Earnings Call Transcript - TATT Q3 2024

Matt Chesler, Partner, FNK IR

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the TAT Technologies Third Quarter 2024 Earnings Conference Call. Please note that today's conference may be recorded. Hello. My name is Matt Chesler, and I am a partner with FNK IR, a US-based Investor Relations firm supporting Eran Yunger, TAT's Internal Head of Investor Relations. Hosting today's call is Yigal Zamir, our President and CEO, and Ehud Ben Yair, our CFO. Before getting started, we'd like to draw your attention to the fact that certain matters discussed on this call 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 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 Technologies' 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, 2023, and other filings we 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 peer companies that publish similar non-GAAP financial measures. Please see today's press release, our earnings release, and the Investors section of our website at tat-technologies.com for a reconciliation of non-GAAP financial measures to GAAP results. 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 used by investors for information and comparative purposes. With that, I'd now like to turn the call over to Yigal.

Yigal Zamir, President and CEO

Hi, good morning, everybody. First of all, I have to say that we are excited to be here today. It's TAT's first live earnings call, and it's another milestone in the evolution of the company and in development, especially after the progress the company has made over the last few years. So, I'm really excited to be here in front of you today and looking forward to meeting you also in-person at future conferences or other events. I'll start by saying that we are very pleased with the results of the third quarter. The company executed really well, and as you can see in the graph, we recorded another record quarter in revenues and profitability. We onboarded new customers, we continue working on improving our efficiencies, and we are continuing to establish the infrastructure that TAT needs to support growth for the coming few years. So, all in all, we are very pleased with the results. If you look at the data, and Ehud, our CFO, will present all the financials in a few minutes, revenue, in comparison to last year, increased by 35%, net income increased by 33%, and we are very pleased with the EBITDA results, which increased by 70%, almost double the revenue, reflecting improvement in our operational efficiencies. We showed a $6.5 million positive swing in cash flow compared to the same period last year. Despite the revenue growth, our backlog is also continuing to grow, which means we are receiving more purchase orders and securing more business for the future than what we are selling. All the signs are positive when we look into the future. A few words about the industry and how it affects us. I'm sure that it's not news to anybody that the industry is going through an interesting period with major demand on the OEM, new manufacturing, and on the MRO and aftermarket services. There is huge demand for new aircraft, especially in Asia, as passenger flights increase. The aircraft manufacturers are struggling to ramp up production from COVID, and supply chain challenges persist in aerospace. We are hearing eight to ten years lead time to receive a new aircraft, forcing airlines to continue operating fleets they were supposed to retire and even to bring back previously divested aircraft. All of this creates pressure on MRO and parts manufacturers, especially for APUs and landing gears. We are enjoying this demand, with increasing contracts from contractual and non-contractual customers, but we share the challenges with the supply chain, which industry leaders expect will stabilize only by the end of next year. Over the past few months, we have strategically sourced the parts we will need, reflected in our inventory increase. Our long-term visibility is improving, with long-term contracts secured and an increase in the purchase orders received on the OEM side, higher than ever before. We are optimistic that growth will continue in the coming years. Short term, we must be mindful of the supply chain challenges and seasonal factors that historically affect fourth-quarter performance, as commercial airlines tend to consume more work during summertime and cargo carriers minimize maintenance during the holiday season. Going into next year, revenue will likely be determined by the supply chain and capacity, which is a good reflection of where we see ourselves heading. We have many opportunities across all business segments. TAT's focus is not just on growing revenue, but on improving profitability, and Q3 is another demonstration of our ability to unlock operating leverage. As we grow the business and hire new people, we are improving efficiencies, and this will positively affect profitability. Overall, we feel confident about the coming years and continue to show good performance. The company has undergone a major transformation during COVID, and the growth we see today reflects just the beginning of our opportunities. We are optimistic looking forward, and with that, I will let Ehud go over the financials.

