Air Industries Group
Q2 2016 Earnings Call Transcript

Published: 18 Aug 2016

[Operator:]

Good day, and welcome to the Air Industries Group Second Quarter 2016 Results Conference Call. Today's conference is being recorded. At this time, I’d like to turn the conference over Mr. Michael Taglich. Please go ahead sir.

[Michael Taglich:]

Before we begin I would like to have Ms. Christine McGivney give us a -- read the Safe Harbor statement. Christine?

[Christine McGivney:]

Certain matters to be discussed are forward-looking statements intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act of 1995. In particular the Company's statements regarding trends in the marketplace, future revenues, earnings and EBITDA, the ability to realize firm backlog and projected backlog, potential future results and acquisitions are examples of such forward-looking statements. The forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the timing of projects due to variability in size, scope and duration, the inherent discrepancy and actual results from estimates, projections and forecasts made by management, the need for working capital to realize upon orders at a timely basis, regulatory delays, changes in government funding and budgets and other factors, including general economic conditions not within the Company's control. The factors discussed herein are expressed from time to time in the Company's filings with the Securities and Exchange Commission could cause the actual results and developments to be materially different from those expressed in or implied by such statements. The forward-looking statements are made only as of date of the press release and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events and circumstances.

[Michael Taglich:]

Okay. We must begin if we could with the results for the quarter ended in June. Net sales were $19.3 million that was a slight increase of $300,000 close to 2% from the prior year of $19 million. Gross profit was $4.1 million that was 21.5% of sales for the quarter compared to $3.897 million or 20.4 for the comparable year so a slight increase there also. Our operating expenses were $4.1 million for June 2016 an increase of $350,000 or 9.3% compared to $3 million paid for the prior year. Our operating income was a loss of 26,000 that was a decrease from last year’s operating income of 72,000. The net loss was 250,000 that was an improvement from the net loss of the prior year being 601,000. Loss per common share was $0.04 that was an improvement of $0.04 from prior year’s loss of $0.08. Dan you want to comment further on that?

[Dan Godin:]

Yes, so I will take it over from here. Dan Godin, the CEO of Air Industries Group. The quarter is very much in line with what we’re thinking as we reposition our business. We’ve been repositioning the Aerostructures sector, as well as Turbine and Engine sectors, parts of our business and showing very-very nice new opportunities as we go through the development phases of growth. So I will tell you I am extremely excited about where we’re going and that where our future is headed here. Our bookings are up significantly, greater than 35% across the entire group. What’s most exciting is we’re growing with existing customers, so they are very much liking what we’re doing in our operational excellence and what we’re doing with respect to growth. We’ve locked off on some new customers which is also exciting, as well as some new programs and new aircraft platforms. So we’ve touched the three elements of growth in our entire business. In our Engine sector, for the whole second half for the year it’s going to return to profitability. As you know we’ve been repositioning those businesses where a significant amount of work had moved to Hungary with one of our sites and with General Electric, so both of those businesses has transformed into new opportunities and new growth. We’ll begin production welding, so we’ve gone from development welding in Poland through the development phase of new parts for General Electric and we’ll start production welding on production hardware for engines in Q3. And they’ll show very nice steady growth month-over-month. So as we reposition, repositioning is well underway we are beginning to yield very-very favorable results across the group and very-very excited about where we’re headed. With that, we’ll take some questions. Mike here if you like to add anything to that, it would be great, if not we’ll go straight into questions.

[Operator:]

And thank you. [Operator Instructions] And we do have our first question from John Nobile. Please go ahead.

[Howard Halpern:]

Actually this is Howard pinch hitting for John today but asking you a couple of questions to you guys. So first question we had was concerning the firm backlog over the next 18 months, if you could disclose that number and if you could sort of describe how that backlog might get fulfilled and maybe if you could break it down to 6 month increments?

