Q1 2023 Air Industries Group Earnings Call

July 12, 2023

Thank you for calling income conferencing. The next available conference specialist who will be with you momentarily.

Yeah.

[music].

Conference Center May have your name.

David Brown.

And your company.

H E R.

And which compensated calling in for.

And just to this group.

Okay, one moment I'll connect you.

Incurred an operating loss for the first quarter of 2023 of $158000.

While the net loss for the first quarter was $618000.

This compared with a net loss of $28000 in the first quarter of 2022, and a net loss of $8 99 in the fourth quarter of 2022.

While we are not satisfied with our recent results I firmly believe the dynamics of the aerospace industry today and in the future will create tremendous opportunities for industries.

Demand is being driven by the evolving geopolitical landscape the need to modernize U S Naval Air and naval resources in their recovery and growth of the commercial aerospace.

Yesterday, we announced two contract awards to provide a glimpse of the opportunities we see ahead.

We received a new award valued at approximately $2 million for arresting gear components.

On the E <unk> Hawkeye tactical Airborne early warning aircraft.

Order originated from a longtime customer of air Industries group.

Second awards announced yesterday come from a new non U S customer.

And as for arresting gear components for the F 35 Lightning combat aircraft.

The second order is valued at $3 2 million and is our first award from a customer located outside the U S. Bringing the total for both orders to $5 2 million.

It is encouraging that the average monthly bookings for Q2.

2023 have increased by over 250% compared to Q2 of 2022.

During the quarter, we also reduce our path to delivery to customers by 30%.

In the near term, we are sharply focused on improving profitability, primarily by scaling up activities at our facilities to better leverage our capacity and our fixed expenses.

And secondly by reengineering projects, so that they can be completed more efficiently and on the newer equipment we have purchased.

Additionally, our Connecticut operations is undergoing a modernization process and being retrofitted with a new roof and solar panels to further electricity requirements.

Over the intermediate to long term, we are pivoting towards opportunities that we believe have potential to drive profitable growth toward that end, we have conducted a strategic analysis of our most compelling market opportunities.

With the help of outside consultants.

Our process has been focused on identifying markets that are attractive and actionable.

Targets include markets that fit our capabilities, where we cannot where we can't compete effectively and where we have significant near term to mid term visibility into the volume and profit potential.

Specifically our growth strategies are intended to expand our penetration of existing platforms and new platforms and capture new markets. For example, we are actively seeking additional business in our traditional serve markets with military fixed wing and rotary aircrafts as well as a commercial air.

Components.

The recent wins of additional E <unk> and F 35 business as I noted earlier are great examples of our expansion of existing military platforms.

Turning to another important opportunity, we are making solid progress with our entry into nuclear submarine market, which aligns well with our core competencies and has the potential to be a significant addition to our business.

The nuclear submarine <unk> rapidly expanding to meet a projected 50% increase in the number of submarines required by the Navy over the next few years.

We see substantial opportunity for suppliers, such as air industries that can deliver to the ultra high quality standards required.

We have already won contracts from two suppliers to electric boat.

Of the two U S submarine builders.

We are optimistic that our successful execution of this project will lead to larger and more significant opportunities as a submarine industry continues to seek new suppliers to support the forecasted ramp up in the years ahead.

In fact, our Sterling Division is also seeing an uptick in submarine as well as rotorcraft and ground based turbine engine components.

Our business development team just came back from the Paris Air show and we are very optimistic about the future outlook of aerospace in general the show was very well attended by our global community and we made numerous new connections with companies that we want to work with.

In summary, the first quarter of 2023 continue to reflect the challenging supply chain environment.

Situation that may persist for the next one or two quarters.

That said and more importantly, we are encouraged by our inroads in both existing and new platforms.

With that I'm going to turn it over to Mike <unk>, Our CFO for the report and then we will conclude with Q&A and.

So Mike Thank you Lou.

Provide some additional detail, particularly on our <unk>.

Gross margin.

Gross profit for last year and this year.

I will agree with you that the first quarter was with adequate but it was kind of lackluster.

As he reported sales for the first quarter were $12 5 million and Thats, an increase of 4% from the first quarter of last year.

Profit for the first quarter of 2003, $1 9 million and that was down from $2 1 million in 2022.

Gross margin for this year was 15% of sales.

For the first quarter and that is slightly higher than the annual gross margin last year, which was $14 three.

