Air Industries Group
Q2 2020 Earnings Call Transcript

Published: 10 Aug 2020

[Operator:]

Good day, and welcome to the Air Industries Conference Call. Today’s conference is being recorded. Air Industries Group’s Safe Harbor statement. Except for the historical information contained herein, the matters discussed in this presentation contain forward-looking statements. The accuracy of these statements is subject to significant risks and uncertainties. Actual results could differ materially from those contained in the forward-looking statements. See the company’s SEC filings on Forms 10-K and 10-Q for important information about the company and related risks. EBITDA is used as a supplemental liquidity measure, because management finds it useful to understand and evaluate results, excluding the impact of non-cash depreciation and amortization charges, stock-based compensation expenses, and non-recurring expenses and outlays prior to consideration of the impact of other potential sources and uses of cash, such as working capital items. This calculation may differ in method of calculation from similarly titled measures used by other companies. At this time, I would like to turn the conference over to CEO, Mr. Lou Melluzzo. Please go ahead.

[Luciano Melluzzo:]

Thank you, James. Good afternoon, and thank you for joining us as we summarize Air Industries’ results for the second quarter and the first half of the year. In addition to discussing our results, we will also discuss the impacts of COVID-19 on our operations. As we continue to navigate through a new normal work environment, we are thankful that our workforce is staying healthy and safe. Air Industries results for the quarter were significantly impacted by COVID-19. As we have discussed before, we were affected by employee absenteeism particularly in April and May, which reduced productions in our factories. In addition, our subcontractors and supply base were adversely affected as well, including plating, key treating, painting, to name a few. There in the quarter many of the companies that provides us service completely shut down for extended periods of time. The combination of these factors impacted both production and shipping of product. Net sales for the quarter were just $8.5 million dollars. During the quarter, and particularly in April and May, we chose to maintain employment and continue to product even though it cannot be immediately processed and shipped and would need to stay in inventory for a time. This caused our work in process with inventory to increase by about $2.5 million dollars. The sum of net sales and the increase in semi finished with inventory is roughly $11 million, which is much closer to our normal sales level of $13 million plus in the first quarter. As you know, Air Industries business is heavily concentrated on components for military aircraft. Unlike commercial aerospace, there has been little change in demand for military product. We have had some cancellations and reductions in our commercial business and we are filling these gaps by accelerating the production of military products. Our backlog which consists of firm orders only has only marginally reduced and remains at about $100 million. I would like to turn the call over to our CFO, Mike Recca for a financial recap, then I'll return to close the call. Mike?

[Michael Recca:]

Now as Lou said, our results for the first quarter are understandable. This is a disruption due to the virus both on us and on every other business in the country. Our sales for the quarter about $8.5 million, that is a 36% decline from the prior year. The effect on gross profit was more significant. Gross profit declined by $1.6 million or 76%. Decline of gross profit was greater than the decline of sales. Lou spoke about employees absenteeism with some disruptive and quantified this during the quarter. Total manufacturing hours were 8000 hours less than in Q2 of 2019. So with these fewer labor hours we had under absorption of our manufacturing overheads. Nearly all, that would be 98% of the lost labor hours, occurred in April and May. For the quarter our operating costs were essentially unchanged couple of hundred thousand dollars one way or another. The low interest rate on our bank debt which we mentioned before dramatically by more than 50% reduced our interest expense which went from 992 in 2019 to 428 in 2020. Now for the six months sales of $21.9 million is a decline of 21% and again, more than 90% of the decline for the six months occurred in the last three months in the second quarter. We had an operating loss six months of $1.4 million and 95% of that loss is attributable to the second quarter. We had negative EBITDA for Q2 and our EBITDA for the six months was $894,000. We compliance of all the covenants of our loan agreement and expect to remain in compliance for the balance of the year and beyond. Lou I'll turn the call back to you.

