CPI Aerostructures Inc (CVU) 2009 Q4 法說會逐字稿

Good day, everyone and welcome to CPI Aero's fourth quarter 2009 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, President and CEO. Please go ahead, sir.

Thank you, Regina. Good morning and thank you all for joining our fourth quarter and year end 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 e-mail a copy to you.

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 resulted. 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 barr us from doing business with them as well as competition in the bidding process for 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 a brief overview of our 2009 full-year results. I will then hand the call over to Vince Palazzolo, our CFO, so that he can walk you through the financial statement details. Then I will comment on the current business environment, our guidance for the current year in 2011 and then briefly wrap things up and open the call to questions.

As reported earlier this morning, for the year ended December 31, 2009 revenue reached an all-time high of approximately $43.9 million. This represents a 23% improvement over 2008's revenue of approximately $35.6 million. Pretax income rose 52% to approximately $5,861,000 compared to 2008's pretax income of approximate $3,854,000. Net income for 2009 was also up 52% year-over-year to approximately $3,946,000 or $0.64 per diluted share compared to approximately $2,591,000 or $0.42 per diluted share for 2008. Selling, general administrative expenses for 2009 were approximately $5,198,000 or 11.8% of revenue compared to approximately $4,717,000 or 13.3% of revenue for 2008. So with that prelude, let me introduce Vince Palazzolo to walk you through the details of the quarter. Vince?

Thank you, Ed. As reported in this morning's press release, comparing the final quarter of 2009 to the final quarter of 2008, revenue increased approximately 38% to a record of $12,729,858 from $9,235,576. Gross margin was 30% as compared to 27%. Pretax income increased 71% to $2,240,661 compared to $1,311,715. Net income was $1,559,661 or $0.25 per diluted share compared to $908,715 or $0.15 per diluted share. Selling, general and administrative expenses were approximately $1,318,000 or 10.4% of revenue compared to approximately $1,247,000 or 13.5% of revenue. At this point, let me hand the call back over to Ed for an overview of the business.

Thanks, Vince. As Vince just reported, the gross margin for the fourth quarter of 2009 was higher than that of the prior year's fourth quarter and the full-year gross margin also exceeded that of last year. We expect that there will be -- still be quarterly ebbs and flows in our gross margin as our new programs come online but we arrived at our 2010 guidance based on a 24% to 26% gross margin range.

Longtime CPI investors have heard me say this before but it bares repeating. It is always the case in new development programs there are many, many changes in the design, engineering and material requirements of the structure to be produced, even when those design modifications are anticipated and accounted for, others occur that cause our company to incur overtime and additional expense in order to meet delivery requirements and production standards.

This has been the case in all three of our major new programs. However, we anticipate that these excess costs will be recovered, and the margins will end up in the range we forecast when we bid on these programs. And we are even more pleased to report that through all of this effort, CPI has been successful in delivering the first seven sets of leading edges to Spirit and we are continuing low rate deliveries on the E 2-D outer wing panel kits and now A-10 structural assemblies. New orders through March 15 of 2010 were approximately $3.6 million. While some of you have expressed concern regarding the lower level of awards since the end of 2008, let me put -- try to put those concerns to rest. As I stated at the ROTH conference last week, I compare the 2008 awards to the game of baseball.

In 2008, we bid on three major programs. Programs that would change the way CPI did business. And we hit a grand slam. We won all three. But just as in baseball when you hit a grand slam we cleared the bases, we whipped out our pipeline of potential major programs at that time. There have been no awards of that magnitude and duration since then. Though that is not a negative comment.

Major aerospace programs are not awarded every day. And we are very fortunate to receive awards on all three major long term programs on which we bid on in 2008. As future contracts have become available for bid, we will -- we will and have done all that we can to achieve the same level of success we did in 2008.

There is a real business potential from the approximately $270 million of unawarded solicitations outstanding, once these programs are funded. This number is approximately $120 million lower than the amount reported in conjunction with our third quarter's earnings release, predominantly because of a large single unawarded bid that we believe the customer will no longer award to anyone. This should not alarm anyone as management felt all along that CPI would have been a dark horse to win this particular competition and in no way counted on it for future growth.

In the past several years, our reputation has been elevated in our industry thanks to our impressive list of customers, the successes we've experienced on the important programs that we are working on and the exposure we have gotten and contacts we've made at various Aerospace and Defense Institutional Investment conferences. We are now in the midst of establishing relationships with additional prime manufacturers, including other helicopter and business private jet companies who have come to recognize CPI Aero as a premier supplier of aircraft structure. Among the unawarded bids outstanding, are contract opportunities with these potential customers. We look forward to reporting on our progress of turning solicitations with these prospects into awards and contracts in the future.

