U.S. Markets closed

Edited Transcript of AIRI earnings conference call or presentation 26-Mar-19 8:30pm GMT

Full Year 2018 Air Industries Group Earnings Call

BAY SHORE Mar 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Air Industries Group earnings conference call or presentation Tuesday, March 26, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Luciano M. Melluzzo

Air Industries Group - President & CEO

* Michael E. Recca

Air Industries Group - CFO

================================================================================

Conference Call Participants

================================================================================

* John Nobile

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

Air Industries Group safe harbor statement. 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 risks 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 risks. 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 other potential sources and uses of cash, such as working capital items. This calculation may differ in method of calculation from similarly titled measures and used by other companies.

At this time, I'd like to turn the conference over to Lou Melluzzo, President and CEO of Air Industries. Please go ahead, sir.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Telari. Good afternoon, and thank you for joining us as we summarize Air Industries' fiscal 2018 results and outlook for fiscal 2019. As I look back at my first full year as CEO of Air Industries, fiscal 2018 was [wild for us] and challenging, but ultimately, satisfying. We accomplished many important goals positioning the business for improved financial performance and profitability. We began the year with a plan to intensify our focus by streamlining operations and consolidating facilities to enhance productivity. Looking back from today, we have accomplished those goals. 2018 presented the additional challenges of -- over the long drawn-out divestiture of our Welding Metallurgy subsidiary to CPI Aero, which closed in December and the decision to wind down our Eur-Pac operations in Connecticut. The lease for the Eur-Pac facility expires in May of 2019, and the final contract will be completed shortly.

Needless to say, these 2 situations consumed a considerable level of time and energy from our management team. Going forward, all our time will be focused on our core competencies and ongoing businesses. For our continuing operations on major, perhaps the primary goal of 2018 was to consolidate Nassau Tool Works into our Air Industries Machining location. Our target date was October 31, when the lease expired and we achieved it. This was a monumental project to relocate 60,000 square feet of manufacturing space and it was accomplished almost entirely with just our employees.

In addition to the consolidation of facilities, throughout 2018, we have been reducing and relocating personnel, including myself from our corporate headquarters to our main operating site.

We have completed this process and have closed the corporate office in Hauppauge. We made this move to bring our staff in closer contact with our operating people. This enhances and accelerates communication and cooperation. Probably the ultimate reflection of success of the changes we have implemented is the increased confidence we are seeing from our customers in the form of not only new orders, but repeat orders. As we had a press release about a month ago on about $13 million worth of new orders, $7.2 million of those orders came in for our Sterling subsidiary up in Connecticut on a V2500 engine platform from a foreign customer. It was a great show of confidence in the parts that we can make. They're definitely in our wheelhouse. The balance of the order came in from -- for E2D parts both in landing and arresting gear. We're just seeing -- we're seeing a lot of activity in quoting, and Q1 has been very good with incoming.

So to that, I would like to turn the call over to Mike Recca to provide further financial numbers. Mike?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Lou, and thank you all for being on the call. Before we start, I want to reiterate that all the results we're going to discuss excludes our Welding Metallurgy subsidiary, which was sold; and Eur-Pac, which has been closed -- in fact it's been closed this month. So for 2019 -- for 2018, net sales were essentially flat with the prior year at $44.5 million compared to $45.3 million, so we had a decrease of about $800,000. Our gross profit though increased to $5.6 million, was an increase of $700,000 compared to $4.9 million in 2017. As very gratifying gross profit rose, even though sales declined, it's unusual gross profit percentage as a percent of sales increased to 12.1% from 9.8%, a 2.3 percentage point increase, I think, also very significant.

Turning to operating costs, I'll be going through explanation here. Historically, we have capitalized and amortized some of our engineering costs that we incur each year. In 2018, we decided to change this method of accounting and we are going to be accelerating the amortization of the accumulated capitalization -- capitalized amount writing off the balance and we will just be charging engineering to the cost of goods sold as it is incurred. So without that change, our operating costs -- operating expense is about $8.6 million, there is a decrease of about $800,000 or 8.5% from the prior year.

We had a loss from continuing operations, but this loss was reduced by about 1/3 to $3 million compared to $4.5 million in the prior year.

Our interest expense for the 2018 was $3.9 million that was compared to $3.4 million in 2017. Not all of that was cash. Our cash interest was $1.8 million in 2018 and $2 million in 2017.

