Air Industries Group (AIRI) 2021 Q1 法說會逐字稿

Good day, and welcome to the Air Industries Group 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 those contained in the forward-looking statements. See the company's SEC filings on Form 10-K and 10-Q for important information about the company and related risk.

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 Lou Melluzzo, President and CEO. Please go ahead.

Thank you, Todd. Good afternoon, and thank you for joining us this afternoon as we summarize Air Industries' results for the first quarter of 2021. And we apologize for yesterday's confusion for anyone who tried to call in.

Business has returned to normal, and it is not a new normal. During December of last year, we experienced some COVID-19-related absenteeism, and this delayed some shipments in Q1. Despite this, we were able to achieve a modest increase in sales. The industry has begun to stabilize. A lot of companies are requesting that their employees return to the workplace, and business across the board are starting to get back to capacity. We now find ourselves, like many other companies, competing with the stimulus packages put out by the government, and these are creating difficulties in finding employees. We currently have 8 to 10 open positions for CNC machinists alone. Like so many other businesses, we are struggling to fill them.

I would also like to give an update on our capital investment program. Last year, we have invested over $4 million in new equipment, a total of 5 large new machines. All of this equipment is up and running. We also moved some equipment from Long Island to our Sterling engineering facility in Connecticut. These machines are starting to produce military product as an offload from our New York operation. In essence, we have partially solved the problem of finding help by filling some open capacity created by the decline in the commercial work. These investments have been very well received by our customers. Perhaps, in part, this accounts for the rebound we have seen in RFQ, that is request for quote activity and new business bookings.

During the first quarter, we booked over $22 million in new business. We closely monitor our book-to-bill ratio, the ratio of new business booked compared to sales. Our goal is to maintain a ratio of 1.2:1. For the trailing 12 months ended March 2021, we are just 1 point shy of this goal at 1.19:1. These bookings have kept our backlog strong at $84.7 million. And again, this represents firm, fully funded orders from our customers.

As you may know, Air Industries' business is predominantly defense, about 85%, with the balance commercial aerospace. The negative effects of the COVID-19 pandemic have been felt primarily in the commercial segment of the market. We have been very lucky. While we have seen some cancellations of commercial orders for landing gear product, these have been offset -- fully offset by increases in products we make for jet engines for both ground and ground-based (technical difficulty). One of our products is used on smaller regional airliners, which is in high demand from the airlines.

I would like to turn the call over to our CFO, Mike Recca, for the financial recap. Then I'll return with my closing thoughts and open up the call to questions. Mike?

Thank you, Lou. As Lou mentioned, sales for the first quarter were slightly higher than the first quarter of 2020, with the increase being about 2%. Gross profit for the quarter was a little disappointing. Gross profit declined by about $400,000 compared to last year, and it was about 13% of sales. Now this was caused by several factors. First, we had increases in manufacturing overhead costs, in particular, costs for employee benefits and depreciation. Employee benefits, and here it's principally health insurance, increased: a new plan year began in January. And depreciation increased because we spent $4 million on new equipment.

Gross profit as a percentage of sales were also depressed due to the cancellation of the commercial aircraft order which Lou alluded to, where we just recovered our costs and had no profit but had revenue. Also, as Lou said, we've had difficulty finding help. We have fewer production employees in 2021 than we did in the prior year. This reduced total production hours in the shop. And for the quarter, we were about 5,000 less this year than last year in 2020.

So the good news is the sales increased with fewer hours. The bad news, each of these hours carried a higher overhead burden. So hopefully, when the special incentives to remain unemployment end, we can fully staff up. And then hours should return to levels in 2020 and additional hours should absorb the increased cost.

The decline in gross profit was more than offset by lower operating costs. Operating costs for the quarter were about $500,000 less than in 2020. So gross profit was down $400,000, operating cost down by $500,000, with a net gain of $100,000 for the quarter. As a result, operating profit increased by $108,000 as we had an operating profit in the first quarter this year compared to a loss in Q1 of last year.

