Q3 2020 Air Industries Group Earnings Call
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Good day today.
Industries' Conference call today's conference is being recorded.
Except for the historical historic.
Historical information contained herein the matters discussed in this presentation contains forward looking statements.
The accuracy of these statements.
Subject to significant risks.
Actual results could differ materially.
Contained in the forward looking statements see other companies.
On forms 10-K, and 10-Q four important information about the company really to address EBITDA.
Total liquidity measure because.
Finds it useful to understand and evaluate results, excluding the impact of noncash depreciation depreciation and amortization charges stock based compensation expenses and non recurring expenses and outlays prior to consideration of the impact of other potential sources and uses of cash such as.
Working capital.
This calculation made different methods of calculation.
Titled measures used by other companies.
Let's talk about the teleconference over to see Oh no no.
No. Please go ahead.
Thank you Jennifer.
Good morning, and thank you for joining us as we summarize air industries results for the third quarter for the nine months ended in September.
We will also discuss the continuing a lessening impact of cold and my team on our operations.
Air industry sales have returned to prevent damage [laughter].
Net sales in the third.
Third quarter worth $13.6 million. This is very close to our average quarterly sales for all of 29.
Gross profit margins increased by nearly 5% percentage points for the quarter, but remains lower than historical norms.
During the quarter, we continue to experience supply chain disruptions in July and to a lesser degree in August.
September things were pretty much back to normal.
We expect gross margins to continue to improve in the fourth quarter.
As you know we have made some significant capital investments during the quarter we.
We have to purchase four major machines spending about two and a half a million dollars.
Three of these machines have a rise in our facility once it is operational and the other to be operational very soon.
The fourth is slated to arrive mid November.
These machines are net new additions to make in our long Island factory, we have relocated four existing machines to our facility in Connecticut.
They are being installed there no it won't be adding to production very soon.
In our last conference call, we discussed how our inventory primarily our work in process inventories.
Increased as a pandemic slowed sales.
I'm very pleased to report that our inventories declined no third quarter by nearly $2 billion.
Our backlog is heavily weighted with military product and unlike many others in the industry consist of first quarters.
We have seen a slight decline in our backlog to this pandemic, but still it remains near $100 million.
With that I would like to turn it over to call to Mike <unk>, Our Chief Financial Officer for the financial recap then I'll return to close the call like that.
I agree with you.
At the time that we would have declined and that's what really kind of anticipated at this point.
For the nine months, our sales are down $5.6 million was about 90% of that decline occurred in the second quarter.
The other part was in the first quarter little bit is there.
Third quarter sales increased by $5 million, and that's 60% higher than sales in the future.
You mentioned gross margin was Ah so part it was for the third quarter, but up about five percentage points from Q2.
Yeah, we expect is going to be returned to normal about 18 plus percent in Q4, that's because of the higher sales volume.
We expect gross margin also looking after the planned product sales in Q4, we have a higher percentage of higher margin product being produced and sold.
Despite the disruption after cost of the pandemic Rockferry, our operating expenses remained under control.
We continue to benefit greatly from much lower interest rate on our bank credit line.
I have to say.
29 gene a 3.5% in 2020.
Adjusted EBITDA is what we watch most closely in.
Q2, Sadly, we had negative EBITDA <unk> a return to positive in Q3 that was positive for the year to date for the nine months.
Expect further improvement.
In the fourth quarter.
I'll turn the call back to you.
Thank you Mike.
Let me close the call with a few thoughts on the remainder of the year.
The installation of the new equipment, the reorganization of our shop floors. The fact that we've been able to keep our workforce healthy are all positive signs had to get to 2021.
All indications are that air industries has achieved the hope for V shaped recovery is short sharp decline followed by a steep rebound yes.
We are confident about the remainder of the year and beyond.
With that I would like to turn the call back over to Jennifer to open the lines to participant questions Jennifer.
Yes, if you'd like to ask a question on todays call. Please press star one on your telephone keypad.
