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Edited Transcript of AIRI earnings conference call or presentation 29-Apr-19 8:30pm GMT

Q1 2019 Air Industries Group Earnings Call

BAY SHORE May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Air Industries Group earnings conference call or presentation Monday, April 29, 2019 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

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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.

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 of 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 call over to the President and CEO, Mr. 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, Ron.

Good afternoon, and thank you for joining us as we summarize Air Industries' results for the first quarter of 2019.

Our results for the first quarter are very encouraging. Our net sales and gross profit significantly exceeded the first quarter of the prior year. We have been able to reduce our operating loss by 80% compared to the first quarter of the prior year.

In recent months, we have announced several major new contracts, and we expect more in the coming months. We are also receiving increasing support from our subcontractors and service supplier which is improving our operational efficiency. These positive results are attributable to significant efforts of our management for the past 18 months.

The primary drivers of the improvements are: the sale of the WMI division. The transaction closed in December of 2018; the closure of our Eur-Pac division just last month; the consolidation of our Nassau Tool Works factory into our Air Machining factory on Long Island. This eliminated 40,000 square foot of space and costs associated with it; the closure of our corporate office and moving our most senior managers, including myself, to the front lines; and the creation of several cells to reduce cycle and setup times out in shop.

Our 18-month, fully funded backlog was $98.7 million as of March 31, 2019. This includes $4.2 million in mixer orders for the BlackHawk helicopter, $9 million in Geared Turbo-Fan PW 4000 and V2500 engine components for our Sterling division and several smaller orders for landing gear components.

[To provide] further details behind the financial numbers, I'd like to turn the call over to our CFO, Michael 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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Thanks, Lou.

Again, the results we're discussing here are from continuing operations only, that is without Welding Met, (sic) [Welding Metallurgy] which was sold last year and without Eur-Pac, which has been disposed of.

So for the quarter, sales were $13.9 million. That's an increase of $2 million or close to 17% compared to the $11.9 million from the prior year. Gross profit for the quarter was $2.3 million. That's a $300,000 or 15% increase over the prior year. Although things increases -- increased, operating expenses went down. For the quarter, they were $2.3 million. That's a decrease of $200,000 or 8% compared to the prior year. Now this requires a little more explanation.

So first, 8% decline, I think pretty good, but the actual results are a little bit better. In 2019, there are 2 expenses that are kind of nonrecurring. First, we had $233,000 of stock compensation expense relating to options. Obviously, that's noncash. But also in '19, we had a $275,000 charge with the remainder of the lease payments on our corporate headquarters, which Lou mentioned, we have closed. So the total of those was over, a little over $500,000. Those are included in operating expenses for the quarter. Without those costs, operating expenses declined by nearly 20%.

So with sales up, the gross profit up and operating expenses down, our operating loss improved by over $400,000. For the first quarter, it was just $62,000. I hate to say "just" when you're dealing with a loss, but $62,000 was a whole lot better than the prior year when we lost $0.5 million in the first quarter. So as Lou said, that's an 80% reduction.

If we didn't have the stock option expense, if we didn't have the office closing costs, we would have been profitable which would be -- which is obviously our goal.

Now EBITDA. This again is a little bit complicated. EBITDA for the quarter was just over $2 million. Back in 2017, we sold our AMK Business, and as part of the sale, we were entitled to receive a stream of payments over time. We sold that contract, the right to receive those payment in Q1 for $800,000, and we booked a gain for that same amount. So that again, just like that expense is a onetime, that's a onetime benefit also.

So without that benefit, our EBITDA would have been $1.2 million. Again, putting that in some perspective, our EBITDA for all of last year, for the whole year roughly equal to $1.2 million when we ended the first quarter.

So all in all, a very satisfying quarter, and hopefully this is the beginning of a string of such quarters. Lou, back to you.

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

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Thank you, Mike.

I'll close out the call with a few thoughts on the remainder of the year. Our results demonstrate that we are succeeding in driving revenue and improving profitability. We remain confident about executing on our backlog of customer orders and continuously improving our operations. We are optimistic that we can continue to build on these improvements in the months to come.

This concludes our formal remarks this afternoon, and I would like to open up the call to participant questions and answers.

Ron, would you please open up 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 we'll take the first question in queue. Please go ahead.

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

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It's John Nobile with Taglich. It's good to see some traction in your sales. Speaking about that, obviously, the first quarter sales look like you're starting really to make a difference on your backlog here -- or delivering your backlog. Do you believe that you will have the ability to make sequential improvements in your sales off your first quarter level going forward?

