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Edited Transcript of ARCW earnings conference call or presentation 17-May-19 9:00pm GMT

Q3 2019 ARC Group Worldwide Inc Earnings Call

DENVER Jun 12, 2019 (Thomson StreetEvents) -- Edited Transcript of ARC Group Worldwide Inc earnings conference call or presentation Friday, May 17, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aaron Willman

ARC Group Worldwide, Inc. - CFO & CAO

* Alan Grant Quasha

ARC Group Worldwide, Inc. - Chairman & CEO

* Jed Rust

ARC Group Worldwide, Inc. - VP of Sales

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Conference Call Participants

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* Ralph Weil

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Presentation

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Operator [1]

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Good day and welcome to the ARC Group Worldwide conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Willman. Please go ahead, sir.

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Aaron Willman, ARC Group Worldwide, Inc. - CFO & CAO [2]

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Thank you. Hello, everyone. Welcome, and thank you for joining us today on this call.

As most of you are aware, this call contains forward-looking statements as defined by the federal securities laws. Forward-looking statements are indicated by words such as expect, anticipate, plan, believe and similar words concerning future events. All future events are inherently uncertain and actual outcomes may differ materially. We do not guarantee future performance and past performance does not necessarily indicate future results.

Further, we undertake no obligation to update our forward-looking statements. We encourage you to review the risks that we face and other information about our company on our filings with the SEC, including our annual report on Form 10-K, the quarterly report on Form 10-Q and our current report on Form 8-K, all of which can be found on our website.

Please note that during the call, all financial measures presented will be non-GAAP unless otherwise indicated.

I'll now share some results from the third quarter fiscal 2019. Sales came in at $19.9 million, which is a 5.7% decrease compared to $21 million of fiscal Q3 of 2018. Gross deficit of $200,000 compared to $1.7 million gross profit of 2018. EBITDA came in at a $400,000 loss compared to a $900,000 gain in 2018. For the first 9 months ended March 31, 2019, compared to the last 9 -- or the first 9 months of 2018 ended April 1, sales were $61.3 million compared to $57.6 million. Gross profit of $4.4 million compared to $2.6 million last year and EBITDA of $2.9 million compared to $100,000 loss last year.

One other meaningful item to note was that in this quarter -- or I'm sorry, subsequent to this quarter, we completed a new debt facility in the nature of $7.5 million. This allowed us to make some extensions to our current debt financing and we believe will allow us the time to make significant changes to correct our balance sheet in the future.

With that, I will turn it over to Mr. Alan Quasha, our CEO, for his comments.

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [3]

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Yes. Thank you, Aaron.

Well, I mean, obviously, the third quarter results were disappointing. I will -- Jed Rust will -- who has importantly taken over running our Colorado operation and we're very pleased with him at the helm. He will take us through some of the operational results after I talk a little bit about the key focus which we focused on during this past quarter, which we're taking 4 main steps to restructure the company, hopefully fundamentally, which hopefully will also mark a turning point in the business.

So first, we completed the sale of our 3D business. Its EBITDA in the first 9 months through the date of the sale was a loss of $3.9 million. We could not afford to keep betting on this technology as it was a tremendous strain on both cash and on management resources.

The second item was the implementation of a very significant cost savings plan in excess of $8 million. These changes included significant cuts to labor, leases and variable expenses. The third phase was to review our customer base, weed out our poor or low margin-making business line customers. Some of the products also included low-volume customers with little future growth. It also included some long-term legacy parts, which didn't fit our core competencies.

Finally, the company has put in place a more stable debt structure and has been able to extend out our current debt to December 31, 2020, and later. This will give us time to work to put in place a better long-term solution for the company, but this was a very important interim step.

So I do want to say, however, before Jed makes his points, that while results, particularly at Colorado, which Jed is taking over and Aaron is also going back to oversee stamping, which was also quite disappointing for the quarter, we had good results in our medical business in Florida. So I don't want to leave the call without pointing out some positives on the operational side.

With that, though, I will send it over to Jed Rust. Over to you, Jed. Thanks.

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Jed Rust, ARC Group Worldwide, Inc. - VP of Sales [4]

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Thanks, Alan.

