Earnings Call Transcript - AIRI Q1 2022

Operator, Operator

Good day and welcome to the Air Industries First Quarter Earnings Conference Call. Today’s conference is being recorded. Except for the historical information contained herein, the matters discussed in this presentation contain forward-looking statements. The accuracy of these statements is subject to significant risks and uncertainties. Actual results could differ materially from those contained in the forward-looking statements. See the Company’s SEC filings on Forms 10-K and 10-Q for important information about the company and related risks. EBITDA is used as a supplemental liquidity measure because management finds it useful to understand and evaluate results, excluding the impact of non-cash depreciation and amortization charges, stock-based compensation expenses and non-recurring expenses and outlays prior to consideration of the impact of other potential sources and uses of cash, such as working capital items. This calculation may differ in method of calculation from similarly titled measures used by other companies. At this time, I’d like to turn the conference over to Lou Melluzzo. Please go ahead.

Luciano Melluzzo, CEO

Thank you, Melinda. Good afternoon, everyone, and thank you for joining us. Our continued progress in driving profitability was fully evident in our first quarter results. As expected, revenue for the quarter was lower year-over-year, totaling 12.1 million, which is down 12% from the first quarter a year ago. Meanwhile, first quarter gross profit increased 16% to 2.1 million, and the gross margin increased to 17.2% of sales, a full 410 basis point improvement over the quarter a year ago. EBITDA was essentially equal to 2021's first quarter. The major factors that impacted our top line performance were supply chain disruptions that delayed our receiving raw materials and labor shortages. On our last call, we discussed core significant contracts won in the first two months of 2022's first quarter. Beyond our revenue contribution, each of those wins had important strategic value in furthering our growth strategy. Let me recap those contracts, beginning with one awarded to our Sterling engineering subsidiary. Sterling is critical to our overall plan to accelerate our profitability growth. We won the plan to replicate the successful strategy of optimizing our Long Island facilities by taking advantage of Sterling’s capacity and investing in new equipment to expand its capabilities. In January, Sterling was awarded a life of program extension (LPA) for the turbine exhaust case for the PW 4000 jet engine, which is used on many Airbus and Boeing commercial aircraft. This is expected to generate revenue in excess of $6 million over its remaining term and adds to our backlog in commercial aircraft. This contract follows an especially important win from the fourth quarter of last year, where Sterling was awarded a new LPA to deliver a chat pod for the new CH-53K heavy lift aircraft, which was Sterling’s first LPA for ready-to-craft assembly. The contract furthers our goal of transitioning Sterling's business towards making complete products produced under long term agreements. Our additional first quarter awards included a contract to produce components for the landing gear of the U.S. Air Force’s B-1B Bomber. This order comes from a long-established customer and is an aircraft platform that has not been in Air Industries’ portfolio for some time. We also secured a 12.4 million contract to produce complete main and ancillary components for the U.S. Navy’s E2D Advanced Hawkeye airborne early warning aircraft. We manufacture complete, ready-to-install landing gear as a tier one supplier to the OEM. Lastly, I mentioned on our last call that we were awarded a total of three new LTAs for critical components for the Blackhawk helicopter, with an estimated combined value of more than 20 million. Last week, we were pleased to report the award of two separate LTAs for the Blackhawk helicopter, bringing the total award to 28.9 million. We believe we won these additional LPAs because of our demonstrated delivery performance for this customer, largely attributable to our investment in capital equipment over the past 18 months. As I noted earlier, Sterling engineering is critical to our plan for profitability growth. That plan is focused on reaching consolidated EBITDA of 10 million. EBITDA for 2021 totaled 6.3 million on an adjusted basis. Our goal is ambitious, but we believe it's achievable. The plan consists of five initiatives. First, expand Sterling’s business both through adding new LTAs and by adding new equipment to expand its capabilities. Second, vertically integrate processes into our Air Industries Group to reduce reliance on outside vendors and improve margins. This initiative is also underway. We have already invested in a paid facility that can accommodate many of our products and will be operational in the next few weeks. We’re also targeting grinding, non-destructive testing, assembly, and other processes. In the past three years, our capital investment totaled 6 million. So far this year, we have written purchase orders for an additional 2.2 million. Our intention is to continually invest and modernize our equipment, enabling Air Industries to manufacture world-class products more efficiently and profitably. The third initiative is to seek aftermarket opportunities overseas and bring maintenance, repair, and overhaul activities in-house. Fourth, expand licensing of our products to avoid middlemen and get closer to our customers. Currently, we have a license for the FA team and are considering licenses for other aircraft as well. Fifth, while we expect to reach our 10 million EBITDA target organically, we are also considering strategic acquisitions to achieve two primary goals: acquiring new aerospace customers and/or new platforms, and possibly moving beyond aircraft to submarines, other navy vessels, army vehicles, missiles, and electronics. Let me now turn the call over to Michael Recca, our CFO, for his financial report, which will be followed by questions and answers and some remarks. Mike?

