CPI Aerostructures Inc (CVU) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the CPI Aero first quarter 2007 conference call. At this time I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode. I will now turn the call over to Mr. Ed Fred. Sir, please go ahead.

Good morning, and thank you all for joining us on our first quarter 2007 conference call. If you need a copy of the press release issued today, please contact Linda Latman of The Equity Group at 212-836-9609, and she will fax or e-mail a copy to you. Also, if you would like to listen to this call again, you can hear a replay on our Web site's Investor Relations section in about an hour, www.cpiaero.com.

Before we get started, I want to remind investors that this conference call will contain forward-looking statements and unknown risks, uncertainties and other factors that may cause actual results to be materially different from projected results. Included in these risks -- the government's ability to terminate their contracts with us at anytime, the government's ability to reduce or modify its contracts if its requirements or budgetary constraints change, the government's right to suspend or bar us from doing business with them, as well as competition in the bidding process for government contracts. Given these uncertainties, listeners are cautioned not to place undue reliance on forward-looking statements contained in this conference call. Additional information concerning these risks can be found in our filings with the SEC.

As has been the case in the previous first-quarter calls, I will provide our new listeners with a brief overview of CPI Aero and our activities.

Based on Long Island, CPI Aero is a world-class manufacturer of aerospace structural parts and assemblies. We are a prime contractor to the U.S. Department of Defense, and we are also a subcontractor to some of the largest U.S. aerospace and defense contractors, such as Lockheed Martin, Northrop Grumman, Vought Aircraft Industries and Sikorsky.

Since its inception in 1980, CPI has focused on the production of aerospace structural parts and assemblies, and in developing the required skills and expertise to provide the highest-quality products possible. We have carved out for ourselves a niche within the aerospace market and become one of the country's leading suppliers of structural spares for vintage and out-of-production aircraft, such as the C-5, T-38 and A-10. We are expert in all facets of aircraft structure manufacturing, including program management and integration, manufacturing engineering, tool design and fabrication, subcontract and logistics management, data management, configuration control, final assembly and test, packing and shipping, and customer acceptance. Typical assemblies produced by CPI are skin panels, leading edges, flight control surfaces, engine components, cowl doors, wing tips, nacelles, and inlet assemblies for military aircraft such as the C-5A Galaxy, T-38 Talon, C-130 Hercules, A-10 Thunderbolt and the E-3 Sentry.

Before I move on to our activities and expectations for 2007, I will let our Chief Financial Officer, Vince Palazzolo, cover the first quarter 2007 results.

Thank you, Ed. As reported earlier this morning, revenue increased 9% to $5,471,968 in the first quarter of 2007, from $5,030,193 in the first quarter of 2006. Gross margin improved 25%, as compared to 19% in the prior year's first quarter, indicating that we are moving towards our normal rate of approximately 30%. Income before provision for income taxes increased to $435,189, compared to $116,894 in the prior year's quarter. Net income was $268,189, or $0.05 per diluted share, compared to $68,894, or $0.01 per diluted share for the same period last year. New orders so far in 2007 were $1.4 million, compared to 6.9 million in 2006. Included in last year's amount was a $5 million release on our C-5 TOP contract, which has not been forthcoming as yet this year. Unawarded solicitations remained at a high level, with open solicitations totaling a maximum realizable value of approximately $300 million.

At this point, let me hand the call back over to Ed for an overview of the business.

Thanks, Vince. As Vince just reported, new orders thus far in 2007 are 1.4 million compared to 6.9 million during the same period in 2006. Although we're disappointed with this decrease, it is not totally unexpected that we would experience a slowdown, given the large amount of contract awards we received in the second half of 2006. We still anticipate a strong award year as we seek to continue to diversify our customer base, and we expect our future revenue mix to reflect the larger proportion of work to be performed in our capacity as a subcontractor to major prime contractors.

As we reflect on our new business opportunities and the potential for current contracts to grow in importance, let me update you on a few.

As I have reported previously, CPI Aero is participating in the proposal process to provide new wings for over 200 A-10 Warthogs. We are participating with a major international prime manufacturer, and we have other subcontracting possibilities as well. This RFP involves a new wing design, followed by production of potentially 200 new wings for this aircraft. We estimate this program's value to be in excess of $0.5 billion, with CPI Aero providing some critical subassemblies to the overall structure. With a contract of that size, the potential to CPI could be significant.