As we've kind of mentioned, our Q3 was a particularly challenging quarter from a top line revenue standpoint. As Aaron stated, we were at $19.9 million for Q3 in comparison to our prior year results of $21 million. The decrease was primarily driven by softness in the defense sector. We experienced strong sales during Q1 and Q2 of this fiscal year, however, saw a disproportionate decline in Q3. The decline was driven by some short-term saturation at the defense sector. And as such, many of our large OEM customers reduced their production levels fairly substantially during our Q3.

On a more positive note, we did actually see a 55% increase in Q3 over prior year in our aerospace sales in our Colorado operation. This strategic growth does continue to show our focus on diversifying our business and creating some long-term stability.

While we are seeing rapid growth in the sector, we have to remain grounded on solving the near-term operational and balance sheet challenges in ARC. As Alan mentioned, we have taken decisive action to flex our business to balance the near-term sales market challenges. We did make substantial cuts heavily in the labor side but not to be -- not to shortchange the efforts also done on a fixed cost side of our business as well. These major changes amounting to almost $8 million will help us to right the business and balance out with the sales that we currently have.

As we mentioned, we also leaned out our operation. In doing so, we also rationalized our customer base to ensure that the products we're manufacturing are within our core competency and generating the appropriate value. Our Florida facility has remained strong from both a top line standpoint as well as from an operational excellence standpoint. We continue to rely on them as they continue to perform for us.

We do remain optimistic to our long-term growth diversification strategy and recognize that we must remain laser focused on improving our profitability and balance sheet in the near term.

With that, Alan, any further words before we answer questions?

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [5]

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No, thanks. We'll take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question from [Paul Rainey], a private investor.

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Unidentified Participant, [2]

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I know who this would be particularly for but my concern is the stock losing its NASDAQ standing. What steps are going to be taken to ensure that it doesn't lose the NASDAQ listing? And another question, can you let us know what the sale of that 3D went for since we are selling off assets to pay down debt? I mean, I think it's a very significant step, but that would be vital information, I would think.

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Aaron Willman, ARC Group Worldwide, Inc. - CFO & CAO [3]

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Yes. So I'll address the NASDAQ listing. Obviously, we're hoping to take steps to get it back over $1. We have, I think, until late fall to September, October to do that. So hopefully, it'll take care of itself. We will do what we can do, obviously to avoid that and I think we'd be successful in that, but it does require us to make a fundamental turnaround here and for shareholders to buy more than they sell. So I don't know what else to say about that, but it's obviously something we're -- we intend to deal with.

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Unidentified Participant, [4]

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Well -- yes, as long as it isn't another reverse split, I'll tell you that, we've been through a few of those in the past with ARC Wireless.

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [5]

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Yes, we're not planning to do a reverse split.

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Unidentified Participant, [6]

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Well, that is good news.

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [7]

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We -- sorry, the...

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Unidentified Participant, [8]

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The sale of 3D cost?

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [9]

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Yes, so -- well, there's a lot of different ways to look at that. But -- and the reason for that is because there were a lot of capital and operating leases that went with the business. So obviously, we took a loss on the sale, but -- and Aaron, you'll have the actual numbers in front of you. But in terms of payables and operating leases and capital leases that were assumed, which the company would have had to pay off itself had we kept the business. What was the cumulative of all those expenses? I just don't have it in front of me.

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Aaron Willman, ARC Group Worldwide, Inc. - CFO & CAO [10]

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Sure. I mean, in the first 9 months alone, we had...

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [11]

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No, no, I understand that, but I'm just talking about the liabilities that were assumed.

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Aaron Willman, ARC Group Worldwide, Inc. - CFO & CAO [12]

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Okay. Basically, $3 million between the leases, payables and other items that they had to take on.

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Unidentified Participant, [13]

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What was that, $3 million?

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Aaron Willman, ARC Group Worldwide, Inc. - CFO & CAO [14]

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Correct.

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Unidentified Participant, [15]

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$3 million, okay. So according to that McLarty loan, the sale has to go directly to that bottom line. Is that where that money went? Or how was that handled?

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [16]

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No, it really just -- there really isn't cash that went to -- I mean, debt was paid down in the sense that liabilities were no longer on our balance sheet. But there's no sort of real cash that went anywhere.

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Unidentified Participant, [17]

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I see.

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Aaron Willman, ARC Group Worldwide, Inc. - CFO & CAO [18]

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They took on annual payments of $2.4 million of leases on top of additional payables in excess of inventory and accounts receivable of another $0.5 million.

