entire market cap if you broke it out. So congratulations on the work you have done there. And just a quick follow-up on the long-term agreement that you've highlighted with DP Cast, if I remember correctly, that expires in the end of 2025. Any update on when you expect that to be renegotiated or essentially move off that agreement? And then I have a final question.

Well, we're looking to be in the middle of that negotiation this year. It's hard to predict whether the exact timing of that. But I think there is intent on both sides that doing it sooner than later is advantageous. But like anything else, that's a negotiation and is something that we'll be putting a lot of energy into.

Understood. My final question. You've talked about strong Q1 bookings, but also you've talked about strong momentum in the first half of the year. So at this stage, are your expectations that the momentum you've seen in Q1 will be there for Q2 and potentially into the second half of the year? How should we think about the progression on the bookings side through the year?

Well, I think what I tried to mention is at least for the first half that we expect some large single orders that will change the trajectory at least in the first half. But the growth drivers really are there for continuing on in the year. So there's nothing that we still expect a robust continued booking throughout the year, but notable ones in the first half, and that's the reason I mentioned that.

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

Thanks for a good quarter. I hope you do better in the second -- first quarter. How is the tariffs affecting you? Or is it only DP Cast supply chain as the China is not taking any Boeing planes, how would that affect you?

So to date, we haven't seen any direct effects yet, but we do anticipate that primarily in our casting business in Canada, it can get affected in two ways. One is on imports of material from the United States. Although we haven't seen them yet, we expect that that will -- we'll see an increased cost on some of the metals that we buy from the United States. And those will be passed on to the customer with pricing increases of material. On the other side is the retaliatory tariffs that Canada has put in place it's not entirely clear, but it looks like that U.S. customers buying castings from our Canadian -- from DP Cast could be hit with a tariff and which could impact their buying decision. I think for the most part that the customers that are buying from DP Cast or buying because of the specific nature thin-walled aerospace quality, hard to manufacture and invest in casting parts and not driven from the lowest necessarily though only based on price. So -- but having said that, I can't imagine that there would be 0 impact of that tariff, but we don't think it would be a major impact and approximately 25% of the DP Cast business is U.S.-based. But again, the aerospace parts, they're hard to produce. There's a lot of tooling and know-how that goes into producing those parts, so it wouldn't even be easy necessarily for them to resource those parts. And I think other areas of the business, there could be -- at least on the electronics side, there could be a very small impact on electronics imports because for the most part, they're working on -- we're using parts that are having military applications, and we're not sourcing from places like China at all. Most of the imports are from countries that won't have as big a tariff impact and the cost of the parts is generally fairly small as a percentage anyway. And on our forming business, the metals or parts are sourced U.S.-based and mostly of steels and -- which have a higher content of U.S. sourcing as well as there -- for aerospace and defense, you have to be real careful of your sourcing. So we think the impact is fairly small on those entities. And if there is one, we'll pass the cost along.

Your next question comes from [ Peter Amot ], a private investor.

David, I think most of my questions have been answered. But just a couple of things just in terms of, I know before, you guys had been looking at acquisitions and stuff. I mean what are you seeing these days? And is everything just frozen just in terms of not wanting to move any capital and things like that? Or are you seeing any opportunities out there?

We're definitely seeing opportunities. Prior to sort of this tariff -- this recent tariff kind of explosion, I think the landscape in a way is very fruitful potentially and valuations perhaps come down a little bit more rational. So yes, I'm looking -- and I haven't seen any evidence, yes, I think a little bit of capital tightness could be there. But in terms of -- in this -- the landscape, I think, is quite fertile, and we're -- and we've been in some discussions. So I'm hopeful that we can execute on a strategic acquisition.

Okay. And then can -- in terms of that, like what size are you looking at in terms of whether it's revenue or EBITDA and stuff like that. Just if you can give us some color on that.

Yes. Well, as I've said before publicly, we have -- we've raised a bit of capital to use to deploy in our cash reserves. And certainly, borrowing is what it is. So we're looking at smaller entities, maybe $2 million to $5 million revenue to start, let's say. And in the $1 million EBITDA would be plus or minus, something [indiscernible] that fits in with our business model would be the kind of candidate.

Okay. And then just in terms of multiples that you see out there, I know when we were talking a while ago, it seemed like almost all the private ones were at higher multiples than the public companies. So what kind of multiples are you seeing out there in terms of possible acquisitions that you'd have to pay?

Well, you could see -- I like to believe that that $3.5 million to $6.5 million is kind of the spot we'd be looking at. I mean, every deal is different, but certainly we're looking more on the $5 million and less. But like anything else, I mean, you have to be careful with when you talk multiples. There's a lot of extenuating circumstances or particulars. But in general, I would say that we're looking at attractive multiples where you'd be around that 5% anyway.

Okay. And just one last question then. On the Cal Nano shares, how many shares do you guys still own?

Amy, do you have the account?

Yes. Let me get the exact number. I believe it's -- it was disclosed in our financial statements. We did sell a small amount during the first quarter, but it's still a significant amount. So just above $7 million.

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

Again, I'd like to thank everyone for joining us today, and we look forward to releasing our first quarter results here in short order. Thank you.

This concludes the Omni-Lite Industries investor call. Thank you for attending, and have a wonderful rest of your day.