CPI Aerostructures Inc (CVU) 2015 Q2 法說會逐字稿

Welcome to CPI Aero's 2015 second-quarter results conference call. With us today are Douglas McCrosson, President and Chief Executive Officer; and Vincent Palazzolo, Chief Financial Officer. (Operator Instructions)

As a reminder, 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 rejected results. Included in these risks are the government's ability to terminate their contracts with the Company 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 the Company from doing business with them as well as competition in the bidding process from -- for both government and subcontracting contracts.

The contracting customers also have the ability to terminate their contracts with the Company if it fails to meet the requirements of those contracts or if the customer reduces or modifies its contracts to them, due to budgetary constraints. 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 and other risks can be found in the filings with the Securities and Exchange Commission. Please note today's conference is being recorded.

Now, I will transfer the call to Douglas McCrosson, CPI Aero's President and Chief Executive Officer.

Thank you, Amy. Good morning and thank you all for joining us for our 2015 second quarter and first-half results conference call. I will start this call by providing a summary of our achievements for the periods and then turn the call over to Vince who will discuss our recent financial results.

Yesterday, after the close of the market, we released our second quarter and first half 2015 financial results. Before I turn the call over to Vince I would like to point out the following items.

First, for the second quarter of 2015, we reported EPS of $0.12 compared to a loss of $3.50 per diluted share in the second quarter of 2014. As compared to the first quarter of 2015, we reported improvements in both revenue and net income in the second quarter of 2015. We expect the sequential quarter improvements to continue over the next two quarters.

Our performance for the second half of the year is expected to be much stronger than the first half, due to the timing of delivery orders associated with several major programs received in late 2014 to early 2015. For this reason, we are projecting full-year revenue of $92 million to $102 million, surpassing the $89.3 million of revenue we recorded in 2012.

Second, we continue to focus our efforts on improving our production margins and have taken steps to drive direct and indirect costs down. Our gross margin for the first half of 2015 was affected by the profit adjustment we made last year, related to revised estimates for the A-10 wing replacement program or WRP.

As a result we continued to record revenue on this program with zero gross margin. Excluding the effect of the A-10 WRP, first=half 2015 gross margin in all remaining programs improved to 23.4% compared to 20.3% in the same period of 2014. Gross margin for the second quarter of 2015 improved by over 30 basis points when compared to the first quarter of 2015 after excluding the contributions of the A-10 WRP during both periods.

We expect our margins to further improve during the second half of the year as we continue to focus on driving costs down during program execution, especially as it pertains to labor, supply chain, and shipping costs.

Third, in the second quarter we received tax refunds approximately $8.1 million related to our 2014 change in estimate with respect to the A-10 wing replacement program. As a result, we generated $2.4 million in cash flow from operations for the first six months of 2015 compared to negative $9.5 million during the same period in 2014.

Additionally, we expect our cash flow to sequentially improve in the remaining two quarters of the year as we expect to generate more than $6.1 million in cash from operations in the second half of 2015. Furthermore, we have approximately $4.3 million in net operating loss carryforwards available which offset future federal and state income taxes.

Fourth, from the beginning of the year through June 30, 2015 we received approximately $24.2 million of new contract awards. Approximately $5 million higher as compared to a total of $19.2 million in new contract awards received in the same period last year.

And finally, at June 30, 2015, our backlog reached a record level of $446.6 million, which is up $43 million from 2014 year-end.

I will now hand the call over to Vince Palazzolo, our CFO, to discuss our recent financial results and expectations for 2015. Then I will comment on the current business environment, backlog and contract awards and new growth opportunities going forward.

I will then open the call to questions. Vince?

Thank you, Doug. Starting with our financial performance for the second quarter and first half of 2015, as shown on slide 6 for the second quarter of 2015 as compared to the second quarter of 2014, we reported revenue of $21.9 million compared to negative $23.8 million. Gross profit of $3.9 million compared to negative $43 million. Pretax income of $1.5 million compared to a pretax loss of $44.9 million and net income of approximately $1 million or $0.12 per diluted share compared to a net loss of $29.7 million or $3.50 per diluted share.