So at the risk of going deep into the weeds here, let me take a minute to explain gross profit and gross margin for 2022.

So a year and you have a normal closing in reviewing books and the annual audit.

And during that time, it's normal to have adjustments to inventory that affects that generates adjustments to gross profit and gross margin.

In 2022, there were two such adjustments.

And these were our first.

We changed the method of determining our slow moving or obsolete inventory.

Previously we calculated this amount every year as a percentage of.

Inventory cost product that moved an entity does not solve or returned to work in process over a period of years.

Consulting with our auditors we changed this over time method two.

Considering 100% of the cost of inventory that had not moved for two years as slow moving.

And increase the reserve to 100% of that inventory for 2022.

Also during last year, we had a single contract.

It was consistently losing money.

And this contract could not complete these losses will continue into 2023.

We will complete the contract.

Situations like this.

Future losses that must be estimated and accrued for so we.

We've done that we've estimated future losses anticipated on the remaining.

Items opened on a contract this increased cost of sales reduced gross profit and gross margin for 2022.

So as of the as of September last year.

Gross margin for the nine months was 17% of sales after.

After the adjustment for these two items, we just discussed.

Calculated a gross margin of 14% for the full year of 2022.

So to get to 14 for the year after nine months, 17%.

We needed to have a margin of just 5% for 2022 so.

<unk> 17, plus five divided by four equal 2014, so our gross margin was 14, but that really is the only because of these two adjustments which are not recurring.

Yes.

Going on to operating expenses for the first quarter of 2023 were just over $2 million and that was an increase of $167000 or eight 9% from 108 188 million in the first quarter of 22.

But there are some other.

Points I want to make here in 2022 operating costs were reduced last year by $118000 recovery of a bad debt now.

Our customers are mostly fortune 500, actually sometimes a fortune 50 companies, but we really don't have bad debts, but there are times. When there was a question about the quantity or some other dispute on a shipment and payment can be delayed.

And again on an organic rules a delayed payment we must consider to be a bad debt until it's resolved in 2022. Some of these disputed invoices were resolved.

We recovered and we paid 118.

This was a negative expense.

And lower operating costs in 2022.

In 2023.

Our audit for our merged in new firm.

Or has it basically the same fee, but it was paid in different assortments. So we paid about $60000 more of audit fee in the first quarter than we had in the prior year.

So considering considering the bad debt income of 2022, which reduced expenses.

And the timing of the audit fees in 2023, which increased expenses.

Operating expenses for the for the two years were essentially even.

Our interest expense on the other hand, we increased and increased by over 60%.

$172000 is.

Entirely due to our actions of our friends at the Federal Reserve.

The net loss for the quarter.

2023 was $618000.

Compared to a net loss of 28000.

In the prior year.

Moving on to the balance sheet balance sheet remains very strong and certainly more than adequate for our needs. Our accounts payable accounts receivable is a very current strictly in line, our inventory, which balloon during the pandemic is being reduced slowly but reduced nonetheless.

And our overall debt has remained unchanged.

That ends my comments I'll turn the call over to al.

Our new <unk>, New chairman Pete retaliated for his remarks.

Okay.

Good afternoon, everyone I'd like to say that was delighted when Mike asked.

Asked me to step up my involvement is.

Chairman of the board.

I believe that his feeling was that it was time to increase or aerospace experience at a time when we are looking to accelerate our growth program and strategy in the new and changing marketplace post COVID-19. So this is very exciting for me and I've always been very close to the <unk>.

<unk>.

And now I continue to be close in.

Increasingly role in helping leadership too.

Address this growth program.

Once again I'm delighted.

The prospects are terrific. The company has done some great things to prepare itself for this new and changing marketplace in terms of increased capability.

The talent so.

This is very exciting for me.

I hope, it's all very exciting for you to watch US go through this period.

Thank you Pete.

We're excited to have you.

Good to be back I guess.

With that Alicia we would like to open up the call to our Q&A session. If you may.

Thank you we will now be conducting a question and answer session. As a reminder, 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 he 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 one moment. Please while we poll for questions.

Okay.

Thank you. Our first question comes from Howard Halpern with <unk> Brothers. Please proceed with your question.

Good afternoon, guys and welcome back Peter.

Good afternoon Howard.

Good afternoon.

Okay.