For the quarter, we had a small net loss of $152,000. And this compared to a profit in 2020. However, the profit in 2020 was entirely due to a COVID legislation-related tax benefit of about $1.4 million. Without this, our net loss last year would have been $356,000. So in 2021, we reduced the loss by more than 1/2.

So for the quarter, we had EBITDA of $1.2 million. We generated positive cash flow of about of $500,000. We reduced our bank debt by $160,000. Our cash on hand and accounts receivable increased by [$360,000]. And accounts payable and accrued expenses declined by close to $50,000. So as a result, our liquidity position remains more than adequate.

And with that, I'll turn the call back to Lou, and I look forward to any questions you might have. Lou, you're up.

Thank you, Mike. Now let's close the call with a few thoughts. The disruptions of COVID-19 are becoming less and less as the year (technical difficulty). Our clients are starting to allow some face-to-face meetings, and some are getting back into the office. We see these as positive trends towards conducting business as we are accustomed to. The new equipment is producing product. Internal bottlenecks are and have been addressed, so we remain very optimistic about our future.

With that, I would like to open the calls up to participant questions. Todd, would you please open up the lines, please?

(Operator Instructions) And we'll take our first question. Caller, please go ahead.

This is John Nobile from Taglich Brothers. I tried yesterday, but to no avail. So I have a few questions. First one, last month, you received orders in excess of $6 million for landing gear components for the F-18, and you expected to receive additional orders of this kind. I was hoping that you could talk a little about what your expectations are and possibly quantify this for the F-18 program going forward.

Well, F-18, we are -- as you know, John, we are licensed to produce F-18 landing gear. That's an ongoing thing, so we're always quoting parts. This was a spot buy that's, I think, deliverable over, I don't know, Mike, was it 18 months or 2 years?

I think it was 18 months.

So we've got a lot of irons in the fire on F-18 parts, and it's just a matter of when they get around to placing an order or the requirements or the need is. As far as other orders, this is a year of LTAs for us. I got here in September of 2017. We were just kind of taking off on a new package of LTAs that had just been introduced. Everything is coming due pretty much in 2021. There is the NY-10 with Sikorsky that is hopefully going to be ironed out before the end of this year.

Multiyear.

Multiyear. That's a 5-year contract with Sikorsky. F-35, it's another multiyear with another client that's going to be ironed out this year. The F-18, as we said, we received our first initial order. So I'm sure, over the course of the year, we will have other spot buys and other products that we're going to get involved with. There's a few irons in the fire.

Okay. And in 2020, you made the large capital investments in new machinery. I think it was $3.4 million. It was close to $4 million, all to help reduce...

Yes. It was $4 million.

Yes. $4 million. And this was all to help reduce the bottleneck that you had experienced with suppliers because you had a huge backlog, trouble getting the backlog out in I guess it was the 18-month period. So I just wanted to see if you could talk a little about the progress that you've made in this regard. And specifically how much of your backlog do you believe that you would be able to ship in the next 12 months with this new equipment?

Well, the new equipment has done a couple of things for us: A, it has eliminated our backlog; B, it's given us options into bigger parts. Most of the equipment -- 3 of the 5 pieces of equipment that we bought were kind of state-of-the-art 5-axis machines. Now granted, in the manufacturing world, you got 3 axis, 4 axis with a rotary and you got a 5-axis machine. 5-axis machine, you could produce just about any component, any geometries on it. So it's opened up where we were going across several machines to get a part on. It's given us the opportunity to kind of set it up and forget it, to program it and manufacture it all in one sitting.

So not only it increased our capacity to get more throughput, it's given us additional capacity to be able to do other work that we weren't able to look at in the past, more complex geometries, a lot of fancier geometries that we now have the capability of doing. And in the honing department, which was a very big machine, we bought for honing very precise holes. We ramped up from a 48-inch stroke to a 60-inch stroke, which gives us some insights into being able to do axles and other components that are -- were far too large for us in the past. And it also has increased the capacity in the diameter from 8 inches to 16. So we can do far greater -- far bigger diameters, if you would.

