Q2 2022 Air Industries Group Earnings Call
Good day and welcome to the Air Industries Conference call Today's conference is being recorded.
Safe Harbor.
Great.
Historical information.
Understood.
And forward looking statements the accuracy.
It's subject to significant risks and uncertainties actual results could differ materially from those contained in the forward looking statements.
Company's SEC filings on forms 10-K, 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.
And part of.
Sources.
Our 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 would like to turn the conference over to Mr. Liu.
President and CEO . Please go ahead Sir.
Thank you Anna.
Good afternoon, everyone and thank you for joining us today.
Air Industries made progress on several fronts in the second quarter of 2022, let.
Let me focus on comparisons to the first quarter of 2022 as the industry and market conditions were more similar.
Our second quarter sales increased by 16, 1% from the first quarter of 2022.
Gross profit dollars increased 67 sequentially and represented 17, 3% of sales versus 17, 2% of sales in the quarter in the first quarter of 2022.
Operating income nearly <unk>.
Increased nearly 20% from the first quarter of 2022.
Adjusted EBITDA in the second quarter was nearly $1 2 million an increase sequentially.
By 13, 3%.
As a percentage of sales adjusted EBITDA was eight 5% for the 2022 second quarter versus an eight 7% of sales in the first quarter.
Despite this financial progress compared with the first quarter of the year.
Our results were below the second quarter, a year ago as detailed in the press release.
Good day.
Supply chain disruptions had been a major factor impacting our performance.
And that of many other manufacturing businesses throughout 2022, causing significant delays in our receiving materials.
The supply chain challenges heightened further in the second quarter with raw material delays compounded by delays in outside processing.
For example, there is now a six to nine months lead time to receive shipments of titanium used in many of our products as the war in the Ukraine drags on and Russian sanctions remain in place.
Prior to the war those two countries, where the largest suppliers of titanium to the U S. While alternative sources are being tapped the new sources are near capacity. So we expect titanium issues to be with us for the remainder of the year.
Even with these ongoing challenges we made important operational progress in the second quarter that includes.
The installation of a paint facility and our Sterling engineering subsidiary in Connecticut, which is now complete and qualifications is underway.
I discussed last time that adding a <unk> capability in one of our is one of our steps.
Vertical integration plan.
We are proceeding with our strategy to reduce the cost and risk of outsourcing major processes and mitigating the sort of delays we experienced in the second quarter.
Construction of the Assembly area and our Sterling facility has also been completed.
As we apply the manufacturing advances we have achieved at our complex machining facility on long island, while taking advantages of Sterling.
Capacity to accelerate our marginal growth and drive our EBITDA.
The New Assembly area will facilitate the assembly process for a substantial customer order.
As I discussed last time grinding and non destructive testing are among the other processes that we are targeting to bring in house.
In fact in the past three years, our capital investment has totaled $6 million.
So far this year, we have written purchase orders for an additional $2 2 million.
Our plan is to continually invest in and modernize our equipment, enabling air industries to manufacture a world class products or efficiently to more profitably.
As many of you know air industries addresses five major platforms, including the Sikorsky Black Hawk Black Hawk helicopter.
The U S. Navy F 18 hearted in the Northrop Grumman E <unk> Naval aircraft, the Lockheed Martin F 35, Lightning two fighter and the Pratt Whitney geared turbofan, which is our entry into the commercial aviation market.
Since April of 2021, we have one new L T A's.
And product orders for all of these platforms.
In the first half of the year, we achieved especially strong growth in our sales, but it <unk> in the geared turbofan.
E <unk> advanced Hawkeye is the Navy airborne early warning aircraft.
<unk> and its earlier variance had been an important platform for our long island subsidiary for decades.
And we manufacture complete ready to install landing gear as a tier one supplier to the original equipment manufacturer.
In February we announced we received a $12 4 million dollar order to produce complete, Maine, and those landing gear and ancillary components pretty too deep.
