Air Industries Group (AIRI) Earnings Call Transcript & Summary

Good day, and welcome to the Second Annual Winter Wonderland Best Ideas Conference. The next presenting company is Air Industries Group. [Operator Instructions] I'd now like to hand the floor over to today's host, Lou Melluzzo, President and CEO; and Michael Recca, CFO of Air Industries Group. Gentlemen, the floor is yours.

Thank you. Welcome, everybody, to the Air Industries Group presentation. We'll start with the safe harbor statement. I assume that everybody has read it, that will take a second. With that, we move on to Sheet 3. Air Industries operates out of our 2 main facilities, 2 main locations. We have about 150,000 square foot in total space plus an additional 13 in just warehouse space that has no manufacturing in it at all. We employ about 205 employees, and we are predominantly a military contractor. 80% of our product makes its way into military applications for different product lines from F-35 to E-2D, a B1 Bomber of sorts. Our primary location is located in Bay Shore, New York, which we addressed here our landing gear, arresting gear, flight safety controls, a lot of structural assemblies and helicopter work in general. Our second location in Connecticut is up in the northwest section of the state, and that caters more to your Pratt & Whitneys and your General Electrics of the world. A lot of it is jet engine components. We also deal with ground-power turbines. We recently, in the last 2 years, got a vendor number for a big rotorcraft client, Sikorsky, and now we're starting to do helicopter assemblies up in that area. And we are initiating new process up in our Connecticut operations. One of the biggest bottlenecks we had over the COVID times was outside processing. So we're doing it ourselves. We're [ ingrowing ] it ourselves. Why invest in Air Industries Group? Well, we're very defense-centric. We were very -- we were sheltered from -- for the most part, from the commercial aviation storm that we saw during the COVID times. We predominantly work on 5 different platforms for 5 different customers that are very stable, all military platforms, and have been kind of the bread and butter of our business. We have improving operational performances. We've now got the 2 facilities working hand in hand where if they have bottlenecks we're reaching out, if they have bottlenecks -- and vice versa. We have a pretty stable backlog. So far, this year, we've received a $20 million long-term agreement from Sikorsky, which is a 5-year LTA; a $12.4 million order from Northrop Grumman E-2D components; $6 million contract from Boeing. So year has started off in the right direction for us. In 2020 and 2021, we invested roughly $6 million of -- in capital equipment. We brought in some new stuff, and we brought in some slightly used equipment, and we've pretty much addressed a lot of the bottlenecks that we had in previous years. There's a new sourcing initiative, again, as I hinted earlier, to vertically integrate our business so that we're processing a lot of the components that we manufacture to alleviate bottlenecks and improve and accelerate deliveries. We have earnings leverage. Gross margins and EBITDA are highly correlated with revenue. As revenue increases, profits increase. We have not shared fourth quarter results yet. So we're going to be talking about the 9 months ending in September, but revenue had increased by $7.9 million or roughly 22%. Our gross profit increased by $2 million, 44%. Gross margins increased by 220 basis points to 14.7% of sales. Operating profit compared to operating loss in 2020. Adjusted EBITDA of about $3.6 million, an increase of [ 2.7 ] or 3x the 2020 number. Further increase in sales should also result in disproportionate increase in net income and EBITDA. The aerospace industry in general is tiered like the triangle on the side. You've got the original equipment manufacturers up on top. And under that, we have really 3 tiers of companies that deal with these. You have your system integrators, your assembly and equipment suppliers and your build-to-print component makers. We fall in about Tier 1, in some occasions in Tier 2, but we are predominantly a system integrator. We make full up gear like what's shown on the right, which is an E-2D component, the full shock absorbers, these components [ should go ] straight to the assembly line, minus the wheels and brakes. Five customers make up 85% to 90% of our sales. Our largest 5 customers, as shown, it's indicated by the charts below: Goodrich, Sikorsky, the U.S. Military direct, General Electric and [ WAR ], which is a Collins-owned company. You can see that Goodrich makes up about 32% of our sales. Sikorsky is pretty close second at 30%. And from there, it kind of drops off with all others really being in that 10% to 13% of additional sales. 