CPI Aerostructures Inc (CVU) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the CPI Aero third 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 over to Mr. Ed Fred, CEO. Please go ahead, sir.

Thank you. Good morning and thank you all for joining us on our third 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 reply 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 include 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 government's ability to terminate their contracts with us at any time, 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 the uncertainties, listeners are cautioned not to place undo 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 nine month's results, current business environment and our outlook for the remainder of 2007. Then I will hand the call over to Vince Palazzolo, our CFO, so he can walk you through the financial statement details. Then we will briefly wrap things up and open the call to questions. Also, I just want to caution you all I am not in the office. I'm away on a business trip in my hotel room making this call, so any hesitation on our part or knock on my door that housekeeping is here is simply -- should be chalked up to that. Okay.

As reported earlier this morning for the first nine months of 2007, revenue was approximately $20.2 million compared to approximately $11.9 million in the first nine months of 2006, an increase of 70%. Pretax income was approximately $2,224,000 compared to a loss before tax benefit of approximately $1,934,000 for the same period last year. Net income for the first nine months of 2007 was approximately $1,379,000 or $0.23 per diluted share compared to a net loss of approximately $1,277,000 or negative diluted shares of - negative earnings of $0.23 per diluted share for the same period last year.

New orders for 2007 through September 30th include new releases -- including new releases on previously awarded contracts were $18.9 million as compared to $21.2 million for the same time frame in 2006. Unawarded solicitations remain at a high level totaling a maximum realizable value of approximately $280 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 for questions. Vince?

Thank you, Ed. As reported earlier this morning, third quarter revenue increased 64% to approximately $7.3 million from last year's approximate $4.4 million resulting in pretax income of $862,136 compared to a pretax loss of $12,577. Net income of $535,136 or $0.09 per diluted share, compared to a net loss of $12,577 or $0.00 per diluted share.

Gross profit margin for the third quarter of 2007 was 27% compared to 17% for the same quarter last year. Gross margin for the current nine month period was 27% compared to 7% for the same period last year.

Selling, general and administrative expenses for the third quarter of 2007 were approximately $1,130,000 or 15.6% of revenue compared to approximately $774,000 or 17.5% of revenue for the third quarter 2006. SG&A expenses for the first nine months of the year were approximately $3,317,000 or 16.4% of revenue compared with approximately $2,756,000 or 23.2% 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 September 30th were $18.9 million compared to $21.2 million during the same period in 2006. This current award number represents tremendous growth coming from the subcontracting area. We continue to anticipate that the award year will finish up very strongly 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, let me update you on two of these items. As announced in late June, Boeing was awarded the contract to provide the Air Force with the new wings for up to 242 A-10 War Hogs. This RFP involved a new wing design followed by production of up to 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. CPI Aero has vast experience with the A-10 aircraft including the manufacture of the 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 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 sub assemblies on the new design.

Next, CPI has succeeded in exploiting subcontracting opportunities with some of the leading U.S. prime manufacturers in aerospace and defense. We've established solid working relationships with Lockheed Martin and Vought and we have now become key suppliers to Northrop Grumman and Sikorsky. As evidenced by the significant increase in awards from these prime manufacturers during 2006, the fact that the 2007 awards have doubled the total amount of subcontracting awards received from all of last year and the awards and accolades we have received from these subcontracting customers. The subcontracting work will play a significant role in CPI Aero's future as we continue to capitalize on 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 2007, we have come closer 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 experience this year will continue well into the future. Based upon the level of new and pending orders, we reaffirm our prior 2007 guidance. We anticipate 2007 revenue to be approximately $27 million with a resulting net income in the range of approximately $2.3 million to $2.5 million.

As I stated during the last two quarters, you'll continue to hear more from us in the upcoming months. We are sticking to our plan of increased IR efforts and we'll be meeting with institutional investors and analysts in one on one or group meetings. 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 that your 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. Operator, can you allow callers to place questions now please?

(Operator instructions). Your first question comes from John Kohler with Oppenheimer Close.

Good morning, gentlemen.

Hi, John. How are you?

Good. How are you?

Good.

I was wondering if you could just probably give a little color on the environment in the subcontracting and in [Pron] if you're seeing any increased opportunity or spend on the government side.

Okay. As of now, the government side is exactly where it's been for 2.5 years. We've seen nothing new. As you know, they're still in the midst of battling out the budget, although it looks like they may sign something very shortly. We'll just have to wait and see what that means to us as far as whether the spending will increase at all. My opinion would be that it probably won't increase a whole lot yet because the war effort is still in high flight and until that changes, it doesn't appear that there will be much in the way of funds available to things other than the direct war effort itself.

