Q1 2022 Air Industries Group Earnings Call
Please standby.
Good day and welcome to the Air Industries first quarter earnings Conference call Today's conference is being recorded.
So for the historical information contained herein the matters discussed in this presentation contain forward looking statements.
Accuracy of these statements are subject to significant risks and uncertainties actual results could differ materially from those contained within the forward looking statements.
See the company's SEC filings on Form 10-K, and 10-Q for important information about the company and related risks.
EBITDA is used as a supplemental liquidity measure because management finds it useful to understand and evaluate results, excluding the impact of noncash depreciation and.
Amortization charges stock based compensation expenses, and nonrecurring expenses and outlays prior to consideration of the impact of other potential sources and uses of cash such as working capital items. This calculation may differ in method of calculation from similarly titled measures used.
By other companies at this time I'd like to turn the conference over to Lou Maluso. Please go ahead.
Thank you Linda good morning, everyone and thank you for joining us.
Our continued progress in driving profitability was fully evident in our first quarter results.
As expected revenue for the quarter was lower year over year totaling $12 1 million, which is down 12.
This 12% from the first quarter a year ago.
Meanwhile, first quarter 2022, gross profit increased 16% to $2 1 million and a gross margin increased to 17, 2% of sales.
Full 410 basis point improvement over the quarter a year ago.
<unk> was essentially equal to the 2021 first quarter.
The major factors that impacted our top line performance, where supply chain disruptions that delayed our receiving raw materials and labor shortages.
On our last call we discussed four significant contracts one in the first two months of the 2020 to first quarter.
Beyond their revenue contribution each of those wins that important strategic value and furthering our growth strategy.
Let me recap those contracts beginning with one award one awarded to our Sterling Engineering subsidiary.
Sterling is critical to our overall plan to accelerate our profitability growth we won.
Excuse me, we plan to replicate the successful strategy of optimizing our long island facilities by taking advantage of Sterling is capacity and investing in new equipment to expand its capabilities.
In January Sterling was awarded a life of program extension and LTA for the turbine exhaust case for the PW 4000 jet engine, which is used on many Airbus and Boeing commercial aircraft.
This is expected to generate revenue in excess of $6 million over its remaining term and it adds to our backlog in commercial aircraft discs.
This contract follows an especially important win at the fourth quarter of last year still.
Sterling was awarded a new LTA to deliver a chat pods for the new CH 50, <unk> heavy lift the aircraft.
And Sterling first LTA for ready to craft Assembly.
The contract furthers, our goal of transitioning sterling business towards making complete products produced under long term agreements.
Our additional first quarter awards included a contract to produce components for the landing gear of the U S Air Force's be won't be Bob.
While the orders from our long established customer it is an aircraft platform, but it has not been an air industries portfolio for some time.
A $12 4 million contract to produce complete main and those landing ancillary components for the U S. Navy's E. <unk> advanced Hawkeye Airborne early warning aircraft, we manufacture complete ready to install landing gear as a tier one supplier to the Oems.
Finally, I said on our last call that we were awarded a total of three new L. T. A's for critical components for the Blackhawk helicopter with an estimated combined value of more than $20 million.
Last week, we are pleased to report.
The award of two separate LTA for the Blackhawk helicopter, which brought the total award to $28 9 million. We believe we won these additional LTA because of our demonstrated delivery performance for this customer which is largely attributable to our investment in capital equipment overlap.
Our capital equipment over the past 18 months.
As I noted earlier Sterling engineering is critical to our plan for profitability growth.
That plan is focused on reaching consolidated EBITDA of $10 million.
EBITDA for 2021 totaled $6 3 million on an adjusted basis. So our goal is ambitious but we believe achievable.
<unk> consist of five initiatives.
First <unk>.
<unk> Sterling business, both through adding new L T A's as well as adding new equipment to expand its capabilities.
[noise] vertically integrate processes throughout air industries group to reduce reliance on outside vendors and improve margins. This initiative is also underway.
We have already invested in a paid facility, which can accommodate many of our products. It will be operational in the next few weeks.
We are also targeting grinding non destructive testing.
