TAT Technologies Ltd.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to TAT Technologies' fourth quarter 2024 earnings conference call. Please note that today's conference call may be recorded. I will be your host, Matt Chesler, from the U.S.-based investor team. Joining me today are Yigal Zamir, our president and CEO, and Ehu Ben-Yeir, our CFO. Before getting started, we would 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 applied 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 Technologies' 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 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 today's press release. our earnings release, and the investor section of our website at tat-technologies.com for 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 is 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 the company uses have limitations and may differ from those used by other companies. With all that, we would now like to turn the call over to Egal.

Thank you, and good morning, everybody. And thanks for joining us for our fourth quarter and annual results call. 2024 was another solid year of fast growth, increasing profitability and strong execution of our strategic business plan. We are very proud in the result. We delivered a 34% increase in revenue to more than $150 million in revenue and grew net income by 139% comparing to 2023. The fourth quarter was just as strong, with revenue increasing by 29%, to $41 million compared to Q4 of 2023. In terms of profitability and margin, we also increased this year with gross margin increasing from 19.7% in 2023 to 21.7% this year, and as you saw, more than 23% in Q4. And adjusted EBITDA margin increasing from 9.7% in 2023 to 12.2% in 2024. Major efforts have been made and are still ongoing to continue and improve profitability in 2025. And we expect the trend to continue. A lot of emphasis on improving our profitability, not just growing the top line. This year we'll launch our new capabilities, especially our APUs 131 and 500. Those new capabilities open up to new substantial markets. A lot has been done during 2024 to build ourselves towards this blue ocean market and it was reflected in our results, revenue increase and other things. We did came with a lot of investment in inventory and we are well positioned going into 2025 to continue and enjoying this very large market. Another thing is that during the year, in 2024, we focused on expanding our trading and leasing capability, which allowed us to enjoy a built-in advantage by using our in-house MRO capability to purchase systems and components in the market, overhaul them, and trade or lease them to our customers, especially in periods where the industry is challenged with... Supply chain challenges and delivery challenges, having the materials and the components available on the shelves opens opportunities, also helps us centralize our supply chain, and we aim to continue growing this activity and strengthening it during 2025, and we are enjoying very high profitability on it. Our backlog and LTA value at the end of 2024 increased to $429 million, comparing to the $406 million at the end of 2023. And we are very pleased with it because despite on top of the growth that we were able to show in revenue in 2024, we booked more and more new orders, and we want new business. So we are ready, and it's a good reflection of the potential growth in 2025, 2026. Supply chain continues to be a challenge in the industry, especially with parts and materials availability, and longer than normal times. In order to overcome the challenges and be ready for the expected growth in 2025, but also in order to provide great service to our customers and have assets ready for trading, we implemented a strategic sourcing plan, which reflects in our inventory. You can see in the inventory, the balance of the inventory at the end of the year, the growth. Most of it, if not all of it, is strategic decisions that we made to get ready with parts, materials, and materials. full components like engines or landing gears available on the shelf so we can support 2025 business and continuous growth. As an outcome of the strategic and the implementing of the supply chain strategy, we basically used the profits that we generated throughout the year and reinvested it to do two things. First of all, to support the working capital, but also to support the inventory buildup. And it reflects in a negative operation cash flow for the year, but something that we did as a strategic decision in order to be ready for this year. So at the end of the day, bottom line, we are summering a meaningful year with growth rate that is much higher than the industry, profitable and expanding our margin. While there are certain challenges ahead of us, mainly gaining new contracts as the new player in the 131 and 500 APUs, and overcoming the supply chain, we are looking forward to another strong year in 2025, with focus on improving performance to our customers, increasing profitability margin, and growing the top line. With that, I will pass the speaking to Ered Ben-Yair, our CFO, to review the financial report. Thank you, Igor.

