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Edited Transcript of AIRI earnings conference call or presentation 16-May-18 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2018 Air Industries Group Earnings Call

BAY SHORE Jun 15, 2018 (Thomson StreetEvents) -- Edited Transcript of Air Industries Group earnings conference call or presentation Wednesday, May 16, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Luciano M. Melluzzo

Air Industries Group - President &CEO

* Michael E. Recca

Air Industries Group - CFO

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Conference Call Participants

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* John Nobile

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

* Larry Cates

- Private Investor

* Stephen Branstead

- Private Investor

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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's 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 used by other companies.

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

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

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Thank you, Vicky. On the line today, we have myself; Mike Taglich, our Chairman; and Mike Recca, our CFO.

Good afternoon, and thank you all for joining as we summarize Air Industries' first quarter 2018 results. As we discussed on our year-end call, our solid number first quarter results are in line with our plan to drive revenue, while focusing on profitability.

We continue to execute on our existing backlog. At this point, we are comfortable that our increase in efficiencies is freeing up necessary working capital to execute on our backlog and meet our customer demands on a profitable basis.

In the first quarter, we continued to align our production schedules to best fulfill customer needs, while continuing to be disciplined about eliminating costs for the processes. I'd like to give you a couple of examples of how we're accomplishing that.

1 man, 2 machines. Almost every machine that has moved from our Nassau Tool Works is sitting in its new location at AIM face-to-face. In most cases, this allows for 1 operator in between 2 machines, so 1 guy is running 2 machines. In some cases where the product allows it, 1 guy is running 3 machines. We're creating working cells to minimize queue times and optimize processes.

We have successfully moved one of our biggest and most important pieces of equipment in the last 2 weeks in the consolidation process. This is a 65-foot deep hole machine that is now in a spot that's dedicated -- it's in a dedicated cell for a very heavy running part for air machining.

We're looking at in-sourcing. We're looking at -- we are in the midst of in-sourcing several part numbers for important programs that, I feel, we need to have better control in. So these parts were on the outside at vendors. Those are going to be coming back into our shop in the next month or 2.

Special processes. We are looking to start the application processes with our customers to try and get approvals for grinding processes, as they relate to our current products. Right now, we do very little ID/OD grinding. It's considered a special process. You've got to get approvals. You've got to have permission to bring it inside, and there's an entire approval process to it. Now, these kind of initiatives are not only going to reduce costs, but they're going to reduce lead time and improve inventory turns.

The sale of WMI is on target to close at the end of May. The net proceeds from the sale will continue to enable our business execution.

To provide further details on our financial numbers, I'd like to turn the call over to Mike Recca. Then I will return to close the call. Mike? Mike, are you on?

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

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Can you hear me, Lou?

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Operator [4]

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Mike Recca?

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

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Yes. I'm here.

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Luciano M. Melluzzo, Air Industries Group - President &CEO [6]

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Okay, Mike. Please proceed.

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

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Thank you. Before we start, I just want to remind everyone that we are presenting our operations without WMI. We're considering that a discontinued operation on our financial statement. So all these numbers do not include their results for the year.

So for the quarter, consolidated sales were $12.2 million. It was essentially flat with the prior year at $12.2 million. I will note that comparing the first quarter of 2018 to the fourth quarter of 2017, sales increased from $9.6 million to $12.2 million. That was a significant increase, and I think that's in keeping with what we feel are improving results for this quarter and for the rest of the year.

Our gross profit was -- had a decrease of about $0.5 million to $2 million for the first quarter, and this primarily resulted from some new product introductions, particularly on the F-35 that Lou will speak to more about later. That first article, first production always has a lower gross profit, as you begin to climb the learning curve.

Our operating expenses were slightly higher than in the prior year. They were $2.6 million and $2.4 million. Historically, our operating expenses in the first quarter are higher than in the following 3 quarters. And we hope that our continuing cost-saving measures begin to show some improvement.

Our adjusted EBITDA from continuing operations was $236,000, and this was essentially even with the prior year. Even though sales were flat and gross profit was down, this -- it's still showing a positive EBITDA. We had previously given guidance that we were going to show a first quarter positive EBITDA from continuing operations, and we did.

Our funded backlog remains constant at about $101 million, and liquidity continues to improve. We are diligently managing working capital and continuing to execute on the backlog. And our liquidity be -- should be further improved in a couple of weeks when we conclude the sale of Welding Metallurgy.

And with that, I'll turn the call back over to Lou and await your questions later.

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Luciano M. Melluzzo, Air Industries Group - President &CEO [8]

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

As we have previously stated in the fourth quarter of 2017, we recognize the need to more appropriately align our revenue to reflect customers' needs. We also refocused the business on its complex machine products for aircraft landing gear and jet engine turbine applications. We remain confident, in part, based upon our first quarter 2018 results that we are correctly positioned to meet existing company backlogs as well as to take on additional commitments. Our backlog from continuing operations remains at over $100 million.

