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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, everyone. My name is Karina, and I will be your conferencing operator today. I would like to welcome everyone to the FTG Q1 2024 Analyst Call. [Operator Instructions] Please note that this call is being recorded.
I would like to turn the call over to Mr. Brad Bourne, President and Chief Executive Officer of FTG. Mr. Bourne, you may proceed.
Thank you. Good morning. I'm Brad Bourne, President and CEO of Firan Technology Group Corporation, or FTG. Also on the call today is Jamie Crichton, our Chief Financial Officer. Before we go any further, I must caution you that this call may contain forward-looking statements. Such statements are based on the current expectations of management of the company and inherently involve numerous risks and uncertainties, known and unknown, including economic factors in the company's industry generally. The preceding list is not exhaustive of all possible factors.
Such forward-looking statements are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied by forward-looking statements made by the company. The listener is cautioned to consider these and other factors carefully when making decisions with respect to the company, and not place undue reliance on forward-looking statements. The company does not undertake and has no specific intention to update any forward-looking statements, written or oral, that may be made from time to time by or on its behalf, whether as a result of new information, future events or otherwise.
So notwithstanding a few challenges in our first quarter, I think 2024 is off to an excellent start. Before proceeding on the details, I would like to thank everyone at FTG for their hard work and their contributions to our success. Our success is a team effort among all 690 staff across the company and around the world.
In Q1 2024, FTG achieved some strong financial metrics, including first quarter bookings of $37.5 million, which was up 14% over Q1 2023. FTG's first quarter revenues of $35 million were up 42% over Q1 2023.
FTG achieved net earnings in Q1 2024 of $1.1 million and FTG achieved adjusted EBITDA of $4.6 million, which was up 42% over Q1 last year, in line with the revenue growth.
Other accomplishments in Q1 include integration activities of both acquisitions that were completed last year progressed well in Q1 this year with improved throughput, improved pricing, cost savings, well underway at Circuits Minnetonka and as of the start of Q2, the FTG ERP system is live there, too.
At Circuit Haverhill, targeted cost savings have been achieved, and we're well underway with targeted equipment investments and growth plans for the site. More activities and full ERP implementation for Circuits Haverhill, are planned for the balance of 2024.
Also, in support of the new acquisitions and the overall growth of FTG, Leo LaCroix was hired as Executive Vice President of Circuits to oversee FTG's U.S. Circuits operations, including the newly acquired site. Leo has extensive senior management experience in the Circuit board industry, selling into the defense market.
FTG managed through a 6-week strike by 67 unionized workers at the FTG Aerospace [ Firan ] facility, which resulted in decreased product shipments during Q1 of approximately $2 million. The reduction in revenue had a negative impact on net earnings of approximately $1 million.
A new 4-year agreement with the employees was concluded in the quarter, and the employees returned to work on January 23. The new contract expires in August 2027.
As noted, customer orders received in Q1 totaled $37.5 million, which resulted in a book-to-bill ratio of 1.07:1. As of March 1, 2024, FTG had total backlog of over $99 million, which is a 34% increase over Q1 last year. Jamie will provide some more details on our Q1 2024 results shortly.
But first let me turn to some external items, and starting with our end market demand remains strong. Airbus delivered 735 aircraft in 2023, but more importantly, as they're looking to ramp to almost 1,000 aircraft annually in the next few years, and this is the 35% production rate increase. Airbus has a backlog of over 8,000 orders, which is over a decade worth of production at current production rates.
In Q1 2024, Airbus delivered 142 planes, which is below the targeted delivery rate for the year. But March was almost half of the deliveries, so this bodes well for the future of the year.
At Boeing, they shipped just under 500 planes last year and have plans to ramp their production by 40% to almost 700 planes in the next few years. Boeing's backlog is almost 6,000 planes, so also over decades worth of orders at current production rates.
But the FAA has told Boeing to halt production rate increases, while they ensure there is sufficient focus on quality. In Q1, Boeing delivered only 83 aircraft due to ongoing reviews of the 737 [ mishap ] with Alaska Air a few months ago. Setting aside that mishap, it is clear why both companies are looking to ramp production.