Good morning, everybody. And thank you for joining us today. As Igor started We completed a very successful year. We'll elaborate a little bit about the numbers and the profitability elements, both for Q4 of 24 compared to Q4 of 23, and also for the full years, 2023 versus 2024. So revenue in Q4 went up to $41 million compared to 38.8. It's an increase of 29% quarter to quarter. Gross margin in Q4 of 24 went up to 23.2% compared to 21.9% in Q4 of 23%. And the adjusted EBITDA went up by almost 60% from 3.4 in Q4 of $23 million to $5.4 million in Q4 of 24. Earnings per share on a fully diluted basis went up to $0.32 per share. It's a 658% increase compared to Q4 of 23%. Looking at the year to year results, so the full year of 2024 ended with $152.1 million of revenue, compared to 113.8 in 2023, which is an increase of 34%. The gross margin went up from 19.7 in 2023 to 21.7% of revenue. which will present $33 million of gross margin. The operating profit went up as well, almost doubled itself or even doubled itself from $6.1 million to $12.5 million. And the adjusted EBITDA went up from 11.1 in 2023 to $18.6 million in 2024, representing a 67% increase in the adjusted EBITDA. Net profits also more than doubled, 100% increase between the year of 2023. They were $4.7 million compared to $11.2 million And in the year of, for the full year of 2024, the earnings per share on a fully diluted basis was a dollar per share representing 95% increase compared to the year of 2023. One of the things that we are very proud of them and we are elaborating them quarter after quarter is that the fact that the company is growing its revenue quarter after quarter, but We're more proud with the fact that we're improving our gross margin, operating margin, and obviously net profit and adjusted EBITDA. So all profitability elements. went up quarter after quarter so gross margin went up for 21.9% in Q4 of 2023 and gradually went up to 23.2% in Q4 of 2024 and the same with all other operating margin net profits and adjusted EBITDA Again, I must emphasize, even though we're presenting quarter after quarter, I believe that in order to better analyze the company, you need to look at more four-quarter results rather than trying to analyze and understand exactly what happens every quarter. Any small deal of two, $3 million can make a change in the quarter, both revenue and profitability. Another analysis that we are showing every quarter is the revenue per product line. So you can see that we're really emphasizing about our four major product lines, which are heat exchangers, APU, the trading and listing, and the lending gears. uh so heat exchangers both oem and mro went up from 13.3 million dollar in q4 2023 up to 16.6 million dollar in q4 24 apu segment went up from 9.2 million dollar in q4 23 to 13 million dollar it's an increase of 42% in the revenue of this segment. Trading and listing also went up for $2.2 million in Q4 of 23, up to $3.3 million in Q4. With an uptick of 5.7 that we reported in Q3 of 2024. And the lending year is already at the level of $2.8 million with expecting revenue to grow dramatically in 2025. Looking at the year by year numbers of the major product line, you can see that heat exchange activity went up from $33.1 million in 2022 to $63.2 million in the year of 2024. APU with a dramatic increase from $18.7 million in 2022 up to $43.3 million in 2024. And obviously, as Igor said, we just started scratching the surface of the new APU engines capabilities that we have, and we expected to see another ramp up in 2025. And the trading and leasing went up from $6.2 million to $13.9 million. Lending year is pretty stable. And as we explained, there was a cycle in the lending year activity that we are presenting. Another cycle of four to five years started in Q4 of 2024 and expected to ramp up in year 25 and 26 to a much higher numbers. So again, we're very proud with increasing not only the revenue, but also all the profitability elements. So revenue is going up, gross profit and margin are going up. And you can see the table is steady growth quarter after quarter, the same with the operating margin and the net income. Two things that I'm asking investors to be aware of that impact the net income of the company. One is the interest expenses that we are paying. We are currently sitting on almost $20 million of loans, some of them long-term, some of them short-term. with interest rate of anywhere between 7.8 to 8.3 percent of interest this is resulting in almost two million dollar interest expenses in the year of 2024 and expected to continue this way for the year 2025 and the second element is tax expenses um which are going to go up in 2025. The company is not going to pay taxes in 2025, but we're going to record the tax expenses, which are mainly due to changes in the tax assets and liability on our balance sheet. And we're expecting to start paying taxes by the end of 2025, starting 2026. In terms of the business breakdown, so again, the company is really focusing its activity on the commercial aviation side of the business, less on the military. The military revenues in 2024 were 18% out of the total revenue, and commercial were 82%. In terms of the two major sides of business, which are OEM and MRO, So OEM were 27% in Q4 and MRO 73%, but looking at the full year, OEM were 32% and MRO 68%, which is very, very steady if you're looking also backwards to the years of 2023 and 2022. In terms of the geographical distribution of the revenue, North America obviously continues to be very strong. 70% of our revenues are coming from U.S. customers, 11% out of Europe, and the rest of the world are the rest. And the last slide is about the backlog. So you can see on the left side that backlog is steadily going up from $400 million in 2022 to $429 million at the end of 2024. 51% of it are the heat exchangers, the long-term agreement. APU agreements, which are usually for anywhere between three to five years, are 28% of the backlog, and 14% of the backlog are, again, lending contracts. As we said before and in the past, we are going to participate in large bids on the new APU segments on in the year of 2025 and on. And once we start winning those contracts, you will see another step jump in the backlog number. And by this, I'm returning the call to Igal Zamir, our CEO.

