Q1 2024 Ultralife Corp Earnings Call

Operator: Good day, and thank you for standing by. Welcome to the Ultralife Corporation first quarter conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising that your hand is raised.

Okay.

Good day, and thank you for standing by.

Speaker Change: Welcome to the Ultra Light Corporation first quarter conference call at this time, all participants are in listen only mode.

Speaker Change: After the speaker's presentation, there will be a question answer session.

Speaker Change: To ask a question. During this session you will need to press star one one on your telephone you would be in here an automated message advising your hand is raised.

Operator: To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jody Burfening, Managing Director of LHA Investor Relations. Please go ahead.

Speaker Change: To withdraw your question. Please press star one again.

Speaker Change: Please be advised that today's conference is being recorded.

Speaker Change: I'd now like to hand, the conference over to your first speaker today Jody <unk>.

Jody: Managing director of L. H eight Investor Relations. Please go ahead.

Jody Burfening: Thank you, Antoine, and good morning, everyone. And thank you for joining us this morning for Ultralife Corporation's earnings conference call for the first quarter of fiscal 2024. With us on today's call are Mike Manna, Ultralife's President and CEO, and Phil Fain, Ultralife's Chief Financial Officer. The earnings press release was issued earlier this morning, and if anyone has not yet received a copy, I invite you to visit the company's website, www.ultralifecorp.com, where you'll find the release under Investor News in the Investor Relations section.

Jody: Thank you Antoine and good morning, everyone and thank you for joining US. This morning for Ultra Nice Corporation's earnings conference call for the first quarter of fiscal 2024.

Jody: With us on today's call are Mike manner authorized president and CEO, and Phil Fain, <unk> Chief Financial Officer.

Jody: The earnings press release was issued earlier this morning, and if anyone who has not yet received a copy.

Jody: You to visit the Companys website, Www Ultra high score Dot com, where you'll find the release under Investor News in the Investor Relations section.

Jody Burfening: Before turning the call over to management, I would like to remind everyone that some statements made during this conference call contain forward-looking statements based on current expectations, and actual results could differ materially from those projected as a result of various risks and uncertainties. The potential risks and uncertainties that could cause actual results to differ materially include uncertain global economic conditions, reductions in revenues from key customers, delays or reductions in U.S. and foreign military spending, acceptance of new products on a global basis, and disruptions or delays in our supply of raw materials and components due to business conditions, global conflicts, weather, or other factors not under the company's control.

Speaker Change: Before turning the call over to management I would like to remind everyone that some statements made during this conference call contain forward looking statements based on current expectations actual results could differ materially from those projected as a result of various risks and uncertainties.

Speaker Change: Potential risks and uncertainties that could cause actual results to differ materially include uncertain global economic conditions reductions in revenues from key customers delays or reductions in U S and foreign military spending acceptance of new products on a global basis, and disruptions or delays in our supply of raw materials and components to debate.

Speaker Change: Conditions global conflicts weather or other factors not under the company's control.

Jody Burfening: The company cautions investors not to place undue reliance on forward-looking statements, which reflect the company's analysis only as of today's date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances.

The company cautions investors not to place undue reliance on forward looking statements, which reflect the companys analysis only as of today's date.

Speaker Change: The company undertakes no obligation to publicly update forward looking statements.

Speaker Change: Reflect subsequent events or circumstances.

Jody Burfening: Further information on these and other factors that could affect Ultralife's financial results is included in the company's filings with the Securities and Exchange Commission, including the latest annual report on Form 10-K. In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful and differ from GAAP. With that said, I would now like to turn the call over to Mike. Good morning, Mike.

Speaker Change: Further information on these and other factors that could affect ultra life's financial results is included in the company's filings with the Securities and Exchange Commission, including the latest annual report on Form 10-K.

Speaker Change: In addition on today's call management will refer to certain non-GAAP financial measures that management considers to be useful and differ from GAAP. These non-GAAP measures should be considered supplemental to corresponding GAAP figures with that I would now like to turn the call over to Mike Good morning, Mike.

Michael E. Manna: Jody. Good morning, everyone. Welcome to our call on Ultralife's Q1 operating results. Earlier this morning, we reported Q1 sales of $42 million, and an operating income of $4.1 million, the second consecutive quarter of $42 million or more in sales, delivering $0.18 EPS for the first quarter, following a reported $0.17 EPS in the fourth quarter. I am extremely proud of the team's efforts across the business in Q1 and the positive impact realized from our top priority and objective this year, which is gross margin improvement.

Michael E. Manna: Thanks, Jody and.

Michael E. Manna: Good morning, everyone and welcome to our call and Ultra last Q1 operating results.

Michael E. Manna: Earlier. This morning, we reported Q1 sales of 42 million and operating income of $4 1 million, the second consecutive quarter of $42 million or more in sales delivering 18 cents EPS for the first quarter. Following a reported 17 EPS in the fourth quarter I.

Speaker Change: Im extremely proud of the team's efforts across the business in Q1, and the positive impact realized from our top priority and objective. This year, which is gross margin improvement the sequential Q1 improvement to 27, 4% accelerates our incremental cash flow to further invest in organic growth initiatives and to pay down our acquisition debt.