Assembly and other processes.
In the past three years, our capital investment totaled $6 million. So far this year, we have written purchase orders for an additional $2 2 million.
Our intention is to continually invest and modernized our equipment, enabling air industry used to manufacture broadcast product.
Additionally, and more profitably.
Third initiatives, just to seek aftermarket opportunities overseas and bring maintenance repair and overhaul activities in house.
Fourth expand licensing of our products to avoid the middleman and get closer to our customers currently have a license for the F 18 and are considering licenses for other aircraft as well.
Fifth while we expect to reach our $10 million EBITDA target organically. We are also considering strategic acquisitions to achieve two primary goals at a new aerospace customers <unk>, new platforms and possibly moving.
Aircrafts submarines.
The Navy vessels army vehicles missiles electronics et cetera.
Let me now turn the call over to Mike <unk>, our CFO for his financial report, which will be will follow with a questions and answers and some remarks.
Hello root already discussed sales and gross profit so I'm going to add some details as well as some additional operating results.
Some comments on the balance sheet.
As Lou said, we achieved a 16% increase in gross profit for the first quarter of 'twenty two.
12% lower sales.
Gross profit dollars.
One 1 million or 17% of sales.
And this compares to $1 8 million or just 13, 1% of sales in the first quarter of 2021.
Operating costs for the first quarter were $1 $9 million.
And this is an increase of 6%.
Compared to the first quarter of last year as this is an unfortunate, but it's not surprising given the economic environment.
Inflation in the face of inflationary pressures, we are now increasing our focus on ways to control and hopefully reduce costs.
Operating income for the first quarter was $207000 is up substantially from $27000 in the first quarter of last year.
This is again this improvement was achieved despite lower sales.
Interest and financing costs for the first quarter were $323000 and they were essentially flat with the prior year.
We had a net loss for the first quarter and that net loss was narrowed to $28000. This year compared to a loss of $152000 last year.
EBITDA.
Adjusted to include stock compensation for the first quarter was just over $1 million. This was essentially equal to the prior year just a few thousand dollars lower.
Compared to 2021 for this quarter EBITDA was eight 7% of sales and that's an improvement of seven 7% of sales in the prior year.
We ended the quarter with a solid balance sheet.
Inventory increased 8% to 32 million the increase resulting from Blackhawk in F 18 programs primarily.
Our accounts payable and accrued expenses increased a modest 4%.
There were no major changes there.
Sales outstanding.
Our supplier relationships.
Very good.
Our debt to Webster Bank, which was formerly known as Sterling National Bank was reduced by $2 $3 million or 13%.
Compared to.
March 31, as compared to year end.
Our loan agreement with Webster has only one major financial covenant.
We are required to maintain a fixed charge coverage ratio of 1.25 to one and that is measured on a trailing 12 month basis at 12 months that ended March 31, 2022, we comfortably exceeded as requiring requirement.
In summary, we improved profitability in the first quarter as measured by increases in gross profit and higher operating income.
Inventory increase for that decline at the end of the first quarter, we remain in strong financial condition.
Sufficient to support our growth initiatives.
So that concludes my comments I'm going to turn the call back to you glue and I look forward to your questions.
Thank you Mike.
Let me close this portion of the call by taking a broad look at where are industry group stands today.
<unk> come a long way since my arrival in 2017.
We have improved our relationships with customers and suppliers reduce debt and established a supportive banking relationships.
We have rationalized and consolidated our operations that are making critical investments in equipment to further drive our opportunity and profitability.
We achieved an important year of growth for Air Industries group in 2021 and demonstrated in the first quarter, our ability to add strategic contracts, while improving profitability on every dollar of sales.
We said last time that while first quarter sales would be lower than a year ago profit would improve significantly and it did.
We continue to expect to deliver improved margins throughout 2022.
We are focused on executing our plan to take consolidated EBITDA to $10 million.
Ambitious goals, but we believe it is achievable.
With that I would like to open up the call to questions from participants Linda if you could open up the lines. Please.
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Hi, Good morning, Mike and thanks for taking.
This call and in my questions.
I have just a couple I was hoping that.
