Air Industries Group
Q4 2017 Earnings Call Transcript

Published: 23 Apr 2018

[Operator:]

Good day everyone, and welcome to the Air Industries Conference Call. Today's call is being recorded. 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 nonrecurring expenses and outlays, prior to consideration of the impact of 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. And now, at this time I would like to turn the conference over to Lou Melluzzo. Please go ahead.

[Lou Melluzzo:]

Thank you, April. Good afternoon all and thank you for joining us, as we summarize the Air Industries 2017 results and discuss our outlook for fiscal 2018. 2017 was a transitional year for the company, with first Peter Rettaliata stepping back into the role of CEO and Mike joining the company as President in late third quarter, and ultimately taken the role of the CEO in the fourth quarter. Therefore for today’s agenda, I’ll reflect on the evolution of our strategic plan and I will share recent outcomes from that plan that have helped us to reposition the business. I will turn the call over to Mike Recca our CFO for financial overview, and then I’ll wrap up with the discussion of our ongoing initiatives. And to let you know Mike Taglich our Chairman of the Board is also on this call. As you might recall from third quarter patterns call, my experience and passion is rooted in manufacturing companies with challenges. I worked for EDAC Technologies, which by the way had a very similar story as that of Air Industries. Put it in the hours and working side by side with my team EDAC Technologies got very healthy and profitable. I have done this in the past and I am looking forward to doing this again. In 2017 we began to focus on increasing the velocity of production at all our business units with a goal of returning the company to profitability, reducing past backlogs and decreasing inventories. Simultaneously, the company began a costs reduction program. In conjunction with the winding down of the era of sequestration, the company began to see a rise in both revenue and backlog. However, as part of examining the company’s ability to return to profitability we recognize by the beginning of the fourth quarter that in an effort to drive revenue, we were not optimally aligned with our customers’ needs. Ultimately in my evaluation of the business, I concluded that we needed to realign production schedules to better serve our customers. I’ll give you an example of this. We took on -- in late 2015 enter 2016, we took on five F-35 parts for one of our largest customers, that a competitor of ours was not delivering on, for whatever reason. With great effort and persistence, we have shipped four of those five parts and the last one is due to ship in the next three weeks, this required a battery schedule of the shop floor in the late fourth quarter. In addition and this realignment of production schedules resulted in a one-time hit to revenue in the fourth quarter. In addition in the fourth quarter, we took the strategic position to refocus the management and the resources of Air Industries on its Complex Machining products, for aircraft landing gear and jet engine turbine applications. This culminated in the announced sale of WMI on March 21, 2018 for approximately $9 million in cash. We anticipate closing this transaction by the end of May. And provide further details behind the financial number, I’d like to turn the call over to Mike Recca. Then I’ll return to close the call with the discussion of our near-term outlook. Mike?

[Michael Recca:]

I am here, thank you, Lou. So for 2017 our revenue, our sales number was $49.9 million, this was a 2.8% reduction from 2016. However in 2017 early in the year in January, we sold our AMK subsidiary and if you exclude that from 2016 and from 2017, we posted a 5.6% increase in revenue for the year, which is really indicative of the company beginning to recover. Our gross profit for 2017 was $4.9 million, this was disappointing $0.01 that was 10% of sales, but it did also represent a $600,000 increase over the prior year. Our interest expense in 2017 was $3.4 million and that was an increase of $900,000 or from $2.5 million in 2016. However, a lot of the interest expense that we incurred was non-cash and it was non-cash because we had some transactions where we raised money, where we sold debt together with some associated warrants and for accounting purposes we had to allocate the debt between -- I am sorry, the expense between debt and the value of the warrants. So overtime we are what’s called accreting that difference as interest over the period of time. In addition the large part of that debt is paid in kind of non-cash, which leaves me the non-cash charges, which in 2017 were significant $9.8 million and that's an increase of $4.8 million in the prior year and that represents our determination that our goodwill at both at welding meteorology, which we're selling and at Sterling Engineering was impaired so we rolled it off. And it also includes some non-cash charges from our discontinued operations. So long and short it is our net operating loss for 2017 was $15.8 million, if we ignore goodwill and the discontinued operations it would improve by 9.7% from $14.9 million in the prior year, basically a benefit of close to 35% improvement over the prior year. EBITDA loss for the year was $2.9 million and this compares with adjusted EBITDA by the way $2.9 million for 2017 versus $5.5 million for the prior year. So we have still operating at an EBITDA loss, but we have cut that loss by close to 50% for the year. In terms of our liquidity, our total obligation from money borrowed has been reduced year-over-year 2017 versus 2016 by $10 million. In the press release we just made we provided a reconciliation of adjusted EBITDA, and I direct your direction there. With that Lou, I'll hand it back to you.