As far as the subcontracting environment goes, for us, we really find it hard to be better. We were having a lot of opportunity to look at different programs from a wide variety of prime contractors. There seems to be an awful lot of activity from those groups and we're trying to leverage our success so far to just open that door a whole lot wider.

Okay. Great. I noticed that there was -- unfortunately, there was a crash of, I guess it was, an F 15.

Correct.

Has that at least raised consciousness that maintenance needs to be done?

I can't answer that for you, John. I really don't know. Should it have? Of course, but to figure out how they're thinking is beyond me. They grounded and all the F 15's for a while.

Right. I saw that.

We haven't heard anything else nor have you read anything else that said somebody's starting to panic. I would have to assume they're looking at it as an isolated incident which may or may not be the case here.

Right. Okay. Thanks.

Sure, John.

Your next question comes from J.T. Abouchar with GRT Capital.

Hi, just a couple quick questions. I know it doesn't take much CapEx to run the business, but sort of a general sense where are we on an overall capacity utilization and can we get any leverage out of that as we grow?

Well, we're nowhere near full capacity in our current facility. If you remember why we moved there was because we were anticipating an awful lot of C-5 TOP work. That has not come, obviously. We have tremendous room still to grow in that facility. Obviously, no CapEx is required for those kinds of things. We could easily double to almost triple the revenue that we're doing on one shift in that facility, depending of course on the mix of work we get. But any mix of work we can easily double our current projected revenue and then some. So, that's not an issue.

Okay. Sort of contrasting the commercial, the growing commercial business with the traditional military work. I know military we're sort of capped on what kind of margins and things we can get. How does the commercial opportunity look?

Let me just be careful to delineate that -- don't confuse commercial with a prime contractor. Some of the work we're doing is subcontracting is for commercial programs. But much of all we're doing is also with the subcontracting world is on military programs.

Okay.

Okay? Right now, we're able to basically hold our margins on all of the work. We did not have to do buy-in kind of stuff. Our margins, that's why we can predict that our margins will continue to go up as we get close to hitting critical mass and then we'll return to our historic margins. So the margins on both work is pretty much the same.

Good. Okay. And materials costs. Some raw materials, particularly metals, have been skyrocketing over the last six months. Does that affect you at all?

I'll say no, it doesn't, but I'll do it with a caveat. In our long term contracts there are escalation factors that allow for that kind of growth and if there's a growth in the cost of something then we get a higher price on the product. On any of the new stuff, the newest pricing is into that, the quote that we've given out. It shouldn't affect us in any way. Now, it's always possible that you can put in a bid and not get the answer for five or six or seven months and there could be a dramatic change there, but what would happen in that case is normally the government or the customer would come back to you and say, "Can you still hold your price based on the economic environment?" And we would either answer yes or no depending on what the situation was.

Excellent. Thank you very much.

You're very welcome.

Your next question comes from C.J. Karthauser with Skirtai.

Hi, guys. Can you hear me?

Sure. How're you doing, C.J.?

I'm doing well.

Good.

Real quick. I just wanted to get an update on Boeing. I'm not even sure if this is anything you can discuss, but have negotiations begun like maybe around the A-10 or is it really not at that stage?

We are obviously discussing with them the possibility of getting work from them given our past history and a program, et cetera. Other than that, I can't tell you too much else.

Okay.

A) It's not public; B) You know, we haven't had anything [definitized] yet.

Sure. Okay. And then, can you talk about any other big awards that you are bidding for right now that you see on the time horizon looking out maybe six months or so?

Not really because not too much of it is public. A lot of it is -- it's not governmental stuff. There is no very, very large governmental stuff coming out. The only thing we did bid on that is public that you can find going through the government websites is what's called a Structural Commodity Council. Starting in 2011, they want to have a group of two or three companies that they go to almost solely for this entire list of structural parts for their aircraft. We have bid on that. We know a few of the competitors. We won't get into who they are, but there's a very good chance that we will be competitive on that entire proposal.

But again, it's not going to generate any kind of revenue until 2010 or 11 because first of all if you consider the top contract, which we have one and Vought has one that carries itself out to 2011, those are huge structural parts that they would want to put on the Commodity Council, so they can't do that until that contract expires. That's the only real big one that's public and then of course we're always constantly bidding now to prime manufacturers on just about anything they have structural. It's tremendous new avenue for us.

So, what is the timeline of that being awarded, the Structural Commodity Council?

It could be anywhere from a month to six months, given the way the Government worked on the C-5 TOP. And again, it will be a nice award to have. It will give us revenue horizon, if you will, to know that come 2011 there's new stuff out there for us.

