TAT Technologies Ltd. (TATT) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the TAT Technologies First Quarter 2025 Earnings Conference Call. Please note that today's conference may be recorded. My name is Matt Chesler and I'm a partner with FNK IR, a U.S.-based Investor Relations firm supporting Eran Yunger, TAT's Internal Head of Investor Relations. Hosting today's call is Igal 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 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 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 20F 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 6K, our earnings release in the Investors 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 have -- 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 Igal.

Good morning, everybody, and thanks for joining us for the first quarter earnings call. I really appreciate your interest and the 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 we established last year or actually I would say in the last 3 years. Our focus on customer operation excellence, market expansion and strategic growth continue to drive results that are ahead of the industry average. We expect to continue and 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 businesses lines. Our gross profit increased 40.9% to $10 million with the gross margin expanding for by 290 basis points to 23.6% comparing 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 spent a lot of time talking about it in the previous calls. We are continuing to invest a lot of effort and energy in improving our internal efficiencies and cost structure, which reflects 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 of our [Audio Gap] by a disciplined expense management. Our backlog and long-term agreement rose to $439 million during the first quarter providing us with strong visibility. It also provides us with an important runway for continued growth amid rapidly evolving aviation market landscape in both commercial and government end markets. The aviation sector is currently navigating several macroeconomic headwinds; including policy changing, the proposed tariffs and border economic uncertainties; all of which have the potential to impact supply chain and customer purchasing behavior. Long term our robust backlog position as well as our demonstrated ability to outperform the industry and while in parallel, we expect we can anticipate some near-term volatility, particularly in the MRO intake. So bottom line when we look at the outlook given the backlog, given the value of the long-term agreement that we are signing and increasing all the time, we have a very positive outlook on the long term. Short term given all the macroeconomic factors, we can expect more volatility from the industry. The expansion of our APU will continue to grow our addressable market. We are now authorized on the 131 APU, the 331-500 which serves the Boeing 777 and Boeing 737 and the Airbus 320. Now only a year-ago we secured our first customer for this engine and since then, we have onboarded several additional customers, both new and long-term and long-standing. We are well positioned as a trusted and reliable partner for serving various Honeywell APUs with top-tier quality and exceptional [Audio Gap]. Our pipeline of opportunities for APU work continues to expand and we are participating in multiple discussions to expand our APU work. To meet this growing demand, we strategically increased our inventory levels during the quarter. While supply chain issues persist, maintaining a higher inventory level position up to meet timeliness reliability. This approach is not just a safeguard. It's a strategic decision and strategic asset that we believe that we have enabling us to maintain our competitive advantage and continue to market growth. As a result, we recorded a net cash outflow in the quarter. However, we are confident that this investment will drive revenue growth and enhance customers' satisfaction in the coming quarters positioning us for continued success. Our growth strategy is based on growing our MRO and OEM business as well as our trading division. This diversified approach provides us with the agility and operational flexibility needed to navigate periods of economical uncertainty. Given the ongoing tariffs uncertainty, our supply chain team is working closely with our suppliers and customers to align expectation, 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 short term, we will continue to navigate the variety of industry-wide challenges. The supply chain remains challenged. Economic uncertainty sometimes cause customers to slow down maintenance plans. To date, we have weathered these challenges successfully. 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 margin. 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.