In terms of I guess, my focus and maybe your focus too is on.

What are going to be the primary factors that are going to help improve gross margin over time.

I think the biggest factor is that we have made some big investments and better equipment.

And that allows us to more efficiently produce those things that we produced in the past and to quote in a more competitive way for some of the projects we'd like to win in the future. There has been over some time.

A real concentration concentration on.

Increasing or capability and capacity.

It is not really exhibited itself and the way that you'd like to because of the COVID-19 period with a very difficult period for decision, making with our customers' supply chain issues all of that clouded really some of the operational performance that we're seeing and then we are capable of performing to in the next couple of years.

Does that makes sense, yes.

Yes, yes.

Near term, we continually see improvement as the supply chain issues abate and could that drive.

Gross margin back to at least 17% area.

Yes.

I am confident that we will be if not at 17% for this fiscal year will be banging on the door of the very close to it.

Sure.

We have new contracts, which we have better pricing on.

There appears to.

The prospects for our Sterling engineering operation are much improved and better absorption of overhead costs. There will have a could have a dramatic effect on gross margin as those materialize.

Mike I think.

Not wrong in saying some of our best products have been.

Slower delivery products because of slower raw material deliveries, there's no question about that.

Alright.

And as the gross margin improves that'll drive towards operational breakeven profitability as for quarters.

Move forward.

There is no magic in this business gross profit as everything we have been I think.

Extremely good at managing our operating costs.

Gross margin keep your operating cost straight as I like to tell the board we can keep our operating cost level, we get to keep the increases in our gross margin, although we are giving them some of them to.

To the bank.

Sure.

A lot of hiring.

Yes.

Oh.

Wow with inflation cooling, maybe things will level out at this point.

They went from zero to five they're not going to go from five to 10.

Well I think if one out of the top we're looking at the top.

Okay.

And just in terms of the perspective on.

Some of the new areas like this.

Area.

Is that a.

A higher margin business or.

I guess could you describe.

The type of business, we can expect over the next maybe 2345 years from that category.

So in the sub business Howard where all the parts that we are concentrating on our the high end items. So youre not going to make you know theyre not theyre, not making 100 submarines a year, they're making two or three so the pricing the pricing for these components is definitely priced in that respect where you're not doing that.

High production rates you do want a couple at much better margins more sophisticated material with a lot more content in them. So we're not shipping parts at our 100 Bucks or 200 parts were shipping parts that are in the tens of thousands in better.

So those kind of things.

Tend to fare better when we can put more labor into them.

<unk>.

Third the Mark the margins will shop, where we're doing the agreement of crop work on submarine work right now, which is a lot of valves.

I think one of the things that's happening in the submarine business as they have some more advanced and more.

Incredible actually is it subs are looking more like airplanes in terms of.

Close tolerance and performance.

Less like battleships.

Thus welding more.

I precision fits in.

Performance.

So our hope is that there has been going to be more money in that.

Okay.

We've looked at a number of companies in that business, both recently and years ago.

Historically, they have significantly higher margins than we have experienced.

Once a contract.

Wanted a contract and you supply.

And like you said, they produced one or two a year or so it's going to be highly sticky once you get that contract right.

It's very sticky because.

They are desperate for new suppliers.

Patrick vote had an advertisement they want to hire 10000 people.

Southeastern Connecticut, I'm not sure there are 10000 people in southeastern Connecticut.

Yes.

And so.

There's no you're talking about the increasing from two to three boats big deal.

Yes.

$4 billion to $6 billion a year.

But what we were told Howard is if youre doing the work now youre going to do it again.

They just don't they don't have the personnel to actually <unk>.

Shop. This out and then do what needs to be done so youre kind of guaranteed this work as soon as you are in it.

Okay, and they will be very helpful in gaining.

Sure.

<unk>.

To produce product necessary.

Absolutely. So we're finding that they are very helpful.

Okay, Okay, well, thanks, and keep up the.

Good work.

Thank you Eric Thank you for your question. Thank you.

Thank you as a reminder, press star one to ask a question at this time.

There are no further questions at this time I would like to turn the floor back over to Mr. Zhao for closing comments.

Thank you Alicia.

So with that once again, thank you all for taking the time to be on the call today.

And for your interest in Air Industries Group, we look forward to updating you on our progress on our next call.

Alicia you May you may close the call.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Yes.

I wish we had more.

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