Air Industries Group (AIRI) 2007 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Air Industries Group second quarter financial earnings results conference call. My name is Danielle, I will be your conference coordinator for today. At this time all participants are in a listen-only mode. And we will conduct a question and answer session towards the ends 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 Mr. Jordan Darrow. Please proceed, sir.

Thank you, operator, and good afternoon to everyone. I'm Jordan Darrow of Darrow Associates, and I welcome you to Air Industries Group second quarter 2007 financial results conference call. For those of you who have not had a chance to review the earnings release, it is posted and can be viewed on the Internet, or we can fax it or e-mail it to you. On the call from Air Industries Group are Peter Rettaliata, President and Chief Executive Officer, and Louis Giusto, 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 the purposes of Safe Harbor provision 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 risks. 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 afternoon to all of you and thank you for participating in our financial results conference call. Today we recorded our financial results for the fiscal second quarter ended June 30, 2007. I will ask Lou to provide a detailed discussion of the results and I will discuss business strategy and corporate development.

From the onset let me assure you that we have a very strong development plan, and the company has moved well against that plan to date. some of which I can talk about today, some of which I can't talk about, but I'm very confident in where we are and in where we are going, and I'm very excited about the future. Things are moving well. We are making some very good moves. The second quarter of 2007 was a gratifying period for several reasons. First of all, we changed the name with shareholder and management approval, and the name is now Air Industries Group Incorporated. This name for me is much more comfortable in that it reflects the almost 40-year history of Air Industries Machining Corporation, which has been known in the industry for that period as a very strong and good company with good customer loyalty. We also changed the ticker symbol and that symbol is now AIRI. And that reflects Air Industries as well.

Our growth strategies in the near term and intermediate terms reflect a focus on diversification of revenues. During the second quarter, we achieved milestones that represent diversification through internal growth initiatives and from our consolidation efforts as well. On the consolidation front, we completed the acquisition of Sigma Metals in April, a strategic metals distributor based in Deer Park, New York. Sigma Metals is now a wholly owned subsidiary of Air Industries Group and will operate as a new platform company. With trailing 12-months revenues of approximately $18 million prior to its acquisition, Sigma will continue to operate from its existing location and has retained all key management and personnel in accordance with the purchase agreement. Sigma as a stand alone platform, as a company that we plan to build through acquisition and consolidation of smaller companies into that platform. We have some good plans there and we are very excited once again.

On the consolidation front, Sigma Metals brings numerous benefits to our company as relates to our pursuit of growth, margin enhancements and expanded services to our customers. Simply we are both more profitable and more relevant to our customers. Sigma also provides the group with a hedge against inflation relative to extensive and volatile raw material costs, very important for the group at large and very important during a period of expansion. The purchase price to acquire Sigma Metals was approximately $5 million plus the assumption of debt. Most of the purchase price was paid in cash and the balance was paid through a combination of restricted stock and debt.

To facilitate the acquisition, we conducted an offering of Series B convertible preferred stock that raised in aggregate, gross proceeds of over $8 million. We are pleased to note that the offering, originally intended to raise a maximum of $7 million was oversubscribed, primarily as a result of stronger than anticipated demand from institutional investors. It's encouraging to see the growing interest in Air Industries Group and view the results of this offering as another extension of the financial community's increasing appreciation of our business model. In terms of our attempt to make our accretive acquisitions, we have a number of initiatives at work at this time. The financing is in place and we are prepared to close on the transaction with Welding Metallurgy, which will close in the next few days.

This company is a specialty welding and products provider, primarily to Northrup Grumman and Boeing Helicopter, and had a healthy level of profitability with approximately $5 million in trailing revenues. We will leverage this business to gain greater market share. For example, we will use Welding Metallurgy's relationship with Boeing Helicopter as a way to drill the relationship at Air Industries MacHine Corporation with Boeing Helicopter. We will also use our longstanding relationship at Sikorsky to build a relationship for Welding Metallurgy. I have already made some sales calls with friends at Sikorsky on behalf of Welding Metallurgy. This leveraging of the customer bases is a form of the synergistic benefits that is the basis for our longer term growth strategy.

