Air Industries Group (AIRI) 2019 Q4 法說會逐字稿

Good day and welcome to the Air Industries Conference Call. Today's conference is being recorded.

Air Industries Group's safe harbor statement. Except for the historical information contained herein, the matters discussed in this presentation contain forward-looking statements. The accuracy of these statements is subject to significant risks and uncertainties. Actual results could differ materially from those contained in the forward-looking statements. See the company's SEC filings on Forms 10-K and 10-Q for important information about the company and related risks.

EBITDA is used as a supplemental liquidity measure because management finds it useful to understand and evaluate results excluding the impact of noncash depreciation and amortization charges, stock-based compensation expenses and nonrecurring expenses and outlays prior to consideration of the impact of other potential sources and uses of cash, such as working capital items. This calculation may differ in method of calculation from similarly titled measures used by other companies.

At this time, I would like to turn the conference over to CEO, Lou Melluzzo. Please go ahead.

Thank you, Anita. Good morning and thank you for joining us as we summarize Air Industries' results for 2019.

Our results for the year are much improved over 2018. Sales are up, gross profit is up and expenses remain well controlled. Air Industries reported an operating profit for the first time in several years.

A few high points for 2019 compared to 2018 are: sales increased to $54.6 million, $10 million or 23% more than in 2018; gross profit increased by $3.7 million or 68%; operating expenses were essentially flat; adjusted EBITDA was $5.2 million, 3x what it was in 2018; our non -- our on-time delivery metrics improved across all metrics; bookings were up 49.5%; the relationship with our supply chain improved dramatically. We have refinanced our credit line, replacing PNC Bank with Sterling National Bank. Our new credit facility, a combination of a revolving credit line and a term loan, has very favorable terms. The interest rate is less than half of what we were paying with PNC. The amortization of our term loan is much more favorable. The combination will reduce our cash needs by about $2.5 million a year. This is new-found money we can reinvest in our operations.

At this time, I would like to turn the call over to Michael Recca, our CFO, for a recap on the financials, then I'll return to close the call. Mike?

Thank you. Good morning, everyone.

A couple of topics I want to discuss. Our gross profit, operating income, net income and the -- a little more information on our Sterling Bank refinancing. As Lou said, gross profit is highly variable with sales. Sales for last year, 2019, were up 23% over the prior year, but our gross profit grew by 68%. So it's really the indication of the earnings leverage of the company that our gross profit increases at a faster rate than the increase in sales, and that's because of the manufacturing company we have. As sales go up, our manufacturing overhead is absorbed and spread over more dollars of sales, increasing gross profit.

Operating income is very, very satisfying for the year. In 2019, we had positive operating income and a greatly reduced net loss. Operating income for 2019 was $328,000, and this compares to a loss of $4.9 million, close to $5 million, loss for 2018. Now to be fair, the loss in 2018 included an expense -- a write-off of capitalized engineering of about $2 million. So perhaps a better comparison is income of $328,000 versus a loss of about $3 million, still a dramatic turnaround.

Our net loss from continuing operations in 2019 was about $2.6 million, and that compared with $8.5 million loss in 2018. We reduced our loss by 2/3. This continues a trend from '17 -- 2017, 2018 and now into 2019 and hopefully, that will continue in 2020.

As Lou mentioned, we -- at -- on December 31, we replaced PNC Bank with Sterling National and dramatically reduced our interest rates. At PNC, we were paying about 9.5% for most of 2019, 5% over prime, plus substantial quarterly renewal fees to keep them in place. At Sterling National, we're paying 2 points -- 2 percentage points over 30-day LIBOR. Now we're currently paying about 4% with a floor of 3.5% on the Sterling loan. With the Sterling loan, we paid off all of our capital leases and our term loans. We had 1 single term loan, and as Lou mentioned, it is going free up about $2.5 million in cash that we no longer need to use to amortize that debt.

Lou, I'll pass it back to you.

Thank you, Mike.

Let me close with a few thoughts on the remainder of the year. Our results for 2019 confirm that we have increased sales and margins. We have achieved both operating profitability and greatly reduced our loss compared to 2018. We are dedicated to continuing these trends.

During 2019, we issued guidance that revenue would be $50 million to $55 million with EBITDA in the $5 million to $5.5 million. We have achieved both goals. While we expect 2020 to exceed 2019, due to the uncertainty in the world today, we are not issuing guidance at this time. We will do so as soon as things stabilize.

With that, this concludes our formal remarks this morning, and I would like to open the call -- I would like to open the line for questions from participants. Anita, can you take the questions, please?

(Operator Instructions) We have a question.

This is John Nobile from Taglich Brothers. I just have a few here. My first one, I was hoping that you can actually break out your sales from defense-related sales versus commercial sales in 2019. If you have a rough estimate of that, that would be great.

John, we're about 80%, 85% military and 15% to 20%, basically. You could call it 80-20, something in that neighborhood, of military versus commercial. So we are not predominantly heavily on the military side.

Okay. I just wanted to make sure. So about 80% military, 20% commercial. Now you expected the fund sales to grow in 2020. I believe commercial sales, given the current situation, will probably be under pressure at least in the short term. But is there anything encouraging that you may be able to say about the long-term commercial sales from what you see at this point?

