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Edited Transcript of AIRI earnings conference call or presentation 15-Aug-18 8:30pm GMT

Q2 2018 Air Industries Group Earnings Call

BAY SHORE Sep 3, 2018 (Thomson StreetEvents) -- Edited Transcript of Air Industries Group earnings conference call or presentation Wednesday, August 15, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Luciano M. Melluzzo

Air Industries Group - President & CEO

* Michael E. Recca

Air Industries Group - CFO

* Michael Nicholas Taglich

Air Industries Group - Chairman of the Board

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Conference Call Participants

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* Howard Allen Halpern

Taglich Brothers, Inc., Research Division - Senior Equity Analyst

* Matthew Butler Koranda

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Air Industries conference call. Today's conference is being recorded.

Except for the historical information contained herein, the matters discussed in this presentation contain forward-looking statements. The accuracy of these statements is subject to significant risk and uncertainties. Actual results could differ materially from those contained in the forward-looking statements. See the company's SEC filings on Forms 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 noncash depreciation and amortization charges, stock-based compensation expenses and nonrecurring expenses and outlays, prior to consideration of the impact of the other potential sources and uses of cash, such as working capital items. This calculation may differ in method of calculation from similarly titled measures used by other companies.

At this time, I would like to turn the conference over to Lou Melluzzo. Please go ahead, sir.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [2]

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Thank you, Todd. I'd like to start by saying that from the Air Industries Group, we have Michael Recca, our CFO; myself; and Michael Taglich, our Chairman. Good afternoon, and thank you for joining us as we summarize Air Industries' Second Quarter 2018 Results.

Late in 2017, I changed our business to focus more on meeting customer demands rather than the day-to-day shipping. I am very pleased to report that our strategy of focusing on customer demands and aligning production schedules to meet those demands, while implementing a disciplined cost reduction program, is paying off with increasing [quarterly] revenue and adjusted EBITDA for the second quarter of 2018. We have now had 3 consecutive quarters of increased revenue and improved profitability.

To continue to execute on our existing backlog of over $111 million as of July 31, on (inaudible) basis, we've set up several working cells during the consolidation process to more efficiently manage the steady-running jobs. Our palletized work centers are now all up and running and producing results. We are upgrading to the latest version of our ERP system so that we can fully utilize its capabilities. And on the sales side, we are being very vigilant as to the type and mix of work that we are pursuing.

In regards to the sale of our WMI subsidiary, we have -- as we have publicly announced, we have terminated the contract with CPI Aero and do not anticipate selling WMI. The results published include WMI. As you probably know, CPI sued in a court -- in court for a specific performance. That is to continue the process contemplated in the contract. We denied the allegations and are vigorously defending our positions. I have no further comments on the CPI deal at this time.

As we look forward to this year so far, I have to say I'm confident in the future. I've seen the changes we have made affect the entire organization. From the executive level to the factory, there is a buy-in to get Air Industries where it can be, whether it's sequential top line revenue growth, improving EBITDA growth, or quite frankly company morale. The business just feels better. Make no mistake: we have a long way to go. I learned a long time ago you never rest on your laurels. That said,, I feel we're moving in the right direction.

To provide further details behind the financial numbers, I'd like to turn the call over to Mike Recca, our CFO, and then I'll return to close the call. Mike?

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Michael E. Recca, Air Industries Group - CFO [3]

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Thank you, Lou. As you saw in our press release, we had revenue for the second quarter of $15.8 million. That was an increase over the first quarter of about $1 million and $12.5 million and an increase of about $3.3 million over the fourth quarter of 2017. And again as Lou mentioned, these include WMI, Welding Metallurgy. So in the last 3 quarters, we have improved our revenue by about 25%.

The consolidated gross profit from operations was about $2.3 million in the second quarter and about the same in the first, but $2.3 million is double the profit in -- the gross profit in the fourth quarter of 27 (sic) [2017] on $12 million of sales. And I think that really shows the earning power of using sales and how it can dramatically increase gross profit.

