Air Industries Group
Q1 2018 Earnings Call Transcript

Published: 17 May 2018

[Operator:]

Good day and welcome to the Air Industries Conference Call. Today's conference is being recorded. Air Industries Group Safe Harbor Statement, except for the historical information contained herein the matter discussed in this presentation contained forward-looking statements. The accuracy of these statements is subject to significant risk and uncertainties. Actual results could differ maturely from those contained in the forward-looking statements. See the Company's SEC filings on Form 10-K and 10-Q for important information about the Company and related risk. 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 Lou Melluzzo. Please go ahead.

[Lou Melluzzo:]

Thank you, Becky. On the line today, we have myself; Michael Taglich, our Chairman; and Michael Recca, our CFO. Good afternoon and thank all for joining, as we summarize the Air Industries first quarter 2018 results. As we discussed on our year-end call, our solid number first quarter results are in line with our plan to drive revenue while focusing on profitability. We continue to execute on our existing backlog. At this point, we are comfortable that our increased inefficiencies is screening up necessary working capital to execute on our backlog and meet our customer demands at a profitable basis. In the first quarter, we continue to align our production schedules to best fulfill customer needs while continuing to be disciplined about eliminating cost for the processes. I'd like to give you a couple of examples that how we are accomplishing that. One man two machines almost every machine that has move from our Nassau Tool Works, is sitting in its new location at AIM face to face. In all most cases, this allows for one operator in between two machines, so one guy is running two machines in some cases where the product allows it one guy is running three machines. We're creating working cells to minimize few times and optimize processes. We have successfully moved one of our biggest and most important pieces of equipment in the last two weeks in the consolidation process. This was a 65-foot deep hole machine that is now in a spot that's dedicated -- it's in a dedicated cell for a very heavy running part for air machining. We're looking at in-sourcing. We're looking at -- we are in the midst of in-sourcing several part numbers for important programs that I feel we need to have better control in. So, these parts were on the outside at vendors, those are to be coming back into our shop in the next month or two. Special processes, we are looking to start the application processes with our customers to try and get approvals for grinding processes as they relate to our current products. Right now, we do very little ID/OD grinding. It's considered a special process. You got to get approvals. You got to have permission to bring it inside and there's an entire approval process to it. Now, these kind of initiatives are not only going to reduce cost, but they're going to reduce lead-time and improve inventory turns. You know the sale of WMI is on target to close at the end of May. The net proceeds from the sale will continue to enable our business execution. To provide further details on the financial numbers, I'd like to turn the call over to Mike Recca. Then I'll return to close the call. Mike. Mike you're on.

[Michael Recca:]

Can you hear me, Lou?

[Lou Melluzzo:]

Yes

[Michael Recca:]

I'm here. Thank you. Before we start, I just want to remind one that we are presenting our operations without WMI with serving out of discontinued operations on the financial statement. So, all these numbers do not include their results for the year. So for the quarter consolidated sales were 12.2 million, it was essentially flat to prior year 12.2 million. I will note that comparing the first quarter of 2018 to the fourth quarter of 2017, sales increased from 9.6 to 12.2 million dollars that was a significant increase, and I think that's been keeping with what we feel are improving results for this quarter and for the rest of the year. Our gross profit was -- had a decrease of about $0.5 million to $2 million for the first quarter and this primarily resulted from some new product introductions particularly on the F-35 that Lou will speak to more about later. That first article, first production always had a lower gross profits as you begin to climb the learning curve. Operating expenses were slightly higher than in the prior year. They were 2.6 million to 2.4 million. Historically, our operating expenses in the first quarter are higher than in the following three quarters, and we hope that for continuing cost-saving measures begin to show some improvement. Our adjusted EBITDA from continuing operations was 236,000 and this was essentially even with the prior year even though sales were flat and gross profit was down, still showing a positive EBITDA. We have previously given guidance that we're going to show a first quarter positive EBITDA from continuing operations and we did. The backlog remains constant at about 101 million and liquidity continues to improve. We are diligently managed working capital and continue to execute on the backlog and our liquidity should be further improved in a couple of weeks when we conclude the sale of welding metallurgy. And with that, I'll turn the call back over to Lou and await your questions later.

