Earnings Call Transcript - TATT Q1 2025

Operator, Operator

Hosting today's call is Yigal Zamir, our president and CEO, and Ehud Ben Yair, our CFO. Before getting started, we would like to draw your attention to the fact that certain matters discussed on this call today may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of the federal securities laws. These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by these forward-looking statements. The forward-looking statements are made as of the date of this call, and except as required by law, TAT Technologies Ltd. assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For a more detailed discussion of how these and other risks and uncertainties could cause TAT's actual results to differ materially from those indicated in these forward-looking statements, please see our annual report on Form 20-F for the fiscal year ended December 31, 2024, and other filings we may make with the SEC. The financial measures discussed today include non-GAAP measures. We believe investors focus on non-GAAP financial measures in comparing results between periods and among our peer companies that publish similar non-GAAP measures. Please see yesterday evening's Form 6-K, our earnings release, and the investor section of our website at tat-technologies.com for a reconciliation of non-GAAP financial measures to GAAP measures. Non-GAAP financial information should not be considered in isolation from or as a substitute for or superior to GAAP financial information, but is included because management believes it provides meaningful information about the financial performance of our business and is useful to investors for informational and comparative purposes. The non-GAAP financial measures that we use have limitations and may differ from those used by other companies. Now with all of that said, I would like to turn the call over to Yigal Zamir.

Yigal Zamir, CEO

Good morning, everybody, and thanks for joining us for the first quarter earnings call. I really appreciate your interest and support as we review the company's performance and discuss our strategic direction moving forward. As you probably see, we started 2025 on a strong note delivering another quarter of double-digit revenue growth with profitability growing even faster than revenue, reinforcing the momentum established last year or, actually, I would say, in the last three years. Our focus on customer operational excellence, market expansion, and strategic growth continues to drive results that are ahead of the industry average. We expect to continue to outpace the industry for the foreseeable future. First-quarter revenue increased by 23.6% to $42.1 million, up from $34.1 million in the same period last year. This growth was fueled by strong demand across our core business lines, along with... Gentlemen, I just want to check that you still hear me. We had a short interruption.

Ehud Ben Yair, CFO

Yeah. We heard you, but there was a little pause.

Yigal Zamir, CEO

I apologize for this. We had a short power outage here. Our gross profit increased from 40.9% to $10 million, with the gross margin expanding by 290 basis points to 23.6% compared to the 20.7% in the first quarter of 2024. This improvement reflects our ongoing efforts to optimize cost structure, improve operational efficiencies, and enhance product mix. We spend a lot of time discussing this in previous calls. We continue to invest significant effort and energy in improving internal efficiencies and cost structures, which is reflected in the results. Adjusted EBITDA increased by 56.2% to $5.7 million, translating to an adjusted EBITDA margin of 13.6%, a notable improvement from our 10.8% in the same period last year. This improvement is a testament to our disciplined expense management. Our backlog and long-term agreements rose to $439 million during the first quarter, providing us with strong visibility. It also provides us with an important runway for continued growth. I mean, the rapidly evolving aviation market landscape in commercial and government end markets. The aviation sector is currently navigating several macroeconomic headwinds, including policy changes, proposed tariffs, and broader economic uncertainties, all of which have the potential to impact supply chain and customer purchase backlog position as well as our ability to outperform the industry. While in parallel, we expect we can anticipate some near-term volatility, particularly in the MRO intake. So bottom line, we look at the outlook, given the backlog, given the value of long-term agreements that we are signing and increasing all the time, we have a very positive outlook for the long term. Short term, given all the macroeconomic factors, we can expect volatility from the industry. The expansion of our APU will continue to grow our addressable market. We are now authorized on the APU 131, APU 331-500, which serve the Boeing 777, Boeing 737, and Airbus 320. Only a year ago, we secured our first customer for these engines, and since then, we have onboarded several additional customers, both new and long-standing. We are well-positioned as a trusted and reliable partner for servicing various annual APUs with top-tier quality and exceptional service. Our pipeline of opportunities for APU continues to expand, and we are participating in multiple discussions to grow our APU work. To meet this growing demand, we strategically increased our inventory levels during the quarter. While supply chain issues persist, maintaining higher inventory levels positions us to meet timeliness and reliability. This approach is not just a safeguard; it's a strategic decision and strategic asset that we believe enables us to maintain our competitive advantage and continue market growth. As a result, we recorded a net cash outflow in the quarter. However, we are confident this investment will drive revenue growth and enhance customer satisfaction in the coming quarters, positioning us for continued success. Our growth strategy is based on expanding our MRO and OEM businesses, as well as our trading division. This diversified approach provides us with the agility and operational flexibility needed to navigate periods of economic uncertainty. Given the ongoing tariff uncertainty, our supply chain team is working closely with our suppliers and customers to align expectations, adjust planning, and maintain a high service level that our partners rely on. In summary, we are concluding a strong quarter and are optimistic about our prospects for the remainder of 2025. In the short term, we will continue to navigate various industry-wide challenges. The supply chain remains challenged. Economic uncertainty sometimes causes customers to slow down maintenance plans. To date, we have successfully weathered these challenges. Long term, my optimism has increased even though my short-term outlook is somewhat cautious. We see encouraging demand for our products and services, strong interest from both new and existing customers, and the potential to achieve long-term growth rates that significantly outpace the broader industry, all while continuing to expand margins. Thank you very much. And with that, I will turn to our CFO, Ehud Ben Yair, to provide further insights into our financial performance and business outlook.

