Good morning, everyone. My name is Michelle, and I will be your conference operator today. I would like to welcome everyone to the FTG Q2 2022 analyst call. All lines have been placed on mute. There will be a question- and- answer session following the call. If you would like to ask a question, please simply press the star followed by the one on your telephone keypad. If you'd like to withdraw your question, please press star followed by the two. Please note that this call is being recorded. I would now like to turn the call over to Mr. Brad Bourne, President and Chief Executive Officer of Firan Technology Group. 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 and 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. Listeners 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. Q2 showed strong progress towards a return to pre-pandemic performance for FTG. The impact of the pandemic is waning after a tough couple of years. Our booking trend is very positive, and our backlog is now almost back to 2019 levels. Booking is a leading indicator and a precursor to increased sales. Let me reiterate something I said last quarter, and that is the change in our mindset at FTG. For the past two years, we've been playing defense. We played great defense. We took many actions to ensure we got through the pandemic. Defense is only half the game.
As of the start of 2022, we are consciously taking actions to play some offense. We have a great balance sheet and the market is coming back. We are taking advantage of our balance sheet to increase capital spending to support higher technology, improve our operations, and to grow. We will continue to do this, but we can and will do more. Our balance sheet puts us in a great position to grow through acquisitions or other corporate development activities. We are putting a lot of effort into this area now, and we can and are looking at other capital allocation options that can benefit our shareholders. Specifically, during Q2, we had an NCIB- approved to buy back up to 5% of our outstanding stock. In May, we began buying back stock and purchased 45,000 shares in the month.
We believe that FTG has the resources to pursue multiple capital allocation efforts to create shareholder value, including organic growth, acquisitions, and a stock buyback. Now let me summarize some key accomplishments from our second quarter of 2022. FTG achieved six sequential quarters of increased bookings as the aerospace industry recovers from the COVID-19 pandemic. FTG's second quarter bookings of CAD 27.6 million are up 6% over Q1 2022 and up 45% over Q2 last year and is the best booking quarter we've had since Q4 2019. We achieved a 1.24: 1 book-to-bill ratio in the quarter. Total backlog at the end of Q2 2022 is CAD 49.6 million, up 45% from Q2 last year.
Sales for Q2 2022 were CAD 22.3 million, which is an increase of 9.8% over Q2 last year and an increase of 9.1% over Q1 this year. FTG has maintained strong liquidity with net cash on the balance sheet of CAD 16.8 million after investments in the quarter of CAD 400,000 for capital expenditures, CAD 1.6 million for research and development, and CAD 100,000 for the share buyback. As announced on June 30th of this year, FTG has been awarded up to CAD 7 million of funding from FedDev Ontario under the Aerospace Regional Recovery Initiative program. This funding will be a repayable contribution against qualifying investments made by FTG. The funding will be repayable without interest through to 2030. FTG achieved a trailing 12-month EBITDA of CAD 8.8 million.
Jamie will talk about the financials shortly, but I would like to highlight what we are seeing in future market demand. The aerospace industry is recovering. U.S. and global air travel continues to rebound. There are many predictions regarding the length of time for the aerospace industry to recover, but all of them indicate a strong commercial aerospace market in 2022, even if not quite back to pre-pandemic levels and a full recovery by 2023. The big challenge the travel business is facing is not customer demand, but being able to staff sufficiently to support the increase in daily flights. When looking at performance and plans from the large airframe manufacturers, Airbus is projecting a production rate in 2022 that will be 15%-20% above 2021. For 2023, they are planning another 40% increase, which would put them above pre-pandemic production rates.
Over the next few years, they are also projecting a 180% increase in the production rate of the A220, where we have significant content. The story at Boeing is a little more complex, as they have not shipped any Boeing 787 since May of last year due to certification issues with the FAA. For the 737, they are now at a 27-plane per month production rate and are targeting ramping to 47 planes per month by the end of 2023. A 75% increase from the current rate. Looking at the longer term, Boeing's most recent 20-year forecast shows growth beyond the COVID downturn as air travel recovers, and it continued to show 40% of all new aircraft deliveries going to Asia, as has been the case in the recent forecast.