Our adjusted EBITDA for the year was about $1.9 million and, of course, adjusted EBITDA is a non-GAAP financial measure and there's the reconciliation of our adjusted EBITDA to GAAP in the press release. The backlog -- and this is a backlog of future orders for 18 months is just over $100 million, and I think you need to define that we define backlog a little differently than most defense contractors. We only add an item to backlog when we have an order for that particular item in hand. It does not include any forecasted quantities that might be given to us by our customers or the size of contracts, so no future orders are included just what's in hand today.

The liquidity, which was strained in prior years, has improved dramatically. It continues to improve. Expect that will continue for the balance of 2019.

Lou, I'll turn the call back to you.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Mike. I want to close out the call with a few thoughts in the 2019 outlook. Since the decision to take -- since the decision in late 2017 to refocus the business on our complex machine products for aircraft landing gear and jet engine turbine applications and to consolidate operations, we have seen an increase in operating efficiency and productivity. We remain convinced that we have correctly positioned the company for increasing revenue and adjusted EBITDA. Our confidence is in no small part due to the renewed and new business orders over the last 3 or 4 months. Our backlog from continuing operations remains over $100 million. Our goal for fiscal 2019 is that revenue will exceed fiscal 2018 continuing operations revenue level of $44.5 million. And adjusted EBITDA should come in at about $3 million to $3.5 million.

This concludes our formal remarks this afternoon, and we will now open the call to answer any participant question. Telari, could you please open the lines for the Q&A session?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we will move to our first question. Please go ahead, caller.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [2]

--------------------------------------------------------------------------------

This is John Nobile from Taglich Brothers. I have quite a few of them here. I'd like to just -- my main question out of all of them is basically the progress since the last call. As far as getting product out the door, I just would like to know if you can actually speak about what has happened since the last call 3 months or 4 months ago? What is being done as far as getting product out of the door because, obviously, you have a very great over $100 million backlog, which speaks well of what we could anticipate in 18 months? But once again, what is it going to take to get this out the door?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, John, that's a great question. We've been hiring -- we've hired 5 new people, some for second shift, some for first shift. We're looking and bringing in at least another 5 new people in the next month to 6 weeks. We've got a new piece of equipment here on-site that a year ago was on the wish list and now it's actually in our facility been installed as we speak. We've got a very large boring mill that's really one of the key components. If you remember, John, about a year ago, I stated that those are couple of pieces of equipment that were key to us and we really didn't have a great plan for a backup, well now we do. And so with new equipment coming online, we've increased hours, we're hiring new people. This will start chewing into some of this backlog.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [4]

--------------------------------------------------------------------------------

Okay. And the boring mill, that was acquired in this first quarter or in the fourth quarter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It was acquired in early Q1, but it is on site today.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [6]

--------------------------------------------------------------------------------

And it's fully operational, you can pump out what...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It arrived on site today. It was on the back of the truck this morning. It was on the back of the truck when I pulled in this morning.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [8]

--------------------------------------------------------------------------------

Okay, all right. Okay. Although -- how long before you think that you'll be able to get this up and running, I'm not sure how long a piece of equipment of this magnitude?

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [9]

--------------------------------------------------------------------------------

About 6 weeks (inaudible).

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [10]

--------------------------------------------------------------------------------

Six weeks, great.

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [11]

--------------------------------------------------------------------------------

This is the machine, it's a true story. It's one of the second biggest machine that Air Industries owns.

--------------------------------------------------------------------------------

Michael E. Recca, Air Industries Group - CFO [12]

--------------------------------------------------------------------------------

And you had the (inaudible) foundation.

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [13]

--------------------------------------------------------------------------------

There was a foundation associated with that cured for well over 6 weeks in order to handle the weight, it's good news.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [14]

--------------------------------------------------------------------------------

Okay. So this, obviously...

--------------------------------------------------------------------------------

Michael E. Recca, Air Industries Group - CFO [15]

--------------------------------------------------------------------------------

All those new hires, by the way, John, are all people in the shop, not office SG&A types.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [16]

--------------------------------------------------------------------------------

No, I assumed, obviously, thinking it was more that on the floor here. All right. Well, that's great. So this new equipment should actually help in the second quarter as far as seeing some traction in getting this -- a lot of this backlog pushed out?

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [17]

--------------------------------------------------------------------------------

It'll be operational, definitely, in the second quarter.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [18]

--------------------------------------------------------------------------------

Okay. And actually on the last call, I brought up -- it was mentioned about 20% to 25% of your revenue mix was generated by commercial sales. I was hoping you could provide some insight into these commercial sales. And what should we expect for 2019 and 2020 as far as new sales or growth in this area is concerned?