[Dan Godin:]

I’d be happy to discuss that to you. I don’t really we have it broken down by 6 month increments in front of me. Firm backlog has increased, firm backlog really exists at two of our sites and that’s in the Complex Machining sector with Air Industries Machining and Nassau Tool Works and their combined backlog has gone up by $4 million and it’s somewhere in the range of about $95 million for that increase. One comment about backlog, we only count funded backlog not unfunded backlog. So we have long-term agreements with customers that extends far beyond for amounts far beyond what we have in backlog, that’s only when those long-term agreements are converted to actual orders that we count the backlog.

[Howard Halpern:]

Okay. And based on what I read in the press release. A lot of it’s going to start to get fulfilled really in Q4, that’s going to be the beginning part of the fulfillment process for that backlog?

[Dan Godin:]

That’s correct, that is correct. We’ve relatively good visibility into Q4 already.

[Howard Halpern:]

Okay. And then in the Turbine & Engine Components segment, the margins have been relatively low?

[Dan Godin:]

It’s been very low. [Multiple Speakers] Let me explain that. Our Turbine & Engine segment both of those have a very low material cost, obviously are welding company, and the welding services company, its inventory if you will, is really weld in wire and gas. So it has very little inventory to all services and so it’s very volume driven. So until you get to breakeven where your absorbing needs to be overheads of the company, your margins could be negative. Once above that there in the mid-20s, banging on 30, similarly at Sterling Engineering, much of the material that they work on is customer supplied. So once again their margins are highly variable with revenue in any particular month. So we expect as those revenues increase which we believe they will for this quarter and for the next, that the margins there will rebound to very attractive levels.

[Howard Halpern:]

Great. And is this the type of segment where you only have maybe two quarters of visibility or could you end up as time goes on having better visibility more quarters out?

[Michael Taglich:]

Again, we don’t have the backlog numbers that we have at the Complex Machining, because the turnaround time is a lot less I mean, if our backlog gets generated. If the part takes six months to make and Sikorsky or Northrop or some other customer wants that part in March, they got to order in September, so it becomes a part of backlog there. In the case of the Turbine & Engine sector, the turnaround times are much smaller in the case of our welding business at AMK, turnaround time could be two or three days. So parts show up on the -- they show-up on the loading dock and in three days they are converted to revenue, the problem is if you don’t know what truck is going to backup at what part tomorrow. Now we do know that more than we used to because we’ve established new customers that are sending us regular shipments and we can expect that to continue. In terms of Sterling Engineering, they have done a -- they have landed a good amount of new business and new customers and existing customers and that is becoming much more regularized, if you will and that is -- we’ve been told to expect ex-amount a month from General Electric ex-amount a month from other customers and that this coming to fruition those customers didn’t exist some 12 months ago.

[Dan Godin:]

And what I could add to that if I may is that with our business development team we are face-to-face with our customers a lot more than we ever were in the past. So what we do is we get a lot more intelligence than we used to have. So we’re not getting surprised like we used to. So we -- it puts us in a place where we could respond to their needs very aggressively. So very much aligned what Michael was just telling you, but I think it’s also good to know that with a strong business development team, you get a lot more visibility into what the customer really needs and wants.

[Howard Halpern:]

John also had a question regarding, I guess revenue in Europe and I guess specifically Poland, I think you talked a little bit about that, but once revenue starts you envision sequential growth occurring quarter-over-quarter?

[Dan Godin:]

Yes. So we really do expect to see that. We have to ramp-up pretty significantly, we’ve made it well-known that we’re partnering with the, we call it shop-and-shop, but it’s really us taking real estate in our partner shop getting Meyer Tool and Meyer has a long-term agreement with General Electric and we’re going to essentially tab onto their seven year long-term agreement. We’ll go as fast as we can and ramp-up. So we see as we get more parts qualified obviously you’ll see the revenue growth follow soon. So we’re also quite honestly thinking fast forward in here, we are being asked to consider Poland for machining and there is some discussion with Northrop on E2D and Poland and we're being quizzed on in fact now that we're learning how to navigate in Poland a little bit better than we used to is that something we consider doing down the road there. So we see very nice steady growth with AMK our welding subsidiary in Poland.