Deliveries for disorder, I expect it to begin next year and be completed in 2024.
The strength in our geared turbofan sales, which are mainly for smaller aircraft, including the popular Airbus <unk> hundred 20, the Embraer E. Two E jets reflects the accelerated build rates in commercial aircraft overall.
Additionally, you may remember that in January Sterling Engineering was awarded a life of program extension for an LTA to deliver a turbine exhaust case components for the PW 4000 jet engine, which with expected revenue in excess of $6 million over its remaining term.
<unk> also met one of ours.
Key corporate objectives for Sterling engineers, which is to transition a larger the.
The product mix into long term agreements.
While not.
Listed among our five major platforms air industries as a longtime supplier for the CH 53 helicopter.
We saw strong growth in the half year sales for CH 53 platform.
And another factory for Sterling Engineering. This past October there were awarded and L. T. A to deliver chat pods for the new CH 53, K, which is the heavy lift helicopter.
C based long range heavy lift helicopter, providing a three times the let's get the ability of its predecessor and exceeding all other DLD rotary wing platforms.
Production of this helicopter is forecasted to increase from four aircrafts in 2022 to nine in 2023 and 15 in 2026.
It is expected that the CH 50, <unk> will remain a production can be 2032 and beyond.
Six months sales were.
Were lower for the balance of our platforms. It is not unusual to see low dairy through the year and between years, depending on the status of government funding.
Different programs and inventory levels at our customers.
Turning to the medium and long term outlook. We attended the Farnborough Air show this year and found the cone among customers to be upbeat.
While realistic about ongoing industry production challenges.
Basically.
Should note that many pandemic related restrictions have been lifted and the industry is returning to a lure more normal cadence of business development, including face to face meetings and trade shows.
Air Industries as Kate has been taken advantage of this normalized environment wrap up our business development activity.
Effort is starting to gain traction and we have received a number of requests for quotations RF queues, which represent the first step in sales process and now have over 100 active prospects in the pipeline.
For example, we have engaged with several new landing gear companies that have already yielded RFP activity.
Part of our growth strategy. We are also targeting adjacent markets that are natural fit with our capabilities. For example, we have focused on the nuclear submarine industry and recently received our first order.
We hope for a dramatic growth from this new market over time.
We also have received vendor number and are seeing our F. Q activity from a major space company. It is.
It's exciting to be able to meet with clients in person again and pursue new opportunities for air Industries group.
As we look to the balance of the year, we expect that current challenges to continue as well.
But we still anticipate the second half of the year to be better than the first half with stronger growth shifting into 2023.
That said, we remain highly optimistic about the long term prospects of their industries as we continue to serve major defense and commercial aerospace programs with growth with growing demand.
While enhancing our performance by vertically integrating our processes as well as making strategic capital investments to become even more valuable partner to our customers.
Let me turn the call over to Mike <unk>, our CFO for his financial report, which will follow with a question and answer and some concluding remarks.
Great. Thanks Luc.
Some additional detail on the second.
Second quarter trying to resolve.
Sales in the second quarter increased by $1 9 million compared to the first quarter of the year, but we're $1 $4 million lower than in Q2 of last year.
Six months sales were $26 1 million Miss a reduction of $3 1 million compared to the first six months of 2021.
Although a $3 1 million dollar decline about half related to two products first was Atlanta gear for the a 380 aircraft, which you may have known has been taken out of production and this resulted in a stop work slash cancellation order from our customer.
And the second was a helicopter product that we've made for many years, but was at the end of its contract.
Both of these products.
Because of the various reasons were sold at a loss. So sales were lower but we also avoided those losses in 2022.
Some more comments about the decline in sales when I discuss inventory a little bit later on.
Gross profit in the second quarter was $180000 $81000 lower than last year and that's on lower sales.
For the six months gross profit was $100000 higher in 2022.
You got to keep in mind that for the most part we use gross profit method of calculating gross profit for interim periods of the year.
This estimate is in refined following our year end inventory counts.
