CPI Aerostructures Inc (CVU) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to CPI Aero's second quarter 2009 financial results 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 Ed Fred, Chief Executive Officer of CPI Aero. Please go ahead, sir.

Thank you, Regina. Good morning, and thank you all for joining us for our second quarter 2009 conference call. If you need a copy of the press release issued this morning, please contact Lena Cati of The Equity Group at 212-836-9611, and she will fax or email 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 one 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 government's ability to terminate their contracts with us at any time; the government's ability to reduce or modify its contract, 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 price 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. I will then hand the call over to Vince Palazzolo, our CFO, so he can walk you through the financial statement details; then I will comment on the current business environment, outlook for the remainder of 2009, and then briefly wrap things up, and open the call to questions.

As reported earlier this morning, for the first half of 2009, revenue was approximately $21.1 million compared to approximately $16.9 million in the first half of 2008 -- an increase of 25%. Pretax income was approximately $2.216 million compared to pretax income of approximately $1.190 million for the same period last year.

Net income for the first half of the 2009 period was approximately $1.449 million or $0.23 per diluted share compared to net income of approximately $790,000 or $0.13 per diluted share in the first half of 2008.

Selling, general, and administrative expenses for the first half of 2009 were approximately $2.679 million or 12.7% of revenue, compared to approximately $2.664 million or 15.7% of revenue for the same period of 2008.

So with that prelude, let me introduce Vince Palazzolo, so he can walk you through the details of the quarter. Vince?

Thanks, Ed. As reported in this morning's press release, revenue increased approximately 25% to $11,437,691 in the second quarter of 2009 from $9,128,406 in the second quarter of 2008. This revenue figure represents the largest quarter in the Company's 29-year history.

Gross margin was 25% as compared to 22% in the prior year's second quarter. Pretax income for the second quarter increased 151% to $1,389,489 compared to $552,812 in the prior year's second quarter.

Net income for the second quarter was $903,489 or $0.14 per diluted share compared to $369,812 or $0.06 per diluted share in the second quarter of 2008. This represents a 144% increase.

Selling, general and administrative expenses for the second quarter of 2009 were approximately $1.443 million or 12.6% of revenue compared to $1.448 million or 15.7% of revenue for the same period of 2008.

New orders through August 5, 2009 were approximately $11.9 million. Non-ordered solicitations remained at an extremely high level, with open solicitations totaling a maximum realizable value of approximately $390 million.

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

Thanks, Vince. As Vincent just reported, the gross margin for the second quarter of this year was higher than that of last year's second quarter and that of this year's first quarter. As we've discussed previously, this is representative of the variances you will see as new programs come online.

As we stated in our press release, we expect that there will still be ebbs and flows, but that for the full year, the revenue -- the results will fall in the range of 23% to 25% gross margin.

It is always the case that in new development programs, there are many, many changes in the design, engineering and material requirements of the structures to be produced. Even when those design modifications are anticipated and accounted for, others occur that cause a company to incur overtime and additional expense in order to meet delivery requirements and production standards.

This has been the case in two of our three new programs, which is currently holding our margin down overall. However, we anticipate that these excess costs will be recovered, and the margins will end up in the range that we expected when we bid on these programs.

We are even more pleased to report that through all of this effort, the Company has been successful in delivering the first three sets of leading edges to Spirit, and we are continuing low rate deliveries on the E2D outerwing panel kits. Also, as just reported, new orders through August 5 of 2009 were approximately $11.9 million.

The decrease from last year's awards at this time can be directly attributed to two areas -- the weak national economic conditions, which are affecting buying decisions throughout the military and commercial markets; and the fact that, at this time last year, we had been awarded some major programs from our subcontracting customers. There have been no such awards yet this year, so that is not a negative comment. Major aerospace programs are not awarded every day, and we are very fortunate to have received awards on all three major programs on which we bid last year.

As future contracts become available for bid, we hope to experience the same level of success we did in 2008. However, even with this year-over-year reduction in awards for the quarter, we are pleased with the high level of unawarded solicitations outstanding, which total approximately $390 million. Having this amount of potential new business in the pipeline makes us believe that we have a vast amount of opportunity ahead of us to acquire additional new contracts.