For this particular program, CPI brings vast experience on the aircraft, including in the manufacturing of the current wings. In 1995, CPI Aero was awarded a $3.5 million contract to re-outfit the entire fleet of A-10 aircraft with the leading edges of the wing, which was necessitated by the Persian Gulf conflict of 1991. So we are very familiar with the current design and its shortcomings.

Additionally, CPI currently employs at least six people who are employed by Fairchild Republic, the original manufacturer of the A-10, and who participated in the engineering and manufacture of the current wing configuration. Accordingly, we bring significant experience to this assembly as a manufacturer of critical subassemblies on the new design.

On the C-5 TOP program, the House Armed Services Committee has approved its fiscal year 2008 Defense Authorization Bill, which recommends a retirement of 51 C-5A aircraft, leaving 60 C-5s in-service. While this sounds like negative news, it actually may be positive. Along with this retirement of aircraft comes a desire to modify and refurbish the remaining C-5 fleet, which could signal increased activity in the C-5 TOP award process. While this remains to be seen, it's an encouraging sign for CPI Aero that the aircraft has once again become an important topic in the budgetary process.

Lastly, CPI succeeded in exploiting subcontracting opportunities with some of the leading U.S. prime manufacturers in aerospace and defense. We have established solid working relationships with Lockheed Martin and Vought, and now we have become key suppliers to Northrop Grumman and Sikorsky. As evidenced by a tripling of awards from these prime manufacturers during 2006, and the awards and accolades we have received from them, a whole new door in CPI Aero's future has opened quite wide, and we intend to make the most of this opportunity. We will continue to solicit new work from all of these manufacturers, as well as others in our industry, and we will strive to continue to perform at the highest levels possible in our effort to support their initiatives.

With our continued goal of achieving our historical gross margins, coupled with overhead reductions taken in midyear 2006 and an increase in revenue, we look forward to a healthy profit picture for 2007. Based upon the level of new and pending orders, today we are reaffirming our prior 2007 guidance. We anticipate 2007 revenue to be approximately $25 million, with a resulting net income of approximately $2 million. Based upon our 2007 results to date, you can see that we are looking for far stronger results in succeeding orders.

You will continue to hear more from us in the upcoming months. We are intensifying our IR efforts and will be on the road meeting with institutional investors and analysts in one-on-one or group meetings. I have just completed a visit to the Baltimore and Philadelphia areas, and next week we'll be up in Boston seeing investors for two days. The Equity Group is organizing several other roadshows for us in other U.S. cities, so if you would like to schedule a meeting, please contact Linda Latman at 212-836-9609. She will let you know when we plan to be in your area.

Before closing, I would like to thank all of our shareholders for your continued support of CPI Aero, and I assure you that your management team and your Board of Directors is working diligently to resume profitable growth and reach our full potential as the world's premier small-business supplier of aircraft structure.

At this point I would like to open the floor to questions. Operator, can you allow callers to place questions now, please?

(OPERATOR INSTRUCTIONS). John Kohler, Oppenheimer & Co.

A couple of questions. I guess the first has to do with the big swing in the gross margin on a sequential basis. I was just wondering if you could help me understand a little bit why that was so large on a quarter-over-quarter.

A couple of reasons. One, we have been working over the last six months of the year to improve our vendors' performances, and to reduce the amount of work that we had to do once parts came in in-house, and that started to come to fruition in the first quarter. Plus, the overhead rates that we had -- the overhead cuts that we had taken in the middle of the year began to -- coupled with increased volume in the first quarter, made our overhead application rates over all of our contracts more favorable, and that helped to drive profit up.

The reduction in work that CPI has to do once you get the parts, that's likely to be ongoing, then?

Yes.

The other question I have is with some subcontract. I know you talked a little bit about relationships with Sikorsky and Northrop and Vought. That business is likely to be just as lumpy as the other business. Is that fair to say?

