Air Industries Group
Q2 2015 Earnings Call Transcript

Published: 11 Aug 2015

[Operator:]

Good day and welcome to the Air Industries Second Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Taglich. Please go ahead sir.

[Michael Taglich:]

Good afternoon. This is Mike Taglich, Chairman of Air Industries. I'm excited to be here unlike most companies, we do not make it a practice of reading our earnings release to people on the conference call. So we are going to read the Safe Harbor statement and we are going to break right at the Q&A. With that, Kristie Petersen, would you read the Safe Harbor statement?

[Kristie Petersen:]

Sure. Certain matters discussed in this press release and this call are forward-looking statements intended to qualify for the Safe Harbor from 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, its belief that the slowdown caused by the Sequester is continuing, 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 in actual results from estimates, projections and forecasts made by management, 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 and expressed from time to time in the company's filings with the Securities and Exchange Commission could cause 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 the date of this press release and the company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Mr. Taglich?

[Michael Taglich:]

Thank you very much. We will break right into Q&A. We are very excited to be in the second half of the year. We promised or we told shareholders we expect to have the beyond guidance for the year – in the range of guidance and we have always said this is a back-end loaded year, it's gratifying to be six weeks into the first half of the second half. And I will pass things to our very fine young CEO, Dan Godin.

[Dan Godin:]

Yes. Welcome everybody to the call. Like you said Michael, you know things for Q3 and Q4 look to be right in line with the guidance that we have been giving. And we have been working a lot of things, lot of different items and financial items on the operational execution side which – credence to the direction that we have been giving. So excited about – we are headed with the business and the team that was waiting here at Air Industries. So with that we can go straight into Q&A.

[Michael Taglich:]

Operator?

[Operator:]

[Operator Instructions] We will go first to John Nobile [Taglich Brothers]. Please go ahead.

[John Nobile:]

Hi. Good afternoon. I know you said it's going to be back end loaded year for you obviously in terms of meeting your guidance. But, I was hoping to get little more specifics maybe contract related specifics in regard to what's going to take to drive, when I broke out the numbers 49 plus in -- $49 million in revenue for the second half?

[Dan Godin:]

So I will take that John. This is Dan. Really what we see is, we got the backlog to support the plan which we – we have got the backlogs from the awards that were delivered – awarded on the second half of 2014. So we feel good about having the backlog in place. Also we have seen some nice rebound from Nassau Tool. Nassau Tool, two of our subsidiaries Nassau Tool and Welding Metallurgy, both have pretty heavy back ended plans, but we are very confident in executing those plans. And then I would say the third thing John that we see is, the land-based turbine market is seeing a nice significant up tick more specifically, the General Electrics, which is giving us a nice positive life with our storing engineering facility. So we have seen a nice up tick in volume that will drive – just predominantly in Q4, but we were doing some new programs with them that will actually start on the tail-end of Q3 and there at the Q4 and pretty much all of next year. So things are very favorable here.

[John Nobile:]

Okay. And if I can just back-up, I didn't hear clearly, the rebound was from Nassau Tool Works and what other segment?

[Dan Godin:]

Welding Metallurgy. So –

[John Nobile:]

Okay. WMI.

[Dan Godin:]

Yes, WMI. Our aero structures.

[John Nobile:]

Okay. And actually in regard to the aero structures and electronic segment. For modeling purposes, which company in that segment, the aero structure electronic segment is going to receive the – or did receive the $3.8 million navy contract and I know that was in presentation that I noted that is $3.75 million you are going to be adding to your revenue to help to get you in line with the guidance. So I just was not certain if it was – I was thinking it was your pact, but I don't know for sure if it's that are or if it's ECC or Wood volume.

[Dan Godin:]

Right, right. So let me help. That's a contract that we are actually awarded from Raytheon, which we have actually seen some nice follow-on contracts throughout the year totaling roughly 4.5 for this year.

[John Nobile:]

4.5 for this year.

[Dan Godin:]

Correct.

[John Nobile:]

Okay. From three and three quarters actually what I was probably in.

[Dan Godin:]

That's right. We have seen – we see few additional subsequent contracts from them on that program and that is for navy program, but it is actually awarded to Raytheon.

[John Nobile:]

Okay. And which – I mean, it's in the aero structural electronic –

[Dan Godin:]

Yes. That is Miller Stuart.

