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Edited Transcript of AIRI earnings conference call or presentation 20-Nov-18 9:30pm GMT

Q3 2018 Air Industries Group Earnings Call

BAY SHORE Nov 21, 2018 (Thomson StreetEvents) -- Edited Transcript of Air Industries Group earnings conference call or presentation Tuesday, November 20, 2018 at 9:30:00pm 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

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Conference Call Participants

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* John Nobile

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

Air Industries Group safe harbor statement. Except for the historical information contained herein, the matters discussed in the presentation contain forward-looking statements. The accuracy of these statements is subject to significant risks and uncertainty. 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 the 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 methods of calculation from similarly titled measures used by other companies.

At this time, I now would like to turn today's call 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, Carrie. Good afternoon, and thank you for joining us as we summarize Air Industries' third quarter 2018 results.

I'm very pleased to report continuing solid performance in our core continuing operations as we focused on meeting customer needs and streamlining operations. The first 9 months of 2018 have been challenging yet rewarding. I state that as a CEO who's closing out his first full year of leadership. We are now beginning to focus on our core business, which is ultimately what really can drive shareholder investment.

The status of WMI sale appears to be settled and we hope to close on the transaction by year-end. In addition, the consolidation of Nassau is complete as of the end of October. We are settled in, and all the bumps and hiccups related to the consolidations are behind us.

Finally, while the disbarment of Eur-Pac is disappointing, we are considering all our options. From the perspective of the shareholders, please note that this business is a minor revenue contributor and for the last 6 months has been operating at a loss.

As far as our continuing operations are concerned, we continue to win contracts on a profitable basis and our existing backlog is $113 million.

Notable milestones. We've shipped our first A380 drag brace assembly. This is a very challenging part both in size and complexity. It's the largest part that we have in our shop. The consolidation of the Nassau Tool Works was primarily handled by our people to ensure a timely completion at the very best price. Now that the complex machining operations are under one roof, the cage codes have been moved to the new location. We are implementing our ERP system to better manage all facets of the business.

To provide further details behind the financial numbers, I'd like to turn the call over to Mike Recca, 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, and thank you all for joining us. I don't want to read the press release to you then because you've already done all of it yourself. I'll just explain out a couple of things.

So the 3 months, September 2018 versus '17, revenue was a little disappointing from a continuing operations. But gross profit as a percentage improved, it's improved from 11.4% to 12%, that is [6/10 of 1%] but it's also a 5% increase year-over-year. Improving gross margin on lower revenue I think is quite an achievement. Hopefully, it's something that will continue.

We have significantly reduced our loss, cut in half almost, from $2.9 million from continuing operations in 2017 to $1.4 million in 2018. Loss per share has been cut from $0.22 last year to $0.05 this year. For the 9 months, again revenue was still a little light but again, gross profit has improved as a percentage. Our loss from continuing operations has declined from over $6 million to under $5 million, and our loss per share has declined from $0.47 per share to $0.17. And our cash flow used in operations has improved significantly, from last year, we used $7.8 million, this year, we used less than $3 million. As mentioned, one of our primary measures is EBITDA, and we have the chart in the press release which shows the EBITDA for the 3 and 9 months. And we have added back the discontinued operations of WMI, and we also added back Eur-Pac for these purposes. As Lou mentioned, this company has been debarred and we're considering what to do. But the last 6 months, since the proposal for the debarment, basically has been shut -- basically have been just operating at a minimal basis. So we've incurred some losses there. But for the 3 months, we had EBITDA, as we calculated, of $579,000, almost $600,000, and for the 9 months of September, over $1 million -- about $1.2 million. And this is significantly better than last year, our EBITDA for the year last year was close to 0 and probably negative. And so I think this is a significant improvement. And we're looking to continue that improvement in the fourth quarter.

And let me hand the call back to you.

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

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Thank you, Mike. As we have previously stated, our results demonstrate that we're on the correct path to drive revenue while improving profitability. We remain confident in part based on our 9 months of the 2018 results, that we are correctly positioned to continue meeting existing company backlogs as well as take on additional commitments.