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [19]

--------------------------------------------------------------------------------

We're actively pursuing more commercial work. We've gone to a full born-out business development plan. We've got a high degree of military components in the shop here. This -- I just finished stating that this last order that we have, the $7.2 million LTA is a V2500 engine component or components, that's commercial work. So we are expanding our horizon here and trying to cover both sides of the production phase, both military and commercial.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [20]

--------------------------------------------------------------------------------

Okay. And well, actually the consolidation of AIM and Nassau Tool, I know that adversely impacted sales and actually I don't know if it's the first quarter, but second and third quarter, it definitely took its toll on sales. So I'm just curious if there was any spillover from that, that impacted your fourth quarter sales?

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [21]

--------------------------------------------------------------------------------

We -- I mean, it was -- we still ship the product. It's not -- it impacted sales, but we still kept the doors open, and we still kept pushing product out of the door. It slowed down. It had its negative effects. It wasn't just a consolidation. A divestiture of WMI really took a lot longer than anybody here expected. We got it done, but it was time consuming. There was just...

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [22]

--------------------------------------------------------------------------------

Okay, so that definitely could have had some impact on the fourth quarter. I know that you had mentioned the full year sales and I just, like when I do the math and I look at the fourth quarter, I just wanted to know what was in that as far as any impact from will actually not just AIM and MTW, but the sale also. So that did -- there was some type of a material impact we could say in Q4 from this?

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [23]

--------------------------------------------------------------------------------

I would say so, yes.

--------------------------------------------------------------------------------

Michael E. Recca, Air Industries Group - CFO [24]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [25]

--------------------------------------------------------------------------------

Could I quantify it? Probably not.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [26]

--------------------------------------------------------------------------------

So I mean, that would be great, but if you could even closely quantify, that would be a phenomenal, but I don't know if you can.

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [27]

--------------------------------------------------------------------------------

(inaudible) what I can do.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [28]

--------------------------------------------------------------------------------

Okay. And you mentioned that you're closing Eur-Pac this month. Correct?

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [29]

--------------------------------------------------------------------------------

That is correct.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [30]

--------------------------------------------------------------------------------

Okay. So all right. So and obviously, you were just getting out the door with a little bit of contracts that you had from there. So I'm just curious if we should expect any onetime expenses related to this closure?

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [31]

--------------------------------------------------------------------------------

There will be one -- I think we've accounted for most of the -- I'm sorry, can you hear me, John?

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [32]

--------------------------------------------------------------------------------

Yes, yes. Basically, it's going to be insignificant because I know at least revenue-wise in the last couple of quarters, it was kind of insignificant. I just wanted to know if there was going to be any kind of a big charge coming.

--------------------------------------------------------------------------------

Michael E. Recca, Air Industries Group - CFO [33]

--------------------------------------------------------------------------------

(inaudible) accounted for most of it in the 2018 there may be -- and again, there's no tail here, there is no severance agreement, so that in magnitude, it leases up in May, it's $10,000 a month. So (inaudible) so it's really kind of is...

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [34]

--------------------------------------------------------------------------------

And -- yes, with the closure though, because basically, that was the bulk of your Aerostructures & Electronics segment, you had the 3 segments, I'm just curious, are...

--------------------------------------------------------------------------------

Michael E. Recca, Air Industries Group - CFO [35]

--------------------------------------------------------------------------------

(inaudible) going forward.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [36]

--------------------------------------------------------------------------------

Going forward you're going to have the 2 segments?

--------------------------------------------------------------------------------

Michael E. Recca, Air Industries Group - CFO [37]

--------------------------------------------------------------------------------

That is correct. We'll have Turbine Engine and Complex Machining.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [38]

--------------------------------------------------------------------------------

Okay. All right. Just wanted to make sure. Let's see asset impairment charges, obviously, there were asset impairment charges and write-offs that were mentioned in the press release. I don't know if you can quantify what that was, how that impacted the fourth quarter?

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [39]

--------------------------------------------------------------------------------

Yes, you'll see in the reconciliation of EBITDA, they're quantified there. And again, one of the asset impairment charges was to look at the inventory at Eur-Pac at year-end. And we are trying to sell that, what is good and salable. But we conservatively estimated what the proceeds of that would be and took an impairment charge for the difference.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [40]

--------------------------------------------------------------------------------

Okay. And actually just 2 more questions here. The CapEx, would you anticipate for CapEx in 2019?

