Innovative Solutions & Support - Earnings Call - Q3 2020
August 6, 2020
Transcript
Speaker 0
Welcome to the Innovative Solutions and Support Third twenty twenty Earnings Conference Call and Webcast. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Mr. Jeffrey Hedrick, Chairman and Chief Executive Officer.
Please go ahead.
Speaker 1
Good morning. This is Jeff Hedrick. Welcome to our conference call to discuss our performance for the 2020, current business conditions and our outlook for the coming year. Joining me is Cheron Ascopar, our President and Rell Wanan, our CFO. Before I begin, I would like Rell to read the safe harbor message.
Thank
Speaker 2
you, Jeff, and good morning, everyone. I would remind our listeners that certain matters discussed in the conference call today, including new products and operational and financial results for future periods are forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially, either better or worse, from those discussed, including other risks and uncertainties reflected in our company's 10 ks, which is on file with the SEC and other public filings. Now I'll turn the call back to Jeff.
Speaker 1
Thank you, Rell. Three years ago, I announced that we would change our approach to the market by focusing only on products in which we had both a performance and technologically driven price advantage. The resulting trending of our operating performance seems to vindicate our change in direction. The third quarter we experienced a historical strong growth quarter with revenues up 28% quarter over quarter or 30% from a year ago. We generated sequential revenue growth in seven of the last eight quarters.
In addition, revenues this quarter including production deliveries to our newest OEM customer Textron. We are pleased to be supplying Textron our ThrustSense autothrottle with lifeguard protection on their new King Air three sixty twin turboprop production aircraft. We intend to build on this relationship in our joint pursuit of retrofit and upgrades of the very large fleet of King Airs expanding the number of production aircraft to include our ThrustSense autothrottle as standard equipment and upgrade existing fleets. The company has the industry's first FAA supplemental type certificate for its groundbreaking and patented ThrustSense autothrottle system with lifeguard protection on King Air's 200s and 300s with Rockwell's ProLine 21 avionics. The full regime autothrottle thrust set system with lifeguard BMCA protection is available for immediate retrofit and promoted at the Textron service centers as well as all King Air maintenance facilities.
This lifeguard feature can offer protection against catastrophic upsets with the loss of an engine if the pilot fails to maintain adequate airspeed. Excuse me for a second. In the process, we have overcome and continue to overcome many challenges, most notably the coronavirus pandemic. We remain focused in protecting our employees, partners and customers and remain ever vigilant as is as to its potential effect on our end markets, supply chain and other aspects of our business. To this date, the impact has been immaterial.
I am extremely proud of our team and their ability to execute in these difficult circumstances. Let me turn it over to Rell for financial details.
Speaker 2
Thank you, Jeff, and thank you all for joining us this morning. Revenues for 2020 were $6,000,000 up 30% from a year ago and also up on a sequential basis from $4,800,000 in the 2020. Growth this quarter was primarily in product revenue. We also had some engineering development revenue associated with final engineering on the F5 development contract, while customer service revenue was down from a year ago mainly due to our prioritization of resource allocation. Gross margins for the quarter were 57%, up from both 55% in the 2019 as well from 47.5% in the 2020.
We indicated that the drop in last quarter's margins was going to be a temporary as a result of product mix and increase in warranty costs and higher labor expense as we staffed up ahead of future product production demands. As anticipated, margins bounced back and were in line with margins achieved the past few quarters. Total operating expenses for the 2020 were $2,200,000 flat with the second quarter and up incrementally from the third quarter a year ago. I would like to once again mention that although revenues have been increasing this year most recently growing 30% in the third quarter. Operating expenses have not increased.
Research and development expense was up approximately $150,000 from a year ago, reflecting an increase in amount of internally funded R and D primarily related to obtaining FAA certification for the King Air autothrottle systems. Despite our 30% growth this quarter, selling, general and administrative expenses were down from a year ago, mainly due to lower travel expense, professional fees and trade show expenses. Most of these reductions are a result of restrictions arising from coronavirus. For the quarter, we generated operating income of $1,200,000 or slightly over 20% of revenue. Due to the continued availability of lost carrybacks, we recognized minimal tax expense in the quarter.
We reported quarterly net income of $1,300,000 or $07 per share. This was the
Speaker 1
most
Speaker 2
profitable quarter in 13 quarters. Over the first nine months of the year, both net income and earnings per share increased 137 percent and 140 percent respectively as compared to the first nine months of fiscal twenty nineteen. The company remains in a strong financial position and generated positive operating cash flow of $340,000 in the quarter and 567,000 year to date. Cash has been used recently to fund accounts receivable, which are correspondingly higher due to the significant growth in revenues. At 06/30/2020, we had $23,000,000 of cash on hand and no debt.
We believe that the company has sufficient cash to fund operations for the foreseeable future. Now I'd like to turn the call over to Sharon.
Speaker 3
Thank you, Ralph. Good morning, everyone. Reported on Q3, the revenues are up. Profitability is at a recent high and one of the general aviation industry's most prestigious manufacturers, Textron has contracted with us to install our proprietary process oral throttle as standard equipment on the production King Air aircraft. We have achieved this progress in spite of the COVID-nineteen pandemic by implementing new safety policies and procedures that have kept all of our employees safe and productive as well as protect our partners and customers.
During the month of April, in order to safeguard the health of our employees, we provided our production workers with two weeks paid time off in a scatter form to minimize congestion in our plant. We have installed automated personnel temperature monitoring at our main facility entrance with facial recognition software in conjunction with daily and in between break sanitization and weekly antiviral fogging of the entire facility to minimize risk of an outbreak. The organization has digested these changes And in the third quarter, as Relp reviewed, margins were up significantly from the second quarter as operating conditions have normalized from these actions. In fact, we are continuing with our hiring to meet the growing demand in areas of production, sales, product support and engineering. The contract for the Beechcraft King Air twin engine aircraft represents our third OEM production contract during the Boeing KC-46A and the Pilatus PC-twenty four.