We expect to have higher sales on a comparable basis in fiscal 2018 than in fiscal 2017. In the last 12 months, we have pulled approximately $6 million of operating expenses. This is reflected in our positive adjusted EBITDA.

This concludes our formal remarks this afternoon, and we will now open the call to answer 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) Our first question will be from John Nobile.

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

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Nice to see the big reduction in cost, your expenses went down significantly, which, obviously, on lower revenue, improved the gross margins. I just wanted to get a little clarification. Yes, can you hear me?

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

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Yes, it's nice to hear from you again. Cost reduction was 37.5% year-over-year.

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

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Excuse me?

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Michael E. Recca, Air Industries Group - CFO [5]

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Cost reduction was 37.5% year-over-year.

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

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37.5%, okay. Assuming the sale of WMI is completed in December, how much cash do you anticipate receiving? I think the original 8-K, your press release said it was supposed to be for about -- was it $9 million in cash? I just want to get an update on this.

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Michael E. Recca, Air Industries Group - CFO [7]

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The purchase price of WMI is $9 million, plus there are 2 contingencies for $500,000 based on contract awards, one, as a company that was going to make the award, has not made the reward to anyone. So we will lose that. So the maximum price now is $9.5 million. And from that are some escrow arrangements and the like, we will end up with an excess -- and has a working capital adjustment, which, of course, cannot be known until you're close to closing -- but we've got 2 or 3 weeks. Last time I looked at it, the working capital adjustment was essentially 0, but again, you'll never know. Plus we got to the bottom line and we're going to reduce our debt by about $5.5 million. So it will be down to the $15 million range with PNC Bank. And we will end up in excess of that $1 million to $3 million in cash, plus there will be some escrows that will be released over time.

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

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Okay. So $1 million to $3 million in cash, so $500 million reduction in debt. Now the consolidation of Nassau Tool Works, Lou, I think your prepared remarks said the end of October, this was already a done deal for you. It's fully consolidated into 1 building now. I was hoping you might be able to quantify how much that disruption actually impacted your Complex Machining sales during the quarter, I don't know if you have that number?

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

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I don't have it, John, in the number format. But I can tell you that there was -- a decent amount of disruption was moving equipment; laying foundations; most of the equipment was pretty sizable, so we needed foundations; securing times, a lot of traffic in the shop over the summer months.

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

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No, I could imagine. I just was hoping you maybe could you give me some kind of a round figure on what that might have cost you in the quarter to do all that because I know the equipments are rather large. So just to get an impact on sales, if it was -- you feel you might have been adversely impacted by $1 million, I don't know. I was hoping maybe you could put out some kind of number on that.

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

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It's tough to say that, John. But keep in mind, this is a 16,000 square-foot factory that have been in place for 30 years that was moved for some about 90 to 140 days. So it was a monumental effort. And also there was further disruption because you had to move things to make room for at our old facility. But in the end, now things are not 6 miles apart, they're 6 feet apart.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [12]

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And now I would anticipate, with that out of the way, gross margins, I'm not saying you're going to -- your revenue's going to stay at this level. But even if it were to stay at this level, the impact of that consolidation should only improve your gross margins going forward, right? I mean, I'm correct in saying that.

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Michael E. Recca, Air Industries Group - CFO [13]

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I think that is correct. Remember, we agreed to -- excuse me, we are reducing our occupancy cost by about $400,000 a year, most of that was in manufacturing overhead, so that will be a reduction there. And then there's the -- impossible to quantify the cost of taking apart, putting it on truck, driving it 6 miles, unloading it, doing the paperwork, and all the other disruptions as opposed to taking it across a 6-foot aisle to the next process on another machine.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [14]

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John, the other facet to this, behind the scenes, is the Nassau Tool Works is primarily a government contracting operation. All the cage codes were assigned to that facility, to that address. So moving those over the summer, our people did a fantastic job in just getting the government to react to the needs that we have. It was almost as big a deal as moving the equipment.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [15]

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That's great to hear, that's a good move. And I haven't asked this question in a while. But I'm just curious, because I know you've had both the defense industry sales, commercial sales, I was wondering if you can actually provide a breakdown of what your current percentage differences are between defense and commercial, say, for the quarter or even year-to-date. My second part to that question, where do you see the potential for the most growth going forward? Is it on the defense area or commercial sales?