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [41]

--------------------------------------------------------------------------------

I don't think it will be major. This piece of equipment that we purchased was not brand new off-the-shelf. We diligently look for a piece of equipment, it's got some life left into it and still do our -- maintain the tolerances that we want. And we're going to keep down that road until such time that it'll allow, but if -- there's not going to be a huge spend in 2019 in CapEx.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [42]

--------------------------------------------------------------------------------

Okay. Because I know what you came -- I don't know what it was for 2018, but it looked like it was...

--------------------------------------------------------------------------------

Michael E. Recca, Air Industries Group - CFO [43]

--------------------------------------------------------------------------------

2018, it was [ostensibly] just tooling. We capitalize tooling when we build it to use it for products and generally amortize or depreciate that over 18 months.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [44]

--------------------------------------------------------------------------------

Okay. And just my final question only because the first quarter is just about over at this point, you should end it in a few more days. I was hoping that you can actually shed some light into what to expect in regard to sales in this first quarter and actually interest expense also?

--------------------------------------------------------------------------------

Michael E. Recca, Air Industries Group - CFO [45]

--------------------------------------------------------------------------------

Interest expense would be running at the same rate as the prior year. Sales, typically the last couple days of the month are big months, are big sales days, big shipment days. Weren't, but that's the case. So we -- and very good first 2 months, I think we're going to be definitely ahead of last year by a good margin and ahead of our budget, which, very encouraging. So we're tentatively optimistic.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [46]

--------------------------------------------------------------------------------

Okay. So ahead of last year, what was last year's first quarter numbers? I'm sorry, I just don't have that in front of me right now.

--------------------------------------------------------------------------------

Michael E. Recca, Air Industries Group - CFO [47]

--------------------------------------------------------------------------------

Close to $12 million.

--------------------------------------------------------------------------------

John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [48]

--------------------------------------------------------------------------------

Close to $12 million. Okay, so we're looking -- so obviously, things are starting to gain traction in this quarter if you're looking at somewhat of an improvement over last year, and that was approximately $12 million.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That is correct.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

(Operator Instructions) We will move next to [Lawrence Cates].

--------------------------------------------------------------------------------

Unidentified Participant, [51]

--------------------------------------------------------------------------------

Most of the stuff I was interested in have already been answered, but I did have one question. I own by now quite a bit of your stock and I initially started buying it because of the potential with Sikorsky, when I read about you having all the Sikorsky business and that Sikorsky got all these new contracts, this multibillion-dollar Defense Department contract. And I just wondered what's the story with that? Do you expect some orders from Sikorsky in the near future? Is that going to happen? What's -- is that relevant for me to even ask about it now?

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [52]

--------------------------------------------------------------------------------

Sikorsky is a definite relevant customer to us. Most of the military stuff, I'll explain the process briefly, is -- goes through TINA compliance if it meets a certain threshold for dollar values. And I can tell you that last year was a heavy quoting year for Sikorsky. So we anticipate that some of that's going to stick. We are busy. And beyond just the new contracts that have been awarded from the Defense Department to Sikorsky, which have yet to trickle down to us because we're still in negotiation. It's a long process. Our traditional business, our legacy products with Sikorsky, which were dramatically impacted negatively. It's impacted by sequestration have come -- I want to say come roaring back to life, but that's probably a little bit aggressive for a conference call comment. But what we used to have orders for significant levels, they declined, and they really rebounded dramatically. I spent 2 days in Washington, D.C. 2 weeks ago, lobbying on behalf of Sikorsky, just prior to the budget release. They got almost everything that they anticipate they were going to get from the government, few extra pieces in certain cases and maybe a little less in other cases, but I think for the most part, the budget -- the federal budget had what Sikorsky had anticipated.

--------------------------------------------------------------------------------

Unidentified Participant, [53]

--------------------------------------------------------------------------------

Well, that sounds good to me. I'll hang in there then and look forward to next quarter, I hope we get good news then, too.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

(Operator Instructions) It appears we have no further questions in our queue at this time.

--------------------------------------------------------------------------------

Luciano M. Melluzzo, Air Industries Group - President & CEO [55]

--------------------------------------------------------------------------------

Okay. Thank you. Okay, so with that, once again, I'd like to thank everybody for taking the time to participate in our call today. Telari, I think the conference is concluded.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

All right. It sounds great. And thank you, everyone, for your participation. The conference call is now over. You may now disconnect your line.