These contracts provide an underlying ongoing stream of revenue consistent with their respective delivery schedules. The aggregate represent the potential for future revenues that are multiple of our stated backlog, so we consider them fundamental to our important risk mitigation nature of our autothrottle especially on twin engine aircraft and for that reason they are making it standard equipment under King Air. They believe the extra safety offered by ThrustSense provides Beechcraft with an advantage in the highly competitive general aviation market. Annual King Air production rates are higher than those of the PC-twenty four. But in the case of King Air also, there are already over 5,000 airplanes currently in service.
Spectrum is also beginning to actively market our autothrottle at their service centers so it can be offered to owners as a retrofit option. Parallel, we are also aggressively marketing our retrofit package autothrottle to government entities and our portfolio of FPOs. We have already delivered production of Autothrottle for Textron, which are included in the third quarter revenues. Simulators for the production King Air aircraft are currently being upgraded with our autothrottle, and they will be training King Air pilots within a couple of months. First, we continue to market our autothrottle to Textron and other OEMs beyond twin turboprop aircraft as we see applicability of some of its safety enhancements to twin jets.
We are in discussion with the OEMs to include our Front Sense autothrottle in several other production aircraft. We believe Textron's recent public announcement will attract the attention of other general aviation aircraft manufacturers. And as Jeff mentioned, transform process from a nice to have to a need to have as potentially life saving standard equipment on their fleet. Now quickly reviewing our ongoing programs. The PC-twenty four program remains on track to deliver approximately 50 Pilatus aircraft this year.
As with all our long term production contracts, we are specified for installation of on all of the PC-twenty four's Polaris manufacturers, which is already over 100. These are generally only a quarter or two of deliveries carried in our backlog, and therefore, only a fraction of OEM delivery potential is visible through that channel. We believe the PC-twenty four program represents a long term opportunity and now a similar contract with Textron to significantly add to that potential. In the commercial transport market, air cargo delivery services keep buying Boeing seven fifty seven and Boeing seven sixty seven planes and converting them. As part of their conversion, we are seeing steady demand for our flat panel displays.
As noted, we finished up development work for the F5 air data computer this past quarter and we will start production deliveries for the U. S. Navy fleet retrofit this quarter. With this contract successfully completed, we are now turning our attention to foreign militaries, which also fly the F5 and could be a large new market for this versatile product. Our KC-forty six program is also a production contract.
It continues to make a steady contribution to our top and bottom line. The orders in the third quarter were EUR 2,700,000.0 and backlog was EUR 6,500,000.0 at quarter end. Well mentioned that our travel and trade show expense was down this year, so we have had fewer opportunities to personally meet with our new prospects. EFA is on the work from home orders, which is added complexity we are managing. Despite these conditions, the FAA personnel have been very supporting our efforts by diligently reviewing our submittal and timely issuance of certifications such as the most recent certification for the production King Air.
In aggregate, we don't believe the pandemic will have a material impact on our business and are excited about the prospects of our portfolio of products. Let me turn the call back to Jeff for some closing remarks.
Speaker 1
Thank you, Sharon. As pleased as I am with the performance for this quarter and the past couple of quarters, we must be very diligent that we keep the pursuit up and our nose to the grindstone as they say to make sure that we realize the opportunities that have been presented to us. This will require a vigilance in our growth requirements of personnel and investments in technology. We're pleased that we performed as well as we did in the middle of the COVID-nineteen pandemic. People in our plant and the things that we did to the plant created a work environment which essentially had zero impact of the from from the pandemic.
I'm very proud of the people in this company that made it happen, and I'm pleased that our work changing the environment that they worked in. So I I I and focus remains strengthening our organization, opening those new relationships that have been provided to us with some of this technology and further growth in our portfolio of price for performance products. Thank you for your attention today. Please, operator, open us up for discussions.
Speaker 0
We will now begin the question and answer session. The first question is from the line of David Campbell with Thompson Davis and Company. Congratulations
Speaker 4
on a good quarter. You actually got to my forecast revenues, and your profits were better than my forecast. Thanks to G and A being less than expected. Over the long term, it seems to me that the biggest contribution will come from aircraft production that compete with the King Air. I mean, the King Air has been around for about thirty years, I think.
I don't know how much how many new King Airs they'll be producing. So it seems like the biggest protection potential would be for competing aircraft that don't have that capability and for re re retrofit of existing King Airs. Can you give us any thoughts about how the company views the marketplace?
Speaker 1
Well, a couple of things. First of all, there's not a hell of a lot of twin engine airplanes coming out that are new. The King Air is a proven standard. And as we said, the large market is not so much ongoing production, although that's excellent business. There's 5,000 units out there and we can offer and these are valuable aircraft.
These aren't single engine Piper Cubs. So so so that they're well maintained. And, oh, by the way, people fly them around with their families in them. And then people who are interested in protecting their families and protecting the airplane will be interested in our autothrottle. And that's in part why Textron is promoting it through their retrofit centers.
I think the King Air is still a strong airplane. The new three sixty is a fast airplane. People are taking the many of the airplane, the King Airs, and putting bigger and faster engines on them as well. So the the the market opportunity is, in our opinion, is very large. And King Air is an ideal aircraft because it's a high value airplane that we provide real performance advantages and safety to the airplane itself and the flight crew as well.
Putting it in another airplane, single engine airplanes, we do that. We're finding that we're looking at not just GA but military aircraft, air transports, not only twin engine but multi engine airplanes. We can do exactly the same thing in a multi engine airplane. And the traditional approach to autothrottles is prohibitively expensive and basically makes it impossible to retrofit. Our system is capable of doing both of those.
So we think we have a very strong advantage.
Speaker 3
And I'll remind you, our
Speaker 1
market direction was always a very strong retrofit company because we believe that when business was bad, they stopped buying new airplanes and they fixed the old ones. And when business was good, they couldn't get the new airplanes fast enough, so they had to fix That the old formula worked out extremely well for us in the past. I believe that, that formula will continue to work for us. So I'm optimistic and very pleased. And honestly, I see a relationship with Textron and their enthusiastic active support by Textron.