And valuation.
Gross profit margin percentage that we're using in 2022 is higher than in 2021.
Operating expenses were essentially flat increasing by just $9000 in the second quarter and $110000.
Less than 3% increase for the six months I think in the current environment of less than 3% increase.
Year over year, it's pretty good news.
Operating income was positive for all periods, but declined in Q2 by about $190000 compared to the prior year.
For the six months operating income was essentially flat.
Interest expense again was essentially flat for both periods.
Slightly by $44000 in the second quarter compared to last year.
Six months is the cloud is slightly smaller $18000, but again essentially flat year over year.
Yes.
For the past several years, our interest rate has been at a floor of three 5% per year.
With the recent actions by the Federal reserve it has risen.
Interest expense is calculated at point, 65% below prime.
Prime now at five 5%, thus our interest rate has risen to 4.85% per year, hopefully the interest rate increases.
We're now finished.
Net income for the quarter was a loss of $7000.
As an improvement of improvement compared to a loss of $28000 in the first quarter of the year.
The six months of losses is 35000 versus income of 87000 last year.
Switching to the balance sheet, our balance sheet remains strong with no major changes our accounts payables receivables all remain within normal limits. There are two items I would like to discuss them.
First our term loan.
As you May know with Webster Bank, we have both a revolving credit line and term loan from La is used is secured by a news to Dubai equipment in May we renegotiated the terms of our term loan to finance further investments in machinery.
We increase the amount of loan to $5 million about a $1 9 million dollar increase.
Some of that increase was used to reduce revolver, but it was also used to pay off some capital leases that will be taken out to finance equipment purchases since we got the term loan in the beginning.
In addition, we added a capital equipment and line of credit for a total of $2 million.
$2 million can be drawn on to finance, 85% of the hard cost of new equipment.
Oh advances on the term loan, including a new line of credit.
Amortized over seven years, that's 84 months.
We have already made deposits and progress payments is about three quarters of a million dollars for new equipment is being she's been constructed and in some of its in shipping inbound shipping right now.
This amount has been driving our revolving line of credit.
The machine is installed these funds will be taken from the equipment line of credit and used to pay down the revolver.
Second I think this is an important point.
Since year end, our inventories increased by $3 5 million.
The majority of this increase is with work in process.
<unk> on the F 18.
CH 53.
And the <unk> platforms.
<unk> discussed the disruption displays delays affecting our production.
The increase in inventory reflects this.
If you add the $3 $1 million increased inventory to sales for the <unk>.
Six months of 'twenty of $26 million when it gives you a total of about 29 million essentially equal to the six months of 2021.
Our view is that this exit is that over time. This excess inventory will be completed and result in increased sales.
And that concludes my comments I'll turn the call back to Lou and I look forward to your questions.
Thank you Mike.
Okay.
On the call by reiterating two central points that I made on our last call with a brief summary.
Today's comments.
We have improved our relationship with customers and suppliers, we reduced our debt and established a supportive banking relationship.
Very important.
We have rationalized and consolidated our operations and are making critical investments in equipment to further drive our opportunity and profitability.
Our operational achievements in the second quarter point to our progress.
We also achieved quarter over quarter financial growth in the second quarter of 2022, despite heightened supply chain challenges, especially raw material delays were compounded by delays in outside processing.
Unfortunately, those challenges are expected to continue for the rest of the year.
Let me also emphasize that we may remain highly optimistic about the long term prospects of air industries. We continue to serve major defense and commercial aerospace program, where demand is growing.
We are developing new markets, including nuclear submarines space programs as well as other blocks.
We are enhancing our performance by vertically integrating our processes.
And we're making sure that each of strategic capital investments to become even more valuable partners to our customer.
And we remain focused on driving our EBITDA growth.
That concludes our report at this time I would like to turn the call over to Anna to open up the lines.
For our questions and answers.
Anna.
Yes, Sir thank you.
And if you would like to ask a question. Please click now by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure your mute function is turned off to allow your signal.
