Q2 2026 TAT Technologies Ltd Earnings Call

August 5, 2026

Operator: Good morning, and thank you for joining the TAT Technologies Q2 2026 Earnings Conference Call. This call is being recorded. My name is Matt Chesler with FNK IR, a US-based investor relations firm supporting Eran Yunger, TAT's Head of Investor Relations. Joining me today are Igal Zamir, TAT's President and CEO, and Ehud Ben-Yair, TAT's CFO. Before we begin, I'd like to remind you that certain statements made on this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These statements are based on current expectations and assumptions and involve risks and uncertainties that could cause actual results to differ materially. Additional information regarding these risks and uncertainties can be found in our filings with the SEC, including our most recent Form 20-F. TAT assumes no obligation to update forward-looking statements except as required by law.

Matt Chesler: Good morning, and thank you for joining the TAT Technologies Q2 2026 Earnings Conference Call. This call is being recorded. My name is Matt Chesler with FNK IR, a US-based investor relations firm supporting Eran Yunger, TAT's Head of Investor Relations. Joining me today are Igal Zamir, TAT's President and CEO, and Ehud Ben-Yair, TAT's CFO. Before we begin, I'd like to remind you that certain statements made on this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.

Speaker #2: Igal Zamir, TAT's President and CEO, and Ehud Ben Yair, TAT's CFO. Before we begin, I'd like to remind you that certain statements made on this call are, may constitute forward-looking statements within the meaning of the private securities litigation reform act of 1995 and other federal securities laws. expectations and assumptions, and involve risks and uncertainties that could cause actual results to differ materially.

Speaker #2: laws. These statements are based on current Additional information regarding these risks and uncertainties can be found in our filings with the SEC, including our most recent Form 20F.

Operator: These statements are based on current expectations and assumptions and involve risks and uncertainties that could cause actual results to differ materially. Additional information regarding these risks and uncertainties can be found in our filings with the SEC, including our most recent Form 20-F. TAT assumes no obligation to update forward-looking statements except as required by law.

Speaker #2: TAT assumes no obligation to update forward-looking statements except as required by law. Investors are cautioned not to place under-reliance on these forward-looking statements. During this call, we may disclose certain non-GAAP measures, reconciliations of these measures to the most directly comparable GAAP measures are available in our earnings release issued earlier today and in our Form 6K filed with the SEC.

Matt Chesler: Investors are cautioned not to place undue reliance on these forward-looking statements. During this call, we may disclose certain non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are available in our earnings release issued earlier today and in our Form 6-K filed with the SEC. With that, I'll turn the call over to Igal.

Speaker #2: And with that, I'll turn the call over to Igal.

Speaker #3: Thank you, Matt. Good morning, everybody, and thank you for joining us. We appreciate your continued interest in TAT. The strong second quarter marked an important inflection point for TAT.

Igal Zamir: Thank you, Matt. Good morning, everybody, and thank you for joining us. We appreciate your continued interest in TAT. The strong Q2 marked an important inflection point for TAT. We delivered another record quarter, converting strong demand into the highest backlog in our history and grew revenue by nearly 23%. Improving supply chain conditions allowed us to convert previously constrained customer demand into revenue, further posturing our strong performance while continuing to expand profitability and grow our record backlog. TAT competitive position continues to strengthen. We are becoming an increasingly important aftermarket partner to airlines, OEM, and MRO providers, leveraging the breadth of our capabilities, the quality of our execution, and long-standing relationship across the aviation ecosystem. An important milestone this quarter was the expansion of our strategic relationship with Honeywell Aerospace. We are now Honeywell sole global authorized distributor for spare parts for the 331-250 APU platform.

Speaker #3: We delivered another record quarter, converting strong demand into the highest backlog in our history, and good revenue by nearly 23%. Improving supply chain conditions allowed us to convert previously constrained Thank customers' demand into revenue, further plosiving our strong performance while continuing to expand profitability and grow our record backlog.

Speaker #3: TAT's competitive position continues to strengthen. We are becoming an increasingly important aftermarket partner to airlines, OEM, and MRO providers, leveraging the breadth of our capabilities, the quality of our execution, and long-standing relationship across aviation ecosystems.

Igal Zamir: TAT competitive position continues to strengthen. We are becoming an increasingly important aftermarket partner to airlines, OEM, and MRO providers, leveraging the breadth of our capabilities, the quality of our execution, and long-standing relationship across the aviation ecosystem. An important milestone this quarter was the expansion of our strategic relationship with Honeywell Aerospace. We are now Honeywell sole global authorized distributor for spare parts for the 331-250 APU platform.

Speaker #3: An important milestone this quarter was the expansion of our strategic relationship with Honeywell Aerospace. We are now Honeywell's sole global authorized distributor for spare parts for the 331-200-250 APU platform.

Speaker #3: We also extended our MRO license for that platform through 2036 and acquired three Honeywell Aerospace 131-9A APUs to expand our trading and leasing business.

Igal Zamir: We also extended our MRO license for that platform to 2036 and acquired three Honeywell Aerospace 131-9A APUs to expand our trading and leasing business. The expanded Honeywell agreement adds a distribution capability we didn't have on this platform before. Historically, we supported the 331-250 platform to MRO and service alone, and now we are also a parts supplier giving operators less so than MRO partners one source across the full life cycle, from parts to repairs and return. Also, extending the agreement to 2036 further strengthened the long-term visibility and secured the profitability of this important business while reinforcing one of our most valuable OEM relationships. When it comes to the industry, commercial aviation fundamentals remains exceptionally healthy. Aircraft are staying in service longer than historically known. Utilization rates are high, and operators continue to prioritize reliable aftermarket support.

Speaker #3: The expanded Honeywell agreement adds a distribution capability we didn't have on this platform before. Historically, we've supported the 331-200-250 platform through MRO and service alone, and now we're also a parts supplier, giving operators lessors and MRO partners one source across the full lifecycle.

Speaker #3: From parts to repairs and return. Also, extending the agreement through 2036 further strengthened the long-term visibility and secured the profitability of this important business while reinforcing one of our most valuable OEM relationships.

Speaker #3: When it comes to the industry, commercial aviation fundamentals remain exceptionally healthy. Aircraft are staying in service longer than historically known. Utilization rates are high, and operators continue to prioritize reliable aftermarket support.

Speaker #3: These trends continue to support healthy demand across our repairs overall and components business. While supply chain conditions have improved significantly, they have not fully normalized.

Igal Zamir: These trends continue to support healthy demand across our repairs overall and components business. While supply chain conditions have improved significantly, they have not fully normalized. We will continue to prioritize customer support even when that requires targeted inventory investment or higher procurement costs. Although these actions have somewhat dampened our profitability gains in the short term, they help keep the aircraft in service and reinforce our reputation as a trusted aftermarket partner. We expect inventory requirement to become more efficient as supply chain continues to improve. We believe that investments we are making today will strengthen customer relationship, expand future business opportunities, and create long-term value for shareholders. On the strategic priorities and M&A front, M&A remains an important component of our long-term growth strategy.

Speaker #3: We will continue to prioritize customer support, even when that requires targeted inventory investment or higher procurement costs. Although these actions have somewhat dampened our profitability gains in the short term, they help keep the aircraft in service and reinforce our reputation as a trusted aftermarket partner.

Speaker #3: We expect inventory requirements to become more efficient as the supply chain continues to improve. We believe that the investments we are making today will strengthen customer relationships, expand future business opportunities, and create long-term value for shareholders.