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Luciano M. Melluzzo, Air Industries Group - President & CEO [16]

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John, we're primarily set up right now with -- for government-type contracting. A lot of our products right now is military-type operations, F-15, F-35, F-18, E-2D, a lot of legacy type work. And we're breaking into the F-35 product line now. Commercial, I -- Mike, what was the product, 80-20 mix?

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Michael E. Recca, Air Industries Group - CFO [17]

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80-20, maybe 75-25.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [18]

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75-25, mostly heavier on the military side.

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Michael E. Recca, Air Industries Group - CFO [19]

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And almost -- a lot of commercial.

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

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So you're saying 25% of the current revenue was commercial?

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Michael E. Recca, Air Industries Group - CFO [21]

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Yes. John, that will be the sum of -- Sterling Engineering is primarily, essentially 100% commercial or 90% commercial. Plus remember, you're saving your product [the first judge], are for commercial engines. They're becoming a big and increasingly large part of the complex machining operation in Long Island. So I would say 75% to 80% military, and 20% to 25% commercial. And I would expect the next year, that percentage would stay relatively constant.

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

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Okay. And actually, kind of a similar question because I was looking at the Q and it said basically, the Department of Defense sales made up less than 10% of total sales I think both for the quarter and for the 9-month period. And when I look back at last year, you had over 20% coming from the U.S. Department of Defense. I'm thinking, is that really related to your package, what did that? Or is there something else in there? I was just hoping to get your take on that.

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

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There was a decline in business in Nassau Tool Works in 2017, actually 2018. As that ramps up, you're going to see the military continue to grow in percentage, as you know. We have -- the products that we're servicing on the commercial side, as you have alluded, the Geared Turbofan, the A380 and some Sikorsky work -- a lot of Sikorsky work, some of that being also really military like the BlackHawk and some being in the new programs that we're getting into their nonmilitary base. The mix is probably going to continue to stay stable at, let's say, 75%, 25% range.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [24]

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All right. And I just have one last question here in regards to the backlog. I looked at in and I said, wow, $113 million backlog. And I knew that, that's usually over an 18-month period. Is that excluding WMI? Or is that inclusive WMI, that number?

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

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No, that's excluding WMI.

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

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So $113 million on the backlog without WMI and I just did the math, I said, okay, if I go over 18 months with that type of a backlog, it equates to almost $19 million in average quarterly revenue, I mean, if that -- if it was just to stay at a flat rate for like 6 quarters in a row. So I'm looking at that, I'm saying, wow, $19 million in average quarterly revenue is the potential over the next 1.5 years according to your backlog. So my question's really, what is it going to take to satisfy that backlog? And do you believe that you can actually do this over the next 1.5 years to satisfy $113 million backlog, which would you put you at -- oh, gee, 19 times 4 is 70 something, $76 million in annual revenue if you were to do that.

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

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Pretty good with math, John. The bottom line is that we're looking to make the sale happen so we can get some liquidity to do exactly that to fund the growth.

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

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Okay. To fund the growth, if you could fund the growth, do you feel that you can actually push out that $113 million worth of -- well, firm backlog, right, that's an 18-month backlog, I believe, so if indeed that comes in the funding to tool up for that type of a backlog, we can look at that going in 18 months, you feel pretty good about that?

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

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You're looking at our operations in Connecticut, you're looking at the Sterling facilities that's just starting to get some traction. They come off a couple of not-so-good years, and there's definitely room to grow here. The quoting activity is very high, they're hitting some products. So there's a ton of opportunities that's presenting themselves here and you got to believe that we're under one roof now. We're in the shop every day looking at operational efficiencies to minimize downtime, due time and everything else associated with producing parts. We've got a full ERP implementation to better get control of machine loading and scheduling. These are all positive things in our future.

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Operator [30]

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Our next question will come from [Steven Brandstetter].

