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Edited Transcript of ARCW earnings conference call or presentation 13-Nov-17 10:00pm GMT

Q1 2018 ARC Group Worldwide Inc Earnings Call

DENVER Nov 17, 2017 (Thomson StreetEvents) -- Edited Transcript of ARC Group Worldwide Inc earnings conference call or presentation Monday, November 13, 2017 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Drew M. Kelley

ARC Group Worldwide, Inc. - Interim CEO, CFO & Director

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Conference Call Participants

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* Jonathan E. Tanwanteng

CJS Securities, Inc. - MD

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Presentation

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Operator [1]

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Good afternoon, and welcome to the ARC Group Worldwide Conference Call. Today's conference is being recorded. With me on the call is Alan Quasha, ARC's Chairman; and Drew Kelley, ARC's Interim CEO and CFO. Before we begin the formal discussion, I would like to turn the call over to Mr. Kelley to make a statement regarding forward-looking information. Please go ahead, sir.

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Drew M. Kelley, ARC Group Worldwide, Inc. - Interim CEO, CFO & Director [2]

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Good afternoon, everyone, and thank you for taking the time to join our call. As most are aware, this call will contain forward-looking statements as defined by 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 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.

The company earlier today announced results for our fiscal quarter ended October 1, 2017. In summary, revenue from continuing operations was $19.9 million compared to $25.7 million in the prior year period. Overall, while the year-over-year comparisons were difficult, given exceptionally strong firearm and defense sales in the prior year period, the current results now reflects continued reduced demand by these customers.

To underscore, excluding the revenue results associated with our Colorado-based MIM and plastic operations, which primarily service those events in firearm sector, the combined revenue from all other ARC facilities declined less than $525,000 from the prior year results. At the same time, there were positive revenue results achieved by the company during the quarter, most notably, with our metal 3D printing operations. Revenue from 3D MT during the quarter was almost 3x greater than the prior year period, and we expect to approach or exceed record quarterly revenue in the current December quarter end.

We continue to make great progress with our recently opened and new 30,000 square foot dedicated 3D facility, which provides us with the ability to add up to 40 machines, including designated areas for defense, controlled environments for medical implants and in-house heat treatment and other machining capabilities. As a result of this progress and our rapid growth in metal 3D printing, the company's board is currently considering additional investments to further accelerate this pace of growth.

Returning to overall consolidated results for the quarter, lower production volumes impacted the company's operational efficiencies as gross profit from continuing operations was 4 -- excuse me, was $1.4 million compared to $4.7 million in the prior year period. EBITDA from continuing operations for the fiscal first quarter 2018 was $0.4 million compared to the prior year period of $1.4 million. Net loss from continuing operations for the fiscal quarter 2018 was $3.3 million compared to a net loss from the continuing operations of $0.7 million in the prior year period.

And finally, overall fiscal first quarter 2018 net loss was $3.6 million compared to net income of $3.6 million for the fiscal first quarter of 2017.

Although we note the prior period included $4.3 million in benefit associated with the sale of the company's noncore subsidiaries.

Given these results and the fact the outlook for the firearm and defense markets remains challenging, we are continuing to take a proactive approach in our fixed cost structure, implementing incremental headcount and other cost reduction initiatives. These recently completed changes are expected to eliminate an additional $3.3 million in annual expenses and are incremental to the prior plan we announced at the end of our fourth quarter. That plan eliminated an estimated $6 million in annual costs.

Importantly, we believe this combined reduction -- excuse me, these combined expense reduction programs are already generating results. And note, selling, general and administrative expense for the fiscal first quarter in 2018 declined to $3.5 million, down from $4.9 million in the prior year period and from similar levels in the prior sequential period. Overall, while we expect the decline in sales to be temporary, our focus on operational efficiency and cost reduction will both be ongoing and permanent. Thus, once we combined our cost reduction initiatives and they start taking full effect, we believe to achieve similar profitability and margins despite lower top line results. Thereafter, with the eventual return of normalized revenue levels, overall profitability could exceed historic levels.

At the same time, management remains dedicated on focusing the company's resources on its core strategic operations while driving cash flow and rightsizing the balance sheet. As previously announced, during the recently completed quarter, the company sold substantially all the assets of its noncore flange business for $3 million.

On the balance sheet front, we remain focused, having reduced past dues from almost 30% of the total accounts receivable to less than 15% quarterly. And at the same time, we've driven inventory to more efficient levels, from almost $20 million at the end of fiscal third quarter '17 to less than $15 million on October 1. Overall, despite this challenging revenue landscape, we have the opportunity to eliminate cost, to drive cash and to ultimately reduce the company's debt on the balance sheet.

I appreciate everyone's time on the call. We'll now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our question from Jon Tanwanteng with CJS Securities.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [2]

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Drew, you're cutting a lot of costs, but where is it coming from? And how does that impact your ability to grow going forward?