Igal Zamir: We expect inventory requirement to become more efficient as supply chain continues to improve. We believe that investments we are making today will strengthen customer relationship, expand future business opportunities, and create long-term value for shareholders. On the strategic priorities and M&A front, M&A remains an important component of our long-term growth strategy.

Speaker #3: On the strategic priorities and M&A front, M&A remains an important component of our long-term growth strategy. We see acquisition as a way to expand our MRO capability, strengthen our thermal system business, and broaden our platform portfolio.

Igal Zamir: We see acquisition as a way to expand our MRO capability, strengthen our thermal system business, and broaden our platform portfolio, and finally, establish a greater presence in geographies that brings us closer to customers. These opportunities have the potential to enhance our competitive position while expanding our relevance across the global aviation aftermarket. We believe that we are well-positioned to execute this strategy. Our strong balance sheet provide the financial flexibility to pursue acquisitions, while our operating platforms and integration capabilities enable us to successfully incorporate complementary businesses. As always, we remain disciplined on valuations and strategic fit, and we will not pursue acquisitions simply for the sake of growth. Our M&A efforts continue to move front and center. We have built a robust pipeline of potential acquisition targets, completed initial due diligence on number of opportunities, and are actively evaluating them.

Speaker #3: And finally, establish a greater presence in geographies that bring us closer to customers. These opportunities have the potential to enhance our competitive position while expanding our relevance across the global aviation aftermarket.

Speaker #3: We believe that we are well positioned to execute this strategy. Our strong balance sheet provides the financial flexibility to pursue acquisitions while our operating platforms and integration capabilities enable us to successfully incorporate complementary businesses.

Igal Zamir: Our strong balance sheet provide the financial flexibility to pursue acquisitions, while our operating platforms and integration capabilities enable us to successfully incorporate complementary businesses. As always, we remain disciplined on valuations and strategic fit, and we will not pursue acquisitions simply for the sake of growth. Our M&A efforts continue to move front and center. We have built a robust pipeline of potential acquisition targets, completed initial due diligence on number of opportunities, and are actively evaluating them.

Speaker #3: As always, we remain disciplined on valuations and strategic fit, and we will not pursue acquisitions simply to seek for the sake of growth. Our M&A efforts continue to move front and center; we have built a robust pipeline of potential acquisition targets, completed initial due diligence on a number of opportunities, and are actively evaluating them.

Speaker #3: M&A is becoming an important focus of our team, reflecting both the quality and the opportunities we are seeing, and our commitment to execute this important element of our long-term growth strategy.

Igal Zamir: M&A is becoming an important focus of our team, reflecting both the quality and the opportunities we are seeing, and our commitment to execute this important element of our long-term growth strategy. In terms of the outlook for the rest of the year, our performance in Q2 and the H1 of 2026 demonstrate the progress we have made and the strong position TAT occupies in the industry. Customer demand remained exceptionally strong, with our record backlog of $650 million providing excellent visibility into the future revenue. Simultaneously, supply chain conditions continue to improve, giving us increasing confidence in our ability to convert our record backlog into revenue while maintaining service levels to our customers.

Speaker #3: In terms of the outlook for the rest of the year, our performance in the second quarter and the first six months of 2026 demonstrate the progress we have made and the strong position TAT occupies in the industry.

Speaker #3: Customer demand remains exceptionally strong, with our record backlog of 615 million dollars providing excellent visibility into the future revenue. Simultaneously, supply chain conditions continue to improve, giving us increasing confidence in our ability to convert our record backlog into revenue while maintaining service levels to our customers.

Speaker #3: Building on the existing relationship, we continue to strengthen our competitive position by expanding OEM relationships and broadening platform coverage, as highlighted by the recent Honeywell agreement.

Igal Zamir: Building on the existing relationship, we continue to strengthen our competitive position through expanding OEM relationship and broader platform coverage, highlighted by the recent Honeywell agreement, which enhanced our service offering while extending an important long-term partnership through 2036. Finally, our strong balance sheet provides the financial flexibility for strategic acquisition that can further expand our capabilities and addressable market. Taken together, these factors reinforce our confidence in TAT's ability to continue delivering profitable growth while creating long-term value for our shareholders. With that, I will turn the call over to Ehud for more detailed review of the financial results.

Speaker #3: Which enhances our service offerings while extending an important long-term partnership through 2036. Finally, our strong balance sheet provides the financial flexibility for strategic acquisitions that can further expand our capabilities and address all markets.

Speaker #3: Taken together, these factors reinforce our confidence in TAT's ability to continue delivering profitable growth while creating long-term value for our shareholders. With that, I will turn the call over to Ehud for a more detailed review of the financial results.

Speaker #2: Thank you, Igal. And good morning, everyone. Good afternoon to those in Israel. As Igal noted, the second quarter benefited from strong demand and a record backlog.

Ehud Ben-Yair: Thank you, Igal, and good morning, everyone. Good afternoon for the guys in Israel. As Igal noted, the Q2 benefited from strong demand and the record backlog. Also, the improvement in supply chain environment enabled us to convert a significant portion of work into revenue as supply constraints eased. We have won several new contracts. We are now starting to see the benefit of these wins following through our financials. It was a great quarter. That said, while profit margin improved, our operating leverage would have been higher if not for some ongoing supply chain issues and weaker exchange rate of the US dollar against the Israeli shekel. Q2 revenue was $52.9 million compared to $43.1 million in the Q2 2025, an increase of nearly 23%. All product segments contributed to the growth in this quarter.

Speaker #2: Also, the improvement in supply chain environment enabled us to convert a significant portion of work into revenue as supply constraints eased. We have won several new contracts.

Speaker #2: We are now starting to see the benefit of these wins following through in our financials. All in all, it was a great quarter. That said, while profit margin improved, our operating leverage would have been higher if not for some ongoing supply chain issues and the weaker exchange rate of the US dollar against the Israeli shekel.

Speaker #2: Second quarter revenue was 52.9 million dollars compared to 43.1 million in the second quarter of 2025. An increase of nearly 23%. All product segments contribute to the growth in this quarter.

Speaker #2: Demand remains exceptionally strong, as reflected in a record backlog and a long-term agreement which increased to a record of 615 million dollars at the end of June 30, 2026.

Ehud Ben-Yair: Demand remains exceptionally strong, as reflected in our record backlog and the long-term agreement, which increased to a record of $650 million at the end of 30 June 2026. Gross profit increased by 23% year-over-year to $13.3 million, with gross margin remaining about 25%. This reflected healthy pricing and operating execution despite continued supply chain inefficiencies that increased procurement costs in certain product lines. We are closely monitoring the landing gear supply chain issues which are impacting revenue growth while we continue to maintain full expense levels for this segment. We still have a low visibility of when supply chain issues within this segment will be resolved. Operating income was $5.6 million, or 10.6% of revenue, compared to $4.4 million or 10.3% of revenue in the Q2 2025.

Speaker #2: Gross profit increased by 23% year over year to $13.3 million, with gross margin remaining at about 25%. This reflected healthy pricing and operational execution, despite continued supply chain inefficiencies that increased procurement costs in certain product lines.

Speaker #2: We are closely monitoring the lending year supply chain issues, which are impacting revenue growth while we continue to maintain full expense level for this segment.

