David Drewitz - IR, Creative Options Communications Clark Stewart - President and CEO Craig Stewart - President of Aerospace Group

Good morning, ladies and gentlemen. Today is Tuesday December 18 and welcome to the Butler National Corporation Second Quarter Fiscal 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Your call leaders for today's call are David Drewitz, Creative Options Communications; Clark Stewart, President and CEO; Craig Stewart, President of Aerospace Group. I'll now turn the call over to Mr. David Drewitz. Mr. Drewitz, you may begin.

Great. Thank you, and good morning. And happy holidays to everyone. Before Mr. Stewart begins, I would like to draw your attention to except for historical information contained herein, the statements in this conference call are forward-looking and made pursuant to the Safe Harbor's provision as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause Butler National’s actual results in future periods to differ materially from forecasted results. Those risks include among other things the loss of market share through competition or otherwise, the introduction of competing technologies by other companies, new governmental safety, health, and environmental regulations which could require Butler to make significant capital expenditures. The forward-looking statements included in this conference call are only made of -- the date of this call, and Butler National undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include but are not limited to factors described under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. So with that completed, I would like to turn the call over to Mr. Clark Stewart. Mr. Stewart, go ahead.

Thank you, Mr. Drewitz. Good morning ladies and gentlemen, we appreciate you taking your time to join us this morning. You should have a press release that was dated December 14 that talks about the status of the 3-months and the 6-months ended October 31, 2018. You will notice that our revenue is up substantially from the previous six months, it was also up substantially in the quarter, and about $6 million operating income, up $1.7 million in the six months and the net income is up also significantly about $1.9 million from the previous year. Our long-term obligation since 2017 is down about $1.5 million and I believe that’s – is that six months or is that a year, that we’re comparing here. I think it’s a year. So it’s $1.5 million and the equity is up 3.6. We spent $620,000 this year on product development in the six month period and last year we’d spent 720, we actually are too busy if we don’t have - have enough horse power to spending more money on product development in this short period. So we are glad to have the business, so that makes the earnings look a lot better. Our backlog is steady at about $13.8 million to $14 million, which is -- definitely adds to the aerospace side of the business. Casino side of the business, we’re up and our marketing program is doing a nice workout in Dodge City and we’re real pleased with that. We’re also very pleased with the additional special mission work and the ADS-B which is the traffic management system through the FAA due in December 31, 2019, and the same thing is happening in Mexico, which is going to add another segment of demand and probably will occur in a lot of the South American countries. So that is a good thing for the – we’ve put in Garmin transponders essentially. I would call your attention to item 5 in the 10-Q which deals with the overhang that we’ve been concerned about, and that item 5 we just look at it we have our compensation committee in our outside advisors looking at how we should deal with that and we expect to get that resolved in the next two, three or four months something like that whenever we get the results back. I would caution you on the earnings on the fourth paragraph on the second page, it starts out as a result of the December 29, 2017 Kansas Supreme Court ruling, as you can see there we have basically $1.6 million of sales tax collected through October 31. That sales tax was paid since 2009 out every year up through December of 2017. So that is a onetime situation or the net effect on our income is about $700,000 after tax between 7 and 8. And so, that’s after taking out the minority interest. There is a little bit more money left in that as it shows there, $368,000 in November of 2018 and I think that will be the end of it, there may be some small amount after that. But essentially that’s a one-time thing, but even factoring that out of our income, we still have a nice increase in income and a good backlog of business that should continue to produce maybe not just good results but positive results, let’s say that. Let's see if I got anything else on here. And in the aerospace business, we’ve continued to develop product and are now getting to implement some of those new pods under wings stores and other system integration into customer’s airplane and generating some revenue from those items. On the loan option to buy out the land and building at the casino, bank is working to get comfortable with the fact there’s only six years remaining on the contract. It seem to be reasonably positive that, that is moving forward. We also are moving forward with the new administration coming into office in Kansas in January, mid-January. We should have some movement on the extension. We don’t have any yet, or changing from a Republican administration to a Democrat administration, and we believe they are probably certainly -- is as favorable maybe more favorable to the extension. Everyone knows it, the state needs the money, so the casinos are going to continue [broadly] [ph]. Having said all that, I think David we’re ready for questions and conclusion whatever we need to do. So all yours David.

[Operator Instructions] Our first question comes from Timothy Macmillan. Please state your question.

Good morning, gentlemen. Clark, you had mentioned it in the annual meeting, I think Craig you had indicated also that there was still quite a shortage of labor. Are you rectifying that at all? Are you still under dire straits as far as finding people?