We are pursuing several other opportunities for consolidation. We have compiled a short list of some 28 companies representing over $500 million in revenues that are potentially within our reach. Many have extensive operations on Long Island and would represent ease for execution. We are currently focusing on the short term on four of these, with a combined value of approximately $30 million. Beyond growth through acquisition, we also proved in the second quarter of 2007 that we have the ability to expand through organic initiatives. In recent months, we secured an add on award from Sikorsky representing in excess of $12 million in new orders, which is in addition to our $50 million long-term purchase agreement.

In June, we received a new contract from Boeing for nacelle strut fittings on the 767 aircraft. If the tanker is selected as a 767 aircraft, that would be an even more glamorous award. Also in June, our Air Industries MacHine Corporation subsidiary was selected by Groupe Latecoere to manufacture cargo door mechanisms for the Boeing 777 freighter aircraft. This new order reflects AIM's ongoing diversification program and is a big part of our push into the international marketplace. We secured a new customer in this award, and we feel that it will in the long-term increase our commercial aircraft market push.

Through these new contracts, we are benefiting from the global commercial aerospace resurgence which complements the large defense-related market which was in recent years, our primary source of revenues. Participating in an increasing level in the growth of the commercial aerospace market is an essential element of our diversification strategy and is the most glamorous part of the growth in the aerospace market in years to come. Moreover, the second quarter of 2007 reflects revenues and improved diversification by Air Industries Group.

For the period, the company's mix of business was approximately 80% military and 20% commercial as compared with 85% military and 15% commercial in the first quarter of 2007. By business unit, our contract manufacturing business represented by AIM contributed 75% of revenues with the materials distribution business represented by Sigma contributing 25% of revenues. This compares with AIM representing 100% of revenues in the previous quarter. We are clearly seeing the execution of our industry strategy showing early signs of fruition.

We are putting the necessary infrastructure in place to move up the aerospace supply chain from basic of contract manufacturing to a provider of comprehensive integration services to the industry titans with a particular focus on flight safety and other critical componentry, including landing gear, resting gear, flight controls and other critical safety and high performance assemblies. We maintain the belief that those who do not consolidate and expand face almost certain demise, while those such as Air Industries Group that take action will benefit from increased market share and economies of scale, improved negotiating positions and a more fortified alliance with the prime contractors and government customers, a strength in enterprise and more significant revenues and profits. This in turn is proven to deliver substantial returns to stakeholders.

With record backlogs and an outlook for accelerating revenues, profitability and cash flow in the second half of this year, we are confident that we are on a course to fully accomplish our long-term goal of becoming a formidable middle market aerospace and defense player. Once again, I feel very strongly about where we are, what we have put in place and how we are going to be able to exploit this increasing commercial marketplace from our defense base as we go forward. Good things have happened. Again, some of which I can talk about, some of which I can't. But we are well-positioned and we have come a long way from a year ago, and I am very, very satisfied with the progress of the company at this point.

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

Thank you, Pete, and good afternoon, ladies and gentlemen. In the second quarter ended June 30, 2007, net sales were $10,989,536 as compared to net sales of $9,220,165 in the second quarter of '06, and $7,488,130 the first quarter '07. The increase of net sales on the prior year period was primarily attributable to an improvement in order releases for parts and related defense components to Sikorsky, as well as a contribution of Sigma Metals from the date of acquisitions in April of '07.

Gross profit in the second quarter of '07 was $2,372,837, as compared to gross profit of $1,752,839 for the same period in '06, and $1,249,000 in the first quarter of '07. As a percentage of sales, gross margin for the second quarter of '07 was 22% as it compared to 19% for the same period in '06 and 17% in the first quarter of '07. The increase in gross profit as a dollar value as well as gross profit as a percent of sales for the second quarter of '07 primarily reflects the higher level of revenue and related improvement in manufacturing efficiencies and, to a lesser extent, higher margin contributions from Sigma Metal revenues. In particular, among the manufacturing efficiencies, was the ability to more accurately capture cost of manufacturing, given a mix of products using our newly implemented automated perpetual inventory system.