Ehud Ben Yair, CFO

Thank you, Yigal. Good morning, everybody. I will quickly review the results of the first quarter of 2025. Revenue went up to $42.1 million compared to $34.1 million. It's an increase of 24% year over year. Gross profit landed at $10 million compared to $7.1 million. That's a 41% increase compared to the previous period. The gross margin went up to 23.6% compared to 20.7%. It's a 290 basis points improvement compared to the previous quarter. Operating profit was $4.2 million compared to $2.2 million, marking an 89% increase, and the operating margin is already at 9.9% compared to 6.5% in the previous period. Additionally, adjusted EBITDA rose to $5.7 million from $3.7 million, a 56% increase, and the EBITDA margin moved up to 13.6% compared to 10.8% in the prior period. Net profit was reported at $3.8 million compared to $2.1 million. Several insights to consider when analyzing the results of the quarter: again, we are improving our margins across the board. Particularly this quarter, OEM revenue and margin saw an increase compared to the previous period. On the flip side, our MRO efforts still face significant supply chain issues which have slightly reduced profitability. Nonetheless, across the overall company performance, we are continuing to enhance our margins. The second factor impacting net profit, which we mentioned in previous quarters, is tax expenses. Currently, all tax expenses are accounting expenses; these are non-cash expenses, mainly due to a reduction of tax assets. As previously stated, we expect to be tax profitable and begin paying taxes both in Israel and the US by the end of 2025. Reviewing our strategic growth engines and product mix for the quarter, the heat exchange product line grew to $18.4 million from $14.2 million, marking a 30% year-over-year increase. The APU segment also increased from $9.2 million to $12.3 million, representing a 34% rise. The trading and leasing segment, as noted before, decreased by 27% to $2.1 million. We've mentioned in the past that trading and leasing are sometimes opportunistic and dependent on the specific needs of our customers; fluctuating quarter by quarter. In this quarter, a certain deal was postponed to Q2, resulting in the decrease seen in trading and leasing for Q1 2025. Landing gear work, as mentioned earlier, began to increase towards the end of Q4 and continued its upward trend, reaching $3.3 million compared to $1.5 million in the last quarter, marking a 127% increase. To quickly summarize the trends from Q1 2023 to Q1 2025: revenue rose from $25.2 million to $42.1 million, gross profit increased from $4.3 million in Q1 2023 to $10 million in the first quarter of 2025, while operating income rose from nearly $1 million in Q1 2023 to $4.2 million in Q1 2025, almost doubling year after year. Regarding the backlog, as you mentioned, we continue to see an increase in our backlog. In Q1 2025 alone, we secured backlogs and orders worth $52 million, increasing our total backlog value to $439 million. The product mix remained similar to the previous quarter: over 50%, actually 54% of the backlog and orders, is heat exchangers, APU accounts for 27%, with the remainder being landing gear at 13%. And with that, I will return the call to Yigal Zamir.

Yigal Zamir, CEO

So as we said before, when we look forward strategically, we have the same growth engines that we discussed in the past. This is why I mentioned earlier that we are extremely optimistic about the long-term outlook for the company. Starting with the APUs, we have a $2 billion addressable market. We are proving more and more our ability to provide exceptional service, fast turnaround times, and competitive pricing to customers, indicating we're just beginning to scratch the surface of this vast addressable market. With the level of interest and the ongoing RFPs we are participating in, we believe this will be a substantial growth engine for the next few years. The landing gear MRO cycle is rolling out as expected, and we are already experiencing significant growth in landing gear work, with expectations for it to continue. TAT is the leading player in the thermal solution MRO sector. The largest players, especially in the MRO side, recognize us as cost-effective and exceptional in service quality compared to most competitors. We aim to continue expanding this business. The thermal solution OEM sector, driven by new aircraft, fleet conversions, and next-generation aircraft, represents long-term strategic opportunities. Lastly, in our trading and leasing segment, we find stability from leasing activities with considerable demand for our products. While the trading aspect is more influenced by component availability and specific airline demands, it remains a growing business with attractive margins. As we build our asset base, we can participate in more deals.

