Air Industries Group (AIRI) CEO Luciano Melluzzo on Q3 2021 Results - Earnings Call Transcript

Nov. 06, 2021 4:35 PM ETAir Industries Group (AIRI)2 Comments1 Like
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Air Industries Group (NYSE:AIRI) Q3 2021 Earnings Conference Call November 3, 2021 4:30 PM ET

Company Participants

Luciano Melluzzo - Chief Executive Officer

Michael Recca - Chief Financial Officer

Conference Call Participants

John Nobile - Taglich Brothers, Inc.

Operator

Good day, and welcome to the Air Industries conference call. Today's conference is being recorded.

Air Industries Group safe harbor statement. 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 noncash depreciation and amortization charges, stock-based compensation expenses and nonrecurring 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 would like to turn the conference over to Mr. Lou Melluzzo, President and CEO. Sir, please begin.

Luciano Melluzzo

Thank you, Chelsea. Good afternoon, everyone, and thank you for joining us as we summarize Air Industries' results for the third quarter and the first 9 months of 2021.

Net sales in the third quarter were about $14.5 million, an increase of more than 5% compared to 2020. For the 9 months, sales were up about 22%. Our gross profit continues to improve, increasing by nearly 22% for the quarter and 44% for the 9 months. These increases are significantly greater than the increase in sales, illustrating our earnings leverage.

Despite the local and global supply chain disruptions, we have made significant progress in improving our on-time delivery of product to customers. Since 2020, we have continually improved the composition of our 18-month backlog, which is comprised only of firm, fully funded orders from our customers. Our overdue product to customers has declined considerably, and more current orders have taken their place. Overdue product now accounts for less than 12.5% of the funded backlog and will continue to decrease in the fourth quarter.

We are continuing a robust capital investment program and are budgeting an investment of $2 million to $2.5 million in 2021. We have already spent roughly $1 million and are expecting a delivery of additional machines by year-end. The pandemic served as an important reminder about being self-sufficient. And because of that, we are ramping up an aggressive in-house processing initiatives. Over the next 2 years, we plan on bringing in -- bringing in-house several outside process that have slowed down our production in the past. Granted, these outside processes are heavily regulated and require special permitting, so patients and a constant push are required. In the end, we will gain more control over the products we manufacture.

I would like to turn the call over to our CFO, Mike Recca, for the financial recap. Then I'll return to open up the call for questions. Mike?

Michael Recca

Thank you, Lou. We've already discussed sales and gross profit. So I'd like to focus on some other operating and balance sheet metrics. Our operating costs remain well controlled. Compared to 2020, for the quarter, our operating costs were flat with the prior year. For the 9 months, they were down close to 5%. So the inflation that seems to be emerging in the economy at large has not yet had an impact on our operations. As a result, operating income in the third quarter was positive. It grew by over $400,000. In 2021, we had a profit of $178,000 compared to a loss of nearly $0.25 million in 2020. For the 9 months, operating income improved by $2.2 million. In '21, we had a profit of more than $600,000. Last year, we had an operating loss of $1.6 million.

I would like to point to some changes in the balance sheet, which I think are very positive that occurred during the quarter and the 9 months. First and foremost, inventory. Due to all the disruptions in 2020, inventory has been a problem since early in the year. Our inventory grew by some $5 million from about $28 million before the pandemic to a high of $33 million. Inventory has now declined to below $30 million and is down close to $2.8 million or 9% since year-end, and we think this is a major improvement.

Our accounts payable and accrued expenses since year-end have declined by nearly $1.6 million or about 15%. AP and accruals now are about 45 days of sales outstanding, which we think is a pretty good level and metric. So between cash generated from operations, reducing inventory, the balance sheet changes, we've been able to reduce our debt, which is principally bank debt by about $3 million.

So in summary, for the third quarter and the 9 months sales, gross profit, operating income all improved, inventories declined, accounts payable declined, debt declined [indiscernible].

With that, I'll turn to Lou and to your questions.