And oh, by the way, the FAA who acknowledged that it as they said to me, you we lose almost a 100 people, a 100 lives a year, and what you're doing here is gonna save lives. I think that's a good endorsement.
Speaker 4
Alright. Did you have any did you have any King Air retrofit revenues in the quarter?
Speaker 3
We're beginning to actively market. Well, we
Speaker 1
didn't have an FCC until about three weeks ago. So we're doing it now. But we see it as a strong look, this is a strong market opportunity. And in our existing PC-twelve, we're announcing the new generation autothrottle for the PC-twelve that offers everything their new airplane does and many more with with a whole bunch of patented features that provides the the the operators real safety and system awareness.
Speaker 4
But there was King Air revenues in the in the quarter. Right?
Speaker 1
Yeah. We shipped Yeah. Not revenue. We shipped out thirteen
Speaker 2
Thirteen units.
Speaker 1
13 ship 13 ship sets of of production equipment. Kinda similar to it.
Speaker 4
And Textron's being now more aggressively marketing the retrofit than they were three or four months ago?
Speaker 1
Well, they didn't do it at all three or four months ago for two reasons. First of all, they wanted to make sure that they announced their new airplane, which just came out two days ago with an autothrottle, and they didn't wanna undermine that announcement. Secondly, we hadn't finished the certification of the units and delivered the production units yet. So they were preparing. This is a big deal, preparing they have these service centers, which are huge.
Each one is huge. I think the one in Tampa has about eight hangars, enormous operation. They have to get that staffed up and trained and start getting the equipment available before they do an announcement. They don't want make an announcement and then say, Oh, well, we don't have any units to give you. So it's starting to come up.
And remember the other thing that's compounded it is the COVID-nineteen. They were shut down in the plant and at the service centers. Nobody was bringing their airplanes in because of the epidemic, the pandemic. So all of that had a negative effect, but we're seeing that clearing out and we're frankly very optimistic.
Speaker 4
Yes. It sounds like you'll get some good new business in the fourth quarter in your September, if I'm reading that right. That's what it sounds like to me.
Speaker 1
Immediate retrofit opportunities. About $300,000,000 worth of opportunities.
Speaker 4
Right.
Speaker 1
So I mean, we have the teams out. We're hiring a guy in Wichita, opening an office of that in the center of The United States to promote this and by the way support Textron. So we're delighted. Textron has done a hell of a good job in implementing and putting it on their airplane. They did it in remarkable with a remarkable speed and support.
We couldn't be more delighted as we are with the FAA who has acknowledged that this is a very valuable thing for safety and they want to get it implemented as quickly as possible safely.
Speaker 4
Raul, I have one last question. Raul, what about the taxes? When will you begin to accrue taxes for your income?
Speaker 2
Well, we're right at the tipping point. So it and we have credit, unused credit. So I would say this year, it'll be something small like this year. But probably going into the next year, I will probably realize a little larger tax expense. So we do have tax credits, things like that.
You can use 5% against that.
Speaker 1
So I would say next year will answer.
Speaker 4
What about the fourth quarter? Do you expect some tax accruals in the fourth quarter?
Speaker 2
I think if it is, it will be small to this. It depends we're right there at the tipping point with our NOLs and such. So I'm anticipating it will if it's if we do, it will be small.
Speaker 4
Okay. Okay. Well, that's it for me. Thanks again for having they're doing so just a great job.
Speaker 1
Anyway, thanks again for your support. You've been you've been great. Although I will tell you, I almost sold all my stock from your last report, and I Well Take care of yourself.
Speaker 3
Good to talk to you.
Speaker 4
Thank you.
Speaker 0
The next question is from the line of George Marimo with Pareto Ventures. Please go ahead.
Speaker 5
Good morning. Thanks for taking my call.
Speaker 1
Good morning. I had
Speaker 6
a question regarding Textron. Are you doing for the new production part, are you just doing the 360s or are you also doing their new production of other platforms like the 200s and
Speaker 1
Their intention is to do all of them. They're doing one at a time. You can understand when they bring this on to the production line, it's a major job and it was even bigger than we saw. But they're trying to get this done in a matter of months where it's usually the lead time's usually a year and a half or more. So they're gonna bring up the
That was the important one that's their latest and greatest airplane. And by the way, if you look at the announcement, the the the first announcement is the ISNS Autothrottle for the three sixty. Then the interior and other things came because it's a significant improvement. It's worthwhile looking at that YouTube as well from the chief test pilot. I would tell you that the intention is to put it in all the aircraft.
That's what they told us, but they it takes time to to get that done.
Speaker 6
Well, for what it's worth, if you look at the company's website on their brochures, your product is already pictured on the C9s and the 200 series.
Speaker 1
Well, that's wonderful.
Speaker 6
So they obviously plan to do it pretty quickly apparently.
Speaker 1
I haven't I mean, I've been in the business longer than I want to admit, but Textron has showed grit and drive that is incredibly refreshing and totally atypical. They've done a hell of a job.
Speaker 6
They really
Speaker 1
have. Didn't just give us an order, but they really attacked us in a very incredibly professional and aggressive way, one that's not common in many large corporations.
Speaker 6
So when you last quarter sort of sized up the opportunity from Textron, were you just talking about the 300 series or are there total platforms of C9 and Frankly, 200s or
Speaker 1
we looked the largest opportunity, and I think even Textron acknowledges it as well, is this huge installed base of aircraft and the retrofit opportunities for those aircraft. I may remind you that the company was built on retrofits. We did $150,000,000 on the KC-one 135 program. We did RBSM for over 60% of the world market. Those were all retrofit.
One of the wonderful thing about retrofit is the volume comes in and grows and you don't have the slow staging. So anyway, we look at it now as a joint effort with Textron, and Textron is aggressively marketing it as a as an install in their existing fleets.
Speaker 6
Right. On the OEM new production, were you sort of factoring in their other platforms yet when you started talking about last quarter, or were you just talking about the March that No.
