Air Industries Group
Q4 2015 Earnings Call Transcript

Published: 4 Apr 2016

[Operator:]

Good day and welcome to the Air Industries Group Calendar Year 2015 Results Conference 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 morning. I am Mike Taglich, Chariman of Board of Air Industries. I would like to introduce Kristie Petersen to read our Safe Harbor Statement.

[Kristie Petersen:]

Certain matters discussed in this press release 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, 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.

[Michael Taglich:]

Terrific, and we will continue our policy of not reading the press release in the interest of the time for our host concerned, I am going to hand it over to Dan Godin. Dan?

[Daniel Godin:]

Thank you, Mike. So like Michael said short of reading the press release, I think I am going to touch in a few things here. We're nice where we saw -- a nice increase over 2014 in sales & revenue to the point of about 25% over 2014. The consolidated loss was very disappointing to us and others of course. We know that was predominantly driven as was said in the press release by our turbulent engine sector where we had some sun setting programs where to a lesser degrees some slight push-outs. And we have also seen continuation of some of the customers moving to a lower cost region. So our opportunities lie -- are very centered around our business development team, we -- for those of you who followed us closely know that we added a business development team to our corporate structure and seeing very good results. We have seen sales bookings over 2015 first quarter increase approaching 19% to 20% over 2015. So we have some good traction with our business development team on new programs and on new platforms. We also in the interest of our customers moving to a lower cost region are exploring the opportunity with a third party to recapture that volume in a low cost region. We have actually moved out and visited low cost regions and our customers are very excited that we are taking the effort to do so. So with that said, Mike, I think we can turn it over to questions.

[Operator:]

[Operator Instructions] And we will take our first question from John Nobile from Taglich Brothers.

[John Nobile:]

Hello, good morning. I was hoping to get a little insight into the turbine engine component segment here. It says on the press release that the transition from legacy to new products is caused customers to shift their production locations. I am just curious as to why they would shift their production locations due to a transition?

[Daniel Godin:]

I think what you see here John is that we have one of our bigger customers for the AMK Welding sector and that particular customer had moved its work to Hungary and we are exploring and that was a pretty significant impact in volume, probably close to 30% of the volume that we were running through our AMK facility. Now one of the things that you will find is that sometimes these customers move to those low cost regions and set up the additional capabilities that they were looking for so their parts are not there. And he who is willing to develop that capability close to their country that they have gone to or within country keeps their costs down pretty significantly just in the interest of inventory and time.

[John Nobile:]

Okay so they made this shift over to Hungary, obviously it's a big component of AMK, now this is responsible for 30% of the total segment or of AMK's part in that segment?

[Daniel Godin:]

AMKs part in that segment.

[John Nobile:]

Okay.

[Daniel Godin:]

So the good news there John is that early indications show that Walmart only recaptured the lost volume/revenue that we're actually seeing a lot of additional opportunities there, the parts that we did not use to make for that customer due to the fact that we are bringing the capability across the pond. We are very excited and it's very much entertaining three-year to five-year long-term agreements and given us additional work.

[John Nobile:]

Okay. On that segment, AMK obviously, that was a pretty big hit in that segment, the overall turbine components segment. Now Sterling is part of that segment also. Was there anything in Sterling that we should be alerted to?

[Daniel Godin:]

No, I think that one of the things that positive part of Sterling is the fact that we have seen a lot of traction. They, there was very limited business development activity with respect to Sterling and quite honestly one of their natives is Pratt & Whitney and they are starting to see some opportunities with Pratt & Whitney. But we saw a light push out on a program which is turbine and exhaust case with the F100. It's a push out, the work is not gone, as a matter of fact we were recently awarded the booking in April last week with that turbine exhaust component so we do feel like the volume will come back.

[John Nobile:]

Okay so Sterling looking at it on a fiscal year, does it look like we are going to back into, I think when you acquired them we were looking into a $10 million or so run-rate on an annual basis?

[Daniel Godin:]

We are targeting just shy of that but we are very optimistic that we will improve.

[John Nobile:]

Okay and if I can get back to customer, big customer responsible for AMK for 30% of their volume, the move to Hungary, is this something that has been completed already or is this still something that's going to push revenue out for you another quarter or so?