In the business jet market, Bombardier reported low double-digit shipment growth for last year, and the projection for 2024 are for a similar level of growth.
Gulfspring is projecting a high single-digit level of growth for 2024. This industry remains in a robust growth mode.
In the helicopter market, Bell Helicopter reported 31% revenue growth last year and are projecting near 10% for 2024. All of this bodes well for us as we look to the future, future demand in the coming years.
We also look at results from key defense contractors, all of them -- and all of them reported revenue growth last year between 2% and 7.5% over the prior year. I have not seen Q1 results from the key players as of today, but ongoing geopolitical challenges in the world will keep defense spending high for a period of time.
Looking at the longer term, Boeing's most recent 20-year forecast shows long-term industry growth, and it continued to show 20% all new aircraft deliveries going to China and close to 40% to Asia, as has been the case in the recent forecast.
A recent business jet market forecast from Honeywell similarly predicts growth in this market in the coming years, with near-term double-digit growth rates for this sector.
The simulator market [indiscernible] the end market applications. But as we always remind everyone about this market, it is lumpy. So a large year-to-year variation things do occur.
As we have said for many years, FTG's goal is to participate in all segments of the aerospace and defense markets, as each moves for their independent business cycles. It is not often all segments are growing together, as seems to be the case right now.
Beyond all these, let me give you a quick update on some key metrics for FTG for Q1 2024. First, as I already noted, the leading indicator of business is our bookings or new orders. As noted earlier, our bookings were $37.5 million in the quarter. This resulted in a backlog of over $99 million at quarter end.
As we have reduced our lead times, this would typically put a damper on orders in the short term, but our results don't indicate this. In Q1 2024, sales were $35 million, which is $10.3 million above Q1 last year. Most of the growth is the result of the acquisitions.
Obviously, the 6-week strike at our [indiscernible] site had a negative impact on the order of the $3 million in the quarter. But the other aerospace sites experienced significant growth of almost 80% for Aerospace Chatsworth and almost 45% for Aerospace Tianjin.
At Circus Minnetonka, the run rate in Q1 was approximately $26 million annualized. That is showing good progress towards getting them to revenue levels where they will materially contribute to FTG sales and profitability. They had strong bookings in Q1.
Looking at the businesses separately, in our Aerospace business sales -- in our Aerospace business, sales were flat at about $10 million in Q1 compared to Q1 last year. The strike at Aerospace-Toronto was a significant damper on what would otherwise have been a very strong quarter.
On the Circuit side of our business, sales in Q1 2024 were up $10.3 million or 66% compared to Q1 last year. Approximately 93% of the growth came from the 2 acquisitions. Sales were down in Circuits Fredericksburg and up at all the other legacy sites.
Overall at FTG, our top 5 customers accounted for 66.5% of total revenue in the quarter. This compares to 58.6% last year.
Also interesting to note, of the top 10 customers, 6 are customers shared between Circuits and Aerospace. We particularly like to see the [indiscernible] customers, as it means we are maximizing our penetration of these customers by selling both compete products and circuit ports.
In Q1 2024, 27.7% of our total revenues came from our Aerospace business compared to 39.1% last year. The Aerospace business share decreased, partly due to the impact from the acquisitions, which were both on the Circuits business as well as a 6-week strike at Aerospace-Toronto site.
I would now like to turn the call over to Jamie, who will summarize our financial results for Q1 2024 and afterwards I will talk about some key priorities we are working on. Jamie?
Thanks, Brad. Good morning, everyone. I'd like to provide some additional detail on our financial performance for Q1. FTG achieved a gross margin of $8.9 million or 25.5% in Q1 compared to $9.8 million or 39.7% in Q1 2023. However, gross margin in Q1 '23 included $2.9 million from the U.S. employee retention credit program or ERC.
Excluding the impact of government systems, gross profit in Q1 '23 was $6.9 million or 28%. So we generated additional gross margin of $2 million on incremental sales of 10.3.
The gross margin rate is down 2.5 percentage points as a result of a couple of factors. Product mix is less favorable, as we had $3 million of high-margin simulator product shipments in the prior year quarter and minimal simulator revenue this quarter. This factor will also affect our Q2 2024.
