Volatus Aerospace Inc. (FLT) Earnings Call Transcript & Summary

All right. We're 4:30. So I'm going to say good afternoon, everyone. Thank you for joining us. Welcome to today's webinar on Volatus agreement to acquire 100% of Lithuanian-based AISPECO. Before we begin, a quick reminder that we welcome your questions throughout the session. Simply click on the Q&A button at the bottom of your webinar screen to submit a question at any time -- we'll do our best to address as many questions as possible during today's session. If we don't get to yours, we'd be happy to follow up with you afterwards. I'd also like to take a moment to point out that certain information set forth in this presentation contains forward-looking information, including future-oriented financial information and financial outlook and that results may differ materially. The risks, uncertainties and other factors that could influence actual results are described in the presentation, in the press release and in our documents filed with the Canadian regulators. This presentation also contains non-IFRS measures, which are outlined in the presentation. There's a full disclosure that can be found on the Volatus Investor website at investor.viotiserospace.com. If you have any questions, please feel free to contact the Volatus Aerospace IR team at Investor Relations at aerospace volatusaerospace.com, investorrelations@featiserospace.com. So with that behind us, I'm going to welcome everybody, again, and thank you for joining Abby and I this afternoon. Yesterday, we announced an agreement to acquire Lithuania based AI spec. It's a Lithuanian technology company that fits directly into our strategy. Ultimately, the technology is an intelligence force multiplier. This transaction is about moving the Lattice further up the value chain by bringing together the aircraft, the sensors, the software and the data that our customers depend on. It creates several new ways for Volatus to grow. About the transaction, we've signed an agreement to acquire 100% of the company. The base consideration is USD 10.5 million, including $3 million in cash and $7.5 million approximately in Volatus shares. There's also an earn-out of up to $2.5 million tied to milestones over the next 3 years. We like this structure because it aligns the teams around building the business. Now a reminder, closing still remains subject to the required conditions and approvals. So AISPECO is based in Lithuania, since its founding in 2020 -- the team has developed a meaningful international business with products used for mapping, infrastructure, inspection and surveillance. It's got customers across North America, Latin America, Europe, Asia and Australia and established relationships with leading sensor manufacturers. Just as importantly, the founders and key leadership are remaining with the business. So we're acquiring both the technology and the people that know how to advance it. Having a Lithuanian base adds engineering and manufacturing capability in the EU and a NATO member country, that's located close -- in close proximity to Canada's largest current overseas military mission in Latvia. This is deployment under operation reassurance and it forms the core of NATO's deterrence and defense posture in Central and Eastern Europe against potential adversaries. So this complements our operations in Canada and creates an opportunity for the strong support of our troops in Latvia. So if you've heard me speak about Volatus before, I generally describe the company as 1 enterprise with 2 growth engines supported by a single common operating platform. AISPECO fits in the same model with 2 related markets served by 1 underlying technology platform. First, utilities pipelines mapping companies and infrastructure; and secondly, defense and security. The same core electronics, sensor architecture and software supporting different configurations. That gives us an efficient foundation for innovation and market expansion. The product portfolio is a major reason we're excited. The portfolio is a complete range of products that incorporate key differentiators included -- including patented stabilization, targeting and tracking, scanning capability that increases the swath by 30% to 35% and the ability to fuse multiple sensors in the case of our largest installation carrying up to 0.9 sensors simultaneously. We also have the ability to record the data and process either on board through Helix's core or store and process the information offline. Lastly, their proprietary software aggregates the data into a single display for a holistic presentation supporting faster decision-making. Together, these are more than individual products. They form a common technology architecture. Here's what makes the technology different. The customer can configure a pod with compatible sensors for the mission. Stabilization helps collect useful data while the aircraft is moving, onboard compute supports faster review and processing and remote control allows specialist operators to work from the ground where conditions permit and in fact, potentially allows a single operator on the ground to operate more than one sensor pod simultaneously. The result is flexibility. Operators can do more with their aircraft, adapt as requirements change and simplify how they collect intelligence. A practical advantage is how easily a payload concept can move between missions, different aircraft different missions, same technology. The module architecture reduces the need to build a separate system for every task. Ultimately, this improves utilization. It makes specialized missions efficient and cost-effective. This fits directly with our core commercial business. We understand utility corridors, pipeline patrols and geo special mapping. AISPECO adds equipment that make these missions more capable. Customers have reported meaningful improvements in specific applications, including fewer flight miles and faster targeted inspections. Those