Our goal for fiscal 2018 continues to be that revenue will exceed fiscal 2017 continuing operation levels of $49.5 million. This excludes the AMK unit that sold at the end of January in 2017.

In addition, we will continue to focus on implementing operational efficiencies, including the consolidation of our facilities, which is on schedule to be completed by the end of the summer. It remains our goal to pull out about $1 million of expenses per quarter. And our continued steps to improve liquidity on operations is reflected in a positive EBITDA the first quarter of 2018. As stated on our prior call, it is our goal to achieve continuous quarterly growth in EBITDA.

This concludes our formal remarks this afternoon, and we will now open up the -- to answer a participant question. Operator, would you please open the line 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 will go to our first question.

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

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This is John Nobile with Taglich Brothers. I just wanted to make sure. You had said that your backlog right now -- your funded backlog was $101 million, and that is continuing operations. I noticed it's pretty consistent with before the sale of WMI. So I'm imagining that you really haven't lost much of a backlog in regard to the sale of what's now a discontinued operation.

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

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That's correct, John. The bulk of our backlog resides at the air machining and the Nassau Tool Works. So we took a little bit of a pushback, but it's not much at all. I don't know, Mike, if you have the number in front of you, but it's just nice to see.

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

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Yes.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [5]

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No, that was nice to see. I wasn't sure how much the backlog might drop, but to see right now with continuing operations still over $100 million, I mean, that was better than I had anticipated.

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

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My recollection is that the backlog at Welding we had in January was about $6.5 million. So...

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

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Okay, because I think $106 million was the number before, and it really only dropped $5 million since the last number, so I just wanted to make sure. Anyway...

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

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Much -- again, the majority of the backlog is at -- is in Complex Machining. Of the $101 million, I'd say $95 million, $98 million of it is at Complex Machining.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [9]

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Okay. I like your focus on your core competencies, like AIM and NTW, but I'm curious about your outlook. The outlook for Sterling, given its weak performance, and once again, in Q1, it was still looking kind of weak and over the past year.

So I'm just curious if Sterling does continue to underperform, might you consider its sale? Or do you see a turnaround and profitability in this in the near term? I know I've asked this before, but I wasn't sure when we might see something pick up here. I know -- I think, on the last call, you had mentioned that -- I believe his name is John Lavery, the original owner of Sterling..

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Michael E. Recca, Air Industries Group - CFO [10]

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Lavery, yes.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [11]

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Yes. He's now managing Sterling for some while now. So I'm just curious to see if, indeed, things are starting to turn around there now with, hopefully, the right man at the helm.

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

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He's been managing Sterling now for 6 weeks.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [13]

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Only 6 weeks, okay. Well, actually the last call wasn't that long ago. Okay. So just to get an outlook for this Sterling only because the March 31 numbers show continued erosion of sales there, so I am just curious if you have anything to share with us in regard to the outlook for this company.

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

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No. John, that's a great question. Here is where we are with Sterling. Sterling's biggest customer was GE Power. Now GE has taken a setback in the ground power generation. So what we've done starting pretty close to the beginning of the year, it's been our focus and we've -- myself included, and our business development folks have pretty much [swarmed] down on that division to be able to bring some new customers to the table.

And I got to say it's going pretty well. We've got a half dozen new big hitters that have -- that we have made introductions. They've -- a few of them have visited the facility. They're interested in our capacity. They're interested in the equipment we have. We certainly have the talent up there. And we've actually received some RFQs from 2 of the customers already.

I'm confident that it's a matter of time, John, before that business starts moving forward again. It's a great business. It's not in landing gear, it's in -- on the turbine side of the business with some of the programs coming to the table with mid-sized planes and some of the military stuff and the geared turbofan.

I'm confident that it's just a matter of time before that business will throttle up. In the meantime, we're being very cautious as to how we run that operation to minimize anything -- any spends or anything of that nature. But John, it's just a matter of time before that division gets up on the upswing. So we're taking the right steps and we're calling the right people.

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

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Well, customers -- you have RFQs from 2 customers existing or new customers right now?

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

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They're -- well, one of them is GE, but it's out of Evendale. So that's a new lead for us. And they're new customers, brand-new customers, customers who were not in the mix even 3 or 6 months ago.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [17]

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Okay. Well, that's good to hear. And on the last call, you mentioned that you were trying to find a buyer for inventory that was purchased in a speculative way by your former management. I believe it was -- could have been up to $7 million in inventory that was purchased. And I'm just curious if anything to report on this, that -- is it looking like there's a chance to -- I mean, that's a large amount of inventory, up to $7 million. So just trying to find out how this is going as far as trying to find a buyer.

