CPI Aerostructures Inc (CVU) 2007 Q2 法說會逐字稿

Good day, everyone and welcome to the CPI Aero second-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 conference call over to Mr. Edward Fred, President and CEO of CPI Aero. Please go ahead, Mr. Fred.

Thank you. Good morning and thank you all for joining us on our second-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 website's Investor Relations section in about an hour at www.CPIAero.com.

Before we get started, I want to remind investors that this conference call will contain forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from projected results. Included in these risks are the governments' ability to terminate their contracts with us at any time, the governments' ability to reduce or modify its contracts if its requirements or budgetary constraints change, the governments' 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 any forward-looking statements contained in this conference call. Additional information concerning these risks can be found in our filings with the SEC.

This morning, I will give you a brief overview of our first-half results, current business environment and our improved outlook for 2007. Then I will hand the call over to Vincent Palazzolo, our CFO, who can walk you through the financial statement details. Then we will briefly wrap things up and open the call to questions.

As reported earlier this morning, for the first half of 2007, revenue was approximately $13 million compared to approximately $7.5 million in the first half of 2006, an increase of 73%. Pretax income was approximately $1.362 million compared to a loss before tax benefit of approximately $1.921 million for the same period last year.

Net income for the first half of 2007 was approximately $844,000 or $0.14 per diluted share compared to a net loss of approximately $1.264 million or a negative $0.23 per diluted share in the first half of 2006.

New orders for 2007 through July 31, including new releases on previously awarded contracts, rose nearly 84% to $15.8 million as compared to $8.5 million for the same timeframe in 2006. Unawarded solicitations remain at a high level totaling a maximum realizable value of approximately $285 million.

So with that prelude, let me introduce Vince Palazzolo so he can walk you through the details of this quarter. When he is done, I will come back on and then open the floor to questions. Vince?

Thank you, Ed. As reported earlier this morning, second-quarter revenue increased approximately 200% to approximately $7.5 million from last year's approximately $2.5 million resulting in pretax income of $926,448 compared to a pretax loss of $2,038,334 and net income of $575,448 or $0.10 per diluted share compared to a net loss of $1,333,334 or a $0.24 loss per diluted share.

Gross profit margin for the second quarter of 2007 was 29% compared to a negative 36% for the same quarter last year. Gross margin for the current six-month period was 27% compared to 1% for the same period last year.

Selling, general and administrative expenses for the second quarter of 2007 was approximately $1.262 million or 16.8% of revenue compared to approximately $1.134 million or 46.1% of revenue for the second quarter of 2006. SG&A expenses for the first six months of the year were approximately $2.185 million or 16.9% of revenue compared with approximately $1.982 million or 26.4% of revenue for the same period last year.

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

Thanks, Vince. As I just reported, new orders through July 31 were $15.8 million compared to $8.5 million during the same period in 2006. This represents tremendous growth coming from the subcontracting arena. We continue to anticipate a strong award year as we continue to diversify our customer base and we expect that our future revenue mix will reflect a 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 was announced in late June, Boeing was awarded the contract to provide the Air Force for approximately 242 A-10 Warthogs. This RFP involves a new wing design followed by production of potentially 242 new wings for this aircraft. The value of this program is to be slightly in excess of $2 billion. CPI Aero is currently exploring its opportunities to participate in this program.

For the A-10 aircraft, CPI brings vast experience, including the manufacturer of its current wings. In 1995, CPI Aero was awarded a $3.5 million contract to reoutfit 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 Aero currently employs at least six people who were employed by Fairchild Republic, the original manufacturer of the A-10 and who participated in the engineering and manufacturer of the current wing configuration. Accordingly, we bring significant experience to this assembly as a manufacturer of critical subassemblies on the new design.

Last month, we received the new C-5 TOP order valued at approximately $1.6 million. Although the size of the contract is not as large as the previous ones, with this award, the C-5 TOP contract has averaged approximately $5.2 million of new work for a 12-month period, making it the second-largest production contract in our history behind only the T-38 modernization program, which averages approximately $6.8 million for a 12-month period.

This award is especially gratifying in light of the House Armed Services Committee fiscal year 2008 Defense Authorization Bill, which recommended the retirement of 51 C-5A aircraft leaving 60 C-5s in service.

During our last conference call, I stated that while this sounds negative, it actually may be a positive development for CPI. This is because with the retirement of certain C-5 aircraft there also comes a desire to modify and refurbish the remaining C-5 fleet.