So we are pursuing those products that we didn't have or could not do in the past. But those kind of things take time to define and quote and get in-house. But that's kind of the direction that we have taken.

So would you say that you've, for the most part, really alleviated the bottleneck, those problems which really hindered your backlog from going out? I believe it's an 18-month firm backlog. Would you say that with this equipment at this point that you could successfully ship backlog in the next 18 months, the $84.7 million should not really be an issue at this point?

I mean, no. Internally, our backlogs, I believe, have been addressed. So we did what we needed to do. There's the outside processing that we're still working on. We're trying to double up on everything. So there's still issues we're working through, but we made great strides, especially during the 12 months of the COVID to seek out other avenues. There was one processing housing in New York, let's say. Now we have another process house in Connecticut or New Jersey or Georgia or sometimes in Ohio or California. So we had a little bit of time to kind of take a deep breath and kind of double up on everything. So we are working the outside processes as well. So it should make delivering on the backlog far, far better.

Okay. A substantial improvement in that, I mean, a large CapEx. So another question here, specifically the COVID conditions. I believe they're starting to ease, and airlines definitely are enjoying more business from people traveling more. So I'm just curious to get your outlook for Sterling and if you expect profitability from this segment in 2021. I think you eked out a small gross profit in the first quarter, so just wanted to get your outlook for the rest of the year.

Yes. We -- you're absolutely correct. We had a small gross profit in Q1 up at Sterling. We are seeing the commercial market, especially in the smaller regional jets, come back quicker than anybody thought it would. The activity with the airlines is definitely picking up. You can tell that by the pricing of tickets, all of a sudden, again. So we actually in -- during the COVID time, the commercial work up there started picking up initially. When the sticker stock came in from your Pratt Whitneys and your GEs, they pulled everything back in-house because they had a massive layoff. We're talking thousands and thousands of employees at both operations.

But I think now what they're doing -- so they pulled back everything in-house to be able to get through this time. We're seeing a lot of that work come back. So some of the work that we had that they had pulled back, we're seeing it come back now. So our commercial sector is definitely starting to show some signs of life far earlier than we had anticipated.

Well, that's good to hear, and I anticipate, obviously, gross margins picking up sequentially going forward, only due to Sterling being really a hindrance on the overall gross margin. So that's a big plus to see it in the plus column, at least on a gross margin perspective.

The other thing, John, I'd mentioned on my little synopsis there was that we have put a decent amount of work up there, military-type work on the machines that we had in Long Island that we moved out to our Sterling facility. The work went with it. So they're burning burden on both ways with the additional capacity that -- so we're finding employees hard to find. We didn't really have a major layoff over there. Even though the aerospace market, the commercial side was kind of down and out, we kind of maintained the workforce, and we put some work up there that we had here.

Yes. John, you should know, in 2020, Sterling had about $400,000 of unabsorbed manufacturing overhead, which depressed margins. Our goal this year is to absorb that with Long Island -- what I call Long Island product up there to increase the throughput. So that would be in addition to -- the profit would be recognized. Instance it does, we recognize that the other segment, but the offset in cost could be $400,000 or $500,000, which would greatly enhance their margins.

No. That's great to hear. And you mentioned on the press release, $22 million in new business, which definitely helped your book-to-bill ratio. I was wondering if you could provide a breakdown of the specific programs of that $22 million in new business.

Do not really have that at hand.

The majority of it?

There is a lot of spot buys in that, John, so it's from different clients. There's -- it's from different -- it's from several different avenues. It's not -- everything is not from 1 person -- 1 customer.

All right. I wasn't sure if it was really geared towards a majority into 1 customer. So...

No.

Yes. And I just -- I wanted to ask a question about the CapEx because it was -- last year, it was close to $4 million in CapEx. It was a good investment that you made, obviously, that you needed to make. But I know that's not going to be the norm going forward. So I was wondering if you could just give us what CapEx you might expect for 2021.