For the defense market, the defense budget request in the U.S. for the next year has a small increase, so this market remains strong. Unfortunately, the conflict in the Ukraine is increasing the focus on defense spending around the world. The business jet market has already seen traffic recover. A recent forecast from Honeywell predicts growth in this market in the coming years. The simulator market mirrors the end market application, so commercial aerospace simulator activity is down but recovering, whereas the defense simulator market remains strong. As we always remind everyone about this market, it is lumpy, so large year-to-year variations do occur. The good news is we are seeing real customer demand materialize this year on programs where we are well- established.
As we have said for many years, FTG's goal is to participate in all segments of the aerospace and defense market as each moves through their independent business cycles. Within FTG, our Canadian and China sites are more focused on the commercial aerospace markets, whereas our U.S. sites are more focused on the defense market. Beyond all this, let me give you a quick update on Q2 2022 for FTG. First, as already noted, the leading indicator of business is our bookings or new orders. For the last six quarters, bookings increased, and Q2 2022 saw bookings up 45% compared to Q2 last year. In Q2 this year, sales were up 9.8% compared to Q2 last year. We definitely saw improved performance across the company as we had far fewer operational challenges in the quarter as compared to Q1 this year.
Sales were up in Canada, the U.S., Europe and Asia, everywhere we do business. In our aerospace business, Q2 sales were up 3% or CAD 300,000 compared to Q2 last year. Year-to-date sales are flat due to an over CAD 2 million drop in simulator activity, offset by increased demand in our other market segments. Simulator activity is increasing going forward. On the circuit side of our business, sales were up CAD 4.7 million or 19% on a Q2- over- Q2 basis. All sites were up, with our JV in China being up almost 90% on increased demand and new awards. Overall at FTG, our top five customers accounted for 55.6% of total revenue in the quarter. The percentage compares to 52.3% last year.
Also interesting to note, of the top seven or top 10 customers, seven are customers shared between our circuits and aerospace business. We always say, we particularly like to see the shared customers as it means we are maximizing our penetration of these customers by selling both cockpit products and circuit boards. In Q2 this year, 34.1% of our total revenues came from our aerospace business, compared to 37.4% last year. I would like to turn the call over to Jamie, who will summarize our financial results for Q2 2022, and afterwards, I will talk about some key priorities we are working on. Jamie.
Thanks, Brad, and good morning, everyone. I'd like to provide some additional detail on our financial performance for Q2. On the sales of CAD 22.3 million, FTG achieved a gross margin of CAD 5.6 million or 25.2%, compared to CAD 5.4 million or 26.7% on sales of CAD 20.3 million in Q2 2021. Excluding the impact of government assistance included within cost of sales, gross margin dollars actually increased by CAD 1.3 million on the sales increase of CAD 2 million, and the gross margin rate increased by 3.8 margin points. Government assistance in Q2 2022 was limited to a residual amount from the U.S. AMJP program, which was less than CAD 100,000, as compared to CAD 1.1 million in Q2 2021 from the CEWS program.
In FTG's case, sales and gross margins have ramped up as government subsidies have been withdrawn. On a sequential basis, Q2 2022 gross margin dollars are up CAD 1.4 million and 4.5 margin points relative to Q1 2022. The average FX rate experienced in Q2 2022 was 2.5% favorable compared to Q2 2021, with an estimated lift to sales of CAD 400,000. In addition, realized gains on FX forward contracts contributed CAD 200,000 to sales as compared to CAD 600,000 in Q2 2021. From a geographical standpoint, the sales increase in Q2 2022 was spread across all of the regions. Sales to Asia, Europe, and other Americas were up 19% relative to Q2 2021, and these regions are predominantly commercial aerospace.
SG&A expense was CAD 3.3 million or 14.6% of sales in Q2 2022, as compared to CAD 2.7 million or 13.1% of sales in Q2 2021. The cost increase is due to increased credit loss provisions, higher performance comp costs, and the inclusion of CAD 100,000 of wage subsidies in the prior year quarter. R&D costs for Q2 2022 were CAD 1.6 million, or 7.3% of net sales, compared to CAD 1.5 million, or 7.4% of sales for Q2 2021. R&D efforts include process development in the Circuit segment and efforts to develop and qualify new products for future aerospace programs. A portion of our R&D expense is customer-funded.
From a balance sheet perspective, the Canadian dollar strengthened relative to the U.S. dollar by approximately 1.4% from the end of Q1 to the end of Q2 2022. The CAD 120,000 foreign exchange loss identified in our Q2 operating expenses was primarily related to losses on the translation of U.S. dollar-denominated balance sheet items, including cash. EBITDA was CAD 8.8 million for the trailing 12-month period ended Q2 2022, compared to CAD 11.5 million for the trailing 12-month period ended Q2 2021. Although EBITDA is reduced from the level recorded 12- months back, it is important to note that in the most recent 12-month trailing period, government subsidies included in EBITDA were CAD 3.2 million, as compared to CAD 6.1 million in the prior 12-month trailing period.
