Air Industries Group (AIRI) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gales Industries fourth-quarter and full-year 2006 financial results conference call. My name is Gina and will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Jordan Darrow. You may proceed.

Thank you, operator, and good morning, everyone. I'm Jordan Darrow of Darrow Associates and I welcome you to Gales Industries Incorporated fourth-quarter and full-year 2006 financial results conference call.

For those who have not had a chance to review the earnings release, it has been posted and can be viewed on the Internet, or we can fax it to you.

Please note that Gales Industries has previously filed its annual report with the Securities and Exchange Commission. That filing, which is publicly available at no cost, contains the Company's financial statements, including balance sheet and income statements.

On the call from Gales Industries is Peter Rettaliata, President and Chief Executive Officer, and Louis Guisto, Vice Chairman and Chief Financial Officer. Management will review the financial results and other recent developments in their formal remarks. The formal portion of the presentation will be followed by a question-and-answer session.

Before we proceed with the formal remarks, please be advised that statements made during this presentation that are not historical facts are forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements may include but are not limited to revenue and earnings projections, statements of business plans and objectives, product development and time-to-market issues, and capital structure and other financial matters. Forward-looking statements may differ from actuality and relying on them is subject to risk. Factors causing forward-looking statements in this presentation to differ from results are discussed in the Company's Form 10-K and 10-Q filings with the Securities and Exchange Commission. The Company is not necessarily obligated to update forward-looking statements whether as a result of new information, future events or otherwise.

I will now turn the call over to Peter Rettaliata.

Thank you, Jordan. Good morning to all of you. We appreciate your participation in our financial results conference call.

Today, we reported our financial results for the fiscal fourth quarter and full year ended December 31, 2006. I'll have Lou provide a detailed discussion of the results, and I will discuss business strategy and corporate developments.

As many of you know, we are pleased to be conducting our first earnings results conference call as a public company. I would like to provide a brief overview of our business for those of you on the call who are relative newcomers to the story. With that backdrop in place, I will then discuss areas in which we made progress this year, areas in which we need improvement, and our growth strategy going forward.

Gales Industries Incorporated traded now on the over-the-counter bulletin board with the symbol GLDS is a holding company established to engage in the consolidation of manufactures, [gearing] integrators and related service providers to the Aerospace (technical difficulty) and commercial aviation industries. Beginning with our first acquisition in November of 2005 of Air Industries Machining Corporation, or AIM as it is called, a leading aerospace defense manufacturer and engineering integrator based in Bay Shore, New York, Long Island, the Company is focused on flight safety and other critical components, including landing gear, resting gear and flight controls.

Consistent with our business plan from the time in which we created the Company, we intend to enhance our presence with the major prime contractors to increase our market share while growing overall revenues and increasing economy of scales. To this end, we have been seeking consolidation opportunities that offer highly synergistic disciplines in manufacturing, technical services, and strategic products distribution. The Company's strategy is execute its consolidation, principally amongst the middle market and lower-tier subcontractors in the industry.

Our existing business today with AIM positions us with revenues of 33 million in 2006, an all-time record for the Company and an impressive total backlog in excess of 60 million, also a record for the Company. We also possess an extraordinary engineering and hard metals manufacturing capability that, simply put, helps keep our soldiers, sailors and Marines, as well as civilian passengers, alive when they fly in a variety of aircraft, including helicopters, fighter jets, or large commercial airliners. AIM, from which all of our net sales has been derived in 2006, has in recent quarters derived a substantial portion of revenues from Sikorsky Aircraft Corporation. Orders from this customer were delayed due to a strike in the third and fourth quarter, which resulted in lower-than-anticipated revenues and our recording net losses in this quarter. However, shipments to Sikorsky are just now returning to their pre (indiscernible) levels and should improve through the year.

The reliance on a single customer underscores the importance of our growth strategy that targets organically generated growth and to a large extent acquisitions, which will create a more even distribution of our customer revenue base. Our fourth-quarter results reflect progress with initiatives implemented earlier in the year to diversify and internally grow the Company's revenues. These achievements will include additional defense-related and diversification through new commercial projects.

