Air T, Inc. (AIRT) Earnings Call Transcript & Summary

Greetings, and welcome to the Air T, Inc. Annual Meeting of Stockholders. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Nick Swenson, CEO. Nick, please go ahead.

Good morning, ladies and gentlemen. I'm Nick Swenson, Chairman of the Board, President and CEO of your company. This meeting is now called to order, and it's my pleasure to welcome you virtually to our 2020 Annual Meeting of Stockholders. Under our company's bylaws, as the Chairman of the Board, I will preside as Chairman of today's meeting. Mark Jundt, who is our Corporate General Counsel, will act as Secretary of the meeting. In addition, Brian Beglin and Scott Loveless from Deloitte & Touche are with us today. Deloitte & Touche is the company's independent registered public accounting firm and Misters Beglin and Loveless will be available during the Q&A portion of the meeting to respond to any questions you may have. I'd also like to introduce Craig Colosso of American Stock Transfer & Trust Company, LLC, which is the company's stock transfer agent. Mr. Colosso has been appointed to serve as the voting inspector for this meeting. As voting inspector, he will determine the number of shares of the common stock represented at the meeting, determine if a quorum is present, assist in the tabulation of votes and perform such duties as provided by the general corporate law of the State of Delaware, if such matter should arise. There are 3 items of business on the agenda for today's meeting as listed in the notice of annual meeting. As no other matters have been submitted to the company for vote in accordance with the terms of the company's bylaws, only the items of the business set forth in the notice of the annual meeting will be considered at today's meeting. After the votes have been taken on the matters for which this annual meeting has been called, we will have an opportunity for stockholders to ask general questions about your company. Consistent with the rules of this meeting and in order to provide for the orderly conduct of this meeting, questions will only be addressed during the appropriate discussion period. The record date for determining the stockholders' entitled to vote -- to notice of and to vote at this meeting, is the close of business -- was the close of business, July 6, 2020. Mr. Jundt, please present the notice of the annual meeting, the proxy statement and formal proxy card and the list of stockholders entitled to vote at today's meeting.

Mr. Chairman, I present the notice of the annual meeting of stockholders to be held August 12, 2020, the proxy statement of Air T, Inc. and form of proxy card, which were sent by United States Mail or electronically on or about July 19, 2020, to each stockholder of record of Air T, Inc. at the close of business on July 6, 2020, addressed to each stockholder at the address of such stockholder appearing upon the books of the company at such time. I also present a list of the holders of the shares of common stock of the company of record at the close of business on July 6, 2020. This list is available upon shareholder request. This list shows the address and number of shares of record owned by each stockholder on the record date, and it has been available at the principal office of the company for more than 10 days prior to the meeting.

At this time, any proxies should be voted through the Internet proxy voting portal or through your broker’s proxy portal as instructed in the materials received from your broker. If you have already submitted a proxy, it will not be necessary to vote today and any of the matters to be decided in today's meeting. I now recognize Mr. Colosso for a report on the shares presented at this meeting.

Mr. Chairman, on the record date, the company had outstanding 2,881,868 shares of common stock, of which 1,789,450 shares or 62.09% are represented at this meeting.