Speaker #2: We still have low visibility on when supply chain issues within this segment will be resolved. Operating income was $5.6 million, or 10.6% of revenue, compared to $4.4 million, or 10.3% of revenue, in the second quarter of 2025.

Speaker #2: With parts availability in certain areas of our business remaining challenging, we have continued to prioritize customer delivery schedule by securing certain components at higher cost when necessary.

Ehud Ben-Yair: With parts availability in certain areas of our business remaining challenging, we have continued to prioritize customer delivery schedule by securing certain components at higher cost when necessary. Absent these ongoing supply chain challenges, our margin expansion would have been even stronger. We continue to invest in the company's growth infrastructure and M&A capabilities. This led to an increase of SG&A expenses. We also continue to invest in development of future thermal system resulting in a modestly higher R&D expenses. Net income was $8.1 million compared to $3.4 million in the Q2 2025. Diluted earnings per share were $0.61 compared to $0.30 in the Q2 2025. The Q2 2026 included a non-recurring one-time gross gain of approximately $4.3 million from the sale of a minority interest in an unconsolidated entity and a non-recurring charge of $900,000 related to tax expenses.

Speaker #2: Absent these ongoing supply chain challenges, our margin expansion would have been even stronger. We continue to invest in the company's growth infrastructure and M&A capabilities; this led to an increase in SG&A expenses. We also continue to invest in the development of future thermal systems, resulting in modestly higher R&D expenses.

Speaker #2: Net income were 8.1 million dollars compared to 3.4 million in the second quarter of 2025. Diluted earnings per share were 61 cents compared to 30 cents in the second quarter of 2025.

Speaker #2: The second quarter of 2026, including a non-recurring one-time gross gain of approximately 4.3 million from the sale of a minority interest in an unconsolidated entity, and a non-recurring charge of 900,000 dollars related to tax expenses.

Speaker #2: The net impact was 3.4 million on the net profit. Excluding the non-recurring gain from the minority interest sale, net income was 4.6 million or 35 cents per regular share.

Ehud Ben-Yair: The net impact was $3.4 million on the net profit. Excluding the non-recurring gain from the minority interest sale, net income was $4.6 million, or $0.35 per diluted share. The foreign exchange of USD against the ILS was a headwind in Q2 2026. The strength of the ILS to the US dollar during Q2 led to foreign exchange losses of over $600,000. We are working with our customers and suppliers on finding solutions to these issues without harming the flow of operation in Israel. Adjusted EBITDA excluding the one-time gain was $7.4 million, or 14% of revenue, compared to $6.1 million or 14% of revenue in Q2 2025. For the cash used in operating activity was $0.6 million compared to +$7 million cash flow in Q2 2025.

Speaker #2: The foreign exchange of USD against the Israeli shekel was a headwind in the second quarter of 2026. The strength of the shekel to the US dollar during Q2 led to foreign exchange losses of over $600,000.

Speaker #2: We are working with our customers and suppliers to find solutions to these issues without harming the flow of operations in Israel. Adjusted EBITDA, excluding the one-time gain, was $7.4 million, or 14% of revenue, compared to $6.1 million, or 14% of revenue, in the second quarter of 2025.

Speaker #2: For the cash, cash used in operating activity was 0.6 million compared to 7 million in a positive cash flow in the second quarter of 2025.

Speaker #2: A portion of the revenue that we recognized had not yet converted to cash collection by quarter end, and we expect it to convert during the third quarter.

Ehud Ben-Yair: A portion of the revenue that we recognized had not yet converted to cash collection by quarter end, and we expect to convert during Q3. Working capital requirements are expected to remain elevated in the near term as we support the extended handling distribution agreement through strategic inventory investments. We view these investments as an attractive use of capital that supports future revenue growth. Briefly summarizing the results for H1 2026, revenue increased by 10.4% compared to the same period in 2025 and reached $94.1 million. Gross profit increased by 12.4% to $23.4 million. This represents 24.8% gross margin, up approximately 40 basis points year-over-year. Operating income was flat at $8.6 million. Net income, which includes a $3.4 million one-time benefit, increased by 58.1% to $11.5 million.

Speaker #2: Working capital requirements are expected to remain elevated in the near term as we support the extended Honeywell distribution agreement through strategic inventory investments. We view these investments as an attractive use of capital that supports future revenue growth.

Speaker #2: Briefly summarizing the results for the first six months of 2026, revenue increased by 10.4% compared to the same period in 2025 and reached $94.1 million.

Speaker #2: Gross profit increased by 12.4% to $23.4 million. This represents a 24.8% gross margin, up approximately 40 basis points year over year. Operating income was flat at $8.6 million.

Speaker #2: Net income, which included 3.4 million one-time benefits, increased by 58.1% to 11.5 million. An excluding the non-recurring benefit, net income would have increased approximately by 11% to 8.1 million.

Ehud Ben-Yair: Excluding the non-recurring benefit, net income would have increased approximately by 11% to $8.1 million. Diluted earnings per share inclusive of the one-time gain were $0.87 versus $0.64. The one-time gain represented approximately $0.26 in diluted earnings per share in the current period. Adjusted EBITDA excluding the one-time gain increased by 4.1% to $12.3 million or 13.1% EBITDA margin. For the balance sheet, our balance sheet remains a competitive advantage. We ended the quarter with net cash of $43 million, with a 0.2x debt to cash ratio and a 0.43x debt to last four quarter EBITDA ratio. We also recently secured a new $100 million, 5-year revolving line of credit with several US-based banks, giving us significant flexibility to support our M&A strategy and future growth of the company.

Speaker #2: Diluted earnings per share, inclusive of the one-time gain, were $0.87 versus $0.64. The one-time gain represented approximately $0.26 in diluted earnings per share in the current period.

Speaker #2: Adjusted EBITDA excluding the one-time gain increased by 4.1% to 20 to 12.3 million or 13.1% EBITDA margin. For the balance sheet, our balance sheet remains a competitive advantage.

Speaker #2: We ended the quarter with net cash of $43 million, with a 0.2 debt-to-cash ratio and a 0.43 debt-to-last-four-quarters EBITDA ratio. We also recently secured a new $100 million five-year revolving line of credit with several US-based banks.

Speaker #2: Giving us significant flexibility to support our M&A strategy and future growth of the company. Diving into the product line, deep exchangers revenue increased by 7.8% in the second quarter of 2026, and 4.2% in the first half compared to the same period last year.

Ehud Ben-Yair: Diving into the product line, heat exchangers revenue increased by 7.8% in Q2 2026 and 4.2% in H1 compared to the same period last year. Heat exchangers business is both OEM and MRO, and the growth is single-digit and steady according with our expectation. In APU, this quarter results are affected by the supply chain recovery, as communicated on the previous earnings call, as well as by new long-term contract wins. We expect to continue the positive trend. Overall, this product line grew by 22.2% in H1 2026, despite the supply chain impact. I'm sorry. Trading and leasing increased by 17% this quarter with several good trades and steady revenue from leasing activities, which will now benefit from 3 additional 131-9A engines that were purchased.

Speaker #2: Deep Exchanger's business is both OEM and MRO, and the growth is single-digit and steady, according to our expectations. In APU, this quarter's results are affected by the supply chain recovery, as communicated on the previous earnings call, as well as by new long-term contract wins.

Speaker #2: We expect to continue the positive trend. Overall, this product line grew by 22.2% in the first half of 2026, despite the impact on the supply chain.