As previously announced, based on the visibility we currently have, we project that 2010 revenue will be in the range of $48 million to $51 million, with resulting net income in the range of $4.3 million to $4.8 million. It is our expectation that our three major long-term production programs, the A-10, E 2-D and G650 will be in full scale production and generating consistent, significant revenue during 2011 and we therefore project the 2011 revenue will be in the range of $78 million to $81 million with resulting net income in the range of $8.9 million to $9.5 million.

Additionally, using 2008 as the baseline, our 2011 guidance affirms our expectations for a three-year compounded annual growth rate for revenue in the the range of 30% to 35% with a resulting compounded annual growth rate for net income in the range of 50% to 60%.

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 are working diligently to continue this profitable growth and reach our our full potential as the world's premier small business manufacturer of aircraft structure. And I would be remiss if I did not once again thank the CPI management team for sharing my vision for 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 intrical part of winning such impressive awards as the ones I mentioned earlier. I'll 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 would like to open the floor to questions. Regina, can you allow callers to place questions now, please?

(Operator instructions). Our first question comes from J.D. Abouchar with GRT Capital. Please state your question.

Thanks for another great quarter.

Hi, J.D. , how are you?

A couple of questions. First on -- just some accounting stuff on -- so I can get to cash flow from operations, what was depreciation amortization in the quarter as well as CapEx?

I don't know off the top of my head. The 10-K has actually been filed already and so you could look on there. If not you can call me back off -- when we're offline and I can get you those numbers.

Okay, great. And then a couple of other questions. On the Spirit contract, if I remember correctly originally there was an opportunity to do both leading as well as trailing edge and then decided just to do the leading edge now until you got ramped up. Cand you make give us an update on the opportunities of picking up some more work at Spirit?

Okay, well actually it was three assemblies, not two, it was the leading edge, trailing edge and the flaps.

I forgot the flaps.

Okay. We're in discussion with Spirit now. We're obviously not through the first ten sets which is what we all agreed they would handle the other two assemblies. We are in discussions with them now about possibly transferring the work back to us as per our purchase order. I can't give you much more information than -- other than that, you know. But to say to you they are aware it is on our purchase order, we are aware it is on our purchase order and it is something that we're certainly, you know, working very hard to get back into our fold, if you will.

Right. And at this point that is not in your backlog or your projections?

That is 100% correct.

Okay.

It is not in my future projections.

And then the perennial topic, the C-5 top, it looks like we've been getting a little bit of business out of there. Can you just refresh me on, you know, potential value and king of if the outlook has changed at all there?

Well, potential value is in, you know, the $200 million range. I think we -- we've been around that contract long enough to know it is not going to come anywhere near, you know, that number.

Yeah.

But it has been a very steady steady $5 million to $6 million a year revenue generating contract. Again, not what we actual expected but then again when we thought we were going to have that as our big contract we never dreamed of having the other kind of contracts that we have now. I think with the fact that there seems to be a commitment to modernize at least the C-5B version aircraft, which is 50-something planes, I think 51, to give them the modification and upgrade on both Avionics and re-engining. There is certainly an opportunity going forward to get more structural work on that because I think logic just dictates that if you are upgrading the Avionics and you are upgrading the engines but you don't do something about the structure you would have a rotted out plane that could fly faster and fly, you know, more efficiently. So I think somewhere along the way here there is the opportunity for a lot more work on that contract. Again, that is also not really built into our projections in any meaningful way.

Okay. And then just to recap the -- the more conservative gross margins in 2010 is basically the big ramp of the three projects and as they come online and sort of the initial engineering stuff gets done we get back up to our -- more historical run rates?

That is absolutely the assumption we're going on, yes.

Great. Thank you very much. Keep up the great work.

Thanks, J.D. Take care.

Again, if you with like to ask a question, press star and then the number one. Your next question comes from the line of Michael Potter with Monarch Capital Group. Please state your question.

Hey, Ed.

Hey, Mike,

Congratulations on a great quarter and a great year.

Thanks.

Just a follow-up on the last caller with regard to the gross margins. I know I've asked in the past about whether or not you anticipate what would achieve a historical 32%-33% range, do you still anticipate that that's a good target for the company?