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

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Well, that is the goal, John. Anything can happen. But we are optimistic that the traction that we have gained will continue throughout this year and then going forward. Now we're a much smaller group than we were. We're tighter. We've got some good equipment now, all in the vicinity that it needs to be. We're starting -- we've created some cells for some of the key product lines that we do in day and day out. It is our intent to continue to improve on Q1's results.

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

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Okay, great. Glad to hear that. And as far as sales capacity -- I'm looking at the Complex Machining segment in particular. With the equipment you currently have in place, I just want to get an idea of you feel the annual sales capacity would be from the Complex Machining segment.

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

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Well, historically, with the equipment that we have in place, Mike, correct me if I'm wrong, we closed on about $70 million, $75 million?

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Michael E. Recca, Air Industries Group - CFO [6]

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That includes turbine and engine also. But the Complex Machining, in its best year in the past, John, of course, the past had different pricing, et cetera. The $56 million, there was probably some room in there. So I would say the capacity today, this is a real estimate. Somewhere in the 70-ish range. Sterling Engineering, in their best year they did $15 million. So as is where is, we're probably in the $80 million to $85 million range before capacity becomes an issue. That is...

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [7]

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Total? $80 million to $85 million total, but for Complex you believe -- with what you have in place now, you can handle about -- in the 70s -- $70 million range?

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Michael E. Recca, Air Industries Group - CFO [8]

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$70 million -- in the low 70s.

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

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John, we have left is Complex Machining. Our Sterling operations do very similar type of work that we do here on the island. It's all heavy-duty Complex Machining. We've kind of divested ourselves of the...

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

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And here's a forward-looking question...

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

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John, there's a tremendous amount of -- there's ability to bring in more modern machines, which, typically, 1 can replace 2 old. So -- and we're making some of those investments already. So the capacity -- of the all the problems we've had in the recent years, capacity hasn't been one. I look forward to dealing with that. And we have...

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

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That's fine. I'm just asking a general forward-looking question as far as the capacity is concerned. Because obviously, you feel that with the backlog you have now, if I was to like do to math on an annual rate, you can handle that with the machinery you have in place. But to get to the next level, say, this is looking down the road maybe a year or 2 or 3, what do you think it would take actually, in terms of CapEx to get you maybe to that next level?

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

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Well, we're very cautious on CapEx. We've got -- we've had open time on the equipment. We have a second shift that we can expand to that doesn't cost any additional CapEx. There's avenues to go before we really start talking. Now if you start talking enhancements and stuff of that nature, then there is room to discuss it. But there is still a lot we can do with what we have.

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

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Okay. That's great to hear, $80 million to $85 million total company capacity currently. And actually, it brings me to another question because I know last quarter you mentioned that you had purchased 1 set of boring mill, I think, was in the first quarter. Expectations was it was going to...

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Luciano M. Melluzzo, Air Industries Group - President & CEO [15]

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That is correct.

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

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It was going to be operational in this quarter, the second quarter. So I'm hoping you can actually shed some light, provide an update on how that's progressing.

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

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It's progressing pretty well. It's pretty much hooked up. We got to run some test parts. Obviously, the parts that go on there are -- it's expensive material so you don't just put a part on there and push a button. But we're going through the testing and the final setups. That machine should be operational in the very near future.

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

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It's in the building and...

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

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In the building.

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

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Okay, so there's nothing that says, "Okay, it's not going as planned." In other words, things are going where this is only going to help you push backlog out at least by the end of this quarter?

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

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It's going in the direction we had anticipated all along, yes.

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

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All right, great. And let's see, operating expenses, they were down about $200,000 quarter-over-quarter. They're up about $700,000 over the fourth quarter. I know you mentioned that you had charges: office closing cost charges, stock compensation expense. But with all that out of the way, I'm just trying to get a feel for what level of SG&A expense that actually you expect for 2019. I mean, what should we look at on an annual basis?

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Michael E. Recca, Air Industries Group - CFO [23]

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Well, we haven't really disclosed that. I will tell you the first quarter with the expense of the audit is always higher in professional fees than the subsequent quarters. You pay for the audit in Q1. You pay for reviews in 2, 3 and 4. If I can keep them constant at this level, I'm a happy guy.

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

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Okay. So subsequent quarters from what we have on the first level, you'll be pleased to see it at the -- static maybe at this level?

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Michael E. Recca, Air Industries Group - CFO [25]

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We've made significant -- our operating costs have gone down from $12 million a year to $6 million or $7 million. That's a significant increase. There's not -- that well is not dry, but it is -- there aren't significant future gains to be had there.

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

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Okay. All right. Well, that's good to hear. Just wanted to get an idea. And -- well, stock compensation expense, we're going to see that in the year. I know you mentioned last year's first quarter didn't have it, but you had it in this quarter.

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

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That's correct.

