U.S. Markets open in 7 hrs 26 mins

Edited Transcript of ARCW earnings conference call or presentation 14-Nov-18 9:00pm GMT

Q1 2019 ARC Group Worldwide Inc Earnings Call

DENVER Jan 3, 2019 (Thomson StreetEvents) -- Edited Transcript of ARC Group Worldwide Inc earnings conference call or presentation Wednesday, November 14, 2018 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Aaron Willman

ARC Group Worldwide, Inc. - CFO & CAO

* Alan Grant Quasha

ARC Group Worldwide, Inc. - Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* Ian Corydon

* Jerald Martin Weintraub

Weintraub Capital Management, L.P. - Founder, President, Managing Partner, and Portfolio Manager

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, good day, and welcome to the ARC Group Worldwide Quarter 1 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Alan Quasha, Chief Executive Officer. Please go ahead, sir.

--------------------------------------------------------------------------------

Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [2]

--------------------------------------------------------------------------------

All right. Good afternoon, everyone. Welcome, and thank you for joining us today on this call.

As most of you are aware, this call will contain 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 is not necessarily indicative of future results. Further, we take -- 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 in our filings with the SEC, including our annual report on Form 10-K and quarterly report on Form 10-Q and our current reports 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.

Turning to the results of quarter 1 of fiscal 2019, I'm happy to turn it over to Aaron Willman, the CFO of ARC, to share positive results. Aaron?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Alan. I am first going to begin by talking about fiscal quarter 1 versus quarter 1 of fiscal 2018, and then I will talk about quarter 1 versus quarter 4 of fiscal '18.

For fiscal quarter 1, we found revenues at $20.6 million comparable to $19.1 million of fiscal quarter 2018. This is roughly an increase of 7.7% over the prior year, which was largely driven by higher sales and volumes in the aerospace, medical and firearms defense markets.

Also during first quarter 1, we saw our gross profit increase to 3.1%. That's comparable to $1.2 million in our fiscal quarter 1 of 2018. This is a 160.9% increase. It is worth note that during this period, we also discovered an error that resulted in a $1 million adjustment to our first quarter results.

EBITDA in quarter 1 was $2.4 million as compared to $0.2 million in the fiscal quarter 2018. Like gross profit, EBITDA was also adjusted by the FCA correction of an error, but also due to our cost reduction initiatives and diversification into aerospace and medical products.

For quarter 1 versus quarter 4 2018, revenues were $20.6 million compared to $22.5 million in last quarter. This is a decline of 8.4%, which was largely due to the seasonality of our sales with our customers. Stamping period is most notable with the automotive base. A good portion of their automotive customers do take a shutdown of 1 to 2 weeks during the July season.

Gross profit was $3.1 million for fiscal quarter 1 compared to $2.7 million for fiscal quarter 4 2018. Again, a big portion of this year was the diversification into aerospace and medical and ultimately cost initiative improvements.

EBITDA was $2.4 million for fiscal quarter 1 compared to $2.2 million for fiscal quarter 4 of 2018. Again, the benefits here were from the cost initiatives and the diversification into more aerospace and medical parts.

This is the quick summary. And I will now turn it back over to Alan Quasha for his commentary.

--------------------------------------------------------------------------------

Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [4]

--------------------------------------------------------------------------------

Okay. Thanks, Aaron.

So what I'd like to stress is that the trends in both the revenues and our margins and our costs are moving in the right direction. So the results for the first quarter of this year are substantially better than this call last year's quarter 1. Year-over-year sales increased by $1.5 million, gross profits by $1.9 million, EBITDA by $2.2 million.

In this fiscal 2018, ARC began 2 main new initiatives, which were our cost reduction plan and the new sales and marketing plan. While the $9.8 million cost reduction plan was completed in fiscal year 2018, we see the positive results of the plan and how it affected our first quarter results. The team continues to work hard and this quarter produced a significant profit increase percentage-wise, which was an even greater increase -- sorry, greater than our increase in -- percentage increase in sales.