[Lou Melluzzo:]

Thank you, Mike. I will close out the call with a few thoughts on the coming quarter and a summary of our near-term go-to-market initiatives. As we have previously stated in the fourth quarter of 2017, we recognized the need to more appropriately align our revenue to reflect customers' needs. We also refocused the business on its complex machining products for aircraft landing gear and jet engine turbine applications. We remain confident in part based upon our first quarter 2018 results that we are in a correctly positioned to meet existing company backlogs as well as to take on additional commitments. Our backlog from continuing operations remains at over $100 million. Our goal for fiscal 2018 continues to be that revenue will exceed fiscal 2017, continuing operation levels of $49.5 million. This excludes the MK unit that was sold at the end of January 2017. In addition, we will continue to focus on implementing operational efficiencies, including the consolidation of our facilities, which is on schedule to be completed by the end of the summer. It remains our goal to pull out about a million dollars of expenses per quarter, and our continued steps to improve liquidity and operations as reflected in the positive EBITDA for first quarter of 2018. As stated in our prior call, it is our goal to achieve continuous quarterly growth in EBITDA. This concludes our formal remarks this afternoon and we will now open up to you to answers the participant question. Operator, would you please open the lines for the Q&A session.

[Operator:]

[Operator Instructions] And we'll go to our first question.

[John Nobile:]

Hello, this is John Nobile with Taglich Brothers. I just wanted to make sure you have said that your backlog, your funded backlog was $101 million and that is a continuing operation. I noticed it's pretty consistent with before the sale of WMI. So I'm imagining that you really haven't lost much of the backlog in regard to sale of discontinued operation?

[Lou Melluzzo:]

That’s correct, John. The bulk of our backlog resides at the Air Machining and the Nassau Tool Works. So we took a little bit of pushback, but it's not much at all. I don’t like it yet.

[John Nobile:]

No, that was nice to see. I wasn't sure how much the backlog might drop, but to see right now with continuing operations still over 100 million I mean that was better than I had anticipated.

[Lou Melluzzo:]

My recollection is that the backlog at welding we had in January was about $6.5 million.

[John Nobile:]

Okay because I think 106 was the number before and really only drop, 5 million since the last number. So I just wanted to make sure, anyway…

[Lou Melluzzo:]

Again, the majority of backlog is at in complex machining of a 101 million, I would say 95, 98 of it is at complex machining.

[John Nobile:]

I like your focus on your core competencies like AIM and NTW, but I'm curious about your outlook -- the outlook for Sterling given its weak performance and once again in Q1, it was still looking kind weak in over the past year. So I'm just curious, if Sterling does continue to underperform, might you consider it sale or do you see a turnaround and profitability in this in the near term? I know I've asked this before, but you know I wasn't sure when we might see something pickup here? I know think of the last call, you had mentioned that I believe his name is John Lavery, the original, yes, he's now managing Sterling for some while now. So I'm just curious to see if indeed things are starting to turn around there and that hopefully the right man at the helm?

[Lou Melluzzo:]

Yes, he has been managing Sterling now for six weeks.

[John Nobile:]

Only six weeks, okay. While actually the last call wasn't that long ago. Okay so just to get an outlook for this Sterling only because the March 31st, numbers show continued erosion of sales there. So I’m just curious, if you have anything to share with us in regard to the outlook for this company?

[Lou Melluzzo:]

John, that's a great question. Here is where we’re with Sterling. Sterling's biggest customer was GE Power. Now GE has taken a setback in the ground power generation. So what done starting pretty close to beginning a year, it’s been our focus and we've -- myself included in our business development folks that pretty much swarm down on that division to be able to bring some new customers to the table. And I got to say it's going pretty well know. We've got a half dozen new big hitters that have that we have made in productions. They have -- few of them have visited the facility, they are interested in that capacity, they are interested in the equipment we have. We certainly have the talent out there, and we've actually received some of RFQ from two of the customers already. I’m confident that it's a matter of time John before that business starts moving forward again. It is a great business. It’s not landing gear. It’s on the turbine side of the business, but some other programs coming to the table with the midsized planes and some of the military stuff and the gear turbofan. I'm confident that it's just a matter of time before that business will follow up. In the meantime, we’re being very cautious as to how we run that operations to minimize anything that -- any spends or anything of that nature, but John it’s just a matter of time before that divisions gets up on the upswing. So, we’re taking the right steps and we’re calling the right people.

[John Nobile:]

Customers, you have RFQs and two customers are existing or new customers right now?

[Lou Melluzzo:]

There, well one of them is GE, but it's out of evened out, so that’s a new lead for us. And they're new customers, brand new customers, customers that are not in the mix even three or six months ago.