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

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Okay. Let me zero in on gross margins here. The first quarter margin, 16.5%. That was on $13.9 million of sales. Just -- because the Q wasn't out yet, so I just want to find out if there was anything in that cost of sales that might have caused that level to be maybe a little higher or lower than what you would consider to be a normal level given that amount of sales.

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

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I was a little surprised by the cost of sales, frankly. If you look at it for 2019, it was 16.5% and now it's pretty close to what it was in the prior year even though sales were up significantly.

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

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Okay. There was nothing out of the ordinary, though, that was in there that might have caused it to be a little bit higher or lower because -- I mean I was pleased to see that high of a margin on that level of sales. I just wanted to get an idea like this is the norm for that level.

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Michael E. Recca, Air Industries Group - CFO [31]

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I think it's light -- I think it's low for that level. We are still incurring some significant expediting costs to move products along and to meet our customer demand -- timing demand. So those can add significantly to your gross margin. We have a couple of jobs that are significantly -- that are operating at a loss now that -- asked our engineers to try and bring some efficiencies out of them. So I'm pretty happy with 16.8%. I think that is easily achievable again, I think. And I'll be looking towards it going up for the balance of the year if sales continue to run at a higher rate than the prior year.

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

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All right. Well, that's good to hear. Just wanted to make sure there was nothing in there that might have skewed it in a certain direction.

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

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Yes. And one other...

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

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I'm sorry. One more on gross margins. If I was to take the $100 million backlog, divide it by 6 even quarters, it equates to approximately $7 million per quarter. So trying to get an idea of what the potential is if you were to get to that level, say, in the next 12 or 18 months. At that level of sales, what do you believe that your gross margins would be? What could you attain at that level?

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

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John, I'm not following the math here. I have a $100 million backlog, you're dividing it by what?

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

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$100 million, if you divide it by 6 quarters, because an 18-month backlog is 6 quarters. So you're looking at $16.7 million -- close to $17 million a quarter. Now don't get me wrong...

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

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Okay. Now I understand. I thought you said $7 million.

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

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No, no, no. $17 million a quarter, if you were to have straight quarter-after-quarter sequential flat growth. I mean, obviously, it's not going to be like that. But I wanted to get an idea of that kind of gross margin, what you might expect, what The Street could except for like a $17 million quarter?

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Michael E. Recca, Air Industries Group - CFO [39]

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For a $17 million quarter, you could expect higher than $16.8 million, maybe...

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

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Well, I know that. I'm just trying to get an idea if you have any internal numbers of what the gross margin potential could be.

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Michael E. Recca, Air Industries Group - CFO [41]

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We really do not. And you have to understand the backlog -- again, remember, we calculate backlog based on actual purchase orders in hand. So the backlog for June -- or May rather, the next month that's coming up, we pretty much know 100% what we're going to try and make a shipment for that month. But you're not going to be -- it's not going to be 100%. It's going to be like 90%. Where a year from now, next June, it's going to be -- it's only 30% or 40% of the business booked already. So...

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Luciano M. Melluzzo, Air Industries Group - President & CEO [42]

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There's a huge...

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

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It's not a straight line the way you want it. And you're -- if you take -- we have a number of jobs that are -- it really depends on the mix. So I really don't have a forecast for...

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

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Yes. I was just trying to get -- I was just -- excuse me. I was just trying to a ballpark there. Obviously, I would anticipate manufacturing efficiencies, economies of scale would be higher. All right, that's all I want to get on gross margins. It's just -- I have 1 final question. And I was doing the math. Your days payable outstanding, they were fairly high over the past few years, actually. And let's see, you finished 2018, it averaged around $77 million, days payable outstanding. I was hoping you could talk a little about how your payable situation currently looks and what you expect for 2019.

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

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Okay. Our debt -- accounts payable is a very big positive achievement. It will be explained more accurately in the Q. Year-over-year, that's April 2018 through March 31st, our accounts payable -- and I'm excluding the crude expenses here. Our accounts payable has gone down by $1.6 million which is terrific. And now they're down [8] -- instead of 70 days outstanding, we're probably, let's call it, 50, okay? But within that, there's even better news. $1.6 million is the gross reduction. Our AP over 90 days has gone down by about $1.2 million. Plus our accounts payable under 30 days has gone down by about $900,000. So the sum of those is a reduction of $2.1 million. The difference is our accounts payable over 30, over 40, over 45, over 60, the normal terms has increased by about $500,000 or $600,000. That's a firm indication, Lou mentioned, we're getting more support from our subcontractors, from our service providers. We have resolved all our back AP issues substantially. There's still some. And people are giving us credit again, so it's become, if you will, a source of cash and a source of support. So it made the operations a lot more efficient.