Ehud Ben Yair, CFO

Just before we move into the Q&A, we detected some technical issues during the call. If anyone in the audience missed something, we would be happy to repeat any information. Can I move to Matt for the Q&A session?

Operator, Operator

Okay. Thank you very much. We are now going to move to the Q&A session. To ask a question, please use the Q&A widget at the bottom of your screens. If we encounter a time constraint, someone from the IR team will follow up with you if your question is not addressed today. We already see that some questions are coming in, and with that, let's pause for a moment to build the queue. The first question is from Josh Sullivan at Benchmark. Thank you, Josh.

Josh Sullivan, Analyst

Congratulations on the quarter. Can you explore incremental sequential growth this quarter a little further? Provide some color on the increase. Was it driven by repeat customers versus new relationships? How are new APU relationships and orders evolving? Yigal, did that come through to you?

Yigal Zamir, CEO

We are not hearing your answer. You may be on mute. Benjamin, can you hear me now?

Operator, Operator

Now we can hear you. Please proceed, Yigal.

Yigal Zamir, CEO

We have some technical difficulties. Just one second, Matt. I apologize for all this. We have a significant issue with the network. I've reconnected via hotspot to my iPhone. I hope that you can hear us well now. Matt, please repeat the question.

Operator, Operator

Oh, great. Let's move forward. The first question was from Josh Sullivan at Benchmark. Josh is asking if we could delve into the incremental backlog sequentially this quarter, discussing some of the reasons for the increase sequentially, whether it was driven by repeat customers versus new relationships, and how our APU relationships and orders are evolving.

Yigal Zamir, CEO

So two things. First of all, it's a combination of existing customers and new customers. We want, and we stated it in the past, when we win, we announce it officially only when we have substantial wins. However, we are constantly adding new customers across various business lines: APUs, landing gear, and thermal components. So it is actually a combination of new and existing customers across the different business lines.

Operator, Operator

Great. Let's shift over to profitability. Josh is asking about margin improvement. How much of that improvement in margins is due to pricing versus operational actions taken to drive efficiencies across the organization?

Yigal Zamir, CEO

I do not think pricing plays a significant role. It's mostly operational efficiencies. Of course, there is a mix of products that we do not control, but we have major initiatives focused on improving profitability. We've stated before that a company like TAT Technologies Ltd. aims for at least a 25% gross margin and 15% EBITDA margin. This is where we want to be in the future, and we are very committed to achieving this, investing significant time and energy into it. So again, it's mainly about operational efficiencies without any major changes concerning pricing.

Operator, Operator

Okay. Great. Here's another question regarding supply chain. From your perspective, what are you observing in terms of the supply chain at this point? What measures are you taking to manage this with your customers?

Yigal Zamir, CEO

First of all, the supply chain situation is ever-evolving. On a very high level, I believe the industry is in recovery mode. However, we still encounter surprises from suppliers, where business lines that were previously stabilized suddenly face delays in deliveries, often pushed back by months without prior notice. So overall, while I believe the trend is positive and the industry is recovering, it remains highly volatile with unpredictable fluctuations across various business lines. The best strategy for us, which we are already implementing, is to increase our inventories.

Ehud Ben Yair, CFO

You can see this reflected in our numbers. I believe the companies that can overcome supply chain challenges first will enjoy growth. I think part of our growth results from the strong service we provide to our customers. When considering turnaround times, we outperform most competitors, which gives us a critical strategic advantage for the company's growth. This does come at the expense of holding inventory, thereby converting cash into inventory rather than keeping it as cash reserves, but this is our current approach, and we intend to continue until the industry stabilizes.

Operator, Operator

We received an investor question regarding your current capacity. How does that affect your medium-term growth outlook? However, I believe you addressed that in your most recent response.

Yigal Zamir, CEO

Yes. Let me add to that. From a technology and equipment standpoint, we are well-positioned to double our capacity. Of course, the bottleneck remains the supply chain and access to necessary parts. We are managing this by strategically purchasing inventory as needed. With all the investments we've made over the last five years, we are in a strong position to at least double our capacity.

Operator, Operator

Let's shift to taxes. We have a question from Sergey Lanyev from Freedom. He is asking how we should anticipate your tax provision for the second quarter and the remainder of the year, considering that you've started recognizing non-cash items in Q1. Is that clear, right, Ehud?

Ehud Ben Yair, CFO

Yes. That's clear. Thank you for the question. I believe until the year's end, we will see average tax expenses similar to those reflected in the current net profit figures. There is a mix of different taxes between Israel and the US, but we expect the profitability in Israel and the US to maintain the same pattern through the rest of the year. Thus, we can assume similar tax rates for upcoming quarters. As I previously mentioned, and I want to emphasize again, these are just non-cash tax expenses until Q3. By Q4, these will transition into actual cash tax expenses.

