Air Industries Group (AIRI) 2022 Q3 法說會逐字稿

Hello, and welcome to the Air Industries Group Earnings Call. My name is Josh coordinator for today's event. Please note that this conference is being recorded. (Operator Instructions)

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. I will now hand you over to your host, Lou Melluzzo, President and CEO, to begin today's conference. Thank you.

Thank you, Josh. Good afternoon, everyone, and thank you for joining us today. We saw a significant increase. In new business activity in the third quarter, and we made further progress in our strategic initiatives. However, supply chain challenges persisted delaying (inaudible) of both components and raw materials, which impeded our shipments and third quarter sales.

Fortunately, the supply chain issues seem to be improving, and we hope that, that trend continues, but still had an impact on the third quarter. Net sales for the third quarter of 2022 were $13.3 million or 5% lower than the second quarter of 2022 and 7.6% lower than the third quarter last year, primarily as a result of the sales decline, the net loss for the quarter was $142,000 and adjusted EBITDA was $801,000. We expect our fourth quarter sales to be stronger than the third quarter with stronger sales growth as 2023 progresses.

We did see sequential growth across several platforms in the third quarter, reflecting the benefits of our diverse customer and platform base. Those included the U.S. Navy's E-2D Advanced Hawkeye aircraft and the F-35 Joint Strike Fighter aircraft. We are looking forward to the remainder of this year into 2023 with a great deal of excitement. That's based on current level of quoting activity that seemed to take off following the Farnborough Airshow. We also see evidence that the government entity is responsible for procurement, such as the defense logistics agencies are increasing their level of activity.

Our confidence is also based on our major new businesses wins thus far this year. For example, in the past 9 months, those have included and most recently, a 5-year $2.2 million long-term agreement or an LTA for the Blackhawk helicopter, bringing to 12 the number of Blackhawk LTAs we have received this year with a combined estimated value of over $30 million. The latest win was for the manufacture of a quadrant, which is a complex assembly that controls the gearbox for the tail rotor of the Blackhawk. The award for this LTA was accompanied by an immediate purchase order for $5,000. The other Blackhawk LTAs in 2022 included flight control assemblies and other flight-critical products.

Separately, we received an order worth $2.8 million for engine components to be used on the F404 jet engine, which powers frontline fighters and trainers around the world, including the new Boeing SAAB T-7A Red Hawk advanced jet training aircraft. In April, the first T-7A Red Hawk rolled off production line at Boeing. The first of 351 aircraft to be delivered to the U.S. Air Force on their terms of a $9.2 billion contract awarded to Boeing in September of 2018. The production aircraft support the iconic Red Tail, symbol of the fame Tuskegee airman of World War II.

Earlier this year, we were also awarded a $12.4 million contract to produce complete main nose landing gear and ancillary components for the U.S. Navy's E-2D Advanced Hawkeye early warning aircraft. Deliveries are scheduled to begin this coming year and be completed in 2024. As a reminder, the E-2D and its earlier variants has been an important platform for our Long Island subsidiary for decades, and we manufactured a complete ready-to-install gear as a Tier 1 supplier to the original equipment manufacturer.

And in January, we announced a new $6 million life-of-program LTA specifically for a turbine engine exhaust case for the PW-4000 jet engine. The exhaust case are used mainly on the Boeing 767s, Airbus 300s and the Airbus 310s commercial aircraft. These exhaust cases are roughly 5 feet in diameter in the highly engineered critical engine component. We manufacture those exhaust cases components at our Sterling engineering facility in Connecticut. So this win was especially important as it met one of our key corporate objectives at Sterling Engineering, and that is to transition a larger percentage of the product mix into long-term agreements and to further tap the potential of the subsidiary.

Our capital investment program is aimed at further supporting this objective. I am pleased to report that the last couple of weeks a new 1.2 million high-tech machine tool was installed at Sterling. This machine will expand our capability and improve efficiencies on the PW-4000 case and several other parts already under our roof. In addition, our new in-house paid facility is fully operational and undergoing qualifications. We will continue to focus on bringing key processes in-house, including grinding, Nital etch nondestructive testing. While we see an abundant opportunity in the aerospace industry for Air Industries in the coming years, we believe an important potential new platform for our future growth includes nuclear submarine components. An adjacent market that is a natural fit with our capabilities. We have determined that the need for proven reliable suppliers to that industry is substantial.