Thank you, Igal. Good morning, everybody. I will quickly review the results of the first quarter of 2025. So 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, it's a 41% increase compared to the previous period. And also the gross margin went up to 23.6% compared to 20.7%, it's 290 basis points compared to the previous quarter. Operating profit at $4.2 million compared to $2.2 million, it's an 89% increase and the operating margin is already at 9.9% compared to 6.5% in the previous period. Also the adjusted EBITDA went up to $5.7 million compared to $3.7 million, it's a 56% increase and the EBITDA margin went up to 13.6% compared to 10.8% in the previous period. Net profits landed at $3.8 million compared to $2.1 million. Several insights to take in consideration when analyzing the results of the quarter. The fact that again we're improving our margins all over the place. Especially in this quarter, OEM revenue and margin went up compared to previous period on behalf of the MRO work. We still suffer a lot of supply chain issues in the market, which led in some cases to slight reducing the profitability. Nonetheless, on the overall company size, we continue to improving our margin. The second thing that impacts the net profit, and we mentioned it in the previous quarters already, is the tax expenses. At this stage, where all the tax expenses are accounting expenses, these are noncash expenses, mainly reduction of tax assets. As mentioned before, we're expecting to be tax profitable and start paying taxes both in Israel and in the U.S. at the end of 2025. In terms of the strategic growth engines and the product mix of the quarter, So the heat exchange product line went up to $18.4 million compared to $14.2 million, it's a 30% increase year-over-year. The APU segment also from $9.2 million to $12.3 million, it's a 34% increase. The trading and leasing, as mentioned before, it's down by 27% to $2.1 million. We mentioned in the past that trading and leasing are in some cases opportunistic and in some cases really based on the specific need of the customers and it can vary between quarter to quarter. In this quarter, a certain deal was postponed to Q2 and this is the reason that you see the reduction in the trading and leasing in Q1 of 2025. And the landing gear again, as mentioned in the past, started ticking up at the end of Q4 and continues the trend in Q1 of 2025, landed at $3.3 million compared to $1.5 million in the previous quarter, it's a 127% increase. So just quickly review the 2 years trending. You will see that again we continue to grow the margin. Just looking at first quarter of 2023, revenue were at $25.2 million and now we are already at $42.1 million. The gross profit also started at $4.3 million in the first quarter of 2023 and moved up to $7.1 million in Q1 of 2024 and we are already at $10 million in the first quarter of 2025. Same trend goes with the operating income that went up from almost $1 million in Q1 of 2023 to $2.2 million in Q1 of 2024 and $4.2 million in Q1 of 2025. We're almost doubling our operating income year after year. With regards to the backlog, as Igal already mentioned, we continue to increase our backlog. We saw a very strong trend in Q1 of 2025. We secured backlog and orders and LTAs worth of $52 million this quarter, which led to an increase in the total backlog value to $439 million. With regards to the mix of the product, it remained pretty much the same as in previous quarter more than 50%, actually 54% of the backlog and orders is heat exchangers and APU is 27% and most of the remaining is landing gear, which is 13%. And by this, I return the call to Igal.

So as we stated before, when we look forward strategically, we have the same growth engines that we discussed in the past and this is why I said it earlier that we are extremely optimistic about the long-term outlook for the company. Starting with APUs, over $2 billion addressable market. We are proving more and more our ability to provide great service and fast turnaround time and competitive pricing to customers and we're basically just starting to scratch the surface of this huge addressable market. And with the amount of interest that we are getting and the active RFPs that we are participating in, we believe that that's a substantial growth engine for the coming few years. Landing gear MRO cycle, as anticipated or stated it, we already see it, it's coming. We see a very nice growth in landing gear work and expecting it to continue. The thermal solution MRO, TAT is the leading player in the industry, one of the largest players in -- especially on the MRO side, we are cost effective. We are providing amazing service to our customers, way better than most of the competitors, and we expect to continue and grow this business as a result. Thermal solution OEMs; the outlook for new aircraft, fleet conversions, all the next generation aircraft, EVTOLs and whatever; represents a long-term strategic opportunity for TAT, And the trading and leasing, while trading and leasing and Ehud touched on it, has 2 components. We have the leasing activity, which is more stable month by month with major demand for our products on the leasing side, provides a general steady flow of revenue and profitability. And then you have the trading side that is more based on availability of components, engines, gears and such and specific demands from airlines. So while it's not as consistent as our ongoing business, it is growing and there is a lot of demand. And as we increase the amount of assets that we can afford ourselves to keep for these deals, we will be exposed to more and more deals and a growing business with a very nice margin. Just before going to the Q&A, we detected some technical issues during the call. So if some of the audience didn't hear something well, we would be happy to repeat whatever was missing during the pitch. We can now move to Matt for the Q&A session.

We're 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. [Operator Instructions] The first question is from Josh Sullivan at Benchmark. He's congratulating us on the quarter and then can you explore backward incremental sequentially this quarter a little bit further. Provide some color on the increase, was it driven by repeat customers versus new relationships? And then how are new APU relationships and orders evolving? Igal, that will come to you. We're not hearing your answers. Maybe, unmute.

Gentlemen, can you hear me now?

Now, we can hear you. Please proceed.

Just one second, Matt. I really apologize for this. We have a major issue here. Some kind of an issue here with the network. So I wonder the technology. I reconnected via hotspot to my iPhone. I hope that you can hear us well now. Matt, please repeat the question.