Michael E. Manna: The sequential Q1 improvement to 27.4% accelerates our incremental cash flow to further invest in organic growth initiatives and to pay down our acquisition debt. I will turn it over to Phil to go through the detailed numbers. Thank you, Mike.

Michael E. Manna: I'll turn it over to Phil to talk through the detailed numbers.

Philip A. Fain: Thank you, Mike, and good morning, everyone. Earlier this morning, we released our first quarter results for the quarter ended March 31st, 2024. We also filed our Form 10-Q with the SEC and updated our investor presentation in the investor relations section of our website, which now includes a summary and status of our transformational new product. Consolidated revenues totaled $41.9 million, compared to $31.9 million for the first quarter of 2023, an increase of 31.4%. Government defense sales increased 83.4%, and commercial sales increased 8.6%. As a reminder, our results for last year's first quarter were negatively impacted by the January cyber attack.

Philip A. Fain: Thank you, Mike and good morning, everyone.

Philip A. Fain: Earlier. This morning, we released our first quarter results for the quarter ended March 31, 2024, we also filed our Form 10-Q with the SEC and updated our investor presentation, and the Investor Relations section of our website.

Philip A. Fain: Which now includes a summary and status of our transformational new products.

Philip A. Fain: Solidago revenues totaled $41 9 million compared to $31 9 million for the first quarter of 2023.

Philip A. Fain: An increase of 31, 4%.

Philip A. Fain: Government defense sales increased 83, 4% and commercial sales increased eight 6%.

Philip A. Fain: As a reminder, our results for last year's first quarter were negatively impacted by the January cyber attack.

Philip A. Fain: Revenues from our battery and energy product segment were $35 million compared to $28.5 million last year, an increase of 22.9 percent. This growth was driven by very strong performance in our sales to government defense and medical markets, which increased 73.6% and 54.7%, respectively. These increases were partially offset by a decline of 13.9% in oil and gas market sales.

Philip A. Fain: Revenues from our battery and energy products segment were 35 million compared to $28 5 million last year, an increase of 22, 9%.

Philip A. Fain: This growth was driven by very strong performance in our sales to government defense and medical markets, which increased 73, 6% and 54, 7% respectively.

Philip A. Fain: These increases were partially offset by a decline of 13, 9% and oil and gas market sales.

Philip A. Fain: The sales split between commercial and government defense for the battery business was $69.31 compared to $78.22 reported for the 2023 full year, and the domestic to international split was $56.44 compared to $49.51 for the 2023 full year, demonstrating heightened domestic demand for our core products and the continued success of our global revenue diversification strategy. Revenues from our communications system segment of $6.9 million were double the $3.4 million we reported last year, primarily attributable to shipments of EL8000 server cases to a large multinational information technology company, integrated systems of amplifiers and radio vehicle mounts to a major international defense contractor under an ongoing allied country government defense modernization program, and power systems to a U.S.-based global prime.

Philip A. Fain: The sales split between commercial and government defense for our battery business was $69 31, compared to 70 822 reported for the 2023 full year and the domestic to international split was $56 44 compared to $49 51 for the.

Philip A. Fain: 2023 full year <unk>.

Philip A. Fain: Administrative heightened domestic demand for our core products and the continued success of our global revenue diversification strategy.

Philip A. Fain: Revenues from our communications systems segment of $6 9 million were double the $3 4 million, we reported last year, primarily attributable to shipments of El 8000 server cases to a large multinational information technology company.

Philip A. Fain: Integrated systems of amplifiers in radio vehicle mounts to a major international defense contractor under an ongoing allied country government defense modernization program.

Philip A. Fain: Power systems to a U S based global crime.

Philip A. Fain: On a consolidated basis, the commercial to government defense sales split was 58.42 versus 64.36 reported for the 2023 full year. Our total backlog exiting the first quarter was 97.4 million and remains diverse in nature across our commercial and government defense customer base. The replenishment rate remains high, and the backlog represents almost 60% of TTM sales.

Philip A. Fain: On a consolidated basis, the commercial to government defense sales split was $58 42 versus 64 36 reported for the 2023 full year.

Philip A. Fain: Our total backlog exiting the first quarter was $97 4 million and remains diverse in nature across our commercial and government defense customer base.

Philip A. Fain: The replenishment rate remains high.

Philip A. Fain: The backlog represents almost 60% of TTM sales.

Philip A. Fain: Our consolidated gross profit was $11.5 million, up 54.3% over the 2023 period, far exceeding the 31.4% increase in revenue. As a percentage of total revenues, consolidated gross margin was 27.4%, versus 23.3% for last year's first quarter, a 410 basis point improvement, and increased 180 basis points sequentially over the fourth quarter. Gross profit for our battery and energy products business was $9 million, compared to $6.5 million last year, an increase of 38 percent.

Philip A. Fain: Our consolidated gross profit was $11 5 million.

Philip A. Fain: 54, 3% over the 2023 period.