We've received a contract award for prototype engine mounts for replacement engines for the 737 and A320 aircraft with Northrop Grumman Corporation. These are some of the most popular airplanes in the world today. A contract from the leading landing-gear company in the world to produce the Drag Strut Brace Assembly for the A380 aircrafts, a contract extension with Sikorsky through the year 2012 for long-term general purchase agreements covering 50 million in parts for the Black Hawk helicopter program as well. Additionally, we've received a commercial contract from a new customer, Erickson Air-Crane, for their line of heavy-lift helicopters used in firefighting, lumbering and heavy-lift activities worldwide.

We expect an even more substantial contribution in the near future from our industry consolidation strategy. As previously announced, we are in the process of closing our second and third acquisitions. These businesses collectively had trailing revenues of approximately 23 million. I expect them to significantly contribute to our earnings in 2007.

After the acquisition of AIM, we spent much of 2006 preparing to grow. We did this by investing in Air Industries (technical difficulty) additional production and achieving SEC compliance. The investments in time, energy and money that we've made in engineering systems, manufacturing systems, financial systems and controls will facilitate our acquisition strategy. With these elements in place, we aggressively pursue new acquisition opportunities.

In December of 2006, we announced a purchase agreement for Sigma Metals as a second platform company for approximately 7 million plus other considerations. The purchase price will be paid in a combination of cash, restricted stock and debt. We believe Sigma brings to Gales numerous advantages in our pursuit of growth, margin expansion, and expanded services to our customers. Strategically, Sigma will provide a vehicle within the Group, enabling us to leverage our position in the Aerospace raw materials industry, providing both a hedge against price inflation and improvement of overall access to critical sources of supply. With 18 million in revenues, this acquisition is expected to close by the end of April.

Earlier in 2007, we announced our third acquisition by the name of Welding Metallurgy Incorporated, a metallurgical engineering and welding services provider and a manufacturer based in West Babylon, Long Island, New York. As far as a purchase agreement, Gales Industries has agreed to pay approximately $6 million in a combination of stock, cash and debt. The closing of the acquisition is expected to be on or about May, 2007. Welding Met with about 5 million in revenues allows us to significantly increase our core competencies and is a perfect complement to other businesses presently a part of our or identified to be acquired by Gales, and provides us with the ability to capture a larger share of the market. Welding Metallurgy has entrenched relationships with three primary customers, two of which represent substantial growth opportunities for Gales. Additionally, it is our intention to extend strong customer relationships currently existing at AIM to produce growth for Welding Metallurgy.

Other achievements worth mentioning -- while interrupted in the fourth quarter as a result of lower revenues from Sikorsky is our success in improving gross margins. We've taken the Company from approximately 11% in fourth quarter of '05 to over 15.3% for fourth quarter '06. At the same time, (indiscernible) taking intended to (indiscernible) the brand growth trajectory over the long-term, including investment in plant and facilities. In short, we expect to become a more dominant force in the middle market, aerospace and defense industry, as stated by our (indiscernible) Chairman, James A. Brown. We're pleased that our corporate achievements over the last (technical difficulty) serve as a harbinger of the future, a future (technical difficulty) some significant shareholder wealth.

I will now pass the call to Lou Guisto, our Vice Chairman and CFO, to provide a detailed review of the financial results.

Good morning, everyone.

For the fourth quarter ended December 31, 2006, net sales were $7,043,074 as compared to net sales of $8,883,571 in the fourth quarter of '05. The decrease in net sales was primarily attributable to a delay in order releases for parts and related defense components to the Sikorsky Aircraft Corporation.

Gross profits in the fourth quarter of '06 were $255,100 as compared to gross profit of $1,570,184 for the same period in 2005. The decrease in gross profit for the four quarter of 2006 reflects the lower level of revenue and continued production of parts in anticipation of order releases from Sikorsky in the first half of 2007.

Selling, general and administrative, SG&A, expenses for the fourth quarter were $934,254 as compared to $1,266,189 for the same period in 2005. The decrease in SG&A reflects the higher-than-normal expenses incurred in the 2005 period from the legal, finance and related professional fees associated with the Company's capital raised and acquisition of Air Industries Machining Corporation, AIM. Included in our SG&A costs associated with stock-based compensation in accordance with FAS 123R of $167,126 of expense and professional fees of $1,414,504 relating to due diligence and other activities surrounding our consolidation strategy.