Comparing the first half of 2015 versus the first half of 2014, we reported revenue of $41.8 million compared to negative revenue of $1.9 million. Gross profit of $7.5 million compared to negative margin of $38.5 million. Pretax income of $2.9 million compared to a pretax loss of $42.4 million, and net income of $1.9 million or $0.22 per diluted share compared to a net loss of $28 million or $3.31 per diluted share.

Moving to slide 7, the first half of 2015, approximately 47% of our total revenue or $19.8 million was generated from commercial programs, mainly from our Gulfstream, Embraer and Honda programs.

Defense programs generated approximately $22 million during the first half of the year, of which $21.7 million was from Tier 1 military subcontracts with OEMs, and $300,000 was from government prime contracts.

As shown on slide 8, our gross margin for the first half of 2015 was affected by the change in estimate for the A-10 wing replacement program, as we continued to record revenue on this program with zero gross margin. Excluding the effect of the A-10 wing replacement program, first half 2015 gross margin on all remaining programs improved to 23.4%, compared to 20.3% in the same period in 2014. This increase is primarily the result of higher gross margin on certain of the Company's commercial programs as production rates have increased and is within the historical expected range of gross profit percentage based on the Company's current mix of programs.

Slide 9 summarizes our guidance for 2015. As previously mentioned, our performance for the second half of the year is expected to be much stronger than the first half, due to the timing of delivery orders associated with several recently announced major programs.

Specifically, for 2015, we expect record revenue in the range of $92 million to $102 million, gross margin for 2015 in the range of 19% to 21% although lower than our historical gross margins, as we will continue to book A-10 WRP revenue at zero profit, net income in the range of $7.2 million to $8 million.

The following slides provide 2015 revenue breakdown by market, subcontractor role and segment. Starting with revenue breakdown by market as shown on slide 10, in 2015, we expect the military commercial split to change as compared to the split of approximately 55- 45% in 2014 with military revenue to account for approximately 62% of total revenue, growing by 20% year over year due to recent military contract wins.

Commercial revenue for the first half of the year increased quarter over quarter. We are projecting that commercial revenue will, however, be flat year over year as the majority of new contract wins in 2014 and in early 2015 work for military programs. Production for these defense programs is expected to ramp up in the coming months supporting our expectations for a much stronger second half compared to the first half of the year.

Regarding our revenue breakdown by subcontractor role as shown on slide 11, the majority of our revenue, approximately 82%, is expected to be generated from programs for which we have a Tier 1 role. 2015 Tier 2 revenue is expected to slightly decline while our revenue generated for prime and Tier 1 type contracts are expected to substantially grow in 2015 as compared to 2014.

Slide 12 shows the breakdown within the three main segments. Kitting SCM is to account for 35% of total revenue and is expected to grow by over 70% compared to 2014, while just 6% of total 2015 revenue is expected to be from our aerosystem segment we project this figure to increase in 2016 as certain international pod programs should be awarded to our customers later this year.

Our aerostructures business is expected to decline year over year, due to decreases in revenue from certain fixed wing programs, most notably, our A-10 wing replacement program as well as purposeful business development activities aimed at increasing the revenue derived from our other segments.

Moving to slide 13, we have several initiatives to further improve our financial position. These initiatives include the following, to continue to pay down debt and reduce interest expense. To continue to invest in automation which should favorably impact operating efficiencies. To continue to drive production costs down to improve cash flow from operations.

As announced, during the first half of 2015 we generated $2.4 million in cash from operations due to the $8.1 million tax refund we received before the end of the second quarter. This compares to a negative cash flow of $9.5 million during the same period in 2014.