Great. What about -- can you talk about the commercial subcontract business? It looks like it was up. You had $6 million for the first nine months of this year versus $0 last year according to the press release. What exactly are those programs?

It was all commercial out of Sikorsky. It was a commercial helicopter program. We had put out a press release on the S-92.

Okay.

That's what that is. Obviously, we're trying to pursue a whole lot more in the commercial arena from all of our potential subcontracting opportunities as long as it doesn't involve a commercial buy-in by CPI. And by that I mean, in the old days, if you want to go back to our old financial reports and our old annual reports, you'll see that CPI was, quite frankly, a subcontractor on commercial aircrafts like the MD-90, MD-11, Boeing 757. The problem with those and some we're not a problem, but one turned out to be a major problem is that in those days they expected you to buy-in and be a partner with them. And when you become a partner and you don't get to get your recurring back for a long period of time, if the program doesn't go to fruition, you're out all the money you laid out. And quite honestly, the company made a decision probably in 1999 or 2000 that we just didn't have pockets deep enough to play the game if it was going to be played that way.

Now, what we're seeing so far is a divergence from that. Its okay, we're providing you tools or yes, you're going to build the tooling and we're going to pay upfront for it, kind of like the government does. And in any situation like that, we're more than capable of building aircraft structure for commercial programs. It's the same exact structure as on a military plan. So as long as the economics work, CPI will always pursue commercial business as well.

Great. And then finally, can you give the SG&A for the quarter or should I just -- do I need to wait for the Q to come out?

I believe Vince did - Vince, do you have that there?

The SG&A --

For the quarter.

For the quarter, yes. The SG&A for the quarter was $1,130,000 compared to $774,000 third quarter last year.

All right. Thanks a lot guys. Nice quarter.

Thank you.

(Operator instructions). Your next question comes from Paul Burger with PLA Associates.

Good morning, guys.

Hi, Paul. How are you?

It looks like the total amount of awards that you did is pretty much where it's been. Can you give any color on that? Have you lost any of the stuff after? Are there new ones in there or is it pretty much a static number?

It's fairly static, to be quite honest with you. The bidding process has slowed down. We haven't lost anything, so you know it's pretty static. It isn't that we lost $100 million but submitted $100 million kind of thing.

Okay. And on the TOPS program, the big thing going on is whether the cost of the program whether they're going to actually do it or not as we talked about before. Are your costs, do you think, included in that? What types of the escalator you have or is that not necessarily one of the issues?

You lost me on that one, Paul.

You're talking about the program doubling basically.

You mean the cost of the program?

Yes.

Okay, that's the RERP and the AMP programs; nothing to do with us. Those are the two modification programs that Lockheed Martin has. Engines and avionics.

All right, so none of those costs are anything in your --?

Have nothing to do with the structural, no. Nothing at all.

Okay. Great. Thank you.

You're welcome. Thanks.

Your next question comes from Michael Potter with Monarch Capital.

Hey, guys. Congratulations.

Thanks, Mike. How're you doing?

Very strong quarter. Back to the TOPS program again. I know we ask this question every quarter, but we've had very, very little released under that contract this year; under $2 million so far. Where do we stand? Can you give us --?

Mike, I wish I could tell you. I think now that we've got this huge debate going on, which Boeing lobby is extremely strong. Boeing also keeps the C 17 line alive. There are certainly enough people in Congress, both House and Senate, that have work in their districts and states from the Boeing C 17 that they are fighting like hell to keep it. The original Air Force thing was we want to upgrade all the C-5s and we're going to limit the number of C 17s. That has seen a shift somewhat and so quite honestly both the programs are in limbo.

They're going to build 10 more C 17s, but they don't know what they're going to do after that. They're not happy with Lockheed Martin on the pricing overruns on the two upgrades I just mentioned. So, it's almost impossible to say where it's going to go from here. There are some saying the C 17 -- the C-5 is outdated; get rid of the whole fleet. Even if you did that, it would take you 10 years to produce enough C 17s to make up for it, so don't think that's going that happen. I think what we'll see is supposedly both items, both the C 17 and the C-5 are slated for debate in January.

Sometime after that, I think you'll -- and this is strictly a personal guess. I have no intelligence to support this. It's just my emotional feeling that in the end when the dust finally clears from this thing, they'll retire all the C-5As, keep all the C-5Bs and Cs, completely modify all of them and build extra C 17s. So, in some respect I think you'll end up with a win/win for the supporters of each. And again, that's personal guess.