Since more than a majority of the outstanding shares of the common stock of the company are represented, either in person or by proxy, we have a quorum at this meeting, and I declare this meeting properly organized for the transaction of business. I now declare the polls open. Stockholders who have already sent in proxies, and who do not wish to change their votes, do not need to vote by ballot today. If you are attempting to vote via the proxy portal, but are having difficulty, please e-mail Katrina Philp at kphilp@airt.net and she can help you along. That's K-P-H-I-L-P@airt.net. The first item of business at this meeting is the election of members of the Board of Directors. The number of directors constituting the Board of Directors has been set at 6 by resolution adopted by the Board of Directors pursuant to the company's bylaws. The Board of Directors has nominated 6 individuals for election to this annual meeting. The list of Board of Director nominees, along with biographical summaries, is included in the company -- was included in the company's proxy statement for this meeting. Each of these nominees has agreed to serve as Director if elected. The nominees are: myself, Nick Swenson; Raymond Cabillot; William Foudray; Gary Kohler; Peter McClung; and Travis Swenson. On behalf of the Board, each of them is hereby nominated for election as a director. Directors are elected by plurality. In other words, the 6 nominees receiving the most votes will be elected as directors. The Board of Directors recommends that you vote for the election of each of these nominees. The second item of business is approval of the following resolution, which is now presented to the stockholders. Resolved, that the shareholders hereby approve, on an advisory basis, the compensation paid to the company's named executive officers as disclosed pursuant to Item 402 of Regulation S-K of the Securities and Exchange Commission, in the company's proxy statement for the 2020 Annual Meeting of Stockholders. The stockholders voted this resolution, which we refer to as say-on-pay vote is advisory and nonbinding on the company. The Board of Directors and the Compensation Committee expect to take the outcome of the say-on-pay vote into account when considering future executive compensation decisions. The Board of Directors recommends that you vote for adoption of this resolution. The third and final item of the business is the proposed ratification of the appointment of Deloitte & Touche LLP as the independent registered public accounting firm for the company for the fiscal year ended March 31, 2021. Deloitte was first appointed by the Audit Committee to serve as the company's independent registered public accountant on September 22, 2018, and Deloitte has rendered its report with respect to the company's annual financial statements for the fiscal year ended March 31, 2020. As I mentioned earlier, representatives of Deloitte are on the line today with us and are available to respond to any questions you may have. The Audit Committee has appointed Deloitte as the company's independent registered public accountants for the fiscal year ended March 31, 2021, and the Board of Directors requests the ratification of the appointment of the stockholders, according to the ratification of the appointment of Deloitte. Accordingly, the ratification of the appointment of Deloitte as the company's independent registered public accountants for the fiscal year ended March 31, 2021, is now presented for a vote at this meeting. This matter will be approved, if more are voted in favor of ratification of the appointment of Deloitte than are cast against ratification. As set forth in the proxy statement, the Board of Directors recommends that you vote for the ratification of the appointment of Deloitte. Would anyone who needs to cast a ballot today, please do so by voting through the proxy portal. Again, if you are attempting to vote via the proxy portal, but are having difficulty, please e-mail Katrina Philp at K-P-H-I-L-P@airt.net and she can help you along. We will take a short break to make sure we have addressed any electronic voting issues. [Voting]

Okay. After that pause to check any last minute online proxy voting, we want to thank you and now declare that the polls closed. I will now ask that the voting inspector -- I will now ask the voting inspector to report the outcome of each of the votes at today's meeting.

Mr. Chairman, the ballots have been counted and the 6 nominees for director have received plurality of votes cast at the meeting, in person or by proxy. The number of votes that have been cast at the meeting, in person or by proxy, in favor of the advisory resolution approving the compensation paid to the company's named executive officers, represents a majority of shares present or represented at the meeting and entitled to vote. And the number of votes that have been cast at the meeting, in person or by proxy, in favor of the ratification of the appointment of Deloitte as the company's independent registered public accounting firm for the fiscal year ending March 31, 2021, represents a majority of the shares present or represented at the meeting and entitled to vote.

Thank you, Mr. Colosso. All 6 directors named in the proxy statement have been elected, the advisory resolution approving the compensation paid to the named executive officers has been approved, and the appointment of Deloitte as the company's independent registered public accounting firm for 2021 fiscal year has been ratified. A complete tally of votes will be reported in the company's Form 8-K to be filed with the SEC within the next 4 business days. Before we turn to Q&A from shareholders, we have a short presentation to share about Air T and fiscal 2021 -- 2020 results through March 31, 2020. [Operator Instructions] We will address those questions during the Q&A section. And we're going to be showing a presentation on the webcast. Okay. Okay. Right. On Page 3 of the presentation. During this presentation, Brian Ochocki, our CFO; and myself will be presenting material. [Operator Instructions] Then we'll address those at the end of the presentation. On Page 3, it's an executive summary of Air T. We're a publicly traded company. It's been around for 40 years, and current management has been in place since the end of 2013. We have 10 companies of various sizes and over 400 employees, but less than 500. We have increased our revenues by 19% per year since current management has been running the company and our operating income has increased 7% per year. For fiscal year ended 2020, revenues were $236 million, and operating income was $7.3 million. Since 9/30 of '13, shares outstanding have declined 22.7%, and that's adjusting for the 3-for-2 stock split. We will now talk about the couple of the driving thoughts behind what we intend Air T to be and what Air T is now. We, as a business, have a long history of growth and generating positive cash flow. We are working hard to identify fantastic people and empower them and their teams to operate the businesses of Air T very well and to increase value for shareholders over time. We call that activating growth and overcoming challenges, and that's something that the holding company is very focused on helping occur at the business unit levels as well. Management has committed by buying a significant portion of the common stock in the open market, demonstrating real alignment with common shareholders. And we believe that management has a good track record at making investments. Page 7. This is a quick review of one of the ideas that we used to run the company, and that's the Investor-Operator Partnership. We believe that great businesses are oftentimes run best by people who have very concrete domain knowledge and a lot of experience in a particular domain. And we also believe that a great business will be able to generate excess cash flow. And by partnering with our fantastic operators and then working at the holding company to reinvest the cash flows that they generate or help them make investments within their own business by providing capital as we've done, then that partnership can really do great things over the long term. We call one of the things we do, making space for dynamos. And that has to do with the idea that we believe that great managers, great operators want to have the space and the resources to run their companies without interference or without interference that hampers their business plan and their ability to operate it. So we're very sensitive to and understand the need to allow our managers the independence to run their own companies. We do, of course, have long-term permanent capital and an attractive C-corp tax rate. And those things, along with the ability to reinvest the company's cash flow, we believe that the long term will result in a good outcome for shareholders. Brian, want to start on Page 8 and provide the financial highlights?