[John Nobile:]

Yes. Miller Stuart.

[Dan Godin:]

Yes.

[John Nobile:]

Okay. And are we still on track for second half 2015 Thrust Strut shipments. They were related to the $38 million commercial contract years ago. I believe you said that we are going to see this in the second half, it's going to be spread over six years. So that we still anticipate seeing some revenue showing up or shipments this year from that contract. And if so what do you expect in 2015 from that and going into 2016, would anticipate a ramp from this?

[Dan Godin:]

Yes. I think we will see continued growth in that. We know that that Thrust Strut goes on the Geared Turbo Fan, which is a new development engine for Pratt & Whitney, which was good because it gives us more commercial content. But, that we have been delivering Thrust Struts this year just not at the rate that we had expected to. So we were supposed to deliver north of 100 of this Thrust Struts that we delivered probably somewhere around 50% of that target volume. We will see – there has been 6000 of those – 4000 of those engine sold. So and there is turbo engine, so that in and itself will tell you that this is a great – that is a great growth program for us.

[John Nobile:]

No. I understand that. Obviously $38 million over six years. I just wanted to get – I was hoping if you could quantify what you expect for this year because it seems like it's another backend loaded program. So we are looking at, at least $1 million in top line numbers from what you have done this year and what you anticipate or is it going to be greater?

[Dan Godin:]

Yes. It would probably be somewhere in the 750-ish range this year and probably at least north of doubling that for next year.

[John Nobile:]

Doubling that next year which is about $1.5 million?

[Dan Godin:]

Correct.

[John Nobile:]

Okay. So it looks like it's going to be – maybe into 2017 that we really start to pick up on this. I mean doubling obviously is a good thing, but $38 million over six years, I anticipate one of these years we are going to see a pretty big jump from year-to-year.

[Dan Godin:]

Yes. It's interesting. Right, it's very similar to all these new programs i.e., the 787, right, I mean these new programs as they come on there. They are obviously -- always ambitious about how fast these programs are going to ramp up. So we have seen this from the customer, right. So we have actually – we have delivered their schedule, it advances their schedule there – actually slowed us down. So it's from a readiness or operational execution standpoint, we are very inline with meeting all of our delivery. It's just a slide and that program to the right where they are trying to resist taking on too much inventory.

[John Nobile:]

Okay. It's still anticipated number – still anticipated over six year period?

[Dan Godin:]

Yes.

[John Nobile:]

Okay. And if I could change track and get into gross margins because I noticed, well, sales were up 43% year-over-year. However, gross margins dropped about 4.6%, so I was hoping you could shed a little color on that big off a jump in sales. However, gross margins dropping relatively – significantly 4.6% from last year's second quarter.

[MikeRecca:]

This is Mike Recca. I will handle that. The gross margin in the second quarter of 2014, well, let be back out and say that we calculate gross margin based on a gross profit – based on a gross margin method, which means that for any particular subsidiary, we calculate the gross profit for a period based on the prior period. So in 2014, Nassau Tool Works and Welding Metallurgy had gross margins that were in excess of what the actual turned out to be by year-end. So the gross margin for the second quarter that knows that reduction in gross margin really resulted from a decline in sales and therefore a decline in the absorption of factory overhead. So the reduction in gross margin is a little bit artificial because the gross margin at WMI and Nassau Tool Works was higher in 2014 than it was in the second quarter of 2014 than it was for the entire year. And this year, we are using a lower margin number there. In addition, gross margin amongst the various operating unit is dramatically different. So you have a different mix of sales, you have a different mix of gross margin.

[John Nobile:]

Okay. Could you get into the gross margins by segment and what do you believe it would take to get in particular the turbine engine component segment. I know in Q1, the margins were fairly low, so it finished 2014 I think with a low 30% range in that segment. So I was wondering if you had – I know the Q would probably have and I'm not sure when it's going to come out. But, do you have those numbers ready now what the gross margins were for your three segments and what you do anticipate seeing going forward in that segment and what it would take to get it back like the little 30% range.

[MikeRecca:]

For the turbine engine segment?

[John Nobile:]

Okay. For turbine engine segment?

[MikeRecca:]

That's what you are asking about, is that correct?

[John Nobile:]

In particular, hold on, the three segments, I wonder such as a big hit was the – I believe it was that one. But I was hoping you would have all three. Because I know the first quarter, the turbine engine was – that's the one that it had about 6% or 7% gross margin in Q1?