It's probably almost all my dictate when your line is open. Please state your name before pose your question once again Thats star one to be placed into the queue.
Oh gosh I first color.
Oh, yeah like Luke good morning, how are you.
Hi, good morning.
[noise] Oh, Yeah, I, just wanted to get a little clarification or fourth quarter, we expect gross margins I think.
18% plus.
And part of that is due to what you believe is going to be a higher level of revenue from what you've seen in Q3, I was hoping you might be able to actually get scale down a little but give us an idea of what to expect in Q4 revenue wise.
We expected to be about Q1 and Q3.
Looking forward to the day, when we never have to speak about the second quarter of 2020.
Yep.
Gross margin in the third quarter was down because of the significant disruption in an extra cost that we incurred absent those would have been back up to about 18%.
So Q4 that we want to do better what had the best quarter of the year I don't think that specific number is appropriate jets yet maybe another couple of weeks, we'll give some guidance on that John. It's also the product mix that we have slated to go out the door in Q4.
Okay, and Oh, we got to Sterling approximately.
What level of sales at Sterling or would you need for positive gross margin. So I know the Q would probably say that was positive or not just particular corridor, which I think was out yet, but I was hoping you could also talk a little about the prospects are still.
Well you know Sterling was our our long island facilities.
We are very very slightly exposed to commercial not not many programs there most of its military here.
Here, they oh at Sterling, They obviously had.
We have a higher content of commercial project.
And you know so we thought sales have declined because of that I know in the last water water and a half what dot well, making summing that up by moving some of the work that we could move out of New York and the year.
And Ah you know part of the part of the price mix here is ground based star power generation, which is actually because of the gas prices being so relatively low has seen an uptick.
So the combination of the work coming in and the power Gen.
For the power generation kind of increasing in magnitude than it was earlier in the year and I you know, there's still ship commercial product but.
We're also getting very aggressive on not on.
Sales and business development side to see what we didnt pull out at all what we could pull out a dog, but you know the market dot and 2021 so.
I would now it's not just the commercial the commercial industry.
Wow lives for the most part there's other things that were exploring to try to.
Make up for for a loss.
I just wanted to get a handle on what level of revenue you might need on a quarterly basis sales.
Sterling to to get to a positive gross margin.
About it's a positive or breakeven gross margin would be about 6 million in seating sales now because we're moving production up here you will see the sales recorded at Sterling, but you will see a reduction in their manufacturing absorption of their manufacturing overhead so.
That might lower that.
It's really kind of a mix of how much is outside sales and how much is inside.
As for costs.
No not at all its million number that that's not a quarterly I mean, you're talking about an annual number and so that is correct Angela for yes, right right right. Okay. So about a million and a half on a quarterly basis, you get at least a breakeven in that.
Talk a little about the gross margins I think what was it a 95.2 million what's your current backlog.
Well, that's a it's a fun backlog and its linking month backlog, but to get an idea about maybe how 2021 is shaping up I was wondering if you can give us an estimate on what do you believe your backlog would be for a 12 month period.
Ah I frankly don't have that information available, John but I'd be happy to.
Get back to you on it but.
No profit.
Right, it's important to understand how backlog works.
If you look at it to the 18 month.
Making this number up a couple hundred thousand dollars in backlog if you look to.
Backlog for November started which starts Saturday.
Sunday the backlog is probably not.
Not including a pass to probably four or $5 million. So it declines over time customers add to backlog because for we only consider from orders based.
Based on their delivery dates when they need something that they order.
With the lead time, so it grows as it as it becomes more card.
But even and I think an important statistics keep in mind exist.
Yeah.
13 million a quarter just as you see the numbers 52 million is actually 52 in the year 18 months is 76 million.
Yes, we wouldn't be if we just did that we couldn't fill up that we couldn't fill our backlog and that's the goal of the new machinery. That's the goal of moving production up to Connecticut.
It is to be able to eat through that backlog and will add to it as we go but.
Basically the waters in the bank as a matter of production out of sales.