Speaker 1
We didn't factor them at all. Okay.
Speaker 6
And then on the retrofit market for the next year with Textron, do you have any feeling on the cadence of that?
Speaker 1
We're hoping it's gonna be an abrupt supply. But it's always a surprise in the retrofit market. But we see it in a strong way. We're talking to the military on a variety of multiengine airplanes and they see some acute safety issues that they have that can only be addressed with our autothrottle. We're delighted we found that.
I mean, we're talking about safety issues that that destroy the airplane and kill the crews.
Speaker 6
Are are are you in more advanced stages of talks with other OEMs and military at this point? Or is it sort of first inning level?
Speaker 1
Well, I I prefer not to comment as they say, but you can presume that that's realistic. The market's there and we're we have a number of demonstrations that have been very successful.
Speaker 6
Yes, it's great to hear. And then I noticed on your website, you're doing some pretty aggressive hiring, it looks like. And your new orders have been a little bit lumpy. I'm assuming this previous quarter was lumpy due to coronavirus. But have the orders picked up with all this hiring?
Speaker 1
We haven't done a lot of hiring. We've done a lot of of advertising for people. And you always do that because you usually pick one out of 20 or 30 people. So you gotta bring a
Speaker 3
lot of them in. So
Speaker 1
we we we start we start an ad campaign for hiring often six to twelve months in advance of the of of the specific need. You gotta do it. It takes time to go through the process and to get people that, you know, that are are a good fit for the company.
Speaker 6
Okay. Okay.
Speaker 1
And we don't hire people that we don't need because I find it personally insulting seeing them reading their screens and not working. We all take a real and focus on, and they're doing a great job. The team is doing a really good job, especially some of our young new engineers. They've got piss and vinegar. They're good people.
Speaker 6
So it sounds like you believe that after it ramps up, the Textron retrofit kind of annual business could be more than the OEM business
Speaker 3
for for new production.
Speaker 1
Oh, yes. And I think Textron believes that too.
Speaker 6
Okay. That's it.
Speaker 1
Look, new production is you don't double new production in a hurry. You're going to run new production at roughly the rates of the historical rates. Some variations up 20% or 30%, but not 200 or 300%. When you have a market potential market of 5,000 of just one kind of aircraft And by the way, they're all they're operating. Their aircrafts are operating, and they're and they're significant investments.
So it's not like they go into the market where the the retrofit cost is a measurable, probable portion of the cost of the of the airframe itself. These are these are traditionally far more expensive airplanes.
Speaker 6
And we quarter
Speaker 0
nineteen.
Speaker 1
We
Speaker 0
very vastly lower production of numbers or somewhat
Speaker 6
similar? Strong Do you have any idea?
Speaker 1
Well, the three sixty just got released. So we'll see how
Speaker 7
it's They're they're they're
Speaker 6
old March or the March series.
Speaker 1
The March and and the February. The March and the two two hundred, we think are going up. What we're finding is the military is using them a lot.
Speaker 6
Oh, okay.
Speaker 1
They use them they use them both for reconnaissance and they use them for transports. Okay.
Speaker 6
I imagine for a military, you'd since we like, a very unique product, it'd be a sole source contract or or if he did?
Speaker 3
What was that?
Speaker 1
It would be sole source.
Speaker 6
I imagine on a military contract, because your product's unique, it'd be a sole source
Speaker 1
Well, we are a sole source, but it's unique enough that it's going to be covered by about six patents. So and we tend to enforce it and our batting average of enforcing our patents is we've bat 1,000.
Speaker 6
Yes. Okay. Very exciting, Jeff. Thank you.
Speaker 3
Thank you.
Speaker 0
The next question is from the line of Joseph Leifler with Retail. Please go ahead.
Speaker 1
Good
Speaker 5
morning. Congratulations on great quarter. And you sound very, very excited, and I'm very excited for you for the future. I would like to know if you can help me out a little bit quantitatively on what kind of sales ramp you would expect for this quarter and for next fiscal year? And what your internal projections might be for quarterly sales going forward?
Thank you.
Speaker 1
We obviously make a habit of not predicting that because every time we do it, we either end up with a coronavirus or as in Boeing, how about the the 200 airplanes that are sitting on the ground? So we're we're we're because a good portion of our business is retrofit on both military, commercial, and and general aviation. We don't ever predict the next quarter other than I can tell you that internal estimates, we don't we we don't want it to go down if we get it all up. So we try to keep going up and then you can only that's the only way we keep our shareholders happy. So we're mindful of that.
Our long term estimates are in that end. If you take a look at the fact that we have not sold one retrofit system yet and the market opportunity is $250,000,000 between those two, zero and three hundred is a big number. And I'm sure that we if we do our job, we'll realize our fair share of it.
Speaker 5
Well, you did mention that you expect the future to be sales to be multiples of your current backlog. And perhaps you could give me some color on what that means?
Speaker 1
Well, you know what our current backlog is, we can tell you that. Our market opportunity, I can only tell you what we believe our market opportunity is. And you have to rely on our judgment or somebody else's judgment on whether it's valid. The fact is that we think we have a unique product that does not exist as there's no competitor out there now. And we're very pleased with it.
And we want to exploit opportunities in other areas. As it's gotten acceptance by one of the largest OEMs in the world from general aviation, we expect that retrofit market is gonna be achievable. I'll tell you what, you can get a better perspective probably in one to two quarters, sometime early next year, we should have an idea of how we're doing penetrating the retrofit market. In the meantime, I intend to stay profitable and keep the business together, which is what I've tried to do since I started founding the company.
Speaker 5
Okay, great. Thank you very much and good luck.
Speaker 1
Thanks for your interest.
Speaker 0
The next question comes from the line of Rick Teller with who's a private investor. Please go ahead.
Speaker 8
Yes, good morning. I have a couple of, I guess, accounting questions. Relates to the fact that I think last quarter new orders were listed as, I forget what, dollars 7,000,000 or $8,000,000 They were pretty high. This, the third quarter, they were listed as $2,700,000 which was quite a drop. But I know you say, and this is standard language in I think all your releases, that backlog excludes potential future sole source production orders and you name some of them and you've added Textron King Air to that.