[MikeRecca:]

The gross margin in the engine segment is obviously the sum of the two units that were in that segment. AMK Welding operates at a much higher gross margin typically than Sterling Engineering, which is a manufacturing company because the welding business is more of a service business and operates at a higher gross margin. However, with the loss of most GE business at AMK, the gross margin has declined, which – because again we are not absorbing the factory overhead. So that's been – that has negatively affected the aero – turbine engine business – turbine engine segment if you will.

[John Nobile:]

Okay. And that was also in Q2 that it affected it.

[MikeRecca:]

That's correct. Now, but you also have to understand that unlike many of our other businesses AMK as a very short turnaround time, the contract or order given to Air Industries Machining or Nassau Tool Works or Sterling Engineering results in products we have 6, 9, 12 months down the road. At AMK Welding order could result in revenue a week from now, again, as a welding service provider. So it's a much more – it's less backlog, but there is also less lead time.

[John Nobile:]

Okay. So going into Q3, which actually was – we were speaking in Q3 and Q4, in regard to the AMK part of the turbine engine segment, what are we looking for in Q3 and Q4, is there business going to pick up in these the current and coming quarters to the point where we can see gross margins getting back into closer to 30% range?

[MikeRecca:]

We have not disclosed any forecast on a particular individual company, I think Dan will be happy to speak about some of the initiatives that were ongoing at AMK Wielding.

[Dan Godin:]

Right. So we have got several initiatives to bring more volume into the AMK business to the point where some of what we lost with that customer General Electric were considering other options to recapture that business back. As well as look at some of the other land-based turbine engine businesses out there, which would be very interested in the services that we provide. But, Michael is spot on in the sense that in many cases in this service-centered business at the part show up before the PO does. And there is very little backlog typically not much more than months' worth of backlog. And so it's a bit volatile in that sense, but they have very nice capability which we have some very good opportunities starting to come our way, which I think we will start to see those gross margins that we realized at the tail-end of last year be back in first quarter of 2016.

[MikeRecca:]

Let me make one more comment, John, if I may. The gross margin in this business is highly volume related. You would think that a manufacturing company, lot of it cost were variable and therefore when you have a reduction in sales, you can cut employees and like. That maybe true if you are running a warehouse and you have a bunch of $8, $9, $10 guys running around driving forklifts. And you can lay them off and rehire them whenever you want. But, when you are dealing with people with 20, 30 years of experience that's the case of the machine, you got to write it out because we let one of the people go. They are employed tomorrow morning and we can't get them back.

[John Nobile:]

So that's really that variable?

[MikeRecca:]

It's highly, highly variable with volume.

[John Nobile:]

Right. Okay. Now, if I get off AMK, get into Sterling because the second quarter is obviously a full quarter contribution from Sterling. So that's why I want to find out what exactly was the gross margin in this segment because now we are looking at Sterling contributing significantly to this segment. And I know it was like I say the thing between 6% and 7% in the first quarter and now this quarter with Sterling showing up good percentage what are we looking at. Do you have those numbers available for this segment?

[MikeRecca:]

Really, we disclosed those margins by segment, but kind of reluctant to give it company by company within that segment.

[John Nobile:]

Okay. But you could disclose at least the entire segment what it was for Q2. I mean it will be out in the 10-Q I guess within the week. So I was just hoping to get if you have those internally –

[MikeRecca:]

I would rather have you read it in the Q.

[John Nobile:]

Okay.

[MikeRecca:]

The Q is going to be out Wednesday or Thursday.

[John Nobile:]

Okay. No problem. All right. No problem.

[MikeRecca:]

Then I would be happy to have chat with you about it.

[John Nobile:]

All right. I appreciate that Mike. Listen, that's all I have. Thanks for taking my questions.

[MikeRecca:]

Appreciate it.

[Dan Godin:]

Thank you, John.

[Operator:]

Thank you. [Operator Instructions] We will go next to [Mark Robins] [ph]. Please go ahead.

[UnidentifiedAnalyst:]

Yes. Thank you very much. But, my questions were answered.

[Operator:]

Thank you. We will go next to [Richard Ketaki] [ph]. Please go ahead.

