Air Industries Group (AIRI) 2020 Q3 法說會逐字稿

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

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 these 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, Lou Melluzzo. Please go ahead.

Thank you, Jennifer. Good morning, and thank you for joining us as we summarize Air Industries' results for the third quarter and for the 9 months that ended in September. We will also discuss the continuing, the [lessening] impact of COVID-19 on our operations.

Air Industry sales have returned to pre-pandemic levels. Net sales in the third quarter were $13.6 million. This is very close to our average quarterly sales for all of 2019. Our gross profit margin increased by nearly 5 percentage points for the quarter, but remains lower than historical norms.

During the quarter, we continued to experience supply chain disruptions in July, and to a lesser degree in August. By September, things were pretty much back to normal. We expect our gross margins to continue to improve in the fourth quarter.

As you know, we have made some significant capital investments during the quarter. We have purchased 4 major machines, spending about $2.5 million. Three of these machines have arrived at our facility. One is operational and the other 2 will be operational very soon. The fourth is slated to arrive mid-November.

These machines are net new additions. To make room in our Long Island factory, we have relocated 4 existing machines to our facility in Connecticut. They are being installed there now and will be adding to production very soon.

In our last conference call, we discussed how our inventory, primarily our work-in-process inventory, increased as the pandemic slowed sales. I am very pleased to report that our inventories declined in the third quarter by nearly $2 million.

Our backlog is heavily weighted with military products, and unlike many others in the industry, consist of firm orders only. We have seen a slight decline in our backlog through this pandemic, but still, it remains near $100 million.

With that, I would like to turn over the call to Mike Recca, our Chief Financial Officer, for the financial recap. Then I'll return to close the call. Mike?

Thank you. I agree with you, the effects of the pandemic and the decline and the effects are really kind of dissipated at this point.

For the 9 months, our sales are down $5.6 million, but about 90% of that decline occurred in the second quarter. The other part was in the first quarter, a little bit in the third.

In the third quarter, our sales increased by $5 million, and that's 60% higher than sales in Q2. We mentioned gross margin was at subpar -- it was for the third quarter, but it's up about 5 percentage points for Q2. We expect that it's going to return to normal about 18-plus percent in Q4. And that's because of the higher sales volume, which directly affects gross margin.

Also looking at the planned product sales in the Q4, we have a higher percentage of higher-margin product being produced and sold.

Despite this disruption and the extra cost of the pandemic, our operating expenses remain under control. And we continue to benefit greatly from a much lower interest rate on our bank credit line, 9.5% in 2019 to 3.5% in 2020.

Adjusted EBITDA is what we watch most closely.

In Q2, sadly, we had a negative EBITDA, returned to positive in Q3 and is positive for the year-to-date through the 9 months. And we expect further improvement in the fourth quarter.

I'll turn the call back to Lou.

Thank you, Mike. Let me close the call with a few thoughts on the remainder of the year. The installation of the new equipment, the reorganization of our shop floors, the fact that we've been able to keep our workforce healthy are all positive signs heading into 2021. All indications are that Air Industries has achieved the hope for V-Shaped recovery, a short, sharp decline, followed by a steep rebound. We are confident about the remainder of the year and beyond.

With that, I would like to turn the call back over to Jennifer to open the lines to participant questions. Jennifer?

(Operator Instructions)

And we'll go to our first caller.

I just wanted to get a little clarification. Fourth quarter, you expect gross margins, I think, you said 18%-plus. And part of that is due to -- what you believe is going to be a higher level of revenue from what you'd be seeing in Q3. I was hoping you might be able to actually expand on that a little bit, give us an idea of what to expect in Q4 revenue wise?

We expect it to be above Q1 and Q3. I'm looking forward to the day where we never have to speak about the second quarter of 2020. The gross margin in the third quarter was down because of significant disruption in extra costs that we incurred. Absent those, it would have been back up about 18%.

So in Q4, we want to do better. We want it to the best quarter of the year. I don't think a specific number is appropriate just yet. Maybe another couple of weeks, we'll give some guidance on that.

John, it's also the product mix that we have slated to go out the door in Q4.

Okay. And in regard to Sterling, approximately, what level of sales at Sterling would you need for positive gross margins? I know the Q would probably see if that was positive or not this particular quarter, which I didn't think was out yet, but I was hoping you can also talk a little about the prospects for Sterling.

Sterling was -- our Long Island facilities, we are very, very slightly exposed to commercial, not many programs there. Most of it's military.

Here at Sterling, they obviously had -- we have a higher content of commercial product. And also we've -- sales have declined because of that in the last quarter, quarter and half. But we're making some of that up by moving some work that we can move out of New York into here.

And part of the product mix here is ground-based power generation, which is actually, because of the gas prices being so relatively low, has seen an uptick.

So a combination of the work coming in and power gen -- for the power generation kind of increasing in magnitude than it was earlier in the year. And there's still shipping commercial product, but we're also getting very aggressive on the sales and business development side to see what we can pull out of the -- what we can pull out of the market in 2021.

We're not just letting the commercial industry run our lives for the most part. There's other things that we're exploring to try to make up for the loss.

I just -- I wanted to get a handle on what level of revenue you might need -- on a quarterly basis, say, at Sterling, to get to a positive gross margin.