To further reduce overhead and SG&A which are currently at historical rates, we are seeking low-cost supply chain sources to improve our margins and also we have implemented third-party logistic processes which should lead to reduced shipping costs.

As shown on slide 14, our initiatives are supported by the approximately $8.1 million tax refund we received, the additional $6.1 million in cash from operations expected to be generated in the second half of 2015, the approximate $4.3 million in both federal and state net operating loss carryforwards, and also our $35 million revolving credit facility of which $12.5 million was available as of June 30, 2015.

Now I will hand the call over to Doug who will comment on the backlog, contract awards, current business environment, and new growth opportunities going forward. We will then open the call to questions. Doug?

Thank you, Vince. Since the beginning of the year through June 30, 2015 we received approximately $24.2 million of new contract awards which included approximately $6.4 million of government run contract awards, $6.1 million of government subcontract awards and approximately $11.7 million of commercial subcontract awards. This compares to a total of $19.2 million of new contract awards from all types in the same period last year.

As slide 16 shows, at June 30, 2015, our total backlog increased to a record $446.6 million as compared to $403.7 million at December 31, 2014.

Funded backlog was increased to $130.6 million, up $10 million as compared to funded backlog at December 31, 2014. Unfunded backlog comprised 71% of total backlog, and increased to $316 million with 40% related to our long-term commercial aerospace programs.

Moving to slide 17, this shows our largest contracts currently in progress including our recently won contracts which collectively have the potential to generate revenue of $447 million during the remainder of their performance periods.

Slide 18 provides an update of a few of our programs currently in progress. Starting with our Phenom 300 engine inlet assembly program with Embraer we have successfully ramped production from two ship sets per month to more than 12 ship sets. We plan to ramp up production to 14 ship sets per month by year-end.

HondaJet, one of the newest and most technologically advanced light jets on the market, is another important program for CPI. In late March of this year, Honda Aircraft received FAA provisional type certification for its business jet and is expecting to receive its final type certification in the next few months.

Honda has publicly stated it has booked orders for more than 100 aircraft and that they expect to deliver at least this many aircraft during the first 24 months following the final type certification. Also, we recently won four large defense programs which added close to $200 million to our backlog. These programs are expected to ramp up in late 2015 and to generate continuous revenue for several years.

I'd like to start with our newest program, the F-35 aircraft. Just last month we were awarded a multiyear contract by Lockheed Martin Company to manufacture four lock assemblies for the arresting gear door on 289 F-35A conventional takeoff and landing or the CTAL aircraft.

This contract which has an estimated value of $10.6 million was an important win for CPI as it was our first on the F-35, an aircraft that is expected to be one of the most vital systems for global security for decades. It also represents for us a new customer, Lockheed Martin's aeronautics division based in Fort Worth Texas.

Currently we are projecting to deliver the initial part of our -- the initial part to our customer in the last quarter of 2016.

Regarding the other three programs, first, our contract for the E-2D C-2A outer wing panel kits. While we have recognized some revenue in the second quarter of 2015 from our multiyear contract for the E-2D outer wing panel kits we expect significant revenue to occur in both the third and fourth quarter of this year as we receive purchased detailed parts from our suppliers.

Regarding our $53.5 million contract for the F-16 aircraft, currently we are acquiring inventory and establishing a small satellite location within the F-16 wing overhaul shop at Hill Air Force Base in Ogden, Utah. We are on track to begin product deliveries to support foreign military sales in very late 2015. Product sales for the U.S. Air Force should begin in early 2016.

Another long-term program for CPI Aero is the $49 million contract to provide structural modification kits for the T-38 Pacer Classic program. We have already received an initial $5.6 million firm delivery order. Based on the current developments and discussions with our customer, the plan is to deliver the first article in mid-2016 and start production in the first quarter of 2017.

Moving to slide 19, this slide summarizes our bid pipeline and breakdown by segment and position within the supply chain. We have submitted several proposals for high-value programs for both the commercial and defense aerospace markets. These opportunities span across all segments of our business at both Tier 1 and Tier 2 level and also opportunities as a prime contractor with the government.