No.
Hey boys pumped on your phone line will indicate when your line is open.
Again that is star one if you would like to ask a question.
And we do have any color. Thank you.
Your line is open.
Hi, Lou when Mike.
John <unk> from <unk> brothers.
You had said in your prepared remarks that you have about a six to nine months.
Lag in the time to receive titanium so I was just curious.
What percentage of your product material cost.
Actually relies on titanium I mean total material cost.
Just to get an idea of how much this is really affecting our getting product out.
John that was a that was a that was a an example that I gave because titanium is near and Dear and we're in the Ukraine is really in it and that whole section of the globe high producing and I think what really we're having issues with the <unk> we have.
Is there a turbofan product, which is an inconel based product.
We would see any materials for the first three or four months of this year.
Now, it's starting to start to trickle in so there was a lag in time and Thats one of our best selling products that we have in house.
The material you know I I went I attended the Farnborough show and.
In England, a few weeks back and.
We're all singing the blues in that in that arena is just.
The availability of raw material is really captivating at this point.
Okay.
The first quarter of 2022, I know there were several announcements related to new orders.
And since then I haven't really seen any press releases in that regard. So I was curious if there were any new orders placed since the first quarter of 2022 and.
And also if you can comment on what your current backlog is.
There've been no no long term agreements the first quarter. This year, we announced some long term agreements and that's really a timing issue and that a lot of our long term agreements were expiring at the end of 2021, so they renewed at the beginning of 2022.
We have received orders against those.
We will continue for the life of the agreement over the next five years, but we haven't got no new really new long term agreements to announce we do have a pretty significant pipeline. So we are expecting to announce some pretty soon we were relatively conservative.
About announcing a and we generally do not announce orders releases as we call them against L. P. S.
Okay in regards to the L. P. As I know I believe you had mentioned that you expect the second half.
2022 to be better than the first half.
Is this primarily because of the <unk> in the first half of the year or just.
Other orders that are helping your second half to be better.
Well the materials that we were expecting a late last year and early this year are starting to trickle in so we're going to do what we can to get them out the door.
Okay.
Okay.
Another question.
In regard to 2021, I know that Youre overdue product has really seen significant reductions a very good thing but.
Question on the rise as you know with the current supply chain issues that are out there now I'm curious if you've been able to keep that level still relatively low or or has it been creeping back up.
It remains relatively low remember past due orders.
I never zero.
Right the nature the nature of the Beast.
<unk> order lesson lead time, so they're gone they're destined to end up in past due.
No I know that you had it.
It has increased in the second quarter not materially.
Okay, well that's good to hear.
And speaking.
Speaking about the.
The capital and the tragic events now Oh I'm sorry.
Pardon me.
I'm, sorry to cut you off mic.
Go ahead.
Part of it part of the increase in past due.
Was due to the geared turbofan, where we had an interruption of material raw material shipments.
And so those products that would have been made I'm, making this up in April could not be made there was a lift there by June they relate.
Okay, well, thanks for that insight.
You've made significant capital investments.
As Luke had mentioned.
You can see it in your Capex and that was all in an effort to alleviate the bottleneck issues.
That has plagued there for some time I was wondering if you could talk a little about that progress has been made in this area and compare that to maybe where you were a year ago.
Well.
It's given us it has given us numerous options on what machine to weaken run product.
One of the problems that we had earlier on when I got to air industries as debt.
There were several bottlenecks voltage turning and milling and we didn't have the options now.
As an example, we've gone from two five axis machines to six five axis.
And different sizes and it can handle different sized product.
We have some additional options on where to put this out where to put this work to eliminate bottlenecks and obviously because of that but we have some doubt youll reduce substantially over the last couple of years.
Okay. So I mean with the you know less of a bottleneck concern than say a year ago would it be safe to say that if there were no supply chain issues currently.
Most likely the first half results on the top line would have shown to be better than last year.
At least equal to last year, and perhaps a little bit better.
