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Edited Transcript of AIRI earnings conference call or presentation 18-May-20 8:15pm GMT

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Q1 2020 Air Industries Group Earnings Call BAY SHORE May 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Air Industries Group earnings conference call or presentation Monday, May 18, 2020 at 8:15:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Luciano M. Melluzzo Air Industries Group - President & CEO * Michael E. Recca Air Industries Group - CFO ================================================================================ Conference Call Participants ================================================================================ * John Nobile Taglich Brothers, Inc., Research Division - Principal Equity Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Air Industries Conference Call. Today's conference is being recorded. Air Industries Group safe harbor statement. Except for the historical information contained herein, the matters discussed in this presentation contain forward-looking statements. The accuracy of these statements is subject to significant risks and uncertainties. Actual results could differ materially from those contained in the forward-looking statements. See the company's SEC filings on forms 10-K and 10-Q for important information about the company and related risks. EBITDA is used as a supplemental liquidity measure because management finds it useful to understand and evaluate results excluding the impact of noncash depreciation, amortization changes, 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 CEO, Lou Melluzzo. Please go ahead, sir. -------------------------------------------------------------------------------- Luciano M. Melluzzo, Air Industries Group - President & CEO [2] -------------------------------------------------------------------------------- Thank you, Connor. Good afternoon, everyone. Thank you for joining us as we summarize Air Industries' results for the first quarter of 2020. Our results for the quarter are in line or generally equal to the first quarter of 2019, despite disruptions that began in early to mid-March due to the pandemic. The results for the quarter were achieved against increasingly challenging conditions such as the shutting down of process shops for an extended period of time, all nonessential personnel working remotely and increased absenteeism at our shops. Air Industries, along with the entire aerospace industry, relies heavily on its processing shops to produce finished goods. Our location in New York Metro area did not play in our favor. With that said, some particulars for 2020 compared to 2019. Sales were $13.4 million, a 3% decline from 2019. Gross profit declined by $100,000 or 4%. The adjusted EBITDA was $894,000. Notably, our net loss before taxes was reduced by $639,000, or 65%. As we now embrace a new way of conducting business, our primary responsibilities are centered on following certain protocols from the CDC, the state and the federal government. Social distancing, Zoom meetings working remotely where applicable, the general well-being of our workforce are at the forefront. I would like to turn the call over to our CFO, Mike Recca, for the financial recap, then I'll return to close the call. Mike? -------------------------------------------------------------------------------- Michael E. Recca, Air Industries Group - CFO [3] -------------------------------------------------------------------------------- Thank you, Lou. Now if we look at the results for the first quarter, they are unremarkable, but frankly, in my opinion, they're quite an achievement in light of the production problems we experienced in March. So in particular for 2020, the first quarter of 2020 compared to 2019, as Lou mentioned, sales declined by 3% to $13.4 million. Gross profit declined by 4%. This decline is in line with the decline in sales. Our operating costs increased by $200,000, or 10%. This is troubling. All of these increase related to additions to the reserve for doubtful accounts receivable, and nearly all of that increase related to a single invoice of a customer for a special project, which had to be rebuilt several times delaying payment. We're in touch with the customer, we seem to be on track now, and I expect this receivable will be collected soon. Interest expense, a bright spot, declined dramatically by $560,000 or nearly -- or nearly 65%, and this is due to the greatly reduced interest rates of our new credit facility. We've gone from a 9.5% rate for much of 2019 to just 3.5% today. And notably, our lower interest cost reduced our net loss before taxes by $639,000, or 65%. As Lou said, our adjusted EBITDA was $894,000, and we were in compliance with all the covenants of our loan -- our new loan agreement. Also late in the quarter, we filed for an income tax refund of $1.4 million. Now this filing resulted from changes in the lost carryback law that was enacted in recent legislation. The addition of the $1.4 million is the reason we have a positive net after-tax income for the quarter. Lou, I'll pass it back to you for closing comments. -------------------------------------------------------------------------------- Luciano M. Melluzzo, Air Industries Group - President & CEO [4] -------------------------------------------------------------------------------- Thank you, Mike. Now let me close the call with a few thoughts on the remainder of the year. It is pretty obvious that the commercial aerospace industry is in trouble. This pandemic is affecting all the airlines, the engine builders, Boeing, Airbus, and their suppliers. Air Industries is primarily a defense supplier and thus, is in a much better position to weather to storm. Defense procurement has not been affected. We have seen no reduction in orders for defense-related products. Our customers have been very supportive and have been creatively providing assistance to help us maintain production and shipments to them. Gaps created by cancellations and pushouts of certain commercial products have been filled by accelerating the production of defense articles. The combination of employees