For Q2 2022, FTG recorded earnings before income taxes of CAD 0.5 million as compared to EBIT for Q2 2021 of CAD 0.6 million. The Q2 2022 income tax provision of CAD 0.5 million, or approximately 100% of pre-tax earnings, reflects that the corporation's Canadian operations were profitable and that deferred tax assets on foreign operating losses were not recognized in the quarter. On a sequential basis, EBIT for Q2 2022 is at CAD 0.9 million on a sales increase of CAD 1.9 million. Our net cash position as of Q2 2022 is CAD 16.8 million, as compared to net cash of CAD 14.8 million as of Q2 2021.
As noted in our comments last quarter, the lease for the aerospace Chatsworth facility expired on June 30, 2022, and the owner had advised us of their intention to sell the facility. To secure the facility for continued occupancy, we've entered into a purchase and sale agreement to acquire the facility for $6.5 million, or CAD 8.1 million. The corporation has provided a non-refundable escrow deposit of $200,000, and expects to settle the remainder of the purchase price, $6.3 million, for cash on the expected closing date of July 27th, 2022. The corporation intends to complete a sale leaseback transaction with a third party following the closing date as soon as this can be completed.
Free cash flow, defined as net cash from operations and investing activities excluding acquisitions, less lease liability payments, was CAD 0.8 million for Q2 2022 as compared to CAD 1.9 million for Q2 2021. Q2 2022 included a use of cash for changes in working capital, whereas the prior year quarter included positive cash flow from changes in working capital. As at quarter end, the corporation's primary sources of liquidity totaled CAD 52.4 million, consisting of cash receivables, contract assets, and inventory. Working capital at June 3rd, 2021 was CAD 39.9 million, as compared to CAD 40 million at the 2021 year end. Accounts receivable DSO were 65 as of the Q2 close, compared to 72 at the year end. Inventory turns were 3.8 as of Q2, compared to 3.4 for 2020 year end.
Accounts payable days outstanding were 68 as of Q2 close, as compared to 86 for the 2021 year end. Investment in plant and equipment for Q2 was CAD 400,000. We do anticipate a higher level of capital expenditures for the second half of 2022. We are entering the second half of 2022 with a backlog of just under CAD 50 million, which is the highest value since before the pandemic. There is clear momentum in the recovery of the commercial aerospace market. We will continue our focus on cash, cost control, and operating efficiency. Our complete set of filings are now available on sedar.com. With that, I'll turn things back to Brad.
Thanks, Jamie. Let me delve in, into some important items regarding our performance across FTG. For me, I thought our second quarter had further improved operational performance. If you look at Q2 this year versus Q2 last year and exclude the government's assistance received in each of the quarters, the revenues increased CAD 2 million and the bottom line improved by CAD 1.2 million. We have a similar improvement on a year-to-date basis, where sales are up CAD 3.5 million and the bottom line is up CAD 3 million, again excluding government assistance. While I know we have a high contribution margin, it takes an amazing effort by everyone at FTG to improve profitability by this amount so quickly.
As I and many others in the aerospace industry have suggested to many people in government, support to the aerospace industry was withdrawn before the industry had recovered sufficiently. We were very pleased to announce after the quarter end that we had been approved for CAD 7 million under the Aerospace Regional Recovery Initiative program. This program provides assistance to help companies recover faster from the pandemic. They're certainly going to enable FTG to play more offense. In our aerospace business, our Toronto facility has done a great job in managing through the pandemic, but now the focus is on growth. They've made some good inroads in increasing activity in the defense market. We are starting to see their simulator business recover, and this should benefit the second half of 2022 and beyond.
We've had a few supply chain challenges due to chip shortages this year, but so far, we have mitigated the impact down to a manageable level. Our aerospace Chatsworth facility was also impacted by pushouts by suppliers for some military components. They continue to have a long list of new sales opportunities, almost all coming from the defense market. They continue to see and win U.S. defense aftermarket opportunities. Our aerospace Chatsworth facility operating performance was significantly improved in Q2 this year, and they were profitable for the quarter. In our Circuits segment, bookings in our Toronto facility have been very robust this year as the commercial aerospace industry recovers. We are taking actions to ramp production in line with this increased demand, and May was an exceptionally strong month for that site.