The second main driver this quarter is our continued shift into aerospace and medical. These industries provide better visibility and margins and will continue to open up a much larger total available market. This year, we are projecting a 58% increase and 6.6% increase in aerospace and medical, respectively. This increase will be roughly 2 million being manufactured out of both of our Colorado and Florida facilities. The stamping division has also followed this diversification directive. It's too early to disclose any significant results. However, they have started doing business for their first oil and gas customer and have some significant programs in the works. Overall, our prime directive here remains to diversify across all core divisions.

The last issue I'd like to quickly touch on briefly before turning this over for questions is the sale of our 3D MT division. This was a tough decision that the board made early on in quarter 1 this year. The sales process has begun and is progressing as planned. Management presentations began last week and will continue over this week and next. It's important to note that as -- ARC plans to use the proceeds to pay down a significant portion of our long-term debt. We expect a transaction to close in the fiscal third quarter.

So that ends my presentation. I want to thank you all. And I'm happy to turn this over for any questions our shareholders may have.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Jerry Weintraub with Weintraub Capital.

--------------------------------------------------------------------------------

Jerald Martin Weintraub, Weintraub Capital Management, L.P. - Founder, President, Managing Partner, and Portfolio Manager [2]

--------------------------------------------------------------------------------

Congrats on the continued progress across the board for the company. Can you talk a little bit about the seasonality of the stamping business? You had a really strong June quarter, a less strong September quarter. You commented in the earlier comments that there's seasonally a slowdown because of your -- some of the automotive companies taking time off during the quarter. Can you help frame what expectations you have going forward?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, absolutely, that was a good catch. And since we have on the phone someone who actually was running the stamping division, Aaron, I'll let Aaron answer that question. But Aaron, you want to talk about a little bit about the shutdowns that occur in the second quarter for automotive?

--------------------------------------------------------------------------------

Aaron Willman, ARC Group Worldwide, Inc. - CFO & CAO [4]

--------------------------------------------------------------------------------

Absolutely. So a lot of our end-user customers are still going to be your Hondas, your Fords, GMs. And that basically drives -- or I should say their annual initiative is to have what they're going to refer to as their maintenance shutdown in the July period. Typically, what we're going to see is a spike in sales in June as a lot of our customers want to ensure they have adequate supply, which will then go into a taper off -- taper off and cancellation of all orders for the first basically week to sometimes 2 weeks, depending on customer. So the impact we can usually find between $500,000 and about $1 million, just depending upon the year. So it's a pretty significant sales drop in our July period. It's a hard period for them to bounce back from fixed costs and things of that nature. So it's an annual issue that stamping has the pleasure of enjoying every single year.

--------------------------------------------------------------------------------

Jerald Martin Weintraub, Weintraub Capital Management, L.P. - Founder, President, Managing Partner, and Portfolio Manager [5]

--------------------------------------------------------------------------------

And so we'd expect in the current quarter, this December quarter, that to bounce back on a -- from a seasonal perspective?

--------------------------------------------------------------------------------

Aaron Willman, ARC Group Worldwide, Inc. - CFO & CAO [6]

--------------------------------------------------------------------------------

Correct. Correct.

--------------------------------------------------------------------------------

Jerald Martin Weintraub, Weintraub Capital Management, L.P. - Founder, President, Managing Partner, and Portfolio Manager [7]

--------------------------------------------------------------------------------

Okay. It was my understanding that you've been awarded some new longer-term contracts from some of the automotive customers. Can you give us any color on how that could impact the rest of the fiscal year?