Okay.
And.
The second quarter gross margins they were up 0.10, 0.1% from the first quarter.
In the meantime revenue grew by almost $2 million and I was hoping you could shed some light on why there was just a minimal change in the gross margins on a pretty significant increase sequentially in revenue.
I've tried to address that I guess, you didn't do that segregated job.
Again, we use the gross profit method at air machining.
For the most part our gross profit last year was 18, 5%, we use that as a guide and unless we can discern some change in product mix or some other external the factor we use that during the year. So the variance in gross margin is equal to <unk>.
The average the CMS sales at eight 5% plus sterling sales at whatever percent because they use a direct measurement approach and that's why.
The overwhelming proportion of ourselves are at CMS and so that they are.
At 18, 8% it will not move until year end when the inventory is taken then we revert and valued.
And hopefully that will only move in one direction, which is up based on that as it did last year.
Okay, Yeah, I noticed last year, I guess I really answered my question because last year in the fourth quarter a huge bump in your gross margins I mean third quarter was 14% and then you showed.
24.
Most of 15%.
The increase in gross margins. So I guess this year, we should anticipate the same thing basically.
Dictated gross margins for the first three quarters and then when inventory is a known factor at the end of the year, we will know what the true gross margin is in.
Do you feel that there's a chance that it's going to be bumped up significantly in that fourth quarter I don't know if that's too early to tell at this point.
It is a two hour it's L b a.
I do not expect will then it got the inquiry.
We got in the fourth quarter of 'twenty, one, but that took our gross margin from 14, 5% to 18 and a half but that entire.
Four and a half percentage point increase.
Had to be accounted for the entire year and booked in the fourth quarter.
Last year.
We had three and a half.
Yeah $3 million to $4 million of the product.
We're.
That $3 million of it was zero profit.
And the half a million dollars in additional sales we lost about $250000.
So we don't have those this year.
So that if you think about it last year, if we hadn't had those particular products John our gross profit for the year would not have been 18, 5% would have been closer to 20%.
So I'm hopeful I'm hopeful for an increase in this year I do not expect it is going to be as significant as it was for last.
Okay Fair enough, alright, Lou or Mike I appreciate it thanks for making the call and for taking my questions.
Okay. Thank you Sam.
And once again that is star one if you would like to add.
Great question.
Well pause for just a moment.
Okay.
And we'll now move to our next caller.
Your line is open.
Hi, My Name's, Mike Atkins and my phone cut out.
Right before you said something about a major space company. If you could just repeat that or elaborate a little bit for me I really appreciate it. Thank you.
No Mike.
I guess, what we're saying is up.
Things are getting somewhat back to normal you know it's been a while since <unk>.
The department of Defense is still working remotely.
Sikorsky Collins borrowing a lot of people still working remotely, but things are starting to get back our malls. So we've had an opportunity to.
Get some face to face time and.
We really stepped up our business development activity because of it so.
We bought strike we've come across with space company, just like Spacex and Blue origin and stuff of that nature.
Lots of quoting activity and hopefully we can we can make something to stick because that's the next frontier. So.
Well there are industry, but.
The direction of our business development has taken us to the sea under the sea and into space.
And we.
We are landing gear company, but we're also a precision manufacturing.
Organizationally and theres opportunities in each of those respective.
Categories.
Okay. Thank you very much I appreciate you for for filling me in on that thank you for taking my call.
Thank you for the call Mike.
And as a final reminder, that is star one if you would like to signal well pause once more.
Yeah.
And it appears there are no further telephone questions I'd like to turn the conference back over tomorrow presenters for any additional or closing remarks.
Thank you Adam.
So with that once again, thank you all for taking the time to be on the call today.
For your attention and questions. We look forward to updating you on our progress of Air Industries group on our next call.
And with that the conference is concluded please.
Disconnect.
Yes, Sir Thank you and once again that does conclude today's conference. We thank you all for your participation you may now disconnect.
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