Michael Recca, CFO

Thanks, Luciano. Luciano already discussed sales and gross profit, so I’m going to add some details, as well as some additional operating results and comments on the balance sheet. As Lou said, we achieved a 16% increase in gross profit for the first quarter of FY 22 with 12% lower sales, gross profit dollars were 2.1 million, or 17% of sales, compared to 1.8 million or just 13.1% of sales in the first quarter of 2021. Operating costs for the first quarter were $1.9 million, which is an increase of 6% compared to the first quarter of last year. This is unfortunate, but it’s not surprising given the economic environment. In light of inflationary pressures, we are now increasing our focus on ways to control and hopefully reduce costs. Operating income for the first quarter was $207,000, a substantial increase from $27,000 in the first quarter of last year. Again, this improvement was achieved despite lower sales. Interest and financing costs for the first quarter were $323,000, essentially flat with the prior year. We had a net loss for the first quarter, which was narrowed to $28,000 this year compared to a loss of $152,000 last year. EBITDA adjusted to include stock compensation for the first quarter was just over a million dollars. This is essentially equal to the prior year, just a few thousand dollars lower compared to 2021. For this quarter, EBITDA was 8.7% of sales, an improvement from 7% of sales in the prior year. We ended the quarter with a solid balance sheet. Inventory increased 8% to 32 million, with the increase resulting from Blackhawk and F18 programs primarily. Our accounts payable and accrued expenses increased a modest 4%, and there were no major changes in sales outstanding. Our supplier relationships remain very good. Our debt to Webster Bank, formerly known as Sterling National Bank, was reduced by $2.3 million or 13% on March 31 compared to year-end, and our loan agreement with Webster has only one major financial covenant. We are required to maintain a fixed charge coverage ratio of 1.25 to 1, measured on a trailing 12 month basis. For the 12 months that ended March 31, 2022, we comfortably exceeded these requirements. In summary, we improved profitability in the first quarter as measured by increases in gross profit and higher operating income. Inventory increased, but debt declined. At the end of the first quarter, we remain in a strong financial condition sufficient to support our growth initiatives. That concludes my comments and we turn the call back to Lou. I look forward to your questions.

Luciano Melluzzo, CEO

Thank you, Mike. Let me close this portion of the call by taking a broad look at where Air Industries Group stands today. We have come a long way since my arrival in 2017. We have improved our relationship with customers and suppliers, reduced debt, and established supportive banking relationships. We have rationalized and consolidated our operations while making critical investments in equipment to further drive our opportunities and profitability. We achieved an important year of growth for Air Industries Group in 2021, and demonstrated in the first quarter our ability to add strategic contracts while improving our profitability on every dollar of sales. We stated last time that while first quarter sales would be lower than a year ago, profit would improve significantly, and it did. We continue to expect to deliver improved margins throughout 2022. We are focused on executing our plan to take consolidated EBITDA to 10 million. It is an ambitious goal, but we believe it is achievable. With that, I would like to open up the call to questions from participants. Melinda, if you could open up the lines, please.

Operator, Operator

Thank you. And we move right into our first question. Please go ahead. Your line is open.