The 6-week strike at Aero-Toronto resulted in lower fixed cost absorption, and therefore, reduced gross margin rate. However, this item is nonrecurring.
Annualized revenue per employee was $214,000 in Q1 2024, approximately 3% better than Q1 '23. Excluding the impact of the strike at Aero-Toronto, we believe the increase would have been greater than 10%.
The average exchange rate experienced in Q1 '24 and the prior year quarter was $1.35. So this is not a factor in our results.
SG&A expense was $4.8 million in Q1 '24, up from $3.8 million in '23, although as a percentage of sales, it declined to 13.7% from 15.2%. The dollar increase is due to $0.7 million from the 2 acquisitions, which were not in the Q1 '23 results, and the fact that Q1 2023, SG&A was reduced by $0.5 million of government assistance.
There are increases in some of the other operating expense line items, which in the case of amortization of intangibles, interest expense and accretion on lease liabilities are the direct result of the acquisitions. In the case of stock-based compensation, primarily the result of a higher stock price.
EBITDA was $4.6 million or 13.0% of sales for Q1 '24, and there were no adjustments this quarter. We do believe, however, that the strike produced Q1 '24 EBITDA by approximately $1 million. Adjusted EBITDA for Q1 '23, which included adjustments for government assistance and acquisition costs, was $3.2 million and also 13.0% of sales.
On a trailing 12-month basis, revenue was $145.5 million and adjusted EBITDA was $20.7 million or 14.2% of sales.
Our net debt as of Q1 '24 was $7.2 million as compared to $3.6 million at the end of Q4 -- end of 2023 year-end, which equates to 0.35x adjusted EBITDA.
Free cash flow, defined as cash from operating and investing activities, excluding acquisitions, less lease liability payments, with an outflow of $3.4 million for Q1 '24.
Capital expenditures in Q1 '24 were $3.4 million as compared to $0.6 million in Q1 '23. Some capital expenditures were accelerated in supportive efforts to complete FTG's scope work related to the Government of Canada's Aerie program, which had a completion date of March 31, '24.
Q1 2024 cash flow was further reduced by $2.3 million for income tax payments and performance compensation payments of $1.6 million, both of which were driven by strong operating results in 2023. We also incurred $258,000 to settle the obligation of performance share units -- sorry, [indiscernible] cash. The corporation used cash to buy shares in the market, as opposed to issuing additional shares to avoid dilution.
FTG has a total backlog of $99.3 million as of Q1 '24. Our focus will be delivering quality products to our customers on a timely basis and improving the efficiency of our operations. Our complete set of our filings are now available on sedar+.com.
Back to Brad.
Thanks, Jamie. Let me delve into some important items in the quarter and growth for the future performance of FTG. We continue to believe our staffing levels are at or at the right level to support our current demand. While we might tweak it slightly from site to site going forward, the majority of our staffing challenges are behind us.
We always remember that we make money by building and shipping products. So we spent significant time and money and investment driving process and productivity improvements at all the sites. This can include manufacturing process improvements, but it can also involve items like automation. We now have a robotic system operational at our Circuits Toronto facility and maybe surprisingly, also at our Aerospace Tianjin facility. We're looking to add the robotic process in our Aerospace-Toronto facility during Q2 this year.
But automation goes well beyond robots. We also have a lot of very automated equipment across our circuit sites that help drive productivity and process control. Automation will continue to be an area for investment across the company.
Looking forward, a key item for us remains the integration of our new sites. For Haverhill, we acquired them to grow our presence in the RF circuit board market for aerospace and defense applications. While they are small with a historic run rate of about $4 million to $5 million, we like their capability. The integration is relatively straightforward, as we intend to continue to operate in its current facility with its existing staff.
Our focus will be to engage our sales team with them to find new customers and to grow the business. This is not an overnight process, but one where we can generate incremental margin and profitability to the benefit of FTG.
Going along with this will be some focused CapEx to address a few production constraints to enable the growth. We did achieve some targeted material savings, which will benefit us going forward. And finally, we will move them on to FTG standard ERP system in the future. This project is just getting underway.