[Unidentified Analyst:]

Yes. My question is on the dividend, how safe is it because it seems to me the dividend is the only thing holding up to share price. And how does management view the share price as far as value for the company in today's market because volume today was terrible, falling in shares, you guys were around road trying to sell this thing. There seems there is no interest. Could you guys explain or try to?

[MikeRecca:]

Mike Taglich, you want to do that?

[MichaelTaglich:]

Sure. I think the dividend is sustainable on are – it's obviously sustainable if we hit our projections like we have already given guidance to the street. We have got a high amount of deprecation that's really more of a book keeping expense and amortization then, which affects our earnings more than that it affects our cash flow as you probably understand. I think the dividend is a way to demonstrate the true earnings power of this company. And while we are not going to get projections on stock price, we are not the cheapest stock in the world when you look at trailing 12 over this quarter, which would be expected when you have a backend loaded year. And if you want to annualize our next couple of quarters, we think we are of cheap, okay. When you look at what a difference company just went off the door for to Warren Buffett's Berkshire Hathaway, you are coming up with a different answer. So stock generally trade in anticipation of future and certainly we are looking forward to making this quarter which is half a way through getting it done in on a tape, which should happen about – what about 75 days from now. So we are – I'm optimistic about where we are as a company. We made more acquisitions I believe in every small cap defense company if you will or a aerospace company that's public combined in the last three years, okay? We have got – I think a strong management team Dan is very strong addition. And it takes time for the earnings power that's inherent in these companies to become apparent. I'm hopeful that this coming quarter and a quarter behind that it will give us some real teeth because as supposed to give a new rosy forecast, I love to talk about quarters at our book and sales accomplished. We certainly have a backlog though.

[Unidentified Analyst:]

Okay. Well, I appreciate that. And I understand exactly what you are saying. But, I know you guys around the road, trying to tell a story and when I look at what happens in the marketplace and at the chart and at the volume, I don't see whether you guys are generating any – even interest in the company?

[Michael Taglich:]

I think it takes time. We have had – I had a series of successful company that started very small public companies, companies like Workers Paper for example is a good example for one. And as we grow, we have to actually execute and have these numbers and we will gain credibility and we will gain liquidity.

[Unidentified Analyst:]

Are you planning on more presentations, seminars or whatever?

[Michael Taglich:]

I think we are going to have – the best way to characterize our IR program is, we are going to be workman like. We are not – companies that have lousy IR get the stock a year ahead where it should be, [indiscernible] it's year behind. If you take a look at this – in the next couple of quarters if we hit our guidance, we are very, very cheap stock. And I don't think in this marketplace that we will be undervalued. So I think what we are going to do – we are going to make the presentations we need to make. And I think that every time we have a piece of news that the shareholders should know about, we will make sure it gets out to the public and with the yield like we have, I think it's a great advertising for whom we are.

[Unidentified Analyst:]

Between the quarters, not waiting for a quarter end on those.

[Michael Taglich:]

No. We have business, we are going to get it out.

[Unidentified Analyst:]

Okay. Okay. All right. I appreciate your straightforwardness. Thank you.

[Operator:]

Thank you. [Operator Instructions] We will go next to [David Stetson] [ph]. Please go ahead.

[Unidentified Analyst:]

Hi, guys. One quick question for you. With $7 million to $10 million of EBITDA expected over the next two quarters, should we see a return to profitability for the company?

[Michael Taglich:]

Yes.

[Unidentified Analyst:]

Would you think it would be profitable for the year?

[Michael Taglich:]

Absolutely.

[Unidentified Analyst:]

Okay. Very good. That something that I'm sure most shareholders would appreciate knowing. Thank you very much.

[Operator:]

Thank you. We will go next to [Mark Robins] [ph]. Please go ahead.

[Unidentified Analyst:]

Hi, apologize. I got to have asked you early. Let me ask you a couple of questions and remember my new to the story, so that kind of answers the previous questioners question about doing – getting attracting new investors. Help me understand in this quarter, how much – what was kind of the breakdown if you will of the various parts, I mean what was new compared to a year ago versus what was there a year ago. I mean how much of it is organic versus acquisitions that occurred?

[Dan Godin:]

Mike.

[MikeRecca:]

Okay.

[Unidentified Analyst:]

Sorry, Mike.

[MikeRecca:]

Let me run through the acquisitions first then I will try and give you some breakdown.

[Unidentified Analyst:]

Thank you.