So does that mean that some of the new orders in your second fiscal quarter, the March, included orders for the King Air three sixty and and the 2,700,000 therefore, they'll no longer be counted in new orders or in backlog. Is that correct?
Speaker 2
That is correct.
Speaker 8
Okay.
Speaker 2
Yes, we received those orders in second quarter, and we did not receive in the third quarter any new orders. But it comes and goes. That's the point of it's intermittent. It's not like you get a two year run rate kind of order. It doesn't work that way.
You get as Sharon was talking about, you get it a quarter two quarters in advance maybe or so. It all depends up to them.
Speaker 8
Right, okay. And then also I'm curious how the accounting will be handled on the retrofit business because I could see if let's say now Textron is training all their service centers, hey, we're gonna bring in a lot of customers who might want a retrofit for this. So if they get a customer says I'd like this retrofitted on my older King Air, Will the service centers have already ordered product from us, or do they wait until they have a customer who says they want it and then they order from us?
Speaker 3
Think So far, they have we have not delivered to them anything for the Retrofit. For the retrofits. But we anticipate that we'll do that.
Speaker 1
They've indicated that's exactly what they have to do, and they tell us that they're gonna have to stock it. But they're we've delivered, as we said, a a number of units for the production. We're gonna have to obviously deliver more when they expand it. We got in the March and and and put it in the February or February. So they did I understand you have a I'm sorry.
What send what? What you mentioned, you said you said my care. I meant Oh, no. No. No.
No. I don't have a care. Like like the royal wing. I understand. I understand.
At any rate, that's the they will start the the it's it's takes a fair amount of time to get it up and going, if you can imagine that. So I would say it's gonna be several months before they start stocking the retrofit warrants. People are coming and say, I'm bringing my airplane in. I want I would like to put the autothrottle in. They'll probably try to get us to do a quick delivery or take their production hardware, and and we will support that.
Speaker 8
Okay. But what I'm getting at is somewhere let's just say it's a year from now and they've got some level of steady retrofit business. Would these service centers be keeping some inventory on hand at that point?
Speaker 1
I'm sure they would. I I I did a sort of a a simple estimate, and they have 10 service centers in The United States, and it takes probably to install one of these about a week or less to install an autothrottle. So and and the service centers probably have I don't know. They they have several centers have hundreds of people. But at any rate, if they did one a one a month, you would do you would do a 120 retrofits a year, and that's only at one a month.
Speaker 8
Right. Okay. So that that presumably, they would have some inventory. And then I just want to yeah. And and does do we would from an accounting point of view, does that get counted in our sales when we ship it to the service center or is it only when they install it in
Speaker 1
an No. No. It's when we ship it to the to Gotcha. The And now Okay. And if they move it to the service center, that's their issue.
But we show the revenue as soon as we ship out the door.
Speaker 8
Ah, okay. Good. I was just trying to figure out how that was gonna be handled. And then a question that has nothing to do with accounting. I'm curious whether there's where we are, if at all, in trying to get the aircraft insurance companies to reflect the safety benefits of the autothrottle in the insurance premiums that they charge King Air owners.
Because I understand that's a pretty hefty sum even a fairly small discount on insurance would go a big way to paying for the autothrottle.
Speaker 1
Yep. Yes. And just like in the fire insurance in your house, if you put in fire alarms or an alarm system, it may not be an overwhelming statement, but you you recognize you wanna do it now because over a ten year period, you pay for the damn thing. So yeah. You're you're absolutely right.
And happily, Dorel has contacted the insurance company and the underwriters, and we're having a meeting with them within A couple of weeks now. Well, I've been asking them that question, as you might guess, for the last couple of weeks. So I assure you that he understands the program.
Speaker 8
Great. Great. Terrific. Okay. Well, thank you so much.
Speaker 1
Thank you for your interest.
Speaker 0
The next question is from the line of Michael Friedrich, who is also a private investor. Please go ahead.
Speaker 9
Good morning, everyone. I I had a question, a sort of a follow-up question to an earlier question in the call. I think just going back to last quarter's notes, I think, Jeff, you had mentioned you thought that that as early as next year that the the OEM revenue may be as much as I think it was the prior year prior year sales. So without just, like, ballparking it, that's somewhere in the 15,000,000, 18,000,000 range. When you were saying that, Jeff, I I just wanna make sure I understand what you were saying.
You were only talking about the existing three OEM deals, not any additional OEM business you might be getting from Textron once the other King Air productions are are approved. Is is that correct?
Speaker 1
Two things. First of all, I'm not sure I would like to believe that our OEM demand would be $15,000,000 I think we have, if we look into two, it would it could be it it could be it could be double digits. It could be 10 to 12 kind of million next year for sure. We think there's gonna be the the the larger influx of business is gonna be in the retrofit.
Speaker 3
We look at the we look at the
Speaker 1
production aircraft as good steady business. We would expect it if we do the entire King Air production line and their and the pandemic sort of lightens up and we get people back, you know, moving their aircraft. Although I among other things, I think I'm optimistic that people will be flying their airplanes more often because it's a lot more comfortable being in your own airplane and not worrying about who's sitting next to you. So there's gonna be a desire to fly private aircraft like the Canadair, by the way. At any rate, the if they do do that, if they if if we just get the full level of production, it could be, you know, upwards to a 100 chipsets a year in OEM.
And if you're talking about retrofit, maybe that's double.
Speaker 9
Okay. Okay. Remember, this
Speaker 1
is very early in the game. We just certainly just got it. We've just released it on the first production aircraft, and we've got some work to do to get it on the other aircraft. You know, the the the the the equipment is ready to go on it, but they still have to feed their production line. So it takes up there's there's multiple months of delay there.