[Daniel Godin:]

No, that is, they are done. And when I say done they have moved there and they are not ones that would tell you they are going because they don't want you to slow down obviously but you know that customer has relocated and we have plans for that missed volumes so we have really intensified our business development activities around this sector and feel very confident that they volume is coming back. Without the move we already show a pretty significant increase over 2014 for AMK.

[John Nobile:]

Okay now any impact from this move to Hungary for this customer for your Q1 numbers?

[Daniel Godin:]

One of the things I would say is no, but we do know as we come into our Aerospace business, our first quarters are our weakest quarters. Because what typically happens is a lot of people pull volume to the left and try and have a very good fourth quarter which is what we did from a revenue perspective and you will see our fourth quarter was our highest quarter and probably the highest quarter for Air Industries Group in thesauri, right. So we come out the first quarter bit soft but feel very confident that Q2 and Q3 could be record breaking quarters for us again. As we went through our budget process we knew that the first quarter was going to be off for us.

[John Nobile:]

I just wanted to ask one more question on the turbine engine component segment. Obviously with the fourth quarter not being that stellar, actually I think when I break out the numbers lower than Q3 in that segment and obviously the margins are hit by this move to Hungary. I am just curious where you see these margins because I know I think we have talked in the past definitely double digit range even I am not sure into 20% range but lately they have been in single digits for all of 25 of that components so I am just curious where do you see these gross margins going in 2016 in that segment and what do you think is going to take to return to at least a double digit range in margins for that segment?

[Daniel Godin:]

Mike, do you want to take that one and I can add to it.

[Michael Taglich:]

Yes, the margins are obviously affected by volume because when you have lower sales you don't absorb the factory overhead or put another way every part carries a bigger burden and so your margins get affected and so it's almost highly related to volume and when that volume returns as we think it will the margins should return also. AMK and Sterling historically operate in double digits 20% or above but we expect to return to that level by 2016.

[John Nobile:]

Okay. Return to 20% and above which is a nice jump from where they are now. I didn't work out the fourth quarter. I didn't have the time but significantly below 10% so if you have to…

[Michael Taglich:]

One other thing John, you know the fourth quarter carried a 100% of the audit adjustments.

[John Nobile:]

Okay. Right, I understand that when I break that out but I mean for the whole year obviously you could see the gross margins below 10% on a segment that's typically at least 20% or above so I mean Q1 is in the books right now, should I expect at least above 10% or at this point Q1 it looks like, we are looking at still below 10%?

[Daniel Godin:]

Q1 revenue we will have a handle on later on today but I am not prepared to say what the margins were. Now we have embarked on some cost reductions specifically at the turbines and engine segments and companywide so I really can't quantify at this point.

[John Nobile:]

Okay. And I mean there was the delay, as usual, in passing the fiscal 2016 budget and I am just curious if you could quantify how that affected the quarter and not only that, how the new budget will affect your different segments if you can break that down into your three segments, how do you feel it's going to affect your different segments in 2016?

[Daniel Godin:]

So one thing we need to start off with, the bad news is they don't planned on passing the budget, the good news is they did pass the budget and it's a two year budget and it does increase military procurement by I think around $35 billion to $40 billion each year so that's significant. Those budgets were awarded in the fourth quarter. There's a time lag between telling the Navy they have the money for the F-18 landing gear and for them to actually place the order and for us to get it made. So there was no real positive affect on the fourth quarter. There will be a positive affect during 2016.

[John Nobile:]

Okay, all right.

[Daniel Godin:]

And I think the recent award for Sterling for the turbine exhaust case is an example of that. That's a product that's been made for years. It's got an engine that is there are thousands and thousands in the field. It is a consumable product you would think be reported on a regular basis but then there was a hiatus of about nine months to a year between orders and now there I a new order for us.

[John Nobile:]

Okay so that definitely impacted Sterling in Q4 but now that's definitely a done deal and Sterling should be back to normal run rates of, I actually think they reported that before, maybe just shy of $10 million for the year.

[Daniel Godin:]

The budget is return to the past yes.

[John Nobile:]

And just one final question, I always get back to a contract that you guys have several years ago but now it should be starting to make a ramp and I believe it should have showed up in Q4 and I am talking about the thrust struts, I don't know if that was going back to 2013 or 2014, you had a $38 million commercial contract.