Speaker #2: I'm sorry. Trading and listing increased by 17% this quarter, with several good trades and steady revenue from listing activities, which will now benefit from three additional 131 and 9A engines that were purchased.

Speaker #2: Lending gear, a 5% of our total revenue is still affected by supply chain constraints. To summarize, the best look is at record level, we announced two new and important contracts with APU customers that involve both both the legacy platform and the new platform.

Ehud Ben-Yair: Landing gear at 5% of our total revenue is still affected by supply chain constraints. To summarize, the backlog is at record level. We announced two new and important contracts with APU customers that involve both the legacy platform and the new platform. Gross margins continue to be stable above 25%, and the balance sheet is positioned to support our growth strategy. The supply chain is improving, enabling incremental growth, and we are very optimistic about TAT's future in general, and especially for 2026 results in particular. With that, I will turn the call back to Igal.

Speaker #2: Gross margins continue to be stable above 25%, and the balance sheet is positioned to support our growth strategy. The supply chain is improving and enabling incremental growth, and we are very optimistic about TAT's future in general, and especially for 2026 results in particular.

Speaker #2: And with that, I will turn the call back to you guys.

Speaker #1: Thank you, Ihud. Before we move to questions, I would like to thank our employees around the world. Their professionalism, especially the close coordination with our customers and the suppliers this quarter, is what makes the results like this possible.

Igal Zamir: Thank you, Ehud. Before we move to questions, I would like to thank our employees around the world. Their professionalism, especially the close coordination with our customers and the suppliers this quarter, is what makes the results like this possible. As we close, there are three quick takeaways. First, our fundamentals have never been stronger. Customer demand keeps growing, and backlog and long-term agreements reach a new record. Second, we are deepening our competitive position. Our expanded relationship with Honeywell adds new distribution rights and extends our MRO authorization to 2036. Third, our balance sheet gives us flexibility to keep growing organically, but more importantly, to support our strategic inorganic growth to create long-term value for our shareholders. We are entering H2 2026 with more momentum, more visibility, and a stronger competitive position than at any point in our history.

Speaker #1: As we close, there are three quick takeaways. First, our fundamentals have never been stronger. Customer demand keeps growing, and backlog and long-term agreements have reached new records.

Speaker #1: Second, we are deepening our competitive position. Our expanded relationship with Honeywell adds new distribution rights and extends our MRO authorization through 2036. And third, our balance sheet gives us flexibility to grow organically, but more importantly, to support our strategic inorganic growth to create long-term value for our shareholders.

Speaker #1: We are entering the second half of 2026 with more momentum, more visibility, and a stronger competitive position than at any point in our history.

Speaker #1: I would like to thank you for your continued support, and we look forward to updating you on our progress. With that, I will turn it over to Matt for questions.

Igal Zamir: I would like to thank you for your continued support. We look forward to updating you on our progress. With that, I will turn it over to Matt for questions.

Matt Chesler: Thank you, Igal. We are now going to open up to the Q&A session. From Zoom, there are two ways you can participate. The first is to raise your hand using the icon, which is at the bottom of your screen. Clicking on it will alert us that you would like to ask a question live, and we will place you in queue and then call on you. You will remain on mute until called on. The second way to participate in Q&A is to use the Q&A widget, which allows you to type in your question. We will take questions from there as well, and if we run into a time constraint, someone from the IR team will follow up with you if your question is not addressed on today's call. With that, we will pause for a moment to build the queue. First question is from Jeff Van Sinderen at B.

Speaker #3: Thank you, Igal. We're now going to open up to the Q&A session. From Zoom, there are two ways you can participate. The first is to raise your hand using the icon, which is at the bottom of your screen. Clicking on it will alert us that you'd like to ask a question live, and we'll place you in the queue and then call on you.

Speaker #3: You will remain on mute until called on. The second way to participate in Q&A is to use the Q&A widget, which allows you to type in your question.

Matt Chesler: The second way to participate in Q&A is to use the Q&A widget, which allows you to type in your question. We will take questions from there as well, and if we run into a time constraint, someone from the IR team will follow up with you if your question is not addressed on today's call. With that, we will pause for a moment to build the queue. First question is from Jeff Van Sinderen at B. Riley Securities. Jeff, please go ahead.

Speaker #3: We will take questions from there as well. And if we run into a time constraint, someone from the IR team will follow up with you if your question is not addressed on today's call.

Speaker #3: So with that, we'll pause for a moment to build the queue. First question is from Jeff Van Cindren at BRiley Securities. Jeff, please go ahead.

Matt Chesler: B. Riley Securities. Jeff, please go ahead.

Speaker #1: Jeff, please unmute.

Igal Zamir: Jeff, please unmute.

Speaker #3: Jeff? Please go ahead. Okay, let's move on. And Jeff, you can jump back into the queue. The next question is from Josh Sullivan at JonesTrading.

Matt Chesler: Jeff, please go ahead. Okay, let's move on. Jeff, you can jump back into the queue. The next question is from Josh Sullivan at Jones Trading. Josh, please go ahead. Josh, please unmute your line. Operator, are you able to assist?

Speaker #3: Josh, please go ahead. Josh, please go ahead. Josh, please unmute your line. Operator, are you able to assist?

Speaker #1: Josh, if you can, please check your audio settings and make sure your microphone is set up to the correct device. We can't hear you.

Igal Zamir: Josh, if you can please check your audio settings and make sure your microphone is set up to the correct device. We can't hear you.

Speaker #3: Let's move on to the next question. The next question is from Ben Cleave at Benchmark. Ben, please go ahead.

Matt Chesler: Let's move on to the next question. The next question is from Ben Klieve at Benchmark. Ben, please go ahead.

Speaker #4: All right, that's working. Can you guys hear me? All right. Well, first of all, congratulations on a very good quarter here. First, I have a question about the APU business and the parts availability dynamic.

Ben Klieve: All right. Is that working? Can you guys hear me?

Igal Zamir: Yes. Finally.

Ben Klieve: All right. Well, first of all, congratulations on a very good quarter here. First, I have a question about the APU business and the parts availability dynamic. I'm curious if you can give us a bit of context around the number of APU units that have been sitting, awaiting that parts availability to unlock. I'm just curious if you can kind of level set us on where the number of units waiting to be worked on ended 2025, where that peaked at the height of the parts challenge earlier this year, and where that sits right now.

Speaker #4: And I'm curious if you can give us a bit of context around the number of APU units that have been sitting, waiting for that parts availability to unlock.

Speaker #4: So, you know, I'm just curious if you can kind of level set us on kind of where the, you know, number of units waiting to be worked on ended, you know, 2025, kind of where that peaked at the height of the parts challenge earlier this year and kind of where that sits right now.

Speaker #1: So I think Hiben, by the way, I think that if you come to the Greensboro facility give or take at any time, you will see dozens couple of dozens of APUs in the shop in different stages.

Igal Zamir: Hi, Ben, by the way. I think that if you come to the Greensboro facility, give or take, at any time, you will see dozens, a couple of dozens of APUs in the shop in different stages. Those of you who visited us when we had the Analyst Day in Greensboro, back then, we had about 50, 60 on the shop on a certain day, random day. We peaked at the end of Q1 because we have several engines that were ready to ship, but missing the last part that we couldn't find. Obviously, all these engines will ship during Q2. The overall amount of engines kind of normalized a little bit back. At any point, even at the end of Q2, if you show up at the facility, you will see 40, 50 engines easily in any certain day.