You were talking about the supply chain issues are impacting our first quarter revenues.
Would you be able to quantify or roughly quantify how much you believe this quarter was impacted by that.
Well, John you know.
Now we're talking about we take materials in lump sums and we produced throughout the year. So it's not like we take pieces when we ship them on a monthly basis, but right.
Right now we have orders for a material that we would do when you know at the end of last year that we just received in a few weeks back and it just seems like Theres a theres a big delay now in line in <unk>.
Our material.
This thing we've seen.
We have gotten past hour bottlenecks in the shop with the capital equipment that we purchased over the last year and a half two years and we've addressed by our internal bottlenecks we are addressing.
The tail end of the bottlenecks with the processing, we're bringing not we're bring in processes in house as we see as we see the need is that you know we're.
Staffing up for that and we're going to do and what we can internally and it still leaves the raw material issues. You know, there's a there's a titanium problems throughout the throughout the supply chain.
They're probably going to continue to be there for a while especially with the conflict over across the pond.
But it's just US you know some materials that we were able to get in weeks are now taking a months and months and months and materials that were taken months and months are.
Going out the year. So there is.
It's the material supply chain is a tough one to conquer.
We rely on people for that.
And.
As far as the labor shortages are those issues.
What actions do you believe you could take in an effort to help alleviate this I know you kind of.
Caught in this labor shortage issue like everybody is but is there anything in particular that.
You know that you feel that you can address that maybe can help alleviate it.
Well one of the thing one of the things that we're doing differently is we're probably overpaying, but that seems to be about the only thing that will adopt transplant somewhere and so for a very strategic positions that we're looking to fill.
We're looking at that.
We're looking at increasing the night shift differentials.
So that maybe we could bring all to attract some additional folks to the second shift which as you know that's an area of expansion for us without having to order more capital equipment.
You know our benefits.
We offer a free insurance.
So our benefits are kind of in line with the industry in some cases, even a little bit better. So we're trying several things to see how we can.
Get people on board.
Okay, even with the increases obviously, you're saying overpaying, which I mean, you have to do what you have to do you still were able to maintain.
Actually a 17, 2% gross margin.
In the first quarter that was on.
$12 1 million in revenue, so that kind of surprised me on the upside. So I was wondering if there was anything in that.
Margin on the cost of sales.
The actually skewed at higher than typical for this level of revenue.
And.
I was hoping you could be a bit more specific on what you believe gross margins could be for the full year. I know you said that there'll be higher than last year, and obviously you know with the first quarter being 17 point to on that revenue.
Hopefully you can just expand on that what was actually in that component of gross margins.
And what would be the driving improvement from last year, even if it was like say a flat revenue.
Okay. Let me you would normally expect on a decline in revenue that your gross margin would be lower and the reason. It isn't is because you look back to 2021, we had a reported gross margin of about 17% for the full year, but that was really the <unk>.
17% was the sum of 20% on some products and a loss of 3% on.
Additional products. So we had two products last year that totaled about two seven and $3 $2 million in revenue.
That.
The $2 7 million of it has zero profit and the other 500000 added $250000 loss that was on a termination of a contract with the 80 380. So you take that out of revenue last year. The gross profit margin was closer to 19% to 20% than it was then.
$17 one so this year, we don't have the no profit.
<unk>.
The no profit products has gone.
Second the <unk> hundred 80 is finished we don't have to we're not going to incur any more losses on that so we had a kind of a higher gross margin going into it but the lower sales kind of tempered that even the last year.
We expect to sell through.
Got it yes.
So this was more or less.
More of a true gross margin last year was more of an anomaly. That's why I wanted to get to like if this was.
Where we should be at this at this level 12 months, that's a 17% 17, 2% is where we should be there wasn't anything that really skewed it.
That is correct. There is no there was no one time there was one no one time benefit they bailed us out.
We earned it on June 17.
Yeah.
Alright so.
And I actually I think the second part of my question was because I know, it's a kind of very good just says you expect improved gross margins over last year.
But.
I was hoping you could be a little more specific on that.
You know like let's see 17 point to on what you did with 12 million to $12 1 million, so assuming sequential growth.
