Air Industries Group (AIRI) 2022 Q1 法說會逐字稿

Good day, and welcome to the Air Industries First Quarter Earnings 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 within 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 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 Lou Melluzzo. Please go ahead.

Thank you, Melinda. Good morning, everyone, and thank you for joining us. Our continued progress in driving profitability was fully evident in our first quarter results. As expected, revenue for the quarter was lower year-over-year totaling $12.1 million, which is down 12% from the first quarter a year ago.

Meanwhile, first quarter 2022 gross profit increased 16% to $2.1 million and a gross margin increased to 17.2% of sales. a full 410 basis points improvement over the quarter a year ago. EBITDA was essentially equal to the 2021 first quarter. The major factors that impacted our top line performance were supply chain disruptions that delayed our receiving raw materials and labor shortages.

On our last call, we discussed 4 significant contracts won in the first 2 months of the 2022 first quarter. Beyond the revenue contribution, each of those wins had important strategic value in furthering our growth strategy. Let me recap those contracts, beginning with one awarded to our Sterling Engineering subsidiary.

Sterling is critical to our overall plan to accelerate our profitability growth. We won -- excuse me, we plan to replicate the successful strategy of optimizing our Long Island facilities by taking advantage of Sterling's capacity and investing in new equipment to expand its capabilities.

In January, Sterling was awarded a Life of Program Extension, an LTA for the turbine exhaust case for the PW 4000 jet engine, which is used on many Airbus and Boeing commercial aircraft. This is expected to generate revenue in excess of $6 million over its remaining term, and it adds to our backlog in commercial aircraft.

This contract follows an especially important win. At the fourth quarter of last year, Sterling was awarded a new LTA to deliver chaff pods for the new CH-53K heavy lift. The aircraft -- and Sterling's first LTA for rotorcraft assembly. The contract furthers our goal of transitioning Sterling business towards making complete products produced under long-term agreements.

Our additional first quarter awards included a contract to produce components for the landing gear of the U.S. Air Force's B-1B bomber. While the orders from a long established customer, it is an aircraft platform that has not been an Air Industries portfolio for some time. A $12.4 million contract to produce complete main and nose landing ancillary components for the U.S. Navy's E-2D Advanced Hawkeye airborne early warning aircraft. We manufacture complete ready to install landing gear as a Tier 1 supplier to the OEM.

And finally, I said on our last call that we were awarded a total of 3 new LTAs for critical components for the Blackhawk helicopter, with an estimated combined value of more than $20 million. Last week, we are pleased to report the award of 2 separate LTAs for the Blackhawk helicopter, which brought the total award to $28.9 million. We believe we won additional LTA because of our demonstrated delivery performance for this customer, which is largely attributable to our investment in capital equipment over -- our capital equipment over the past 18 months.

As I noted earlier, Sterling Engineering is critical to our plan for profitability growth. That plan is focused on reaching consolidated EBITDA of $10 million. EBITDA for 2021 totaled $6.3 million on an adjusted basis. So our goal is ambitious, but we believe achievable. The plan consists of 5 initiatives. First, stand Sterling's business both through adding new LTAs as well as adding new equipment to expand its capabilities.

Second, vertically integrate processes to our Air Industries Group to reduce reliance on outside vendors and improve margins. This initiative is also underway. We have already invested in a paint facility, which can accommodate many of our products and will be operational in the next few weeks. We are also targeting grinding, nondestructive testing, assembly and other processes.

In the past 3 years, our capital investment totaled $6 million. So far this year, we have written purchase orders for an additional $2.2 million. Our intention is to continually invest and modernize our equipment, enabling Air Industries to manufacture global cast product more efficiently and more profitably.

The third initiative is to seek aftermarket opportunities overseas and bring maintenance, repair and overall activities in-house. Fourth, expand licensing of our products to avoid middlemen and get closer to our customers. Currently, we have a license for the F-18 and are considering licenses for other aircraft as well. Fifth, while we expect to reach our $10 million EBITDA target organically, we are also considering strategic acquisitions to achieve 2 primary goals: at a new aerospace customers and/or new platforms and possibly moving beyond aircraft to submarines, other Navy vessels, Army vehicles, missiles, electronics, et cetera.

Let me now turn the call over to Mike Recca, our CFO, for his financial report, which will be -- we'll follow with the questions and answers and some closing remarks?

Thank you, Lou. We've already discussed sales and gross profit. So I'm going to add some details as well as some additional operating results and some comments on the balance sheet.

As Lou said, we achieved a 16% increase in gross profit for the first quarter of 2022 by 12% of lower sales. Gross profit dollars were $2.1 million or 17% of sales, and this compares to $1.8 million or just 13.1% of sales in the first quarter of 2020.

Operating costs for the first quarter were $1.9 million, and this is an increase of 6% compared to the first quarter of last year. And this is unfortunate, but it's not surprising given the economic environment. So in the face of inflationary pressures, we are now increasing our focus on ways to control and hopefully reduce costs.

