TAT Technologies Ltd.

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 Shuffler, and I'm a partner with FNKIR, a U.S.-based investor relations firm supporting Iran Younger, TAT's internal head of investor relations. Hosting today's call is Egal Zamir, our president and CEO, and Ehud Ben-Yer, 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, THC 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 THC Technologies' actual results to differ materially from those indicated in these forward-looking statements, Please see our annual report on Form 20F, where 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 investor section of our website at tattechnologies.com for 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 Egal.

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 earning call, and it's another milestone in the evolution of the company and in development, especially after the progress that 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 our meeting you also in person and in the future in 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 continuing to establish the infrastructure that TAT needs to continue supporting the 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 in 35 percent. Net income increased in 33 percent. We are very pleased with the EBITDA results increased in 70 percent, way more than almost double than the revenue, which speaks about the improvement in our operational efficiencies and enjoying the growth. We showed a $6.5 million positive swing in cash flow comparing to the same period last year, cash flow from operations. And despite the fact that our revenue is growing, our backlog is also continuing to grow, which means bottom line is that we are receiving more POs and more orders, and we are securing more business for the future than what we are selling. And all... Basically, all the signs are positive signs when we look into the future. A few words about the industry and the way that we look at the industry and how it affects us or where that it meets us. So I'm sure that it's not going to be new to anybody that the industry is going through some very interesting period where we see demand, major demand, both on the OEM, new manufacturing, and on the MRO, on the aftermarket and services. Major demand for new aircrafts. Passenger flights are increasing all over the world. Huge demand for new aircraft in Asia. The aircraft manufacturers are really struggling to ramp up from COVID. Supply chain is still challenging in aerospace. And the result of all of this is that you see capacity from the aircraft manufacturers that while it's increasing, it's not meeting the demand. We are hearing, you know, eight years and ten years lead time to receive a new aircraft. It forces the airlines to continue operating fleets that they were supposed to retire and or in some cases even bring back to operations aircraft that were already divested and moved to storage. All of this creates huge pressure on the MRO. And part manufacturers, especially on APOs and landing gears, part manufacturers find themselves struggling because they have demands both on MRO and OEM. and the supply chain is disrupted. All of this is representing both opportunities and challenges to industry players like TAT. On one hand, we are enjoying the demand. We see increasing demand both on the OEM and on the MRO side. And some of the demand comes from contractual customers, but we see an increasing portion of the demand coming from non-contractual customers that have contracts with other vendors that are struggling and they are coming to us. On the other hand, we are experiencing the same challenges with supply chain and we are, based on what we are hearing in the industry, from the industry leader, is not expected to show a better performance before the end of next year. So there is a hope, I would say, expressed by the industry leader that their supply chain will stabilize at the end of next year, time will tell. And we took all the measures in the last few months to strategically source parts that we will need for next year. You can see it in the increase in our inventory. And what we are trying to do is to turn the challenge into opportunity for next year by ensuring that we will have all the parts that we need to secure the demand that we believe that will come. So in terms of visibility, when we look into the future, long-term, we see improvement in our visibility. We have the long-term contracts that we secured. We are seeing an increase in the amount of purchase orders that we receive on the OEM side for next year and the following year. higher than ever in the past. And while we're not publishing looking forward statements, we can say that we are enjoying a funnel of opportunities that is way larger than what TAT ever saw in the past. So all in all, when we're looking into the next two or three years, very positive signs that the growth is going to continue and demand is definitely in the rise. Short term, We have to bear in mind two factors. First of all, the supply chain. It's not an area of concern, but we need to be mindful of it. We have a big challenge of constantly making sure that we have the parts Not always finding the parts in the right price that we would like to have, and we are still buying them, which has some effect on gross profit. But making sure that our key advantage being a smaller player than the big industry player is our ability to move faster and to be more nimble and find the solutions. that we need to continue and support the market. So it's always a challenge that we are basically dealing with on a daily, weekly basis. So far, with success. And you need to remember, short term, also some seasonality. Historically, when you look at the performance in the fourth quarter of the year, there's always seasonality. On the MRO side, typically, commercial airlines are... consuming more MRO work during the summertime when it's hot in the peak season, when they are flying a lot, they have more repairs to do. And then in the winter. And the second factor on the cargo carriers, typically in preparation for the holiday season, they prefer not to do maintenance and keep their aircraft flying. So not expecting any big increase over there. In a quote that was made by one of the industry leaders a couple of weeks ago that I really like, he said that revenue for next year will not be determined by the opportunities, but it will be driven by the supply chain and capacity. And I love this statement because I think that this is a good reflection of where we see ourselves going into next year. We have lots of opportunities across all business segments, both in the OEM and the MRO, across the business lines that we have. And the name of the game for next year, as far as I'm considering, is to make sure that we have the parts and that we have the capacity to support the growth that is coming. So that's on the market and visibility and impact on TAT. Another point that I would like to say before I finish is that TAT key focus is not just on growing revenue, but it's on improving profitability. And I think that Q3 is another demonstration of our ability to unlock operating leverage. As we grow the business, as we continue to, you know, we hired a lot of people at the beginning of the year, we uh it takes time for to get the efficiencies and the utilizations and whatever our supply chain is getting more and more sharper in the ability to find the right parts in the right cost all of this is affecting our our profitability and it's a key initiative for the for the coming years to continue and improve uh to what we consider to be best in class in the industry. So all in all, before I hand the presentation to Ehud, we are pleased with the results. The trajectory is good. We feel confident about the coming few years and our ability to continue and show good performance. The company went through a major transformation in the business during the years of COVID. We invested in a new strategy, organizational structure, strategic contract, entering new product lines. The growth that we see over the last two years just reflects the beginning of the opportunities that the company is enjoying these days. And I'm saying the beginning because the way that I express myself, I'm saying we are just scratching the surface of the opportunity. When you look at the market size, at the demand in the industry, there is a lot of room to grow, and the demand is there. So we are very optimistically looking forward. And with that, I will let Erdogan go over the financials.

