Air Industries Group (AIRI) 2020 Q2 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 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 are 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'd like to turn the conference over to CEO, Mr. Lou Melluzzo. Please go ahead.

Thank you, James. Good afternoon, and thank you for joining us as we summarize Air Industries' result for the second quarter and the first half of the year. In addition to discussing our results, we will also discuss the impacts of COVID-19 on our operations.

As we continue to navigate through a new normal work environment, we are thankful that our workforce is staying healthy and safe. Air Industries' results for the quarter were significantly impacted by COVID-19. As we have discussed before, we were affected by employee absenteeism, in particular in April and May, which reduced productions in our factories. In addition, our subcontractors and supply base were adversely affected as well, including plating, key treating, painting to name a few.

During the quarter, many of the companies that provide the service completely shut down for extended periods of time. The combination of these factors impacted both production and shipping of products. Net sales for the quarter were just $8.5 million.

During the quarter, and particularly in April and May, we chose to maintain employment and continued to produce product, even though it cannot be immediately processed and shipped and will need to stay in inventory for a time. This caused our work in process with inventory to increase by about $2.5 million. The sum of net sales and the increase in semi-finished with inventory is roughly $11 million, which is much closer to our normal sales level of $13-plus million in the first quarter.

As you know, Air Industries' business is heavily concentrated on components for military aircraft. Unlike commercial aerospace, there has been little change in demand for military products. We have had some cancellations and reductions in our commercial business, and we are filling these gaps by accelerating the production of military products. Our backlog, which consists of firm orders only, has only marginally reduced and remains at about $100 million.

I would like to turn the call over to our CFO, Mike Recca, for the financial recap. Then I'll return to close the call. Mike?

Thank you, Lou. So as we said, our results in the first quarter are understandable, considering the disruption due to the virus, both on us and on every other business in the country. Sales for the quarter, about $8.5 million, that is a 36% decline from the prior year. The effect on gross profit was more significant. Gross profit declined by $1.6 million or 76%. Decline in gross profit was greater than the decline of sales. We spoke earlier about employee absenteeism, with some perspective and quantify this during the quarter. Total manufacturing hours were 8,000 hours less than in Q2 of 2019. So these fewer labor hours, we had underabsorption of our manufacturing overhead. Overall, that would be 98% of the lost labor hours occurred in April and May.

For the quarter, our operating costs were essentially unchanged, a couple of hundred thousand dollars one way or another. The lower interest rate on our bank debt, which we've mentioned before, dramatically by more than 50%, reduced our interest expense, which went from $992,00 in 2019 to $428,00 in 2020.

Over the 6 months, sales were $21.9 million, that's a decline of 21%. And again, more than 90% of the decline for the 6 months occurred in the last 3 months in the second quarter. We had an operating loss, 6 months, of $1.4 million, and 95% of that loss is attributable to the second quarter. We have negative EBITDA for Q2, and our EBITDA for the 6 months was $894,000. We are in compliance with all the covenants of our loan agreement, and we expect to remain in compliance for the balance of the year and beyond.

Lou, I'll turn the call back to you.

Thank you, Mike. Let me close the call with a few thoughts on the remainder of the year. We recently made an announcement of a major investment in equipment totaling about $2.5 million. These acquisitions made at a very attractive prices will accelerate production and also greatly enhance the work envelope of the product that we can manufacture.

It may seem counterintuitive to make these investments during the disruption caused by COVID-19, but we are in the enviable position of having orders in backlog that exceed our ability to fulfill them. These new machines will be installed and operating in the fourth quarter. They reflect our confidence in the future.

This concludes the formal remarks this afternoon. And I would like to open up the call to questions from participants.

James, can you open up the line, please?

(Operator Instructions) And we'll take our first question.

Good afternoon, Lou and Mike. First, I wanted to get into the second quarter. It was adversely impacted by employee absenteeism, and there were temporary closures, which is understood with the virus. You split suppliers' facilities. I was hoping that you could update us on how these conditions currently look.

John, how are you today? It seems like everything is starting to stabilize. Everybody is open for business right now. Some places have had an attrition in workforce. We've been lucky enough to maintain the workforce, for the most part, the way we were. We temporarily furloughed a few guys during the crisis -- during the highlight of this virus, but we have since either hired back or brought those folks back, and there was only a handful of people. But it seems like all our sub tiers, our supply base, our subcontractors, however you want to call them, are getting back to the cadence that we were accustomed to and pumping out product. So that's been stabilized to some degree. It might be with less folks, but they are there, and they are working.

Okay. Not fully back as far as your suppliers are concerned, but obviously, marked improvement since the second quarter, I could take it at that?

As to supply, yes. In terms of absenteeism, it has returned to normal, 2% or 3% on any given day or not around. Our absenteeism in the factory is at historical levels. It's back to normal.

All right. And I have a question in regard to your $2.5 million machinery purchase orders here, which you said you anticipate you'll be running these at full on in the fourth quarter. You're getting them, obviously, in this quarter. But I was hoping that you could quantify how much of your bottleneck with suppliers? You believe that this new machinery will alleviate -- or if I could put it another way, what percentage of your bottleneck with suppliers will the new equipment be able to handle?