Operating income for the first quarter was $207,000. This is up substantially from $27,000 in the first quarter of last year. And this -- again, this improvement was achieved despite lower sales. Interest and financing costs for the first quarter were $323,000, and they were essentially flat with the prior year.

We had a net loss for the first quarter, and that net loss was narrowed to $28,000 this year compared to a loss of $152,000 last year. EBITDA adjusted to include stock compensation for the first quarter was just over $1 million. This is essentially equal to the prior year just a few thousand dollars lower compared to 2021.

For this quarter, EBITDA was 8.7% of sales, and that's an improvement of 7.7% of sales in the prior year. We ended the quarter with a solid balance sheet. Inventory increased 8% to $32 million, the increase resulting from Blackhawk and F-18 programs primarily. Our accounts payable and accrued expenses increased to modest 4%. There were no major changes in sales outstanding, and our supplier relationships remain very good.

Our debt to Webster Bank, which is formerly known as Sterling National Bank, was reduced by $2.3 million or 13% compared to -- March 31 compared to year-end. And our loan agreement with Webster has only one major financial covenant, we are required to maintain a fixed charge coverage ratio of 1.25:1, and that is measured on a trailing 12-month basis. For the 12 months that ended March 31, 2022, we comfortably exceeded this requirement.

In summary, we improved profitability in the first quarter, as measured by increases in gross profit and higher operating income, inventory increase, but debt declined. At the end of the first quarter, we remain in strong financial condition sufficient to support our growth initiatives.

That concludes my comments. Let me turn the call back to you, Lou, and I look forward to your questions.

Thank you, Mike. Let me close this portion of the call by taking a broad look at where Air Industries Group stands today. We have come a long way since my arrival in 2017. We have improved our relationships with customers and suppliers, reduced debt and established a supportive banking relationships.

We have rationalized and consolidated our operations that are making critical investments in equipment to further drive our opportunities profitability. We achieved an important year of growth for Air Industries Group in 2021 and demonstrated in the first quarter our ability to add strategic contracts while improving our profitability on every dollar of sales.

We said last time that while first quarter sales will be lower than a year ago, profit would improve significantly and it did. We continue to expect to deliver improved margins throughout 2022. We are focused on executing our plan to take consolidated EBITDA to $10 million. An ambitious goal but we believe it is achievable.

With that, I would like to open up the call to questions from participants. Melinda, if you can open up the lines, please.

(Operator Instructions) And we move right in to our first question.

I have just a couple. I was hoping that you were talking about the supply chain issues impacting the first quarter revenues. Would you be able to quantify or roughly quantify how much that you believe this quarter was impacted by that?

Well, John, we're talking about -- we take materials in long sums and we produce throughout the year. So it's not like we take 10 pieces and we ship them on a monthly basis. But -- right now, we have orders for material that we're doing at the end of last year that we just received in a few weeks back. And it just seems like there's a big delay now in raw materials.

We seem have gotten past our bottlenecks in the shop with the capital equipment that we purchased over the last 1.5 years, 2 years, and we've addressed our internal bottlenecks. We are addressing the tail end of the bottlenecks with the processing. We're bringing processes in-house as we see the need and fit. We're staffing up for that, and we're going to do what we can internally.

It still leads to raw material issues. There's titanium problems throughout the supply chain. I think they're probably going to continue to be there for a while, especially with the conflict over -- across the time. But it's just some materials that we were able to get in weeks are now taking months and months and months. And materials that were taking months and months are going out, out of the year. So there is -- it's -- the material supply chain is a tough one to conquer. We rely on people for that.

And as far as the labor shortages, those issues, what actions do you believe you could take in an effort to help alleviate this? I know you kind of caught in this labor shortage issue like everybody is. But is there anything in particular that you feel that you can address that maybe can help alleviate it?

Well, one of the things that we're doing differently is we're probably overpaying, but that seems to be about the only thing that would transplant someone. So for very strategic positions that we're looking to fill, we're looking at that. We're looking at increasing the night shift differentials so that out maybe we could bring -- attract some additional folks to the second shift, which is a definite area of expansion for us without having to order more capital equipment. Our benefits, we offer free insurance. So our benefits are kind of in line with the industry, in some cases, even a little bit better. So we're trying several things to see how we can get people on board.

Okay. Even with the increases, obviously, you're saying overpaying, which -- I mean, you have to do what you have to do. You're still able to maintain -- actually a 17.2% gross margin in the first quarter, that was on $12.1 million in revenue. So that kind of surprised me on the upside.

So I was wondering if there was anything in that gross margin or the cost of sales that actually skewed it higher than typical for this level of revenue? And I was hoping you could be a bit more specific on what you believe gross margins could be for the full year. I know you said that they'll be higher than last year and obviously, with the first quarter being 17.2% on that revenue.