This high level is an indication that our reputation has been elevated in our industry, thanks to our impressive list of existing customers. We are now on the radar screens of additional prime manufacturers, including other helicopter and business private jet companies, who are beginning to acknowledge CPI Aero as a premier supplier of aircraft structure.

Even with the large contract awards announced recently, the amount of total bids outstanding continues to remain significantly high, as we are now bidding on contracts with these new potential customers. We are hopeful that several of these solicitations will become awards and contracts in the future.

Based on all of the above factors, we reaffirm our projection that 2009 revenue will be in the range of $42 million to $45 million, with a resulting net income in the range of $3.9 million to $4.3 million.

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

And I would be remiss if I didn't once again thank the CPI Aero management team for sharing my vision of where we can take this Company; but more importantly, for making it happen. I would also like to thank all of the employees of CPI Aero for executing on that vision and being an integral part in winning such impressive awards, as the ones I've mentioned earlier.

I look forward to the future of this Company with great eagerness and anticipation of now executing on these contracts, and then attaining new ones, due to the quality of our work.

At this point, I'd like to open up the floor to questions. Regina, can you allow callers to place questions now, please?

(Operator Instructions). John Kohler, Oppenheimer + Close.

I notice that the number of C-5 awards that have come out lately are generally positive, but wondering if you could maybe give some color as to whether those refer for aircraft that were already on the ground for other work? If you happen to know that.

No, we have no idea the answer to that. I don't think they're on the ground yet, because obviously if they're on the ground, some of those parts we've just gotten contracts for will take nine months to 12 months to deliver. So I don't think they're for planes that are on the ground -- or if they are on the ground, they'll get sent back up, and then later on be refitted with the parts that we would provide through these two contracts.

Okay, great. Also, it looks like the total bids outstanding was up about $30 million?

That's about right.

Okay. And I'm guessing that that's not just an addition of $30 million, that there might have been some movement in there?

A little bit of movement, sure. I mean, just by the fact that we announced the $5 million or $4.9 million from C-5, that leaves that part of money, which means we'd need $5 million more to break even.

So, there have been some small movements downward, smaller things that we haven't won. And then we've submitted substantially more during the quarter. We have not lost nor has there been any awards on anything of any major size during the quarter at all.

Okay. That sort of leads to the next question I had. I'm wondering if you're seeing winning bids or other scuttlebutt that maybe people are willing to accept lower margins on programs, given the state of where we are in the (multiple speakers) [workflow]?

John, not that we're hearing. Like I said, there have been no awards where we haven't had to do a -- as we like to call it, a Murder Review Board here, where we try to find out why we lost the bid. There have been no major awards given out. We're not hearing about people taking loss leader kind of jobs or cutting their margins to the quick at this moment, to try to win something.

We still have not heard about a major pickup in government spending on the kinds of things we do yet. So that's still all out there. Is it a somewhat encouraging sign that we've won almost $9 million worth of C-5 work so far this year, on the top contract? Yes, absolutely. That makes us very happy.

I'm not going to jump for joy yet, because we don't know is this now a trend? Or is this, hey, we just realize we needed some parts; let's get them on order and move on. But $8 million plus from the top contract is encouraging.

Yes, exactly. On the -- was wondering if you can give an update -- you said that you delivered three sets of leading edges to Spirit, and I missed the number of kits on the E2D.

No full kits yet -- pieces of different kits. They inventory -- Northrop Grumman inventories those kits. We have not provided a full kit yet, but we've provided various elements of a full kit to them. That's why I called it low rate deliveries.

Okay. And I was wondering, in regards to the A-10, if you have spent your money on tooling -- or if you've heard from them or what the status is on that?

A-10 tooling is not in place yet. We have a good amount of it on order. The tooling is not as extensive as the Spirit Gulfstream tooling. That was an extremely expensive buy; the A-10 tooling is not to that level of cost. But it is not in place yet. It's on order.

Okay, great. Thanks very much.

Russ Silvestri.

A couple of questions. What's the total backlog that you have today?

I'll let Vince answer that one.

Yes -- actually don't -- I'm not 100% sure of the backlog at the moment, because we don't report that at the quarters. I would have to go back to my schedules and look at it. If you want to give me a call, you can give me a call afterwards and I can give you an idea.