That is a positive -- breakeven gross margin would be about $6 million in Sterling sales. Now because we're moving production up here, you will see the sales recorded at Sterling, but you'll see a reduction in their manufacturing -- absorption of their manufacturing overhead.

So that might lower that. It's really kind of a mix of how much is outside sales and how much is inside transfer of costs.

Okay. The $6 million number, that's not a quarterly number, you're talking about an annual number, right?

That is correct.

It's annual number. Yes. That is correct.

Right. Okay. So about $1.5 million on a quarterly basis, you get at least a breakeven in that.

If I could talk a little bit about the gross margins, I think that was at the $95.2 million is your current backlog. Now I know that's -- it's a firm backlog, and it's an 18-month backlog, but to get an idea of maybe how 2021 is shaping up, I was wondering if you can give us an estimate on what you believe your backlog would be for a 12-month period?

I expect we don't have that information available, John, but I'd be happy to get back to you on it. But remember. It's important to understand how backlog works. If you look at to the 18th month, and I'm making this number up, there's a couple of hundred thousand dollars in backlog. If you look to the backlog for November, starting -- which starts Saturday or Sunday, the backlog is probably not including past dues, probably $4 million or $5 million. So it declines over time. Customers add to backlog because firm -- we only consider firm orders based on their delivery dates. When they need something, they order it with the lead time. So it grows as it becomes more current.

But even -- I think an important statistic to keep in mind is this, $13 million a quarter, just as to use, the numbers, $52 million is -- $26 million -- $52 million a year, 18 months is $76 million, which we wouldn't be -- if we just did that, we couldn't feel like that. We couldn't fill our backlog. And that's the goal of new machinery. That's the goal of moving production up to Connecticut is to be able to eat through that backlog, and we'll add to it as we go. But basically, the orders are in the bank, it's a matter of production, not of sales.

Okay. And Sikorsky and Goodrich, now they are very responsible for -- actually over 2/3's of your sales on a quarterly or a yearly basis. I was hoping you could talk a little about the prospects you see for each company.

Yes. Well, (inaudible) is a multiyear [10], which is the Sikorsky Black Hawk contract, that's coming due. We bid that at midyear this year. They've had it now for several months. They're working on it. We would expect that to be awarded sometime maybe in the first quarter, some degree of it. It's a timing issue. Also -- so that's on the Sikorsky side. That's -- we're still getting spot orders, spot buys. So that's been pretty steady throughout the course of the year.

We just don't press every $1 million order, but that's been pretty steady. Our incoming actually this year, even through the pandemic is not -- it's not that bad. It's almost in line with last year.

Now with Collins Aerospace and Goodrich, the F-35 is another program that's going to be up for -- is going to be up for grabs that's going to become due, I would say, at some point in 2021.

So we're hopeful that between the 2, we will be able to contribute to the backlog like we've done in the past, plus other prospects that we got in the works.

Okay. But I would imagine most of your backlog is really hanging on these 2 companies?

I wouldn't say -- yes, I would say a good portion of it. I wouldn't say all of it. There's a -- they are our biggest customers. There's no question about that. But we're spread over a lot of platforms and a lot of different folks. Northrop Grumman is becoming a hot commodity at Air Industries. We've done a lot of Northrop work, both direct and indirect for government and other customers. But we're seeing a lot of activity direct now. So there's opportunity there.

Okay. Well, that's good to hear. Thank you for that. Just 1 final question. When I read the press release, it was made -- mentioned in there. You talked about more pronounced costs that adversely affected the July and August but returned to near pre-pandemic levels in September. I was hoping that you could give us a little more specifics about that, talk a little about that. And if you could even quantify what that might have affected your third quarter numbers by?

It's hard to quantify. But to give you an example of how it happens, inventory built over the course of the second and third quarter, $4 million or $5 million, and that was all work in process. And remember, our product requires a lot of outside processing. The product typically will leave the facility to be processed 3 or 4 times before it's finally finished.

And as the processing houses were shut down, that product had to be -- and when that is accomplished, it is very time-sensitive for the production process. So you got -- a piece, it has to be heat treated before the next -- the next operation. Then if heat treated is not available, it gets put on the shelf. So that's really because of the growth of the inventory. And when they -- when these processing hasn't got back in business, they had a big backlog because everybody was in the same position we were in.

So prices were up. And because we were behind with our customers, we had to pay expediting costs to move our product out of somewhere else and all those additional costs impact gross margin.

Now that kind of -- that seems to have ameliorated by September, and it was kind of like back to the good old days. We're back -- by the way, and the good old days weren't that great because there's a big bottleneck in supply, in processing throughout the industry.

But the new equipment you have now should definitely help in easing, I would anticipate in the fourth quarter, a lot of that bottleneck?

The bottomneck, what we're talking about here is a bottleneck of outside processing, which has returned to normal, but normal wasn't that great. The additional machinery and the outsourcing initiative and the shifting production to our Connecticut facility should increase throughput and therefore, additional processing, but eventually additional sales.

(Operator Instructions) And at this time, there are no further questions.

Thank you, Jennifer. So with that, once again, thank you, everyone, for taking the time to be on the call today and for your attention and questions. Operator, you can conclude the call now. Thank you.

Thank you. This does conclude today's conference. We thank you for your participation.