Holaday, our FTG Circus Minnetonka was the larger acquisition. Their sales were over USD 31 million pre-pandemic. They were hurt by the pandemic like we were. We see the long-term positioning of Minnetonka to be a source of high-technology circuit boards, similar to our Tornoto facility, but with the U.S. footprint. This U.S. footprint is critical as we will look to grow our share of the U.S.-only advanced circuit boards in the defense market.
In the short term, we have 3 priorities as we integrate Minnetonka into FTG. First, we need to ramp their throughput and revenues. In Q3 last year, we hired 2 key people. First, we hired [ Paul Godbout ] who has run our Fredericksburg facility until early in the pandemic. He is back on a temporary basis, but with his operation skill, he has helped us immeasurably. It will give us time to find the right person for the long term.
Then as noted earlier, we hired Leo LaCroix. He is a senior executive from within the circuit board industry with strong aerospace and defense experience. The [indiscernible] was also focused on Minnetonka. but he has now moved into the larger role and is responsible for FTG's U.S.-based circuit board business. I am confident he will be a huge benefit to FTG for the long term.
But as it relates to Circuits Minnetonka, throughputs and -- Minnetonka's throughputs and revenues, we have closed about 50% of the gap to get back towards the pre-pandemic run rate. We continue to see strong demand, so ramping throughput remains a priority item for this site.
In Minnetonka, the second priority is to reduce material costs. We have identified cost savings opportunities that can benefit this site, as they are now part of a larger company. It will take some time to achieve the savings as in some cases, it requires customer approvals and internal engineering efforts. But when complete, we expect to achieve savings on the order of $1 million annually.
Our third priority is to improve pricing. We believe Minnetonka has not been sufficiently proactive in adjusting prices as costs went up over the past few years. We have had some successes already, and we will continue to address this. We want to ensure any inflationary costs incurred at that site over the past few years, whether material labor or other, are passed through to the customers and not squeeze our margins.
Beyond these actions, we have plans to move them to FTG's standard ERP system and at the start of Q2 this year, the online. There is a transition period, as we run out old jobs from the old system and ramp up jobs in the new system. When fully complete, they will ensure the site operates and reports in our proven standard methodology.
And lastly, while not an immediate integration item, when we bought the site, we believe that we can expand and grow their customer base focused on the U.S. defense market. This has already started. We are seeing some real interest from numerous customers in adding this site to their approved suppliers list. This is good news.
The bad news is that typically is a long process to get through a new site approval. But we will stay focused on this to grow the site in the coming years beyond the pre-pandemic high point.
In Q1, we continued to see strong demand across most sites. Our backlog grew in Q2 is over $53 million, including the new site. While not a good metric, we ended Q1 with over $14 million in past due orders, down from $18 million at the end of Q3 last year, but up from $12.5 million at year-end.
Over half the past-due orders are at Aero-Toronto. The strike at Aero-Toronto was a big reason for their increase. To help drive this down as fast as possible, we have worked with our customers to shift some production from our Aerospace-Toronto from facility to other aerospace facilities, at least for the short term. This should help in Q2 and beyond to recover back to strong on-time performance across all FTG sites.
As always, there are possible downsize or headwinds that could impact our future performance. With the labor contract settled at Aero-Toronto, we have only 3 years before another labor contract expires. So this risk is mitigated for 2 years.
We always focus on the Canadian U.S. dollar exchange rate as possible. But this has been pretty stable for a period of time at attractive rates. Supplying change risk are diminishing. While we see some items with extended lead times, it is less what we're experiencing early in 2023.
Also, maybe just to ensure everyone is aware, we've now increased our SG&A costs by about $1 million to $1.5 million quarterly on about $10 million in incremental sales from the acquisition. Included in those is about [ $400 ] million per quarter and higher financing costs compared to Q1 last year, as well as higher labor costs for SG&A staff at the new sites, and higher lease accretion costs due to the new leases tied to the new acquisitions.
We are expecting to grow in 2024 as compared to 2023, like we just did in Q1. The easiest aspect of our growth will be having the acquisitions for the full 12 months this year compared to only 7 months in 2023. This should add an estimated $12 million in incremental sales for 2024.