Speaker 9
Okay. Okay. And just over to the the PC 24 production, I know we're up to 50 shipsets a year. I I think longer term, if you took a look at their their total goals for that for that plane, that number should keep going up. Do you have any any any idea, you know, what what the maximum I I think if you did the numbers, it could be as many at some point as, like, a 100 a year.
Is that what you guys are seeing as well, or is that number too high?
Speaker 1
No. That that that's possible. It's a remarkable airplane. It could go up to that level. Remember, it's a it's a replacement for some turbo some turboprops.
And it's okay. It's significantly more expensive, but it's a very high performer. They built an entire huge expansion to their facility. They virtually doubled the size of their facility manufacturing facility in Stauns, Switzerland. We've been there obviously a number of times.
And it's a brand new high volume facility. So they're but they're cautious. The company is sensibly cautious and moving smoothly and slowly. They don't want hiccups. They don't want to jump too quickly.
And they are doing it deliberately and doing a hell of a good job. Remember, did 40 and then now 50. And I would expect them to go creep up to towards a 100. It's a great airport. Great airport.
Speaker 9
Yeah. Yeah. It sure it sure is. It sure is. Okay.
And then
Speaker 1
a one here. Great airplane too. We got one. We love it. I love it anyway anyway.
Speaker 9
Yeah. Jeff, on the on the on the multiprop engines, I know right now you have really no competition on that, but I I I'm I'm sure you fall follow the idea that, like, Pilates has developed their own autothrottle for their new production t
Speaker 1
t 12. It's let's let's be clear. It's not an autothrottle. We have an alternative. And by the way, it's it's they didn't develop it.
Pratt and Whitney supplies it with two settings. That's cruise and climb. Our autothrottle does a great deal more. And, oh, by the way, we're announcing a series of patents of stuff that never existed before. We focused toward that.
And, oh, by
Speaker 3
the way, that that autothrottle,
Speaker 1
as you would refer to it, is not retrofitted into the 700 airplanes.
Speaker 9
Beautiful. Beautiful. I I like I like
Speaker 1
how you do is you teach the pilot how to do it. Or you get our
Speaker 9
I was gonna say, I like how I like how you pounced on me there. I like I like the confidence.
Speaker 4
So that's that's that's great.
Speaker 1
I I mean, we we look. Pilatus, a wonderful company. And, by the way, I bought a Pilatus airplane three weeks before I took the company public. So nobody like you would say you got rich and bought an airplane. So but this has an incredibly good airplane, and and and and they we're we're very fortunate to have them as a customer.
It's a great No. Yeah. I got it. I know if I realize that.
Speaker 9
Yeah. Yeah. Okay. One more thing, and then I'll let you go. So, yeah, I think you guys posted an article about how all of the CRT instrumentation is being discontinued on the on the on the 07/03 sevens and six sevens.
Can you give me an idea of the remaining opportunity? And I know this is more of a worldwide question in the flat panel display area and the and the cockpit renovation area that you guys are in. And are you still working with Lufthansa on that?
Speaker 3
We're we're not we're not working with Lufthansa much now. Okay. What we're doing is we're finding a more direct more direct sales to the carriers. It's become more successful for us. There's remaining about one thousand five seven six sevens that still remain that need to be retrofitted.
Obviously, there's a huge number of 737s that our system is applicable to.
Speaker 1
We're
Speaker 3
seeing constantly, we're delivering every quarter. We're delivering equipment for those platforms.
Speaker 1
By the way, any competition we have is significantly more expensive. And as the value of the airplane declines, which it does with age, people don't want to spend a lot of money in an old airplane. And we can do we offer two huge advantages. Our retrofit system, besides having an incredible record of reliability and performance, also can be installed in a matter of less than a week, four or five days. The competitor takes a month.
It costs somewhere between 50,000 and $75,000 a day to put a transport aircraft on the ground. So it gives you a compelling reason why we should we actually should improve our competitive position as the fleet ages.
Speaker 9
Great. Great. Alright, guys. Well, a lot of irons in the fire. Hopefully, we had to keep adding more, and congratulations.
Speaker 1
Thank you very much. We got our work cut out for us.
Speaker 9
That's it. Take care.
Speaker 1
Thanks.
Speaker 0
The next question is from the line of Craig Rose with Acxiom. Please go ahead.
Speaker 10
Hello guys. Thanks for all the color today. Regarding understanding that the biggest market for you right now is the retrofit of the King Air. Sharon mentioned other opportunities. Could you name the next highest value target for retrofit?
And he also specifically said twin engine jets. Does that mean Textron has an exclusive on this application for turboprops?
Speaker 1
No. They don't have an exclusive for turboprops. And we're finding that we can take we did the Eclipse and did an autothrottle on the Eclipse almost five years ago. So and by the way, now selling software upgrades to that equipment for Eclipse. So we know how to do a turbo prop a turbo fan engine.
And we have had people that have contacted us and expressed an interest in putting them both in their production and potentially retrofit, but primarily production. So we see a market in that area. We'd rather not identify it as you can sort of expect. But we also see it in other multiengine aircraft and traditionally turboprops. There are tens of thousands of them in operation right now that would benefit enormously from our autofraud.
As an example, we're able to do something and have patents pending on it now for lawyer mode where we actually measure the efficiency of the air airplane in real time and adjust the speed of the airplane to to maximize its endurance. See, we're the only people that have ever done that. And it works. So people that do reconnaissance and and surveillance are very interested in this system.
Speaker 10
Okay. Additional question or two. You mentioned the military. I I assume the military is one of the largest fleet operators when you add up all the branches of the military of the King Air. And so you've done
Speaker 1
I honestly don't know how big it is, but I know it's in hundreds of them. There's various versions of them. And everybody has a King Air somewhere. So everybody we've already talked to people like the DEA and those kinds of people and we're progressing with opportunities there. So they're very interested in, as an example, DEA flies around lawyering looking for bad guys.
Well, this thing takes care of that and keeps the crew safe. So it really pays off. So, yes, it's there. I would prefer not to identify the specifics. I would relate it.
But I'm optimistic that we're gonna get a significant amount of military business. And oh, by the way, they pay really quick.