Great. The first question was from Josh Sullivan at Benchmark. Josh is asking if we could go into further detail on the incremental backlog sequentially this quarter, talking about some of the reasons for the increase sequentially whether it was driven by repeat customers versus new relationships and then how are APU relationships and orders evolving?

So 2 things. First of all, it's a combination of existing customers and new customers we won. We stated it in the past. When we win, we come with the official announcement only when we have substantial wins, but we are all the time winning more and more business that is less meaningful for a stand-alone PR, but we are adding new customers and both on the -- it's across the business lines. It's APUs, landing gear and thermal components. So in reality it's a combination between new and existing and between the various business line. Nothing unique that stands out more than others.

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

I don't think that it has anything to do with pricing. It's mostly operational efficiencies and, obviously, there is always some level of mix of products that we don't control. It is what it is, whatever we get. But we have major initiatives around improving profitability, which we -- and we stated in the past that we believe that a company like TAT needs to be at least at 25% gross margin and 15% EBITDA. And this is definitely where we want to be in the future and we are very committed to getting there and investing a lot of time and energy in it. So again, it's mostly operational efficiencies, nothing to do with pricing changes.

Okay. Great. He has an additional question around supply chain. What's your -- from where you're sitting, what are you seeing in terms of the supply chain at this point and what are you doing to manage that with your customers?

So first of all supply chain, it's an ever-evolving situation. On a very high-level macro trend, I personally believe that the industry is in recovery mode. But still every time suppliers -- we wake up to surprises from suppliers. Business lines that were already stabilized and we thought that everything is okay and all of a sudden, deliveries are being pushed sometimes in months with no expectation, with no advance warning. So the overall trend is -- I think that the overall trend is positive and the industry is on a recovery mode, but it's still extremely volatile and ups and downs and it's not consistent across business lines. So the only thing that we can do and this is what -- and we are doing it strategically is to increase inventories and you see it in our numbers. We -- I believe that the companies that will be able to overcome the supply chain challenges first will enjoy the growth. I think that part of the reason that we are growing is that we are providing great service to our customers. Across the business line when you think about turnaround times that we are demonstrating to our customers on the MRO side, way better than what we hear that competitors are providing. This is a critical strategic advantage for the growth of the company. It comes with the cost of inventory and turning cash into inventory versus cash in the bank. But that's what we are doing and we plan to continue until such day in the future where the industry will really be more stabilized.

We did have an investor question asking about your current capacity and how that serves your medium-term growth outlook. But I think you just addressed that in your most recent response.

Maybe Matt, just to add to it and we spoke about it in the past. From a technology standpoint, equipment and everything else; we are well positioned to more than double the capacity. So, obviously, the bottleneck is supply chain and having the parts. We are overcoming it by strategic purchase of inventory where needed. From facility standpoint, equipment and everything else, we are -- with all the investments that we have done over the last 5 years, we are well positioned to, if I have to guess, at least double the capacity.

Okay. Let's shift to taxes. We have a question from Sergey Glinyanov from Freedom and he's asking how should we think about your tax provision for the second quarter and the remaining part of the year as you've started to recognize noncash items in Q1. Is that clear, Ehud?

Yes. That's clear. Thank you for the question. I think what we're going to see until the end of the year is the average tax expenses that you see right now out of the net profit will continue to stay around the same level. There's a mix of different taxes between Israel and the U.S., but we believe that the profitability between Israel and the U.S. is going to continue the same until the end of the year. So you can assume the same tax rate for the following quarters. As I mentioned before and I'm emphasizing it again, these are just -- these are noncash tax expenses until Q3 and by Q4, it's going to become tax expenses which are followed by cash.

Okay. Sergey is also following up with a question around our opportunity with defense customers in light of the current budgetary landscape, particularly in the United States. So can you comment on the opportunities for growth within the government and defense market?

I think that -- by the way, yesterday, we had an internal meeting asking ourselves the same question. So the opportunities -- it's a good point. The opportunities are definitely there and the budgets are in place. We don't see any quick turnaround here from strategic decisions in the government side into immediate buying decisions. There are solicitation that are being opened by the Air Force or Navy or Army in the U.S. from time to time. It's more based on schedule in our case for TAT so I'm not expecting any immediate reaction or substantial growth. Having said this, we have our defense sales team dedicated to selling to the U.S. Armed Forces and popping -- being in close contact with the buying offices and looking forward to RFPs, to solicitations to get open so we can bid on them. So I believe that strategically, this segment is growing and needs to continue and grow. Nothing special that can be reported short term.