I would say that's temporarily true. As you start up with a new customer, you will see a little bit of lumpiness; there's no doubt about it. What we are, obviously, gearing ourselves up for and looking forward to is having a steady revenue stream from each one of these companies, but especially the newer ones, Northrop Grumman and Sikorsky. But at the moment, yes; it's going to be a little bit lumpy.

I don't want to pin you down or create undue expectations, but do you have any idea when you might see that more stable stream, or is it still too early to tell?

I think it's too early to tell. I don't think it's necessarily a predictable thing. I think it's a matter of winning new awards from them, performing on them, and then them starting to almost fill a pipeline for you. Now, we've done well for both of them, as evidenced by the fact that we received substantial awards from Sikorsky last year after they "took us for a test drive", and Northrop Grumman named us their supplier of the year. So I don't think there's any question of whether or not they find us to be a favorable supplier or not; it's just a matter of getting us the work, and then starting to do it on a regular basis. So to predict when exactly it's going to happen is kind of hard.

Last question, I guess, and then I'll jump back in the queue. The current budgeting process, the back and forth, can you quantify what you think -- what impact that's having on award release?

I'm sorry (multiple speakers)

On disbursements, on what you think --

I think we're still in the same exact boat we've been in, this back and forth. You're still in a situation where as long as you're funding a war effort, the repair/replacement money that we've been waiting and that's built up our backlog of unawarded stuff is still sitting there. Now, is the political climate such that some of this money will start to free up as there seems to be a press on to somehow bring this conflict to a close? That remains to be seen.

As far as the back and forth on the C-5, I think what they're basically looking at is what is the best way to spend their money. And there's been conjecture, although the quadrennial review did not support this stance, that the C-5As are too old and we don't want to spend money on them. So what if we got rid of the C-5As, built more C-17s, and refurbished all the C-5Bs and higher models? That's, again, not a bad thing for CPI, in that the C-5 TOP contract, for example, did not call for enough replacement parts to do Bs and As together and the entire fleet as it was. So, still at 60 aircraft, there's enough room in our contract to be able to provide a substantial amount of work. When that's going to come and how it's going to come remains to be seen. But while -- like to here, part of the C-5 fleet is going away, the other thing that we did find encouraging is that -- okay, you know what? -- it's on the radar screen again. Obviously, people are paying attention to it. And if they're talking about having only 60 in service, but needing those 60 to reach a certain performance level, that bodes well for CPI and the ordering process.

Great. I'll get back into the queue. Thanks.

(OPERATOR INSTRUCTIONS). David Cohen, Midwood Capital.

Could you just go back over your comments regarding the C-5? Was that a budget proposal from the DOD, or was that a congressional --

That is the House, it's the House of Representatives, their budget submittal. Granted, it has to go through conference, which it will. But, the basic premise is how they would rather spend their money, apparently, is rather than have the 111 C-5s that they originally talked about, and that the quadrennial review calls out for, they want to take it down to 60, which would eliminate all of the As, the older C-5 there are, back-filled with C-17s at the rate of about 10 a year -- so it will still take quite a while to get that back up to speed -- and then do the re-engining and the avionics and structurals on the 60 remaining C-5 aircraft.

So is this something -- I mean, you want to have it obviously (inaudible) go through the Senate, (inaudible) this is just the committee?

This was the committee, yes. That's correct. This was the Armed Services Committee.

Does that conclude your question, sir?

I think we lost him.

Carter Newbold, Rutabaga Capital Management.

I think you just clarified this, but the entire C-5 fleet is 110, of which 50 are the Class As which are proposed for retirement?

That's correct.

And are those airframes likely to be used for salvage and spares in a way that would be detrimental to your ability to sell into the remaining 60 active fleet?

I think there will always be a certain amount of cannibalization. But given the fact that they find the plane so unreliable to retire 51 of them, I don't think it will be significant enough to say, oh, there go our orders for the next three years because they'll just keep pulling parts off these planes. Yes, there will be some; I don't think it will be significant enough to hurt us or anyone else who is dealing with C-5 parts.

And then, I'm sorry if I missed this in your opening commentary, but I think you said on the last conference call that the expected decision date on the A-10 was this month. Is that -- does that still hold?

