Air Industries Group Q2 FY2023 Earnings Call

Hello, and welcome to Air Industries Group Second Quarter 2023 Earnings Call. As a reminder, this conference is being recorded. This call and the accompanying webcast may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, including statements regarding, among other things, the company's expectations regarding realization of its business strategy and growth strategy. Expressions, which include forward-looking statements, speak only as of the date of this call. These forward-looking statements are based largely on our company's expectations and are subject to a number of risks and uncertainties, some of which are beyond our control and cannot be predicted or quantified. Future developments and actual results could differ materially from those set forth and contemplated by or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. This call does not constitute an offer to purchase any securities nor a solicitation of a proxy, consent, authorization, or agent declination with respect to a meeting of the company's shareholders. At this time, I would like to turn the call over to Lou Melluzzo, President and CEO. Please go ahead, sir.

Thank you, Latanya. Good afternoon, and thank you for joining us today. I'm pleased to report that we have achieved strong top line and bottom line improvements in the second quarter of 2023. Net sales grew 5% to $13.2 million. Our profitability improved at an even faster pace with gross profit dollars up more than 13%, and our gross profit margin increasing to 16.4%. We recorded a positive operating income in the second quarter after two quarters of operating losses, resulting in a 36% reduction in our net loss. The main drivers of our profitability improvement were the sales growth and product mix in our Sterling Engineering subsidiary. In general, we realized higher margins on the products sold through Sterling, plus higher volume and plant utilizations have made a substantial difference in cost absorption and, therefore, profit leverage. We're fully focused on increasing Sterling sales, especially through long-term agreements. We see additional exciting opportunities for Sterling in the coming months. Additionally, Sterling's performance has benefited from transformation efforts we have undertaken, the capital investments, and project reengineering. This highlights the efficiency of our new equipment. Over the past two years, we have added critical equipment at Sterling, such as our new large format bridge mill and coordinate measuring machine. We are continuing to invest in machining that gives us unique capabilities and differentiates us in the marketplace. Additionally, a plant modernization project is in the works that includes a new roof and solar panels. Installation of the solar panels will reduce energy requirements and further save costs. Company-wide business development efforts are proceeding at full throttle, and we're encouraged by the feedback we're receiving from both our long-standing and new customers. Last month, we announced two new contract awards valued at a total of $5.2 million for our resting gear components for the U.S. Army E-2D Hawkeye tactical airborne early warning aircraft and for the F-35 Lightning combat aircraft. One of the contracts was for a long-time customer, while the other came from a new non-U.S. customer and was our first award from a customer located outside the U.S. The Paris Airshow also proved to be an important source of new business opportunities. For example, we met with a potential customer in France, which led to a meeting with their Canadian operations, and we have now received an RFQ request for proposal from a highly interested potential new customer. We made further inroads into the nuclear submarine market in the second quarter and expect more projects to begin in the third quarter. That market is experiencing expansive growth given the projected 50% increase in the number of submarines required by the U.S. Navy over the next few years. We have targeted this market because we have identified a need for suppliers like Air Industries to deliver components that meet the ultra-high quality standards required. Our business development effort has translated into increased bookings, which jumped more than 250% in the second quarter of 2023 compared to the second quarter last year. The quoting activity continues to be very high across the board. On our last call, I discussed the strategic analysis that we conducted with the help of an outside consultant to identify our most compelling market opportunities. As a result, we have defined the intermediate to longer-term opportunities we plan to pivot toward, with the potential to further drive profitability growth. We have identified markets that are attractive and actionable and fit our capabilities where we can compete effectively. Importantly, we will target markets where we have significant near- to midterm visibility into the volume and profit potential. Specifically, we intend to expand our penetration of existing platforms, continue to add new platforms, and capture new markets. The additional E-2D and F-35 awards are two examples of our expansion of existing military platforms. With a strong second quarter behind us, we are very optimistic about the momentum we have gained and the outlook for the future of the company. The demand drivers I pointed to last quarter remain intact. The evolving geopolitical landscape, the need to modernize U.S. air and naval resources, and the recovery and growth of commercial aerospace are all contributing factors. Let me conclude by asserting the following: our team is primed and ready. We have made the capital investments in the equipment to further differentiate our capabilities while also refining our delivery processes and reinforcing customer service. I'm confident that we are seeing the onset of a sustained period of improved order flow trajectory. In short, we are in a position to take full advantage of the current upcycle. And now let me turn the call over to Mike Recca, our CFO, for his report, which we will follow with a Q&A and some concluding remarks. Mike?