Philip A. Fain: Far eclipsing the 31, 4% increase in revenues as.

Philip A. Fain: As a percentage of total revenues consolidated gross margin was 27, 4%.

Philip A. Fain: 23, 3% for last year's first quarter.

Philip A. Fain: 410 basis point improvement.

Philip A. Fain: And increased 180 basis points sequentially over the fourth quarter.

Philip A. Fain: Gross profit for our battery and energy products business was 9 million compared to $6 5 million last year, an increase of 38%.

Philip A. Fain: Gross margin was 25.7 percent, an increase of 280 basis points over 22.9 percent reported for last year's first quarter and an increase of 50 basis points on a quarterly sequential basis. The year-over-year and sequential increases were primarily due to higher cost absorption and more efficiencies resulting from our concerted effort to level out production more evenly across the 2024 quarter, as well as improved price realization. For the communications system segment, gross profit was $2.5 million compared to $0.9 million for the year earlier period.

Philip A. Fain: Gross margin was 25, 7% an increase of 280 basis points over 22, 9% reported for last year's first quarter and.

Philip A. Fain: And an increase of.

Philip A. Fain: 50 basis points on a quarterly sequential basis.

Philip A. Fain: The year over year and sequential increases were primarily due to higher cost absorption and more efficiencies, resulting from our concerted effort to level load production more evenly across the 2024th quarter as well as improved price realization.

Philip A. Fain: For our communication systems segment gross profit was $2 5 million compared to <unk> 9 million for the year earlier period.

Philip A. Fain: Gross margin was 35.8% compared to 26.8% last year, primarily due to higher factory volume and favorable sales product mix. On a quarterly sequential basis, gross margin for this segment improved 860 basis points. Operating expenses were $7.4 million, the same as the year-earlier quarter. As a percentage of revenues, operating expenses were 17.7 percent, compared to 23.2 percent for last year's first quarter, a 550 basis point improvement, reflecting pure sales leverage. The combined leverage of our 410 basis point gross margin improvement and our 550 basis point reduction in operating expenses to sales ratio resulted in a 9.7% operating margin. On an absolute dollar basis, operating profit improved to $4 million in the 2023 first quarter, to 4.1 million, the highest level achieved in at least the last 15 years. The business interruption insurance claim pertaining to our Q1 2023 cyber attack still remains in review and is not included in our financial results.

Philip A. Fain: Gross margin was 35, 8% compared to 26, 8% last year, primarily due to higher factory volume and favorable sales product mix.

Philip A. Fain: On a quarterly sequential basis gross margin for the segment improved 860 basis points.

Philip A. Fain: Operating expenses were $7 4 million the same as the year earlier quarter as a percentage of revenues operating expenses were 17, 7% compared to 23, 2% for last year's first quarter.

Philip A. Fain: 550 basis point improvement.

Philip A. Fain: Reflecting pure sales leverage.

Philip A. Fain: Buying deleverage of our 410 basis point gross margin improvement and our 550 basis point reduction in operating expenses to sales ratio.

Philip A. Fain: <unk> and a nine 7% operating margin.

Philip A. Fain: On an absolute dollar basis.

Philip A. Fain: Operating profit improved to $4 million over the 2023 first quarter.

Philip A. Fain: To $4 1 million the highest level achieved in at least the last 15 years.

Philip A. Fain: The business interruption insurance claim pertaining to our Q1 2023 cyber attack.

Philip A. Fain: Still remains in review and is not included in our financial results.

Philip A. Fain: Our tax provision for the fourth quarter was $0.7 million versus $0.1 million benefit reported for the 2023 quarter computed on a gap-based, including the impact of interest expense to help finance that excel acquisition in foreign currency gains and losses. Net income was 2.9 million or 18 cents per share on a gap fully diluted basis. This compares to a net loss of $0.3 million or a loss of $0.02 per share for the 2023 quarter, excluding the provision for non-cash U.S. taxes expected to be fully offset by our net operating loss carry-forwards and other tax credits, adjusted fully diluted EPS, was $0.21 per share for the first quarter of 2024, compared to a loss of $0.05 for the 2023 period, adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense, with 5.2 million or 12.5 percent of sales compared to 1.2 million or 3.6 percent for the prior year quarter, on a TTM basis.

Philip A. Fain: Our tax provision for the fourth quarter was <unk> 7 million versus <unk> 1 million benefit reported for the 2023 quarter computed on a GAAP basis.

Philip A. Fain: Including the impact of interest expense to help finance, the excel acquisition and foreign currency gains and losses net income was $2 9 million or <unk> 18 per share on a GAAP fully diluted basis.

Philip A. Fain: This compares to a net loss of point $3 million.

Philip A. Fain: Or a loss of <unk> <unk> per share for the 2023 quarter.

Philip A. Fain: Excluding the provision for noncash U S taxes expected to be fully offset by our net operating loss carryforwards and other tax credits adjusted fully diluted EPS.

Philip A. Fain: Was <unk> 21 per share for the first quarter of 2024 compared to a loss of <unk> for the 2023 period.