I did say that. It was supposed to be May 17. What happened was twofold. One, the government wanted to go out and ask for what's called a BAFO, best and final offer, giving everyone a chance to take a look at everything and reprice or lower -- I'll say lower their price, because that's what everybody does in a BAFO. But then there was also a minor screw-up, I'll call it. One of the competitors, and none of us know who, accidentally got some information about another competitor from the government. It's not unusual. It happened before. It happened when CPI won the T-38 contract. Sometimes a person hits a wrong button, and whether it's pricing or technical or whatever gets out. The fact that it was done prior to the BAFO kind of put everybody back on a level playing field, because at least everybody has a chance to react to what the one person got. The prime bidders on this were told what the information was. The BAFO is now due out, I've heard, as early as today, but certainly by the end of the week. And then the process will continue. So, the award is delayed; I don't think it's delayed that much longer. Experience tells me a month or so. Don't hold me to that. That's not anything formal I have from anyone. But, four weeks for a BAFO would be a long time. It's probably about a week or two to actually submit the BAFO, and a couple of weeks' worth of evaluation of those submittals. So I think we're still looking at an award prior to the end of the second quarter.

Okay. And just back to the C-5s for a second, because of the sort of tentative nature of what -- this proposal that's come out of the House, I'm still trying to understand its near-term ramifications. Is it possible, or do you have booked backlog today for stuff you're planning to ship in the back half of this year onto those airframes that are proposed to be retired? And if so, is it -- obviously, it hasn't been material enough for you guys to pull away from your guidance, but is it a significant number?

Absolutely not. No. Because while they want to take them out of service (a) it will not be an overnight taking them out of service. They'll take out the least air-worthy, if you will, right away. But some of them still have to fly. You can't pull half the C-5 fleet out when you can only manufacture 10 extra C-17s a year to build it back up. So anything that we're building now is not an issue. We don't see it impacting us in any way like that. So in answer to your question, no; it doesn't impact our projections whatsoever, and as -- that we've had no turnoffs because of this. Plus, remember, this is in discussion now. If you're lucky, there will be a bill signed by October 31, and usually it takes a lot longer than that. So, no 2007 impact whatsoever.

That's helpful. Thanks. Good job on the margins.

[Paul Berger], private investor.

Can you give a little more color on the backlog of the bids out? That number has been fairly constant for the last year or so. Do the primes or the government -- have any of the orders been actually -- not orders -- but any of the contracts been issued, or are they all still pending on the government side of it?

Some of the -- some contracts have been awarded. We were awarded some contracts over the last year. Some have been awarded that, obviously, we didn't win, and then it's been refilled with new orders that we've put in. We still bid on our normal, approximately, 30 to 40, up to maybe 50 contracts a week. Probably not 50 anymore, but we still do our normal order bidding every week. So that number has been refilled.

I'm thinking more -- on the 300 million, how much of it has been there for a long time (inaudible) the government hasn't awarded the contract to the (inaudible)

I would say about two-thirds of it. About 200 has been sitting there for a while.

Do you have any feel for when any of that is coming out with the new budget, or can't really tell?

I couldn't tell either way. I don't know.

Again, a lot of it has to do with the political climate. All of this stuff has not been being ordered ever since we had the war effort begin. And apparently, due to there's only a certain amount of money to go around, as long as there still is a war effort, a lot of the money for these kinds of things is getting diverted other places. We have stopped predicting in this particular category because we've been wrong for two years. If you would have told me a year and a half ago that we'd be sitting here today and still not have seen what seemed to me to be obvious repairs and replacement part ordering done, I would have told you you were crazy. Obviously, you wouldn't have been, because we haven't seen it. Our competitors haven't seen it. The backlog stays where it is. And somehow these planes continue to fly without any major issues at the moment, and I hope it stays that way until such time as the money frees up and we can then provide the parts.

To follow up on that, do you have any idea how much duct tape the government has in stock?

I've heard it's billions of rolls, Paul, billions.

There are no further questions at this time. I will turn the call back over to management.

I'd like to thank you all for listening in, and we look forward to talking to you in about three months and reporting our second-quarter results. Thank you very much.

Ladies and gentlemen, this concludes our conference for today. Thank you all for your participation, and have a nice day. All parties may now disconnect.