So thank you, Eld. So just to summarize, 2024 was another strong year. And when we look at our... Going into 25 and 26, we still enjoyed the same strong demand that we've been seeing in the last two years. industry is still recovering and I'm not sure that in some cases we don't see the light at the end of the tunnel in terms of when the industry is going to catch up with the demand. So there are increasing demands. We have a large increase in our MRO orders. We already have a good visibility to this year and starting to see increasing book of orders also already for 26. the two new engines, and I would mention bidding on new contracts. It's a major growth engine for the company. The trading and listing activities, which we plan to continue and expand, and strategic deals that we have signed, and opportunities that we have for growth in the lending yield. Basically, it's the same landscape of growth engines that we discussed in the previous quarters, and we are very optimistic about it and the opportunities for growth moving forward.

Okay, thank you. We're now going to open up to the Q&A session. First, with some instructions. As a reminder, there are two ways to ask a question from the Zoom webcast. The first is to use the Raise Your Hand icon, which is at the bottom of your screen. Clicking on this will alert me that you'll want to be called on to ask a live question, and you'll be placed in a queue and called on. Just note, you're going to be on mute until you're called on. The second way to participate in Q&A is to use the Q&A widget, which will allow you to type in and text the question in. We'll take questions from there as well. But just note, if we run into a time constraint, someone from the IR team will get back to you if your question is not asked on today's call. With that, we'd now like to begin and pause for a moment to build the queue. I will now take the first question. First question is going to be from Josh Sullivan at Benchmark Company. Josh, go ahead. josh uh be sure to take your line off the mute if you've not already done so gosh i believe you're still on mute

How about now? Now you're good. Good morning. Good morning. Thank you. Yeah, just congratulations on the result. As far as the investment in inventory, just given the ongoing unstable nature of the supply chain, can you just highlight what you're seeing from suppliers at this point, maybe versus the previous quarter? Sure.

So I think that we didn't see any big change in supply chain behavior over the last two quarters. And without going to too many details, in some product lines, and I mentioned it in previous calls, we are fully recovered and the supply chain is recovered. And over there, you know, internally, and we don't go into these details, We take a very strategic approach. So anywhere where the supply chain always is stabilized, and especially on the material side, raw material side, it's way more stable than what it was during the COVID years. Over there, we didn't increase. We are keeping on the opposite. Despite the fact that we are increasing revenue, we are not increasing purchasing and inventory. In some cases, even went down. We are just increasing the inventory terms. I think that the key challenges is on the parts delivery, when we need to buy parts from the OEMs in order to perform the work, whether it's APUs or learning gears. Over there, there are still major challenges with very long lead times and unpredictable deliveries. And over there, we made a strategic decision to invest a lot in order to be ready for the growth. So, you know, if I have to split between materials and parts and components, materials is pretty stable. The lead times are still not back to where they used to be before COVID, but they're getting there. And over there, we are not increasing. On the opposite, increasing. On the parts, OEM parts, to support engines or landing gears, still pretty much a challenge with very long lead time and lack of consistency, if you will, in the deliveries.

Got it. And then just looking at the launch and the new APU capabilities here in 2025, What does the demand side of that equation look like, or how should we think about how you guys are going after some of those programs? I mean, are you looking at the larger ones? Do you think we'll see smaller ones and more incrementally? Just trying to understand how we might visually see the APU opportunity evolve over 25.

So I'll say the following. I'll split the answer into two sections. First of all, there are plenty of challenges that airlines are experiencing around the world with the availability of these engines. With the supply chain challenges and with the ramp-up that is required by the industry and many of our competitors still struggling to ramp up the rate required, So there is a lot of demand. I would say we see a lot of interest in either already being in active RFPs or planning to open RFPs and or planning to figure out solutions to how to overcome the challenges that airlines have despite of the fact that they are locked into existing contracts. So there is a lot of demand and plenty of activity around, you know, we see a very large funnel of opportunities. You know, we are a newcomer into these engines, and we are going to win on RFPs, but I think that going after very large RFPs at this point, we are trying, but I don't know that I can say, yes, we are going to win major, major, very large RFPs. being a newcomer and into this game. I think we are going to more focus on small to medium-sized RFPs from airlines. Actually, it's not just in the future. We are already doing it, and we are now in active process on several of them. So if you think about it, small airlines to medium-sized airlines are more on the sweet spot for us. For this year, I would say.