The Company incurred a fourth-quarter net loss before provision of income taxes of $253,031 for the three months ended December 31, 2006, as compared to a net loss before the provision of income taxes of $182,127 for the three months ended December 31, 2005. The net loss after taxes was $580,346 for the three months ended December 31, 2006. A comparison of net income with prior year is not informative because the predecessor company was an 'S' corporation.

For the full year 2006, net sales were $33,044,996, an increase of $2,309,893 or 7.5% from net sales of $30,735,103 for the same period in 2005. SG&A expenses for 2006 were $4,390,598 as compared to $2,798,048 for all 2005.

Income for the full year of 2006, before provision for income taxes and nonrecurring items, was $153,400 for the first 12 months of 2006 and $676,046 for 2005.

The Company's net loss for 2006 was [336,560] and includes recognition of a nonrecurring tax associated with the sale of the Company's real estate. A comparison of net income with prior-year results is not informative because the predecessor company was an 'S' corporation.

Moving to the balance sheet, at December 31, 2006, Gales had bank and other long-term debt of 5.8 million and an availability -- what we call shadow cash -- of 3.7 million under the Company's credit facilities. The Company is not allowed to have a discernible cash balance on its balance sheet because of its credit agreements, which requires all cash to be swept into its loan accounts and the increased availability within the loan accounts as a result of that sweep is the shadow cash I previously mentioned.

In 2006, we consummated the pre-plant sale and leaseback of the real estate property in Bay Shore, New York, our corporate campus and wholly-owned subsidiary where AIM is located. The sale and leaseback of our campus was preplanned with our bank to reduce our debt and open up our credit line to provide additional resources for the acquisition program. At the time AIM was acquired, the property and buildings housing these operations had been purchased by Gales in November of 2005 for approximately 4.2 million and upon consummation of the sale leaseback sold for 6.2.

Net of closing costs and other fees relating to the transaction, Gales had repaid approximately 4.8 million or 48% of its borrowings from the PNC Bank that had been used to make the initial purchase of the property and buildings with the balance of the transaction proceeds used for working capital and earmarked to fund potential acquisitions.

After the end of the year, we announced further reductions of the debt that simultaneously highlighted management's confidence in the future of the Company. Peter Rettaliata and Dario Peragallo, President and Chief Executives -- President and Executive Vice President, respectively, had converted 719,772 (technical difficulty) principal amount of notes plus accrued interest due from the Company into 1,799,431 shares of Gales' common stock.

In terms of asset categories, it should be mentioned Sikorsky's finished goods and work-in-process inventory was 4 million higher (indiscernible) year end when compared with the same account for inventory at the end of the third quarter. This higher level is expected to decline through the first half of 2007. The Company provides firm backlog as well as projected backlog as two indicators of future activity. As of March 31, 2007, Gales Industries has a firm backlog representing fully authorized orders for products to be delivered exceeding $37.3 million. Additionally, Gales' projected backlog, which includes both the firm backlog as well as anticipated order releases, totaled approximately $60 million. In our financial outlook, we are providing for the first time guidance for financial results which includes the consolidation of operations from AIR Industries and the acquisition of Sigma Metals and Welding Metallurgy, which are pending completion.

Our guidance for consolidated quarterly run-rate by the end of 2007 includes revenue within the range of 57 to $60 million, earnings before interest, taxes and depreciation and amortization -- what we call EBITDA -- within the range of 4.5 million to $6 million, and net income within a range of 2 million to 2.5 million.

That concludes my remarks on corporate Gales Industries' fourth-quarter and full-year 2006 results. We would now like to turn this call back to Pete.

Thank you, Lou.

We trust that you have gathered, from our remarks, that we are making impressive progress with our consolidation effort and our growth strategies. With several acquisitions announced or in the exploratory stages, we believe that there continues to be ample room for our company to expand as we emerge as a formidable middle-market Aerospace manufacture and integrator.

As we continue down this path, we are confident that the capital markets will value us in line with our public-market comparables, which at the present time represents significant value creation for our shareholders.