Speaker #1: Those of you who visited us when we had the analyst day in Greensboro saw that back then we had about 50 or 60 on the shop floor on a certain random day.

Speaker #1: I say we picked at the end of Q1 because we had a couple of we have several engines that were ready to ship but missing the the last part that we couldn't found.

Speaker #1: Obviously, all these engines were shipped during Q2. And and the overall amount of engines kind of normalized a little bit back, but at any point, even at the end of second quarter, if you show up at the facility, you will see 40, 50 engines easy in a any certain day.

Speaker #1: I would say that now it's back to normal. You need to remember that the other factor is that we won several new businesses, which we published.

Igal Zamir: I would say that now it's back to normal. You need to remember that the other factor is that we won several new businesses, which we published. Obviously, with new customers funding more engines, you should expect to see a gradual increase in the amount of engines in the process.

Speaker #1: So obviously with new customers sending more engines, you should expect to see a gradual increase in the amount of engines in week in the process.

Speaker #3: Got it. Very good. That's very helpful. And then for my follow-up, and then I'll get back in queue, is also around this parts availability dynamic.

Ben Klieve: Got it. Very good. That's very helpful. For my follow-up, and then I'll get back in queue, is also around this parts availability dynamic. I'm curious, one, the degree to which the Q2 results were kind of a positive surprise for you, relative to where you thought this may end up, during your Q1 call, if the parts availability kind of came in faster than you were expecting. Also, can you give us any kind of context around your expectations here for really when this will fully normalize on a full quarter basis, if you even have that visibility, and then I'll get back in queue.

Speaker #3: I mean, I'm curious, first, about the degree to which the second quarter results were a positive surprise for you, relative to where you thought things might end up during your first quarter call.

Speaker #3: If the parts availability kind of came in faster than you were expecting. And then also, can you give us, you know, any kind of context around your expectations here for the for really when this will fully normalize on a full quarter basis?

Speaker #3: If you even have that visibility. And then I'll get back in the queue.

Igal Zamir: I have to split my answer into 3 different levels, parallel tracks. On a macro level, what we see in the industry more and more is more parts producers or raw material producers that are extending their lead times. There is so much pain around on-time delivery, some of the vendors just choose to increase lead time, so they can meet their turnaround expectations or delivery expectations. That's one factor that affects you because, when they announce that they have a new extended lead time, all of a sudden it creates a rupture in the system.

Speaker #1: You know, I have to split I have to split my answer into three different levels, parallel tracks. On a macro level, what we see in the industry more and more is more parts producers or raw material producers that are extending their extending their lead times.

Speaker #1: You know, there is so much pain around on-time delivery and some of the some of the vendors just choose to increase lead time so they can meet their turnaround expectations or delivery expectations.

Speaker #1: So that's one factor that affects you, because when they announce that they have a new extended lead time, all of a sudden it creates a rupture in the system.

Speaker #1: Some of the OEMs that that were used to keep very large inventories to support shops like ours, are also under pressure pressure to reduce inventory.

Igal Zamir: Some of the OEMs that were used to keep very large inventories to support shops like ours are also under pressure to reduce inventory, and they are, as a measure to reduce their inventory, reducing their level of inventories, more aligned with their subcontractor's lead time, and their availability or ability to react fast to changing demand. We need to remember, on the OEM, it's fairly easy to project and to anticipate six to 12 months in advance and to provide the vendors enough lead time and the general saying, we don't have problems there at all. Going into your last question, OEM is stabilized as a general thing. On the MRO, because of the nature of the business and because of the large fluctuations in parts consumption between different airlines, between different times of the year, there is much more volatility.

Speaker #1: And they are, as a measure to reduce their inventory, reducing their level of inventories to be more aligned with their subcontractors' lead times.

Speaker #1: And their availability or ability to react fast to changing demand. You know, we need to remember on the OEM, it's fairly easy to project and to anticipate six to twelve months in advance, and to provide the vendors enough lead time. And generally speaking, we don't have problems there at all.

Speaker #1: Going into your last question, OEM is stabilized as a general saying. But on the MRO, because of the nature of the business and because of the large fluctuations in part consumption between different airlines, and between different times of the year, there is much more volatility.

Igal Zamir: Going into your last question, OEM is stabilized as a general thing. On the MRO, because of the nature of the business and because of the large fluctuations in parts consumption between different airlines, between different times of the year, there is much more volatility.

Speaker #1: And that's more challenging. And now that the lead times are expanding, it's becoming more and more challenging. The last factor is the specific crisis that we had in Q1 with one major OEM that just couldn't ship.

Igal Zamir: That's more challenging, and now that the lead times are expanding, it's becoming more and more challenging. The last factor is the specific crisis that we had in Q1 with one major OEM that just couldn't ship. When we announced it first time, when we published our annual results, we said that we have a problem and we didn't see the light of the end of the tunnel, we've been getting a lot of promises for recovery, which took a lot of time. Eventually, they caught up.

Speaker #1: And when we announced it, first time when we published our annual results, we said that, you know, we have a problem and we didn't see the light of the end of the tunnel.

Speaker #1: But we've been getting a lot of promises for recovery, which took a lot of time. Eventually, they caught up. So this major crisis that that we experience in Q1 is behind us.

Igal Zamir: This major crisis that we experienced in Q1 is behind us, and now we are more into general supply chain challenges in MRO, in aerospace, with extended lead times and the need to predict much more in advance, which is difficult, what you will need and when you will need, and be able to give the vendors enough time to react. Obviously, it's a challenge, and we are adjusting our systems to these new expectations and new lead times, mainly affecting landing gear and APU.

Speaker #1: And now we are more into general supply chain challenges in MRO and aerospace, with extended lead times and the need to predict much more in advance, which is difficult.

Speaker #1: What you will need and when you will need it, and be able to give the vendors enough time to react. So obviously it's a challenge, and we are adjusting our systems to these new expectations and new lead times.

Speaker #1: Mainly affecting landing gear and APU.

Speaker #3: Very good. Appreciate that color. Thanks for taking my questions. Congratulations again on a nice quarter. I'll get back in the queue.

Ben Klieve: Very good. Appreciate that color. Thanks for taking my questions. Congratulations again on a nice quarter. I'll get back in queue.

Speaker #1: Thank you.

Igal Zamir: Thank you.

Speaker #3: And the next question is from Alexandra Mandry from Truist. Alexandra, please go ahead. Unmute your line and please go ahead.

Matt Chesler: The next question is from Alexandra Mandery from Truist. Alexandra, please go ahead. Unmute your line and please go ahead.

Speaker #2: Hey, good morning. Great results, and thanks for taking my questions. Hopefully, you can hear me.

Alexandra Mandery: Hey, good morning. Great results, thanks for taking my questions. Hopefully, you can hear me.

Speaker #1: Yes. Hi, Alexandra.

Igal Zamir: Yes. Hi, Alexandra.

Speaker #2: Hi. So I was wondering how your progress is on gaining content on the APU MRO for Boeing 737 and A320 series. You know, what is your strategy like to gain content there and has it shifted at all over time?

Alexandra Mandery: Hi. I was wondering how your progress is on gaining content on the APU MRO for Boeing 737 and A320 series. What is your strategy like to gain content there, and has it shifted at all over time?

Speaker #1: I think I remember that you asked me more or less the same question three months ago in the last call, and it's pretty much the same.