We’re searching everyday, but we seem to be holding in there, we are -- Pete’s really going to need -- be needed in the ADS-B, the aircraft mechanic side of it in the spring and through the fall of 2019. So we’re gradually building that up. We have a significant backlog of work there, and it’s all about how the market shuffles it. You know as to whether we get it or somebody else does, but we are getting our share I believe, as indicated by the numbers and by the vendor conversations we’ve been having. So, I think that the answer to your question is we’re always looking for good people and we do that every day. And we are seeing more people than we were seeing the last time I was complaining. So I’ll quit complaining, but I'll tell you that we’ve got to maintain the staff and keep growing them in here because it’s a challenge.

It’s a very tight market for the labor on both the sheet metal mechanics and the avionics type guys right now. I know Cessna is hiring – or Textron is hiring down on [indiscernible] makes life tough on everybody else when they’re hiring.

You’re basically saying no, you’re with this 2020 project, that your backlog and so forth -- are you saying very strong through calendar year 2019?

I don’t see too many fluctuations in the block -- in the backlog between now and the end of next calendar year to be honest with you.

Let’s talk a little bit Tim about what -- what we really – what’s really in the backlog, what’s really there are the big ISO, the Intelligence surveillance and so on projects and those are in that backlog, the ADS-B stuff that’s due in December of 2019. They’re popping up at the rate of about four phone calls or five a day. And you don’t know, you don’t really know whether they are shopping or not. That’s one of the, it’s kind of like special mission, airplane shows up and say, why aren’t you working on it. But we don’t even have an order. Oh, I’ll get you one. So it’s that type of situation. The panic is starting to set in because the availability of the vendors to do the work is pretty limited. According to our information most of our competitors dealing with Cessnas and the others stuff are booked out through July or August something like that. So it’s a tough situation for all airplane owners and we’ll just have to see how it plays out, but we think we’re trying to address it and get more and more prepared, get more and more of the share of the market, so I think that's about the best we can do. Does that answer your question?

Yes. Now also you’d mentioned at the annual meeting about the gun, the gun situation down there in Arizona and you’re talking about rapid increase in orders there, is that progressing nicely?

Craig, you need to answer that.

Yes, we’re continuing to see - I don’t know that where the demand is quite as high as our customer had expected it to be at this point. But it’s not very far off. So we’re continuing these increased capacity out there, and their backlog is strong, that will continue for sure through the next 12 months.

What was that increase again Craig from what number to what number in the last several months you mentioned it at the annual meeting just so everybody knows.

I think that we’re, we’re looking – we’ve been at about probably 50 GCUs, from 40 to 50 GCUs a month and we’re now up to about 80 and there’s a -- there is a possibility to get up over a 100 here in the next calendar year, that’s per month.

And the sales were a little over $11 million this quarter and I believe aircraft, so again just re-emphasizing the aviation -- you’re looking to keep that in, would it be safe to say the 9 to 11, 12 million area for the next several quarters is that unreasonable to think?

It will just -- the fluctuations will be in whether in the ISR world of what projects come through here in the next two to three months and what don’t -- if what we’ve got scheduled right now comes then that’s probably pretty accurate as to where things will be over the next few quarters. But if these are pretty large projects we have one on push out, we may see a decrease in revenue, a little bit below that. But we’re hopeful that everything we’ve got on the schedule right now are we’re pretty booked up through at least March [indiscernible].

Yes, Tim in the whole segment we were showing $7.4 million for the three months compared to $3.8 million a year ago. I’d say that the $7.4 million is probably a little higher than I would expect, I’d expect $5 million to $6 million probably. That’s at best, but then you know, we don’t know for sure. Like, like we’ve told you that business is one quarter you get delivered a lot of work and a lot of money, next quarter you can’t get it out and make the quarterly cutoff. So it’s a fluctuating thing that I’d say were 5 to 7 million.

And the casino now is clearly profitable and is that a pretty good assumption, that you’ve kind of cleared some hurdles there and things are looking better in the casino situation?

Yeah we’re good. I mean we’re [running] [ph] 2%, 3%, 4% or 5% above last year and same on the budget most of the time. The big item coming up there is the Indians are going to open a casino in Guymon which is about 100 miles southeast of us. That's why it will hurt us and some of the business out of the Texas Panhandle. And we think we can [indiscernible] through there, but it’s going to cost marketing money and so profitability won’t be quite as good. But anyway, we don’t, we don’t see that as closing the doors or anything; we do see other competitor in the business or gamblers in the marketplace I think. So, it’s a two edged sword, you get it working real well and then somebody wants to come and get some of your tips you know.

