Air Industries Group - Q2 2023

Transcript

Operator (participant)

Hello, welcome to Air Industries Group Second Quarter 2023 Earnings Call. At this time, all participants are in listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 designation 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 Chief Executive Officer. Please go ahead, sir.

Lou Melluzzo (President and CEO)

Thank you, Latanya. Good afternoon, 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 even a 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 at 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 effort we have undertaken through capital investments and project reengineering, but 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 machinery 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 roof and panels will reduce electricity requirements and further save costs. Company-wide business development effort is proceeding at full throttle, and we're encouraged by the feedback we're receiving from both our longstanding and new customers.

Last month, we announced two new contract awards valued at a total of $5.2 million for arresting gear components for the US Navy E-2D Advanced Hawkeye tactical airborne early warning aircraft and for the F-35 Lightning II combat aircraft. One of the contract was from 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 Air Show 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. 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 US 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 from 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 mid-term 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 that the momentum we have gained in the outlook for the future of the company. We demand, excuse me. The demand drivers I pointed to the last quarter remain intact. The evolving geopolitical landscape, the need to modernize U.S. air naval resources, and the recovery and growth of commercial aerospace. 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. 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?

Mike Recca (CFO)

Thank you, Lou. I'd like to start by saying I agree with Lou, that the second quarter was very encouraging. Let me provide some additional detail. As reported, our second quarter sales were $13.2 million, that was up 5% from the first quarter of 2023, although they were 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, down about 10% from the $2.4 million in the second quarter of 2022. Gross profit margin, this is gonna get a little complicated.

Gross profit margin was 16.4% of sales for the second quarter, and that's an increase of 140 basis points, 1.4 percentage points, from 15% in the first quarter. Gross profit margin recorded for the second quarter of 2022 was 17.3%. It looks like our gross profit margin is down, but for the first three quarters of 2022, from January through 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 the contract that will be completed in 2023.

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 than the second quarter of 2022. Lower operating expenses in an inflationary environment. Our operating income turned positive in the second quarter of 2023, totaling $90,000, and that compares an operating loss of $158 in the first quarter of 2023. Compared to 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 the prime rate, which is currently 8.5%, plus 0.65%, 650 basis points, with a 4 or 3.3. Until mid-June 2022, 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, by net loss versus a net loss of $618,000 in the first quarter of this year.

Net loss in the second quarter was $7,000. Again, keeping in mind the gross profit, gross margin differences, our performance improved. Balance sheet remains more than adequate, our accounts payable and receivables are very current. Our inventory, which had increased significantly in 2020, and 2021, is now in line with historical averages. That concludes what I have to say. Let me turn the call back to Lou.

Lou Melluzzo (President and CEO)

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. With that, Latanya, I would like to open up the call to any questions.

Operator (participant)

Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Once again, that's star one to ask a question at this time. One moment while we pull for our first question. Our first question comes from Howard Halpern with Taglich Brothers. Please proceed.

Howard Halpern (Principal Equity Analyst)

Well, congratulations. Nice quarter, guys. Nice quarter.

Lou Melluzzo (President and CEO)

Good afternoon, Howard.

Howard Halpern (Principal Equity Analyst)

In, in terms of gross margin, what are we looking at are, are the key elements to keeping it at the 16.4% or improving it over the second half of the year?

Mike Recca (CFO)

Howard, I, I, this is Mike Recca. I believe the gross margin will improve as the margin, as the year progresses for a couple of reasons. First, we have 1 contract at Air Industries Machining, our, our biggest company, that was operating at a loss last year. We, we accounted for what we anticipated the future losses were for this year. That accounting is pretty accurate, so that means we have a, 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. Once that goes away, it will no longer pull down the average of the remaining sales. Second, up at Sterling, the gross margin is highly, highly variable, depending on the volumes.

Lou Melluzzo (President and CEO)

In the second quarter, the gross margin was 18%, and that's a significant improvement over the 0.2% that we had in the first quarter. We expect those margins and better product mix are going to continue and in fact, continue to improve. The combination of 18% at Sterling, plus, well, I think they're gonna be more like 17%-18% at Long Island, we should be have some improvement over the 16.5%.

Howard Halpern (Principal Equity Analyst)

Okay. That, that's nice. That's very encouraging. In terms of when you talked about, you know, being prepared for the upcycle, now, and you also talked about receiving, you know, some RF, RFPs. Going forward or including right now, are the new areas that you're investigating, are you getting RFPs for, for those areas, or is that still yet to come?

Lou Melluzzo (President and CEO)

You know, one of the areas we were investigating last earlier on last year was the submarine business, and that seems to be taking, you know, a life of its own. There's, there's very much interest from several customers. That's going, that's going in the right direction. There's a lot of quoting activity. We have, we have orders in-house at both in our New York and Connecticut facilities, so that-that's been a big plus. You know, our trip to the Paris Air Show in June of this year has really led to some additional opportunities that, you know, we've been after for a long time. You finally get to talk to the right people.

You know, we are now we're talking to the world's largest overseas landing gear 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 that the air show was only, maybe 1 month, 1.5 months ago, well, there's a substantial amount of RFQ activity right now based coming out of that business. It, it, it's very, very promising in the respect that we will hit something, you know, and it, it'll start a new relationship.

You know, we've, we've always been a domestic supplier, so we, we supply to, to places like Northrop Grumman and, and our product, one way or another, do end up overseas somewhere, but not directly through us. Now we've, we're, we're doing business with some overseas companies direct, which, you know, is, is, is kind of going in the right direction for, for the type of work that we do, because there's a lot of foreign, a lot of foreign countries that fly U.S. jets. On the spare side.

Howard Halpern (Principal Equity Analyst)

Okay.

Lou Melluzzo (President and CEO)

Avenue that we are kind of pursuing.

Howard Halpern (Principal Equity Analyst)

Okay. Just one final one, since you didn't mention it, I just want to confirm. Did the supply chain issues, they've mostly alleviated as we go into the second half of the year?

Lou Melluzzo (President and CEO)

you know, the supply chain issues, are still mostly centered around materials availability. you know, they seem to be easing in areas and, and, you know, getting worse in other areas. It, it, it's a fine balance, you know. one of our biggest running product, which is our thrust struts here in, in New York, that's, that's been an ongoing product most of this year. towards the end, towards the fourth quarter of this year, supposedly, we're being told by the mills that some of these material supply issues will, you know, start easing up and materials should start flowing hopefully in 2024. Yeah.

Howard Halpern (Principal Equity Analyst)

Okay.

Lou Melluzzo (President and CEO)

When you talk about supply chain issues, right now, that seems to be the biggest contributor to, to the problem, is materials.

Howard Halpern (Principal Equity Analyst)

Okay. Okay, well, keep up the good work, guys.

Lou Melluzzo (President and CEO)

Hey, Howard?

Howard Halpern (Principal Equity Analyst)

Yeah.

Lou Melluzzo (President and CEO)

If you speak to John McBeal, tell him I said hello, please.

Howard Halpern (Principal Equity Analyst)

I will. I will.

Lou Melluzzo (President and CEO)

Thank you, Howard.

Operator (participant)

Once again, ladies and gentlemen, to ask a question at this time, please press star one on your telephone keypad. 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.

Lou Melluzzo (President and CEO)

Thank you, Latanya. With that, guys, 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 the progress on our next call. With that, Latanya, I, you can, end, end the conference.

Operator (participant)

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