Okay. And then can you talk -- did you have any turn orders, meaning orders that you got within the quarter that you're able to execute and generate revenue on this quarter?

I'm going to say not likely. I guess it's possible we won something small during the quarter and I've already put it on order, I had it delivered to us. But it would be a minimal amount of revenue added to the revenue that was already planned for the quarter.

Even the most minimal lead-times on our simple machine parts right now is 10 to 12 weeks.

Has that changed at all? I mean, is that shortened or lengthened?

No, that's about normal.

It's about (multiple speakers) -- yes.

Okay. And when you talked about the gross margin, I think I may have missed it. What was your expectation for the second half of the year?

The same range that we're in now, 23%, 24%, 25%. I would lean towards the 24%, 25% range at the moment, the higher ends, because it seems like we've cleaned up a lot of the growing pains from the new programs. Now, that doesn't necessarily mean once -- going back to you earlier question, once the A-10 tooling gets here, we start setting that up, and they start making modifications that could change. But right now, I think we're running fairly efficiently, given the programs that are still in their early stages.

And the cash flow in the quarter?

Cash flow for the quarter has been negative, predominately related to outlays for the Spirit tooling that we talked about.

And the anticipation for that for the second half of the year? I mean, with that now behind you? Is the A-10 going to continue to be cash flow negative, or --?

It will be flat probably in the second half of the year. That is -- my projection would be -- for that, would be that it will be flat in the second half of the year, because although we'll start collecting on some of the programs that are running, the A-10 tooling is going to flatten that out.

It will probably not drive it negative, like the Spirit tooling did. As I said, the Gulfstream tooling was very expensive.

Okay. And last question, in terms of the total current assets you have, I think it's like $49 million on the balance sheet -- could you break that out between inventories and receivables and PP&E?

Yes, PP&E (multiple speakers) --

And maybe how it compares to the previous quarter, too?

We've had nominal additions to PP&E. When we get -- when the 10-Q gets filed, and see that that standard classic receivables, which would be things that we have actually built and are waiting on exact cash collections on, have increased to an excess of $4 million. And the remainder of that and the differential would be most of the cost and estimated earnings in excess of Billings line.

Right. And Russ, we don't break that out between inventory -- or our costs incurred or estimated earnings itself; it's one number.

And the total PP&E number then? What do you expect that -- before the 10-Q comes out?

PP&E is about $1 million, which is about what it was the last quarter -- [if all] you added, as I said, a nominal amount and there's been some depreciation.

Got it. And the cash flow being negative, I mean, we're talking about [sort of the] million bucks type thing?

Probably a little less than that.

That's all.

(Operator Instructions). Michael Potter, Monarch Capital.

Just to follow up on the prior caller, can we perhaps go to a full P&L and balance sheet on future releases? I think it would help make things a little bit more clear.

We can talk to the Board about it. I don't know. We filed the 10-Q the same day as the press release. So -- but we'll discuss it with them at the next Board meeting, okay? If they don't have an issue with it, we'll file [full ones] with the press release.

Can you give us an update, Ed, on where we are with the -- I think you mentioned in the prior call that we're looking to be a Sikorsky, I guess, platinum supplier towards the end of the year? (multiple speakers)

Right. You have your precious metals a little wrong, Mike, but we are going to be a gold supplier.

Gold, okay.

Yes, gold. So -- they don't do platinum. But we're on track. They've had their (inaudible) order in, evaluating our systems; our delivery and quality ratings are sky high, through the roof, so now it's more a way of trying to measure us. Normally, they measure companies using lean manufacturing standards. Well, obviously, since we don't manufacture, a lot of what we do here doesn't fit the true definitions of lean requirements. So they're trying to find out how to figure in what we do into those standards.

But we're on schedule for end-of-the-year. That's their words as well as mine. So that's going just exactly as how we had hoped. We actually have an individual here who is absolutely responsible for getting that done by the end of the year, who reports to us every two weeks on status. We just got status the end of last week, so, everything's on schedule.

All right. And then what does that mean with regards to future business, once we receive this gold status?