Our operating expenses for the quarter were flat at about $3 million, but our operating expenses for the 6 months ended June compared with prior year were about $1.3 million or 18% less than the year before. For the 3 months ended June, our operating costs were about $1.2 million or 30% less than the prior year. So again, I think we've been pretty diligent in maintaining -- controlling our costs.

In terms of operating loss, and here, I'm going to ignore, for the time being, $1.5 million add-back to income that you see in our 10-Q filing. What that is, is we established a reserve against the net assets of Welding Metallurgy at December 31, so that they would equal the expected net proceeds from the sale. When the sale didn't happen, we reexamined all those assets and their, principally, receivables, inventory and property. None of those assets have been impaired. So we eliminated that reserve and added it back to income, which was -- on paper, it looks great because we had operating profit for the quarter. But in reality, it's just an accounting entry and there wasn't a real operating profit. But our loss from operations for the 3 months declined by $600,000 or 51%. And for the 6 months, it declined from $1.8 million to $1.3 million, about $300,000 or -- I'm sorry, about $400,000 or about 25%. So we are not profitable, but we are gaining on it, if you will.

EBITDA for the 6 months was $768,000. In -- if you look back to our first quarter press release, EBITDA was $144,000. So we've increased that by $500,000 or about -- tremendous increase based on a minor increase in revenue. So again, it's an illustration of the leverage -- the earnings leverage that exists in the business.

And that's all the comments I have on the financials. Lou, you want to wrap it up?

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Luciano M. Melluzzo, Air Industries Group - President & CEO [4]

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Thanks, Mike. I'll close out the call with a few thoughts on the coming quarter and a summary of our near-term, go-to-market initiatives.

As we have previously stated, our results demonstrate that we are in a correct path to drive revenue while improving profitability. We remain confident, in part, based on our first and second quarter 2018 results, but we are correctly positioned to continue meeting existing customer orders as well as take on additional commitment. Our goal for fiscal 2018 continues to be that revenue will exceed fiscal 2017 revenue levels of $62.6 million. This includes WMI, but it excludes the AMK unit that was sold in January of 2017. In addition, we will concentrate on implementing operating efficiencies, and it remains our objective to pull out additional expenses every quarter. It continues to be our goal to achieve continuous quarterly growth in EBITDA in fiscal 2018.

With that, this concludes our formal remarks this afternoon, and we will now open the call to answer the participant questions. Operator, would you please open the lines for the Q&A session?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from John Nobile.

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Howard Allen Halpern, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [2]

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This is actually Howard sitting for John today. He's out of the office. I wanted to ask about the consolidation program and how you envision it continuing to proceed. And what kind of cost savings can you still gain from such a program?

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Luciano M. Melluzzo, Air Industries Group - President & CEO [3]

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Well, the consolidation of the Nassau Tool Works into the Bay Shore facility now is going to -- we term as CMS, Complex Machining Sector, is just about at the tail end. There's 2 machines left to go that we've already poured pads, but the machines are practically running 24/7 and I'm just looking for the right opportunity to unplug them and plug them in. They're key pieces of equipment. I have commitments to customers that I can't -- I just can't unplug them and have them out of loop for a week or 2. So we still have plenty of time. We've got the building until October. So those will make its way over, but everything else of any substance has already been moved and has been implemented into our Bay Shore facility. Everything is now under one roof. We're looking -- Mike, was it about $1 million in cost savings per year just in...

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Michael E. Recca, Air Industries Group - CFO [4]

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We have actually 2 consolidations. We were able to reduce -- in anticipation of selling Welding Metallurgy, we're able to reduce the factory space, half of it which was being used as a warehouse. We eliminated that. We sublet that property. That's worth about $300,000, $350,000 a year in reduced rent. And when we exit Nassau Tool Works, we're currently paying there $410,000 in rent. We may sublet some of that. So the gross is about $760,000 in savings, and let's assume $250,000 of new expense for the sublet of Nassau Tool Works for some storage. So the net savings is about $500,000.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [5]

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So in the last -- I'm sorry. Go ahead.