not being at work and supply chain issues seriously reduced April shipments. Sales improved in May, but remain lower than the prior year. We are hopeful that the worst of the disruption is over and that the conditions will improve for the balance of the year. This concludes our formal remarks this afternoon, and I would like to open the call to questions from participants. Connor, please open the lines to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And we will take our first question. (Operator Instructions) -------------------------------------------------------------------------------- John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [2] -------------------------------------------------------------------------------- This is John Nobile with Taglich Brothers. I know that Air is considered an essential business and your backlog is significant. Actually, if you wouldn't mind, when -- if you could just fill us in with the backlog as I think last call, you said it was over $100 million? -------------------------------------------------------------------------------- Luciano M. Melluzzo, Air Industries Group - President & CEO [3] -------------------------------------------------------------------------------- Yes. It still is. It still is, yes. -------------------------------------------------------------------------------- John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [4] -------------------------------------------------------------------------------- Okay. I was hoping you could talk a little bit about how things currently look in regard to how COVID-19 is impacting the bottleneck with your external suppliers. I'm just wondering if there was any indication yet as to when some of the ones that are closed might open. I don't know if you have any news to share on that. -------------------------------------------------------------------------------- Michael E. Recca, Air Industries Group - CFO [5] -------------------------------------------------------------------------------- Yes, yes. I'd be glad to share news on that. Well, John, I'm happy to report that everybody is back open. So we've had several suppliers here on Long Island and Connecticut and abroad, it's not just in this area that we're shut down for about a period of 2 weeks, common; some for 3. Some shut down for a good 2- or 3-day cleansing. Now they're back all online, but they're not at full capacity. It will take -- some places are open now 3 days a week, some places are back to 5 days a week, not working Saturdays because of the decline in business. So basically, they've cut out some of the overtime. They're working through the bottlenecks that were created during the time that they were shut down, which places like us, we didn't shut down. We had -- we were affected by employees calling in and our absenteeism and -- over several weeks. In late March and April was probably 30%, which we're happy to report that that's declined substantially now. So everybody is back online, but not the full capacity. And I would say that, of course, in next couple of weeks or months, maybe that will get back to an even keel as well. -------------------------------------------------------------------------------- John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [6] -------------------------------------------------------------------------------- I know that you're considered essential, but are they also considered essential being that they were supplying parts? -------------------------------------------------------------------------------- Michael E. Recca, Air Industries Group - CFO [7] -------------------------------------------------------------------------------- They are. But when you have -- when you come down with a virus and it affects your workforce, essential or nonessential… -------------------------------------------------------------------------------- John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [8] -------------------------------------------------------------------------------- No, no, no, believe me, I understood… -------------------------------------------------------------------------------- Michael E. Recca, Air Industries Group - CFO [9] -------------------------------------------------------------------------------- The owners and the managers imagine what they need to do in order to take -- so if we had this problem, we would have made the same decisions. -------------------------------------------------------------------------------- Luciano M. Melluzzo, Air Industries Group - President & CEO [10] -------------------------------------------------------------------------------- Yes. It's one thing to be -- you are allowed to be open, doesn't mean you're capable of being open if 40% of the staff is sick. -------------------------------------------------------------------------------- John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [11] -------------------------------------------------------------------------------- No, no. I understand that. And actually, just another question kind of tied to the bottleneck issue, and I just want to get off the pandemic. I just want to see -- let's assume that the pandemic conditions, they ease in the next coming quarters, few quarters, I don't know, by Q4, whatever, who really knows. But some sort of normalcy does return to the market, say, by the end of the year. With the CapEx investments you made over the past year to help alleviate the bottlenecks, I was wondering if you could provide maybe what you feel the quarterly run rate in revenue would actually be if we are back to normal, say, by the end of the year. Now you had in the third quarter, say, $14 million in revenue, and you had substantial bottlenecks with that. So taking that number and saying, okay, with the CapEx you have already, what do you think we could see as far as revenue? And it's a big assumption as to figuring out when this virus is going to end, but say it does by the end of the year, what do you think is the potential for your revenue with the bottleneck situation most of it alleviated? -------------------------------------------------------------------------------- Michael E. Recca, Air Industries