Luciano Melluzzo

Thank you, Mike. Let me close the call with a few thoughts. Despite the disruptions with transportation, rising fuel costs, shortage of qualified workers, the new vaccine mandate for federal contractors and general world uncertainty, Air Industries delivered a solid quarter and is profitable for the 9 months of 2021. The new equipment we purchased earlier in the year is proving its worth in reducing both cycle time and improving bottom line results. We look forward for continuing on this journey of improvement for the balance of the year.

With that, Chelsea, I would like to open up the call to questions from participants, if you may?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question.

John Nobile

Lou and Mike, it's John Nobile from Taglich Brothers. I just have a couple of questions. I just wanted to start with what is the current backlog, I don't know, either as of September or today?

Luciano Melluzzo

Our current backlog is just about -- just above 80 -- 82-ish, John.

John Nobile

Okay. So about $82 million currently. And were there any shipments that you anticipated for Q3 that were going to be -- that you believe are going to be pushed into future quarters?

Luciano Melluzzo

Well, John, we have that kind of every quarter. Every quarter, there's something that pushes. We've got enough work in the works that we kind of have that built into our budgets. It's not a perfect world. So we've always got more than we think we can do just for that to happen. There's always tie-ups here. There's tie-ups there. There's little hiccups along the way. Sometimes it's very small, sometimes it's major, but that's something we live with.

John Nobile

All right. I mean would you classify it as either small or major or somewhere in between for the third quarter?

Luciano Melluzzo

There was a substantial amount this quarter.

Michael Recca

I couldn't quantify it exactly, but anecdotally, there was a lot of product that just didn't get in that was tied up in processing or other delays. So that kind of slipped -- as we describe it, slipped to the right.

Luciano Melluzzo

Sometimes, John, you have questions out to the government. And you know how quickly they react. So...

John Nobile

All right. But you anticipate and -- we're into the fourth quarter, you anticipate the fourth quarter number is looking better than the third quarter?

Luciano Melluzzo

Yes. I would see an improvement.

John Nobile

Okay. Okay. And you mentioned in your prepared comments that you projected to make anywhere from $2 million to $2.5 million in capital investments on new machines in an effort to grow your in-house processing. So I believe you said you already spent year-to-date approximately $1 million. So just doing the math, we're looking at about a $1 million to $1.5 million fourth quarter in investments in these machines. Is that correct?

Luciano Melluzzo

Yes. That's correct, John. I mean the path we're taking, we got a big lathe coming in, hopefully, in the next couple of weeks. I went down to -- I went down south to go look at it just last week. I was on the road, the lathe is ready for shipment. It should be here sometime in maybe the third week in November that will be installed. So that's part of the spend that we've already put in place. So in order to gain more control over our destiny, we are -- we have decided to bring in some in-processing.

At our Connecticut facility, we've carved out about 23,000 to 25,000 square feet of space that we have. We are currently setting up a paint booth. I already hired people for it. So that's kind of in the works. And after that, we're going to look at other processing like grinding Nital etch, NDT [shopping]. Now granted, these processes are heavily regulated. Like if you going to try to set up a paint booth, there's a lot of permitting with both state, town. There's just a ton of stuff that you have to go through, but we are chipping away at it. And once we get that under our belt, we will start the next process. But we're never going to be a chrome plate shop or a NAT -- not NAT CAD or CAD plate and stuff of that nature, but there's a lot of processes that we can do ourselves to make life easier and get a better inventory turn in the course of doing it.

Michael Recca

And besides just -- I mean faster, more dependable. Because you know right now, you send something have to be processed and it historically, it's taken 2 weeks. You call in 2 weeks and they said, well, we're going to get to it another week and be 2 weeks after that. So now you've got a 3-week or 4-week hole in your budget, if you will. And that screws up plan tremendously.