results show the kind of value that better sensors and smarter workflows can create our opportunity is to bring that capability to a broader customer base. Remote operations is another way to create value. AISPECO has developed the ability to control compatible payloads from the ground. Volatus brings operating experience and an established operations control center. Together, we see the potential for managed sensor service. The aircraft can fly the mission while a specialist controls the payload remotely. That can expand access to expertise, create new service opportunities. From my perspective, it's an attractive extension of capabilities we already have. Defense and securities are equally important parts of the story. AISPECO has sold 1 system already to a North American defense prime for TERRAIN data collection. This is an important reference point. The same technology has referenced for border monitoring and maritime awareness. We also see a compelling application and wildfire response where thermal and optical imaging can help teams understand changing conditions. These markets all value timely, reliable intelligence, which is exactly the business we're building. Our defense strategy is to start with a proven commercial technology base and adapt it to customer needs. That can include different sensors, communication and secure data handling. Over time, it may also include larger uncrewed aircraft and other defense platforms. Military certification will be separate -- will be treated at least as a separate development step, but the attraction is that we're not already starting from 0. We're building on products, software and engineering that are already in use. AISPECO also strengthens our international footprint. Latvia is a NATO and European Union member. That complements our Canadian operation. It brings us closer to European customers and partners and supports our ambition to serve allied markets. We believe that this combination of Canadian operational scale and European sensor expertise can be a real differentiator. And this is where the strategic pieces come together. Volatus has crude and uncrewed aircraft are passer drones, mission planning, flight operations and data services. AISPECO adds proprietary pods, sensor controls, onboard computing and mission software. After closing, we expect to connect those layers more closely. Instead of coordinating several vendors, a customer can work with one organization across every stage of the mission. That's simpler for the customer and gives us more opportunities to create value. Now I'd like to talk for a minute about developing technology, the Helix Adam. This is an important bridge to our drone strategy, Adam is being developed as a lightweight LiDAR and high-resolution imaging payload for drones and mobile mapping. It's designed to work within the broader AI spec software environment. For Volatus, that means the potential to extend the same sensor expertise from crude aircraft onto our uncrewed platforms. It creates a path forward with more meaningful capable mapping missions with a common technology foundation. The specifications that are shown here are preliminary, but the direction is particularly exciting. The transaction also changes how we participate in the economics of a mission. Today, Volatus revenue by operating an aircraft and delivering data and intelligence solutions. -- with AI SpecCo following closing, we expect to participate also in the hardware and software layer as well. We can learn directly from missions and feed that experience back into product development, which creates a closer connection between engineering and the customer. It's how ultimately we intend to build a stronger, more integrated business over time. We also see several opportunities to create value from the combination. One is using AISPECO systems across more of our own existing operations. Another is introducing its products to our pipeline, utility and infrastructure relationships and third is expanding access to European customers in Allied markets. Management has estimated an annual cost and direct synergies of CAD 1.5 million to CAD 2.6 million by year 2. We've also identified $7 million to $12 million of incremental revenue and addressable market opportunities. These are separate forward-looking estimates, definitely not represented as contracted sales or additions to our financial outlook, but what really matters strategically is that the opportunities come from businesses and customer relations, we already understand. The stand-alone AISPECO outlook also illustrates the scale of the opportunity. We have attempted to be conservative by projecting approximately CAD 10 million in fiscal 2027 revenue, with an adjusted EBITDA margin of 8% to 12%. An actual fact, with the management of AISPECO, we've established 3-year earning targets that are well above that. Those tie into the earn-outs that we've put in place for the team. It's also important to note that they have approximately CAD 5 million in contracted backlog and approximately CAD 35 million of unfactored sales pipeline. The outlook excludes the proposed synergies and uncontracted defense programs. It depends on the assumptions and risks that are disclosed or outlined in our disclosure. But we see this as a useful picture of the business we intend to build on and which is the reason we're raising it rather than a guarantee of results. So let me close with the bigger picture. We believe AISPECO is a strong strategic fit for Volatus. It brings real products talented engineers, established customers and proprietary technology. It strengthens our commercial offering. It creates new pathways in defense, remote operations and drones and it moves us closer to being a fully integrated aerial intelligence company. We're excited about the opportunity ahead, and we look forward to building it with the AISPECO team after closing. Thank you. And at this point, we welcome your questions. Abby, over to you.