Selling, general, and administrative expenses for the second quarter were $2,330,498, as compared to $1,167,093 for the same period in '06, and $1,127,759 in the first quarter of this year. The increase in SG&A reflects the increase in the company's financial personnel and continued expenses for professional fees associated with the company's position as a public company. And enhancing its reporting systems and other public company compliance matters. Breaking out some of the components of SG&A in the second quarter of '07, costs associated with the stock-based compensation in accordance with FAS-123 R. was $241,000. I'd like to call your attention to the fact that $150,000 of that cost is non-recurring. Professional fees was $645,000 relating to our due diligence and other activity surrounding our consolidation strategies and rent increase by $30,000 from the first quarter of '07, reflecting the addition of Sigma Metals, which occupies additional space on Long Island from our AIM corporate locations.

Earnings before interest and taxes, depreciation and amortization, EBITDA, for the second quarter of '07 was $306,908 as compared to $864,998 for the same period in '06, and $290,458 for the three months of '07. We consider EBITDA to be an important financial indicator of the company's operational strength and performance, and use this indicator when making decisions regarding investments in the various components of its business and acquisition valuations. Because EBITDA is not a measurement determined in accordance with Generally Accepted Accounting Principles, GAAP, and thus susceptible to varying calculations, EBITDA as discussed may not be directly comparable to other similarly titled measures reported by other companies.

The company's loss before provision for income taxes was $237,305 for the three months ended June 30, '07, as compared to a profit of $224,423 for the same period in '06 and a loss of $6,723 in the first quarter of '07. The net loss for the three months ended June 30, 2007 was $315,443, or $0.01 a share, compared to a net loss of $40,432 for the same period in '06, and a loss of $71,487 for the first quarter in '07. As of June 30, '07, we had outstanding 67,008,469 shares of common stock. As of that date on a fully diluted basis after given effect to assuming the exercise of conversion of all outstanding options, warrants, derivative securities, we had outstanding an aggregate of 109,972,865 shares of common stock. This number does not give effect to any dividends or interest which may accrue on the outstanding Series B convertible preferred stock or convertible notes.

Moving to the balance sheet, at June 30, '07, Air Industries Group had bank and long-term debt including a current portion of that long-term debt of $12,894,937, and availability of approximately $1 million under the company's loan facilities with PNC Bank. All cash balances, with the exception of cash originating with the capital rates are applied on a daily basis to amounts outstanding under the revolving portion of the company's outstanding loan facilities rather than being accounted for on the balance sheets as cash. In April, 2007, Air Industries raised $8,020,000 in gross proceeds from an over-subscribed issuance invested in by institutional and accredited investors to a private placement of 802,300 shares of its series B convertible preferred stock. A portion of the proceeds has been allocated towards what cash component of the acquisition of Sigma Metals including in the fully diluted share count referenced earlier in my remarks. The common stock underlying the Series B convertible preferred stock has been registered with the Securities and Exchange Commission.

In terms of other assets, as a result of the production of parts for Sikorsky that were delayed as well as material requirements for the significant amount of new contract awards received by AIM and the inclusion of Sigma Metals, a company that distributes metals with significant inventory turns throughout the year, the company's raw material, finished goods and work in process inventory at the end of the second quarter of 2007 was $20,360,593, which includes about $3,100,000 of inventory from Sigma, an increase of about 28% from the first quarter of '07. This inventory level is expected to modestly decline as shipments for orders that had been delayed for more, are more fully resumed in the second half of the year.

The company provides firm backlog as well as projected backlog as indicators of future activities. As of June 30, '07, Air Industries Group had a firm backlog representing fully authorized orders for products to be delivered exceeding $48 million, which is a company historic record. Additionally, Air Industries Group projected backlog, which includes both firm backlog as well as anticipated order releases, totaled approximately $65 million at June 30. As we stated, these backlog levels, which are solely derived from business relating to Air Industry Group's wholly owned operating subsidiary, Air Industries Machining Corp., are the largest in the company's history. The backlog at June 30 reflects a 29% increase as compared to the prior firm backlog of $37.3 million as of March 31, '07.

For our financial outlook, we are reiterating our guidance for financial results which includes the consolidation of operations from Air Industries Machining Corp and the acquisition of Sigma Metals and, upon completion, Welding Metallurgy. This guidance is for consolidated quarterly run rates by the end of 2007 that includes revenue within the range of $57 million to $60 million, EBITDA within the range of $4.5 million to $6 million, and net income within the range of $2 million to $2.5 million.