Philip A. Fain: Adjusted EBITDA defined as EBITDA, including noncash stock based compensation expense was $5 2 million or 12, 5% of sales compared to $1 2 million or three 6% for the prior year quarter.

Philip A. Fain: Adjusted EBITDA is $19.8 million, or 11.7% of sales. Turning to our balance sheet, we ended the first quarter with working capital of $70.9 million in a current ratio of 4, compared to $66.5 million in a 3.8 for 2023 year-end. With the strengthening of our balance sheet, we are positioned to accelerate the paydown of our debt, thereby reducing the costly interest expense, which represents almost 12 cents per share on a TTM basis.

Philip A. Fain: On a TTM basis.

Philip A. Fain: Adjusted EBITDA is $19 8 million or 11, 7% of sales.

Philip A. Fain: Turning to our balance sheet. We ended the first quarter with working capital of $70 9 million and a current ratio of four compared to $66 5 million and $3 eight for 2023 year end.

Philip A. Fain: With the strengthening of our balance sheet, we are positioned to accelerate the paydown of our debt, thereby reducing the costly interest expense, which represents almost 12 cents per share on a TTM basis.

Philip A. Fain: We reduced our debt by just over....5 million in the first quarter with the expectation to pick up the pace in subsequent quarters. Going forward, our backlog, diversified end markets, growth initiatives, and ongoing actions to improve our gross margins and further strengthen our balance sheet position us well to further leverage the business model. I will now turn it back to Mike.

Philip A. Fain: We reduced our debt by just over.

Philip A. Fain: <unk> 5 million in the first quarter with the expectation to pick up the pace in subsequent quarters.

Philip A. Fain: Going forward.

Philip A. Fain: Our backlog diversified end markets growth initiatives and ongoing actions to improve our gross margins and further strengthen our balance sheet.

Philip A. Fain: <unk> as well to further leverage of our business model I will now turn it back to Mike.

Michael E. Manna: Thank you, Phil, for the detailed review of the Q1 results. As I mentioned in the last call, we refined our 2024 priorities, exiting the year with the following being key to continued success. First, material cost deflation. We need to keep driving material cost initiatives, working with key suppliers to produce realized cost savings. We have hired experienced supply chain resources over the past six months in Newark, Virginia Beach, and Vancouver to work on vendor rationalization and consolidation, critical part dual sourcing, low-cost region sourcing, and streamlining logistics spend across the enterprise. Secondly, lean productivity.

Michael E. Manna: Thank you Phil for the detailed review of the Q1 results as I mentioned in the last call. We refined our 2024 priorities exiting the year with the following being key to continued success.

Michael E. Manna: First material cost deflation, we need to keep driving material cost initiatives working with key suppliers to produce realized cost savings we've hired experienced supply chain resources over the past six months in Newark, Virginia Beach in Vancouver locations to work on vendor rationalization and consolidation critical part dual sourcing.

Michael E. Manna: Cost region sourcing and streamlining logistic spend across the enterprise.

Michael E. Manna: Continue to reduce waste and inefficiencies in all of our processes, both on production lines, with line balancing projects and automation initiatives, and throughout the support and back office functions, including additional systems integration activities. And finally, sales funnel improvement We have a larger and increasing pipeline of new products with a healthy funnel of sales opportunities, which most have yet to close, which is required to continue to drive future growth. As the world becomes more portable and increasingly uses critical applications, it is important that Ultralife brand products lead the way.

Philip A. Fain: Secondly, lean productivity continue to reduce waste and inefficiencies and all of our processes. Both on production lines with line balancing projects and automation initiatives and throughout the support and back office functions, including additional systems integration activities and.

Philip A. Fain: And finally sales funnel improvement, we have a larger and increasing pipeline of new products with a healthy funnel of sales opportunities, which most have yet to close which is required to continue to drive future growth.

Philip A. Fain: World becomes more portable and critical applications. It is important and ultra like brand products lead the way.

Michael E. Manna: On the direct labor and materials side, we have seen conditions improve over the last 12 months, and an SNOP process has kept us mostly within component lead times and allowed us to deliver strong revenue in recent quarters. We continue to refine the S&OP process and expect this to further level production demand, in turn allowing more efficient utilization of our direct precious resources as we continue to grow the business. Next, I'll give updates on the organic growth projects and new development underway for the businesses, which are key to future sales and market expansion.

Philip A. Fain: On the direct labor and material side, we are seeing conditions improve over the last 12 months and an arsenal processes kept us mostly within component lead times and allowed us to deliver strong revenue over recent quarters. We continue to refine the SLP process and expect this to further level production demand and turning.

Philip A. Fain: Allowing more efficient utilization of our direct precious resources as we continue to grow the business.

Philip A. Fain: Next I'll give updates on the organic growth projects and new development underway for the businesses, which are key to future sales and market expansion.

Michael E. Manna: On the communication systems side, first, I'll review our EL8000K systems, which is a system developed with our strategic partner that allows high-end computing power to be used in difficult environments on the edge for industrial 5G and AI applications, truly bringing server-level computational power to the point of use. For the EL8000 project, we shipped 1.6 million units of revenue in Q1, the highest shipment quarter to date, and a key to further diversification in the comms system's business.