We have started to make small but important inroads into this market and have won several orders for some (inaudible) for both our complex machining and our Sterling Engineering business. Let me reiterate that I said in today's news release, we are excited about the many opportunities that are emerging in our marketplace, including in defense, commercial aerospace, and now nuclear submarines, and we remain committed to manufacturing products that meet or exceed the exacting safety standards and performance demands of these industries we address, while continuing a capital investment program that makes us even more valuable partner to our customers.

Now let me turn the call over to Mike Recca, our CFO, for the financial recap, which we will follow with a question-and-answer and some concluding remarks. So with that, Mike?

Thank you, Lou. I want to provide some additional detail on the results for the third quarter and 9 months. As Lou said, sales for the third quarter were $13.3 million, bringing year-to-date sales to $39.3 million. That's $4.2 million lower than the $43.5 million for the 9 months of 2021. The primary cause of sales decline was due to a delayed shipment that we discussed and decline in shipments for Blackhawk helicopter product. We are -- we have announced that we are finishing an old and beginning new LTAs with Sikorsky and these last for approximately 5 years. They're all -- these are all for Blackhawk products. In the transition from an old LTA to a new one, it's normal for orders and for product and the shipments of product to be a little choppy. One reason for this can be the older LTA may have lower prices than the new and customers, therefore, have an incentive to buy ahead at the lower prices and delay ordering at the new higher prices.

Shipments to Sikorsky in Q3 were significantly lower than the quarterly for the first half and it's caused by fewer orders received earlier in the year. For the fourth quarter, we are projecting and very confident that Sikorsky shipments will return to normal. For all our other aircraft platforms, there were no major variances in shipments.

Gross profit. Gross profit in the third quarter was $2.2 million or 16.9% of sales versus $2.0 million or 14% of sales in the prior year. For the 9 months, gross profit was $6.7 million, again, was 17.1% of sales versus $6.4 million or 14.7% of sales for the 9 months of 2021. I need to remind you that for our largest subsidiary, we use the gross profit method of calculating inventory and thus gross profit for interim periods of the year, as estimated gross profit has been refined following our year-end inventory count and valuation of that inventory.

Last year in the fourth quarter of 2021, the gross profit percentage was increased to update the estimates that have been used for the prior 3 quarters of 2021. At this time in 2022, it's not possible to determine whether the gross profit percentage for this year-end will be increased, decreased or remained the same as has been estimated for the first few quarters of the year.

Third quarter operating expenses decreased by nearly $100,000 from the second quarter of the year, but increased $236,000 from the third quarter of last year, and we're up $346,000 or 6% for the 9 months. These increases reflect very obvious inflationary pressures that are present throughout the economy but also included in operating expense in Q3 of this year and thus in the 9 months was about $130,000 in employee severance costs resulting from some management employment changes that we made in September.

Operating income remained positive for all periods. Third quarter operating income declined by $81,000 versus the second quarter of this year and was lower by $8,000 in the third quarter of 2021 and for the 9 months, operating income declined by $18,000. Interest rates, despite recent rate increases, our interest expense remained essentially flat for all periods. For the past several years, our interest rate has been at 65 percentage points -- 0.65 percentage points or 650 basis points below the primary with a floor of 3.5% per year.

The first Federal Reserve actions raising interest rates did not affect us. It did not affect the floor, but they do now. With the primary to 7% today, our rate has risen to 6.35% for the year. And that will be what we pay going forward, hopefully, if not too long. The net loss for 2022 third quarter was $142,000. This compares with a loss of $7,000 in the second quarter of 2022 and a net loss of $66,000 in the third quarter of 2021. For the 9 months of 2022, our net loss was $177,000 versus net income of $21,000 in the prior year.

Balance sheet. Our balance sheet remains strong. There were no major changes during the year, our accounts payable, accounts receivable remain very well controlled. And as I discussed last time in May we renegotiated our term loan of Webster Bank to finance further investments in machinery. We increased the amount of the term loan (inaudible) $5 million and added an equipment line of credit for an additional $2.0 million. This $2.0 million can be used to finance 85% of the cost of new equipment. And all advances on the term loan, including the new line of credit, amortized over 7 years that's 84 months.

As Lou mentioned, we are making investments we have aggressively invested in new machinery this year, and we'll spend in excess of $2 million. The line of credit that we negotiated facilitates this investment. Now before I turn the call back to Lou, let me comment on an initiative we announced after the end of the third quarter. On October 4, we announced a one-for-10 reverse stock split, which became effective on October 18. This action was proactive. It was not done as a result of any threatened action by the stock exchange but we also believe it broadens the base of potential investors in the staff.