[Daniel Godin:]

Yes, I got it. So john when you said you had one more question earlier, I thought oh my god, he is not going to ask one of my favorite programs. Here is the very good news about that program. It now looks like it's getting some traction and we have seen some schedule pulled for the left this year for 2016 so we will be delivering close to 200 -ish plus struts this year so it says that the C Series platform now is starting to take off with the qualifications have been certified, whether airplanes have been certified for many of its hurdles. So we see the schedule coming to the left on this program which is great. We have gone through all the operational excellence type things in the factory and in the last year delivered close to 150 and 200 plus this year and an additional data point for you and others is E Series has the same thrust strut with all indications look very good for us being awarded that program as well.

[John Nobile:]

200 units. Could we quantify this into revenue?

[Daniel Godin:]

$2.5 million for 2016 in revenue.

[John Nobile:]

Great. And that's all I have, thank you.

[Daniel Godin:]

Thank you, John.

[Operator:]

[Operator Instructions] We will now take our next question from David Stetson [ph], private investor.

[Unidentified Analyst:]

Hey guys, all my questions have been answered by John. Thank you.

[Daniel Godin:]

Thank you, Dave.

[Operator:]

[Operator Instructions] And we'll take our next question from Richard Pataki, private investor.

[Unidentified Analyst:]

Yes, I was just wondering a few years back dividing profits between military and private revenues. I was wondering have we better balance now or we more dependent on the military and number two, looking at the shareholders view of this the price of the shares and the secure, well if its secure divi then, I was just wondering, could you comment on that? Thank you.

[Daniel Godin:]

So Michael I will take the military and commercial and if you want to just talk for the divi that would be great.

[Michael Taglich:]

I will do that.

[Daniel Godin:]

So one of the things which is painful is the turbine and engine sector has been. It is one that we feel very confident. I myself and a 21 year engine Pratt & Whitney guy, so I feel all the TVs that I read look very good for us and we feel very good about where we are headed in this sector and why is that important to military versus commercial. We do see that the going into the turbine and engine sector will help balance our portfolio. We have up until now we have been kind of 90-10 and with some of what we are looking to do from an acquisition standpoint we feel like it will get us closer to our 80-20 and then you know pushing us towards 75-25. We will for the foreseeable future be a military heavy player and from our balance portfolio standpoint, we do think that we will see some lift in the commercial world as we get deeper and deeper into the turbine and engine sector. Michael, with respect to dividend, Michael will talk.

[Michael Taglich:]

We mentioned in the press release that we are on the verge of completing an acquisition which will bolster the turbine engine sector so that's one of the reason we decided to hold off on paying the dividend for this quarter until we have completed that acquisition and we will address it once we are completely, should be in just a couple of weeks.

[Unidentified Analyst:]

So no dividend this quarter?

[Michael Taglich:]

This quarter being the first quarter, there may well be.

[Unidentified Analyst:]

No, the fourth quarter there is no dividend right?

[Michael Taglich:]

There was no dividend paid in the first quarter for the fourth quarter but we will address the dividend once we complete this acquisition which should be in two weeks or three weeks at tops.

[Unidentified Analyst:]

So it is suspended until we see the next one?

[Michael Taglich:]

That is correct.

[Unidentified Analyst:]

And what is the guarantee of the next dividend being paid?

[Michael Taglich:]

Well there are no guarantees ever for anything but again we…

[Unidentified Analyst:]

So basically dividend is suspended?

[Michael Taglich:]

No, I didn't say that. I said that there can never be any guarantees but we are committed to a dividend policy and we are going to address that very quickly.

[Unidentified Analyst:]

Is it going to be adjusted when you start paying it again or will it be what it is now?

[Michael Taglich:]

I really could not say at this time.

[Unidentified Analyst:]

Oh, wonderful. I can see why we have almost over a year and a half of 50% to 60% drop in the share price which is not good when you are long term share holder so thank you for answering the questions.

[Operator:]

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

[Michael Taglich:]

All right thank you everybody for your support. We look forward to this year with the only think I can say about it is I am glad we got it behind us. We have done a lot of great things to reposition the company that aren't reflected in our EBITDA but we should have a pretty significant recovery so that is what we are expecting. Anybody else with any comments Dan, Mike?

[Daniel Godin:]

Yes, I couldn't agree more Michael. I feel very confident that 2016 we will start reaping the benefits of all the things we put in place in 2015 and the results should be much better.

[Michael Taglich:]

Great, thank you and the conference is finished.

[Operator:]

Okay. Thank you everyone. That will conclude today's conference. We thank you all for your participation.