Philip A. Fain: On the communication systems side first I will review our E. All 8000, K systems, which is a system developed with our strategic partner.

Philip A. Fain: It allows high end computing power to be used in difficult environments on the edge and industrial <unk> and AI applications truly bringing server level computational power to the point of views.

Philip A. Fain: The <unk> thousand project, we shipped $1 6 million of revenue in Q1, the highest shipment quarter to date and are key to further diversification in the comm systems business.

Michael E. Manna: With the wide-range DC power supply available later this year, we expect vehicular and remote DC applications to become part of the EL8000 product line in the future, as this product line grows in defense and commercial applications.

Philip A. Fain: Next with the wide range do you see power supply available later this year, we expect vehicular and remote DC applications to become part of the <unk> thousand product line in the future.

Philip A. Fain: This product line grows in defense and commercial applications.

Michael E. Manna: Secondly, we received initial orders for a new project to win for radio power in an airborne application. We expect this program to ramp up over the next year and continue for at least five years. Finally, we have several projects underway on next-gen amplification products that target both domestic and international customers. I hope to have more detailed updates in future calls.

Philip A. Fain: Secondly, we received initial orders for our new project win for radio power in an airborne application. We expect this program to ramp over the next year and continue for at least five years.

Philip A. Fain: Finally, we have several projects underway in Nextgen amplification products that target, both domestic and international customers I Hope there are more detailed updates in future calls.

Michael E. Manna: On the battery and energy side of the business, we are excited about the opportunity for funnel growth across a variety of new and existing products and are optimistic we will see incremental orders this year. As previously mentioned, we have production equipment in place for our thin cell to support customers in the medical wearable space and several applications in item tracking. The sales funnel is strong, with multiple projects in the qualification phase, primarily The 1-2-3-A product line, currently supporting IOT in the illumination market, has seen opportunity funnel growth in medical pack assemblies, with several quotes provided underway for multi-cell packs, which is a key initiative for this product line.

Michael E. Manna: On the battery and energy side of the business. We are excited about the opportunity funnel growth across the variety of new and existing products and are optimistic we will see incremental orders this year.

Philip A. Fain: As previously mentioned, we have production equipment in place for our thin cell to support customers in the medical wearable space and several applications in item tracking.

Michael E. Manna: The sales funnel is strong with multiple projects in the qualification phase primarily in medical applications.

Philip A. Fain: The <unk> product line currently supporting Iot and the illumination markets has seen opportunity funnel growth in medical pack assemblies with several quotes provided underway for multi cell packs, which is a key initiative for this product line.

Michael E. Manna: Our improved final chloride product line, targeting monitoring and telemetry applications, continues qualification in field testing with several customers. These qualification cycles are extremely lengthy. For instance, we have one customer that has been testing the product for over one year. With multiple opportunities and qualification, we anticipate initial product production orders later this year. Our development work on the conformal wearable battery continues.

Michael E. Manna: Our improved final court chloride product line.

Michael E. Manna: <unk> monitoring and telemetry application continuous qualification and field testing with several customers.

Philip A. Fain: These qualification cycles are extremely lengthy.

Michael E. Manna: For instance, we have one customer that has been testing the product for over one year.

Philip A. Fain: With multiple opportunities and qualification we anticipate initial product production orders later this year.

Philip A. Fain: Our development work on the confirm a wearable battery continues we are working on completing the rest of the validation testing to enter U S. Government first article testing, which is currently scheduled to start later this year means.

Michael E. Manna: We're working on completing the rest of the validation testing to enter the U.S. government for historical testing, which is currently scheduled to start later this year. Meanwhile, as I mentioned last call, we are shipping samples to other prospective applications and customers to expand sales channels outside the U.S. military to international markets. Sales funnel and commercial opportunity pipeline growth is key for 2024 to keep our strong organic growth trajectory going as we have yet to fully realize the return from all our new product investments made over the last three to five years.

Michael E. Manna: Meanwhile, as I mentioned last call, we are shipping samples to other perspective applications and customers to expand sales channels outside the U S military to international markets.

Michael E. Manna: Sales funnel and commercial opportunity pipeline growth is key for 2024 to keep our strong organic growth trajectory going as we have yet to fully realize the return from all our new product investments made over the last three to five years.

Michael E. Manna: In closing, the team is energized and focused on their key objectives of gross margin improvement and sales funnel opportunity growth. The initiative started last year and delivered promising early results with initial positive gross margin improvements and a healthy backlog position. We expect more benefit across the portfolio as we progress. As Mocumentum continues, I look forward to further organic growth investment, paying down our acquisition debt, and beginning our next accretive M&A search.

Michael E. Manna: In closing the team is energized and focused on their key objectives of gross margin improvement and sales funnel opportunity growth initiatives started last year are delivering promising early results with initial positive gross margin improvements and a healthy backlog position, we expect more benefit across the portfolio as we progress.