[Luciano Melluzzo:]

Thank you, Mike. Let me close the call with a few thoughts on the remainder of the year. We recently made an announcement of a major investment in equipment totaling about $2.5 million. These acquisitions made at very attractive prices will accelerate production and also greatly enhance the work envelope of the product that we can manufacture. It may seem counterintuitive to make these investments during the disruption caused by COVID-19, but we are in the enviable position of having orders in backlog that exceeds our ability to fulfill them. These new machines will be installed and operating in the fourth quarter. They reflect our confidence in the future. This concludes the formal remarks this afternoon and I would like to open up the call to questions from participants. James, can you open up the lines please?

[Operator:]

Thank you. [Operator Instructions] And we'll take our first question.

[Unidentified Analyst:]

Hi, good afternoon Lou and Mike. First I wanted to get into the second quarter which was adversely impacted by employee absenteeism and there were temporary closures which is understood with the virus. You split the supplies facilities. I was hoping if you could update us on how these conditions currently look?

[Luciano Melluzzo:]

Hi John, how are you today?

[Unidentified Analyst:]

Good thanks.

[Luciano Melluzzo:]

It seems like everyone is starting to stabilize. Everybody is open for business right now. Some places have had an attrition in workforce. We've been lucky enough to maintain the workforce for the most part the way we were. We temporarily furloughed a few guys during the crisis, during the highlight of this virus, but we have since either hired back or brought those folks back and it was only a handful of people. But it seems like all our sub tiers, our supply base, our subcontractors, however you want to call them, are getting back to the cadence that we were accustomed to and helping our product. So that's been stabilized to some degree. It might be with less folks but they are there and they are working.

[Unidentified Analyst:]

Okay, not fully back as far as your suppliers are concerned, but obviously marked improvement since the second quarter, I could take it at that?

[Luciano Melluzzo:]

Active suppler, yes. In terms of absenteeism it has returned to normal 2% or 3% on any given day are now around. Our absenteeism in the factories is at historical levels, it is back to normal.

[Unidentified Analyst:]

All right. And I have a question in regard to your $2.5 million machinery purchase orders here which you said you anticipate you'll be you said so long in the fourth quarter you're getting obviously in this quarter. But I was hoping that you could quantify how much of your bottleneck with suppliers you believe that this new machinery will alleviate or if I could put it another way, what percentage of your bottleneck with suppliers will the new equipment be able to handle?

[Luciano Melluzzo:]

So to put it in perspective it is hard to give you a percentage, but I'm going to explain how this thing works. So the equipment that we purchased, we purchased a new five axis machine that greatly enhances the size capability of our product, but say our largest product was 48 inches or 50 inches, this thing gets us to an envelope of that's another foot beyond that. So it gives us access into other products that we were either not doing effectively or it puts us in a bargain where we can quote larger work. So and it also eliminates bottle – we have the smaller – we have the 800 mm pallet machine in our facility. We've always had it, we've had it for a while. This is the 1000 mm machine which is the next step up in five axis machining. So that opens up some new doors. It takes out bottlenecks from the existing equipment that we had and it obviously got all the newest technologies in it, all the 1000 whistle in process inspection it helps us really inspect the pot without having to take it off the table. So it does a lot in that respect. So that's one piece. The other piece, we bought two additional five axis machines which were smaller in size. The envelope there is about 39 and 40 inches let's call it for all intents and purposes. But the beauty on these machines is what we call a light off cell. The machines are integrated into a pallet system with 28 different pallets that are loaded and unloaded off the grid or done separately while the machines are working and you really can load 28 pallets with different work, push a button and walk away for the weekend. The machine will inspect the parts. The machine will tell you when it is done and if there is a problem it glows a red light and stops the process, so it is called the lights out cell because it works – it could work around the clock. With the right work it can work around the clock which is another feature that Air Industries has not had in the past, so it breaks new ground as the type of work that we can do that we would have not been competitive in the past, it opens up new doors. And the last piece of equipment that we purchased was a vertical hoe. Now we have a 48 inch capacity vertical hoe now. This and it goes up to eight inches in diameter, 48 inches in stroke. This new hoe goes 60 inches in length and stroke and up to 16 inches in diameter which again is for product that we would have passed on in the past and now we could effectively let's say hold back. So it not only eliminates bottlenecks with one hoe into two hoe, because it can do smaller parts as well, but it give us a door into bigger product.