[Lou Melluzzo:]

Thank you, Mike. I will close out the call with a few thoughts on coming quarter and a summary of our near-term go-to-market initiatives. As previously mentioned in the fourth quarter of 2017 we recognized the need to more appropriately align our revenue reflect our customers' needs. As such revenue was negatively impacted for the fourth quarter. However, we are confident that are now in position to meet existing company backlogs as well as take on additional commitments as demonstrated by our anticipated first quarter 2018 revenue from continuing operations of $12,269,000. We continue to focus on implementing operating efficiencies, pulling approximately $1 million of expense per quarter. Our backlog from continuing operations is now over $100 million. One of the reasons I chose to take this job is my proven ability to drive revenue and execute on backlog. Our goal for fiscal 2018 revenue is to exceed 2017 continuing operation revenues of $49.5 million that excludes the AMK unit that was sold at the end of January 2017. The company continues to take steps to improve its liquidity and operations as reflected in a slightly positive EBITDA for the first quarter of 2018. It is our goal to achieve continuous quarterly growth in EBITDA. We're working harder than we ever have to improve gross margins and operating profits. It is my goal to keep working hard and that the financial results will reflect this. With that, this concludes our formal remarks this afternoon. And now we will open up the call to answer a participant’s questions. April, would you please open up the lines for questions and answers?

[Operator:]

Thank you. [Operator Instructions] We'll take our first caller. Please go ahead.

[Unidentified Analyst:]

Hi, guys. This is Brad Nos on for Matt Grande [ph] here. Just wanted to -- I guess taking a look at the residual ANE [ph] businesses following the divestiture of WMI. How do you feel strategically about maintaining or potentially selling those businesses? And do you feel that there is enough of revenue base to kill from those lower revenues. Or I guess essentially get profitability or can you just provide some color around that?

[Lou Melluzzo:]

Brad, I'm sorry, but there were some background noise. Can you repeat a portion of that question?

[Unidentified Analyst:]

Yes, sorry, seems like there is feedback. But yes, so just regarding the A&E segment following the divestiture of WMI. How do you feel about the revenue base that’s left over and your ability to scale that to profitability or are you thinking more long lines of also selling those businesses down the line as well?

[Lou Melluzzo:]

No, no, with the divesture of WMI, we're getting a cash infusion to actually help the growth of both the opportunities that we have at A&E. With the consolidation of the two businesses and the go ahead plan, right now, those businesses will scale up accordingly in the future. So there is no plan selling those businesses at this time.

[Unidentified Analyst:]

Okay, that's helpful.

[Lou Melluzzo:]

Nor there are any plans to sell Sterling or any other transaction -- any other of our units at this point.

[Unidentified Analyst:]

Okay, got it. And then just given some of the recent engine blade concerns regarding the Southwest airlines incident, do you anticipate any increased regulatory scrutiny or costs that may come into play for turbine engine components going forward?

[Lou Melluzzo:]

That was an unfortunate accident. We don't really make the parts because those type of -- that was a blade and a blade malfunction. We don’t really make blade being work we do cases and we do that kind of stuff there might be regulatory compliances that will be set forth, but it should not reflect the product line that we currently do at Sterling Engineering.

[Unidentified Analyst:]

Okay, thanks for the clarity there. And then just regarding the 2018 EBITDA guidance commentary, you’ve referenced obviously breakeven in Q1 and then quarterly EBITDA in the range of $2.5 million to $3 million per quarter. So I just want to double check that that would indicate sort of $8.25 million I guess at the midpoint and adjusted EBITDA for the full year. And then do you expect that EBITDA to be relatively evenly distributed for Q2 through Q4 or would we think of more of a ramp going towards the end of the year?

[Lou Melluzzo:]

There is no straight-line in here, here in the end goal, we are working very diligently and hard to do incremental improvements to each and every quarter going forward.

[Michael Recca:]

Can I comment there, there is no straight-line improvement; they only exist in the fantasy world of projections. But we believe we're positive -- breakeven to positive in Q1. And we'll improve quarter-by-quarter and we'll hopeful by the end of the year, we will be in $8 million run rate -- $8 million to $9 million run rate. Not that we're going to earn $8.3 million in the EBITDA for 2017 in total.