That's absolutely the target we're shooting for, Mike. Whether we're going to get to it in, you know, late '11, into '12, somewhere in there, still remains to be seen but that is still absolutely our target. We haven't had to take this work at -- at losses or reduced rates or anything else. So it is still our assumption that as we become more efficient, as the programs themselves become more efficient, we'll be able to start to generate a higher gross margin. Yes.

Okay. But it's -- okay. Great. So we should -- it's -- it's realistic that into '11-'12 that we should start to see those historical margins again.?

It is realistic that we could see those. That's absolutely correct.

Okay. With the A-10's, do we have an opportunity to -- I mean how are things going with Boeing and do we have an opportunity, perhaps, to pick up more work on the A-10 or perhaps even other programs that Boeing is working on?

Yes to both questions. We are doing a great job. They are very happy with us. We, so far, have had a terrific experience with them as a customer.

There are potentially additional pieces we can be doing on that A-10 wing that would increase the value of the contract we have. And also I think once we've proven to them our capability as a manufacturer of structure, we will certainly try to knock down the door on some of their other programs. You know, 787 looks like once its rolling again, it's going to roll really, really fast and really hard and I'd certainly like to offer up our company as an alternative method for them to produce parts that are, you know, 100% quality and also can be delivered quickly. So those are other avenues that we will be pursuing with them.

Do we have an opportunity, perhaps, on the refueling contract?

We haven't delved too deeply into that yet. I don't think quite honestly the refueling contract is anywhere near completion. Even though -- and again this is personal opinion, folks, don't take it as fact, but I don't believe for a second that it's going to be a one-aircraft company program. I know Northrop Grumman has said they are out of the competition. I find that hard to believe. I think politically it is totally unacceptable for the US government. I think at some point they'll have to come to a compromise on the requirements of that RFP. And both companies will be in.

So I don't think that that program is necessarily very close to being awarded. When it is awarded, or when we think it is a whole lot closer, we would offer our services to either one of those two companies, because we can do -- we've done a myriad of things on the current tanker program. And, you know, could offer those same capabilities on the new tanker program.

Okay. And then just one last question, our Sikorsky gold certification, where does that currently stand?

As I stated at Roth last week, the -- we are on the list to being main supplier of gold. The belief right now is that it will be between April and June. So we're -- possibly only a month away. We're having our final audit very, very soon. And there's a -- a three-pronged approach.

You need to be above certain levels on all three things to be supplier gold. We are already above the levels on two of those three. The final audit, we believe we've got the third one covered now and then that would lead to us being made supplier gold. Currently there are only 30 companies out of all of their suppliers across the board who are either supplier gold already or -- or what they call performing, which means that they are the next companies to become supplier gold. So if it does happen in April to -- to June time frame, we'll probably be one of 15 companies that has actually achieved supplier gold.

Perfect. All right, great job, guys, I'll get back in queue.

Thanks a lot, Mike.

Our next question come from the line of Russ Silvestri with SKIRITAI Capital. Please state your question.

Good morning, Ed. Russ Silvestri here.

Hey, Russ, how are you?

Fine, thank you.

Long time, no see.

Two quick questions, one I've asked you in the past and I'm curious to hear it again, two questions, one is what are you doing to assure the 100% quality and the second is, again, a personal opinion, I do not know if you saw this morning Triumph is in agreement to acquire Vought and I was curious as to how you think that might impact your business.

Okay. First one, what do we do to ensure 100% quality? We're doing two things now, besides the one we've always done which is on-site inspection here at CPI of every incoming part and every outgoing assembly. We're also now doing an awful lot of what I will call offsite quality inspections which means that they are being done at the facility of our supplier, either through the use of CPI consultants, a government quar located at those facilities, or even a third party.

We are making sure that every piece that comes into this building has gone through some level of inspection first. This way it speeds the process here, eliminates, you know, potential for more mistakes and then, again, you know, a final inspection before it leaves this facility. As of right now, you know, for Sikorsky we are at 100% quality, no escapes, no anything. We are at 100% on-time delivery, so, as I've said we've reached two of the three criteria.

As far as the news today on Triumph buying Vought, everybody kind of new somebody was going to buy Vought, they've been wallowing for a couple of years. It's probably a great move on Triumph's part. How it affects us, I'm not sure yet. We do -- we do only about a $500,000 a year with Vought, so I don't see -- I mean, that's not a big number, it's not something that if they turned it to zero tomorrow would impact my projections in any way shape or form. It remains to be seen how Triumph deals with this -- this -- this acquisition. And for me to even guess would be kind of silly. But, you know, are they going to take things in-house and do them themselves? Are they going to off-load a bunch of the work? Did they buy it because they have certain contracts that they want or do they really want the means of production that Vought had? I do know those answers yet. I think anyone who's following this just has to sit back, wait and see how this unfolds. It shouldn't hurt us in any way. The question is, will it give us opportunity to bid on stuff that Vought either used to do or that Triumph wants to off-load, et cetera? That remains to be seen.

