Air Industries Group Q1 FY2024 Earnings Call

Hello, and welcome to the Air Industries Group First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note 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 business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date the statement is made. 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 in, contemplated by, or underlining 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 designation with respect to a meeting of the company’s shareholders. At this time, I would now like to turn the call over to Lou Melluzzo, President and CEO. Please go ahead, sir.

Thank you, Shamali. I thank everyone for joining us today. The first quarter of 2024 saw revenue growth compared to the first quarter of last year as well as compared to revenues we achieved during the fourth quarter of 2023. More importantly, the strong order and opportunity flow we experienced during the fourth quarter of last year continues and remains strong. We achieved bookings of $12.95 million, and our backlog increased to $99.3 million. Our quarterly book-to-bill ratio, which is simply quarterly bookings divided by quarterly net sales, was 0.92 to 1. Q2 has started strong with new activity, and while timing is always difficult to predict, given the opportunities we see, I believe that our annual book-to-bill ratio in fiscal 2024 will continue to exceed the industry standards of 1.2 to 1. After the market closed today, we announced an $8.2 million order for Black Hawk and H-92 components. Our funded backlog of $99.3 million represents the net future sales we expect to realize from funded orders we have already received. These funded orders issued by our customers come from long-term agreements, spot buys, and other. It is important to understand that our backlog does not include, what is sometimes referred to as, unfunded orders. Unfunded orders represent future orders possible under existing long-term agreements and other contracts. When you take a step back, the total value of contracts awarded to us as of March 31, 2024, including our $99.3 million of funded backlog, was $179.1 million. The $179.1 million amount provides some multiyear visibility into our future revenue and validates the key partnerships we have with our customers. Importantly, as I mentioned earlier, we remain laser-focused on several large opportunities we eventually expect to close. All in all, I am confident that fiscal 2024 will be a year of growth. Now, let me turn the call over to Scott, who will discuss our Q1 results. I’ll be back to add some closing commentary and a bit more specifics on our 2024 outlook before opening it up to questions and answers. Scott, you may proceed.

Thanks, Lou. As Lou mentioned, we remain confident that fiscal 2024 will be a year of growth. Let me discuss our results. Consolidated net sales for the first quarter ended March 31, 2024, were $14 million. This was higher than the $12.5 million we achieved in Q1 of 2023. And in fact, it was even higher than the $13.5 million we achieved in the fourth quarter of 2023, although I caution everyone not to annualize any particular quarter’s results. This quarter’s sales level shows you a sense of our current production capabilities at our current staffing levels. Gross profit as a percentage of sales in Q1 2024 was 13.6% as compared to the 15% we achieved in Q1 of 2023. It was lower than what we had achieved in Q4 2023, which was 16%. This quarter, our gross margins were impacted by several new products. We also experienced some hiccups in our Connecticut manufacturing facility, specifically incurring lower than expected hours. However, I am confident that gross margin will improve later in the year, as we refine our operations and accelerate our products. Operating expenses in Q1 2024 were $2.2 million, or 15.4% of sales. When compared to Q1 of 2023, these metrics were very similar. Our Q1 2024 operating loss, largely driven by the lower gross profit, was $259,000 compared to a Q1 2023 loss of $158,000. Interest expense in Q1 2024 was $462,000, down slightly as compared to the $476,000 in Q1 of 2023. Finally, on the bottom line, net loss was $706,000 for the quarter, compared to a Q1 2023 loss of $618,000. With respect to adjusted EBITDA, we generated $362,000 in 2024, compared to $578,000 in 2023. The detailed reconciliation of this non-GAAP financial metric is included in our press release that was issued last evening. Now, let me quickly highlight a few items on the balance sheet. We finished the quarter with $225,000 of cash. Our debt level was approximately $23,936,000, a slight increase from Q4 of 2023. As of March 31, 2024, we unfortunately did not meet our Fixed Coverage Charge Ratio in our credit facility with Webster Bank. However, we did make all required principal payments pursuant to the terms of the credit facility, and we are working with Webster to obtain adjusted or new financing that better meets our operating requirements. Cash receivable at quarter end was $8 million, and inventory was $29.3 million. Both amounts are very similar to how we finished Q4 of 2023. And with that, I will turn the call back to Lou for some closing remarks and an update on our 2024 business outlook. Lou?

