Good day, ladies and gentlemen, and welcome to the Omni-Lite Industries investor conference call. Our host for today's call is Amy Vetrano-Palmer, Omni-Lite CFO. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to your host. Amy, you may begin.
Good afternoon, and thank you for joining us. With me today is our Chief Executive Officer, Dave Robbins. Our call is being recorded and will be available for playback, the details of which are in our press release issued. The purpose of this call is to provide an update on Omni-Lite's financial performance and operations, as we did file our third quarter and year-to-date 2023 results, which were released Friday, November 10th. After our remarks, we will open 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, www.omni-lite.com, or email us at d.robbins@omni-lite.com or a.vetrano-palmer@omni-lite.com to request a copy.
Before we get started, I would like to remind you that today's discussion will or may include forward-looking statements, including information regarding Omni-Lite's performance based on our views of the company's business and the environment in which they operate, our future plans, objectives, business prospects, and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that can cause our actual results or performance to differ materially. We're also mindful of the risks and impacts of changes in the health of the general economy, including the effects of the U.S. financial market, the U.S. global commercial aerospace market, and the U.S. Department of Defense budget. All forward-looking statements should be considered in conjunction with the cautionary statements contained in our press release and the risk factors included in Omni-Lite's SEDAR filings.
The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. I'd also like to mention that in addition to reporting financial results in accordance to International Financial Reporting Standards, or IFRS, during our call, we may also discuss or reference non-IFRS financial measures, specifically adjusted EBITDA and free cash flow. A reconciliation of these non-IFRS metrics, if applicable, is included in our applicable SEDAR filings and press releases. Lastly, unless noted, any reference or discussions of our financial results or metrics are in U.S. dollars. I'd now like to turn the call over to Dave. Dave?
Thanks, Amy. Good afternoon, everyone, and thanks for joining us. I'd like to make a few comments about our third quarter 2023 performance, followed by comments on our current business. Third quarter 2023 revenue, $3.3 million, marks an increase of 22% from second quarter 2023, and a 4% increase over the third quarter of 2022. Growth in the quarter was driven by a combination of increases in commercial air transport, fastener products, and defense electronics. Adjusted EBITDA for the first third quarter 2023 was up over $110K over Q2 2023, which is a continued significant improvement and an indication of our ongoing improvements in productivity, managing SG&A and indirect labor-related expenses and product pricing.
Bookings in the third quarter increased to $4.7 million, up from $2.7 million year-over-year, and sequentially up $1.3 million from $3.4 million Q2 2023. Backlog at quarter end was a strong $6.1 million, indicating continued revenue growth into 2024. New order bookings reflect strong demand for engineering fasteners in the commercial aerospace and defense needs, jet engine castings, and missile defense sensor electronics. The strong backlog and bookings underlie the increase in strengthening robust customer engagement throughout 2024 and have expectation to continue. Qualification samples and associated product production plans of a new form engine component were produced in the quarter, which we expect to start production in the second half of 2024.
The first prototype optical sensor casting component was produced in the quarter in anticipation of qualification samples being delivered into Q4. In the quarter, two new bookings for high-efficiency missile sensor electronic components will start initial production in Q4 and expect to continue into 2024. Our ability to engineer and process, reliably produce products with exacting specification in months and not years, was the heart of winning these orders and our competitive moat and business model. With that, I'd like to turn the call over to Amy. Amy?
Thanks, Dave. Dave addressed the revenue and outlook, and I'll make a few comments regarding cash. Adjusted free cash flow, defined as cash flow from operations minus capital expenditures, was a source of cash of approximately $255,000, as compared to a use of cash of $615,000 in the same period of 2022. We did use approximately $127,000 for CapEx purchases, which were for improvement in the manufacturing process.
We continue to see increases in both WIP and finished goods and decreases in raw material, indicating the start of new jobs and the movement of our backlog. We finished the quarter with a strong $1.3 million in cash and no debt, which is consistent with how we ended both Q1, Q2 of 2023, and Q4 of 2022, as we continue to maintain a strong cash balance. This completes our prepared remarks. We'd like to open the call for questions.
At this time, we will conduct the question and answer session. If you would like to ask a question, please press star, then the number one on your telephone keypad now, and you will be placed in the queue in the order received. Once again, to ask a question, press star, then the number one on your telephone keypad now. Your first question comes from John Lewis, an individual investor. Please go ahead.
Hi, Dave and Amy. How's it going?
Good.
Good. Listen, thanks for holding the call. I haven't been on it in a while, but I am a big believer in conference calls, one of the top five things small-cap companies can do to give their, you know, their shareholders a platform. I've got three questions. Don't want to dominate. I haven't been on this to say, I don't know if any analysts are covering it, but number one question: in your notes in the MD&A outlines the Canadian division's performance. I believe the company was bought around December 2021, and unanimously approved by the Board. Seemed to recall it was break-even at the time. I looked at the numbers, and the bad news is, to date, this year, it has lost $1.2 million on sales of $2.7 million, if that's correct.
I guess the good news would be that the other two divisions are doing well. Wondering what your plans are to fix this division, and can you comment on the other divisions?