Igal Zamir: I think I remember that you asked me more or less the same question three months ago in the last call. It's pretty much the same. I think that we are gaining nice traction on the 500 engine, and on the Boeing 737 and the Airbus A320. It's more of a one-off opportunities than a long-term contract. I believe that, given the very competitive nature on the 131. By the way, we are competing all the time on RFPs and hoping to win some of them, but we are not targeting the large airlines, as a key opportunity for growth in this platform.

Speaker #1: I think that we are gaining traction on the nice traction on the on the 500 engine and on the Boeing 737 and the Airbus 320.

Speaker #1: It's more of one-off opportunities than long-term contracts. And I believe that given the very competitive nature on the 131 and it's expected and I I don't anticipate any major by the way, we are competing all the time on RFPs and and and hoping to win some of them, but are we are not targeting the large airlines.

Speaker #1: As a key as a key opportunity for growth in this in this platform.

Speaker #2: All right. And then are you seeing any impacts of higher jet fuel prices or a conflict in the Middle East impacting your customers or the business?

Alexandra Mandery: Okay. Are you seeing any impacts of higher jet fuel prices or a conflict in the Middle East impacting your customers or the business, and what have you heard from your airline customers?

Speaker #2: And what have you heard from your airline customers?

Speaker #1: You know, obviously they are concerned about it, but we didn't see any impact. If you think if you look at industry data, utilization of aircraft is in in a very healthy position.

Igal Zamir: Obviously, they are concerned about it. We didn't see any impact. If you look at industry data, utilization of aircraft is in a very healthy position. The fleets are flying. It puts some constraint on the airlines' profitability. They need to keep the fleets flying. The utilization is high. It doesn't affect MRO as a general thing.

Speaker #1: And the fleets are flying. It puts some constraint on the airlines' portability, but it doesn't affect their need to keep the fleet flying, and the utilization is high.

Speaker #1: So, it doesn't affect MRO. It's a general saying, I would.

Speaker #2: Great. Thank you.

Alexandra Mandery: Great. Thank you.

Speaker #3: Let's now ask the question answer the question from Josh Sullivan at Jones Trading who submitted it via chat. And here's the question. With the supply chain improving here, how do you how do we think about backlog conversion going forward?

Matt Chesler: Let's now answer the question from Josh Sullivan at Jones Trading, who submitted it via chat. Here's the question. With the supply chain improving here, how do we think about backlog conversion going forward? Should we expect the impressive backlog to release here, or can it extend even as you deliver more? Can it expand even as you deliver more?

Speaker #3: Should we expect the impressive backlog to release here or can it extend even as you deliver more? Can it expand even as you deliver more?

Speaker #1: I I think you know in in feel free to add after I give my two cents but as a general saying the the the more the vast majority of the backlog of the backlog increase the value of the long-term agreement is long-term agreement.

Igal Zamir: Igal, feel free to add after I give my two cents, as a general saying, the vast majority of the backlog increase, the value of the long-term agreement is long-term agreement. We're not expecting any, I call it miracles, quarter over quarter. Obviously, Q1 was a one-time dip, we recovered from it. Moving forward, any new win that we published is going to be spread over three to five years, we're expecting a steady growth, not any major jump. There was a little bit of factor this quarter of specific backlogs of engines that were stuck in the building, and we couldn't bring them to the finish line. Obviously, we recognized them, and recognized them in Q2. Looking forward, there is no expectation.

Speaker #1: So I'm not we're not expecting any I call it miracles quarter over quarter. Obviously Q1 was a one-time one-time dip that and recovered from it but moving forward any new win that we published is going to be spread over three to five years and we are expecting a steady growth not not any major jump.

Speaker #1: There was a little bit of factor this quarter of specific black logs of engines that were stuck in the building and we couldn't bring them to the the finish line.

Speaker #1: Obviously we recognized in recognized them in Q2 but looking forward we I I don't see the there is no expectation obviously things can change and we may be surprised by by very large intake but I don't have any indication today that suggest that such a jump is expected.

Igal Zamir: Obviously, things can change, we may be surprised by very large intake, I don't have any indication today that suggests that such a jump is expected. Ehud, I don't know if you have any further color to add.

Speaker #1: I don't know if you have any further callers to add.

Speaker #4: Yeah, I think the only thing to add is just that we want to make sure the audience and the analysts covering the company understand that this quarter has some catch up from the previous quarter.

Ehud Ben-Yair: Yeah, I think the only thing to add is just we want to make sure that the audience and the analysts that are covering the company understand that this quarter has some catch up on the previous quarter. I'm suggesting for all those who's trying to understand the past and try to forecast the future, obviously, is to look at the average of the first six months of the year rather than thinking that Q2 is the baseline for the future. Obviously, the company will continue to grow, but I need to make sure that people understand exactly the results.

Speaker #4: So I'm suggesting for all those who's trying to understand the past and try to focus the future obviously is to look at the average of the first six months of the year rather than thinking that the second quarter is the baseline for for the for the future.

Speaker #4: Obviously the company will continue to grow but I need to make sure that people understand exactly the results.

Speaker #3: Josh's follow-up question is on M&A. He's asking, what leverage levels are you comfortable with, and what areas are of strategic interest at this point?

Matt Chesler: Josh Sullivan's follow-up question is on M&A. He's asking, what leverage levels are you comfortable with, and what areas are in the strategic interest at this point? Does the extended lead time dynamic influence your M&A thoughts as well?

Speaker #3: Does does the extended lead time dynamic influence your M&A thoughts as well?

Speaker #1: I would like to take the lead.

Igal Zamir: Ehud Ben-Yair, would you like to take the lead?

Speaker #4: Yeah. So first of all, I would say that with the M&A in general, we're doing a very good progress. I think we're looking now at the very healthy funnel of very interesting opportunities and as you said with cost few minutes ago, we're very disciplined about it.

Ehud Ben-Yair: Yeah. First of all, I would say that with M&A in general, we're doing very good progress. I think we're looking now at a very healthy funnel of very interesting opportunities. As Igal Zamir said in his quote a few minutes ago, we are very disciplined about it. We define the strategic deals that we're looking for. We define what are the prices that we are willing to pay, and we are going to be very disciplined. In general, I'm very encouraged with the fact that there is a very healthy funnel. With regards to the other financial aspects we communicated in the past, and this is still the plan, any deal that will be executed will be at a lower multiples than we are trading, for sure.

Speaker #4: We define the strategic deals that we're looking for. We defined what are the prices that we are willing to pay. And we are going to be very very disciplined.

Speaker #4: But in general, I'm very encouraged with the fact that there is a very very healthy funnel. With regards to the other financial aspect, we communicated in the past and it's still this is still the plan.

Speaker #4: Any deal that will be executed will be at a lower multiple than we are trading, for sure. And we usually go to finance it with 50% credit and 50% money that will come from the capital market.

Ehud Ben-Yair: We usually go to finance it with a 50% credit and 50% money that will come from the capital market. We're not going to expose the company too much in terms of a carried leverage, we want to keep it as a healthy leverage, nothing more than that. We're not going to take any crazy risk here.

Speaker #4: We're not going to expose the company too much in terms of credit leverage and we want to keep it as a healthy healthy leverage nothing more than that.

Speaker #4: We're not going to take any credit risk here.

Speaker #3: Thanks Ehud. Let's move on. Let's move back to a live question. We have Jason Schmidt from Wake Street. Jason, please unmute your line and go ahead and ask your question.