Ehud Ben Yair, CFO

Thank you, Yigal. Happy to be here and present another quarter of very good results. I will go through the numbers and provide some key indicators. Looking at Q3 of '24 compared to Q3 of '23, revenues increased to $40.5 million from $29.9 million, a 35% increase. It's important to note that the company is not only growing its revenue but also improving profitability quarter after quarter. The gross margin increased to 21% from 19.4%, and the operating margin nearly doubled from 5.9% to 8.5%. Adjusted EBITDA also rose by 70%, from 10.1% of revenue to 12.6% in Q3 of '24, and net profit increased by 33%, from $2.2 million to $2.9 million in this quarter. For the nine months of the fiscal year, revenue increased to $111.1 million from $82 million, while gross margin rose from 18.9% to 21.2%, operating margin nearly doubled from $4.2 million to $8.4 million, and adjusted EBITDA increased from 9.3% to 11.8%. Net profit also rose from $4.3 million to $7.6 million, representing a 77% increase compared to previous periods. Over the last four to five quarters, all parameters have consistently improved. In Q2 of '24, gross margin was 21.9%, which dipped to 21.1% in Q3 of '24. It is essential to understand that our revenue mix can affect gross margin, and while this change is not a concern, it does reflect the nature of our segmented products. In terms of our segments, our heat exchange activity went up from $12.9 million to $16.6 million, a 33% increase year-over-year, and the APU activity rose from $8.2 million to $10.5 million, a 27% increase. Trading and leasing increased significantly from $1.9 million to $5.7 million, although this figure is not typical revenue for this segment. The landing gear segment has faced supply chain challenges, affecting revenue growth. However, we are working hard to secure the necessary parts and expect better revenue numbers heading into 2025. Overall, we are proud of our revenue growth and improvement in profitability, and we are monitoring our peers in the industry where we are growing faster than competitors. In terms of our backlog, we have $423 million in Long-Term Agreements (LTA) and backlog, with 52% from the heat exchange segment and 26% from the APU segment. About 80% of our revenue comes from commercial activity and 18% from military. The geographical breakdown shows North America contributing 75% of the revenue. And with that, I will pass the pitch to Yigal for a short summary.

Yigal Zamir, President and CEO

Bottom line, just to summarize this short presentation, we are optimistic about the future. The industry trend is moving in the right direction, and demand is high. We are well-positioned with the right products and capabilities. The company is doing a good job overcoming supply chain challenges; it's never perfect, but we are probably doing what we need to be ready for next year. We have many capabilities that we can leverage in the coming years, and we look forward optimistically into 2025 and 2026. That's it for today from our end. We'll now move to the Q&A session.

Matt Chesler, Partner, FNK IR

Thank you, Yigal. We're now going to open up to the Q&A session. As a reminder, there are two ways to ask a question from the Zoom webcast. The first is to use the Raise Your Hand icon, which is at the bottom of your screen. Clicking this will alert us that you'll want to be called on to ask a live question, and then you'll be placed in a queue when called on. Just note, you're going to be on mute until you are called on. The second way to participate is to use the Q&A widget, which I know a number of you have already done, and that will allow you to type in and send your question, and I'll read that out. We'll take questions from there as well, but just note if we run into a time constraint, someone from the IR team will get back to you if your question is not asked on today's call. With that, we'll now begin and pause for a moment to build the queue. Let us begin with a submitted question.

Yigal Zamir, President and CEO

When we are comparing ourselves to competitors, unfortunately, most of our direct competitors are not publicly traded, therefore you cannot see the data online. However, we have been exposed to financial reports of what we consider to be best-in-class companies in our field. We want to be above 25% in gross margin. I'm not making a forward-looking statement or guaranteeing that by when it will happen, but we are working hard and considering 25% gross margin as a threshold that the company realistically should meet.

Matt Chesler, Partner, FNK IR

There was an additional question. When should we expect 131 sales to start ramping up?

Yigal Zamir, President and CEO

This year, the way that we are looking at the 131 and the 331-500, the APUs that serve the Boeing 737, the Airbus 320 family, and the Boeing 777, we gained full capability and FAA approval to start providing services about a year ago. We made a strategic decision to start with one-off deals. We are doing one engine at a time and not pursuing a large contract to begin with. We need to gain operational efficiencies and expertise. Additionally, we needed to build the financial model for large contracts because most airlines bid with fixed prices; dismantling an engine involves complex statistical modeling and experience. We are getting engines, performing the work, and we have a large opportunity funnel going into next year in '26. We likely have more RFPs in the making than what TAT has ever seen. A significant demand exists for engines in the market, and there are not many competitors offering support to airlines worldwide. We will update the market once we secure these contracts.

Matt Chesler, Partner, FNK IR

The next question is about EBITDA margin targets and relates to a separate EBITDA question. Can you share longer-term EBITDA margin targets as you scale your revenue up to a $300 million run rate? Additionally, what are some of the main levers of EBITDA margin expansion that you expect to pull in the coming years?