Group - CFO [12] -------------------------------------------------------------------------------- The whole dynamic of the business has changed. You're talking about us being a defense contractor, getting in line at the process shops to have our parts processed. Now you're talking about the commercial business being maybe 20% of what it was 2 months ago. So you got to believe that those opportunities, some opportunities have opened up. How much, I do not know. -------------------------------------------------------------------------------- Luciano M. Melluzzo, Air Industries Group - President & CEO [13] -------------------------------------------------------------------------------- We don't know. We also don't know when, John. That's really the issue. -------------------------------------------------------------------------------- John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [14] -------------------------------------------------------------------------------- Okay. Right. No, no, I fully understand. I just wanted to get an idea of when -- if and when we do get back to normalcy, with what you've already invested in capital equipment to help alleviate the bottlenecks, what the potential may be there. But speaking about the commercial end of the business, which obviously is taking a hit. In light of the current pressures on the commercial airlines, you had a $9.3 million flush truck order back in -- I think it was January. And that was expected to be delivered in the second half of this year and the first quarter of 2021. Is that still in line to be delivered? Or is that going to be maybe pushed back at this point? -------------------------------------------------------------------------------- Luciano M. Melluzzo, Air Industries Group - President & CEO [15] -------------------------------------------------------------------------------- It has been partially pushed back. We have taken $5 million out of our backlog with respect to that. We're still expecting to ship 4 of the 9, and we are backfilling the $4 million in -- the $5 million of lost revenue by accelerating some military product to fill that slot. And you asked about backlog, the backlog remains essentially unchanged. It's down to $3 million to 2%. We still have $100 million -- $111 million backlog for the next 18 months. So if that works out to -- if you straight-line that, that works out to about $40 million a year or more than that, more like $60 million a year. So we're having trouble just fulfilling our backlog, if you will, so we have plenty to pull into the spaces created by losses or delays in commercial orders with the understanding that you can't -- this is a long lead time product, 3, 4, 6, 9 months from the day that you start until you deliver, so you can't make a shift immediately. But in the long run, we have the orders, we have the backlog, we'll fulfill them to the extent we can -- as we make this shift from one product from product A to product B, and our processing houses can process them get them back to us. -------------------------------------------------------------------------------- Michael E. Recca, Air Industries Group - CFO [16] -------------------------------------------------------------------------------- Materials are also a factor. Some of the materials that had been ordered still are not here. That probably will arrive later on the year. So going back to the answer of -- to answer your original question, what does it do to our CapEx, that CapEx is just going to do a different product on it. It's still going to… -------------------------------------------------------------------------------- John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [17] -------------------------------------------------------------------------------- Okay. Okay. So it's obviously a different product, you're talking more defense-related product. But out of that $9.3 million, I just want to clarify, at least $4 million of this is going to ship at a time period that you expected to ship it? -------------------------------------------------------------------------------- Michael E. Recca, Air Industries Group - CFO [18] -------------------------------------------------------------------------------- That is correct. -------------------------------------------------------------------------------- Luciano M. Melluzzo, Air Industries Group - President & CEO [19] -------------------------------------------------------------------------------- That is correct. That is correct today. -------------------------------------------------------------------------------- John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [20] -------------------------------------------------------------------------------- Right. Understood. Understood. Things changing on a daily basis. All right. Well, listen, that's all I want to get. So I appreciate your comments on that, and I wish you the best. -------------------------------------------------------------------------------- Luciano M. Melluzzo, Air Industries Group - President & CEO [21] -------------------------------------------------------------------------------- Thanks, John. -------------------------------------------------------------------------------- Michael E. Recca, Air Industries Group - CFO [22] -------------------------------------------------------------------------------- Thank you, John. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- (Operator Instructions) And speakers, at this time, there are no more questions in queue. -------------------------------------------------------------------------------- Luciano M. Melluzzo, Air Industries Group - President & CEO [24] -------------------------------------------------------------------------------- Okay. Okay. Thank you, Connor. So with that, once again, thank you, everyone, for taking the time to be on this call today and for your attention and questions. This concludes our conference call for Q1 2020. And thank you, everybody, for attending and the questions for today. Connor, you may disconnect. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- This concludes today's call. Thank you for your participation. You may now disconnect.