I would now like to turn the call back to the operator so that we may begin the question-and-answer session.

Sure. (OPERATOR INSTRUCTIONS). [David Cohen], Harborview Capital.

Congratulations, gentlemen, a good report. A couple of questions -- first of all, what's your target range for organic growth over the next couple of years? Obviously, we know that you are looking at acquisition targets but based on just your organic business?

Dave, that's a good question. We have not announced or publicly stated a range for organic growth, but you know, from the year 2000 through 2006, we grew from 16.3 million to the range of 33 million, so we have always considered organic growth as a very important component in our strategy, and we continue along the same range.

I've made a number of glamorous announcements here and prior to this meeting about a the 737, A320 engine mount contract and the A380, the Drag Strut Brace contract, our new customer, and Erickson Air-Crane. All of those are good things.

Additionally, we expect that our acquisition program, while supplying a lot of growth through acquisition, will also supply some impetus to the organic growth program by creating new and synergistic relationships with customers that we are not currently working closely with at AIM. So the acquisition program will also help us in the area of organic growth at AIM and vice versa.

At Sigma, there are certain customers that we don't have relationships with, as well as Welding Met where we don't have certain relationships, and vice versa. So organic growth is not projected but should continue in a healthy way as it has in the past, and spurred on by additional impetus to our acquisition program.

Okay, one other question -- you mentioned obviously the fourth-quarter numbers were hurt a bit by the Sikorsky slow down. Could you give us a little bit of color as to how that is resolving itself?

Also, you mentioned a desire to obviously diversify away from Sikorsky. Can you give us a little idea as to how you plan to do that going forward?

Certainly. The first thing, some good news of course, is that the Sikorsky strike is over, and Sikorsky is very focused on regaining their schedule where they own revenue (indiscernible) more importantly because the Black Hawk helicopters are so urgently needed by the U.S. government customer today to support operations in Iraq and around the world. So, we're starting to see now the recovery of the Sikorsky schedule and shift from delayed deliveries onto increased demand, which we expect to continue through certainly the end of the year. They have a very aggressive schedule to meet to stay in line with their government customer who, as you can imagine, is very concerned and very interested in their meeting their contractual obligations.

On the organic growth side at AIM and in the area of diversification away from Sikorsky, we have targeted areas that are critical to our growth and the landing gear business with Goodrich Corporation, very successful in the areas including the JSF aircraft. We are bidding on an F-18 landing gear contract (technical difficulty) them and also some 777 components, all of which look very promising. Certainly, the JSF contract we've already won and are in-house and will build with aircraft deliveries to the Navy, Air Force, Marines later on in the decade.

We are also very conscious of the burgeoning commercial aircraft business. (indiscernible) a lot of activity around the 777 aircraft and the 767 aircraft. Most recently, we had some terrific program reviews in preparing for some invitations to quote from [Radico] Air, a French company who makes major door components for both the 777 and the 787 for Boeing. We feel very strongly that we can do a good job building mechanisms for those doors, which are part of our core competency in the subassembly and mechanical structural arena.

Okay, thank you. That's it for me.

[Steve Lerner], Gunn Allen.

I've just got a few questions here. What kind of public-company valuations should we use as a benchmark? (indiscernible) considering what Gales should be possibly worth. I'm sure a lot of people are wondering where can they compare it to. What do you think?

Well, I think that, in some of our material in the past, we've started to look to some comparables with the growth that has been enjoyed by the Triumph Corporation, or the (indiscernible) Company, both of whom have executed a consolidation strategy much like the one that we are going through today. I think that they are good companies to look for comparable statistics.

We have also given some guidance relative to our growth in the future which, including the first two acquisitions, which would bring us to something like 50, $60 million in earnings before interest or EBITDA for the future.

All right. So (indiscernible) comments on those are pretty good companies. As far as a couple of other questions here. In '06, you reported a small loss, although half of that loss was in the fourth quarter. Just give us again -- I know (indiscernible) a sense of how things are trending now, and do you think that '07 -- or how greater of '07 do you think will be a better year for Gales overall? Much better than last year? What are you thinking?

We believe it will be better than last year in two dimensions. Number one, the operating profit for AIM in 2006 was positive in spite of the setback we had with Sikorsky in the fourth quarter.