Lastly, CPI has exceeded in exploiting subcontracting opportunities with some of the leading US prime manufacturers in aerospace and defense. We have established solid working relationships with Lockheed Martin and Boeing and we have now become key suppliers to Northrop Grumman and Sikorsky. As evidenced by our tripling of awards from these prime manufacturers during 2006, the fact that the 2007 awards already surpassed the total amount of subcontracting awards received for all of last year by approximately 15% and the awards and accolades we have received from them, the subcontracting work will play a significant role in CPI Aero's future as we continue 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.

During the first half of 2007, we are close to achieving our historical gross margins, which, coupled with the release of funding on projects on which we are bidding or have bid both as a prime and subcontractor, give us reason to believe that the positive trends of the first half of this year will continue into the second half of 2007 and into the coming year.

Based upon the level of new and pending orders, today we have revised our prior 2007 guidance. We anticipate 2007 revenue to increase to approximately $27 million, which represents a 50% increase over last year's revenue with a resulting net income in the range of $2.3 million to $2.5 million. Based upon our 2007 results to date, you can see that we are looking for a somewhat stronger result in the second half of the year.

As I stated last quarter, you will continue to hear more from us in the upcoming months. We are sticking to our plan of increased IR efforts and we will be on the road meeting with institutional investors and analysts in one-on-one or group meetings. The Equity Group is organizing several roadshows for us in New York City and San Francisco, 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. Additionally, Vince and I are available for conference calls and we would also welcome visits by institutional investors and analysts.

Before closing, I would like to thank all of our shareholders for your continued support of CPI Aero and I assure you the management team and your Board of Directors is working diligently to continue this 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. Brian, can you allow callers to place questions now, please?

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

Good morning, gentlemen. How are you today?

Good, John. How are you?

Good, thanks. A couple of things. The add-on to the Hover Infra Red Reduction System, that is obviously a vote of confidence by Sikorsky or at least that division I guess that is my question. When the possibility comes along for additional parts, do you have to deal with individual divisions or is that handled by an aggregate --?

Much of what we are working with now is handled by the same material group. So while you might be dealing with a different buyer, I guess that is a different platform, you still have to go through the centralized procurement group if you will.

Okay. But that should still make additional parts business easier for you guys I assume?

Oh, absolutely. Absolutely. As you said, it's a tremendous vote of confidence to take the thing up from $4.4 million to over $7.5 million in a six, eight month period of time is very exciting for us. It means we are doing the job we are paid to do.

And the gross margin expansion in the quarter, was that structural mix or were my expectations just too low?

Were your expectations too low?

Yes. I meant the increase -- was it structural in mix? What was the primary driver behind that? Was it just the efforts that you guys are taking to reduce costs?

All of the above. Exactly. I will let Vince answer.

Yes, it is a combination of all of those things. Some of the cost cutting that we had done a year ago is starting to take its effect now. We have, as you are aware, as you mentioned, those things have sort of leveled out our overhead rates and our overhead rates now being applied over a larger base of business has improved our margin and some of the more direct control that we put on our suppliers and our cooperative efforts with all of our suppliers has streamlined and made more efficient the procurement process and the timing of when we receive goods and that has helped speed things through the shop at a more efficient rate.

Okay. Great. And then on the balance sheet, I noticed that cash was up, short-term debt was down and then working capital was up. And I was just wondering if you could comment as to whether or not most of the expansion is still self-funded or are you getting some payments from some of the larger contractors.

Mostly we are not getting progress payments from the subcontractors. Improved cash flow is a result of improved margin and that margin from that subcontracting business has been -- the better margins that we are getting now overall are just allowing us to run a much more efficient cash positive business.

Okay, great. Thank you.

Michael Potter, Monarch Capital.

Hey, guys. Congratulations on a great first half. Just wanted to I guess ask about the backlog and the delivery schedule for the second half of the year. Obviously gave guidance for $2.5 million. Is that all based upon current work in hand?

Yes.

Yes, definitely. Absolutely. Yes, we are not putting out a revised projection and then hoping we get some more new business for it.

Got you. So we are being conservative. We should get some work over and above that?

We should, Mike. The only question becomes when is it deliverable and therefore, does it generate revenue this year.

Got you. Okay. On the Boeing award, I mean that sounds terrific. You put in your commentary -- we are exploring work, doing work on the program. My understanding was that we were part of the group in essence that won the contract. Can you give me a little greater detail, a little clarification on that?