That concludes my remarks on Air Industry Group's second quarter and first half of '07 results. I would now like to turn the call back to Pete.

Thank you, Lou. We trust that you have gather from our remarks that we are making impressive progress with our consolidation efforts and our growth strategies. With two acquisitions completed to date and a third deal to be completed shortly, we will soon have our three platform businesses in place. From there we can move more completely, address several potential acquisition opportunities that are presently in the exploratory stages even further.

We believe that there continues to be ample room for our company to expand as we emerge as a formidable middle market aerospace manufacturer and integrator. We believe that the capital markets are beginning to take notice of our strategy and our ability to execute. This is evidenced by institutional investors oversubscribing to our April capital raise and to support the newfound institutional interest in our stock, we are pleased to announce that we will have accepted the, an invitation to present at the Noble Financial small cap conference on the August 20, where some 400 investors and nearly 100 presenting companies will be participating. For those who can't attend, the presentation will be webcast and a notification of the details will be forthcoming. I would now like to turn the call back to the operator so that we may bring the question and answer session.

(OPERATOR INSTRUCTIONS).

Operator, our first question comes from Tom Mullen of TWM Capital Management, who is presently overseas. He has e-mailed us and asked us to put forth on the call the following question: When can we expect to see our shares listed on a different exchange as it has been almost two years since the initial offering?

Good question and one that is on the top of everybody's tongue. It is our plan to be listed on a major market as soon as possible. It certainly is in our strategic direction. We have talked to both the NASDAQ and the American Stock Exchange and we meet all the criteria for listing with those exchanges with the exception of share price. We are doing everything that we can to enhance our performance and growth to develop our share price that would facilitate listing. Some of that has also to do with increased acquisition, but also has to do with the stronger performance against backlog that Lou has talked about. So we are very hopeful that we will, in the short term, be able to achieve listing with either one of those two exchanges.

Your next question will come from the line of Ben Lichtenberg with Noble Financial. Please proceed.

Good afternoon, gentlemen. The acquisition strategy, how many do you anticipate a year, with the backlog you mentioned of, not backlog, but short list or perspective target companies, it sounds like you might be doing several a year. Do you have a team that does nothing but pursues them, that does due diligence and then post transaction, integrates those companies or does senior management simply divert their efforts from day-to-day operations to do all that?

We do have a team and a formal standing committee and we do have a number of outside consultants who help us in our acquisition strategy and also the workload involved in making these things happen. But I think that our initial group of acquisitions is probably going to total something like five companies in the short term. As we reach the year, the next year and the year after, I think you will see us settle down to more like two acquisitions per year as we have our basic structure in place. So there may be a little bit of a change in the pace, a change in the size of the company that we go after and also a much more developed structure to consolidate companies into which should make a big difference.

You did discuss how you find them, diligence, negotiate and close, but you didn't mention how you integrate them. How long is that process? Who does that?

Integration is a really process of putting probability in your best favor, I think. In our initial acquisition phase we made sure that we have been buying companies that we know well, that suit us well and where there's a great deal of synergy and consistency among the management teams. We have a fairly mature management structure here at Air Industries. We have a developed a very strong financial group that didn't exist prior to the development of the new corporation, the public corporation, and we have found that the key to execution is putting things in place to help probability, including a very strong operating system that we have been spreading to the new companies as we put them in place.

So you're saying that your industry, because you have a track record with many of these companies, it's fairly seamless and not too prone to risk?

What I'm saying is we have selected companies that we thought would be relatively, not easy, but that we would understand the execution of integrating those companies because we understood the companies well prior to selecting them. What we are not doing in the early stages of our acquisition program, is buying companies that are being presented to us by third parties and that are an arm's length away from us. Every company that we have pursued for acquisition is a company that was not necessarily for sale at this point, but that we have selected for acquisition, including the concept of ease of execution. So that has been a precondition of our selection of those companies at this point in our plan execution.

Very good. Thank you.

(OPERATOR INSTRUCTIONS). Your next question will come from the line of Steve Lerner with Glenn Allen. Please proceed.