[Unidentified Analyst:]

Okay, got it. That's helpful. And then just maybe one more for me here, just regarding your outlook for capital expenditures in 2018 I think you spend around $1.5 million here in 2017, but with the divestiture of WMI, I guess should we expect a lowered run rate in 2018 and beyond? Or how should we think about the future capital intensity of the business?

[Lou Melluzzo:]

The business -- and I’ve had a lot of idle equipments sitting around. So you fully get back into a capital expenditure mode. I have to really make sure that there is nothing sitting idle. So, for 2018 and beyond, if we ramp up into capital expenditures, it's not going to be anywhere near the numbers of the past at least for a while to come.

[Michael Recca:]

Let me focus on that for secondly, the capital expenditures in 2017 were largely related to the ramping up of a particular program for Pratt & Whitney Geared Turbofan. We believe we’re properly equipped to manage that demand now. And absent winning a giant new program which we love that requires capital expenditure, we don't really see any significant investment in 2018.

[Unidentified Analyst:]

Okay, got it. I think that's it for me guys. Thank you.

[Lou Melluzzo:]

Thank you, Brain.

[Operator:]

[Operator Instructions] Next caller, please go ahead.

[John Nobile:]

Hello, Lou and Mike. Thanks for taking my questions. This is John Nobile, Taglich Brothers. Just a few questions, first one in regard to your finances, I believe that a lack of financing had hampered sales growth in the past. Could you give us a sense of what to expect going forward in regard to your finances? And how does this play into securing the inventory necessary to satisfy the $106 million backlog?

[Lou Melluzzo:]

I can certainly expect a conversation John. A lot of our raw material at the A&E [ph] industries and now with the consolidation is customer consigned. So that helps out tremendously in cash flow when we don't have to put out the money in right up front. Some of the programs that we have over at the old Nassau Tool Works, a lot of government type jobs, there is materials that we have to spend money on. And impart, the divestiture of WMI goes a long way to making that happen and securing the future for that business as well. So it's the combination of the two John.

[John Nobile:]

Okay. So you're saying the customers do supply the inventory for these jobs?

[Lou Melluzzo:]

The raw material, the forgings. Not across the board, but on quite a few programs.

[Michael Recca:]

John, can I jump in a second.

[John Nobile:]

Yes.

[Michael Recca:]

You noticed -- this is Mike Recca, so our inventory as you knew better than anybody. Our inventory has increased from about $28 million to $30 million to $40 million. That was a speculative buys by former management. So what we're doing now is we’re vigorously trying to find a buyer for that excess material to generate some cash and get us back to where we want. Or we’re kind of constrained because we have too much of inventory, we don't need now enough for what we do on the accomplishments that Lou and other members of management have earned in each quarter have been to have suppliers supply some inventory to us, which is meliorated that. But hopefully and we have very focused effort now to rid ourselves of this excess inventory that we've been carrying for some years now.

[John Nobile:]

Could you quantify how much excess inventory you're looking to sale, and how are those prospects looking?

[Michael Recca:]

Kind of give you -- it will be a very round number, but $5 million to $7 million. And the prospects it's very difficult to guess about when someone is going to want something, and when you're going to have a sale. So the difference is now we do have a concerted effort to find a buyer as appose to I'll call it a less than concerted halfhearted effort.

[John Nobile:]

Alright. And actually Lou you alluded a little bit to what I'm about to ask you, but I was hoping to get a little more detail. In the fourth quarter of 2017, you said you made changes to align your production schedules to meet the needs of your customers. And it was pretty big, I was just hoping you might be able to provide a deep details of exactly what that entails?

[Lou Melluzzo:]

John, I gave you an example, we got some orders in late 2015 and late 2016 on five we're calling the transitional price, they were brought into our company from another company that wasn't delivering. And honestly they sat around for a while. And they worked do at the end of last year. And we were not ready with them. So we really scrambled and set up new schedules, new timelines. We ended up shipping one part prior to close of the year last year. And the another three parts have shipped in the first quarter of this year and the last parts will be shipped in three weeks. So we convinced basically a year’s worth of work in the last six months.