Well, John, we had some years of catching up to do. So we do (multiple speakers)

No. I know that. I mean I'm not going to expect $4 million in CapEx for 2021. I just wanted to get an idea.

Yes. I mean we're going to continually upgrade equipment on a yearly basis. It's not going to amount to $4 million, but it's always -- some of our equipment is years old, and there's always something better, faster, quicker. And we have our eyes set on that stuff because the only way to become world-class is to have new, great equipment to do work the most efficient possible way. So we're always going to make an upgrade. We're always going to make a repair. We're always going to try to buy a piece of equipment that can greatly enhance our workflow.

Okay. Fair enough. And...

It won't be to the magnitude as we had last year.

No. I didn't anticipate that. I just was hoping you maybe could put out a number there. Like -- well, you had $273,000 in the first quarter. I don't know if I should just like flat line that out as like this is typical of what we should expect going forward.

That would be fair. But the $273,000 in the first quarter was really soft costs of the final installation of the existing -- of the $4 million invested in 2020. But flat line, $275,000 for the year would not be a terrible -- would be a reasonable estimate.

Okay.

As an opportunistic opportunity, a good opportunity.

Okay. All right. I just wanted to get an idea of what to expect. And if I can ask you a question actually for modeling purposes, what should I use as the fully diluted share count? I previously -- I think I had a little over 38 million shares on a diluted basis, which is what I'd like to put it in a report just to say what it is diluted. So what would be a fair number to use going forward as your diluted share count?

We have 32 million outstanding now, about that, right? 38 million would be good. There are 3 sources of dilution. We have convertible debt. We have options, and we have warrants.

Now, if you look at the warrants, there's about 1.2 million, 1.3 million outstanding, but about 500,000, 600,000 of those are going to expire on exercise because the prices are significantly higher than where we are today, somewhere between $2.50 and $3.50, most of them are in the 3s. And they expire beginning in November. And the last ones of this group expires in May of next year, a year from today, a year from now. So about 700,000 at $1.50.

Then on the options, there's 1.6 million in options outstanding. This is not volume weighted. It's just the total divided by the total, is about $1.30 is the combined exercise price of all those options.

Then the convertible debt, there's $4,080,000 of that -- I'm sorry, $4.8 million of convertible debt. And that's convertible at an average price of $1.18. So that's about 4 million shares. So there's about 6 million shares that could be issuable. But there's also $8 million in proceeds from issuing those.

Right. Understood. So bottom line is, at least with the share count, and obviously it's going to help your cash flow, but 38 million is a pretty safe number to assume going forward. Because I know when you have a loss it's anti-dilutive, so you can't use that. But assuming a bottom line profit, 38 or so million is a good number to use?

That's correct.

Okay. Just one last question. Bear with me here. Looking at it, the last 4 quarters -- the past 4 quarters, you've kept operating expenses below $2 million a quarter. And good for you guys to really cut the cost in the COVID era here. But I just wanted to know if this was a level that we should expect going forward. Because what will be at -- actually, last year's first quarter was almost $2.3 million and now we're down to about $1.8 million.

So going forward, I don't know if I should look at it as under $2 million or as an increase in business in order to support that, we should anticipate maybe creeping up a little bit from here.

Well, the first quarter of last year was abnormally high due to a bad debt write-off. We're -- we don't have bad debts in the sense that our customers go bankrupt or the like. We have bad debts because it's on dispute as to how much was billed, how much was returned and the like. But there's an age to the point where for GAAP purposes, it was "bad". So we wrote off, I think the amount was $352 million. There was a $350-ish million. We recovered about $90 million of that this year. So the swing, that's not going to recur. That was a quarter-specific expense. So $1.8 million to $2 million a quarter going forward, I think, is appropriate.

(Operator Instructions) Mr. Melluzzo, at this time, we have no questions in queue.

Okay. Thank you, Todd. So with that, once again, thank you, everyone, for taking the time to be with us on this call today and for your attention and questions. Todd, you may conclude the call.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.