[John Nobile:]

And on the last call, you mentioned that you’re trying to find the buyer for inventory that was purchased in a speculative way by your former management, I believe it was -- could have been up to $7 million in inventory that was purchased. And I am curious if anything to report on this, is it looking like there’s a chance to -- I mean that’s a large amount of inventory, up to 7 million so just trying to find out how this is going as far as trying to find a buyer?

[Lou Melluzzo:]

That initiative as well John is at the forefront of our responsibility and at the forefront of business development. We’re looking actively, we have been in contact with another, probably three or four potential buyers that were not in the mix last year, or ever before. We are gaining some momentum and interest and I think at some point in time not far from now we will start divesting some of that inventory.

[John Nobile:]

And just -- if I could, only because I haven’t asked this in a while and I am curious as to your current revenue mix be it military and commercial just to find out how this mix is currently and not only that how do you see that mix changing over the next year or two?

[Lou Melluzzo:]

I believe and Mike Recca, please help me out here. But I believe we are about 80% military, 70% to 75% to 80% military and the rest commercial. Now, we’re in a few great programs like the Geared Turbofan, that are starting to pick up ramp, they’re starting to pick up pace. Predominantly, we’re certainly military at this time. We’re in a business.

[Unidentified Analyst:]

It sounds like over the last year. it did sound -- it sounds like it did go a little bit more commercial because I think going into the year you were, really over 90% military mix?

[Lou Melluzzo:]

We've got some content in a couple of new programs that I'm excited about and Geared Turbofan being one of them.

[John Nobile:]

Okay.

[Lou Melluzzo:]

But I think even what we’re really hoping for John, I’d say right now, as you look at Sterling, I was there, probably a 4 million of commercial and a 1 million of military. So that’s 80 -- it’s 4 then at Air Machining income to complex machining together are probably 90% military. So, you're probably in the 80%, to 85% military now, I am hoping that the 85% that’s military becomes a 125% of the 85%, as that are commercial doubles.

[John Nobile:]

And let see the sale reading through cue I saw that the sale of WMI, it's actually contingent upon that. We met with CPI aero structures obtaining financing, so just curious…

[Lou Melluzzo:]

It is no longer contingent upon that. We met with CPI. I want to get earlier with sometime last week, I can’t remember when.

[John Nobile:]

The queue came out yesterday, that’s why I just -- actually was, yesterday I printed in early today, but just looking at it, it did mentioned it was contingent. So it's not contingent upon the financing at this point?

[Lou Melluzzo:]

There’re couple of continuances in the original contract, one was the CPI got their financing, we’ve been told by them that is not an issue that they’re ready to close. Second was that we’ll get consents from five major customers and that we would attempt to get consents from all customers but the five were necessary. We’ve received all five of those consents. CPI and we’ve tenant rescheduled by month end May 31st closing. And I don’t see anything on the horizon that’s going to delay that beyond that, so that’s a nice clean close, at the month end, it’s perfect, so that's our target.

[John Nobile:]

The cash infusion should be nice.

[Lou Melluzzo:]

It's usually better coming in and going out.

[John Nobile:]

And just one final question if I can get some details on the 10-Q. It was stated that the reduction in the first quarter gross margins was due to the product mix and that you believe gross margins will improve. I was hoping….

[Michael Recca:]

Gross margin should improve for two reasons. One because you don't have as a higher percentage of first-time products being sold, it's not new introductions so that should improve it. And second as revenues improve, you should absorb more refractory overhead and as a year goes on, our factory overhead should decline because we will be exiting at least half of the Nassau Tool space and reducing our real estate expense and other expense, and all our people we are working in one location and hopefully they'll be more efficient. Lou, do you want to comment on the F-35 thoughts in Q1?

[Lou Melluzzo:]

As I stated earlier and back in the fourth quarter, we've realigned operations, we were lagging behind in some of these deliveries and we expedited them through the shop and then really moved that breakneck pace to get these parts out to our customer in a timely fashion, but you were talking just on the F-35, there you were talking five brand-new developments. There was additional part on the F-15 program, and it was parts on the A380 programs. So we had a heavy developmental quarter parts than at now left the building and around queue to be optimize going forward, so that there won't be first-time through. So that's kind of set back there.

[John Nobile:]

So this first quarter you did have a very hard percentage of parts that were really first-time products, which I understand the tooling up and everything. It's heavy R&D and things like that. What percentage are we looking at in the quarter that was really first-time from well with the total sales or what 12.2 for the quarter but how much of that was really related to the first time?