What will also happen in 2007 is (indiscernible) the acquisitions of two companies bringing us to this $57 million to $60 million range at year-end, you'll see that the SG&A expense to launch our acquisition program and to create Gales as a holding company will be distributed over this much larger base, and you'll see that the profitability will be well-improved as a result. Add to that a significant organic growth program underway, and I think you'll see 2007 as a good year, and you will start to see the elements work together much better than they did in the past.

Remember that we [forded] on the revenues of AIM all of the internal growth and development of the Corporation to accommodate the future objectives of our acquisition program, and have gotten that done, including a fair amount of nonrecurring cost probably totaling almost $1 million in that timeframe.

All right, one more question here -- can you tell us why the recent board-level changes have been made? With Michael Gales no longer serving as Chairman, do you intend to change the name of the Company? I would assume you may want to be doing that. What's your thought there?

Let me say a couple of things. I think that Michael Gales did a great job of helping us to develop this [decision] for our company in the future. He was very tenacious about getting us started, and in fact putting this structure in place, taking the Company public, pulling together a talented group of people to go forward. I think, as time went on and as the mission turned from the initial creation of our mission, creating of the Company, developing those initial ties, Michael found that the focus of the Company became much more of an operational focus and his tool set and skill set were not necessarily the ones we needed for leadership in the future, and we're very excited about the leadership going forward for those purposes. So, I feel very, very good about our prospects going forward and our leadership going forward and where we are today. So, that's good news.

I do think that there is a name-change for the Company envisioned. We have in fact launched a competition among employees to consider suggestions of a name change. The reason for that is, as we are growing and becoming a more important piece of this middle-market aerospace subcontractor space, we would like a name that more reflects our aerospace heritage and maybe more importantly connects us to the strong reputation that Air Industries has developed in the industry over the last 30 some odd years.

So you are correct; I think a name change is in place. I think that we have transitioned our management and personnel in line with where the Company must go and the kinds of people we must need to place. I'm very excited about the future and where we are and what the future portends for us.

All right, just one more (indiscernible) -- I did write it down; I just want to make sure. The projection that you have going forward for '07, as far as bottom-line earnings, is between 2 and 2.5 million on the net/net, and as far as EBITDA, you're talking about somewhere in the neighborhood between 4.5 and 6, correct?

That's correct; that's absolutely correct.

All right, so then I can put it into the valuation term model as to what we should think about stock price. All right, I appreciate it very much, guys. Thanks a lot for all your help.

[Roddick Affrick], [Westbury] Group.

Good morning, Peter and Lou. Great job this morning.

A couple of related questions on the topic of acquisitions, if we could just sort of take them serially. First, the acquisitions you've made or announced to date have been somewhat varied in terms of the what you expect them to do for the Company and so on. Could you describe your overall acquisition strategy?

Certainly. The acquisition strategy involves the creation of a synergistic aerospace and group of companies. There are three categories that we're going to group organized companies under. The first category is the (indiscernible) manufacturing company, like Air Industries and Welding Metallurgy, both manufacturers building to customer design. We are creating a group or organizational category for engineered products. These are the kind of products where we would be actually engineering and own the rights and data to those products in the aerospace business. The Services group, which is where Sigma fits as a raw material distributor to the industry. The idea is that these companies will work synergistically with each other as well and create economies of scale, marketshare advantages and business relationships that somehow make us larger than the sum of our parts.

Some companies that we acquire will be platform companies. Air Industries is a platform company; Sigma is a platform company; Welding Metallurgy is a platform company. We will be acquiring companies for consolidation into those platform companies, so we have a company envisioned in the future that is much like Air Industries and we will find that our synergies will be to buy that company and physically locate it along with Air Industries for the economies-of-scale benefits and marketshare benefits that I talked about earlier. So that is our strategy, all aimed at the mid-market aerospace subcontracting space, sharing the same customers, sharing the same specifications and requirements and building on all of these relationships.

Let me just add one thing to what Peter has just said. That is the first two targets have positive earnings, significant EBITDA, and great, great growth potential. We basically focused on those two acquisitions to make sure that we could substantially add to the company we now have in place, Air Industries, and provide the basis for future acquisitions.