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

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That initiative, as well, John, is at the forefront of our responsibility and at the forefront of business development. We're looking actively. We have been in contact with another probably 3 or 4 potential buyers that were not in the mix last year or ever before. We are gaining some momentum in interest. And I think, at some point in time, not far from now, we will start divesting some of that inventory.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [19]

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Okay. Great. And just if I could -- only because I haven't asked this in a while and I am curious as to your current revenue mix, be it military and commercial, just to find out how this mix is currently. And not only that, how do you see that mix changing over the next year or 2?

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

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I believe -- and Mike Recca, please help me out here, but I believe we are about 80% military -- 70% to 75% to 80% military and the rest commercial. Now we're in a few great programs, like the geared turbofan, that are starting to pick up -- ramp, they're starting to pick up pace. Predominantly, we're certainly military at this time. We are (inaudible) business (multiples speakers).

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [21]

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It sounds like it went -- over the last year, it did sound -- it sounds like you did go a little bit more commercial because I think, going into the year, you were really over a 90% military mix.

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Luciano M. Melluzzo, Air Industries Group - President &CEO [22]

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We've got some content in a couple of new programs that I'm excited about, and geared turbofan being one of them.

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

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But I think, even -- what we're really hoping for, John, I'd say, right now, if you look at Sterling, I would -- there, you probably have $4 million of commercial and $1 million of military. So that's 80 -- that's 4. And then at air machining, I'm sorry, Complex Machining together are probably 90% military. So you're probably in the 80% to 85% military now. I'm hoping that the 85% that's military becomes 125% of the 85%, but that our commercial doubles.

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

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Okay. All right. And let's see. The sale of -- reading through the Q, I saw that the sale of WMI, it's actually contingent upon CPI Aerostructures obtaining financing. So I'm just curious...

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

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No, it is not. It is no longer contingent upon that. We met with CPI, I guess, sometime last week. I can't remember when.

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

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Okay. The Q came out yesterday. That's why I just -- actually, was it yesterday I printed it out or today? But just looking at it, it did mention it was contingent. So it's not contingent upon the financing at this point?

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Michael E. Recca, Air Industries Group - CFO [27]

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There are a couple of contingencies in the original contract. One was that CPI got their financing. We have been told by them that is not an issue, that they are ready to close. Second was that we would get consents from 5 major customers. Now we will attempt to get consents from all customers, but 5 were necessary. We have received all 5 of those consents.

CPI and we have tentatively scheduled, a month-end, May 31, closing. And I'm -- I don't see anything on the horizon that's going to delay that beyond that. So that's a nice clean close at a month end. It's perfect. So that's our target.

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

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The cash infusion should be nice.

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

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It's usually better coming in than going out.

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

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Okay. And just one final question if I could get some details on the 10-Q. It was stated that the reduction in the first quarter gross margins was due to the product mix and that you believe gross margins will improve. I was hoping...

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

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Gross margin should include from -- should improve for 2 purpose -- for 2 reasons. One, because you don't have as high a percentage of first-time sale -- first-time products being sold, it's not a new introduction, so that should improve it.

And the second, as revenues improve, you should absorb more of your factory overhead. And as the year goes on, our factory overhead should decline because we'll be exiting at least half of the Nassau Tool space and reducing our real estate expense and other expense, and all our people will be working in one location. And hopefully, they'll be more efficient. Lou, do you want to comment on the F-35 parts in Q1?

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

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Yes. As I stated earlier, in the -- back in the fourth quarter, we realigned operations. We were lagging behind on some of these deliveries and we expedited them to the shop and really moved at a break-neck pace to get these parts out to our customer in a timely fashion.

But you were -- talking just on the F-35, you're talking 5 brand-new developments. There were additional parts on the F-15 program, and there were parts on the A380 program. So we had a heavy developmental quarter. Parts have now left the building and are on queue to be optimized going forward, so there -- they won't be first-time throughs. So that's kind of the set back there.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [33]

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So this first quarter, you did have a very high percentage of parts that were really first-time products, which I understand, the tooling up and everything, it's heavy R&D and things like that. I mean, what percentage are we looking at in the quarter that was really first time from -- well, the total sales were, what, $12.2 million for the quarter. So I mean, about how much of that was really related to the first time?

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Luciano M. Melluzzo, Air Industries Group - President &CEO [34]

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It's not so much as a percentage, but the effort that it takes, John. Those parts were managed.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [35]

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No, I understand. That's right.

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

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Those parts (inaudible) every step of the operation by somebody, so they're not automated. They don't just -- parts in our facility sometimes leave 8x and some parts have to be expedited 8x, and they have to be sometimes hand-carried to those operations. But we needed to get back on -- we need to get it back on track with delivery and customer requirements. And we pulled out all the stops to make that happen.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [37]

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So going into second quarter right now, we should see less of or really nonexistent effect from what you've seen in the first quarter related to first-time products.