Speaker 10
That's great. So I'll just stress the insurance industry awareness as I think your previous question Rick mentioned is probably really, really important. The lifeguard name I think is great. And so, you know, I'd just like to compliment you on that. The new air cargo company that everyone's heard of now, Amazon, what does that mean to you guys?
And and and what has it meant with your relationship with FedEx?
Speaker 1
Well, just so you know, Amazon is operating a fleet by leasing it from two big operators. We supply the 40 of those aircraft are operated with our equipment. So Amazon is is operating it themselves. Where they go with that, and there's a lot of rumors on what's going on, but we would expect to be around for the operation. Because as I said, the downtime is fractional.
It's a small downtime. We actually were able to modify an airplane in twenty four hours once. That's never been done ever in the history of the industry. So we have that as an advantage and its actual cost. And the performance is proven.
We get reliability numbers that are outstanding. There are hundreds of thousands of hours of reliability. So we expect and hope that we'll get that. We're going to be diligent to try to bring it in. But that would be a strong opportunity.
Just to give you a little background, I can remember when I delivered equipment to FedEx when they had seven airplanes. They have 700 now. I I remember how it grew.
Speaker 10
Great. That's all, guys. Thank you.
Speaker 1
Thanks, Greg. Good talking to you.
Speaker 0
The next question is from the line of Marcel Herbes with Herbes Capital. Please go ahead.
Speaker 11
Good morning and thanks for taking my question. Congratulations on a strong quarter and all the progress you're making on the auto throttle. I wanted to follow-up on the orders, which have slowed down a bit for obvious reasons. How were your orders trending throughout the quarter and into July? Do you see a pickup at all?
Speaker 1
Well, as you can imagine, it's lumpy. If you get an order or anything, it's a big bump. Right now, it's about what we expected, but, you know, we're we're diligent. Clearly, we we are optimistic that we have the right product and there's a right market. We're and we're all and I'm committed to making sure that we continue to make a profit.
So whatever that takes, we do we you know, that's what we try to do all the time.
Speaker 11
Right. And I'm also trying to kind of get a sense of how many King Air's three sixties might be produced every year. I mean, if I packed this at 50 kins a year, would that be too aggressive or too too miss an estimate?
Speaker 1
Well, $3.60 is for upgrading obviously a large part of the fleet. I don't know, but I would guess initially 10 and then 20 and then 30 kind of thing. The 300 is about 50% of their production right now. Ultimately, would expect the three sixty to take over what is now the 300 series production.
Speaker 11
I see. Do you know how many
Speaker 1
Remember, we're not focused on only the three sixty. They've already made a commitment to do it on all the other airplanes. That's why they're doing the retrofit. But where they're doing one airplane at a time, It's a monumental task to get it through the system. So once they got the three sixty done, which was a critical one, the other ones should be easier.
They should follow in line.
Speaker 11
Right. If if you look at at those models that they are committing to eventually to integrating you, how many airplanes do they produce here?
Speaker 1
It varies. It was I I I'm saying that they've already talked about retrofitting the c 90, so they're gonna put it on the 90 and the on the two fifty and the 200. I mean, ultimately, it's whatever their total production is. Their if their thought is that they're gonna their committed position is that they're gonna put this autothrottle on a 100% of the King Airs. So how how quickly that happens, I don't know.
Speaker 11
Right. Right. So if you look back at '17, 18 or '19, what how many King Airs do they produce in a typical year?
Speaker 1
They might they may it depends on the economy. So we said that the retrofit is probably going to be a lot more.
Speaker 7
Right. Okay, perfect.
Speaker 5
Well, thanks
Speaker 11
so much for taking my question.
Speaker 1
The King Air is a great airplane. We expect military programs. Frankly, we're teaming with Textron we speak on a proposal to the military.
Speaker 11
I mean That's good to hear.
Speaker 1
Better. So that's a it's moving along very quickly. We're getting and this is and this is visibility at their top very top management. And they're very responsive. Very responsive.
Speaker 11
Great. Thank you.
Speaker 1
Thank you.
Speaker 0
The next questioner is Derek Bubble with ABO Downing. Please go ahead.
Speaker 7
Hi gentlemen. Congratulations on an amazing quarter and just a really exciting market opportunity Long time listener, first time caller here. So thanks for taking my questions. For having me in there
Speaker 1
as long as you did.
Speaker 7
Pleasure. So you talked about $300,000,000 worth of immediate retrofit opportunities for the King Air. Have you looked pardon?
Speaker 1
The potential market, yes.
Speaker 7
Got you. So have you looked at the total addressable market? Because you mentioned a lot of other markets, including the military markets. Have you looked at what the total addressable market is and any numbers around that?
Speaker 1
I'm always reluctant to do that and I'll tell you why. I would be delighted if I could get a substantial portion of the King Air market. We would almost choke on it. So we're aware that the other market is probably four or five, even six times the size. But whether or not we penetrate it and go after it and whether people wanna keep the airplanes, all kinds of ifs.
So to be prudent in our judgment, we restrict our our our estimates, if you can appreciate that.
Speaker 7
Yeah. Definitely appreciate that. I'm not I'm not promising and overblaming.
Speaker 1
But to some degree, it's opportune opportunistic. If somebody comes along and says, gee, I got an airplane. There's 300 of them
Speaker 3
out there that need us,
Speaker 1
and we don't need that, this, know, we may look at applying our autothrottle system to it. It's reasonably scalable and quite adaptable. It's we've been very lucky with it. It's been very good.
Speaker 7
Yes, absolutely impressive and exciting. What a great spot to be in from a strategic standpoint. I'm curious, have you thought given the size of the market opportunity, have you thought about partnering up with a strategic partner to make sure that you can meet this huge potential unmet need?
Speaker 1
Honestly, take a look at, dealing with Textron and potentially another OEM that has another airplane is probably the best way to do it rather than another manufacturer.