Yes, I think Lou brings a big point. T much of our strategy is aimed at offering exit strategies to companies where we are buying below market and we are looking to, for the most part, make acquisitions between three and six times EBITDA, so that we start off at the right foot, not paying a lunch premium, which we would have difficulty making up. Then in those rare cases where we find the synergies so compelling, paying as much as market price where we understand that the consolidation would bring that EBITDA multiple down to consolidation. So we are looking to do this economically and to be accretive to EBITDA, and to do things smartly and to not force acquisitions for acquisition's sake, but to make acquisitions that add synergy, earnings, and as I said, accretive to EBITDA.

Just a follow-up question, too, on that, you know, you've been successful thus far in finding new, suitable acquisitions that fit into your metrics and as you say, doing them because they are the right deal as opposed to just for the sake of doing them, but why do you think you will continue being successful in finding other others that fit? Related to that is, is there sort of a timeline you have in mind of when you might make additional acquisitions?

Great question, because we are a little unique, I believe.

You may know that the aerospace market saw $31 billion worth of M&A activity in 2005, so the business strategy of the aerospace business right now includes consolidations, so there's lots of activity; many people who want to be at one end of the acquisition (indiscernible) or the other.

We have positioned ourselves over the years, for a number of reasons, well to know the industry in terms of who is out there. As you might know, for many, many years, I was (technical difficulty) dealing with all aerospace companies, certainly in the East Coast, most particularly on Long Island. These people still remain as friends and competitors of ours, and we talk to them on a daily basis.

I've also made sure that I've presented some leadership for the companies of these types, both locally and as the Chairman of Adapt, which is local aerospace group on Long Island, and also at the national level where I'm just retiring from the Board of Governors of the Aerospace Industries Association. These network opportunities give us a chance to know many companies, know our competitors, know our brother and sister companies in our market space and keep talking with them. The market is ripe for consolidation because of a lot of our reasons. Many people, simply because of their age, need exit strategies, and what one time were family businesses where investments have not been made to go to the future, but where there's a lot of value for consolidation within a group where those investments have been made. So we feel very good about our ability to maintain a strong list of candidates without going to the list that is won out by the industry who does not have these personal contacts.

You should also be aware of the fact that this management team is focused not only on making a number of acquisitions but ensuring that it can control and can consolidate properly the acquisitions it does make. To that end, we've invested a lot of time and a lot of capital in creating the proper control environment and operating systems that can be put into these acquisitions in template form, so we can get the type of control that to some extent these companies have never enjoyed before. Most of the targets that we have looked at or Escorts and to some extent they've done very, very well. To some extent, they've gone about as far as they can go with an Escort. We are now stepping into the picture; we're going to make them part of our group and we're going to put them in an environment that ensures that they know what they're doing and we know what they're doing.

Now, our plan includes as many as four acquisitions in 2007 and a minimum of two acquisitions each year after. So, we're going to make sure that execution is important and that we do it well, but we want to be steady and continue to have an impressive growth plan, a lot like what you will see in the experience of (indiscernible) and (indiscernible).

So, that's great and very helpful. So I guess, then, it would be fair to say, at least in the short to intermediate term, that you're not too worried about somebody else coming in and trying to copy your strategy, given that you're focusing on, perhaps, a different group of companies than certainly the larger guys in the industry.

Certainly, our strategy is very personal dealing with people that we know, companies that we understand, people and relationships that are in place to engineer a tailored-type exit strategy for them and we don't seem to have a shortage of candidates at this time.

Great, thank you.

At this time, I'd like to turn the call back cover to management for any further remarks.

Okay, I would like to thank all of you for being here. This is our first conference and we are very excited to have provided this guidance. We appreciate the continued support of our shareholders and the increased interest from the broader investment community in our plans for our aerospace industry expansion. We are very excited about the progress that we've made towards acquiring several well-run and profitable companies. As we have now done with our first conference call in our prior press releases, we will continue to update you on the development of our business.

Thank you for taking the time and the interest and we are very excited about the future. Thank you.

Thank you.

Thank you for joining in today's conference. This concludes the presentation. You may now disconnect. Have a great day.