Yes. Thanks, Nick. At a high level, Air T's fiscal '20 results were strong. We had 10% revenue growth, which we saw across all operating segments. Operating income was down $2 million, $7.3 million versus $9.3 million. That was driven by lower profitability in commercial jet engines and aircraft, offset by very strong growth in our ground equipment segment. As Nick alluded to earlier, our business is best understood by looking at it at the business segment level. The next 4 pages, which Nick will walk you through, will give you a little more insight on those segments, our largest segments and some more granular financial performance that rolls up to this consolidated level.

Thanks, Brian. I would turn -- have everyone turn to Page 10 please, to talk about our segment, commercial aircraft and engines. This segment is comprised of Contrail, Worthington, AirCo and Jet Yard. Taken together, they operate in such a way that they can acquire aircraft or engines or airframes and either part them out and sell the parts and/or lease off parts of an aircraft or an entire aircraft. Each of those 4 businesses operates independently, although we have some common management within what we call the Stratus group, which is Worthington, AirCo and Jet Yard. Those businesses, each of them has been acquired by Air T. None of them are start-ups, and they have significant long-term operating histories and management. We, as you can see within our financials, have had a terrific success in -- especially in our Contrail business, which has grown significantly since we acquired it. That business is -- the revenues within this segment are $104 million or nearly 50% of the Air T revenues and operating income in fiscal 2020 was $8 million. We believe that the combination -- if our business plan and our business execution is done correctly, the combination can be very significantly enhanced as opposed to operating as an individual company. We think that as we've worked to bring these companies together within Air T, we've seen some attractive synergies and attractive cooperation between our businesses. And we see that segment as a place where we can grow over time. Obviously, impacted by today's current COVID environment, and we can get to that later. Segment 2, Page 11 is the overnight air cargo business. This is the original Air T business. Air T owns 2 of the 7 domestic FedEx Feeder businesses. We have the contract with FedEx to fly aircraft and maintain those aircraft. It's a business that has been a steady business and growing. We, in 2019, added -- or promoted a new CEO of our MAC and CSA businesses, Mike Bandalan, and he's done a terrific job of improving those businesses and improving operations on a daily basis. On Page 12, we have segment 3, which is our aviation ground support equipment segment. Global Ground Support, LLC is the business that comprises -- entirely comprises the segment. We sell de-icing equipment, scissor lift trucks and other ground support equipment. We have been the sole source supplier to the U.S. Air Force of de-icing equipment for 18 years. The management team in Olathe, Kansas has done a terrific job improving that business over time, and we are very -- always very happy to give a shout-out to Mike Moore, who runs Global Ground Support for us. We feel like we have a terrific product and a very strong management team. Page 12 -- Page 13. Brian is going to comment on COVID. Go ahead, Brian.