Speaker 3
The other
Speaker 1
manufacturers, I mean, I don't I I don't see that other than if they wanna sell a cockpit system and need an autothrottle,
Speaker 3
they may come to us for the autothrottle. But
Speaker 1
I think aiming with Dextron is formidable. It's really to be blunt with you, it's as it's as high as I could have had my expectations. I'm delighted that they're working as hard and as they are. So it's terrific. I'll be happy to just support them for the near future.
Speaker 7
Excellent. Excellent. And then on the last call, you talked a little bit about how you were seeing a shift from first class and business class commercial over to private aviation. I'm curious, are you still have you still been seeing that trend through year to date? And are there any numbers that you could put around that?
Speaker 1
Take look at a company called Wheels Up. They operate King Airs. They got 100 airplanes now all over the country. Hundreds. That's a lot.
And Planesense has PC 12, and they're buying them like they're coming out of style. So more and more people are looking at them and saying, look. If I have to if I have to spend $7,000 to go round trip to Virginia, California, I don't need to have to run spend a hand two and a half hours going through a a airline terminal. If I could get in, go over in the airplane and wait for me, and I'll get on it and relax in the airplane. So there's increasingly, there's reason to believe that it's a reasonable solution.
I had some friends that were in Palm Beach three months ago, and they hadn't come up. And they were they were anxious about getting on a commercial airplane with the with the corporate pandemic. And they they got eight people all in the from the same condominium complex and also moved in the Philadelphia area to pull together in a matter of two or three days, and they chartered a a a an eight passenger turbofan check to take them up. And it ended up costing them roughly the same as a first class ticket, but a hell of a lot more convenient.
Speaker 9
That's great color, and and really appreciate it. I
Speaker 7
so I I work for a a large institutional firm. And for the purposes of this call, I'm a private investor because it's just the opportunity is just too small from than what we would have as a minimum investment from an institutional standpoint. But from an institutional standpoint, what I would recommend is that you get some sell side coverage, maybe get an investor relations campaign going, get your calls out on FactSet, maybe do some additional conference calls so you can get some more traction in the institutional market. And then last but not least, if you could get an active options tree, you know, calls and puts traded on your stock, that would drive some more additional volume and then, you know, give current investors some some additional liquidity. And then that would probably all those three things together would probably drive a significant increase in your share price and be good for shareholders and for yourselves.
Sorry not to lecture, but just wanted to give you some suggestions in a public forum.
Speaker 1
I appreciate the advice. We are or at least I am reluctant to oversell the company. We've had some wonderful times. We've actually had times where we generated 18% net after tax sorry, 30% net after tax profit. So that was wonderful.
But that also is vulnerable if you can't keep supporting behind it. So I'm a bit bit a bit a bit more conservative in my estimates. When I've when I've got a well established retrofit business, then I'll be talking to the to the street again. We had some pretty good luck as you probably know over the past years. But properly there, you don't wanna oversell the business.
You don't want to promise things that you can't deliver, and I'm trying to be a little circumspect.
Speaker 7
Fair enough. Well, you've done a fantastic job running the company, Jeff, and fantastic job with this product. I have a friend who's a commercial airline pilot. He's incredibly excited about the autothrottle. He thinks it's one of the greatest developments in the history of aviation.
So wonderful job. Really excited to be on board here. Thanks for everything you've done here.
Speaker 1
Thanks for your kind words, and I promise we'll keep trying to build But I actually really wanna deliver on my promises, and and and it's a it's it's a challenge. I had a director who was head of all of engineering for Boeing, and he said his boss told him, integrity was doing what you said
Speaker 2
you would do when you said
Speaker 1
you would do it. I listen. I think about that every day.
Speaker 7
We need more people like you in our society, Jeff.
Speaker 1
Not sure of that. That's nice you're going say. You have a good day.
Speaker 8
Thanks. You too.
Speaker 1
We've got Craig Rose is back.
Speaker 0
We have one further question from the line of Craig Rose with Acxiom. Please go ahead.
Speaker 10
One follow-up question. You mentioned Wheels Up and the size of their fleet. What are the odds that the that you could get the FAA to mandate this safety feature on all charter aircraft similar to what they did in the seventies with terrain awareness on planes and did not do with helicopters, and we have recently seen, you know, what can happen there. So what are the odds of that?
Speaker 1
I think we gotta prove this. And I think it's notable. We're very proud of Textron's selection of us. Trust me. I I was there when we did the first presentation.
It was a difficult it was a difficult implementation. They were very it unique was situation where we had developed a product and they're not used to that. They're used to having people develop a product for them. We developed it for ourselves. They were extremely supportive and I'm gives me confidence that there is a strong safety market.
And I think the FAA knows it for sure. And if the NTSP learns to acknowledge it, I think it could be look. It's very straightforward. Addison, Texas, the guy if you get an airplane if you have a pilot, well, how the airplane gets too slow with an engine out, it's catastrophic. And, sadly, it's a terrible situation.
And I guess that's true with any airplane, but but, essentially, this, we we mitigate that. We do it with that's something that's never been done before. And I assume that people want and by the way, there's a whole bunch of other things it does besides VMCA protection, underspeed protection, all kinds of things. So I'm hoping that the NTSB notices it. And if they do, they can they can put they can put pressure on the the appropriate authorities.
I don't think there's any reluctance to implement this. I can tell you that the FAA has been as supportive in the certification of this equipment, and it's taken, I don't almost six years as I've ever heard or seen in my career. I mean, they've done an they've done an extremely thorough but but did not drag their feet. They did a they did an admirable job. And so I I think it's a possibility.
I think there's there's a good possibility that that could happen. But we gotta, you know, we gotta pay our dues and and and get it in airplanes to show that that it it's a good, reliable it only has to save one person's life, and and that'll make all the difference.
Speaker 10
Great. Thank you.
Speaker 1
Good talking to you. Take care. That appears to be the the, the end of the discussion. We appreciate your interest in joining us today. We're signing off.
Have a good day. Good luck. Stay well.
Speaker 0
The conference has now concluded. Thank you for attending today's presentation.