Yeah. And in the comments on the landing gear cycle, you know, how should we think about that? And when do you think we really see that starting to engage?

So you saw the beginning in Q4, and we expect it to continue this year. The full, you know, the peak is expected in 26 to 28. But we are expecting substantial growth there. this year and that will get to maximum demand next year, again, 26 to 28.

And then just kind of more of a general question. Obviously, you guys have a great penetrating story here, but what's your sense of the overall MRO market, you know, just given some of the macro comments out there?

So I think that since the industry is still in recovery, obviously, And with all the supply chain challenges, we see a very strong demand. I think it will take time before MRO will catch up. And if you look at what the larger companies and the industries are publishing, they are talking about catching up at the end of this year, sometime in 26th. So while maybe there is a little bit of concern on the airline side that we are hearing, maybe a little bit of softening on the flight side, but there is so much catch-up to do that for the foreseeing future, we don't see any decrease in demand on the opposite.

Great. Thank you for the time.

Thank you.

We're going to move to the next question. The next question is from Sergey Glynianov. Sergey, the line is open.

Yeah, hello, everyone, and first of all, I want to say congratulations for another successful quarter. So I have a couple of questions, and first of all, what's the book-to-bill ratio is now, and what time period does it take to convert all backlog to revenue?

So the book-to-bill ratio is over one, obviously, because you see that not only that we increased revenue, we increased the backlog more. And you have to remember that when we operate, as time goes by, we are eating from the backlog and the value of the long-term agreement, but we are replacing it with more revenue new orders and new contracts in a larger amount than what we were able to translate into revenues, which is a great indicator for the future growth that we are expecting to see. On the OEM side, regarding the second question, on the OEM side, these are very long-term. We are under long-term contracts. And what you see or what we recognize in the POs is either the value of the contracts for the coming few years or when the OEM is actually giving us the POs, the actual POs for the coming 12 to 18 months, we replace the contract value into the actual POs. So on the OEM side, the next 12 to 18 months is already covered with actual POs, which is part of the number. And then for the coming few years, it's based on the aircraft manufacturer production plan. And that's, give or take, 30% of the business, 32% of the business last year. On the MRO side, typically contracts are between three to five years. And so we take the airline historical data of how much replacement and how much overall spend they have per year times the remaining contract time, and that's what we book. And we need to remember that Give or take 40%, it depends, it's changing, but about 40% of the revenue comes from non-contractual customers. And so that's the last portion, because when we actually get the PO from a non-contractual customer, or we get an actual asset for a repair on the aftermarket side, the MRO side, then obviously we add the value, the expected value into the... into the calculation. So let's call it 40% is very short term. We got something, we have to produce it in the coming few months. The other 60% based on contract, it's typically three to five years contracts on the MRO and way longer contracts on the OEM with actual POs for the coming 12 to 18 months.

Okay, got it. Thanks. And the next one is APU projections, pretty clear, but what's it about the thermal solutions? What remaining growth rate do you expect next two to three years, maybe?

On the thermal solutions, first of all, we expect to continue growing. We have a huge advantage of the thermal solution. I believe that we've been a very long-term partner of the large OEM. We are T1 to Boeing. We are T1 to Textron on most of their fleet. We are T1 to Embraer. We also produce thermal components to system manufacturers. We are under very long contracts, and as long as the OEM continue to recover their production, we expect to see more and more POs. We already see an increase for this year from the OEMs. That's on that side. On the aftermarket side, the MRO side, TAT is one of the leading companies in the industry globally. It's not the largest. We had great performance. We made huge improvements over the last two or three years. We made huge investments in capacity and production line, dramatically increasing our capabilities in our facility in Tulsa, Oklahoma. And as time goes by, we win more and more business. And we are very competitive, and we are very happy with our growth, expecting to continue.

Yeah, that sounds great. And I think the statement on the last call was about EBITDA margin above 15%. Are you still on the track of exceeding 15% EBITDA margin in 2025?