So to put it in perspective, it's tough to give you a percentage, but I'm going to explain how this thing works. So the equipment that we purchased, we purchased a new 5-axis machine that greatly enhances the size capability of our product. Let's say our largest product was 48 inches or 50 inches. This thing gets us to an envelope that's another foot beyond that. So it gives us access into other products that we were either not doing effectively or it puts us in a ballgame where we can quote larger work. So -- and also eliminates bottle -- we have the smaller -- small -- we had the 800-millimeter pallet machine in our facility. We always said -- we've had it for a while. This is the 1,000-millimeter machine, which is the next step up in 5-axis machining.

So that opens up some new doors. It takes out bottlenecks from the existing equipment that we had. And it's -- obviously, it's got all the newest technologies in it, all the bells and whistles in process inspection. It helps us really inspect the part without having to take it off the table. So it does a lot in that respect. So that's one piece.

The other piece, we bought 2 additional 5-axis machines, which were smaller in size. The envelope there is about 39.5 -- 40 inches, let's call it, for all intents and purposes. But the beauty on these machines is what we call the lights-out cell. The machines are integrated into a pallet system with 28 different pallets that are loaded and unloaded off the grid, so they're done separately while the machines are working, and you really can load 28 pallets with different work, push a button and walk away for the weekend. The machine will inspect the parts. The machine will tell you when it's done. And if there's a problem, it throws a red light. It stops the process. So it's called the lights-out cell because it works -- it could work around the clock -- with the right work, it can work around the clock, which is another feature that Air Industries has not had in the past. So it breaks new ground as the type of work that we can do that we would have not been competitive in the past. It opens up new doors.

And the last piece of equipment that we purchased was a vertical hone. Now we have a 48-inch capacity vertical hone now. This -- and it goes up to 8 inches in diameter, 48 inches in stroke. This new hone goes 60 inches in the length and stroke, and up to 16 inches in diameter, which, again, is for product that we would have passed on in the past, and now we can effectively, let's say, pull that. So it not only eliminates bottlenecks with 1 hone to 2 hones because it can do smaller parts as well, but it gives us a door into bigger product.

Okay. And this year, obviously, it won't take care of the entire bottleneck. [It's not] like you're going to have to outsource, but would you say that it would alleviate at least a significant portion of your current bottleneck right now?

It would definitely -- well, yes and yes. So it would eliminate a bottleneck. It would eliminate the risk of having 1 machine that does that break down and be dead in the water, and it opens up capabilities. So it plays -- it solves a couple of different things, John.

Okay. I just want to get an idea because, obviously, with the backlog, I think you mentioned on earlier comments, it's still floating around the $100 million mark. That's the firm backlog for 18 months, correct?

That is correct. Yes.

I just want to get a handle on this because a significant investment in the machinery, which is a good thing. I mean if you can alleviate that bottleneck to some percentage, that's a great thing. Because I realize without that bottleneck, you could probably be doing -- if you took $100 million and did it over 6 quarters flatlined, it'd be -- I think, if I did the math right, over $17 million quarters on the top line. So that's why I was just trying to get a handle on how much of this bottleneck would be alleviated by these purchases here. Forgive me for being the analyst trying to get percentages from it or whatever. If you have that, that would be great. But I guess, bottom line is this is only going to help to get product out the door faster and to help to bring that backlog down much quicker. If I could take that...

Faster and more efficient.

Yes. Okay. And this should be fully operational by the fourth quarter is what you said, all the equipment?

Yes. The machines were available. And these machines, the Mitsui Seiki is a big 5-axis typically has a 12- to 14-month lead time, but an OEM canceled an order because of the commercial business going away. So that machine is available right now in a warehouse. So we just poured the foundation in the last -- we made the spot in the shop and poured the foundation last weekend. So it's got to dry for 4 weeks. And I -- first week in September, that machine could be in our facility.

Beautiful. Good for you. And I just have one final question, if I can get into the commercial business. I know that's significantly depressed currently, but is there anything to report regarding the long-term agreement for the thrust struts? I know, Mike, you love to hear me say that word, thrust struts. That was announced back in January. It was significant. I'm just hoping that there's some life still to this. Is there anything to report on this going forward at least in the next 6 months or so?

Yes. We have been told to expect a push-out on the thrust strut order. So not a cancellation but saying a reduction in requirements for the balance of this year and next. We're still trying to finalize what that would be, but we've had that event. Further, we have some parts for the A380 that they have outright canceled, and that they will be paying us a termination. The good news is we were nearly done. I don't know what the percentage is. So we'll be paid about what we would have been paid for had we finished the product. Then these holes that have been created, we've been able to fill by accelerating military product, military components that the governments will want to take as soon as we get them done.

You did have one -- looking through the queue, you did have some sales in the second quarter, commercial sales were -- did the thrust strut order contribute to any of that revenue in the second quarter in the commercial segment?

Yes. We did make shipments of thrust struts in the second quarter. I don't have the...

Could you quantity that?

No. I don't have that right now.

(Operator Instructions) And that will conclude today's question-and-answer session.

I will now turn the conference over to Mr. Lou Melluzzo for any additional closing remarks.

Thank you, James. So with that, this concludes our formal remarks this afternoon. And thank you for calling and for your attention and questions. The conference has now concluded. And I would like to... James, please disconnect.