Circuits Fredericksburg was improved in the second half of the quarter subsequent to some management changes made during the quarter. Circuits Chatsworth had improved operational performance in Q2 this year, with sales up more than 9%. We continue to invest in the business to further improve performance, including additional capital equipment, process improvements, and strengthening the organization. This site is not yet at the performance levels we expect. Both our China sites are exclusively focused on the commercial aerospace market. As noted from the Boeing market forecast, Asia remains a key market for commercial aerospace activity, so we believe these sites will be valuable in the long term. Our aerospace Tianjin facility has seen orders increase consistently since the start of 2021 as the commercial aerospace market recovers and they win new work. In Q2, sales were up 32% compared to Q2 last year.
In Q2 this year, we received a new order for cockpit products for the Boeing 737, with production to be shared between our Toronto and Tianjin facilities, and our total backlog of panels for the Boeing 737 aircraft is now approaching CAD 2 million, with deliveries starting in Q3 this year. These orders are showing the results of return on investment from a multi-year effort to have these sites approved to supply cockpit panels for Boeing aircraft. Tianjin is also seeing strong demand from their business jet customers and in general aviation. We now have a hiring plan in Tianjin, which sees us add 40%-50% more production staff as fast as possible. At their current capacity, they are sold out through 2022. Of course, our goal is to add capacity so they can continue to grow.
Progress continues on the C919 aircraft development in China. While we have not quite completed our qualification activities, we have shipped our first production orders and have received new orders for this year. At our Circuits joint venture in China, we saw new wins and increased demand at that site in Q2 and for the coming quarters. As already mentioned, sales were up almost 90% year-over-year at that site. We continue to manage our balance sheet, but also to leverage its strength. Our net cash on the balance sheet is above CAD 16 million at the end of Q2 this year. We are seeing a number of acquisition or corporate development opportunities arise that could fit with either of our business. Given our commitment to play some offense and our strong cash position, we are evaluating and pursuing them.
Our criteria for any such transaction would remain what we have always said. They would need to meet a number of the following objectives. Be aligned with FTG's market and product focus, expand our technology offering, expand our geographic coverage, such as Europe for commercial aerospace or Europe, India or other top 10 Western defense countries for defense, accelerate FTG's penetration of the aftermarket segment, drive up plant utilization, be an attractive price multiple, and be accretive to earnings. Finally, looking forward into the balance of 2022 and beyond, there are reasons for optimism. As already noted, the industry is recovering and production is ramping. Our sales team has been doing a stellar job, and we are seeing them winning new programs and adding new customers. We are playing offense to capture new work.
With a focus on operational excellence in all parts of FTG, we are confident we remain on a growth trajectory in the coming quarters. This concludes our presentation. I thank you for your attention. I would now like to open the phones for any questions. Michelle?
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Nick Corcoran of Acumen Capital. Please go ahead.
Good morning, and thanks for taking my questions. Morning.
Just a couple questions for me. I think with the lockdowns in China and employee absenteeism in North America, can you quantify what the impact might be on the sales in the quarter?
Yeah. We have had an ongoing, you know, small one or two people a week absence due to COVID across the company. That was much improved from what we had seen in Q1, where, you know, we were having departments being absent due to COVID. The impact was a lot less, but still there. Specifically related to China, the lockdowns in China in this quarter were more around Shanghai and other areas. Tianjin was not impacted, or our sites in Tianjin was not impacted by any shutdowns, lockdowns during our Q2.
Good. I think you mentioned in the disclosure that availability of electronic components impacted sales in the quarter. Can you quantify what that might have been?
Yeah. Again, it was not a huge number. I'm gonna say, you know, maybe it's in the somewhere in the 0%-5% of sales range, something like that. It definitely impacted our aerospace business only, not our circuits business. Aerospace Toronto in some assemblies had shipments delayed, and Aerospace Chatsworth same thing, had some delays. You know, overall, it was a relatively small percentage of our total activity.
That's good color. You disclosed the up to CAD 7 million of funding from FedDev Ontario. Can you maybe give some color on what period you expect this, and whether there's any retroactive fundings?