Okay.
Sikorsky and Goodrich now they're responsible for actually over two thirds of your sales on a quarterly or yearly basis. I was hoping you could talk a little about the prospects you see for each company.
Yeah.
Well you know at White multiyear 10, which is the Sikorsky Blackhawk a.
Contract that's a that's coming that's coming do you know we did that at a mid year. This year they've had it now for several months there are out there working on it we would expect that to be awarded a sometime maybe in the first quarter well have some degree of it.
Oh, it's it's Todd it's a timing issue.
Also so that's on the Sikorsky size. That's you know, we're still getting a spot spot orders you know spot buys so that's been pretty steady throughout the course of the year. We just we just don't stop press that'd be a million dollar order, but that's that's been pretty steady or it can be actually this year even through this pandemic is not is not.
It's not that bad you know, it's almost in line with what Dodd with last year now.
Now with dogs with Collins aerospace and Goodrich.
Yes, 35 is another program, that's going to be up for a.
It's going to be up for grabs that's going to become due oh, yeah, I would say at some point in 2021.
So we're hopeful that that between the two we will be able to contribute to the backlog like me that we've done in the past plus.
Plus other prospects that we got in the works.
Okay, but I would imagine most of your backlog is really a thing.
On these two companies.
Uh huh.
I wouldn't say I would say a good portion of it I wouldn't say all of it Didnt know, there's there's no no no. They are our biggest customers. There's no question about that.
But that we told her out worse were spread over a lot of platforms and a lot of different folks.
You know Northrop Grumman is odd is becoming a you know a high commodity at Air Industries. You know we've done a lot of Northrop work power, both direct and indirect for you know that.
The government and other customers, but we're seeing a lot of activity Direc now so there's there's opportunities there.
Okay. That's good to hear that thank you for that just one final question when I read the press release.
It was made mention in there you talked about more pronounced costs that adversely affected the July and August but.
What we turned to a near pre pandemic level since September I was hoping that.
You could give us a little more specifics about that talk a little about that and if you can even quantify what that what that might have affected your third quarter numbers by.
I, it's hard to quantify but given example of how it happens you have used inventories built over the over the course of the second and third quarter.
5 million Bucks and that was all work in process and remember our product requires a lot of outside processing.
But typically will leave the facility to be processed three or four times before it's finally finished.
And as the processing houses were shut down that price had to be it and they're not and when that is accomplished.
It is.
Very time sensitive for the production process. So you yeah, you've got to have a piece of it has to be treated.
For the next.
Right and then ask 'em operation than if he treated not available it gets put on the shelf.
So that's really because of the growth of the inventories and when they have been these pricing has got packing business had a big backlog because.
Everybody was in the same position we're in so prices went up and because we were behind with our customers. We had to pay expediting costs to Ah to move our product does someone else's and all those additional costs in past growth in that gross margin.
Now I'll check that kinda back that seems to have ameliorated by September and it's kinda like back to the good old days back by the way the good old they bought back right, because there's a big bottleneck and supply and processing.
The industry.
At least I got an.
The new equipment, you have now should definitely help the easing I would anticipate in the fourth quarter a lot of that bottleneck.
The bottleneck, what we're talking about here is a bottleneck of outside processing, which has returned to normal but normal wasn't that great. They put the additional machinery and the outsourcing initiative and they're shifting production to our Connecticut facility should increase.
Throughput.
And and therefore additional advisors and then but eventually additional sales.
Okay, all right well I think that that's great. That's all I have I'm looking forward to the fourth quarter, especially out of the way things have shaped up in this quarter. So I'll open it up to others that might have questions. Thank you guys.
Thanks, John Thank you John.
And once again to ask a question.
On your telephone keypad.
Yes.
And at this time there are no further questions.
Thank you Jennifer.
So with that once again, thank you everyone for taking the time to be on the call today configure our attention and questions.
Operator, operator, you can conclude the call now thank you.
Thank you.
Today's conference we thank you for your participation.
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