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Unidentified Participant, [19]

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I got you, okay. All right. So we still stand with that $14 million on that 11% interest rate with McLarty?

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [20]

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Yes, I think it's $15 million, yes.

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Unidentified Participant, [21]

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$15 million. Oh, sweet.

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [22]

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Yes.

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Unidentified Participant, [23]

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Okay. All right. Well, I hope we're doing the necessary things to right this company. I hate to see it go full circle from pink slips, then on the NAS and back to the pink slips. I mean, this has been some ride. Mr. Quasha, you feel it more than anyone, I'm sure. And you may be our largest shareholder but you're not the only shareholder, so just keep us in mind also.

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [24]

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Yes. We're not -- the company took on way too much debt and overpaid the thing, so we're definitely trying to work our way out of that. It's not an easy thing to be doing. And trust me, it's not something that thrills any of us.

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Unidentified Participant, [25]

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Right. Well, this is really not -- I've read a lot about you and this is just not your game. You run a very tight ship, and I still don't understand how it got to this point, especially in Colorado, to be such a drain on the company when the company was -- when that division was purchased, it was profitable. So I don't know how it broke and so bad but it's been a nightmare.

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [26]

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Yes. So I mean, just so you -- I mean, everybody -- you should understand this, Paul, that Colorado is a great facility. It has tremendous capacity. If you've been out to visit them, it's a very large facility. It has a lot of fixed costs. And when your core revenue stream basically halves because it's tied a lot to the defense business, firearms, in particular, and that business is down well over 50%. So you have to absorb all these fixed costs. And that's not a pretty sight, and we have been -- and it takes a while to change your product mix to a different kind of mix, which is what we're trying to do because there are some of us who think that the -- that the heydays of the firearm business is not something anybody should be counting on coming back.

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Unidentified Participant, [27]

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Right, right. Well, not with the current administration, yes. The past administration used the best gun salesmen around, so -- well, I see we have at least 3 to 4 space companies competing against each other. That's got to be a big boom for us. Where before, it was just NASA, and now, we have several going on. So we're just an arms dealer selling to all of them. I hope that's how it is. Well...

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [28]

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Anyway, so I think long term, I think one has to build a strategy. I mean, just so everybody knows, I mean, long term, our bets are going to be with medical and aerospace. And so that's where we're making longer-term commitments.

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Unidentified Participant, [29]

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Well, good luck to you guys. We're in your corner.

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [30]

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Thank you, Paul.

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Operator [31]

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(Operator Instructions) We'll take our next question from Ralph Weil of R. Weil Investment Management.

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Ralph Weil, [32]

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Regarding the stamping business, how dependent are you at this point on the -- and have been on the auto business? And what are you seeing there? And what else can you do or what other areas might you be pursuing so that, that doesn't become a problem, more of a problem?

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Aaron Willman, ARC Group Worldwide, Inc. - CFO & CAO [33]

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Yes, certainly. We are currently 95% dependent upon automotive. That automotive mix is primarily to your Japanese transplant companies, your Hondas, Nissans, Subarus, cars of those natures. The diverse casing that we're actually working on pretty heavily is into, I'll call it, defense or you called -- I'm sorry, Jed called it aerospace. It's more on the governmental contract side. There is significant history in those plants, specifically the Wauseon facility in doing government contract work. And that's really the future we're headed.

Few things are definitely in the queue. I can't share any results yet as we have not been issued POs, but that is the primary focus at this point in time is nonautomotive work, some appliance but more so in the defense and aerospace segments.

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Ralph Weil, [34]

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Does that mean you're not going to focus on autos anymore because it's been cyclical or up and down? Or what are the thoughts there?

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Aaron Willman, ARC Group Worldwide, Inc. - CFO & CAO [35]

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No, we certainly still are focusing on automotive. I would say in the past years that was all of our focus. We weren't really prospecting a lot of new customers outside of the automotive just because of our niche knowledge in that area. However, in recent years -- and it's a bit of a slower process. I think Colorado was the same thing when they started their patent aerospace. We've been really on -- focusing on the aerospace side for the last 1.5 years, 2 years, and that's where we're starting to see some very good traction, albeit no POs yet, to get us to start divest -- to diversify.

We -- this year, we have won significant POs with automotive business, and we will continue to take those POs, but our intent is to focus the larger portion of our marketing and sales force on to nonautomotive work.