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Drew M. Kelley, ARC Group Worldwide, Inc. - Interim CEO, CFO & Director [3]

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Well, the cost focus is not specific to any one property, but in fact, we're looking at this at a global approach. We've, for all practical purposes, evaluated all facilities on all levels, and we believe that, ultimately, it's not only in the best interest of the company from a cost-reduction standpoint, but has little to no impact on our ability to grow. In particular, we're simply refocusing, as I've said, our focus. And by eliminating the new part development opportunities that are no longer at the targeted margins or don't have the potential for the outsized revenue impact that we're looking for, this is simply how we still, we believe, can maintain a top line growth approach while being very bottom line focused. And again, these are costs that are going from just about every aspect of the P&L, both on COGS and SG&A, and obviously, within the various different line items of those categories.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [4]

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Got it. And how should we expect them to roll in? Are they all done in the quarter or is there more to do before you can realize the full run rate?

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Drew M. Kelley, ARC Group Worldwide, Inc. - Interim CEO, CFO & Director [5]

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Good question. Both programs, both the initial $6 million plan and this plan at $3.3 million are, for all practical purposes, complete and implemented. The ongoing effect, obviously, will take some time to get the full benefit. But as we have mentioned and as I specifically outlined, I think you're already starting to see that on the SG&A line in this quarter. Again, probably is the January through -- January, February and March quarter where you see the complete effect of both programs. But we believe that both the original program and this incremental will have material cost savings until that period as well.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [6]

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Okay, great. That's helpful. And could you give us an update on the larger product ramps that are in your pipeline and how are those progressing? I know you've had some trouble in the last quarter, but just any color on those would be appreciated.

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Drew M. Kelley, ARC Group Worldwide, Inc. - Interim CEO, CFO & Director [7]

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At the end of the day, there is a significant opportunity for us in the sales pipeline. And again, we've refocused on a lower number of parts. But again, refocusing the efforts on those that have outsized revenue potential. And of course, again, at margin that we deem appropriate. These are large programs that, in many cases, are platforms, including several parts, in some cases, more than 1 or 2 dozen, and in many times, you don't launch simply one part, but all of them. So for that reason, they are time-intensive, both the overall MIM process along with some of these parts in particular are challenging. But again, I think, we feel we got a good focus on the right types of parts to develop. And we are certainly, in many cases, at the latter stages of implementing these programs and in these platforms. And for that, again, we're generally very bullish on the opportunity. We think that there is a significant amount of opportunity, both in the markets, which we serve. And more importantly, in some of the markets, which we continue to aspire and to grow in, most notably medical, dental and aerospace. So for that, we do believe that we're very close on many of them, not quite there on all of them. But again, it will be our primary focus, in many cases, on the development side as we go forward the next coming weeks and months.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [8]

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Great. And then just on -- your firearms customers, is it still an inventory issue that we're talking about here or is there something more secular or customer-specific that is impacting your results within that sector?

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Drew M. Kelley, ARC Group Worldwide, Inc. - Interim CEO, CFO & Director [9]

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Generally, we are seeing industry-wide trends, and by that, I mean the reduced demand. There are pockets that were small indications of some rebound. But quite frankly, I think the persistent level here, having gone through now about 1.5 quarter of observing it firsthand indicates that, at the end of the day, I believe those inventory levels that we referenced on prior calls, both going into presidential campaigns and others, are really still elevated. And the demand has not been there relative to some of the things that we've seen in the past, both in terms of just general industry demand and, in many cases, the response to headline risks. So at this point, again, we are not waiting for the market to return. But as I mentioned, these are proactive cuts and cost-reduction initiatives. And that we're very confident that, at the end of the day, we can not only achieve profitability now at these reduced levels, albeit in the near future, but once the business returns, and again let me underscore, we have not lost customers, material customers or customers that we want to retain. So for that reason, we do feel that once the revenues return to more normalized levels, the flow through the bottom line should be outsized both, again, in absolute dollar and on a margin perspective.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [10]

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Got it. And just to clarify, the new large program that you've been referencing for the last year, and then you're trying to ramp and get out the door, are those exposed to the good demand that you're seeing out there? Was that more of a defense and government and law enforcement contract-type thing that doesn't necessarily get impacted by what's flying off the shelves at Walmart?

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Drew M. Kelley, ARC Group Worldwide, Inc. - Interim CEO, CFO & Director [11]

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To certain extent, yes. These are diversified opportunities, not just simply in the firearm and defense market, but many of them do have a military application as well as a sporting application. So it's our hope and our belief that for those reasons, we'll see a successful launch in the not-too-distant future.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [12]

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Okay, great. One last question. Your reference, I think it was 3D metal printing being at record levels in the December quarter or even exceeding that. What was the prior record, and just as for my knowledge?

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Drew M. Kelley, ARC Group Worldwide, Inc. - Interim CEO, CFO & Director [13]

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Just south of $1 million per quarter. So again, we're very excited about where that business is headed. And for that reason, we are again considering some opportunities there. But in the third quarter of fiscal '17, we were $913,000 -- $100,000, and again, we're very excited about where that business is headed.

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Operator [14]

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(Operator Instructions) And it does appear we have no further questions. Mr. Kelley, I'll turn the conference back over to you sir for any closing comments.

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Drew M. Kelley, ARC Group Worldwide, Inc. - Interim CEO, CFO & Director [15]

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All right. Well, I appreciate everyone's time, and we look forward to speaking with everyone in the future. Thank you, again. Bye-bye.

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Operator [16]

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This will conclude today's conference call. We thank you for your participation, and you may disconnect at this time.