Do you do any business with Triumph today?

Yes. We actually use Triumph as a supplier for some parts, not as a customer at the current moment. And it is an interesting dichotomy there. They are buying a customer and yet they are a supplier to us and so we'll see how that goes. I mean, we have others that we compete against and are supplier suppliers and also are customers. It 's not anything that's going to be unusual for us.

And then just as a follow-up, I noticed that the cash on the balance sheet at the end of the year was higher than it has been in the past. Is there any need for you guys to raise any additional capital given the current projection?

That is a question, Russ, I can't necessarily answer for you. We evaluate that as business unfolds each and every day basically. Everyone knows that we have a self-registration statement out there. That statement is out there in case we decide that we do need to raise money. It will be a quick, easy process to get done. It has been out there now probably five, six months. We haven't drawn down on it so far. But if we choose to, it will be because there's a good business reason to do so.

Thank you.

(Operator Instructions) Your next question comes from the line of John Kohler with Oppenheimer and close. Please state your question.

Good morning.

Hey, John, how are you.

I'm good, how are you?

Very good, thanks.

Good. Glad to see that we're getting close to the end of the road, so to speak, with Sikorsky. I'm just wondering if could you talk a little bit about some of dynamics that are going on there. There's still in full mode to outsource more of their production and how things are shaping up.

Sikorsky has been a terrific customer. Obviously, if we're going to be made supplier gold they think extremely higher of us. It has been a terrific relationship so far. We've taken on some very, very difficult work from them on offloads and they've been incredibly impressed with how we've gone about our job and gotten them parts, et cetera. They are -- they are still absolutely in the off-load mode.

I -- I think the next, I will say year to two years with them is critical, because as all of you should know, a lot of what they do is on a five-year, what they call a multiyear -- this will be multiyear eight, a five-year kind of term so that when you win something now the likelihood is that you are going to keep it for the next five years. So we are obviously in, you know, a full-up mode to make sure we can bring in as much as is humanly possible right now so that we do have that kind of work locked up for five years. So I think the fact that we are being named supplier gold, we have so much in bid to them at this moment, I don't think the timing could be any better for us. Now it's just a question of making sure we do win those additional jobs, and then continue to execute on everything we've done. But, again, to get supplier gold you had to have been 100% delivery, 100% quality for a 12-month period. And so this is not like, okay, we just cleaned everything up. We have done this since the day we took them on as a customer.

Right. Okay. And sort of a follow-up, since you mentioned the bids out. The one bid that was canceled I know you said it was sizable, I was also wondering if you had any that fell off due to age.

We had a couple that fell off due to age. We had some that have been added on due to new bidding, it just so happened that the piece that fell off was almost identical to the amount we decreased and, again, it hasn't fallen off -- well, we took it off. It is still out there. We have not been told that the program will not be awarded.

But we've been around this business long enough to know, we've heard enough stories about where we think this is headed that I don't ever want to mislead any reader of our information to think that something is there when I truly do not believe it is. And I think that this one particular contract will not get awarded to anyone, even though it was put out for competitive bid. I -- I think they have, and I will not deal with who it is, but I think that they've come up with a different idea for it and so therefore we made the decision as a management team to take it off that number.

Okay. Great. That's it. Thanks.

All right, John. Thank you. Take care.

Our next question comes from Michael Potter with Monarch Capital Group. Please state your question.

He was only allowed one turn. What's up, Mike?

Just a follow-up. Yes. To Russ' point earlier, the -- you know, the balance sheet certainly improved, more cash onhand, a nice increase in working capital, what is the current availability under our line?

I'm sorry, what was the --

Current availability under the line?

We have one -- the line is $3.5 million total and subsequent to year end we paid down some more so we have about $1.8 million available.

Okay. So we're in good shape there. And what's -- what's the CapEx budget for 2010?

The CapEx budget is -- is $100,000, round numbers.

So very little.

Absolutely. We're not a heavy CapEx company.

Yes, we're not a heavy CapEx company. $100,000 is a fair number, yes.

Okay.

Okay?

Okay, thanks, guys.

You got it.

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

Thank you, Regina. Okay, I just thank you all for participating in the call and we'll probably be back to you will in about six weeks for our first quarter call 2010. Thank you 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.