Sure. And it seems like and I know this isn’t your fault at all, but it seems like the banker gets comfortable with this loan and then all of a sudden he changes his mind and I don’t know if that’s oversimplification, but it seems like at one time they have seemed comfortable with what’s left, then it’s a question mark and so forth. So is that and that’s what you’re saying is he’s still working on trying to get comfortable with this at this point?

Well, you’ve got to realize Tim that’s probably my error in getting you feeling that way. I think they started out as we want a seven [indiscernible] year loan, 20-year [AIM] [ph], all that kind of stuff. And then we’ve backed off on that and they got to justify in their mind that all this stuff that the state telling them is true and the state’s got to tell them same thing every time. And now you’re dealing with an election year. All kinds of variables in the election and the variable feelings about what's going to happen in the gaming business in Kansas, and just a whole multitude of things we probably don’t need to discuss here. But what it is and once we get the administration changed, at least the direction should be relatively stable. And we’ve gone from three different administrations really in the last six months. So, that's what I would say. I wouldn't say that the bank is that unstable. It's more of the political world is unstable.

And you feel pretty comfortable you can get this new administration on board? Or is that a hope or is that a wish? Or you feel real comfortable that would happen?

It’s a hope and a wish. I wouldn’t be that – I’m not that comfortable in any political situation. That will be truth. I don’t now for sure. None of us do and just like we don’t know what the voters here are doing. That’s really where we are. And it’s too bad that we’re in this time period with this particular project, but that’s where we are and that’s what it looks like. But we’ve not given up, neither the bank given up and I don’t think states given up. It just a matter of getting over, all those square pegs in the square holes and the round pegs in the round holes.

Okay. All right. Very good. Thank you gentlemen.

Thank you, Tim.

Our next question comes from Sam Rebotsky. Please state your question.

Yes. Good morning. Let me continue on the Boot Hill Casino and the real estate. The price that we pay for the land and the amount of money we’re seeking is sort of, could you quantify what those numbers are? And as far as your judgment what kind of room is there relative to the value of the land and what we are able to buy it? And number two, relative to the profitability would -- I assume there would be greater profitability if we owned the land?

Yes. The answer to that is correct. The answer to -- the price is fixed by an option agreement we signed when we -- before we ever built the building and anything. But the price is not changing. It's a fixed price. And it’s a good price relative to the real estate estimates of the value, the appraisals and all that stuff where price is not the problem. It question of how long will the casino will be opened? 30 more years or three more days and it’s not really three more days. Really six more years or 30 years or 15 years or something else and when we get that all nailed down then we’ll be a lot more stable. As far as pricing and interest-rate and all that kind of stuff on the buyout loan, that’s pretty well established that banks are trying to hold that at a pretty close to where it is now and the grinding it up like the Federal Reserve is doing. So they’re really working with us on that. So, I’m pleased with that. Like I say, it’s a political question. The price is a good price and though its 2009 price actually. So a pretty good shape.

So, when we say, if we came down to a point the difficult in getting the loan we can buy and sell the land, the building et cetera at a significant profit over our price to buy?

Yes. The problem there is we don’t have any idea what a willing buyer would pay for it.

Okay.

But it’s a different – there’s a different stream whether it’s got a casino on it or whether it’s just the support facility for the event center. So you got -- that’s a big swing in value. The build and the structure today would cost significantly more than what it cost to build out when we did.

So as far as and the bank that we’re working with, this is the only bank in the area that would work with us or offer? I mean, this is the relationship we have, is there…?

We have good relationships with two or three banks. This is the best of the current one.

Okay. So -- and I guess, it’s a three-month time frame. Each time we look we sort of see if there’s any progress? And as far as your judgment did you indicate there is some movement in this discussion or with the fact that interest rates are in the process of going up that help or hinder the process?

I think that if the banks were calling all were shots. They’ve like closed before the quarter ends. But they aren’t. So something that it’s just that situation that you got to get political stride stabilized.

Okay.

And that’s a best way to do it. Anything else we would say is purely a guess, not…

Okay. All right. Look, now let me get back to the aerospace. The amount of business you have are you working on one shift?

We are currently working on one shift.

If you need it to can you – if you had the employees, do you have the work to work on more than one shift? Or what does it mean? Or is it a possibility? Presumably, would it be more profitable if you had more business to work on more than one shift? Or is the cost prohibitive at this point if you would to work on more than one shift?