Speaker Change: As momentum continues I look forward to further organic growth investment paying down our acquisition debt <unk> accretive M&A search. Thanks, everyone that concludes our prepared remarks for today now I will go back to the operator for questions.

Operator: Thanks, everyone. That concludes the prepared remarks for today. Now we'll go back to the operator for questions. Thank you.

Operator: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while I compile the Q&A watch. Our first question comes from Josh Sullivan from the Benchmark Company. Please go ahead.

Operator: Yes.

Speaker Change: Thank you at this time, we will conduct a question and answer session.

Operator: As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.

Operator: To withdraw your question. Please press star one again.

Operator: Please standby, while we compile the Q&A roster.

Operator: Our first question comes from Josh Sullivan from the Benchmark Company. Please go ahead.

Joshua Ward Sullivan: Hey, good morning. Congratulations on a nice quarter here. Thank you. Um, you know, as far as the Gross Margin Initiative... Yeah, how much of the improvement here is the benefit of volumes versus those?

Joshua Ward Sullivan: Hey, good morning.

Joshua Ward Sullivan: Congratulations on a nice quarter here.

Joshua Ward Sullivan: Thank you. Thank you.

Joshua Ward Sullivan: As far as the gross margin initiatives, how much of the improvement here is the benefit of volumes versus those strategic initiatives.

Philip A. Fain: It's probably shared at this point. I mean, obviously, we're putting more volume across the same fixed costs, which always helps your gross margin numbers. And we are seeing, you know, some additional price realization on the sales that we have. So it's, you know, the sales side is a double whammy on the gross margin. So I would say it's shared at this point.

Joshua Ward Sullivan: It's probably shared at this point I mean, obviously, we're putting more volume across the same fixed cost, which always helps your gross margin numbers and we are seeing some additional price realization on the sales that we have so it's in the.

Philip A. Fain: The sales side is a double whammy on the gross margin.

Philip A. Fain: So I would say it's shared at this point.

Philip A. Fain: And Josh, I'll just add a little bit to that. The primary example that we use is right where Mike and I are located. It's Newark. How did Newark do?

Speaker Change: And Josh I'll, just add a little bit to that.

Speaker Change: The primary example that we use is right, where Mike and I are located as newer accounted Newark perform because the volume was slightly higher but we did see a very very nice increase in gross margin. So that goes beyond the volume the volume portion of it. So there is the other.

Philip A. Fain: Because the volume was slightly higher, but we did see a very, very nice increase in gross margin. So that goes beyond the volume portion of it. So there's the other items that Mike mentioned really at play here.

Philip A. Fain: As Mike mentioned really at play here.

Philip A. Fain: And then, if we look at the recent defense funding for Ukraine and elsewhere, should we expect that to benefit your defense work or needs, or is there something that's been pulled forward in recent quarters?

Philip A. Fain: And then if we look at the recent defense funding for Ukraine, and elsewhere should we expect that to benefit your defense work their needs or is there anything thats been pulled forward into recent quarters.

Philip A. Fain: Well, we would hope that it does help our defense business and funnel through. Unfortunately, the money is usually, unfortunately, going to primes, typically, and then the primes are giving orders to us, so it is taking probably four to six weeks for us to even have any mention that orders are possibly coming our way.

Speaker Change: Well, we would hope that it does help our defense business and funnel through the money usually as you know unfortunately as much as they are saying that it's an immediate funding.

Philip A. Fain: It's going to primes typically and then the primes are giving orders to us.

Philip A. Fain: It is taking probably four to six weeks for us to even have any mentioned that orders are possibly coming our way.

Philip A. Fain: And then, you know, on the inventory side, you know, how should we think about the cadence through the year?

Speaker Change: Got it.

Philip A. Fain: And then.

Philip A. Fain: On the inventory side, how should we think about the cadence through the year.

Philip A. Fain: The way I look at inventory is it absolutely depends on the POs in hand, the timing of deliveries, and some great lessons that we learned during the lean COVID years with all the supply disruptions to put ourselves in a position where we're going to get the orders out on time to support our level loading. In level loading, Josh, if there was one thing that helped us more than anything with gross margin, it was level loading, and level loading is not just trying to do the same level of production on a day in and day out basis. It goes all the way through our purchasing process, all the way through our materials planning, through our manufacturing, all the way through cash collections. That is in a perfect world.

Philip A. Fain: The way I look at inventory is it absolutely depends on the always on hand, the timing of deliveries and some great lessons that we learned during the lean COVID-19 years with all the supply disruptions to put ourselves in a position where.

Philip A. Fain: We're going to get the orders out on time to support our level loading and level loading Josh. If there was one thing that helped us more than anything with gross margin at its level loading and level loading is not just trying to do the same level of production on a day in that day in and day out base.

Philip A. Fain: It goes all the way through our purchasing process all the way through our materials planning to our manufacturing all the way through cash collections.

Philip A. Fain: And if that is in the perfect world, but there certainly are exceptions, because you've got to know your supplier is very very well and one of the reasons why inventory went up.