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Howard Allen Halpern, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [6]

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No. I was going to ask another question that -- in the press release, you talked about improvement in inventory turn, and I'm wondering how that has been achieved and how you're going to improve upon that. And I assume it has something to do with your change in focus towards the customer demand aspect.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [7]

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That's certainly a big portion of it. The other portion of it is just the type of work that we're pursuing in the future and the type of work that we have in here. We've got -- our product line is kind of based into 2 segments. We got the landing gear sector that has longer turn times, just a lot longer time to process the parts. The parts leave the facility quite a few times for outside processes. And then we have another sector that really caters to helicopters and landing gears, too -- landing gear to some degree as well. But it's just the shorter lead time. The materials are readily available. They're not forged materials. They're not hand-forged materials for the most part. And those, we can turn potentially 6, 7, up to 8x per year depending on the product mix. The combination of the 2 will definitely improve inventory turns. And then efficiencies and lean techniques and just the better layout of the shop floor, in general, is going to stop the parts from having 2x by machines but actually beyond the machines. And the fact that we don't have to drive it 7 miles to the old Nassau Tool Works and lose parts when they leave -- especially in the winter months or the summer months, they've got to be acclimated to the temperatures once they come back into the facility. So there's no queue times. So those kind of things will improve inventory turns.

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Howard Allen Halpern, Taglich Brothers, Inc., Research Division - Senior Equity Analyst [8]

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Okay. And one final one. I had noticed -- I guess in the Q, you talked about you anticipate gross margins improving somewhat in the second half. Is there any particular segment that we should look at to see the most improvement in?

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Michael E. Recca, Air Industries Group - CFO [9]

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I think you should look at the Complex Machining Sector, which has the highest percentage of factory -- fixed factory overhead cost, which, if I could spread it over $25 million a quarter in revenue instead of $12.5 million, would dramatically enhance gross margins. You look back...

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Michael Nicholas Taglich, Air Industries Group - Chairman of the Board [10]

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That's -- it's not a projection yet. $25 million in Complex Machining is not a projection.

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Michael E. Recca, Air Industries Group - CFO [11]

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Not a projection. It's a mathematical example, not a projection.

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Operator [12]

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Our next question comes from [Milton East].

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Unidentified Analyst, [13]

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I was looking at -- in the 10-Q, it looks like you had a big increase, a remarkable increase in net sales from WMI, like -- it looks like from, like, $2.8 million to -- where are my notes, to $4.8 million. I was wondering if you could provide, I don't know, a little color on how you accomplished that because that was the kind of improvement, I'm assuming, you also want to see in your complex machinery.

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Michael E. Recca, Air Industries Group - CFO [14]

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You're -- when you're referring to $2.8 million to $4.2 million, you're talking about the first quarter to second quarter or...

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Unidentified Analyst, [15]

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Yes, sir.

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Michael E. Recca, Air Industries Group - CFO [16]

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Year-over-year? I'm a little confused. Yes. Okay.

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Unidentified Analyst, [17]

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Yes.

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Michael E. Recca, Air Industries Group - CFO [18]

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And that first quarter really a -- that's really a timing issue. And in terms of the receipt of contracts that we -- again, Welding Metallurgy's process time -- they get a contract today. They turn it into a sale in 3, 4, 5, 6 weeks, as opposed to 3, 4, 5, 6 months at Complex Machining. So the contracts hadn't arrived, and so we were screaming at them, hysterical on the first quarter. And then finally, they came through in the second quarter and we were able to -- for the year, we're right on budget. But for the quarter-over-quarter, it's a bit of a slip but nothing dramatic. What we anticipated happening in the first quarter happened in the second, put simply.

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Unidentified Analyst, [19]

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Okay. Okay. So for -- I'm assuming that going forward -- and it's already been said, that -- what kind of goals do you have on a per quarter increase for complex machinery? I mean, with that large backlog, is it next quarter, $1 million more in net sales, $2 million?

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Luciano M. Melluzzo, Air Industries Group - President & CEO [20]

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We've gone through the summer with a lot of necessary interruptions. So the consolidation, the process of trying to divest WMI, there was a lot of necessary interruptions. Certainly, we are now starting to finalize the consolidation and focus on business. So we will see incremental improvements going forward. As to what that might be, I hate to speculate, but our goal still remains to do better next quarter than we've done this quarter.