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

Thank you, Mike. Let me provide a brief summary of my comments today. We saw a significant increase in new business activity in the third quarter and made progress on our strategic initiatives. However, supply chain challenges impeded our third quarter shipment and sales. Even so, we are optimistic that we can deliver stronger sales for the 2022 fourth quarter and expect stronger growth as 2023 progresses. Our product and platform diversity our new business wins in 2022 and the current high level of quoting activity combined are the basis for our confidence for the remainder of the year and for 2023.

To further support our opportunity and growth, we are continuing our strategic capital investment with a focus on expanding our capabilities, enhancing our efficiencies through vertical integration and further tapping the substantial opportunity of our Sterling engineering subsidiary. Let me also emphasize that we remain highly optimistic about the long-term prospects of their industries. We continue to serve major defense and commercial aerospace programs where demand is growing.

Additionally, we are highly encouraged by our initial success in the adjacent nuclear submarine market. Air Industries Group remains committed to manufacturing products that meet or exceed the exacting safety and performance demands of the industries we address and to becoming an even more valuable partner to our customers.

That concludes our report. And I would like to open the call to questions from participants. Josh, can you open up the lines, please?

(Operator Instructions) Our first question comes from the line of Howard Halpern.

I'm with Taglich Brothers, and I'm pinch hitting for John today. He's out. Congratulations on navigating a tough quarter and still producing operating profit. That was nice to see. But in terms of -- you talked about some of the headwinds with supply chain and materials and components. Has that begun to ease? And if so, should we begin to see you increase shipments throughout the fourth quarter?

Well, we are seeing some improvements in the supply chain. Materials earlier this year actually started -- it started about third quarter of last year were very difficult to get, and we started some product late because of it. We had a pretty good size order that we expected material before the end of -- basically in December of last year that we didn't get until June of this year. So we lost 6 months on that order. We're starting to see some better full materials into our shop. There's still a purchased hardware springs and particularly engineered springs and other items, sensors that are a little bit more challenging to get.

But we are starting to see some easement in that. Largely because some of the OEMs are ordering a lot in advance, where material used to be more just in time. Now we're starting to see Collins and your Boeings and your Pratts place order for material a year, sometimes 2 years in advance to try to ease some of this. So we're seeing some improvements. hopefully, like I said, that trend continues.

Can I add one thing to that?

Sure.

Our products take a long time to make 6 months, 9 months, sometimes longer than a year. If you have a product -- if you have a shortage of material in the middle of that. So if I have (inaudible) done we've worked on for 3 months in a 6-month cycle, and we have a product shortage or material shortage for another 3 months when that shortage is lifted, I saw a few months ago. So if all the supply chain issues evaporated tomorrow, it does mean that all the problems are solved for the fourth quarter. But we do expect the third quarter -- fourth quarter, rather, to be much stronger than the third.

Okay. And all things being equal, as we go into 2023, the new machinery, the testing and once everything gets fully up and running, do you expect that you'll be able to really increase productivity, increase gross and operating margin for all the different programs and even the nuclear product shipments. Are you really encouraged that, that is going to kick in next fiscal year?

Well, what drives some of that is the type of orders that you get in. Obviously, on the platforms that we already deliver on. We know the quantities, we know what next year will bring. If you follow the forecast that the OEM puts out, some of these new opportunities that we're seeing, we're not well versed so far with the submarine business. It's lower quantities, higher value type products, a lot of (inaudible) So we know that Electric Boat is looking to hire 571 employees as of 2 weeks ago, the last report we got.

So there are opportunities to be able to position ourselves in those types of industries. It's a little early to tell, what piece of a pie we can get, but they like some of the capacity that we're offering, what the machine tools that we've added in the last call it, 18 months to 12 years, we put them in place to fill that capacity. And they're starting to recognize that we could be a place to go to. We will see a gradual increase as time progresses.

Okay. Okay. Well, guys, keep up the good work.

And would you do us a favor, and tell John, we said hello.

I will. I will.

Thank you very much. There are no further questions in the queue. (Operator Instructions) Okay. It looks like there are no further questions coming through, so I'll hand back over to Lou Melluzzo.

Thank you, Josh. So with that, once again, thank you all for taking the time to be on the call today and for your interest in Air Industries Group. We look forward to updating you on our progress on our next call. And in the meantime, we would like to extend our best wishes for the holiday season. With that, Josh, you may conclude the call.

Thank you very much for joining the call today. You may now disconnect your handsets.