[Howard Halpern:]

Okay. And I did notice reading the press release I guess this might be with regards to your business development team and the intelligence I think you are adding but is it your team that’s seeing the new opportunities within the customers or is it a collaborative between the customer and your business development team if you could describe a little bit about that new opportunities?

[Dan Godin:]

Sure. I think what it is quite honestly is one, we've established a very seasoned team of leaders in the business development side of our sector of our business and what we're doing a much better job at is selling Air Industries Group and leveraging the different subsidiaries and how while we can provide a more bundled solution to that customer. So, they like the fact that we can provide them, they can provide us with one tier and we can provide them with five different types of solutions against that one tier. So we're obviously selling that capability very well with our business development team, but they see us as becoming more of a, a much bigger player in the industry and we're getting opportunities with tier 1s and sometimes the OEMs.

[Howard Halpern:]

And just one final question, I guess it's regarding I guess last year Congress did a two year funding, so does that really mean 2017 it shouldn't really be too much in the way of delays or do they still have to do something to actually fund what they [Technical Difficulty]?

[Dan Godin:]

No, we see to 2017 being much more stable from a funding perspective like this year. So, we think that we will be good there, not only did they fund they just funded a tad bit over what they had previously been funding. So we saw an increase of about 38 billion in DLD release.

[Operator:]

And we'll take our next question from David Stetson. Please go ahead.

[David Stetson:]

Great to see the Company is stabilized and doing better. My first question has to do with Mike Taglich had mentioned that you expect fourth quarter record revenue and EBITDA formidification what would that range be? What would be a record revenue in EBITDA quarter look like for the fourth quarter?

[Michael Taglich:]

If you look back on history when we give about $20 million to $25 million like for example last year we gave $23 million and our EBITDA for the quarter was about $2 million. Again at $25 million I think it's reasonable to expect about a 10% EBITDA margin.

[David Stetson:]

Okay. So you're looking for approximately $25 million for Q4 is that the expectation?

[Michael Taglich:]

We're actually really kind of working through that right now. So, we don't have a number that we would like to discuss today.

[David Stetson:]

Okay.

[Michael Taglich:]

We are expecting significantly better than Q2 and also Q3.

[David Stetson:]

Okay. I just didn't have the numbers in front of me what a record number would look like, so okay I got a good feeling on that. One another note I’ll comment is it I was just reviewing the insider ownership for Board members of Air Industries and with exception of the Taglich crew it's pretty lite on shareholder ownership for people on the board and considering the stocks that are five year low it would be encouraging to me as a shareholder to see some the board members and insiders step up and buy some shares at these depressed levels especially if you foresee record numbers down the road.

[Michael Taglich:]

Yes, that's fair commentary.

[Operator:]

And our next question comes from Marc Robins.

[Marc Robins:]

Help me -- well I guess this is a way to ask it, help me understand essentially from a macro situation what’s going on, it appears Mike as you like to describe, things are still being shifted to the right, the business is still being shifted to the right. The increments that you’re getting right now are really from your own internal development and expanding into the marketplace. Is that a correct characterization for what’s going on in the last couple of quarters?

[Michael Taglich:]

I think really the improvement that we’ve shown in bookings that’s going to translate into sales is much more a result of micro internal activity than a substantial change in the macro. Again the $38 billion increase, that’s nice much better than a cut. The cuts of the past hurt us badly because it was targeted to the maintenance of existing programs and in the preservation of the new programs such as the JHF. Now the increase is better but it’s been much more productive for us to go out and get new business from new customers on new platforms which the BD team has been very successful at.

[Marc Robins:]

Yes, it’s correct congratulations. Has there been much of a shift away from military and the commercial, or is it still predominantly military?