Matt Chesler: Thanks, Ehud. Let's move back to a live question. We have Jason Schmidt from Blake Street. Jason, please unmute your line and go ahead and ask your question.

Speaker #5: Hey guys, thanks for taking my questions. I'm just curious if you could discuss the supply chain dynamics and the landing gear market. I know you had some open work orders.

Jason Schmidt: Hey, guys. Thanks for taking my questions. Just curious if you could discuss the supply chain dynamics in the landing gear market. I know you had some open work orders last quarter, given the sequential and year-over-year improvement in the landing gear business, just wondering if we should take that the supply conditions have eased there as well.

Jaeson Schmidt: Hey, guys. Thanks for taking my questions. Just curious if you could discuss the supply chain dynamics in the landing gear market. I know you had some open work orders last quarter, given the sequential and year-over-year improvement in the landing gear business, just wondering if we should take that the supply conditions have eased there as well.

Speaker #5: Last quarter, but given the sequential and year-over-year improvement in the landing gear business, just wondering if we should take that to mean the supply conditions have eased there as well.

Speaker #1: Hi Jason. You know, before we start, just just let's all make sure that we remember landing gear is a very small portion of the business, about 5%.

Igal Zamir: Hi, Jason. Before we start, just let's all make sure that we remember landing gear is a very small portion of the business, about 5%. We don't see the recovery as we reported in the last few quarters. What the dynamics that we see is a drastic extension of lead times, in some cases to more than 12 months, which has a major impact on the ability to adjust to the needs. These are very expensive parts. You need to remember that on landing gear, not like the APU where you can use USM parts and find solutions from the market when the OEM gets stuck. On landing gear, as a general saying, there is much more usage of new parts from the OEM. When these parts are not available, you cannot complete the work.

Speaker #1: And we don't see the recovery as we reported in the last few quarters. What the dynamics that we see is a drastic extension of lead times in some cases to to to more than 12 months.

Speaker #1: Major which has a major impact on the ability to to adjust to to the needs. These are very expensive parts. You need to remember that on landing gear not like the APU where you can use USM parts and find solutions from the market when you when the OEM gets stuck.

Speaker #1: When it comes to landing gear, generally there is much more usage of new parts from the OEM. And when these parts are not available, then you cannot complete the work.

Speaker #1: I don't we don't have a visibility to when when this trend is going to stabilize, but it it really affects the the landing gear business.

Igal Zamir: We don't have visibility to when this trend is going to stabilize, but it really affects the landing gear business.

Speaker #5: Understood. And then just as a follow-up, can you help us think about operating expenses and that trend through the second half of this year?

Jason Schmidt: Understood. Just as a follow-up, can you help us think about operating expenses and that trend through H2 of this year?

Jaeson Schmidt: Understood. Just as a follow-up, can you help us think about operating expenses and that trend through H2 of this year?

Igal Zamir: Yeah. You need to bear in mind that, and we discussed it H2 of last year, we invested a lot in establishing infrastructure to support the good strategic growth and to support M&A. We expanded our overhead at the group level in a meaningful way in H2 of last year in preparation. Obviously, we are working very hard to get going with M&A and to show the first deal whenever we will be ready. Moving forward, I think that we have the infrastructure today that we need to support the growth. As we continue growing, it will help us improve the margin, the operating margin.

Speaker #1: Yeah, you need to be reminded of that, and we discussed it the second half of last year. We invested a lot in establishing infrastructure to support good strategic growth and to support M&A.

Speaker #1: So we expended our overhead of the at the group level in a meaningful way in the second half of last year in preparation and obviously everybody you know we are working very hard to get going with M&As and to show the first deal whenever we will be ready.

Speaker #1: And moving forward, I think that we have the infrastructure today that we need to support the growth and as we continue growing, it will help us improve the margin the operating margin.

Speaker #5: Okay, thanks a lot guys.

Jason Schmidt: Okay. Thanks a lot, guys.

Jaeson Schmidt: Okay. Thanks a lot, guys.

Speaker #3: Thank you Jason. The next question is a follow-up from Jeff Van Cindren at B. Riley. Jeff, it's all yours.

Matt Chesler: Thank you, Jason. The next question is a follow-up from Jeff Van Sinderen at B. Riley. Jeff, it's all yours.

Speaker #2: Great. Can you guys hear me now?

Jeff Van Sinderen: Great. Can you guys hear me now?

Speaker #1: Yes, Jeff. Hi, how are you?

Igal Zamir: Yes, Jeff. Hi. How are you?

Speaker #2: Okay. All right. Thank you. Let me add my congratulations on the strong results for the quarter. Just wanted to circle back to supply chain for a moment if we could.

Jeff Van Sinderen: Okay. Hi. Thank you. Let me add my congratulations on the strong results for the quarter. Just wanted to circle back to supply chain for a moment, if we could. Wondering what still needs to happen for normalization there. Are there specific remaining bottlenecks that you're working on? What do you think is the timeframe for normalization?

Speaker #2: Wondering what still needs to happen for normalization there. Are there specific remaining bottlenecks that you're working on? And then what do you think is the time frame for normalization?

Speaker #1: That's I I would say it's a tricky question because in in most cases we we are dealing with the OEMs that have their own supply chain challenges.

Igal Zamir: I would say it's a tricky question because in most cases, we are dealing with the OEMs that have their own supply chain challenges. It's a pass-through from subcontractors to the OEMs, not something that we can definitely impact one way or the other. We are more dependent on the OEM actions. As I said it before, when it comes to direct materials or parts that we source directly from the source, it's stabilized. When you look at all the raw materials for our thermal components, as example, we have no issues. When it comes to parts that we are sourcing from OEMs, these OEMs have a very large network of subcontractors, and some of them are really struggling to catch up. I think that we are still in the after-COVID effect.

Speaker #1: So it's a path through from sub-subcontractors to the OEMs, not something that we can definitely impact one way or the other. So we are more dependent on the OEM actions.

Speaker #1: When it comes to direct material, as I said before, when it comes to direct materials or parts that we source directly from the source, it stabilized when you look at all the raw materials for our thermal components, as an example.

Speaker #1: We have no issues. When it comes to parts that we are sourcing from OEMs, then these OEMs have a very large network of subcontractors and some of them are really struggling to catch up, you know, I I still I I still that we are still in the after COVID effect.

Speaker #1: So many many small subcontractors that disappeared or shut down their business during COVID lots of single source dependency and now and now the need to develop new sources and to certify them which is a very long process in aerospace.

Igal Zamir: Many small subcontractors disappeared or shut down their business during COVID, lots of single source dependency. Now they need to develop new sources and to certify them, which is a very long process in aerospace. That's my personal thought. What we experience is the relationship with the OEM and what we are projecting to you guys is more based on what the OEMs are telling us. There's another factor that affects some of the businesses. In normal times, there is a large market of USM parts available as a substitution for OEM parts when there is a shortage of parts. These days, airlines, the retirement of old fleets are much slower than normal because airlines are forced to keep on flying old fleets. Everybody is searching for the USM parts, which makes it much more difficult to find them.

Speaker #1: But that's my personal thought. What we what we experience is the the the relationship with the OEM and what we are projecting to you guys is more based on what the OEMs are telling us.

Speaker #1: There is another factor that affects some of the businesses, you know, in normal times there is a large market of USM parts available for as a substitution for for OEM parts when there is a shortage of parts.