So there's some-
Go ahead. Sorry.
No, that's okay, Amy. You go.
I would add one piece of information, in that in Canada is also some of the corporate-related expenses, because our holding company is also, part of the Canadian division, not part of the DP Cast division. So that does include, things such as stock comp expense, our audit-related fees, some of those, you know, pretty significant costs that do, you know, come into play. So Dave?
Yeah, I was just gonna reiterate that same, but also about the business, comment on the business. You know, I have, you know, publicly stated that there has been opportunities for improvement at Casting. And, you know, we've made some improvements, rationalized some of the business. I think when we first acquired the business, there was some good business in the jet engine area and some other defense and aerospace-related product, but there was a mix. There was also a mix of other businesses that, you know, once we put some business systems in and really could see whether they were, you know, contributing to our bottom line, we rationalized them out.
So there's, you know, there's been a bit of restructuring and rationalization of the business, as well as streamlining the operations to to be able to... we feel like it will be able to contribute. Maybe taking us a little longer than anticipated, but, you know, we're making steady progress.
Okay. Thank you. Actually, the reason I'm on the call today is a friend—like, I've been a shareholder of the company for, you know, a decade or more. He's actually a CNO shareholder, which you hold shares in. He reached out to me to ask me what I thought about OML as a potential investment. So I assume that the recent success of California Nanotechnologies may be bringing new eyeballs to OML, or at least its seven million shareholding. Along with this did come a criticism. He told me the directors received $40,000 as annual compensation. I told him he was nuts, but I was wrong.
I canvassed over this weekend, and I cannot find anywhere or anyone that tells me in small cap land, for the nature of the business, the revenue profile, lack of M-M- M&A, that this is reasonable. Like I told -- I was told $20,000, you know, for a Director and $25,000 for the Chairman. I'm just wondering if you have any comments on this, and, and, you know, or, and/or do we even need five Directors?
So okay, there's a lot, a little bit to unpack there. Well, I mean, I don't have all the data in front of me, but, you know, we felt like, you know, we don't want to be on the low end. We wanted to be, we feel we are in mid pack, so to speak, in our compensation, so not exactly sure the data you're looking at, but, but, you know, it was constructed with that in mind, not to be on a high, on a high level. But having said that, it is a very active Board. We do have, you know, I mean, DP Cast was an acquisition that we did, and there is a, an acquisition mindset.
So, you know, so I don't, I don't think it's fair to characterize it that there's no M&A activity. M&A, M&A activity can come in kind of it's not a linear process. It can kind of come in chunks. So and I've, I've commented you know, quite a bit that we've had you know, an M&A campaign. So, you know, it's an active Board and you know, feel like it's appropriately compensated.
Yeah. Okay. So you mean, and I don't want to be overly negative. You know, my goal, hopefully, is for this company to thrive and get to profitability. You know, I was given numbers like $750 a meeting, that sort of thing. And these, these are... You know, I own a lot of companies, so I reached out to actual Board members of other companies. So I'll leave it at that. I guess, lastly, you know, a lot of people are wondering, does the company have any thoughts on what it will do with its CNO shareholding? That's it for my comments and questions.
Well, the reason that we, you know, participated in the conversion was, we thought that there was a good chance and, you know, we might have an opportunity to convert our holdings into cash that would benefit Omni-Lite shareholders. So it was, it was that transaction had that in mind.
Yeah, I know. I wonder about the... I mean, I was in the recent financing, so I'm wondering about the actual overall position. Do you have any thoughts on what you will eventually do with the 7 million plus shares?
Well, we've certainly got ideas, and one of them is converting it to cash.
Okay. All right. Thank you. Appreciate it.
Yep.
Your next question comes from Manny Creamer, individual investor. Your line is open.
Yeah, hi. Thanks for the good quarter. I just read in the news that Boeing announced that they might China—China might resume the 737 MAX on the wide bodies. How will that affect your revenues or, if any? Have you been doing business with Chinese at all?
Well, we do know that our engineered fasteners are forming components is on the 737 MAX platform. So, you know, what's different about the 737 MAX as some of the newer aircraft is that they're high use of composites and these engineered fasteners and our uptick in business, that's one of the platforms that is you know, helping drive that. So we look at that kind of news as you know, positive as well as some of the other aircraft new starts, including the 737.
How about the Airbus? Is that any factors in getting more orders from Airbus also?
Yeah, some of our customers are doing quite a bit of business on the Neo platform. And again, we have some engineered fasteners on those newer platforms.
Okay. Thanks very much.
Once again, to ask a question at this time, please press star, then the number one on your telephone keypad. Your next question comes from Frank Waneski, individual investor. Your line is open.
Hey, Dave. Hey, Amy. Couple questions. Kind of following up on the first gentleman's questions. On the casting side, what specifically have you done? Have you had labor reductions there? You said you changed the process a bit, but you know that, you know, I think it's probably in less good shape than it was when you bought it, at least from a income statement standpoint. And I'm just wondering when we might see some progress there.