Philip A. Fain: But there certainly are exceptions because you get to know your suppliers very, very well, and one of the reasons why inventory went up over year end is specifically because of that. We know the orders. We know the suppliers. We know their supply chain. We do not want to be cut short. So could inventory go up 2 million or down 2 million compared to any future quarter? Yeah, it absolutely can, just because we want to be able to serve our customers, and this does cost. The cost of that in some points is the pay down of the debt, but that will all get caught up.

Philip A. Fain: Over a year and specifically because of that we know the orders we know the suppliers. We know their supply chain, we do not want to be caught short so could.

Philip A. Fain: Could inventory.

Philip A. Fain: Yeah go up $2 million or down $2 million compared to any future quarter. Yeah. It absolutely can just because we wanted to be able to serve our customers and this does cost.

Philip A. Fain: Most of that in some point is it is the pay down is the paydown of the debt, but that will all get caught up.

Philip A. Fain: And then, just on the thin cell opportunity, any update on timelines as far as FDA certification or any trials that we can keep an eye on?

Speaker Change: Got it.

Philip A. Fain: And then just on the thin cell opportunity any update on timelines as far as.

Philip A. Fain: FDA certification or.

Philip A. Fain: Or any trials that we can keep an eye on.

Philip A. Fain: Well, we're still being told that over the summer they should be through some of their initial testing. They're still positive that we're going to see production orders this year, and we do continue to ship in small quantities to that customer for other applications, but it's not the big announcement or the bigger award that we're hoping for in the future, for sure.

Philip A. Fain: Well were still being told over the summer there should be through some of their initial testing.

Philip A. Fain: And there is still positive that we're going to see production orders. This year and we do continue to shipping small quantities to that customer for other applications, but it's.

Philip A. Fain: <unk>.

Philip A. Fain: The big announcement or the bigger awards that we're hoping for in the future for sure.

Philip A. Fain: And then how should we think about the EL8000 cadence? You know, are these orders lumpy, or do you think this is the beginning of some kind of consistent flow here?

Speaker Change: Got it.

Philip A. Fain: And then how should we think about the El 8000 cadence you know are these orders lumpy or do you think this is the beginning of a more kind of consistent flow here.

Philip A. Fain: [inaudible] It's a little early to say definitively which way that's going to go, Josh, and there are a couple different components to this business. In some cases, you know, we're doing the actual integration of actually placing the server in the cases. In other cases, we're just selling cases, and someone else is doing the integration work. So it really depends on which scenario it is and, you know, unfortunately for us on the integration side, the servers available, number one. And number two, just the cadence of the customer's orders going out to the field.

Philip A. Fain:

Philip A. Fain: It's a little early to say definitively, which way that's going to go Josh and Theres a couple of different components with this this business in some cases.

Philip A. Fain: We're doing the actual integration of actually placing the server in the cases in other cases, we're just selling cases and someone else is doing integration work. So it really depends on which scenario. It is and unfortunately for us on the integration side or the servers available number one.

Philip A. Fain: Two just the cadence of the customer's orders going out to the field.

Philip A. Fain: And then just one last one, you know, on the decline in the oil and gas market. Is that end market dynamics, or is there anything else going on?

Josh: Maybe just one last one on the decline in the oil and gas market is that end market dynamics or is there anything else going on there.

Philip A. Fain: Well, we don't think it's the market dynamics at all. We had one customer, we believe, overbuy in Q4. They've been slow through Q1. We're starting to see some orders pick back up now, but we don't believe it's a long-term, you know, impact on the business. I think, you know, we kind of look at things as a yearly run rate, and we think we're still on track to have a really strong year in that business.

Speaker Change: Well, we don't think its end markets dynamics at all we had one customer we believe overbuy in Q4, they've been slow through Q1, we're starting to see some orders pick back up now, but you know we you know.

Philip A. Fain: We don't believe it's a long term.

Philip A. Fain: No impact to the business I think we kind of look at things as a yearly run rate and we think we're still on track to have a really strong year in that business.

Joshua Ward Sullivan: Great. Well, thank you for your time. Thank you, John.

Philip A. Fain: Okay.

Speaker Change: Well, thank you for the time.

Josh: Thank you Josh.

Operator: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. Our next question comes from Samuel McColgan from Breakout Investors. Please go ahead.

Speaker Change: Thank you.

Samuel McColgan: As a reminder to ask a question.

Samuel McColgan: Please press star one on one of your telephone and wait for your name to be announced.

Operator: Yeah.

Samuel McColgan: Our next question comes from Samuel Mccolgan from breakout investors. Please go ahead.

Samuel McColgan: Yeah, brilliant. Great. Yeah. Congratulations. Great quarter. Well done. Well done. I just had a couple of questions. One was on operating expenses.

Samuel McColgan: Can you hear me okay.

Speaker Change: Yesterday, when we hear you.

Speaker Change: Good afternoon.

Samuel McColgan: Yes, congratulations great quarter, well, then well then.

Samuel McColgan: I just had a couple of questions.

Philip A. Fain: They came in a little bit lower. I just wondered how you think that will kind of progress through the year? Are you hoping to kind of stay at a little bit lower level? Or, you know, are they just going to kind of fluctuate around where they are? Just wondering how that might look.