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Operator [46]

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(Operator Instructions) We'll now take our next question. Please go ahead.

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Unidentified Analyst, [47]

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Do you have a number for your tax loss carryforwards?

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Michael E. Recca, Air Industries Group - CFO [48]

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No, I don't. But they're so large, I'm afraid of them. It's probably in the $20 million, $30 million range.

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Unidentified Analyst, [49]

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Okay. And your backlog is for 18 months, but a lot of your contracts go way longer than 18 months. How much is behind that? I mean I know you don't really disclose it publicly. But like obviously, gearing up for several years of growth when you sign these long-terms contracts. So like what really happens after the 18 months?

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

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The thing is you get a long-term agreement, they only do releases, and the releases are 12- to 18-month long. That's what we recognize. But we could have a 5-year contract, but we don't recognize it as a 5-year contract. We recognize it as what is 12 and 18 months out.

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

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And it's exactly right. We have these long-term arguments that have in them estimates of what the customer is going to order. So Sikorsky, Lockheed Martin, pick a customer, who cares. And let's say we have a 5-year agreement that they're going -- that they estimate they're going to order $30 million worth of product. So we have an LTA, long-term agreement, and over 5 years at $6 million a year for 5 years. We sign that contract today. Tomorrow, they issue a purchase order for $500,000. That $500,000 goes into our backlog, not the $5.5 million. Now they place orders every month, and they usually place them based on a lead time. If a product takes a year to make and they need it next May, we're going to get a purchase order for it any day now. If the product takes 2 months to make and they need it in July, we'll get it in May. So we have it made in June. They deliver it in July. That's why the -- if you look at it 18 months -- I'm making this up because I haven't looked at it today. Our 18th month backlog may be $3 million, $4 million at most, maybe $2 million. But our backlog for next month is $7 million or $8 million. Plus there's past due amount, so we still have to try it out to [wear] it out. So we don't record -- most defense contractors aerospace companies record to a funded backlog and an unfunded backlog. In the example I gave you, where we have a $6 million LTA and a $500,000 order, our funded backlog is $500,000. Our unfunded backlog is $6 million. We don't report that.

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Unidentified Analyst, [52]

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Okay, that's helpful. On April 3, you issued a press release. And you said "total bookings of new business of the 3 months ended March 31 were $19.9 million." Out of that $19.9 million that you booked in the first quarter, what would be in the backlog, and what's probably not in the backlog?

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Michael E. Recca, Air Industries Group - CFO [53]

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Very little of that bookings that occurred are in the backlog. It was, again, those are orders. So only new orders that have been funded and could -- placed into purchase orders are in the backlog.

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Unidentified Analyst, [54]

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Okay. But out of that $19.9 million, over the long term, how much do you expect to actually see in revenue?

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Michael E. Recca, Air Industries Group - CFO [55]

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I expect to see more than $19 million. Typically, that's a long-term agreement. The customers order more than the agreement is for. Not always. Things can change. And if they do change, the customer has no obligation to us. Go back to my $6 million and $500,000 example. If they place an order of $500,000, that may be it. They may stop there. There's no obligation to place the next $5.5 million, which is why we don't include it. But typically, they undershoot -- they under -- they have a long-term agreement for less than what they really need.

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Unidentified Analyst, [56]

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Your backlog at $100 million, and you booked revenues of $13.9 million, and I think maybe $11.9 million in the quarter before. Are you disappointing any customers that are not getting deliveries? Or are you behind on deliveries? Or it's just the timing of when it's shipped?

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

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We've got -- we've got us some parts that are overdue. And we're communicating with the customers, and they're being tremendously supportive in helping us along with getting these parts done.

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Michael E. Recca, Air Industries Group - CFO [58]

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And we're improving. We made significant improvements in the last 3 to 6 months. We discussed 1 product this morning, where 4 or 5 months ago, we were at a 30% on-time delivery rate. They want us at 98%. We're at 70% now. So we've increased by 40 basis points in the last 3 months.

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Unidentified Analyst, [59]

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So if you do get to a 90% or 95% on-time delivery, obviously revenues would have to go up if you're meeting your backlog?

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Luciano M. Melluzzo, Air Industries Group - President & CEO [60]

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That's right.

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Michael E. Recca, Air Industries Group - CFO [61]

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That is correct.

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Operator [62]

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It appears there are no further questions at this time. Mr. Melluzzo, I would like to turn the conference back to you for any closing remarks.

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Luciano M. Melluzzo, Air Industries Group - President & CEO [63]

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Thank you, Ron.

So with that, once again, thank you, Everyone, for taking the time to be on the call today and for your attentions and question. We look forward to speaking with you in the near future.

Ron, can you conclude the call?

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Operator [64]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect your lines.