[MikeRecca:]

In 2014 and April, we acquired a company called Woodbine Products that's been combined into Welding Metallurgy one of our subsidiaries. And then in June, we acquired Eur-Pac, in September – I'm sorry, yes, September 1, we acquired a very small company called ECC that was combined with Eur-Pac. And then in October 1st, we acquired Welding Metallurgy – excuse me, AMK Welding and in March 1, 2015, we acquired Sterling Engineering. Now, one of the things that we have – been counting on is that – what we call our legacy businesses that's the older companies that we wanted for a number of years they have been hurt by a sequestration, we believe we are coming out of the trough of that and showing some increases quarter-by-quarter with some significant increase and forecast for the balance of the year. So and this year in terms of it's EBITDA contribution for the six months versus the prior year, it's really not significant for the acquisition because we didn't known them for that long and we did have a lose – an EBITDA lose at our AMK Welding operations, we discussed before. But, the legacy companies have improved their EBITDA over the prior year and their revenue not in the aggregate, not individually amongst – there are pluses and minuses within them. Not a segment breakdown but it's really a timing breakdown, if you will.

[Unidentified Analyst:]

And so what we are really saying is, as we get into the latter half of this year not only is there a higher volume. But as you pointed out, there is going to be a much better gross margin contribution plus that higher volume and hence the leverage that we are all hoping for.

[MikeRecca:]

Let me give you an example of one of our subsidiaries, but we don't – I won't use the name. When it was doing $12 million or $13 million and was operating about at a 36% margin. The subsequent year went down to $10 million, also the delay of the contract and the margin went down by 9 percentage points. So that will give you some idea of the earnings leverage in terms of volume versus margin.

[Unidentified Analyst:]

Got you. Was there a much in the way and I don't know any other way to say, but dislocations, I mean usually when you have that many acquisitions, operating expenses just get screwed up because people don't know what they are doing and who they are reporting to. What would you guess would be the fudge factor caused by that in this quarter?

[MikeRecca:]

Well, in this quarter, really not terrible. I see operating costs at the corporate level are – it's a little bit higher than they were a prior year because that each individual operating subsidiary, not materially different than they were before – before we acquired it. They are really kind of in line. It's just more of them means more cost.

[Dan Godin:]

And I will add to that, if you will Mark. There is a choppiness in the small companies that somewhere inherent and there is a transition issues with them. So the way I look at the value is the earnings power of these companies after we get our teeth into them. You are looking at a year and year and a half when we transformed them.

[Unidentified Analyst:]

Yes. Don't worry, you don't have to explain choppiness to me. I can talk about choppiness and 1979 in Precision Casparts. By the way I think Warren ought to be – ought to be reminded that he is only up 18,000 percent at 60s, Precision Casparts since 1981 is up about 20,000 percent. So it actually beat the pants off of Berkshire Hathaway. So go get them boys.

[MichaelTaglich:]

I'm sorry, by the way one multiple did I go out of the door for?

[Unidentified Analyst:]

I didn't even know. Listen, I sold all of mine, I thought I was a genius when I went up the first ten times. That's me.

[MichaelTaglich:]

All right. So I notice in Q&A we are supposed to be – we are not supposed to be asking the questions, but it look like awfully on multiple EBITDA.

[Unidentified Analyst:]

Well, it was they were doing about $7 million, $8 million when they were doing 18. When they had $18 billion market cap. And so he went for 36. I don't think Warren is a value buyer any longer.

[Michael Taglich:]

Cash attrition. All right. Any other questions? We are going to pose another street any time we have some real news. We are excited about where we are. Hopefully, this second half of the year is something that becomes a base for next year. That's what I'm expecting privately, but I'm not giving guidance for next year. Again, which goes to the value that we have here. I'm very optimistic about the long-term success of this company. So are there any other questions moderator?

[Operator:]

It appears we have no further questions at this time.

[Michael Taglich:]

All right. Thank you, all. We are always available for phone calls. And I'm looking forward to making all the shareholders more money. Thanks. I guess with that I will go into the phone call.

[Dan Godin:]

Thank you.

[Michael Taglich:]

Have a good day guys. Bye-bye.

[Dan Godin:]

Sure. Bye-bye.

[Mike Recca:]

See you guys.

[Operator:]

This does conclude today's program. We appreciate your participation. You may disconnect at any time and have a great day.