Yes. Thanks, Glen. We have a series of questions coming in. So first question is, as it relates to the $7 million to $12 million of addressable market opportunity, can you provide more insights on what that exactly means? So I can take that question. It's mostly coming in from the synergies. We have estimated of $7 million to $12 million, that's not an addressable opportunity just purely the revenue synergies. We expect to come in because of this transaction in addition to the cost synergies of between $1.4 million to $2.6 million. This $7 million to $12 million of synergies -- revenue synergies are 1 coming in from operations in the U.S. pipeline and utility access. So AISPECO historically has sold pause to the customers and never been operated them. This gives and Volatus has always acquired parts from different vendors and operated, so this expansion market in terms of the value chain where we stand, instead of just being an operator, we also control the technology stack. And second is the access to the European market in oil and gas and utility space where Volatus does not exist and AISPECO has a stronger foothold. So those 2 combined basically gives us basically a rough estimate of $7 million to $12 million of revenue synergies for us today. The second question is, one of the elements of the purchase of ASP is flight controller -- you already have codex, please enlight us why this is important and how it integrates.

That's a great question. I'll take that one Abby.. So first of all, the flight controller we're talking about, it's a flight computer that ultimately synchronizes all of the sensors that are on board, the pod within nanoseconds. So really, that's all about processing and managing the sensors themselves. The V Cortex product that Velatis has developed and continues to be developing is actually an autonomy stack for unmanned systems. So it's particularly important to recognize that there are 2 different things. One of them is about operating the sensors. The other 1 is about operating the aircraft and the mission. After closing, we expect that we've got some long-term opportunities in integrating the AISPECO technologies with the autonomy stack and Cortex and ultimately carrying that even 1 step further into our Valkyrie and ARS platforms to ultimately put together a fully integrated mission solution for RPAS. Bear in mind that while AI Speck is developing and has deployed commercially products for the RPAs or drone space. Their primary business to date has focused around the piloted aircraft and helicopters. So I think this is an example. I'm really glad for the question because it's a very, very good example on where the technologies between AISPECO and Volatus ultimately pulled together into something that's more comprehensive and an entire end-to-end solution.

The next is, is the $2.5 million earnout contingent on revenue synergies in addition to cost synergies I can take that one, Glen. And the answer is yes to both. It is contingent on revenue synergies. And as Glenn mentioned, we have given an outlook of $10 million to be generated in 2 the reality is the earn-out -- the revenue are not related to revenue synergies is much higher than the outlook. We are being very conservative in the outlook. And second, there are 6 different a unique earn-out criteria and milestones that have been laid down, and those are all related to the business development, technological development and also the integrated business execution. The next question is, do you expect or does the AISPECO product offering help us win near-term opportunities in any of the DDI streams.

I'll take that one. Before I start on that one, Abby, I'd like to add something to the previous question on the earnout. One of the key things that I like about earn-out strategies, basically, sellers always want to sell on the future opportunity of the business, what they see coming. -- buyers want to buy on the historic norms, right? What's the business already done? The beauty of an earnout is it allows us to enjoy the benefits of both. The guaranteed cost to the company is based on the historic performance of the business, but the upside of achieving their goals actually is shared equally then between the management of the company that's made the -- that's ultimately established the goals and all of the shareholders now in the combined organizations. But a key point to understand here is it's in our best interest to collectively support the company to achieve its revenue goals? Because at the end of the day, when the founders of that business achieve their earnouts, it means that everybody wants. It means that the company has experienced the growth that we had set out to achieve the sellers, the management of the existing company have actually achieved their goals. And of course, the hope is that the market recognizes the overall performance of the company and that the benefits are shared with all of our shareholders. So it's -- think about it this way. We don't necessarily -- it's not a matter that we combine the revenues to achieve the earn-out, the earnouts are specific to the performance of the company. What we do is we combine the horsepower of the company to ensure that, that company or maximize the opportunity for it to meet its earn-out goals. It's a win-win situation. And frankly, that's our objective. Now the question on DDI is a very, very good one. So this technology -- this is now a Canadian-controlled technology. It's based in Latvia. That's where the skill set is -- we have the ability to manufacture that IP in Canada. We have the ability to manufacture it in Latvia -- in Lithuania, which is exactly the same capabilities we have with our drones now we can build Canadian technology at our manufacturing facility in Mirabel, along with the pods. We can equally build the drones that ultimately the Canadian military may need to support our troops in Latvia. So it gives us an expanded presence with an allied nation and because the IP is Canadian controlled, even though that it's domiciled and developed by a team inside of one of our allied partners. Ultimately, we do believe it will help us with our bids in the DDI proposals and Canadian by procurement. The big issue to say right now is this transaction we'll still take a few days before we get across the regulatory steps required to close the transaction. So at this moment, we can't really comment on any of the RFPs that are out there because at the moment, this would be a partner transaction, whereas in a few days from now, we expect that it would actually be Volatus Aerospace IP. So that's how that works.

I think there were some follow-up question, Glen, you answered that, which are basically -- will any of the production of AISPECO products be completed at Mirabel facility? Are there any expected cost synergies or margin improvement? And a follow-up on that same is will the products be even repaired or can be repaid at Mirabel facility.

So our strategy with the business is to do what's absolutely best for the global Volatus Aerospace interests. So remember, one of the challenges being a public company is even internally, if we're not able to disclose all of this transaction before it's actually announced publicly. So at the end of the day, the people now that we need to explore cost synergies, where we can actually develop supply chains, better supply chains and so on, that actually that hard work begins immediately. But the truth of the matter is what we expect -- is it for North American business, we'll be able to support the North American business out of Canada, out of North America. -- and continue to build the product development and the manufacturing for Europe and other parts of the world in Lithuania. Our objective is ultimately to position the company to be able to support multiple markets to the best benefit of our customers.