If we can ramp production on sales at the newly acquired sites, this would further add to the growth. And we continue to win new programs across the company that will layer on incremental organic growth on top of all of this.
Beyond this, we continue to see strong customer demand, as I discussed earlier. And we will still see further benefit from the high-value assembly orders we booked early in 2023, as these will have -- these will be full year benefits for us in 2024. These assemblies of the on Boeing and Airbus aircraft.
And we will see the benefit of the C919 program in China moving into production. We shipped our first production orders last year, and we expect to see significant production rate increases later in 2024.
With the more complex geopolitical situation in China, I'm sure there are still concerns about our activities there. But in 2023, both our operations in China had their best sales year ever. This continued in Q1, with the site seeing 13% and 45% growth compared to Q1 last year.
As I've mentioned in previous quarters, we [indiscernible] cash back to Canada during 2022 and 2023. In total, we've now brought back $2.2 million in cash. By doing this, we don't have surplus cash stranded in China, and it reduces our exposure to things that ever deteriorated between Canada -- or China and the West. We anticipate bringing back more cash in 2024. But we are being cautious about our operations in China, as any further increased in tensions between China and other countries could impact our operations there.
We continue to assess possible corporate development opportunities that could fit with either of our businesses. There are opportunities out there, but it's too early to know that they would be a good fit and a good deal for FTG.
With our focus on operational excellence in all parts of FTG, our strong financial performance last year and in Q1 this year, our recent acquisitions and our key sales wins, we are confident we are on a strong long-term growth trajectory.
This concludes our presentation. I thank you for your attention. I would now like to open the phones for your questions. Karina?
[Operator Instructions] Your first question comes from Nick Corcoran from Acumen.
A couple of questions from me. The first is the backlog is about $99 million. How much do you expect to get through in the second quarter?
So total backlog is $99 million, backlog due in Q2 is [ 53. ] I think I said we're not shipping [ 53, ] that I guarantee. But I do think a couple of factors for Q2. Q2 is typically one of our better quarters. There's less holidays, less vacation days. There's no Christmas shutdown, so we get kind of maximum number of production days, which is a benefit to us. So I would hope Q2 this year would be in line or possibly a little bit higher than Q4 last year.
Great. And then just with the issues that Boeing is having, have you seen any signs in the supply chain that they might be scaling back any of their orders?
No. We have seen no impact as of now. And a couple of things happen, but this industry -- it's a big effort to change production rates, whether you're changing them up or changing them down. And so as of now, Boeing has made no effort, no attempt to change any production rates on their aircraft. They're holding them where they are. They might not be shipping planes out to customers, but the production rates are not impacted.
And I think they believe they will get through the reviews, and they really are through most of the reviews, and get back to shipping product to customers. So as long as the production rate holds, there is no impact to us.
And then one of the things you mentioned in your prepared remarks is you've been able to improve pricing. How much of the pricing do you think you pass through to date?
That's a good question and honest answer, Nick, for Q1, I don't have a number. We're looking at this every day on opportunities and every day as contracts for renew, we set target margins for what we're trying to achieve. And so if the contracts renewing, we review margins on a part number by part number basis, and we make sure we are achieving our objective.
And going along with that, we're really trying to be careful going forward, and we've been doing this for more than a year now. We -- when we're renewing contracts with customers, we're now either doing annual pricing, which means we can relook at it on a yearly basis, or we will embed an escalation clause in the pricing or in the contract so that there's a mechanism to automatically adjust prices on a go-forward basis.
So we're taking these steps to make sure that we can consistently pass on any incremental cost increases through to the customer and not see our margin squeeze.
Great. Then one last question for me. In terms of CapEx for fiscal '24, any indication what you're expecting for the year?
CapEx for the rest of the year will be, I'm going to say normal, Nick, with the exception that we do have another maintenance capital. We have some roof -- we have to address the roof and [indiscernible], which is a relatively significant item. It's around the $1 million level, which will occur kind of Q2, Q3 time period. But the rest, excluding that CapEx for the rest of the year ought to be kind of normal.
[Operator Instructions] Your next question comes from Eric Chu.