So our involvement in the commercial side is really with a couple of platforms. I mean we are heavily into the Geared Turbo-Fan. That's the contract that we published, I believe, back at the beginning of the year for $60 million with 5-year LTA going forward. We don't expect that -- at least from where we're sitting right now, we don't expect that to slow down dramatically. I think the need for that engine will be hot and heavy in the future. So that's a pretty stable platform to be on. We have very little content on the A380. Now we know that A380 is coming to an end at some point, and we are going to be ramping that up. Actually, we've ramped up our first contract, but we just got an extension for another year, 1.5 years at much favorable pricing that we've been doing this program, and I don't see that being sidelined. So that's not going to affect us that much. We have absolutely 0 content on the 737. So that has had no impact on Air Industries or Sterling Engineering operations in any way, shape or form. So our content on the commercial side is -- we're not in a great exposure is what we're saying.

Okay. Well, that's great to hear. I just wanted to make sure I get some clarification on that end. But obviously, being more heavily into defense right there is a little defensive, if I could say it that way. And then what is your current backlog? I know it's been floating around $100 million. What is your current backlog? And how much of that is actually defense-related?

Our current backlog, 18-month funded backlog resides at $114.7 million, just under $115 million. And of that -- where we could put the pipe would be defense more like 90% in all lead time items. It's on the defense side.

Okay. Great. Okay. And one thing, being that you have that much of a defense backlog, on the last call, you mentioned that you purchased 4 horizontal lathes, and that was in an effort to remove some of the bottlenecks in shipping product. Could you comment on the status of those lathes? And any further progress that might have been made in alleviating the bottleneck?

So we purchased 2 horizontal lathes. We purchased...

Two. Okay. I'm sorry. I thought it was 4.

Yes. We've [picked up] horizontals and 4500s. And those machines are both fully operational, fully staffed. And they're running 2 shifts, and they work wonders with eliminating the bottlenecks in that area. And last year's CapEx also included a large boring mill, a Kuraki horizontal boring mill which we've just retrofitted. And that is also running a commercial product on it right now, a community product. That's kind of what we want this thing for. All 3 pieces of the equipment are 100% operational and staffed.

Okay. So with these here alleviating the bottleneck, one can at least anticipate, especially with a heavy defense spending, that there should be a ramp-up, a sequential ramp-up in sales from -- at least in the fourth quarter.

We are forecasting a ramp-up this year. Obviously, there's a hiccup right now in the system with this virus. We don't know it's going to affect the supply base, how it's going to affect the OEMs. I mean as of right now, there's -- Boeing has shut down a factory on the West Coast. It doesn't have -- really have to have much effect. We're seeing Airbus I think is closed in France for 4 or 5 days for a deep cleaning. MTU is working some limited hours. GKN over in Sweden and Norway are also working on a limited schedule. We don't know. I mean the only difference here is that this thing blows over in a couple of weeks, which I don't know if that's the case or not, and obviously our government can't give us more information. But I can't see this thing being around for 6 months or I pray to God it's not around for 6 months.

Right. No. I fully understand.

We know that we can ramp it up. We have hired some personnel in Q1. We've added 4 people to day shift. We've added 4 people to night shift since December. So we are planning on a ramp-up.

[And John, keep in mind], remember, we're different than a retail store or a restaurant. The demand -- even if we have a delay in shipments because a lot of our customers closed, when they reopen, we can make up that difference. So...

Okay. So...

So we are considered an essential business, John. So which means we're going to be open from -- open through this. And it would be our intent to keep the machining operations going I think pretty much at all costs. And like Mike has just been saying, it's an opportunity to get ahead. Even though you might not be able to ship the parts this week or next week, we'll have those parts ready to go within time.

No. That's great to hear. That was my next question. I wanted just to find out if you were considered an essential business where you still are operational. So that was -- good to hear that. If I could just switch gears here to interest rates here. Your interest cost, let's see, in 2019, it was about $3.6 million, and that was at an average rate of about 9.5%. Now in light of the current rate being around or less than 4%, Mike, if I could ask you, what do you believe the interest expense will be in 2020 from what you see right now?

It'll be down by about $1.1 million.

$1 million. Okay. So you were $3.6 million. But you're looking roughly, as you see now, maybe about $2.5 million in that line.

That's correct.

Okay. And just one final question. If there's anybody else, I'll leave it open for them. The Roth agreement to date, how much was raised from that agreement?

John, glad you asked that. The Roth agreement opened up. We sold our shares in 4 days. We raised about $1 million. We literally sold 419,577 shares. So that was it. So we're finally...

Okay. That was 419,000 shares. Is that correct?

That is correct.

And that was approximately $1 million raised. All right. Great. Well, it's good to hear some words of encouragement these days here from what's happening in your business.

We have no further questions at this time. (Operator Instructions) It appears we have no further questions at this time, sir.

Okay. Great. So with that, once again, thank you, everyone, for taking the time to be on this call today and for your attention and questions. The management and employees of Air Industries look forward to continued growth in 2020.

Anita, please close.

This concludes today's call. Thank you for your participation. You may now disconnect.