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Luciano M. Melluzzo, Air Industries Group - President &CEO [38]

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Nonexistent is not an accurate -- we've always -- we always...

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [39]

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No, no. Lesser adverse effect.

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Luciano M. Melluzzo, Air Industries Group - President &CEO [40]

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A lesser amount, that is correct, John.

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Operator [41]

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(Operator Instructions) And we'll go to our next question.

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

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Yes. Who's calling?

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Larry Cates, - Private Investor [43]

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This is [Larry Cates]. Am I on?

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Luciano M. Melluzzo, Air Industries Group - President &CEO [44]

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You are. Yes, you're on.

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Larry Cates, - Private Investor [45]

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Okay. Good. I bought this stock, quite a bit of it actually. And one of the main reasons was because I was reading about the connection the company has with Sikorsky and the helicopter flight boxes and, of course, at the same time, the large government contracts Sikorsky has gotten. And I haven't heard much from the company in any of these calls or any of the press releases about that Sikorsky connection. And I just wondered if you had anything you'd like to tell us about that.

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

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Yes. Certainly, I can address it. Sikorsky is a very big customer of ours. Once the contracts come down from the government agencies or foreign countries or however they get, certainly, it takes time for Sikorsky to define who's going to -- who they're going to go out for proposals on and if they come out to the supply base.

Now being that a lot of these programs are military, not all, but a lot of them are military, almost all proposals of any substance have to go through TINA compliance, basically Truth in Negotiations Act. So those types of proposals are not on the same timeframe as a standard spot buy by any major OEM.

Those proposals have to be audited by the government internally with the Sikorsky folks. We have to -- it's a long process. So just because a contract has been awarded to Sikorsky does not mean that overnight it will come out to sub-peers. But eventually, it does make its way. Our quoting activity with Sikorsky has been better than usual, but that's what I can tell you on that, Larry.

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Larry Cates, - Private Investor [47]

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Well, that's good to hear. I hope you get some of those contracts as soon all the i's are dotted and the t's are crossed. And I'm looking for that to happen. I assume that that will make you even bigger in the eyes of investors and industry people.

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

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I strongly agree with you. Big contracts are definitely something we're pursuing. But it is what it is at this time. It's all due diligence, and it takes time.

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Operator [49]

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And we'll go to our next question.

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Stephen Branstead, - Private Investor [50]

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This is [Stephen Branstead]. Are you guys interested in doing any investor conferences in the future now that you've kind of cleaned up the company and it's kind of heading towards a growth phase?

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Luciano M. Melluzzo, Air Industries Group - President &CEO [51]

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I think the answer to that is yes. Is it going to happen this week or this month? I am not sure. But I think, eventually, in the not-too-distant future, when we've got it back into the swing of things, yes.

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Stephen Branstead, - Private Investor [52]

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As -- and with the plant consolidation, you figure by the end of, I guess, August, you guys will be finished out of there. Or was it mostly finished?

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

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Yes. It's moving along right on schedule. We're looking for a mid-summer to late summer completion. So there're not many pieces of equipment left to move. In the last 2 weeks, we moved a 65-foot piece of equipment that really was our biggest and really the biggest risk. And our guys managed to move that in 2 weeks. In less than 2 weeks, we are making chips on it. So I -- kudos to them. They did a great job.

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Stephen Branstead, - Private Investor [54]

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And going forward with your auditors, I guess, there's always a chance of a going concern letter and stuff like that scaring investors. With the sale of WMI and possibly even turning the inventory over better, would you -- do you foresee a going concern notice in the future?

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

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I would like to answer that, if I may. The fundamental way to prevent a going concern business is to return to profitability. That's our aim, that's our goal. Hopefully, we get there by the end of this year. I think at that point -- when you're cash flow positive and you're showing a net income, time is on your side. When you're not, time is against you. But I think that's the best avenue we have to arguing a going concern opinion.

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Stephen Branstead, - Private Investor [56]

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Okay. My last question just has to do -- I know the military is kind of slow on -- now that they're receiving -- starting to receive the funding from the federal government, are you guys seeing any increased bidding activity for your services?

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

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The RFQ activity has definitely increased. We're seeing, under President Trump and the releasing of funds that he's looking at, we've definitely seen elevated activity.

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Operator [58]

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(Operator Instructions) And we have no more questions at this time, so I'll hand the call back over to Lou Melluzzo for any additional or closing statements.

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Luciano M. Melluzzo, Air Industries Group - President &CEO [59]

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Thank you, Vicky. So with that, once again, I'd like to thank everyone for taking the time to participate on our call today. And I think that's a wrap-up. Vicky, back to you.

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Operator [60]

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That does conclude today's conference. We thank you for your participation.

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

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Thank you, everybody.

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Luciano M. Melluzzo, Air Industries Group - President &CEO [62]

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Thank you, everybody.