--------------------------------------------------------------------------------

Aaron Willman, ARC Group Worldwide, Inc. - CFO & CAO [8]

--------------------------------------------------------------------------------

Sure. The first, I think most notable one was really a brand-new customer for us with Bridgestone. That was a $1.2 million contract with production starting in the January time frame. With all automotive contracts -- I should say, the majority of automotive contracts that we have it's usually a 5 years' production cycle. So it's not just 1 year sales, but 5 years at the $1.2 million mark. The further increase that we have is that originally that program was scheduled to be shared production with both ARC and then also a facility in Japan. Since then they notified us they will not seek that shared production, and all production will start in the Michigan facility effective January. There are a few other programs of this nature, but I think that is the most notable one to talk about.

--------------------------------------------------------------------------------

Jerald Martin Weintraub, Weintraub Capital Management, L.P. - Founder, President, Managing Partner, and Portfolio Manager [9]

--------------------------------------------------------------------------------

And that will be January of 2019 or did that date change for you?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That's right. That will be January of 2019.

--------------------------------------------------------------------------------

Jerald Martin Weintraub, Weintraub Capital Management, L.P. - Founder, President, Managing Partner, and Portfolio Manager [11]

--------------------------------------------------------------------------------

Okay. Congratulations on that.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Jerald Martin Weintraub, Weintraub Capital Management, L.P. - Founder, President, Managing Partner, and Portfolio Manager [13]

--------------------------------------------------------------------------------

And then Alan, you spoke a little bit about the diversification efforts. Can you give us any more color on success or wins that we've had in that process at this stage?

--------------------------------------------------------------------------------

Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [14]

--------------------------------------------------------------------------------

Yes, so the -- okay, the negative of aerospace is that incredibly long lead time that it takes to get a part approved and into production. The positive is that you have visibility once it gets into production for many, many years, and margins are pretty decent. So we've been making progress. We're still at the very early stages of that. But progress looks good, and already we're starting to see the impact of moving some things into production. So all that's good. And it's definitely a major move for Colorado, which has been highly dependent upon firearms. And then on the medical side, which has been our Florida facility, that continues to go very well. And Florida has been a very, very healthy business and very good, both profit and cash generator. So all of that -- both of those show nice order increases. And the future looks pretty healthy for both.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It doesn't look like there are any other questions unless... Am I right on that?

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

We do have one other questioner. Our next question comes from Ian Corydon with Hayden Investor Relations.

--------------------------------------------------------------------------------

Ian Corydon, [18]

--------------------------------------------------------------------------------

Alan, could you just talk about the asset investment that you have in the 3D MT business?

--------------------------------------------------------------------------------

Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [19]

--------------------------------------------------------------------------------

Which investment?

--------------------------------------------------------------------------------

Ian Corydon, [20]

--------------------------------------------------------------------------------

The 3D business that you're selling.

--------------------------------------------------------------------------------

Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [21]

--------------------------------------------------------------------------------

And what's the question? You asked us how much what?

--------------------------------------------------------------------------------

Ian Corydon, [22]

--------------------------------------------------------------------------------

What kind of asset value is there?

--------------------------------------------------------------------------------

Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [23]

--------------------------------------------------------------------------------

I'm sorry, I'm just -- for some reason, the line isn't good. Can you say that again and maybe speak a little more slowly?

--------------------------------------------------------------------------------

Ian Corydon, [24]

--------------------------------------------------------------------------------

How much have you invested in that business?

--------------------------------------------------------------------------------

Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [25]

--------------------------------------------------------------------------------

Invested. I think it's around -- it's hard to say because there's both equipment and losses. And do you want to just -- do you want -- if I add both of those, then it's probably around $8 million.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

At this time, we have no other questioners in the queue. So I'll turn it back to the speakers for closing comments.

--------------------------------------------------------------------------------

Alan Grant Quasha, ARC Group Worldwide, Inc. - Chairman & CEO [27]

--------------------------------------------------------------------------------

Yes, no, thank you, everybody. And I have nothing else to say, so thank you for joining the call. And we'll end of the call now. Thank you.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, that concludes this afternoon's presentation. You may disconnect your phone lines and thank you for joining us today.