So part of, in the comment about, SG&A and overhead expenses being down, part of that is, at DP Cast, is participated in that. We, you know, we look to have business systems help us produce more efficiently, and with less need for that kind of overhead. And certainly that's an adjustment that we've made up there, as well as rationalize, you know, some of the products, and towards ones that are—really have more of a runway of visibility in terms of yearly, you know, yearly needs. And so. And I wouldn't characterize it as it's worse shape than when we bought it.
So it's probably in better shape, because you've changed things. But I was talking about purely from a, an income statement basis. And I did see the, the overhead, the labor-related reference in the, in the discussion of the overhead. have you got any, internal model? I think when we, when we talked before about it, I think you said, you know, a quarterly run rate of about, you know, $1 million, or a little over $1 million would, would bring it to break even or profitability. Is that still the case?
... Yeah, it's, it's right. If you're talking U.S. dollars, a little-
Yeah.
A little north of $1 million, but, you know, our target is set higher than that. But that's about right. A little more than $1 million. But again, we're targeting, you know, much higher than that, or at least significantly higher than that.
Over what time frame? Over the next 12 months, or?
Yeah, I mean, we're looking to get quarterly improvement. We have now better priced backlog that's robust. And so when we started the year, it was not as robust as it is now. So, with better priced backlog and a streamlined workforce, I think those are the, you know, the underlying, how we can make incremental improvement each, you know, each quarter. I think you know, with castings, you know, when you're putting parts on, you know, aircraft, you know, there's a bit of a cycle from the time you start a job or especially a new job. So part of our backlog is on new products.
And on the older products, that there still is a lead time of maybe six to nine months before you really recognize that revenue and receive the cash. So, you know, it takes, it takes a little time for that to, you know, improvement to show up. But, you know, we see the signs for steady improvement.
And then like, how much of your $6.1 million backlog is from casting?
It's significant, at least proportional and a little bit more than proportional amongst the three divisions.
Okay. All right. And one final thing on that. I believe you're carrying about $1 million in intangibles on your balance sheet. Is that mainly related to the castings?
Yeah, that is majority due to the purchase of them.
Is that something that your accountants, auditors are gonna be testing annually, like in U.S. companies?
Yep, yep, they do goodwill testing every year. So that'll be part of this year's audit, as well as it has been for the prior two years.
Okay, and do you feel that the intangibles at casting will pass that test?
Yes.
There's still $1 million worth of intangibles for something that's, you know, doing maybe $4 million in revenues and not making money?
So the whole $1 million that's there is not just related to DP. There is a good portion that's also related to the Monzite organization. So yes, I do believe that both will be in a good position, and there won't be an impairment on either of them.
Okay. All right. This is more of a comment than a question, but again, it sort of relates to your answer on your Board. To the extent that they were largely responsible for this casting acquisition, which may not be the Black Hole of Calcutta, but it certainly was a difficult acquisition. As a significant shareholder, I would definitely encourage you not to make any more acquisitions until you've totally rectified the last acquisition. The acquisitions are tough, and the casting business is particularly tough as I think you now know.
I would just make sure that the Board is aware that some shareholders would not be pleased with additional acquisitions until this acquisition is totally cleared out. But that's just a comment, and I've told that to you before, Dave, so I just wanna reiterate that.
Well, you know, no, Frank, I, you know, we, we have mentioned this, and, you know, I share that sentiment. You know, at last, you know what? We, we're not, we're not looking to build a, you know, a house of cards. And, you know, I do like this castings business. It, you know, at its heart, it has the ability to, you know, we model it at making our 40% gross margin, 25% EBITDA kind of model. We're gonna get there, but I certainly, yeah, don't and aren't looking to, you know, to do an acquisition for the sake of doing acquisition. We've got to build on a good platform.
And we're gonna get there with castings.
Yeah, yeah. No, I, I, I hope you do, because it was, I mean, it's what you bought with the proceeds from the plant sale, which, which was one of your, your bigger assets. And the asset allocation decision, which is a Board decision at this point in time, doesn't look like it was a terrific decision. So, you'll pardon me if I have a little skepticism that the Board is able to make other capital allocation decisions in any better manner. And just on the casting business is a tough business.
But I think it was Buffett that said, "When a business with a reputation as a bad business is taken over by management with a reputation of good management, it's the former that survives." So just be aware of that. It's a tough business. You guys are good managers, but it-
Yeah.
Mm-hmm.
I was unaware of that comment. That's... So Buffett said that, huh?
Yeah, it was Buffett said that. I believe, I believe it was Buffett, yeah. Anyhow, that's my, you know, I, I think overall, it was a good quarter. The fastener business and the electronics business are doing exactly what I would have expected them to do, and it's just the casting business that, that needs to be, that needs to be, straightened out. And, I know you're spending a lot of time on it, and I wish you the best of luck.
You got it, Frank.
Thanks.
At this time, it appears there are no further questions. I'd like to turn the call back to management for any closing remarks.
That's all on our end. Thank you for joining us today, and we look forward to seeing you all next quarter. Thank you.
This concludes today's Omni-Lite Industries investor call. Thank you for attending. Have a wonderful rest of your day.