What might we look at as far as an annual gross margin.
I'd be very happy to get to between 19 and 20.
Okay that sounds reasonable to me right now and just getting into.
Actually a little revenue and just one last question.
You're coming off of a $12 $1 million first quarter.
And with the current backlog I'm not sure where it stands currently but I know that its only improved since.
At the end of the year is it reasonable to expect.
A significant ramp in revenue for the rest of the year Fitch I guess it would put you on track for maybe revenue be near your 2021 level you did what $58 nine should we anticipate.
We anticipate that happening like a nice ramp in us.
Actually second half and three quarters to come to get you up to that level with what you have on the books right now.
Our goal is to have revenue AD revenue up to equal to last year $58 nine a we expect that the ramp up is going to be more in the third and fourth quarter than in the second.
Based on our production.
Production remember these are long lead time items, so what's in production today shifts in November .
Okay, but I mean, you Havent said.
The idea was that I mean.
Firm backlog the 18 months, it's a funded backlog. So you should have a good idea of what you expect going forward. So Q3, and Q4, it's going to be more backend loaded right now, but we should get closer to that.
$58 9 million level that we had last year I just wanted to clarify that.
That's our goal and expectation.
Great I appreciate that that's all I have thanks for taking my questions.
Thank you John .
Again, if you do have a question or comment today. Please press star one on your telephone keypad and we do move onto our next question. Please go ahead. Your line is open.
Yes, good morning, gentlemen, I've got a question for Lou.
You you briefly spoke of additional business going forward.
And I'm wondering are there or what are the.
What's the growth outlook for the company or what what are your plans.
Hum.
Are you wanting to to.
The increase was accompanied by by acquisition or are you wanting to.
Add more equipment.
Hum.
As revenue ramps up what are you planning on taking the company and I'll go ahead and let it go with that thank you.
Good morning, Thank you for the question.
So what I put on the table.
As our growth strategy for the business going forward. There is out there is numerous areas that we.
We're not involved in that.
Possibly avenues for us to grow revenue and continued go into company.
On the capital equipment side of things.
Some of the equipment is in replacement of older equipment to better and more efficiently.
New products.
So that equipment is net added capacity and capabilities that we not we did not have in the past you know a larger size more complexity.
Following that we done that here in New York over the last couple of years and now we're going to follow we're going to take that blueprint and move it to our Connecticut operations to expand those facilities so that.
The company organically can grow organically, we probably have you know.
Space constraints to about maybe $70 million past that.
We're going to have to look at additional space.
And we will continue to go into company with licensing agreements, which kind of puts you in.
Cuts out a lot of the competition you know theres not out.
There's not going to be 678 players in the field. When you have a license there is going to be maybe one or two potentially three players. So there is an opportunity to to better name, our pricing and margins associated with that work.
We are going to look at parallel opportunities, we're going to be.
We are a landing gear company, but at the end of the day. We're also a complex machining company. So there's no reason, we can't get into law.
<unk>.
Naval vessels Army vehicles, and other things that we currently don't do.
Its precision work and it's it pays out almost as well as the aerospace industry.
So.
Processing when we process thing not only are we going to take care of our own needs, but you know we can sell the service. So there might be there's probably an avenue to exploit that with painting and shop painting and analyzing and all the other things that are associated with there's several.
Possibilities to fair a fair it out to be able to grow revenue.
Thank you.
So is it fair to say that you're foreseeing.
Quite a few more contracts coming forward.
Well I mean, we're always quoting stuff [laughter].
So I would say you know in the course of the year. We've got a lot of we've got a lot of irons in the fire something will materialize.
Yes, Thank you Luke.
Okay.
Thank you.
At this time, we have no further signals will turn back to little bit looser for closing remarks.
Thank you Melinda.
So with that once again, thank you all for taking the time to be on the call and for your attention and questions. We look forward to updating you on the progress of Air Industries group on our next call.
Melinda with that we concluded the conference you may disconnect.
Thank you. This concludes today's teleconference. We thank you for your participation you may disconnect your lines at this time.
Okay.
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Hum.
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