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Michael Nicholas Taglich, Air Industries Group - Chairman of the Board [21]

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There's -- we're not going to give a number, but boy oh boy, we want it to be a lot higher. So -- and it does beg the question, we're just not going to give you a number right now.

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Michael E. Recca, Air Industries Group - CFO [22]

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Yes. And also keep in mind that -- again, the production cycle for complex landing gear can be 6 to 8 months long. So there's nothing we can do next week to deliver that product. Now do we have shorter term? We have shorter process products also. There are things we can do, but there is that constraint.

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Unidentified Analyst, [23]

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Okay. Okay. And last question, although I know you don't want to say anything more about the terminated sale. I was wondering if there was anything at all that you could add about the -- what happened in the court date.

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Michael Nicholas Taglich, Air Industries Group - Chairman of the Board [24]

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We don't comment on things in court for obvious reasons.

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Unidentified Analyst, [25]

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Okay. Yes.

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Michael E. Recca, Air Industries Group - CFO [26]

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Court date...

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Unidentified Analyst, [27]

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I thought I'd try anyway. All right.

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Michael Nicholas Taglich, Air Industries Group - Chairman of the Board [28]

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Well, the most recent meeting, we just set a date. So it's no...

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Michael E. Recca, Air Industries Group - CFO [29]

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It took 1.5 hours to get to the city, it took 1.5 hours to get back to the city, and it took 15 minutes in the court to decide to meet next Tuesday at 1:00.

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Operator [30]

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Our next question comes from Matt Koranda.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [31]

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Just wanted to see if you guys could touch on the bookings for the quarter. I mean, I'm looking at the difference here in backlog quarter-over-quarter. It goes up nicely. Does that -- and I wanted to check my math here. Does that imply bookings during the period were $26 million and up essentially 50% year-over-year? Or is the old backlog number from Q1 stale because of the WMI disposition?

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Michael E. Recca, Air Industries Group - CFO [32]

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That's an interesting point. I don't know what backlog number you're using for the quarter ended June -- ended March. But I don't think bookings are up by -- I don't think backlog is up by $26 million.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [33]

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The number that's published as of July 31.

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Michael E. Recca, Air Industries Group - CFO [34]

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As of July 31, $111 million. I will tell you that bookings have not been as strong as they were from the prior year. This is not -- right now, our book-to-bill ratio, firm-wide, is about 80%, which is -- I'd like to have it more than 100%. But for the time being, our problem is executing against the backlog, not growing it. So there's no issue in the near term that says there's a lack of business.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [35]

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Okay. All right. Got it.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [36]

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The quoting activity still meets pretty high.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [37]

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Sure. Okay. And then the inventory position, I think, was $39 million and that ticked up sequentially. But I'm guessing that also has to do with putting the asset held for sale back on your books. Is that the case? I just wanted to get some clarity on that.

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Michael E. Recca, Air Industries Group - CFO [38]

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That is -- if you're looking 6 months versus the year-end, it's reinstating the Welding Metallurgy inventory back onto the books when it was held -- in assets held for sale prior to that. Inventory quarter-over-quarter went down by about $0.5 million at CMS, offset by increases at Welding Met and a very temporary increase at our subsidiary, Eur-Pac, which took in $560,000 worth of inventory last week in June and sold it the first week in July, kind of distorted it. Inventories have remained where they were, a little bit of erosion, which is a good thing. And we would like to get inventories down further.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [39]

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Okay. And then last time, I think, we spoke, you still had a fair amount of finished goods in inventory that may have been shipping out. I just want to get a sense for the cadence for that and the potential to kind of generate free cash flow from working capital for the remainder of the year. I mean, would you expect -- could you hazard a guess as to how much inventory you'd have by the end of the year?