[John Nobile:]

So basically looked at what has not gone where you have a big backlog. And you kind of not retool but looked at the business model and said okay, what are we doing wrong, where we cannot get the product out? And you feel at this point that taken the hit in the fourth quarter you kind of realigned everything where now if a customer need so and so product by so and so day, you feel that delivery of that would be more consistent maybe going back to where you were many years ago. Am I looking at this correctly?

[Lou Melluzzo:]

Yes, that is 100% correct it's more automated. I mean, honestly, we have to ship what our customers' want, not what we want to ship. And that's kind of the difference.

[John Nobile:]

Okay. And just one other question in regard to the sale of WMI, I'm just curious how you believe this is going to impact the margins in the aerostructure and electronics segment?

[Lou Melluzzo:]

Well the only thing remaining in aerostructures and electronics and we’re going to have probably rethink our sector allocation if you will. For the EUR-PAC, which is very small business, which has had a very difficult time from a difficult contract it performed on in 2016 and 2017 and it's in the rebuilding phase. But overall margins are -- our margins are depressed and they are depressed because we have low volumes in large factories. So as volumes increase we’re better able to absorb our factory overhead, we expect margins at all facilities will increase dramatically.

[John Nobile:]

Okay. And if I could backup to Sterling, because I know when you acquired that I think margins were good and they trickled down to a negative gross margin. So I just wanted to get an indication of how Sterling is looking at the moment, does it look like there is some hope for that as far as -- while returning to positive gross margins and increasing sales in that area?

[Lou Melluzzo:]

My comment about revenue and margins being related is much more true is Sterling than anywhere else and that is because almost all of Sterling sales utilize customer material. So if you look at AIR Machining I am going to throw out a number which is not totally accurate. If their sales are 50% material and 50% labor, at Sterling they are more like 90% labor and 10% material. So a small increase in sales has a dramatic increase in -- positive increase in margins and vice-versa. When Sterling back in 2015, if my memory is correct, Sterling was doing $800,000 to $900,000 per month or $9 million, $10 million a year, and was operating a margins of 25%. Now it’s doing $6.5 million, $7 million a year and margins are negative. So just a small -- a big number, but still a relatively small percentage increase can have a tremendous increase in margins as the sale increase.

[John Nobile:]

Right, right. Because I know that’s what hurt the overall margins was Sterling in that category but how is the outlook for Sterling as we speak?

[Lou Melluzzo:]

We size the business for the volume that we have up there we’ve ramped up business development, we’re bringing new customers to the table. There is higher coding activity with customers that they have -- from places that they have never coded before. It’s going to be a matter of time John, but we’ve taken all the right steps to secure that future for Sterling.

[John Nobile:]

Okay, that’s all I have, thank you very much.

[Lou Melluzzo:]

John, I want to mentioned we made a General Manager -- you made a General Manager change up there.

[Michael Recca:]

Yes, yes we actually made two General Managers in late in the year and early part of this year, we have made a general management change up at Sterling and I now have John Lavieri back who is the original owner and he is there to help us out until such time that he doesn’t want to do it anymore and we made a change here at A&E the General Management and I got to say that both of the changes that we have made are showing very positive effects.

[John Nobile:]

Okay great. Thanks for taking my questions.

[Lou Melluzzo:]

Thank you, John.

[Operator:]

Next caller, please go ahead.

[Unidentified Analyst:]

Good afternoon gentlemen. On a previous conference call you mentioned you are closing one of your facilities before October of this year, how is that going?

[Lou Melluzzo:]

Yes, we are consolidating Nassau Tool Works into our Bay Shore facility of Air Machining. We are about 70% done with that consolidation of heavy equipment with the exception of one or two pieces of equipment that are left will. So we are still waiting for 100% to have that equipment moved -- have moved and then it’s just a peripheral stuff, supporting stuff. But although we had a pretty trying winter this year, the guys still managed to move equipment in between the snow flakes and it’s coming out pretty good, it’s ahead of schedule actually I would say.

[Unidentified Analyst:]

Yes.

[Michael Recca:]

When we bought Nassau Tool Works I am kind of the company historian here. We bought Nassau Tool Works in 2012 with a five year lease on the facility on half year lease. The plan all along was exit the Nassau facility and to integrate Air Machining which is our base business with Nassau Tool Works into one facility under one roof, under one general manager, that was underway until we hired Dan Goldman in the fall 2014. We were embarked on a different business plan and set Nassau Tool Works and Air Machining up as separate companies essentially in competition with each other. So now we are reverting back to our old plan of consolidate the companies into one, we are not closing a facility we are exiting a lease and we'll recognize some significant cost benefits from doing so. But again with a closing of facility has a ring of giving up and walking away I just want to be clear that is not the case here.