[Unidentified Analyst:]

And this here obviously it won't take care of the entire bottleneck, it sounds like you are going to have to outsource, but would you say that it would alleviate at least a significant portion of your current bottleneck right now?

[Luciano Melluzzo:]

It would definitely. Well, yes and yes. So it would eliminate a bottleneck, it would eliminate the risk of having one machine that does that breakdown and beat that in the water and it opens up capabilities. So it provides, it solves a couple of different things John.

[Unidentified Analyst:]

Okay, I just wanted to get an idea, because obviously with the backlog I think you mentioned over in your comments it is still floating around the $100 million mark, that's the firm backlog for 18 months, correct?

[Luciano Melluzzo:]

That is correct, yes.

[Unidentified Analyst:]

I just want to get a handle on this because significant investment in the machinery which is a good think, I mean if you can alleviate that bottleneck to some percentage that is a great thing, because I realize without that bottleneck you could probably be doing if you took $100 million and did it over six quarters flat lined you'll be I think if I did the math right over $17 million quarters on the top line. So that's why I was just trying to get a handle on how much of this bottleneck would be alleviated by these purchases here. Forgive me for being the analyst trying to get percentages from it or whatever, if you had that, that would be great, but I just bottom line is this is only going to help to get product out the door faster and to help to bring that backlog down much quicker.

[Luciano Melluzzo:]

Faster and more efficient.

[Unidentified Analyst:]

Yes okay and this should be fully operational by the fourth quarter is what you said, all the equipment?

[Luciano Melluzzo:]

The machines were available and these machines, the [indiscernible] is a big 5 axis typically has a 12 to 14 month lead time, but OEM cancelled an order because of a commercial business going away. So that machine is available right now in a warehouse. So we just poured the foundation in the last – we made spot in the shop and poured the foundation last week and it has got to drive for four weeks and/or first week in September that machine could be in our facility.

[Unidentified Analyst:]

Beautiful, good for you. And I just have one final question if I can get into the commercial business, I know that's significantly depressed currently, but is there anything to report regarding the long term agreement for the thrust struts, I know Mike you love to hear me say that word thrust struts. That was announced back in January was significant, I'm just hoping that there is some life still to this, is there anything to report on this going forward at least in the next six months or so?

[Michael Recca:]

Yes, we have been told to effect a push out on the [indiscernible] order, not a cancellation, but a reduction in requirements for the balance of this year and next and we're still trying to finalize like what that would be. We have had that event and further we have some products for the A380 that they had outright cancelled and that we were repaying that termination. The good news is we were nearly done, I don’t know what the percentage is, so we will repay the bal what we would have been paid for as we finished the product. Then these holes that have been created we have been able to fill by accelerating military product, military components that the governments want to take as soon as we get them done.

[Unidentified Analyst:]

Looking out, I'll conclude, looking through the Q you did have some sales in the second quarter commercial sales, did the thrust struts order contribute to any of that revenue in the second quarter in the commercial segment?

[Luciano Melluzzo:]

Yes, we did make shipments of thrust struts in the second quarter.

[Unidentified Analyst:]

Okay.

[Luciano Melluzzo:]

I don’t have the…

[Unidentified Analyst:]

Could you quantify that?

[Luciano Melluzzo:]

I can't.

[Unidentified Analyst:]

Okay, all right, that's all I had. Thanks for taking my questions.

[Luciano Melluzzo:]

Always a pleasure, John.

[Michael Recca:]

Thank you, John.

[Operator:]

[Operator Instructions] And that will conclude today's question-and-answer session. I will now turn the conference over to Mr. Lou Melluzzo for any additional closing remarks.

[Luciano Melluzzo:]

Thank you, James. So with that this concludes our formal remarks this afternoon and thank you for calling and for your attention and questions. The conference is now concluded and I would like to James please [indiscernible].