Yes. To answer the second part, it definitely is retroactive. Basically, the way this program works is it will support investment in the business between April of 2021 through March of 2024, so a three-year period of investment. It goes back a year, or actually a little bit more than a year. The investment it supports is really across a full range of things you can do with a business, which was great. It supports investment in research and development, but, you know, within that, it can be product development, of which, you know, we have some plans aerospace business. It supports investments in process improvement and efficiency improvements, which supports both of our businesses.
It supports investments in automation and Industry 4.0 technologies, which is something that we had already started, so we're gonna be able to continue to do that. It supports investments in green technologies. We actually like that. We like it for two reasons. Generally, when we invest in green technologies, actually as a benefit to the business financially, and obviously it's good for the environment and good for the community in which we live and operate, so it's a double benefit. Then lastly, it supports investments in cybersecurity. If you remember back in 2019, we were actually, you know, subject to a cyberattack, which hurt us in that year.
That's one reason we like to invest in cybersecurity to protect the business, but also more and more so in doing business in the defense market, it's a requirement to have a robust cybersecurity program in place to be able to do business in that market. It supports all of these investments over a three-year period. It is repayable over a five-year period, but starting in 2026 through 2030. It's a long-term program. It is interest-free funding. It's really gonna be good for FTG. You know, it definitely is gonna allow us to invest more aggressively and play more offense.
Great. The backlog is almost CAD 50 million. How much do you expect to have through that in the third quarter?
There's more than CAD 25 million due in the quarter. Having said that, you know, there's always the little challenges. You know, we talked about one such as chip shortages. I never plan for perfection in a quarter. You know, that's one factor. You know, we're gonna be under CAD 25 million. I guess the other one on that is our Q3 picks up the summer months, June, July, and August. Summer months typically have higher vacation. My estimate has always been I lose about a week of production in the summer due to vacations. I would expect that to be the case this year. You know, that's gonna put us, you know, in the CAD 20s million for sure. But exactly where, I don't know.
Definitely, you know, under CAD 25 million.
Would you expect a sequential improvement from Q2, or do you think the summer period and other challenges to potentially be a challenge there?
Yeah. I mean, I think that's a bit of a challenge just 'cause, you know, as I say, for sure we lose on average one week of production, which is about, you know, an 8% reduction in production days in a 13-week quarter. You know, I gotta be able to. I would have to grow more than 8% just to stay flat from Q2 to Q3, and not sure I'm gonna do that.
Great. Just the last question from me. The purchase of the Chatsworth facility is expected by the end of July. How long do you expect to take to do the sale-leaseback transaction?
I don't know. You know, my goal is immediately. I don't think I'm gonna achieve that goal. You know, we've been working on finding buyers already. You know, there's definitely interested parties in California for the building. We had to get through all of our due diligence in terms of closing the acquisition, and that just took longer than we'd hoped. You know, my goal is to own that building for as short a period of time as possible. We're gonna keep working on that to get it off our balance sheet as fast as we can.
That's all from me. Thanks again.
All right. Okay, thanks, Nick.
Thank you. Your next question comes from David Plum, Private Investor. Please go ahead.
I was gonna ask a question about Chatsworth, too, whether it's gonna be third-party related, but obviously you don't know the buyer at this stage. The question is changed to, is this going to mean an increased cost to operate at Chatsworth?
I guess we will see. You know, my expectation is, as we started to talk to potential acquirers of the building, it is really just pure math. You know, they're financial investors. They put X number of dollars down. They expect a return, and that converts to a lease rate. You know, my goal on the building is to sell it at approximately the price we paid for it. That should translate into probably a small increase in the lease rate from where we have been, but I would not call it a material number.
Okay, thank you for that. The other question I wanted to ask you is, normally in your comments, you put Airbus in front of Boeing. Does that indicate that Airbus is a bigger customer?
No. I think it indicates A comes before B. I can't think of a reason why. It just is first. I would actually say Boeing is a bigger customer to us. I would love to do more work with Airbus. I think to really penetrate the Airbus supply chain will require us to have a footprint and, you know, some activity in Europe, which we do not have yet.
Okay. Thank you, guys. It's nice to hear the increased confidence, especially from a couple of years ago.
Yeah, agreed. It's nice to be able to be more confident.
Thank you.
Thank you. Once again, ladies and gentlemen, if you do have a question, please press star one at this time. There are no further questions at this time. Please continue.
Thank you. A replay of the call will be available until August fourteenth at the numbers on our press release. The replay will also be available on our website in a few days. I thank you all for your interest and your participation. Thank you.
Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.