We continue to successfully compete for a number of opportunities in both defense and commercial markets. This commercial defense mix within the bid pipeline changes as a function of the timing of proposal submittals and awards.

Recently we submitted several high-value proposals for large commercial airliner and regional airliner applications. These programs are typically for higher complexity assemblies and of long duration and therefore can have high potential value. The submission of these bids for commercial programs combined with taking the F-35 military out of the pipeline after we won accounted for a shift towards commercial programs rather than military programs.

As a result, around 72% of our total bids are for commercial aircraft structure, while 28% are for military aerostructures and military aerosystems. We have submitted or will soon submit proposals for both Tier 1 and Tier 2 applications on the aircraft shown in slide 20.

As I have mentioned a few times in the past, the timing of the review and evaluation of proposals by the potential customer and final decisions remain out of our control. However, our 2015 guidance does not include revenue from a potential new win on a large commercial or regional airline.

Moving to slide 21, our focus area for the balance of 2015. We remain focused on gaining market share at the Tier 1 level, particularly within high mix, lower volume markets such as defense, business aviation, and regional airliner.

We will begin to utilize our recently deployed manufacturing technologies that increase capacity and lower unit costs. In so doing we expect to improve margins on current products and to better position CPI Aero as a Tier 1 or Tier 2 manufacturer within higher volume markets such as the large commercial airliner market.

Our business development team has been focusing its efforts on further diversifying our customer base and sources of revenue. We seek ways to be less dependent on new aircraft production by developing products and services that take advantage of the anticipated growth in aircraft usage. Just a small fraction of our 2015 revenue is expected to come from our aftermarket services.

We want to grow this segment of the business aggressively over the next couple of years. We are seeking to develop new sales channels and service offerings for our aftermarket and MRO services business to provide a better balance between long cycle and short cycle sales.

On the commercial side, we will undertake to become an FAA certified repair station so that we can perform structural overhaul and repair of the various assemblies we currently manufacture, as well as provide other services for the installed base of commercial aircraft. On the military side, we are looking to increase our scope of work beyond our existing program such as the one we performed for Sikorsky for the repair of Black Hawk stabilators.

For example, we are competing for both fixed wing and helicopter structural repair contracts in addition to our typical new manufacturer programs.

Moving to slide 22, our efforts have well-positioned CPI Aero for even greater success in the future. Our belief is supported by our large and diversified backlog of approximately $447 million, our growing bid pipeline with new opportunities for both the defense and commercial markets, the ability to perform on larger and more complex programs due to investments we've made in advanced technologies and fast growth opportunities arising from developments in both commercial aerospace and within the military and defense sectors.

Before opening the lines for questions I would like to mention that we will be presenting at two conferences next week, the Jefferies Industrial Conference on August 12 in New York, Canaccord Genuity Conference on August 13 in Boston. Vince and I hope to see some of you there.

This concludes our prepared remarks. At this point Amy, please open the floor to questions.

(Operator Instructions) Mark Jordan, Noble Financial.

Question relative to how the A-10 program winds down. When are the final shipments scheduled? And I believe that you had stated last year that, in your business plan, you had a base case of about $3 million in A-10 revenue. Is that still the case?

Mark, the delivery schedule will run at least until the middle of next year. Perhaps even to the latter half of next year. The amount of ship sets that we are delivering on a monthly basis.

As for the revenue, the original comment that we had made about the 3 -- $4 million with revenue from last year was based upon the assumption that the program would get terminated and we would stop working on it in September of this year. Well, obviously we are at August 6 of this year and we haven't been terminated yet.

So, we are going to have to continue to book revenue beyond where we currently -- where we currently are. We still have about $5 million to $6 million worth of revenue to run on that program through the end of the cycle which, as I say, is going to run at least until mid-next year, maybe until the latter half of next year.