I think the challenge – yes, it’s given the people that are willing to work non-standard shift and especially the supervisors to work for non-standard shift. Over a short period of time, I think we got the people that will be willing to do that. And it’s a matter of if we find enough people and if there’s enough work to go to a second shift, different locations depending on what the business demands. I think it’s a possibility. I know that we’ve kicked that idea around on Arizona a couple of times and we have kind of works the flag ships the different times out there. And we’ve done that and that have gone as well. And we may have to do that at avionic shop, depending on what we have for ADS-B. So based on the demand and we don’t want to kill the employees we’ve got, but if we got the willingness of some of the employees to do that then -- if we can look at doing as the situation dictates

Yes. We’ve done that in the past and they’ve gone in Arizona both. And so it’s something we can do if we can see that we can get the skilled workers.

And as far as – is it a bidding process or is the backlog or your basic – are there many people you’re competing against? And so is this potential bids? Is there more significant business that you could get? I mean, I guess you don’t want to increase your backlog too long, so your prices may go up. Is that a fair statement?

That’s probably fair statement. Let’s talk about the shifts and the backlog. The backlog, we’ll take as many orders we can get, there’s no question about that. Now the problem is that the dates that the customer has to have float around on us and those customers as you know are dealing with probably in a lot of cases in the special mission, some kind of government agency somewhere, we're not directly associated with that. But those people will change those -- change those delivery dates and we try to accommodate them and that's when we work the overtime and that kind of stuff. And so we have the capability of doing it. It's all a matter of what's the most efficient way if we don't want to be in a position where we're giving up a profit by working the overtime if we don't have to do it. And the other thing that's going on here is of course, in the FAA mandated regulatory people mandated avionics stuff is everybody is waiting until the last minute. And then the price starts increasing a little bit. And then that drives and then they start calling in droves, but they don't do anything. So you can't really tell what's going to happen between now and next year from now. And how many of them won't get done and the business will run on through April or May. If these other mandates, they've all worked like that. So we try to do as best we can and like I say we have done the over time in all the locations in the past if we had to do it and also the second shift. So – then the other big item though that we compete in the Phoenix market for the – or the skilled people down in Tempe. And we also compete in Wichita for the skilled airplane people with Textron and Boeing with their -- whatever their sub is, it's doing the work of the independent contractor, Sprint –Sprint, I think. We compete with those people for the technical type mechanics. And that is tough because the economy is doing well and those companies are doing well. And so everybody's out there trying to hire people and that's where that is. So we think we're doing all right. Right now, we'll see how it goes through spring and summer.

Okay. And as far as the stock buyback you bought the 480,000 at $0.30, October. Is there more stock available. I guess have you bought any in November or December? Or -- and how many more shares are you open to buy?

We're continuing that we couldn't buy between the end of October 31 until Friday because we're in a quiet period, but we are planning on continuing to buy shares when our shares are available to buy. And I can't remember what the -- I think the total was 750, that’s 750,000 is what the board's approved for us.

Yes. So it’s authorized to purchase $750,000?

Right.

So how much -- through May 1, 2019. So the 750,000, does that go against 1.359 million that you already bought? Or what is that 750? Would you increase that number or do you need board approval to increase it?

We would need board approval to increase it, but the shares that we bought kind of gives the values that we expect, kind of gives us 750. I think for the last year the board increased it from 500 to 750. So I think the board is willing to increase it as long as it makes sense for the company and with our cash position and the way we're looking at -- how they view the stock.

We have bought a million number that you quoted there, May and June, those are shares not dollars.

Right. That's what I'm saying. So, I mean a million…

So the 750 is dollars.

Yes. Okay. So it’s against that 750,000, so whatever the difference what compare is what’s left to buy. But that against – its gotten diminished I guess. Well okay. And I think you -- look, you have all these possibilities on all your fronts, I guess, the aerospace and the casino, everything seems to be good, hopefully something closes sooner and your earnings could improve further, I mean, because you had that one short $0.03 benefit in this quarter. And the stock could get to a better level. Well, you’re doing what you could do. Good luck. Hopefully, we achieve more of the milestones that you got in front of you.

Thank you for the question on the share. If you look at the details there, plus we’ve reduced the weighted average share by about 700,000 by the buyback, so you can see that. So we are gaining on it and that -- those are shares not dollars. So that’s what we’ve done. So thank you very much for the question. We appreciate you taking your time to ask it.

[Operator Instructions]. And we have no further questions.

All right. Thank you very much. We appreciate everyone taking their time this morning to talk with us on the call. And we are cautiously optimistic that we can meet all of the great things you’d like to have us do. So thank you very much. Have a great holiday season.

Thank you everyone.

This concludes today’s conference call. Thank you for attending.