Thank you, Igor. Happy to be here, happy to present the another quarter. Very good results. I will go through the numbers and will give you some also some key indicators. So looking at the Q3 of 24 compared to Q3 of 23 in revenues went up to $40.5 million compared to 29.9. In the same period last year, it's an interest of 35%. The thing that they will follow us through the whole presentation is that not only the company is growing its revenue, but we are also quarter after quarter improving our profitability. So you can see here that the gross margin went up to 21% compared to 19.4. The operating margin, which almost compared to the previous period went up from 5.9 to 8.5. The adjusted EBITDA, again, the same trend, went up by 70% from 10.1% out of revenue into 12.6 in Q3 of 24. And net profit also increased by 33% from 2.2 to $2.9 million in this quarter. Same trend if we're looking at the nine-month period of time. So revenue went up to $111.1 million compared to $82 million in the same period last year. Gross margin went up from 18.9% out of revenue into 21.2% out of revenue, an increase of 230 bit points. Operating margin the same, double. compared to almost double, 2% almost double, from $4.2 million to $8.4 million, and moving up from 9.5% out of revenue to 14%. The same goes with the adjusted EBITDA that went up from 9.3% to 11.8%, and the net profit from $4.3 million to $7.6 million, representing a 77% increase compared to the previous periods. Looking at the last four or five quarters, again, you can see that constantly all of the parameters are growing up. So again, we are very proud with the fact that we are increasing revenue. And by the way, we are looking and monitoring our peers in the industry and we see that we're growing our revenue in a much faster pace compared to our competitors with similar companies to us. But again, not only this, we're improving all of the profitability parameters and you can see it here on the slide, quarter after quarter. I must also draw your attention to the fact that in Q2 of 24, gross margin was 21.9 and it went down to 21.1. in q3 of 24 and going deep into understanding the company so you know that we have several strategic segments within those segments we have different products and within the different products and services we have different customers with different profitability so from time to time the mix of revenue could show either an increase or a decrease in the gross margin. And again, it's nothing really to be a concern of, but just draw attention to the fact that the blend of revenue can affect the gross margin. Nonetheless, you can see that the gross margin is improving quarter after quarter, and we're very proud of it, and the same with all the other profitability margins. In terms of revenue from our strategic products, so the heat exchange activity, which represents both OEM and MRO activity, went up from 12.9 to 16.6, representing a 33% increase year after year. The APU activity went up from 8.2 to 10.5, another 27% increase in the APU activity. This is all MRO. And the trading and the listing, which is part of it is a seasonal, part of it is an opportunistic model, went up from 1.9 to 5.7. Again, the 5.7 in this quarter does not represent an average level of revenue in this segment. It's really kind of an opportunistic deal that we did in this period of time. And lending gear, this is the key area where we struggle with supply chain. We have many orders and many sets that are waiting to be repaired, but here in this segment, the supply chain is really hitting us strong, and it is very difficult to grow the revenue quarter after quarter. Nonetheless, we are working very hard on it. We are buying all the needed parts, and we are hoping that entering into 2025, we will see a much higher revenue numbers in the results. So that's about the segment. Next slide, just to illustrate to you again the trend that the company is facing in the last two years or ever since we went out of COVID. So we're riding the positive trend of the industry. You can see that revenue went up from $21 million in Q3 of 2022 to up to 40.5, well, doubling the company in one year in terms of revenue. We're very proud of it. The same you can see here in terms of gross margin. So the gross margin went up from 3.4 two years ago to 8.5, more than doubling the gross profit. And the margin also went up from 16.4 in Q3 of 22 to 21% this quarter. Same goes with the operating profit, but with a much, much stronger pace again. We managed to transfer all of our efforts, not only to grow the business, but also to improve our internal efficiencies and make sure that we're making more and more money quarter after quarter. The same goes with the net income that was negative in Q3 of 2022 and went up to almost $3 million, $2.9 million in this quarter. Another element that needs to draw attention is the backlog. So the backlog is really, or the backlog and the LTAs is really a combination of all the long-term contracts that we signed during the years according to the segment. So currently at the end of this quarter, we have $423 million in our LTA and backlog. 52% of it is coming from the heat exchange segment and 26% in heat. It's coming from the APU segment. And again, as Igal said, we're expecting in the coming year to see that the APU segment will grow and take a larger portion in the pie of our backlogs and long-term agreements. uh in terms of the business uh breakdown so at the end of q3 24 80 of the revenue are coming from the commercial activity and 18 is military so i would say two years ago it was a 30 military and 70 commercial so the company is growing more and more and more in the commercial segment and so the The portion of the pie in the commercial is currently 82%, and we expect to continue growing the company from the commercial activity. In terms of MRO and OEM, 30% are OEM activity and 70% is MRO. This is constant in the last several quarters. And in terms of the geographical breakdown, North America contributes 75% of the revenue, Europe 11%, and the rest of the world is the rest. Again, this is also very constant in the last several quarters. And by this, I will pass the pitch to Wigal for a short summary.