But what I don't understand is just on the basic spares business on the C-5, it seems as if it's down significantly from where it was three, four, five years ago.

It absolutely is. But let's go back and segregate spares versus TOPS contract. TOP was not a spares contract.

I understand that.

The spares contract is the same contracts that are all tied up in this massive backlog we're getting of things we've bid on that haven't been awarded. These planes are not being maintained at the level they need to be or should be or could be. And that's hung up in that large pot that we talk about all the time that really hasn't had anything done with it for two, two and a half years. The TOP is a modification program; meaning, if we're going to upgrade the avionics. If we're going to upgrade the [engining], then we should replace these structural parts on it also to make sure the plane can fly for 30 or 40 more years. So that's certainly two separate items.

I thought a lot of the spares got moved under the TOPS contract?

No. With that said, what we used to -- some of what we used to do as spares or -- I wouldn't call them spares. They were replacement parts. Some of them, yes, got moved onto the TOPS contract, but there's still a huge replacement parts quoting process and when you consider only between us and Vot, only 250 parts went on those two C-5 TOP contracts. And when you figure there are literally tens of thousands of structural parts on an aircraft that size, there's still tremendous, tremendous number that will need replacement.

Okay.

For damage or wear versus a set desire to included it in the modification.

Okay. So we are still seeing business and orders on that end?

Well, we are seeing request for quote. We're just not seeing orders at all. Nobody else is, which is the part that keeps us optimistic. It's not like we're bidding and losing. Our competitors are in the exact same boat. I have one competitor I talk to weekly and we're both experiencing exactly the same thing.

With regards to the releases, we had a rash of releases in the third quarter last year and based on through year-end; not nearly as strong this year. Do you anticipate a pickup before year end that they're going to release a whole bunch of work?

Again --

Again, the government's fiscal year-end already has ended.

Yes, that's true, except that they don't have a defense budget yet. So, until that occurs, I wouldn't expect to see much of anything. It appears they're getting very close to ending at and then yes I would anticipate as in past years that there would be a flurry of activity.

And on the Boeing side, has Boeing released any work to subcontractors yet? Not any work, but have the contracted with any of the subs on the A-10 contract?

From what we know, yes. The largest one that's one of their subs. Yes, they have.

Okay. What about down the line from there? Is it just the one out of 10 or is it one out of two or three?

From what we understand, it's about one out of four, possibly five. From what we understand, they will discuss with each one along the way and try to negotiate some work share, if you will. And CPI is in fighting for a piece of it, quite candidly.

Wasn't -- when Boeing made the proposal to the Air Force or submitted their RFP, wasn't CVU on that RFP?

They absolutely were.

Okay. So, hasn't a lot of the negotiations already taken place in order for Boeing to have submitted that RFP?

Yes. You could say that, Mike. The problem with that is that's negotiation to submit a proposal. You can imagine that once a company has won and I'll say this to you; this is not Boeing. This is industry-wide. CPI does it with its people all the time. When you've bid on a large contract and you get prices in and you get quoting in and you negotiate with somebody so that you can get a price to put in a quote, that's a whole lot different than when you go back to that person and say, "Okay, guess what? We've won. Do you want the work?" Because if you do it's not anticipated any more. Now it's something real. And I expect better pricing now that it's real, et cetera, et cetera.

So, that's the stance we're in now. We're talking to Boeing as I've said many times. We bring an awful lot to the table on the program. Yes, we were named in their proposal. That's public information as well. And so, we anticipate getting something from them? Yes, we do and we're working real hard at getting that, but to go any further informationally would be premature.

So, on the three or four subs that are left for Boeing, I guess, to do the final negotiation, are they doing them one at a time and are we second or third in line or are they trying to do it all at once?

Okay. Well, all the info I can give you on that, Mike, is that they are talking to everybody, but they pick them off one at a time. In other words, they have conversations with all the remaining ones and then pick one and say, "Okay, you're next. Let's finish you up. Okay, you're next. Let's finish you up." Like that.

I know you hoped that we would have something buttoned up by this time, at least from the second quarter call. Do you anticipate that we're going to get something before year end?

I would hope so, Mike. I can't guarantee that.

I know you can't guarantee it.

That would be my desire, yes.

Okay. And then just one other. On the CapEx for the nine months is how much?

I don't know if I even have that. Vince, do you have the CapEx?

It wasn't in any of the releases. For the nine months, it was about $90,000.

What are you budgeting for the fourth quarter?

Comparable to that. So, figure another $120,000.

That's $30,000 for Q4?

