Monday, 25 May 2009

Annual AMA Meeting: Opportunities & Challenges

AeroMechanical Services Ltd. (TSX:V-AMA)
Basic Shares: 82.5 million
Fully Diluted:88 million


A surprise speaker at AeroMechanical’s May 21st annual meeting summed up the company’s future prospects best.

Hugh Cleland, a co-founder and portfolio manager at Northern Rivers Funds – which owns about 10% of AMA stock – asked one question of the roughly 30 shareholders present:

“What airline wouldn’t look at the chance to save $100,000 to $200,000 per aircraft (in annual fuel bills) when they don’t have to spend significant capital?”

Mr. Cleland wasn’t on the roster to speak at the annual meeting.

But he’d arrived in Calgary the day before and wanted to tell investors how his faith in AMA had hit new heights after peppering AMA executives and AMA’s latest partner – Sierra Nevada Corporation, the U.S. private company with rumoured annual sales of $1 billion through sales of state-of-the-art avionics equipment to the military – about the near and far-term future of AMA.

Mr. Cleland’s question revolved around AMA’s fuel management initiative, which can save airlines roughly 3% of the fuel a typical jet aircraft burns every year.

When dealing with hundreds of aircraft in a typical large airline’s fleet, that 3% quickly soars into the multi millions of savings every year.

And all an airline needs to do to start the fuel-management program is lay out a relatively small sum for consulting and acquiring AMA’s technology – the afirs box , or bluebox as it is informally called.

The fuel management software and expertise that AMA offers is a “game changer” AMA President Richard Hayden told the annual meeting.

“This (fuel-management system) moves the sales prospect from a nice-to-have technology to a must have,” Mr. Hayden said.

However, here’s the irony:

At no time before in AeroMechanical’s history have the financials – recurring revenue, cash coming in the door and costs of sales – looked so good.

But the one dominant question on the minds of shareholders was how the company was going to bring in some extra cash to work on some interesting improvements to its technology without issuing more shares.

Investors heard more funding is needed to further develop and get regulatory approval for the next generation technology or bluebox that AMA has been working on for two years.

Some of the compelling reasons for building this next afirs box are two new standards being imposed on the airline industry by the European Economic Community (EEC).

First is the Emissions Trading Scheme that will soon tax airlines for all of an aircraft’s carbon emissions while flying in EEC airspace.

Second are a suite of requirements that automate the communication between an aircraft and air traffic control as well as other aircraft. The European rules are captured under a set of proposed regulations called Link 200+ and implementation requirements are only a couple of years away.

The corresponding activity in North America is called NextGen that has a different timetable but the same end result.

On the first issue, AMA’s bluebox and the fuel management system gives airline executives the ability to monitor each of their aircraft’s fuel burn in real time in an effort to trim fuel usage and thus minimize any taxes on that aircraft’s carbon emissions.

A constant electronic signal that identifies aircraft can also easily be built into an AMA bluebox. But it costs a lot to complete the research and development and garner international aviation regulatory approvals to put this next generation bluebox– formally called the afirs 228 – on an aircraft.

Neither AMA Chairman and CEO, Bill Tempany,or Mr. Hayden, told the annual meeting what the cash requirement is.

But both repeatedly said rather than dilute shares any further with a public financing, the focus is first and foremost on living within AMA’s budget and raising any extra funding by way of loan instruments and/or federal government grants.

AMA only has payable loans of $257 thousand as of the first quarter in 2009.

Mr. Cleland said he was especially encouraged on the financing front after spending a lot of time with some Sierra Nevada Corporation (SNC) executives.

Investors heard that SNC executives are spending about 30% of their time promoting AMA’s technology to the U.S. Air Force and other military concerns.

Cleland said that and the fact that funding negotiations are going on with SNC covers off one of four reasons why he is sticking with his AMA shareholdings.

“I’m either going down with this ship or taking off with it,” Mr. Cleland jokingly told investors. Mr. Cleland said he didn’t come to his conclusion to stick with AMA lightly. He told the annual meeting he asked AMA executives and AMA’s current and prospective clients a lot of probing questions before reaching his conclusion.

His listed three other reasons for gaining renewed confidence:

1. The appointment this year of Mr. Hayden, a former vice-president of Meggitt PLC, a multi-billion dollar, U.K.-based aviation firm, as AMA’s President;
2. The appointment of Jack Olcott, an aeronautical engineer and former head of the National Business Aviation Association as an active member of AMA’s Board of Directors;
3. The appointment of Matt Bradley, a former Canadian Air Force pilot and commercial pilot as AMA’s Vice President of Operations.

Mr. Cleland said the extraordinary skills of all three will be critical to bringing AMA to profitability.

The other topic investors repeatedly raised was China.

Mr. Hayden said while he doesn’t fully understand the politics of that vast and complex country, he is encouraged by the continuing interest Chinese aviation officials have in fulfilling AMA’s contract to put its blueboxes on board 515 aircraft there.

To date, only Shanghai Airlines has installed two blueboxes and Mr. Hayden said the airline is pleased with the technology’s performance.

“In my view, we are seeing enough legitimate activity (from China) to hang in there,” Mr. Hayden concluded.

Despite that assurance, another investor asked if it wasn’t time to stop spending any more money in China.

But Mr. Tempany said he, too, was encouraged by the steady progress that Michael Fang, AMA’s Vice President of China, is making there.

“I’m nowhere close to throwing the baby out with the bathwater,” Mr.Tempany said.

AMA also filed its first quarter results on SEDAR that highlights the accomplishments and challenges the company faces.

On the one hand, cash coming in the front door is steadily and dramatically rising, moving from $608 thousand in Q1/08 to stand at $2.8 million in Q1/09.

The all-important recurring revenue increased from $270 thousand in Q1/08 to $904 thousand in Q1/09.

All revenue, including recurring revenue, increased from $398 thousand in Q1/08 to $1.2 million in Q1/09.

Salaries and benefits dropped, not something you often see.

General and administration costs rose only slightly, research and development for the first quarter of ’09 was up sharply due to the next-generation bluebox but marketing costs for the quarter compared to last year’s quarter dropped by over one half.

The net loss also dropped sharply for the quarter. It stood at $1.2 million – nearly half of the $2 million net loss in the same quarter in 2008.

Unearned revenue – monies paid to AMA but not eligible under accounting rules to be brought into revenue yet – sharply increased in Q1/09 rising to $1.8 million from $812 thousand in the same quarter last year.

At the same time, though, working capital dropped to $934 thousand in Q1/09 from $1.3 million in Q1/08.

To view the full first quarter results please click here.