Thanks, Nick. As you can see, each of our business segments has been impacted by COVID-19. And as we discussed in our 10-K filing in late June, revenue declines in April and May have been significant, especially in the commercial engines and parts being down 67%. Obviously, we can't predict when or how the aviation industry will recover from these COVID-19 impacts. However, we've taken several steps to preserve liquidity and protect our business segments in order to capitalize on whatever opportunities emerge as the economy and the aviation industry recover in the future. Primary example of that is in April 2020, we secured a Paycheck Protection Program, PPP loan of $8.2 million under the CARES Act. The purpose of that loan is to maintain employee salaries through the economic disruption caused by COVID-19. The loan has a 1% interest rate, up to a 5-year maturity and has a possibility of being forgiven upon application with the Treasury Department. Over the next -- switching gears a little bit. Over the last 6 years, our revenue has increased 181% and is significantly more diversified than it was in fiscal '14. You can see primarily that there's growth in our core -- our original ground overnight air cargo and ground support equipment segments. But we all -- the addition of the commercial aircraft and engine segment has rounded out our portfolio and allowed us to become more diversified in many different business -- many different businesses. Moving to Page 15. We just wanted to give a snapshot of our nonoperating assets. Our balance sheet -- on our balance sheet, we have $10 million of public and private securities at valuation as of our 10-K filing, our 10-K covering March 31, 2020. Those assets meet various strategic and investing criteria that we've set and fill out our portfolio with the 3 main business segments that we've talked about previously and are also -- we wanted to call those out on this page. Moving to Page 16. Our capital structure is designed to appropriately shape our bet sizes. The key point on this slide is we've put our debt into 3 broad categories. We have direct and guaranteed debt at the corporate level. That consists of a revolver, several term loans alone on our real estate. And the second bucket is our trust preferred security. We issued this TruP -- we call it the TruP. We issued that in June of last year and have been converting -- we issued warrants and $4 million of trust preferred last year, and we've been converting warrants over the subsequent year. That balances $12.9 million at year-end -- as of year-end. And the third and largest bucket is nonrecourse debt at various business units. You can see that Contrail has $40.6 million of debt at the end of fiscal '20, and that is financing for the assets and the assets that they purchased. And the same on AirCo 1. AirCo 1 covers assets in our other commercial aviation trading businesses. Those are nonrecourse. And as the slide mentions on the left, appropriately sized for the bets we're making -- the investments we're making in those business units. This shows more of the thinking on how and where we're placing our financing in the various business units. Page 17. Since current management has taken over, the share price of Air T has increased at 9.3% per annum. This is updated through July 28, 2020. And as you can see on the footnote at the bottom, it also includes the impact of the $4 million trust preferred dividend that we issued to common shareholders last year as part of our trust issuance or trust preferred securities. Page 18. This shows a snapshot of -- a long-term snapshot of the revenue growth we've achieved, steady revenue growth from 1994 through 2020 and also an upward trajectory on operating income. And as the footnote points out below the operating income, 2017 was somewhat of an aberration as we had a large noncash impairment and inventory write-down tied to our investment in Delphax Technologies that swung that income negative in 2017. But since then, you've seen -- you can see the positive trend on op income that we've achieved. I'm going to turn it back over to Nick to talk about growth strategies.

Thanks, Brian. Page -- look at Page 20, some ideas about how we intend to grow Air T. First of all, we look for investments that are close to the businesses that we own or within the businesses that we own, could be a new product that we want to develop or an acquisition that's in a nearby space. We also -- to acquire cash flow-generating businesses or make intelligent investments that add to the Air T portfolio. We are able to, through our BCCM subsidiary, monitor markets and invest in marketable securities and alternative assets as we find them. And we also, as I mentioned earlier, are interested in investing in products that include the partnership of third-party capital that will allow for the growth of businesses that we own. So growth strategy one. We've, over the years, as you -- if you're a longtime watcher of Air T, have seen us build out the commercial aircraft trading, leasing and part-out business. That's an example of strengthening a business that we were already in. You can -- you've seen us buy engine parts inventory and trade that inventory. And you've seen us fund Global Ground Support, de-icing inventory to fund significant growth and product development at Global Ground Support. We do, as I mentioned, at the holding company, have a very strong -- we believe, very strong ability to look at investments, whether they be private or public and evaluate them against what our opportunities are in other areas and make appropriate investments, and we've done that over time. Page 23 is -- amplifies that idea and trend, that capability of Air T. We have, as a consequence, some corporate overhead that, I would say, a typical company of our size would not have. And that's something that we intend to be getting a return on, that is if we have personnel at the holding company who are reviewing investments and helping us understand what we might be doing to invest in different places, we intend to be getting a return on those personnel and the investments and the infrastructure there. And we think that, that infrastructure will be getting operating leverage over time as we gain scale and as we add deals to the Air T portfolio. Page 24. We do intend over time to look to partner with outside capital to help us drive growth within the business segments that we own. Those could come in many different forms in a number of our businesses. We're in an enviable position that we have interesting and attractive opportunities that are able to generate, we believe, significant returns and attractive returns. And so part of our job at the holding company is to match up capital with investment opportunities. Okay. We want to go back to the script here. That's our presentation. [Operator Instructions] We'll now turn to the Q&A from shareholders. We've been collecting questions on our website for the past several weeks, and we'll begin by answering those questions. As a reminder, you were able to submit questions on the website. And hopefully -- we've received about 9 questions through Slido. That's -- we're going to be having a Slido website available going forward every quarter. So shareholders are going to be able to submit questions, and then receive answers from management, either in writing or verbally on the annual -- at the annual meeting.