[Unidentified Analyst:]

Okay, thanks. One more question, last year Sikorsky announced I guess back in June or July of last year they had a big contract for the Black Hawk Helicopters. Do you think you guys will see anything this year orders from that, or maybe next year?

[Lou Melluzzo:]

There is a lot of stuffs in the works. We really can't talk about specifics because they haven't materialized yet, but there is definitely a lot of stuff in the works.

[Unidentified Analyst:]

Okay. And with regards to the readiness of the military aircraft, as we know the budgets have been passed, the government is I guess funding or will be funding increased military spending. Are you seeing anything with regards to readiness improvement or more orders because they're trying to get more planes ready for use?

[Lou Melluzzo:]

We're seeing highlight at a coding activity for sure.

[Unidentified Analyst:]

Okay. And what does it take to get from codes to actual closing contracts or is it just your bidding against other competition or just what does it take to close the deals?

[Lou Melluzzo:]

With the government products it’s much more involved on that, and there is a longer lead time. Because even if you are the incumbent you still got to go through TINA Compliance to make sure the truth and negotiations is all above ground. So there is a timeframe for all that stuff to happen. It just doesn't materialize like a spot buy normally would. But we're definitely on top of that.

[Unidentified Analyst:]

Okay. And your book-to-bill ratio was that positive in the fourth quarter?

[Michael Recca:]

Yes it was.

[Unidentified Analyst:]

Or above one, it was. Yes okay. Did we add another $4 million in backlog or…

[Michael Recca:]

I would be happy to get back to you with specifics on that, I don't have it on my fingertips. If wanted to either call us or drop us an email we will be happy to respond.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Next question, please go ahead.

[Unidentified Analyst:]

Hi, this is [indiscernible]. I think previous gentlemen may have asked the question but I’ll just be a little bit more specific here. You had a press release the recent press release where you or it might have in the SEC filing, the $47 million contract that you noted from Sikorsky. I was wondering what percent of that is in your $106 million backlog?

[Michael Recca:]

The $27 million, if you don't mind, Lou will handle it -- the $27 million is the new Sikorsky issues contract what I call multi-years. So we got new multi-year contract. And that provides for $40 million or $50 million worth of orders over the next five years. Now typically what happens, what we count in backlog and we're a little bit peculiar in the way we do this. We count in backlog only orders that are fully funded and have a definite delivery date. Not what we might expect to have happen over the next five years. So that’s most people call that funded backlog. $106 million I could not tell you at this point in time, how much of that Sikorsky contract involves in is that, I'll be happy to do that if you contact us directly and give you a number. But that is what -- we expect to do actually more than what the stated contract demand is over the next five years. But what's in the $106 million of backlog at March 31st, I don't know the answer. But it is only those kind of basically that $106 million Sikorsky in otherwise something has to happen for that to go away. It doesn't have to happen to -- something doesn't have to happen for it to materialize. Those are firm orders to deliver product worth $106 million over the next 18 months. This is not the sum of a long-term agreement, which are a multiple of that.

[Unidentified Analyst:]

Yes. I think I remember their ticker symbol is CBU, the company that you sold WMI, they have a nice little presentation, yes, they have a nice little presentation like their funded backlog I think is $7 million and their unfunded is like $300 million or something. Okay, thank you.

[Michael Recca:]

To compare us to that the $106 million that we're discussing over the eighteen months is funded, ordered, people are expecting and they are expecting it in May, June, July, August the next eighteen months, beyond that we have agreements to deliver a multiple of that. So, you compare their funded backlog to our $106 million.

[Unidentified Analyst:]

Okay. Well thanks, that's kind of what I have been doing. I see you guys have been pretty conservative with the backlog that you've stated. Actually very conservative. All right, thank you.

[Lou Melluzzo:]

Thank you.

[Operator:]

And it appears there are no further questions at this time. I'll turn the call back over to Lou, for any additional and closing comments.

[Lou Melluzzo:]

Thank you, April. So, with that, once again I'd like to thank everyone for taking the time to participate on our call today. Turn it back over to April I think we are all set.

[Operator:]

Okay. That does conclude today's conference. Thank you all for your participation. You may now disconnect.