Thank you, Scott. Let me provide some additional color on the challenges of gross profit in Q1. During Q1, we began initial production on a number of new programs for new customers at the same time. Gross margins at the development stage of a new product tend to be lower. Historically, as we become more knowledgeable about how to produce a product, we reduce production time, we reduce cost, and become more efficient as the product matures. The good news is that once these products are under our belt, it is not uncommon for us to improve our production cycle times upwards of 30% to 40%. At the end of the day, I am pleased with our Q1 performance, and I am confident that fiscal 2024 will be a year of growth. And considering all the typical disclaimers in our Form 10-Q filed with the SEC yesterday, we are still targeting the net sales for fiscal 2024 to be at least $50 million, with an adjusted EBITDA in 2024 being better than that of 2023. As the year progresses, we intend to provide updates, as appropriate. Now, let’s turn the call over for the Q&A portion of the call. Shamali, can you please open up the lines?

Thank you. Our first question comes from Howard Halpern with Taglich Brothers. Please proceed with your question.

Good afternoon, and good start to the year.

Good afternoon, Howard.

Hi, Howard. How are you?

Okay. So, moving forward, will the operating expenses in the first quarter reflect what we can expect for a while as you continue to upgrade the information technology and cybersecurity areas of the business?

So, I would say that in Q1, the operating expenses will probably be slightly higher than I anticipate for the remainder of the year. However, there are additional costs in there, as you indicated, for IT upgrades and cybertechnology to make us compliant with the various things we need to be as a government contractor and just as a business in general. But, I wouldn’t think they would be higher than that in the future periods.

Okay. And in terms of, you talk about it was a new program that began in Q1. Now, is that sales going to ramp quarter-by-quarter, or will there still be some fluctuations in that new program but as you continue to deploy it, it will help drive margins up throughout the quarters?

As Lou mentioned, as our production matures, our cycle time typically decreases, which should lead to higher margins. I believe we will observe this trend as time goes on. Lou, would you like to add anything further?

Absolutely. As you know, we’ve been focused on new business development for the last 12 to 16 months and we’ve successfully brought in new products and clients. Some of this material has a lead time of nine months to a year and a half, and it has all arrived simultaneously. Consequently, we initiated several projects at once. We expect to begin shipping this product throughout the year, and some of these are long-term agreements lasting three to seven years. We anticipate seeing gains from the products developed in the first quarter and the end of last year as well.

Okay. And we will from time to time, I guess, see some fluctuations based on if it’s a new program. There will be some startup always and then a ramp to follow on some of the new programs that you will be engaged in.

That is correct.

That is absolutely correct.

Okay. And as of now, the raw materials issue seems like it’s pretty much behind?

Most of our product, especially the important ones that really caused us some aggravation in 2023, it seems like that’s mostly behind us. I mean, we’re still managing it day to day, but we’re getting material. And I have more material in-house so far this year than I had all of last year, so that’s a positive trend to start. You can’t predict the future, but we’re hopeful that it continues.

Yes, indeed.

What are you observing from your current customers, as well as potential new ones? Their aim is to invest capital.

It seems that we are experiencing significantly more activity from the government compared to the past couple of years. During the COVID pandemic, government spending was directed towards areas in which we were not involved, particularly in space-related initiatives. However, currently, there appear to be numerous opportunities for spare parts in the programs we participate in, leading to an increase in demand. We have also acquired several new customers who could potentially account for 30 to 40 percent of our business. We are in the process of producing and developing our products aligned with our strategic plan that was presented to the Board at the end of last year. As you may know, our revenue is primarily derived from military programs, comprising about 85 to 90 percent of our income, and during the COVID years, we saw little to no commercial activity. However, commercial opportunities are starting to arise, and we are actively pursuing them as there is work available in that sector.

Okay. And just one last one. How is the move or the progression to the submarine business going?

Slowly but surely, it’s new to us. So, materials react differently than the aerospace materials that we are accustomed to. It’s all about the proper development. When you’re cutting power and it is tight as we produce, the way you address a part and speeds, there is a litany of things that you just have to try to see how the materials react. It’s moving along. It’s not going as fast as I would like to go, but it is moving along.

Okay, okay. Thanks, and keep up the great work.

Thank you for your call, Howard.

Thanks, Howard.

Thank you. And we have reached the end of the question-and-answer session. I’ll turn the call back over to Lou Melluzzo for closing remarks.

Thank you, Shamali. Thank you, everybody, for being on the call today and for your interest in Air Industries Group. We look forward to updating you on our progress on the next call. Shamali, at this point, you may conclude the call.

Thank you. Ladies and gentlemen, this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.