How are you doing? I see that you have some revenue growth and some modest losses. For the visibility going forward for the second half of the year, what kind of visibility do you really have so that people can see that, yes, this is what we are going to do?

Well, I think that once again, Lou has talked about the growth in inventory and the growth in backlog. What has taken place in the first half of the year is that we have been manufacturing a lot of product that we expect much of that product to ship through the end of the third quarter and through the fourth quarter of this year to some of our primary customers that earned value is in place, and that we see great earnings and revenues as a result in that way. So our guidance talks about a much better fourth quarter and a better third quarter. Much of the ingredients to make that happen has been put in place. Some of it has to do with Sikorsky demand delays that are opening up towards the fourth quarter. What you don't see is the amount of time and effort that we have spent in the investment in organic growth, where we don't have the opportunity to ship product as yet, but where we are developed first articles and prototypes and engineering and tooling. And so a lot of what you see in the short term as a loss or as expense will find it's way into product and sales a year from now. So it's actually been a very productive period both in the development of inventory for shipment and the development of tooling and product and process for the future.

All right. Appreciate it.

Thank you very much. In fact, Steve, what has really surprised us is we have launched a full acquisition program for growth, or organic growth has been substantial and it will be more apparent to you in 2008 and on.

All right.

(OPERATOR INSTRUCTIONS).

Well, thank you all -- one more question.

We have a question from the line of Robert Schroeder with Taglich Brothers. Please proceed.

Hi, Pete.

Hi, Rob.

Can you give us an idea of any lingering effects of the Sikorsky strike from a year ago that occurred in Q2? And second part of my question, can you just talk to the capabilities that you've acquired with Sigma and Welding or will acquire with Welding that's going to help fuel the growth of the overall company?

Yeah, I think the lingering effect of the strike at Sikorsky last year is that they have been fighting their own behind schedule situation since that time. Their demand curve moves very quickly, starting at the second half of the third quarter, and then fourth quarter of this year to meet their obligations with their customer. And that's what they are working to. So the lingering effect has been that we've built more product to their inventory which we expect to be shipped again in that later part of the year. Truly we have not put what we have in inventory into inventory we may not have been able to stay up with the demand curve for the end of the year as we see it. So that's been the effect to that extent.

With Sigma Metals, we see a number of good things, first of all, as I mentioned earlier, they become a hedge against inflation and costing for these volatile raw materials that are important to our business. As the Air Industries Machining Corporation, as Welding Metallurgy and others have long-term contracts with fixed pricing, raw material cost escalation is a difficulty. With Sigma, they are in the raw material distribution business which gives us some better ability and talents in buying raw material, being able to buy them in larger quantities and distributing them among the different customers but also their time frame is very short. So they are buying and selling metal and enjoying the increased pricing and costing while that's a concern on the other side of the company.

So it becomes a natural hedge against inflation and we average out the effect and it will be stronger for the group in general. At Welding Met, we become well situated in the fabrication side of the aircraft manufacturing business and offer more to our customers and then able to within our own group develop a more complete product up the integration scale and vertically integration scale with customers. So now, the kind of product we can offer with both companies in the same group is a little bit more expensive, a little more detailed, a little bit more difficult for our competitors to participate in. Does that answer the questions?

Yes.

Good. Thanks, Rob.

At this time there are no more questions from the queue. I would like to pass the presentation back over to management for closing remarks.

Okay. I'd like to thank you all for participating on today's conference call. We appreciate the continued support of our shareholders and the increasing interest from the broader investment community and our plans for aerospace industry expansion. We look forward to keeping you appraised on the developments of our business. And let me repeat once again, we are in a development phase of this group of this company. And much of which I can't talk to you about. But let me assure you that the development phase is going well.

What we are putting in place, the investments we are making in organic growth, the relationships that we are developing with potential acquisition candidates are very exciting and, or in some ways more than I could have anticipated a year ago. I am very comfortable and confident with the future and also gratified by the kinds of receptions we've been getting both from the financial community and also the aerospace industry as well. So please feel free to call should you have any questions and thank you again for participating in today's call.

Ladies and gentlemen, this concludes your presentation. You may now disconnect and have a great day.