Well, it means that there will be a handful of companies, and eventually a bigger handful, that have this level of status. They will be the companies that receive priority or preferential treatment when it comes down to proposals that are submitted by individual companies like us. It will be a criteria. If two companies are dead even, but one of them is a gold supplier, one of them isn't, the gold supplier will get that award -- according to Sikorsky.

Is it that important? It's that important, especially when you consider that Sikorsky has projections out on the Street. They're going to continue to grow procurement-wise -- which means they're going to be buying more and more. And we certainly want to be -- I don't know that we can make it to the top five suppliers in the world, but I'd certainly like to be considered their biggest and best small-business supplier that they have. And so it does have an extreme level of importance in the universal order of things.

And where are we with our, I guess, our bid pipeline with Sikorsky? Are we expecting some new awards before the end of the year?

I would hope, Mike. If you're asking me, do I expect them before the end of the year? The answer is yes. Do I know I'm going to get them before the end of the year or they'll even award them by the end of the year? No. Sikorsky does things their own way. It's a lot slower than I'd like them to be.

That said, I'm not going to question their success level or how they do their jobs. So we'll just continue to submit more and more stuff. We actually visit Sikorsky on a weekly basis. And I mean that; it's religious. Somebody is up at Sikorsky every week, following the programs we bid on, following the programs we're on, always looking for more opportunities, always trying to get customer feedback, if there's anything we can do better.

So, as I've said many times, to me, they're a major focus of what we want to do here at CPI and where our success can really come from.

You also mentioned that we have several bids out with potential new customers?

That's correct.

Can you give us a little bit more color there?

No, because they're not public at the moment, what the bids are. But I can tell you -- and I think I've said this in my presentation to investors, et cetera -- we have now made bids to Bell Helicopter on certain parts and then looking to offload. We have bid Airbus parts in conjunction with other companies, sometimes teaming arrangements where we bid together and put together a whole assembly, where certain parts are ours, certain parts are theirs.

Those are the two major ones at the moment. We've got other orders or bids out to other companies, but when you're talking things that would really excite the listener and excite us within CPI, I'd say those are the two big companies right now, is that we're actively pursuing business at Bell Helicopter and Airbus.

Right. And then on, I guess, on the last call, you mentioned that you were going to be traveling to the Paris Airshow and this was going to be your first time going to the Airshow. Can you give us a little bit of update of how it went and was it a positive -- and it's something that we're going to be continuing to do?

Well, I can't answer whether we're going to continue to do it. The next one is two years from now. I can give you a general gut feel as to how it went. And that would be to say to you that from our perspective, we thought it was spectacular -- the show itself, obviously.

But also, the fact that Doug McCrosson, my Senior VP of Ops, and I were able to meet with the top decision-makers in the procurement areas of all major companies. And when I say all, I mean Northrop Grumman; I mean Bell Helicopter; I mean Airbus; I mean Boeing; I mean LMI; NORDAM.

We got audiences with people that, if we tried to get them here in the States, would never happen. Not because they don't like us or -- but when you're here in the States, you've got 1,100 other things going on, and a little company from Long Island calls and says, can we get a meeting with you? You know what? We're probably not high on their priority list.

But when you're in a controlled environment like the Paris Airshow, and the sole purpose of those people is to meet as many people as they can every half hour for five days, it gave us the opportunity to have an audience with decision-makers. And we believe from the feel of it, from the feedback we've had since, from the things we're seeing since, that it was highly, highly productive.

Now, nothing develops overnight. Nothing develops in two or three months or even six months. So, when you say, well, would you go back again? I'll let you know 19, 20, 21 months from now when we see the seeds that we sowed at Paris this year, did they grow? If they did, then, yes, you know what? It's a great venue. If they didn't, is it because it really isn't productive for us to be there? Were there other environmental reasons that it didn't happen? That we have to wait and see.

Cold, off the cuff, as of today, I thought it was a tremendous thing. I would do it again in a second two years from now, because, again, companies and people in those companies know us that didn't know us before then. And we've had continued communication with all of those companies since.

Great. I'll get back in queue. Thanks, guys.

[Paul Berger, Hammock Investor].

A couple of things. The outstanding bids went from 360 to 390. Can you give us any color on how much went to new bidders as opposed to people you've bid with before?