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Michael E. Recca, Air Industries Group - CFO [40]

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It's going to be less, but it's not going to be substantially less. Now when you're looking at our financial statements, finished goods classified in the notes -- if you're reading the notes, it's kind of a misnomer because a lot of times, we make product, it's finished but it's not -- we have no demand for that finished good. We have a demand for a higher level of assembly, which includes that product and 2 or 3 others that we then assemble into. So as -- one, you make half the landing gear and it gets put into finished goods until the other side of it is complete, then you can mate them together and you have a landing gear. So it's -- if I could sell all my finished goods tomorrow, trust me, I would sell them. But there will be some reduction in inventory. But it's -- one of the challenges of this business is it's a working capital hog. And if it takes 6 months to make something and you want more than 2 turns a year, you have to have a really long year, okay? So it's -- that's the nature of it.

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Matthew Butler Koranda, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [41]

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Well, that being said though, [Lou's...]

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Michael E. Recca, Air Industries Group - CFO [42]

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That being said, we're focusing. We're focusing on -- one of the things we look at when we look at product now in terms of what we're going to bid is what's the process time. And so I'm going to take 6 weeks as opposed to 6 months. Even if it's a lower margin, it sounds like a lot more fun. So we are focused more aggressive on those products.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [43]

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Our product mix and the type of work that we're looking to pursue is not completely changing, but we're doing a lot more due diligence into seeing how quickly it could flip.

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Operator [44]

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(Operator Instructions) We'll take our next question from [Steven Brandstetter].

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Unidentified Analyst, [45]

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On a previous call, you mentioned that the sequester under Obama caused a big military readiness problem. Has the money started to flow yet from military? Or are we still seeing money being held back?

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Michael E. Recca, Air Industries Group - CFO [46]

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The answer is twofold: a, the bill has been signed 2, 3 days ago. There has been some ordering on the part of prime contractors and the military for parts in anticipation of an approved budget. It's been approved for several weeks. But the procurement process is not quick. So it will take some time for the $717 billion to be fully allocated, spent for us to get for the Air Force -- the Navy to place orders or for Sikorsky or Northrop Grumman to have orders from the military then to place orders with us. It's going to take several weeks or months before that flows down, but sequester and Obama are receding into history.

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Unidentified Analyst, [47]

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Okay. A couple of quarters ago, you mentioned you had excess inventory that you were hoping to sell. Any news on that?

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Luciano M. Melluzzo, Air Industries Group - President & CEO [48]

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We are -- it is trickling out of here. I'd like to give it a bit all of it in one shot but -- so the market doesn't allow it. But we have been moving some here, some there. We have been moving inventory.

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Michael E. Recca, Air Industries Group - CFO [49]

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I guess over the past -- last 2 years, we've sold about $1 million of it. It's down to about $1 million and we decided that we've just sold another, what?

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Luciano M. Melluzzo, Air Industries Group - President & CEO [50]

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Just last week, we had a pretty good hit. We sold about $350,000, $320,000 worth of inventory.

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Michael E. Recca, Air Industries Group - CFO [51]

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$320,000.

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Unidentified Analyst, [52]

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Okay. And my final...

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Luciano M. Melluzzo, Air Industries Group - President & CEO [53]

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So there is a need for it.

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Unidentified Analyst, [54]

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Okay. So revenues in the past 6 months was $30.6 million, first $33.2 million last year. You announced earlier on the call that you're hoping to exceed the full year of $62.6 million. So is one to assume that you -- in the next 2 quarters, you should beat previous year's estimates by the $2.6 million, the difference?

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Michael Nicholas Taglich, Air Industries Group - Chairman of the Board [55]

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You should assume that Q3 is going to be sequentially better than Q2 and that Q4 is going to be sequentially better than Q3. And the only other thing I'd give you as guidance is this company, as it's structured, should be doing over $20 million a quarter, and we will get there. Will we get there this year? We'll see. We're not going to predict that, but we should get there.

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Operator [56]

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At this time, speakers, we have no questions in queue.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [57]

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Okay. Okay. So with that, once again, I'd just like to thank everyone for taking the time to participate in our call today. And I'll turn it back over to Todd.

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Operator [58]

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Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.