Samuel McColgan: Operating expenses they came in a little bit lower I just wondered.

Philip A. Fain: How do you think that'll kind of progress through to the Aries, hoping to understand a little bit lower level.

Philip A. Fain: And then just kind of kind of fluctuates around where they are just wondering how that might look.

Philip A. Fain: Well, our goal is to keep our operating expenses as low as possible. I mean, in Q1, I think we underspent a little bit on the R&D side. We thought we'd probably spend a little bit more, but it's just a matter of timing on some of that spend. You know, we want to add a little bit of expense on the marketing and sales side just to really drive that funnel growth. But overall, we're not looking for, you know, huge swings in that expense line at this point.

Speaker Change: Well our goal is to keep our operating expenses as low as possible I mean in Q1 I.

Philip A. Fain: I think we underspent a little bit on the R&D side, we thought we'd probably spend a little bit higher but it's just a matter of timing on some of that spend we want to add a little bit of expense on the on this on the marketing and sales side, just to really drive that funnel growth.

Philip A. Fain: But overall, we're not looking for huge swings in that expense line at this point.

Philip A. Fain: Yeah, pretty much. And the other question I had was about debt. I know you're hoping to kind of ramp up how quickly you're paying that down; you don't know how the year will quite turn out yet, but I just wondered if you had kind of a goal in mind of how much you were hoping to reduce the debt by through 2024. I don't know if you can comment on that.

Speaker Change: Yes, Brian.

Philip A. Fain: And the other question I had was bad debt.

Philip A. Fain: I know, you're hoping to kind of ramp up how quickly are paying that down.

Philip A. Fain: Obviously.

Philip A. Fain: You don't know.

Philip A. Fain: Question that yes, but I just wondered if you had kind of a goal in mind of how much you will help data.

Philip A. Fain: To reduce that debt.

Speaker Change: Well I don't know if you can comment on that.

Philip A. Fain: Oh, I can comment on that. I previously have commented on that, Sam, and my goal going into any quarter is to reduce debt on a quarterly basis by $2 million, and that is through solid operations. What we have in hand with an unknown expectation date of when we're going to see it is the ERC claim that we have with the IRS. We announced that in Q2 of last year. That's $1.5 million.

Speaker Change: I can comment on that I previously have commented on that Sam and my goal going into any quarter is to reduce debt on a quarterly basis by $2 million and that is that is through solid operations, what we have in hand with them.

Philip A. Fain: Next bill ex expectation date of when we're going to see it is is the ERC.

Philip A. Fain: Claim that we have with the eye with it.

Philip A. Fain: Yes.

Philip A. Fain: We announced it in Q2 of last year, that's $1 5 million not sure when we're going to see that and I'm not sure of the IRS notice that either and then the.

Philip A. Fain: I'm not sure when we're going to see that, and I'm not sure the IRS knows that either. And then the business interruption insurance claim that we spoke about in the last couple quarters, that's still in process with the insurance underwriters, and with the volume of work they have, those do take some time. But those I would absolutely earmark for debt reduction, but on an ongoing basis, all things being equal, I target $2 million going into any one quarter.

Philip A. Fain: The business interruption insurance claim.

Philip A. Fain: We have spoken about the last couple of quarters that that's still in process with the with the insurance underwriters and with the volume of work. They have those do take some time, but those are I would absolutely earmarked to debt reduction, but in an ongoing basis, all things being equal I target $2 million going into any one quarter.

Samuel McColgan: Yeah, that would be an impressive, impressive reduction through the air if you're able to funnel all that in. Yeah, that's it from me. Well done. Really impressive water. Thank you so much.

Philip A. Fain: Yes that would be an impressive impressive reduction through the.

Samuel McColgan: And I will let Ed.

Speaker Change: Yes, that's it from me well, then really impressive quarter.

Operator: Thank you so much. Thank you. Thank you. Have a great day. Thank you. As a reminder...

Speaker Change: Thank you. Thank you. Thank you have a great day.

Operator: Yes.

Operator: And as a reminder, to ask a question, you need to press star one one on your telephone and wait for your name to be announced. I am not taking any further questions at this time. I would now like to turn it back over to Mike for closing remarks.

Operator: Thank you.

Operator: As a reminder.

Mike: To ask a question you need to press star one on your telephone and wait for your name to be announced.

Mike: I am showing no further questions at this time I would now like to turn to.

Operator: I would now like to turn it back over to Mike for closing remarks.

Michael E. Manna: All right, thanks everyone for listening to today's call. We look forward to talking to you next time during the Q2 2024 earnings call in July. Talk to you then. Bye now.

Mike: Alright, thanks, everyone for listening to today's call. We look forward to talking to you next time during the Q2 2024 earnings call in July.

Mike: Talk to you then thanks, everyone by now thank you.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Operator: Okay.

Operator: Yes.

Operator: Okay.

Operator: [music].

Operator: Okay.

Operator: Good.

Operator: [music].

Operator: Okay.

Operator: [music].