Yigal Zamir, President and CEO

In addition to wanting to achieve a gross margin above 25%, we also aim for above 15% EBITDA as a company goal that we believe is achievable. We have invested significantly in establishing growth infrastructure with the necessary manpower and an executive team; most of these investments were made, positioning us to support a much larger company, which should naturally bring better margins. Additionally, we have operational efficiencies that present huge opportunities. As prices and the supply chain stabilize, we will benefit from the operational efficiency improvements. Employee utilization is also crucial; while we've hired many new staff for our shops, they must learn to work efficiently over time, which takes many months of training and experience to ensure we do not compromise on quality or regulatory demands. Ultimately, with time, we will gain benefits that should positively impact profitability.

Matt Chesler, Partner, FNK IR

Just a reminder for our participants, to ask a question, please either Raise Your Hand or submit a question via text, and we will read it out. The next question is regarding heat exchangers. Can you elaborate on the backlog such as the type of aircraft and platforms, and is heat exchange production in the U.S. or still in Israel?

Yigal Zamir, President and CEO

Regarding heat exchangers, we have OEM production as a Tier-1 supplier to Boeing, Textron, Embraer, and several other system manufacturers. The production is split between Israel and our facility in Tulsa, with most MRO work being done in the U.S. We serve various aircraft, including Boeing and Airbus in both commercial and military sectors. We have the capability to support and repair units we produce as well as those from other manufacturers.

Matt Chesler, Partner, FNK IR

Can you clarify the comments you made about seasonality in the business? What type of seasonality do you typically expect? Did we see it last year, and what did we see this year?

Yigal Zamir, President and CEO

In recent years, industry anomalies make it difficult to speak about usual seasonal patterns. Historically, during peak seasons, cargo operators minimize repairs before the holidays to keep their fleet flying, while commercial airlines do more repairs due to higher summer traffic and temperatures. The OEM and military sides do not exhibit seasonality. In the past, the fourth quarter tends to be flat compared to the previous quarter, not expecting any significant increases or decreases.

Matt Chesler, Partner, FNK IR

Can you talk about any efforts to domicile in the U.S. and to attract North American investors into the shareholder base?

Yigal Zamir, President and CEO

Our company operates mostly in the U.S., with our office in Charlotte and the majority of our production and customer base in North America. However, we are expanding globally, particularly in the APAC region. Recently, we have begun to increase our U.S. investor relations activities, including our first U.S. earnings call. As we grow and demonstrate performance in line with U.S. investor expectations, we plan to be more involved in the U.S. market.

Ehud Ben Yair, CFO

We are spending considerable time and effort communicating our story to the investment community. Since June, we participated in two major conferences in New York and Los Angeles. We plan to attend another important conference in New York on December 11, hoping to meet with many of you.

Matt Chesler, Partner, FNK IR

Can you spend a moment to talk about the competitive landscape across your businesses? Who do you consider to be primary competition?

Yigal Zamir, President and CEO

We decided to focus our company on key areas: heat exchangers, APUs, landing gear, and trading. Our goal is to be a leader in our fields of expertise without entering commodity markets. Regarding competition, we see several key competitors within the aerospace sector, including Honeywell for APUs and other OEMs, but there are typically only a handful of competitors for each area. Quality, reliability, and the ability to solve customer problems are critical areas where we strive to exceed the competition.

Matt Chesler, Partner, FNK IR

Can you talk overall about the company's backlog? What it means? Is it the full annual potential revenue over a specific number of years? How should investors consider that metric?

Yigal Zamir, President and CEO

When looking at our heat exchangers, the backlog consists of OEM contracts with major manufacturers including Boeing and Textron, along with MRO contracts which include historical usage data from major airlines. The forecast informs our LTA and backlog numbers, and actual purchase orders replace forecast numbers as we secure contracts. Currently, for next year, we have substantial actual POs, exceeding initial forecasts, which is promising for revenue.

Matt Chesler, Partner, FNK IR

Thank you, Yigal. We will ensure that the IR team gets back to participants with any unanswered questions after the call. Yigal, please provide brief concluding remarks.

Yigal Zamir, President and CEO

I appreciate everyone taking the time to join us today. We look forward to seeing you at future events or personally to answer any questions you may have. We are pleased with our results, and this company is on a positive trajectory. We are optimistic about the coming two years as there are many opportunities ahead. Our strategy is working, and we can leverage various strengths moving forward. Thank you very much.