Operator, Operator

Sergey is also following up with a question regarding growth opportunities with defense customers, particularly in light of the current budgetary landscape in the United States. Can you comment on the potential for growth within the government or defense market?

Yigal Zamir, CEO

I think that just yesterday, we had an internal meeting where the same questions were discussed. The opportunities are definitely there, and budgets are in place. However, we do not anticipate quick strategic shifts from the government side leading to immediate purchasing decisions. There are solicitations routinely opened by the Air Force, Navy, or Army in the US, but these are based on schedules relevant to TAT Technologies Ltd. I'm not expecting any immediate reaction or substantial growth. Yet, we have our defense sales team dedicated to pursuing contracts with the US Armed Forces, hoping to engage closely with their purchasing offices and look ahead to RFPs and solicitations that will allow us to bid.

Operator, Operator

Okay. There's another growth-oriented question. One is regarding a few prominent logos in the Global Logistics sector, such as FedEx, UPS, and DHL as customers. There's a question surrounding the APU revenue opportunity with these customers, as well as the pipeline for APU 131.

Yigal Zamir, CEO

First of all, UPS, FedEx, and DHL are existing customers. We hold excellent relationships with all three companies and see ample opportunities to grow within their product lines. This will depend on when their current contracts expire and the RFPs they open subsequently. We are well-positioned to secure additional business based on the successes we've had in prior years. Regarding the overall potential for the APUs, the commercial market represents the largest opportunity. Today, almost any airline globally is a potential customer for TAT Technologies Ltd. Airlines are typically bound to three to five-year agreements, and when those contracts come to an end, unless they encounter significant problems, they don’t switch vendors during that term. If they face difficulties, they usually wait until contract renewal before opening up RFPs. We are actively engaged with many RFPs, and in 2024, we opted to wait before participating because we weren't confident in securing long-term opportunities. By the end of 2024, we felt more confident about our capabilities and efficiency, so we are participating in large RFPs, which are plentiful. I see this as a positive snowball effect: starting slow but gaining traction as we win bids and increase our awareness in the market. We are positioning ourselves as a key player in this segment, attracting more customers to consider us seriously as their future vendor. The numbers are substantial; we are discussing 131 engines, with estimates of around 16,000 to 18,000 engines operational worldwide today.

Operator, Operator

Great. Appreciate it. I think that answers that. On the landing gear opportunity, Josh Sullivan is asking where we stand in that cycle. What indicators should we watch for performance ramp-up, both externally and internally?

Yigal Zamir, CEO

You are already seeing results in the landing gear segment, as our volume has doubled. We're just getting started. The big cycle is set to commence this year and peak between 2026 and 2028. Looking at OEM announcements, industry capacity is insufficient to meet the demand expected for 2026 and 2028. When they evaluate all vendors like us, those with the ability to support this capacity shortage will be favored. Believing this will lead to significant growth for us.

Josh Sullivan, Analyst

When do you expect the redomicile process to be completed?

Yigal Zamir, CEO

I'm not sure I fully understand the question. Could you please repeat it?

Ehud Ben Yair, CFO

Are you inquiring about the completion of the redomicile process?

Operator, Operator

Perhaps that's not a great question. We could use clarification on that.

Yigal Zamir, CEO

Well, from an operational standpoint, we are based in the US. Management resides in the US, our headquarters is in Charlotte, and we operate with the majority of our customers, as well as most employees located in the US. So if you focus on operations and management rather than the registration side, we are effectively a US company today. I’m unclear if this answered your question or if there is further detail required.

Operator, Operator

Let me encourage others to submit questions. We will pause to evaluate the queue.

Ehud Ben Yair, CFO

Thank you.

Operator, Operator

Yigal, I believe we are at a good point for me to turn the call back over to you.

Yigal Zamir, CEO

In summary, we are very pleased with the results. Another quarter of continuous improvement in all business aspects. Strategically, when we assess the long-term outlook for the company, we are optimistic about the opportunities, growing demand, and the volume of RFPs and bids we are participating in to keep growing the company. I'm proud of our team and their ability to overcome numerous supply chain challenges. We do not use these as excuses; rather, we utilize them as a springboard to demonstrate to the industry and our customers that we provide superior service with significantly faster turnaround times. This truly benefits our customers. Thus, our outlook remains strong from a strategic standpoint. We executed well in Q1, navigating the short-term headwinds and industry concerns successfully. Overall, the company is moving in the right direction and executing our plans effectively. I want to take this opportunity to thank everyone for joining us today for showing confidence in us and our company. Thank you for your partnership, and we look forward to continuous collaboration.

Operator, Operator

Thank you, Yigal. This concludes the earnings call. You may now disconnect your lines. Thank you.

Ehud Ben Yair, CFO

Thank you.