Computers. We don't really -- the way the business is in general, we don't have that much in the way of CapEx. Before I - let me make sure I'm right about that. That's right.

Okay. So we're really generating a lot of cash now it seems?

Well, we're generating cash, but we're growing the business, Mike, so the cash is going into the business itself. But yes, we've certainly turned the corner from where we were a year ago this time.

And then just to follow up on a question that you had earlier on the gross margin side, you mentioned that obviously the objective is to get back up to the historical gross margin, I guess, of the 31, 32, 33 range. Is that a goal that we think we can achieve for 2008?

That will depend on what revenue we project for 2008. I'm not ready to do that yet. There are some factors that could raise my projection or keep my projection where it is in my head at the moment. So, until we do that, I don't want to say. But yes, we are approaching - obviously, this climb in revenue is getting us back to the point where we hit critical mass and then the historical gross margins reappear and only get better then as we grow higher and higher because again we will have covered the overhead of the new building and everything that goes with that. We're operating with less people. We've become much more efficient from a year, year and a half ago. So yes, is 2008 feasible to return? Absolutely. Absolutely.

Thanks, guys.

Okay, Mike. Take care.

Your next question comes from Stuart Horowitz with Earlybird Capital.

Stuart Horowitz. How are you, Stu?

I'm doing great. How are you doing?

Very good.

Congratulations on the quarter.

Thank you. Thank you.

You're welcome. Just something aside from where the conversation has been for the last five or 10 minutes or so. In the theme of diversification, you talk about contract work and commercial work and such. What about in the area of the private sector. It looks like there has been some enormous growth in the area of the [fractional] jet business and/or the business with refitters and fabrication or renovation and customization of jets for the private sector and small jets. Have you entertained anything in that way of perhaps potential acquisition? Is there something that you think could be very accretive to tuck into the business that would help you diversify?

I don't think so, Stu. Not in that regard; not in that direction. Right now I don't think acquisitions are the way CPI wants to go. I think we want to continue to focus on our business and expand our base that we were doing through subcontracting to people. Now, that said, if there are manufacturers out there who are producing for that sector that you just discussed; you know, the executive business jet, the small private jet, et cetera and we can increase our opportunities by subcontracting to them, that's certainly something we are looking at and will continue to look at because you're correct. That sector of the aviation industry is growing rapidly. And more and more people are going to that kind of transportation.

So, we are looking at it. It's something we haven't thought about or discussed or even begun to pursue. But as far as acquiring something like that, I just don't think the company is in a position to do that at this moment. I'm not sure if that's the direction I would go if I was acquiring something.

Okay. It's out of the core. I realize that. It's something you really would want to --

Anything out of the core I wouldn't necessarily be afraid to try, but I wouldn't try it by jumping headfirst into the pool. I'd probably stick my foot in first.

Okay. And in the way of -- if you just got a little bit more granular as to what you see unfolding over the next two to three quarters. What would you envision as sort of a best case scenario or what you'd like to see in terms of awards? What is the agenda look like, so to speak?

That's a hard one, Stu, because I've got to be careful not to give out thoughts that people perceive to be facts. I just think if you've seen the trend in our subcontracting business now over the last three years, I would love to see that trend continue, grow even more. I think there's tremendous, tremendous business opportunity out there and I think we are doing, quite honestly, and I pat my business development people on the back for this, I think they're doing a tremendous job of developing those opportunities. And you know, the pure numbers speak for themselves as the kind of job they're doing.

Also, over that next two to three quarters of next year, I would hope that we would see some kind of a wind down of the war effort and that some of these planes would be home and being repaired. If that's the case, I think we would see a tremendous boom in our business. If people consider that we went from $30 million down to $25 million down to $18 million and that entire drop was based on the fact that we were in a war and funding wasn't coming to CPI or any of our competitors for that matter. And you look at 2007 and see that we're going all the way back to $27 million and that pool of money still has not been released. You realize we're growing the business in an entirely different way.

That pool of money, when it releases, is almost now like brand new business to CPI. If people are looking for growth factors or growth potential, that's a huge one and it's from a pool of money where CPI was a leading small business in the country. So, between that and the just tremendous, tremendous increase we've seen in our subcontracting work, that's where I see our growth coming from. That's where I see CPI going down the road. And I think the road is pretty bright, quite honestly.

Yes, I agree. Well said. Thank you.

Okay, Stu. Take care.

You, too.

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

Okay. I'd just like to thank everyone for participating and we look forward to talking to you in March. If any of you have questions along the way between now and March, please don't hesitate. Vince and I are always available and we'll give you as honest an answer to your question as we're allowed to. Okay? Thank you all very much.

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