Speaker #1: But these days you know airlines the the retirement of old fleets are much slower than normal because airline has to are forced to keep on flying old fleets.

Speaker #1: Everybody is searching for the USM parts. Which makes them which makes it much much more difficult to find them. And even if you find them, you pay much more than what we used to pay in the past.

Igal Zamir: Even if you find them, you pay much more than what we used to pay in the past. That's the dynamic. We see it all over the place, and we see many of our competitors and other industry players sharing the same dynamic. The only thing that we can do, and we've been doing it, is to drastically increase our inventory, to keep much more buffers to deal with all of this.

Speaker #1: So that's the dynamic. We see it all over the place and we see many of our competitors and other industry players sharing the same dynamic.

Speaker #1: The only thing that we can do and we've been doing it is to drastically increase our inventory to keep much more buffers to deal with all of this.

Speaker #2: Okay, that's that's really helpful. It seems like you're handling it very effectively. Could you maybe elaborate a little bit more on your expanded relationship with Honeywell and how you expect that relationship to benefit your business in the future?

Jeff Van Sinderen: Okay. That's really helpful. It seems like you're handling it very effectively. Could you maybe elaborate a little bit more on your expanded relationship with Honeywell and how you expect that relationship to benefit your business in the future?

Speaker #1: You know, first of all, the relationship with Honeywell is extremely important to us. It's one of our the APUs in general is one of our strategic product lines and represents the fastest growth opportunity for TAT we are making we made great strides on the 331 to 150 platform over the last few years.

Igal Zamir: First of all, the relationship with Honeywell is extremely important to us. The APUs in general is one of our strategic product lines, and represents the fastest growth opportunity for TAT. We made great strides on the 331-200 and 250 platform over the last few years. We are growing this type of engine very fast. Now with distribution, we can support the full ecosystem. It is not just providing MRO services and leasing, but now also supporting customers and other industry players, including competitors with parts when they need them. I see it as an opportunity also to grow the distribution. In general, we find the distribution business very interesting.

Speaker #1: We are growing this type of engine very very fast and now with distribution it gives us the full the full we can support the full ecosystem not just providing MRO services and leasing but now also supporting customers and other industry players including competitors with with parts when when they need them.

Speaker #1: I see it as an opportunity also to grow the distribution in general I we find the distribution business very interesting and this this first deal basically on top of being a good deal for TAT and expanding the business and everything that we mentioned is also the first time that we are going to experiment and you know get proficient in in dealing with distributions which hopefully we we can do you know in distribution services which which hopefully we can do more in the future.

Igal Zamir: This first deal, basically on top of being a good deal for TAT and expanding the business and everything that we mentioned, is also the first time that we are going to experiment and get proficient in dealing with distributions, which hopefully we can do in distribution services, which hopefully we can do more in the future. I think that the expansion of the agreement in six more years is also a critical component, a major advantage for TAT, which provides a lot of visibility and help us to secure a profitable growth for the next 10 years.

Speaker #1: And I think that the expansion of the of the agreement in six more years is also a critical component a major advantage for TAT.

Speaker #1: Which provides a lot of feasibility and help us to to secure a profitable growth for the next 10 years.

Speaker #2: Okay. Excellent. Thanks for taking my questions and continued success.

Jeff Van Sinderen: Okay. Excellent. Thanks for taking my questions, and continued success.

Speaker #1: Thank you. Thank you very much.

Igal Zamir: Thank you. Thank you very much.

Jeff Van Sinderen: Great.

Speaker #3: We have a question that was emailed in from Sergio Heber. Who's asking us to walk through the working capital dynamic in the second quarter in terms of operating cash flow and then related to that.

Matt Chesler: We have a question that was emailed in from Sergio Heber, who is asking us to walk through the working capital dynamic in Q2, in terms of operating cash flow. Related to that, is there anything that we should be thinking about in terms of working capital and cash flow as it relates to the expanded relationship with Honeywell?

Speaker #3: Is there anything that we should be thinking about in terms of working capital and cash flow as it relates to the expanded relationship with Honeywell?

Speaker #1: Yes. So the the operating cash flow in the second quarter of 2026 was impacted from two two things mainly. One of them is a continued increasing inventory signed before we started purchasing inventory for this the distribution deal and also we strategically invested in inventory on areas where we felt that there was a part shortages and risk in the market in order not to be caught again with the situation that we were in in Q1 of this year.

Ehud Ben-Yair: Yeah. The operating cash flow in Q2 of 2026 was impacted from two things mainly. One of them is continuous increasing inventory, as I explained before.

Ehud Ben-Yair: We started purchasing inventory for the distribution deal, and also we strategically invested in inventory on areas where we felt that there were power shortages and risk in the market, in order not to be caught again with the situation that we were in Q1 of this year. Looking forward for the rest of the year, I am expecting inventories to continue growing. Again, that is a strategic decision here, and it will have some impact on the working capital. On the other hand, as I mentioned before, there were several deals that were not collected during Q2 of the year, and they were pushed for collection in Q3 for this year, which will create a positive impact on the cash flow. All in all, just to summarize all those details, I am expecting operating cash flow to continue trending in this way. I am expecting inventory to continue growing.

Speaker #1: Looking forward for the rest of the year I'm expecting I'm expecting inventories to continue growing again that's a strategic decision here and it will have some impact on the on the working capital on the other hand as I mentioned before there were several deals that were not collected during during the second quarter of the year and they were pushed for collection in Q3 for this year which will create a positive impact on the cash flow.

Ehud Ben-Yair: On the other hand, as I mentioned before, there were several deals that were not collected during Q2 of the year, and they were pushed for collection in Q3 for this year, which will create a positive impact on the cash flow. All in all, just to summarize all those details, I am expecting operating cash flow to continue trending in this way. I am expecting inventory to continue growing.

Speaker #1: So all in all just to summarize all those details I'm expecting operating cash flow to continue trending in this way. I'm expecting inventory to continue growing as I said in order to overcome two factors the distribution deal and the and the lack of parts in the in On the other hand as the CFO of the company I'm not concerned we have enough cash we are generating profits so we have the internal resources to deal with those demands without increasing any line of credit or increasing the credit leverage of the company.

Ehud Ben-Yair: As I said, in order to overcome two factors, the distribution deal and the lack of parts in the market. On the other hand, as the CFO of the company, I am not concerned. We have enough cash. We are generating profit, so we have the internal resources to deal with those demands without increasing any line of credit or increasing the risk level of the company.

Speaker #3: Okay. Thank you Ehud. You know with that there are no more questions in the queue that that haven't already been addressed at some point during the conversation today.

Matt Chesler: Thank you, Ehud. With that, there are no more questions in the queue that haven't already been addressed at some point during the conversation today. With that, we are going to bring the conference call to a close. I wanted to thank everyone for joining us today, and we look forward to keeping you updated on the company's progress on future earnings calls. With that, you may now disconnect your lines.

Speaker #3: So you know with that we are going to bring the conference call to a close. I wanted to thank everyone for joining us today and we look forward to keeping you updated on the company's progress on future earnings calls.

Speaker #3: With that you may now disconnect your lines.

Speaker #1: Thank you very much.

Speaker #3: Thanks.

Ehud Ben-Yair: Thank you very much.

[Analyst]: Thanks.

[Analyst]: Goodbye

Operator: Goodbye

Q2 2026 TAT Technologies Ltd Earnings Call

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