Congrats on a great quarter. A quick question for you regarding your Asian exposure and exposure to COMAC. Do you expect this to be a material lift in the coming year or coming 2 years? And if so, do you have a general sense on what that quantum would be?
The shorter answer is yes. But -- and it's -- we've been engaged in the C919 program for a decade now. And I think when we started, we got the development process was going to be a lot faster. But it is done in any case.
And the -- but from the beginning, there were projections for this aircraft of production rates ramping to 140-ish planes a year. That is still their plan. And for us, that's not going to happen this year, to be clear, but they are ramping. They're into real production, and it's going to ramp each year.
I think to us, it's a material, maybe not a life-changing amount, but I think it would be on the order of $5 million in incremental revenue starting in the near future and ramping from there.
[Operator Instructions] Your next question comes from Alan Jacobs.
Brad, my question is on the impact of the strike. If there's a $3 million in sales, how come it could be -- have as much as $1 million impact on net income, which is like a 33% margin. I mean, is there something unusual that happened because even if that facility had higher-than-average margins, it just seems [ 32% ] like is a big number as a percent of lost sales.
Yes. But it's really just tied to FTG's economics. We have fixed costs at all our sites that are about 30%, which state, whether you shift nothing or ship a lot to fix spots are fixed, hence the name.
So our contribution margin on incremental revenue, whether it's going up or going down, is more on the order of 33% or somewhere in that ballpark. So it's an estimate from us to be clear, because we don't have an exact number on what didn't ship and therefore, what margin was not achieved. But the key is the contribution margin impact to the site into FTG, not just a normalized margin across the business.
So what about all the expenses, including taxes and other things that -- or the impact of taxes on that $1 million?
Sure. I mean, there is impact from taxes. But again, to be fair, we're not trying to get a really precise number on this. We're trying to give a ballpark estimate. And so we're saying it was about 1/3 of the revenue was the bottom line impact to us. If you want to assume it's a little bit less or a little bit more, that's fair. I hear you. But I think it's a pretty reasonable estimate. It's somewhere in that ballpark.
Just to be clear, the $1 million estimate is a pretax number. We also refer to [indiscernible] [ million ] as the estimated after-tax impact.
[Operator Instructions] Your next question comes from Eric Chu.
Brad, are you planning on any acquisitions this coming year or the next couple of years, specifically in North America? Or is it mostly Chinese corporate development targets you're assessing?
Our history and -- our plan going forward is we're going to try to build the business. We're going to try to grow organically, and we're trying to -- we would like to layer on acquisitions. Timing of them is always uncertain. We have to find targets they have to be willing to talk. There has to be a deal that makes sense. And so will there one going to happen this year or next year? I hope so. But for sure, no guarantees.
In terms of what we would be looking at, I would say it could be a number of things. In some cases, we're looking to add technology. I think if you look at the IMI acquisition last year, we're trying to some RF circuit board technology into the business. So that was a technology acquisition.
At some point, and again, I don't know if it'd be this year, next year or beyond, at some point, I believe it's in FTG's interest to have a footprint in Europe. Good or bad, Airbus is outperforming Boeing these days. And if you want to grow your share with Airbus, it's easier to do it from a U.S. -- or from a European footprint.
Similarly, there's a lot of increased defense spending going on in Europe. They're closer to some of the ongoing conflict. European defense spending, if you look at it as an entity as opposed to individual countries, that spending is significant, getting close to what the U.S. spends. So it's kind of the second reason to be in Europe.
And really along those same lines, another area that geographically could be of interest to us at some point would be India. We look at the defense spending across the world. U.S. is for sure, number one. Europe is significant. Russia and China are not markets we're going to pursue and next on the list is India. So the Indian market is one that at some point, we could address as well.
So there's a number of factors we're looking at in terms of what future acquisitions could do, and we just got to tie it back to what's available and what's a reasonable deal. So we are looking. We'd love to do one in the next couple of years.
There are no further questions at this time. I would like to turn the call over back to Mr. Brad Bourne. Please continue.
Thank you. A replay of the call will be available until Sunday, May 12, at the numbers noted in our press release. The replay will also be available on our website in a few days. I thank you all for your interest and participation. Thank you.
That concludes today's conference call. Thank you for your participation. You may now disconnect.