Of the $30 million increase, I would basically say it was about $12 million to $15 million of new and, I guess, $15 million to $18 million of people we've already dealt with before. That's a ballpark figure, though.

Right. Also, obviously your numbers came in well. And if you're going to do what you're projecting, your back end is going to be much greater than the front end. It's the same thing that happened last year. Can you give us any idea why this stuff comes in at the back end as opposed to maybe [smoother] through the year?

Yes, a couple of different things. First of all, our SG&A expenses in the back half of the year are significantly lower than our SG&A in the front half of the year, due to accounting rules regarding the way we compensate our Board of Directors. We take some pretty big stock option charges in the first half of the year and those don't recur in the second half.

It's not straight-line accounting; it's actually you have to take the hit on the day you issue the options. That's a significant difference in expenses in the tail half of the year.

And then generally speaking, a lot of companies -- in our case, we're going to have deliveries in Q4 of particularly, we'll probably be delivering the first unit on order two of Spirit. And as Ed mentioned earlier, we've delivered some small parts on E2. We should have a full kit out in the fourth quarter of this year.

So, that will wrap up the revenue at the end of the year also. And that does seem to be a pattern that is followed somewhat -- it's not seasonality, per se, but that would give you the two biggest reasons why the second half is more profitable.

One final question. It's my understanding that the government issued a new C-5 contract, pretty much a follow-on to the one that you guys have, if they ever order it. And it's supposed to be a IDIQ. Can you give us any color as far as how big that is and what years you may expect something like that to happen?

Yes, they came out with what they called a Structural Commodity Council award, meaning just as they did with the C-5 TOP, they wanted to bundle a bunch of parts going forward. Same kind of parts we have on the C-5 TOP, and to take effect, in essence, from 2011 on, when the C-5 TOP contract expires.

CPI bid on that -- in that process and was named one of the three winners in that process, along with two privately-held companies -- GSE Dynamics and a company called -- wow, why can't I think of that name at the moment?

Top Flite or something like --?

Top Flite, right, like the golf ball. We are the three winners with them in the restricted, meaning small business, Structural Commodity Council award. If somebody now says to me, well, why didn't you announce that? Because there's really no dollar value to go with it right now. You asked me, is it IDIQ? Yes. You know what? It's very, very much like the C-5 TOP contract.

The only difference is when they decide they need parts, they will go to the three of us -- unless somebody's not approved to build one of them, then they'd only go to two of us -- but they will go to the three of us and say okay, you are the three people qualified to build this; now bid on it for us. And we will either win or lose, based on our price, with the type of product, whether it's an assembly versus just providing a part -- whatever.

And being IDIQ and not having a finite dollar value like the C-5 TOP does, and did, it made no sense for me to come out and try to lather everybody up about a contract we won, but I can't tell you how much it's worth and I can't tell you how much of it we're going to get.

Again, should it be productive from 2011 on? Of course. They're parts we've made before that nobody else has, even the other two competitors. There are other parts on it that we haven't built yet but we believe we can be competitive on.

So, it has nice potential. Can I quantify that potential for you? No, not right now. Maybe as we get closer to 2011 and we start to see what they need and what they're going to order, et cetera, I'll be able to do something like that. More likely is, as and if we win awards from that contract, I would simply announce that we've won it, the dollar amount, and then tell you that it was part of the Structural Commodity Council contract that we were a winner on in 2009.

: But usually on the IDIQ's they give some maximum dollar amounts; did they give one on this one? Or not?

I don't believe so, because they haven't completely finalized what items are going to be on the contract. The things that we bid on -- or what allowed us to become a winner in the process was a specific number of parts, but that is not the overall parts that are going to be on it.

It was -- how do I say this? -- it was almost as if it was the first installment of parts. And if you three are chosen, or when you three were chosen, that means that you three will now get to bid on the rest of the parts that we'll add to this. But it's still in formulation because the C-5 TOP contract is still out there for almost three years -- 2.5 years.

Okay, great. Thanks a lot, Ed.

You've got it, Paul.

(Operator Instructions). There are no further questions. I will now turn the conference back to management.

Thank you, Regina. Thank you all for listening in, and we look forward to talking to you in November when we do 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 now disconnect.