That ties into a question of your balance sheet line of cost and estimated earnings in excess of billings being about $90 million. How much of that relates to the A-10?

And I would assume under the scenario you just outlined of deliveries running through midyear to the fall of 2016 that those would be convert -- that would be converted to cash over time.

What exposure there is of that $90 million is A-10 that should eventually be converted to cash?

It's about 12% of that number. Yes, about 12% of that number is the A-10.

Okay.

It is of course offset. There is also $1.7 million liability on the liability side of the contract loss liability. That's also A-10. So the net number might be closer to around $9 million, net.

Okay. Given that wind-down that you have and that should be generating cash as it comes to completion, should the Company therefore be meaningfully cash flow positive from operations in 2016?

Mark, we haven't done the forecast for 2016. But whatever gain we make on that side we lose on building up inventory on our recent wins, particularly the F-16 and the T-38. So, when we provide our guidance on 2016 we will provide some cash flow guidance as well.

But yes, if there weren't those $200 million of new orders that we put into the backlog starting about seven or eight months ago.

Okay. Final question for me. Obviously you outlined a rich bid pipeline and the fact that you have nothing -- no incremental awards in your outlook for this year. While there's nothing in your outlook, do you expect needing meaningful decisions on some of those bids that are out there between now and the end of the year?

Yes. There's one military -- I'm not talking about some of the smaller ones but there's a military one that we expect our customer to make a decision on doing the third quarter. This current quarter. And there is one larger commercial that we expect a -- not a final decision but a down select decision, probably during the early fourth quarter.

I'm not sure if the down select process will result in a final decision in 2015. But we will know in the fourth quarter if we are part of the two companies that get downselected.

Okay. Thank you very much.

Mike Crawford, B. Riley & Company.

Thank you. Going back to the A-10, what is the likelihood that the government might have to go back to -- Boeing and Boeing might have to come back to you to actually order additional wings, which then would put you in a position of actually making margin on some of this production?

You know, I hate to handicap this because I've already been wrong once on this. But I would've thought that Congress would've already stopped it.

That said, there is money for the A-10 to continue flying. What's uncertain still is whether or not that necessarily means the government will continue with the wing program and I feel that there is still some possibility that we will be asked to stop or at least drastically slow down that program within the next several months as they -- as the situation in Washington kind of unfolds.

That said, I find that scenario may be more likely than the scenario that gets us to beyond the current amount on order, which is 173 aircraft.

So in order of likelihood I would say we have a likely -- it's more likely that the program gets scaled back and/or terminated and then, second most likely, would be we run it to the 173 and the least likely is that they do more and then order more.

Okay, thank you. And then on another defense program, you've been running a [long-running] supplier to UTC Aerospace Systems.

Yes.

And on the DB-110 sensor. And now the Company, that company is looking to get a smaller pod to accomplish what that product does.

Now is that something that you would be capable of working on with them? Or would it be more of a build to print situation? How closely would you work with a customer like that on --?

We are working actually very closely with United Technologies aerospace systems at the earliest stages of their design and development. We are not under contract, I should say, for the -- for any derivative pods of the DB-110 but our relationship is such that we are part of the process on at least an informal basis providing some producability tips and some kind of ROM estimates of what the structure may cost.

So our relationship is excellent with the UTAS. We are looking to extend our current DB-110 contract with a multiyear , which is an ongoing discussion we are having with the customer. And that agreement would also lend itself to derivative pods and entirely new pods as well.

Okay, but that's separate from this other military platform you're expecting (multiple speakers)

I'm not sure exactly which one. If you are referring to TacSAR then we are intimately involved. If you are referring to one that I'm not aware of, I can't answer that.

Okay, thank you.

(Operator Instructions) Seeing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Douglas McCrosson, for closing remarks.

Thank you. And thank you to all of you for participating in this call. We look forward to speaking to you again in early November when we announce our 2015 third-quarter results. Thank you, goodbye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.