[Michael Taglich:]

No I think it is -- we’re still, and our business today is still predominantly military. We are moving in that direction as we grow our Turbine & Engine sector we’ll become naturally less dependent on military where a lot of the growth that we’ve seen in the Turbine & Engine sector is commercial in nature. So we’ll naturally start to become less and less dependent on the military platforms.

[Marc Robins:]

And one of the things that we chatted about Mike sometime ago in the vision and maybe down I should be asking you rather than Mike but I am sure that [Multiple Speakers], you are cope of setting with one another. The vision is to kind of create a many precision gas parts and to me that also means to really work to get higher quality, better fatter margin kind of business. Now is that a possibility, is that something we’re striving for?

[Dan Godin:]

No, absolutely. As we know that in this business volume is your friend which is -- I’ve had my foot on the gas for growing the business and this it is why I developed a business development team here, as well as have some local representation where it makes sense. But as we see volume uptick in our factories, we will definitely start seeing much better margins. And quite honestly we have been looking at some of the work that we’ve done in the past and if it doesn’t make sense for us from a margin standpoint, sometimes it’s okay to pass on a part, right. So we have got to that level of granularity and parts that make sense for us, we do and ones that don’t make sense for us, we move away from. But all-in-all we definitely are pushing and striving towards much more lucrative margins.

[Michael Taglich:]

Mark one more comment on margins, our wheel of margin contribution in terms of direct labour and materials is much higher than our gross margin. We have large fixed costs that have to be absorbed, so until we get to those, when we get to those volumes the margins could increase dramatically.

[Marc Robins:]

What would you -- I hate to ask this because I don’t want to say box you in, but what would you feel guys as a target gross margin if things were running like it had?

[Michael Taglich:]

I think if you’re say running as a -- well that forecast in too much of the future and if we get to $25 million quarterly run rate, $100 million a year which I think is eminently achievable, a 25% gross margin is also very appropriate for that level of business.

[Marc Robins:]

Okay. And then lastly Mike, go ahead I am sorry.

[Dan Godin:]

No, no, no I was just, I was conferring with Mike, I think that that’s about where we would be.

[Marc Robins:]

Okay, great. And then lastly Mike I know that you’ve pulled in the reins on new acquisitions and mergers and so forth, but I know you’ve got your year to the ground, what’s the temperament out in the marketplace of some of these folks that you might be looking at? And what I mean is, are they a little more, little less willing to negotiate and are they asking for more or what’s the environment appear like for sort of acquisitions right now, has it changed much in the last 6, 9, 12 months?

[Michael Taglich:]

Really hasn’t changed that much. If they’re asking for more and they’re looking for a high multiple they are talking to the wrong guy.

[Marc Robins:]

But essentially what you’re really saying is that the same group of older entrepreneurs that started at the World War II or Korean War that now have to get out?

[Michael Taglich:]

Let’s say our real acquisition strategy is twofold or bifurcated or whatever. We’re looking for smallish acquisitions that we could fit into one of our existing locations and businesses. And we’re looking at other and I hate this term, but we’re looking at other strategic acquisitions that can bring us new customers and new line of business and would be more of a standalone fourth leg of the tool, we have three today, this should be the fourth. So we’re going down both avenues.

[Operator:]

[Operator Instructions] And it appears there are no further phone questions at this time.

[Dan Godin:]

Okay. Mike, do you want to wrap it up or anything?

[Michael Taglich:]

Sure. I want to thank everybody for their time today. And I want to assure that we’re working very hard at the Company to deliver the kind of results that shareholders would be pleased with it. And as the largest individual shareholder, I am and the Board we are strongly behind our management team and we love the direction we are going in. We can’t wait to turn these bookings into EBITDA, is that right Dan?

[Dan Godin:]

That’s absolutely correct. Very correct if that is where we are headed.

[Michael Taglich:]

All right, everybody have a great day and enjoy the rest of the summer.

[Dan Godin:]

Thank you, Michael.

[Michael Taglich:]

Take care, bye-bye.

[Operator:]

And that will conclude today’s conference. We appreciate your participation. You may now disconnect.