So we are not providing forecasts, but you can see that I'm very consistent. And thank you for reminding me. Definitely, internally, as I said last time, I believe that a company in our type of business, if I'm looking at our competitors, best in class needs to be, what I consider to be best in class, needs to be above 25% gross margin and above 15% EBITDA. And you can see the solid trends in this direction continuing. We are investing. Actually, if you were here with us internally, looking at our focus for this year, we place profitability improvement and continuing the improvement in efficiency and reducing cost at a higher priority than just investment. increasing the top line. We really want to make a lot of effort to get to the point that we have a strong engine that generates good results with very high margins. So we know that when we increase the revenue, we are going to enjoy it. So definitely in the right direction and hoping to get there as fast as possible.

Yeah, sounds great. And the next one, what is your long-term revenue structure outlook, breaking it down into thermal, APU, lending gear, et cetera? It's really interesting because we see that APU share is increasing, and now you mentioned that lending gear revenue is will slow down after 2028, as far as I understood. So just put a little bit of colors about that. Thank you.

So I think that for the coming years, we're expecting to see a growth in all of the segments. ETH exchanges, APU lending, and also the trading and the leasing. We believe that the APU will be a stronger growth engine than the other, given the new contract and the size of the market. But as I said before, we're expecting growth in all of the segments in the coming years.

Okay, thank you. And the last one is a little bit about Legendry Group. Yeah, E-Jet 175 is quite popular and that's great. You are authorized to provide landing gear. Moreover, we saw a big deal of purchasing by American Airlines of new ones that may bring a lot of work ahead for TAT. But anyway, do you plan to get new authorization of another business or regional jets?

Are we expecting to get any other authorization on top of the agents?

It's not something that currently is on our roadmap for this year. So right now, in the roadmap for this year, we really focus on increasing the capacity to meet the demand on the existing platforms.

Okay, got it. And that's all from me. Thanks a lot, and wish you all the best. Thank you. Thank you very much. Thank you, Sergey.

Thank you, Sergey. And then now we're going to move to take a question that was typed in. This one is from Jonathan Siegman. First, congratulating us on the continued positive results during these challenging supply conditions. He's asking for us to comment on pricing trends that our customers are paying for our services. You know, is it increasing, changing year over year?

So, you know, the general thing, we have two types of customers. We have the contractual customers, and over there, pricing escalations are predetermined with formulas, typically tied to indexes, material indexes and labor indexes. So, per the indexes, the prices are changing on an annual base, and obviously they were adjusted also going into 25, according to the relevant indexes. And then we have the non-contractual customers where it's a little bit more tricky. There are market considerations and competitive considerations, and obviously we want to make sure that the prices are going to enable us to maintain the profitability. On the other hand, we also want to make sure that we are not going to be – disadvantage being more expensive than competition. So obviously it's a more per case discussion, but I think that we are positioned well from the pricing, from 2025 pricing to continue and enjoy the margin that we saw last year.

There are no more questions in the queue. With that, I'd like to turn the call back over to Gal for closing remarks. Okay.

So one second. So, you know, this is a summary of everything. We are very proud in the results, and we are well positioned to continue and to grow the company in 2025. The demand is strong. We see a lot of interest in, you know, coming our way from new customers. The agreements that we have signed with the larger OEMs will continue to drive our growth. And all in all, I didn't mention the leasing and trading that is growing, especially in times where the industry is struggling. So all in all, we are very optimistic about the potential to continue to grow the business. I'd like to say that while, as I said before, in the type of business that we are, and up until now, in the last two years, we've been every quarter focusing on the quarter, and it was really quarter-to-quarter discussion. But I think that we need to start looking at the business more on an annual year-to-year growth. You see it from 23 to 24. There may be changes and fluctuations from quarter to quarter. There are unpredictability on the MRO side of the business. We don't have a good control on what will come and when will come. Even the airline don't know. Most of the maintenance that we do is not predetermined, with the exception of the landing gear, which is known in advance and planned months and months in advance. On all the other product lines, the maintenance is per condition. So as long as the unit is working well on wing, they are not dismantling and sending it to overall. So, there are fluctuations. There are also budgetary decisions that airlines are making. Sometimes they want to be more profitable and cut costs on a certain quarter, so they don't send their components for maintenance. The following quarter, they can bombard you with all the units that they were accumulating for many months. We can see variation between the quarters, but when we look at the full year, an expectation for 2025, comparing to 2024, we are well positioned for another very strong year. I'd like to use this opportunity and thank the participation in this call for taking the time to join us today and for the trust and partnership with our company. And looking forward to talk to you in the future and see you in conferences and answer any questions that you have. Thank you very much, everybody. Matt, back to you.

That is the conclusion of the call. Thank you all for joining us. You may now disconnect your lines.