[Lou Melluzzo:]

It's not so much as a percentage but the effort that it takes, John. Those parts were managed. Those parts -- every step of operation by somebody, so they're not automated, they are now parts in our facility sometimes as lead eight times and some parts have to be expedited eight times, and they have to be sometimes hand carried to those operations. But we needed to get back on, we need to get it back on track with delivery and customer requirements, and we pulled out all the stops to make that happen.

[John Nobile:]

So going into the second quarter right now we should see less of our non-existent effect from what you've seen in the first quarter related to a first time product?

[Lou Melluzzo:]

Non-existent is not an accurate repo, we've always….

[John Nobile:]

Lesser adverse effect.

[Lou Melluzzo:]

A lesser amount that is correct, John.

[Operator:]

[Operator Instructions] And will go to our next question. Hello, caller your line is open, please check your mute function.

[Unidentified Analyst:]

This is Larry Kates. I bought this stock quite a bit of it actually and one of the main reasons was because I was reading about the connection the Company has with Sikorsky and the helicopter flight boxes. And off course at the same time the large government contract Sikorsky has gotten and I haven't heard much from the Company in any of these calls or any of the press releases about that Sikorsky connection and I just wondered, if you had anything you'd like to tell us about that?

[Lou Melluzzo:]

Yes, certainly I can address this. Sikorsky is a very big customer of ours. Once the contracts come down from the government agencies or foreign countries, we are ready to get. Certainly, it takes time for Sikorsky to find who's going to be -- who they are going to go out for proposals on and they come out through the supply base. Now being that a lot of these programs are military, not all, but a lot of them are military, almost all proposals of any substance have to go through TINA compliance basically Truth in Negotiations Act. So, those types of proposals are not on the same time frame as the standard spot buy by any major OEM. Those proposals have to be audited by the government internally with Sikorsky folks. We have to -- it's a long process so just because the contract has been awarded to Sikorsky does not mean that overnight it will come out through the sub-tiers. But eventually it does make its way. Our quoting activity with Sikorsky has been better than usual that's what I can tell you on that Larry.

[Unidentified Analyst:]

Well, that's good to hear. I hope you get some of those contracts as soon as all the i's are dotted and the t's are crossed, and I'm looking for that to happen. I assume that will make you even bigger in the eyes of investors and industries people.

[Lou Melluzzo:]

I strongly agree with you. Big contracts are definitely something we're pursuing, but you know it is what it is at this time. It's all due diligence and it takes time.

[Operator:]

And we'll go to our next question.

[Unidentified Analyst:]

This is Stephen Brown. How are you doing this afternoon? Are you guys interested in doing any investor conferences in the future now that you kind of cleaned up the Company and just kind of heading towards the growth phase?

[Lou Melluzzo:]

I think the answer to that is, yes. Is it going to happen this week or this month? I'm not sure, but I think eventually in the not-too-distant future when you're going to back into the swing of things, yes.

[Unidentified Analyst:]

And with the plan consolidation, you figure by the end of I guess August. You guys will be finished out of there or is it mostly finished?

[Lou Melluzzo:]

Yes, it's moving along right on schedule. We're looking for a mid-summer to late-summer completion. So there's not many pieces of equipment left to move in the last two weeks we've moved a 65 foot piece of equipment that really was our biggest and really the biggest risk, and our guys managed to move that in two weeks in less than two weeks we are making chips on it. So kudos to them, they did a great job.

[Unidentified Analyst:]

And going forward with your auditors I guess there's always a chance of a going concerned letter and stuff like that scaring investors, but the sale of WMI and possibly even turning the inventory over better. Did you foresee a going concern notice in the future?

[Michael Recca:]

I would like to answer that if I may. The fundamental way to prevent a going concern business is to return to profitability. That's our aim. That's our goal. We hopefully we get there by the end of this year. I think at that point when you're cash flow positive and you're showing a net income time is on your side when you're not time is against you. But I think that's the best avenue we have to argue in a going concern opinion.

[Unidentified Analyst:]

Okay, my last question just has to do I know the military is kind of slow on. Now, that they're receiving, starting to receive the funding from the federal government. Are you guys seeing any increased bidding activity for your services?

[Lou Melluzzo:]

The RFQ activity has definitely increased. We're seeing under President Trump and the releasing of the funds that he's looking at. We've definitely seen elevated activity.

[Operator:]

[Operator Instructions] We have no more questions at this time, so I'll hand the call back over to Lou Melluzzo for any additional or closing statements.

[Lou Melluzzo:]

Thank you, Becky. So with that, once again I'd like to thank everyone for taking the time to participate on our call today and I think that's a wrap up. Becky, back to you.

[Operator:]

That does conclude today's conference. We thank you all for your participation.