John Nobile

No, that's a good thing. I agree as much in-house processing as you could do, obviously. I know your backlog is very healthy. And I know in the past, you haven't been able to -- it's an 18-month firm backlog. It really has been hindered by what you call a bottleneck with all these suppliers. So the more I guess you can do in-house, the better chance you have of actually shipping out an 18-month backlog in that 18-month period. I wanted to...

Luciano Melluzzo

You saw -- over the summer, we saw a bit of -- it eased up a little bit because the commercial side of the business is very -- almost nonexistent. So these places were able to service us a little bit better. But how long is that going to last, so we're planning for the future. Commercial will come back. And when it does, then we're just going to be a number. So we would -- we want to take charge of our destiny.

John Nobile

Okay. I want to ask you a question about the CH-53 helicopter. I know you had a press release not that long ago. It was a $5.2 million long-term agreement for that helicopter. Now that was based on existing orders. So I was just curious, is that existing order based on the initial production of 4 aircraft that are scheduled for 2022? Or are those existing orders based on the projected increase in that production through 2026? I just wanted to get a feel for what exactly were the existing orders for the helicopter that you had in the press release stated that it was based on? And was it for? Or are we looking at the long term of -- I think it was going up to -- I don't know, if it was 15 in a couple of years?

Michael Recca

I believe it's close to 10. It's the -- it's not for the 4 aircraft in the next couple of years, but rather the first low-rate initial production. Now that $5.2 million is at the minimum that our customers said that they will be producing and that we should be prepared for upside additional orders beyond that. This helicopter will probably have additional orders, both from U.S. military and foreign military sales.

John Nobile

It's a new platform, correct, the CH-53?

Michael Recca

The derivation of -- CH-53 has been around. This is the K version.

John Nobile

Okay. So based on existing orders of approximately 10 of these helicopters. I just wanted to get an idea because you got 4 in 2022. I know the press release says 9 in 2023. That already is over 10, that's 13. And you're increasing to 15 aircraft, I believe, annually by 2026. So...

Luciano Melluzzo

This is the rock bottom. We're very conservative on the numbers that we put out. We know that they're going to sell more helicopters than what we state in that release. Again, this doesn't include any foreign orders, anything. So we know that there's going to be a ramp-up in this thing once you get off this initial run.

John Nobile

That's what I was getting to. I just wanted to make sure that I was thinking about this correctly, like this is a start at this point, $5.2 million.

Michael Recca

Exactly correct. Exactly correct.

John Nobile

Okay. And just one more question here. Did your Sterling subsidiary showed a positive gross margin in the third quarter? I know the Q will probably have that broken out, but I was also curious what that gross margin is for Sterling in the third quarter because I know it's always hindered overall margins when it shows up negative. But not only in the third quarter -- I'm sorry.

Michael Recca

Go ahead.

John Nobile

I just besides the gross margin for Sterling in that quarter, with the new $5.2 million long-term agreement for this helicopter, just wanted to make sure that if you expect Sterling's gross margins to improve going forward?

Michael Recca

For the third quarter, I do not believe. Still -- I think Sterling pretty much broke even on a gross profit basis. They had a solid gross profit for the 9 months. And going forward, between the internal production, and the addition of this CH-53 order, their gross profit should be very solidly profitable henceforth.

John Nobile

Okay. Because I know that has a big effect on your overall gross margins when you had either breakeven or a negative gross margin in your Sterling subsidiary. All right. So in the fourth quarter, we should anticipate showing some revenue from this CH-53K?

Luciano Melluzzo

Negative, John. Just because we got an order doesn't mean we're producing it tomorrow. This is -- it's long lead items. So the -- we're developing with it right now. You're going to see revenue -- you're going to see some revenue on it sometime next year, but you're not going to see it in the fourth quarter.

Operator

[Operator Instructions]. All right. And speakers, we have no further questions in the queue.

Luciano Melluzzo

Thank you, Chelsea. So with that, once again, thank you all for taking the time to call in and for your questions. With that, Chelsea, can you please conclude the call?

Operator

Thank you, ladies and gentlemen. We appreciate your participation. This concludes today's teleconference, and you may now disconnect.

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