2020 and 2021 were relatively stable as far as percentages are concerned. So with these 5 customers, there's really 5 predominant aircraft platforms that make up the sales. The S-70, the Black Hawk's sales declined somewhat because we were in between contracts. We since have made up a large degree of that in the first month of this year by bringing in about $20 million worth of Sikorsky work. The rest, you're looking at the F-35 platform, about 15% of sales; F-18, which we are licensed directly to Boeing, making up about 14% of sales; the E-2D, about 11% of sales; and the geared turbofan, which is the only commercial product on this sheet, about 7% of sales. And again, there was a little decline in Sikorsky because of the contract. Otherwise, the percentages were pretty stable from '20 to '21. So we have a balance of legacy product and new aircraft platform. Our portfolio has the 5 programs that account for 80% of our business. These 5 aircraft platforms, the U.S. Army, the S-70, UH-60, the S-70 Black Hawk, there's about 4,000 helicopters out in the field right now. It's been in business for over -- it's been in circulation and flying for over 40 years, and we'll continue to be doing that for the future -- foreseeable future because that helicopter now not only serves the military, but it serves municipalities, and a lot of different countries have hopped on a very stable program that's got a great reputation. The F-18 Hornet, the U.S. Navy F-18 horse, sole fighter aircraft for carrier-based operations. 600 have been produced. It's operated by 7 countries, including Australia and Finland, and it will eventually be replaced by the F-35, but there's going to be spares on this program for years to come as well. The E-2D Northrop Grumman product is primarily naval battle management command and control aircraft. This is the big radar plane. And this -- we make both the main landing gears and the nose gear. We also make all the attachments on this aircraft that stop the plane, catch the drawstring on the aircraft carrier, so we make the trusses and the hooks as well. It's operated, again, by 7 militaries, including Japan, and we see that as a stable platform going into the future. The Lockheed Martin F-35, obviously the newest fighter out there, is going to replace a lot of aircraft in the future. There's 8 partner countries and 6 other foreign militaries involved in this. There's nearly 3,000 projected in the next decade or so. Full-rate production has just -- is just beginning on this now. So this has a long life ahead of it. And then the commercial product within our portfolio is thrust reversers for the geared turbofan, which is one of the highest engines in the market right now. Air Industries produce structural components that operate thrust reversers, two primary long tubes that are used to throw the thrust in the opposite direction. These smaller aircraft had high demand and from airlines that have changed the consumer demand. No longer are the big planes, like the A380s, which they disband, they stopped making it a few years ago. These are touch-and-go aircraft. They come in, they unload, they load up and they're flying constantly. This chart highlights 12 -- trailing 12 months. If you can -- if you look back starting at Q1 in 2020, you'll see the dip in sales in Q2 due to COVID, then you see a rebound coming in Q3. And then from there, it starts to stabilize and slightly increase right up to Q3 of 2021. So the Q2 in 2020 was predominantly associated with the COVID absenteeism and other things that ran across all industries, not just aerospace. So that concludes our brief presentation, and we would like to open up the floor to questions.

The first question -- the first question reads, you have made capital investments in new machinery of over $2 million annually over the last 2 years. Are you currently at a tooling level that you feel will help alleviate your bottlenecks issues with suppliers? And do you plan further investments in new machinery in 2022? And could you quantify? So great question. We have spent about $6 million actually in 2020 and 2021 on new equipment. We have addressed numerous bottlenecks, both in turning, in milling and honing, and now we're starting to address vertical integration. Our plan for 2022 and 2023 is to spend an additional $5 million over the next 2 years. We see that breaking out as maybe $3 million this year, $3 million, $3.5 million this year and $1.5 million to $2 million next year to continue our vertical integration process and to replace some old -- older aging machines that we have in the shop to better service our clients. So that will be an ongoing thing.

A few more to the left has questions, too. All the way down. That's why I'm wondering where they are. Should those on far right wish to ask questions? Yes. Take it.

I think that might be it for questions. So with that, I think we conclude our presentation.

Certainly. Ladies and gentlemen, that does conclude Air Industries Group presentation. The next session will begin shortly. Please consult the conference agenda for the next presenting company. Remember, one-on-one meeting requests are still open, so be sure to log in for a conference platform and request more meetings. You may now disconnect.