There's another growth-oriented question here. One is around we highlighted a few logos in the global logistics sector with the FedExs, UPSs, and DHLs of the world as customers. And so there's a specific question around APU revenue opportunity with these customers. There's also a question in here around in general the pipeline for APU131. Perhaps if you can talk to those opportunities.

First of all when it comes to UPS, FedEx and DHL; they are existing customers. We have great relationship with the 3 entities and we have some opportunities to grow within their product lines. It depends on when their existing contracts will come to term and then they will open them to RFPs and we are definitely in a great position to secure more business from them based on success over the last few years. When you look at the overall potential for the APUs, the commercial market is the biggest opportunity. And basically today, any airline -- almost any airline in the world is a potential customer for TAT. Airlines are typically on 3 to 5 years agreements and when the agreement comes to term -- unless if they have a major, major problem, they don't change vendors in the middle of a term even if they are struggling. They get to the end of the term, they open RFPs. We are participating in a lot of RFPs. And I believe, if you remember, in 2024 we deliberately decided to wait with participating in RFPs because we didn't feel confident enough to secure long term. And at the end of '24, we mentioned in conference calls that we feel more confident with the fact that we are gaining experience and improving the operations and efficiency and being ready. In 2025, we are going to participate in large RFPs which we do. There is a very nice funnel of opportunities and I believe that it's just going to grow. I call it a positive snowball effect. You start slow and small and then you gain and you win and with the wins, you become -- the awareness to the company is becoming and we are positioning ourselves. I think that we are slowly but surely positioning ourselves as a key player in this segment, which will bring more and more customers to consider us in a serious way as their future vendor. And the numbers are huge. We are talking about 131 engine, we are talking about more than -- I don't know, between 16,000 to 18,000 engines that are flying today that are in use today around the world.

Great. I think that answered that. On the landing gear opportunity, Josh Sullivan is asking where we're at in that cycle. How should we expect it to ramp up or what early signs should we look for either externally or internally to evaluate your performance?

Well, you're already seeing the results in the landing gear increase, it's more than doubled and we just started. The big cycle starts this year and will peak in the next 3 years, '26 to '28. If you look at announcements made by the OEM, there is not enough capacity to support -- in the industry to support '26 to '28 demand. So when they are combining all the vendors like us that have the ability to support where there is a lack of capacity, So we hope that -- we hope and believe that we are going to see a very nice increase.

Next question is from an investor. When do you expect the redomicile process to be completed?

Can you please repeat the question?

When do you expect the redomicile process to complete? Perhaps that's not a great question.

We need a clarification on the question. From an operational -- again, just maybe from an operational standpoint, we are based in the U.S., the management in the U.S., our headquarter is in Charlotte. We operate like most of the customers and most of the -- the vast majority of the employees are in the U.S. So if you look at the -- if you -- leaving the registration aside, if you just look from operation and management standpoint, we are a U.S. company today. I don't know if that was the question or whether there was another question. Obviously, we have a very strong business in Israel that is doing great and we are definitely planning to continue and develop it. But the company is based in the U.S. And I don't know if it answered the question or not.

Let me prompt others to submit questions. We will now pause to evaluate the queue. Igal and Ehud, I believe we are at a good point here for me to turn the call back over to you.

Well, maybe just to summarize. We are really pleased with the results. Another quarter of continuing improvement in all aspects of the business. And we -- when we look at the -- strategically when we look at the company long term, we are very optimistic about all the opportunities and the growing in demand and the amount of RFPs and bids that we are participating in and the opportunity to continue to grow the company. I'm really proud in our team and the ability to overcome many of the supply chain challenges and others. We are not using it as an excuse, but rather we are using it as a springboard to show the industry and our customers that we are providing better service and much, much faster turnaround times, which really helps our customers. So the outlook is strong on a strategic base. Obviously, we did a great job in Q1 overcoming the short-term headwinds and some short-term challenges and concerns in the industry and we'll continue to do it. So all in all, the company is in the right direction and executing our plans. And wanted to use the opportunity and just thank everybody for joining us today and for showing confidence in us and in the company and we appreciate the partnership and looking forward to continuing working together.

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