We were part of a team with a different competitor. That competitor happened to be Israeli Aircraft Industries, IAI. We were actually a member of their team. We submitted subcontracting proposals if you will to various other competitors on this program. Boeing was definitely one of them. Okay? We are now in the midst of exploring whether or not we will get the work from them, how much it will be and what the pricing thing will be. We are optimistic that good things will come of this. The fact that they were impressed enough with us to mention us when they proposed, etc. is certainly a very, very positive sign for us.

Okay. Okay. So part of their proposal to the Air Force was their intention to use CPI?

Yes, I believe that is correct.

Great. That should be terrific. And when are wings supposed to start being delivered to the Air Force? When does this program start to go into effect?

I guess they are going to begin the design work almost immediately. That design work will take almost a full year and then tail-end of 2008, they we will probably start the production of the first article. So that is when the first time it would generate revenue for us if we are indeed the participant in it and then beginning in '09 and big-time in 2010 would be the production of those wings.

Okay. All right. Thanks, guys. Keep up the good work.

Thanks a whole lot.

David Cohen, Midwood Capital.

Hey, guys.

How are you doing, Dave?

Great. With respect to the TOP contract, do you feel that the (inaudible) to shake loose more orders there has changed at all or has it still sort of been business as usual with respect to the pace at which orders are coming in?

On the C-5, I think it is business as usual. The other orders -- the stuff that makes up the big backlog in unawarded bids, that is still stagnant. As long as there is still not a final directions if you will for the war effort, I am not sure when that is going to break loose.

As far as the C-5 right now, I would have to see to you, I think it is business as usual. I talk about the fact in the script and also in conversations I have that the House Armed Services Committee wants to cut back X number of C-5s and then you hear the Senate committee saying, baloney, we want the C-5, we don't want the C-17. So it sounds as if that is going to become a bit of a battle as well. How big a battle, I am not sure yet. But until those things get ironed out, I can't imagine orders are going to go through the roof on C-5 because there is this whole debate as to who likes it and who doesn't, which wasn't there.

I guess from my vantage point, I sit here and say, wait a minute, you did a quadrennial review that said you needed to have these. Why are we arguing about it now for? But that might also be self-serving for CPI's interest.

The fact is right now the C-5 TOP is still business as usual, still plugging away. We are still trying to get some stuff shaken loose on it and we still have resources applied to do that, but as of right now, I'd have to say to you that there is no real change there.

And second question is implicit in your guidance for the back half of the year, what kind of assumptions are you making with respect to gross margin orders to what you experienced year to date? Is there further improvements in gross margin that you expect to see?

We expect that the second six months of the year our margins will be comparable to what we experienced over the blended six-month period. We may not expect it to rise. We are not going to go out on a limb like that, but I would think that based on what we have experienced and have been experienced in our operations over the last six months that that will continue for the remainder of the year.

All right. Thanks, guys. Keep up the good work.

Thanks, David.

(OPERATOR INSTRUCTIONS). [Mike Sheik], Private Investor.

Hey, guys. Can you hear me okay?

Just fine, Mike. How are you doing?

Good job again. It looks like you guys are turning the corner. I wanted to ask about backlog. You normally comment on that. I think you said -- was it $285 million?

Unawarded.

Unawarded, right. And what was it last quarter? If I remember correctly, it was somewhere around three something -- $320 million?

It was just around $300 million, $305 million, something like that.

All right, $305 million. So not much has kind of come off the table and your increase in awarded contracts -- it has gone up dramatically with such a small reduction. So that is $20 million, so can you comment on what your hit ratio is? Is it still around that 13 -- I'm sorry -- win ratio -- is it around 13% or is it kind of going a little bit higher now?

Okay. I want to be very clear on this. Our win ratio has always been based on the fact that we were a prime manufacturer direct to the US government and that is where that hit rate has come from. With the subcontracting stuff, obviously we don't put in anywhere near as many bids, and I want to be very careful that people don't misinterpret this comment when I say we may have put in five and we won one, so therefore our hit rate is 20%. That skews the entire process. I think that has to get included in with our overall rate.

Overall, we are at about the same exact rate -- 13% to 14%. Hasn't changed. The difference is, yes -- if you look at the wins -- there hasn't been a lot of activity, let's put it more that way, than anything else. We lost 20 out of the backlog, but increased overall by 12 and change. So there were $8 million worth that either dropped out from the government that we did not win as competition and this is all on a net basis.