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Ralph Weil, [36]

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Okay. I read in the release that plastics are down. What part of your business has been plastics versus metals? And where -- into what areas would be plastics -- what you do in plastics be going towards?

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Jed Rust, ARC Group Worldwide, Inc. - VP of Sales [37]

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So I'll answer that. This is Jed. Our plastics division is located also in our Colorado facility and actually does a very similar ratio of defense and firearms work in comparison to a small proportion of other industries. So quite honestly, it is impacted heavily by the same market challenges we were seeing in our MIM business in Colorado. So that's the primary driver there. As far as percentages of our business in Colorado that's there -- of the Colorado entity, it's about 30% of our aggregate top line in Colorado combined.

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Ralph Weil, [38]

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You were introduced, but Mr. Quasha didn't say where your previous employment was, what you did in the past. Could you just tell us what you did?

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Jed Rust, ARC Group Worldwide, Inc. - VP of Sales [39]

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Yes, absolutely. I've actually been with ARC and actually the prior entity called Advanced Forming Technology, been around for about 13 years, had a variety of different roles, but most recently have been really focusing on basically righting the ship in Colorado. I used to be Director of Operations in the Colorado facility back about 5, 6 years ago, and so I'm working aggressively right now to return it back to the entity that I know it can perform as.

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Operator [40]

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(Operator Instructions) And we have our next question from [Paul Rainey].

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Unidentified Participant, [41]

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Yes. I have another question. I understand the past manager from Florida was moved to Colorado. And is he any longer with the company?

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [42]

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No.

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Unidentified Participant, [43]

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Okay. All right. Because I guess that's when it began to, okay, disintegrate. Okay, good. That was the question I had.

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Operator [44]

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We'll now take our next question from Ralph Weil.

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Ralph Weil, [45]

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Could you comment a bit more on which -- it sounds to me, from what you said, that to be an area that you are going to grow in more, the aerospace area? Could you comment on what type of business you have there and whether you've been getting small engineering and development orders, whether you've gotten production orders, whether you've gotten small ones which you feel will build over the next few years? Can you just elaborate a little more on the aerospace industry -- your aerospace industry participation?

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Jed Rust, ARC Group Worldwide, Inc. - VP of Sales [46]

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Absolutely. So again, I'm probably more excited than most on the aerospace side as it has been a work in process for quite a few years now. But we do have quite a few components in aircraft engines flying overhead every single day with some very large engine manufacturers in the aerospace world. Those components are ongoing in steady production. We do have firm orders in our system out for several years actually on those components. And then that has been something that has been, I'll say, precipitating over the last 18 months or so, and that's part of the reason we're seeing some substantial growth here.

Further, we have won several new business -- or several new parts, and those are in the process of being qualified right now. We are still projecting a very solid fiscal year '20 coming on in the aerospace field, and it's something that we have rallied our business around to support. We are also still pursuing additional clients in this space. We do have -- as of the end of Q3, we have 1 client who is nearing submission of a new purchase order to us for new development exercise. So this will further expand our aerospace into yet another client. So hopefully, that answers your question about a lot of engine components for aircraft.

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Ralph Weil, [47]

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Are these also -- when you say aerospace, I take it this is also some space programs?

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Jed Rust, ARC Group Worldwide, Inc. - VP of Sales [48]

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We continue to do work with some of the launch companies. However, those are primarily development-based type of efforts. They're not necessarily production, at least in the way that we classify them.

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Operator [49]

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(Operator Instructions) It appears we have no further questions at this time. I would like to turn the call back over to Mr. Willman for any additional or closing remarks. Please go ahead, Mr. Willman.

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Aaron Willman, ARC Group Worldwide, Inc. - CFO & CAO [50]

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Well, thank you, everyone, for joining today.

I think I can speak for Alan and Jed here that results for Q3 certainly were disappointing. The company's taken some very significant steps to right the ship. And I think we have a pretty solid plan to fix things on a go-forward basis.

Alan, Jed, feel free to add any comments you wish to that, but I think that's the message that we are trying to send.

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Jed Rust, ARC Group Worldwide, Inc. - VP of Sales [51]

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Agreed.

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Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [52]

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All right. Thanks, Aaron. Thank you all on the call. And I think that's the -- I think this ends the call, so thank you.

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Aaron Willman, ARC Group Worldwide, Inc. - CFO & CAO [53]

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Thank you, everyone.

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Operator [54]

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