But hopefully, you could just expand on that. What was actually in that component of gross margins? And what would be the driving improvement from last year, even if it was like, say, flat revenue?

Okay. Let me -- you would normally expect on a decline in revenue that your gross margin would be lower. And the reason it isn't is because if you look back to 2021, we had a reported gross margin of about 17% for the full year.

That really -- the 17% was the sum of -- 20% on some products and a loss of 3% on additional products. We had 2 products last year that totaled about to $3.2 million in revenue. That -- $2.7 million of it had zero profit and the other $500,000 had a $250,000 loss that was on the termination of a contract for the A380. So you take that out of revenue last year, your gross profit margin was closer to 19% to 20% than it was in the 17.1%. So this year, we don't have the no profit -- the no-profit product is gone. Second, the A380 is finished. We don't have to -- we're not going to incur any more losses on that. So we have kind of a higher gross margin going into it, but the lower sales kind of tempered it back to even the last year. We expect sales to improve...

Yes. So this was more or less more of a true gross margin. Last year was more of the anomaly. That's why I wanted to get to like if this was where we should be at this level, $12 million, that's 17.2% is where we should be. It wasn't anything that really skewed it.

That is correct. There was no onetime benefit that bailed us out. We earned it on a true gross margin of 17%.

All right. So -- and actually, the second part of my question was because I know it's kind of vague just as you expect improved gross margins over last year. But I was hoping you could be a little more specific on that, like, let's say, 17.2% on what you did with $12 million -- $12.1 million. So assuming sequential growth, what might we look at as far as an annual gross margin?

I would be very happy to get to between 19% and 20%.

Okay. That sounds reasonable to me right now. And just getting into actually a little revenue. Just one last question. You're coming off that $12.1 million first quarter. And with the current backlog, I'm not sure where it stands currently, but I know that it's only improved since the end of the year.

Is it reasonable to expect a significant ramp in revenue for the rest of the year. It's -- I guess, it would put you on track for maybe revenue to be near your 2021 level. You did what $58.9 million. Should we anticipate that happening, like a nice ramp in actually second half and 3 quarters to come to get you up to that level with what you have on the books right now?

Our goal is to have revenue up to equal to last year, $58.9 million. We expect that the ramp-up is going to be more in the third and fourth quarter than in the second based on production. Remember, these are long lead time items. So what's in production today, ships in November.

Okay. But I mean you have a good idea with that -- I mean a firm backlog, the 18-month, it's a funded backlog. So you should have a good idea of what you expect going forward. So Q3 and Q4, it's going to be more back-end loaded right now, but we should get closer to that $58.9 million level that we had last year. I just wanted to clarify that.

That's our goal and expectation.

(Operator Instructions)

Got a question for Lou. You briefly spoke of additional business going forward. And I'm wondering what are the -- what's the growth outlook for the company? And what are your plans? Are you wanting to increase the company by acquisition? Are you wanting to add more equipment. As the revenue ramps up, where do you plan on taking the company -- and I'll go ahead and let it go with that. Thank you.

Thank you for the question. So what I put on the table is our growth strategy for the business going forward. There's numerous areas that we're not involved in that are possible avenues for us to grow revenue and continue to grow in the company.

On the capital equipment side of things, some of the equipment is in replacement of older equipment to better and more efficiently do products. Some of the equipment is net added capacity and capabilities that we did not have in the past -- larger size, more complexity. We're following that we done that here in New York over the last couple of years.

And now we're going to follow -- we're going to take that blueprint and move it to our Connecticut operations to expand those facilities so that the company organically can grow. Organically, we probably have space constraints to about maybe $70 million. Past that, we're going to have to look at additional space.

And we'll continue growing the company with licensing agreements, which kind of puts you in -- cuts out a lot of the competition. There's not going to be 6, 7, 8 players in the field when you have a license there, it's going to be maybe 1 or 2 potentially 3 players. So there's an opportunity to better name pricing and margins associated with that work.

We are going to look at parallel opportunities. We're going to be -- we are a landing gear company. But at the end of the day, we're also a complex machining company. So there's no reason we can't get into naval vessels, army vehicles and other things that we currently don't do.

It's precision work and it pays almost as well as the aerospace industry. So processing when we process thing, not only are we going to take care of our own needs, but we could sell the service. So there might be -- there's probably an avenue to exploit that with painting and shot peening and anodizing and all the other things that are associated with. There's several possibilities to fair it out to be able to grow revenue.

So is it fair to say that you're foreseeing quite a few more contracts coming forward?

So, I mean, we're always quoting stuff. So I would say, in the course of the year, we've got a lot -- we've got a lot of irons in the fire, something will materialize.

At this time, we have no further signals, so we'll turn back to Lou Melluzzo for closing remarks.

Thank you, Melinda. So with that, once again, thank you all for taking the time to be on the call and for your attention and questions. We look forward to updating you on the progress of Air Industries Group on our next call. Melinda. With that, we conclude the conference. You may disconnect.

Thank you. This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.