So I would say to you that our win rate is about the same as it has always been, which has always been historically higher than most of the competition. But we are right now being very successful on our bidding to these as a subcontractor to these major primes. We don't just bid 200 things a week or a day or a month or a year. It is not like that. We get a finite number and I would say to you that our win rate on that so far has been excellent and we hope it only gets better based on our performance with these people.

Okay. Another question. I think it was Michael who commented on this and I guess I am out of the loop on it, but he mentioned something about a Boeing award. Can you please -- I didn't get that part of the conversation.

Okay. If you remember, there was a competition to rewing the entire -- almost the entire fleet of A-10 aircraft.

Oh, okay. So it is the A-10, all right.

And Boeing won that competition.

All right. That clarifies it for me. And you commented a little bit about the quadrennial review and how its battle -- this is regarding the C-5 TOPS contract -- well, probably, overall, the amount of awards you're getting from the military. But now I am listening to what I see on TV and it looks like they are going to use the -- Congress is going to use the nuclear option and now the military is scared to spend any more money to make matters worse. That is what I perceive in the news. What is your perception out there? I mean how much longer are we going to be stymied? Are you feeling that decisive move by the government to say, look, we're setting a timetable for getting in or out of Iraq is really going to turn things around?

Well, of course, this is personal opinion and not --.

That was what I was asking, yes.

Okay. Personally, I think with an election coming up, what, 14 months from now, there will have to be some kind of a definitive plan, which appears to be either the total withdrawal or certainly a significant withdrawal of troops from that arena. Given that that is going, in my opinion, to free up the money to repair the planes and every other aspect of the government's asset that have been I don't want to say ignored, but put on the back burner because of the requirement to properly dress, protect, feed our troops overseas. I think that that withdrawal at whatever level will free up money and allow for some of this backlog to stop being addressed.

There is a fact I keep talking about with this backlog and that is all of this was generated by requirements from the Air Logistics Centers on the aircraft that they maintain. This isn't, gee, I would like to do this or, boy, it would be really nice to do that. This is we need 19 cargo doors without an RFP, see what we get. Those 19 cargo doors are still going to be needed whenever this lightens up and to whatever extent it lightens up and at some point, all of those things will be funded.

We believe we will win our share of them just like we always do and we believe that if you just take the number and do any kind of percentage rate you would like on it, you will see that it becomes a significant boost to the Company's revenue and net income lines. So we remain optimistic that when it comes, it is going to certainly give us a jumpstart here. But as you saw, we couldn't wait forever for that to occur and we put on a full-court press on the subcontracting work and it has paid off handsomely for us. We are going to be up over 50% in revenue from last year's number.

Thanks a lot. Final question was isn't your historical gross margin around 32%? Is that something that once the mix -- once mix gets back to traditional, which is more military, I mean there's more subcontract work in here, then you will get back to those levels? I am not understanding why next year you won't be trending more towards the historical.

Very simple and we will be more towards it. The point is -- keep in mind that we were at 30% to 32% in a much smaller facility with much less overhead. We moved into this facility on the anticipation of significant work on the C-5 TOP program, which has not come. We moved as a $30 million company basically. We have just come off a $30 million year. In order to get back to the historic rate of 30% to 32%, the Company's revenue will need to increase above 30, probably more towards 35. Again, we are moving in that direction as well as you can see. I am coming from 18 to 25 earlier this year now to 27 this year.

So all of the things that need to be done are being done or have been done. We cut our overheads in other areas of this Company a year ago and the results were seen in the back half of '06 and certainly here in '07. The mix itself -- don't misunderstand the fact that we are doing subcontracting doesn't mean we are doing commercial work.

At the moment, we are doing a minimal amount of subcontracting on commercial platforms. Most of what we have gotten from Sikorsky is on military aircraft. Most of what we have gotten from Northrop Grumman is on military aircraft. The contractor that we were not able to name twice now in the last two years that we have received contracts from, those are on military programs. So it has nothing to do with whether we are doing military or not and the subcontracting margins are just as nice as the military margins we have. We didn't go out and change our margins to look for subcontracting work. So it is just a matter again of you set your bar a little bit higher as far as critical mass went and we are climbing up to that bar now.

All right. Thanks.

Okay.

At this time, there are no further questions. I will now turn the conference back over to management.

Okay, thank you, Brian. And thank you to all our listeners. We look forward to talking to you three months from now for our third-quarter conference call. Thank you.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may disconnect at this time.