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Unidentified Analyst, [31]

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My questions are pretty similar about the existing backlog. We've seen the backlog increasing pretty steadily for the last, say, 1.5 years, 2 years, and revenues declining. Is there, I guess now that Nassau Tool Works has completed consolidation and WMI's almost done, when do you think you would see a turnaround in, like, where the comps are positive, where we see revenue growth rather than a revenue decline?

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Luciano M. Melluzzo, Air Industries Group - President & CEO [32]

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It's going to probably take us a couple of quarters to get things completely moving in the right direction. We've got -- we have some adjustments to make with personnel, we had adjustments to make with machines. A lot of our processes are locked process, so it means approval from our customer to move them. As I alluded earlier, the government was very strict on how we move parts. You just don't unplug a machine today, set them up in a different location tomorrow and move, you got to go to a lot of first articles. Like I said, it was a challenging couple of quarters in getting all that done.

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Unidentified Analyst, [33]

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Okay. And on the inventory side -- all good, I'm sorry, go ahead.

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

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I'm sorry, proceed.

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Unidentified Analyst, [35]

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All right. On the inventory side, I know you guys were trying to sell some inventory a while back, I don't know how that was going. But do we need a cash infusion from the closing here to buy more inventory? Is that holding us back?

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Michael E. Recca, Air Industries Group - CFO [36]

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We had some inventory that was purchased by a former CEO. Some of it turned out to be was in anticipation of a contract that we did not win. We had whittled that down. About 2/3 of what had has been sold. There's also some purchases in advance, it was a product that we will eventually use, but it is very slow moving. We have years of supplies with this problem. We'll have some cash coming in from the Welding Met sales. So we have too much of the inventory we don't need, and we do need some other -- some different product. We've been successful -- (inaudible) successful in arranging for some of our customers to supply that inventory. So yes, we could use a cash infusion. Yes, we are getting one. I really don't have any answers to whether we have sufficient cash to buy all the inventory we need or not.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [37]

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Steve, our inventory, the stuff that we have in the shop and had, had for a while, you could find it, we are shopping it around to pretty much the free world. You will see it on the LSI listing going forward in the very near future. We've been successful at moving some, not as fast as I would like but we are pushing out the door anything and everything that we could.

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Unidentified Analyst, [38]

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So is the inventory that we have or the inventory that we would need, is that holding us back from fulfilling these -- the existing backlog?

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

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I'm not sure I understand exactly which one, you mean the tied-up cash?

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Unidentified Analyst, [40]

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Well, what I'm saying is we only have a certain amount of cash and the inventory that we have doesn't necessarily -- we don't -- a lot of it isn't what we need to fulfill the backlog of the contracts that you have it, you need the right parts to put -- to assemble to fulfill the $130 million backlog. Is it still cash trapped where we can't really fulfill it until the sale start accumulating? I mean...

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

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Some of the backlog...

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Unidentified Analyst, [42]

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How do we affect the backlog?

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

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That, Steve, was purchased on speculation on an order we never got. So there is a portion of that, that we don't need to fulfill current orders, but it is part of our inventory. That doesn't mean that, that's not sellable, we've been semi-successful at selling some of it this past year and in the past.

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Michael E. Recca, Air Industries Group - CFO [44]

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I think the answer to your question is yes, we could use -- more liquidity is always good. It's not really desperate or dire. We could buy some more inventory but we -- we really are -- we've suffered in the last couple of months from bottlenecks in production, involved with consolidating the plans, we believe that's beyond us and that will improve from here. We will get liquidity, some improvement liquidity both from reduced debt, which reduces interest, reduces amortization payments, et cetera, and some free cash from the sale of WMI. So we'll still have to reassess it then.

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Operator [45]

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(Operator Instructions) I'm showing no further questions in the queue at this time.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [46]

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Okay. So with that, once again, I'd like to thank everyone for taking the time to participate in our call today. I will tell you I came to AIRI knowing there will be challenges. We have dealt with them head-on, and we are moving forward.

In a short period of time, we have streamlined the business and positioned the company to take advantage of improving efficiencies.

Carrie, back to you.

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Operator [47]

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Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.

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

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Thank you. Goodbye.

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

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Thank you.