Thank you. I'd like to start by saying I agree with Lou. The second quarter was very encouraging. Let me provide some additional detail. As reported, our second quarter sales were $13.2 million, which was up 5% from the first quarter of 2023 and 5.7% lower than the second quarter of 2022. Year-to-date sales for the six months were $25.8 million, essentially flat with the prior year. Our gross profit for the second quarter was $2.2 million, which is up around 13% from the $1.9 million in the first quarter of 2023 and down about 10% from the $2.4 million in the second quarter of 2022. Gross profit margin, this is going to get a little complicated. Gross profit margin was 16.4% of sales for the second quarter, that's an increase of 140 basis points, 1.4 percentage points from 15% in the first quarter. Now gross profit margin recorded for the second quarter of 2022 was 17.3%. So it looks like our gross profit margin is down, but in the first three quarters of 2022, from January to September, our gross margin was 17.3%. At year-end, we determined that our gross margin for the full year was only 14.3%. The reduction resulted from a new, more conservative method of calculating and reserving for slow-moving inventory and anticipated future losses on one particular contract, and that's a contract that will be completed in 2023. So comparing our second quarter 2023 gross profit margin against the full year margin of 2022, that is 14.3%. Our 2023 gross profit dollars and our gross profit margin percentage exceeded the prior year. Operating expenses were $2.1 million, that's only 2% higher than the first quarter of 2023 and 4.3% lower in the second quarter of 2022. So lower operating expenses in an inflationary environment. Our operating income turned positive in the second quarter of 2023 totaling $90,000, which compares to an operating loss of $158,000 in the first quarter of 2023 and compared to an operating income of $250,000 in the second quarter of 2022. Interest expense has gone up and increased about 5% from the first quarter and was up 73% from the second quarter of 2022. Our interest rate on our bank loan, that's the majority of our debt, is calculated at a prime rate, which is currently 0.5% less than 6.5%, which is 650 basis points with an effective interest rate of 3.3. Until mid-June of last year, the Federal Reserve interest rate increases did not affect us. Since then, our interest rates and thus, our interest expense have doubled. Our net loss for the second quarter of 2023 was reduced to $395,000 from a net loss of $618,000 in the first quarter of this year. The net loss in the second quarter was $7,000. Again, keep in mind, the gross profit and gross margin differences; our performance improved. The balance sheet remains more than adequate, and our accounts payable and receivables are very current. Our inventory, which has increased significantly in 2020 and 2021, is now in line with historical averages. And that concludes what I have to say. Let me turn the call back to Lou.

Thank you, Mike. Let me reiterate, our team is primed and ready. We made the capital investments to further differentiate our capabilities, and we are in a position to take full advantage of the current upcycle. We are highly excited about our opportunities, and we are vigorously executing our strategy. And with that, Latanya, I would like to open up the call to any questions.

Our first question comes from Howard Halpern with Taglich Brothers.

Congratulations. Nice quarter, guys. Nice quarter. In terms of gross margin, what are we looking at as the key elements to keeping it at 16.4% or improving it over the second half of the year?

Howard, this is Mike Recca. I believe the gross margin will improve as the year progresses for a couple of reasons. First, we have one contract that Air Industries Machining, our biggest company, was operating at a loss last year. We accounted for what we anticipated the future losses were for this year; that accounting is pretty accurate. So that means we have a bunch of sales at essentially zero margin or a very slight profit or a very slight loss. I don't have the exact numbers in front of me. So once that goes away, it will no longer pull down the average of the remaining sales. And second, up at Sterling, the gross margin is highly variable depending on the volumes. In the second quarter, the gross margin was over 18%, and that's a significant improvement from the 0.2% we had in the first quarter. We expect those margins and better product mix are going to continue and, in fact, continue to improve. So the combination of 18% at Sterling plus, well, I think it's going to be more like 17% to 18% at Long Island, should give us some improvement over the 16.5%.

That's great to hear. It's really encouraging. Lou, you mentioned being ready for the upcycle and also mentioned receiving some RFPs. Are there new areas you're exploring that are currently included, or are you still waiting on RFPs for those?

So one of the areas we were investigating earlier last year is the submarine business, and that seems to be taking on a life of its own. There's a lot of interest from several customers, so that's going in the right direction. There's a lot of quoting activity, and we have orders in-house in both our New York and Connecticut facilities. So that's been a significant plus. Our trip to the Paris Air Show in June of this year has really led to some additional opportunities that we've been after for a long time. We finally got to talk to the right people, so now we are talking to the world's largest overseas company, which is something that we were not able to crack in the past for one reason or another. The interest is high, both in us doing business with them and just as importantly, with them doing business with us. Although the Air Show was only maybe a month or a month and a half ago, there is a substantial amount of RFQ activity right now, coming out of that business, so that it's very promising in that respect that we will hit something, and it will start a new relationship. We've always been a domestic supplier, meaning we supply to places like Northrop Grumman, and our product in one way or another does end up overseas somewhere, but not directly to us. Now we've started doing business with some overseas companies directly, which is moving in the right direction for the type of work that we do because there are a lot of foreign countries that use U.S. jets.

Okay. And just one final one. You didn't mention, I just want to confirm that supply chain issues, they are mostly alleviated as we go into the second half of the year?

The supply chain issues are still mostly centered around materials availability. They seem to be easing in some areas and getting worse in others. It’s a fine balance. One of our biggest running products, which is our component in New York, has been an ongoing product for most of this year. Towards the fourth quarter of this year, we're being told by the mills that some of these material supply issues will start easing up, and materials should begin flowing hopefully in 2024. Right now, that seems to be the biggest contributor to the problem is materials.

There are no further questions in queue at this time. I would like to turn the call back over to Mr. Melluzzo for closing comments.

Thank you, Latanya. So with that, I want to thank everybody for being on the call today and for your interest in Air Industries. We look forward to updating everyone on our progress on our next call. With that, Latanya, you can end the conference.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.