Q1 2025 Innovative Solutions and Support Inc Earnings Call
Speaker Change: Good day and welcome to the innovative solutions and support first quarter 2025 results conference call and webcast. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: This release is publicly available in the Investor Relations section of our corporate website at Www Dot innovative dash S. S Dot com.
Speaker Change: I would like to remind you that management's commentary and responses to questions. On today's conference call May include forward looking statements, which by their nature are uncertain and outside of the company's control.
Speaker Change: Although these forward looking statements are based on management's current expectations and beliefs actual results could differ materially.
Speaker Change: For a discussion of some of the factors that could cause actual results to differ please refer to the risk factors section of our latest reports filed with the SEC.
Speaker Change: Additionally, please note that you can find reconciliations of all historical non-GAAP financial measures mentioned on this call and the press release issued earlier today.
Speaker Change: Today's call will begin with prepared remarks from share them who'll provide a review of our recent business performance and strategic outlook followed.
Speaker Change: Followed by a financial update from Jeff.
Speaker Change: The conclusion of these prepared remarks, well open the line for your questions with that I'll turn the call over to Cheryl.
Speaker Change: Thank you Paul and good afternoon to everyone joining us on the call today.
Cheryl: Let's begin with a high level overview of our first quarter financial performance.
Cheryl: During the first quarter it delivered more than 70% year over year growth in revenue driven by momentum from new military programs and contributions from our legacy platforms.
Cheryl: Organic growth, which was in the mid to upper single digit range was mainly driven by continued momentum across our military end markets.
Cheryl: Trends, we expect to continue.
Cheryl: We are also seeing improved trends.
Commercial business and expect growing momentum as we move through the fiscal year.
Cheryl: Our fiscal Q1 is typically a busy period for air transport.
Cheryl: Our gross profit increased approximately 20% as a strong revenue growth was partially offset by the significant investments youre, making to support our growth initiatives, which I will discuss in more details here shortly.
Cheryl: Our backlog was approximately 81 million as of December 31st 2024, compared to $14 6 million in the prior year.
Cheryl: Well now our call last quarter.
Cheryl: Juice.
Cheryl: I assess the next our long term value creation strategy.
Cheryl: Yeah.
Cheryl: As a quick refresher our strategy centers on a combination of targeting commercial growth within the high value markets.
Cheryl: Improving operating leverage.
Cheryl: And the disciplined returns driven approach to capital allocation.
Cheryl: During the first quarter, we continued to execute against our initiatives I would like to take a moment to highlight just a few of the key achievements that reflect our commercial growth priorities.
Cheryl: We continued to make significant investments in our growth initiatives, which is impacting our margins in the near term.
Cheryl: Place us in a strong strategic position to take advantage of some other exciting opportunities.
Cheryl: Markets and drive profitable growth in the coming quarters.
Cheryl: Some of these investments included the following.
Cheryl: First.
Cheryl: Activity in our military markets continue to accelerate.
Cheryl: We made significant investments in both infrastructure and <unk>.
Cheryl: <unk> capabilities to support the high performance requirements of our defense customers.
With that and integrated and modern ERP system.
Cheryl: More robust.
Cheryl: <unk> infrastructure and strengthen our security and accounting services to make us compliant.
Cheryl: With defense Federal acquisition regulation supplement or DFAST requirements.
Cheryl: These are critical investments as we continue to win a bid for larger D O D programs.
Cheryl: Second we are also continuing the expansion of our Exton, Pennsylvania facility.
Cheryl: When completed.
Cheryl: In mid 2025.
Cheryl: We will have doubled our footprint and increased our production capabilities by more than a threefold.
Cheryl: I watched the progress from my office window every day and I'm happy to report that the groundwork is complete.
Cheryl: The steel structure is up and the completion of the internal and external walls will commence shortly.
Cheryl: As a side note.
We've been funding this the bulk of our P&L.
Cheryl: Importantly, we are adding this capacity with a capital investment of only 6 million providing for the opportunity of a very strong with that.
Cheryl: We also think it's worth reminding everyone that the <unk> manufacturers, 100% of its product and our <unk> facility.
Cheryl: We think this is important and puts us in an enviable position as the new administration makes it significant push for re shoring of manufacturing and in America first mentality.
Cheryl: But during the first quarter, we made significant investments in support of our most recent acquisition from Honeywell.
Cheryl: This spending during the first quarter was made ahead of the expected growth from these platforms.
Cheryl: We also made investments that resulted in some duplicative costs as we train our staff to transition the manufacturing of the products from Honeywell into our Exton facility.
Cheryl: The integration is on track and we are excited by the opportunities from this most recent acquisition.
Cheryl: And finally, you also continued to strengthen our workforce across the organization to support our strategic growth initiatives.
Cheryl: Our head count is up over 25% from last year.
Cheryl: Which will help us.
Cheryl: As we scale the business.
Cheryl: In terms of new product development.
Cheryl: We may we remain highly focused on the opportunity within cockpit automation, leading to autonomous flight.
Cheryl: Our next generation of our utility management system or U M. S. Two remains on track to have our first test flight by mid 2025 for the Pilatus PC 24.
Cheryl: We also believe the next generation of AI.
Cheryl: Our enable utility management system is the ideal certifiable platform for flight automation.
Cheryl: With our initial focus being military customers and applications.
Cheryl: We believe the military market is the most immediate and logical market to deploy our autonomous flight capabilities.
Speaker Change: Yeah unfortunate recent events.
Speaker Change: Turning to the surface the need for more automation in the flight deck to enhance safety.
Speaker Change: We are encouraged by the growth opportunities across our commercial air transport business aviation and military markets.
Speaker Change: We're confident we're making the necessary investments to strategically position <unk>.
Speaker Change: To win in the markets.
Speaker Change: In conclusion, we are off to a solid start for fiscal 2025 and are excited by the opportunities that lie ahead.
Speaker Change: We have made the investments necessary to support our new programs.
Speaker Change: We have made important progress regarding the integration of our most recent acquisition and we are making the necessary investments to support our organic growth initiatives.
Speaker Change: That said we.
Speaker Change: We still intend to remain a strategic acquire.
Speaker Change: While we have most recently been focused on complementary product lines from large avionic suppliers that expand our capabilities in advanced avionics.
Speaker Change: We are also evaluating opportunities to acquire smaller avionics manufacturers.
Speaker Change: Well, we anticipate synergies will be realized by incorporating their outsourced production in our facility.
Speaker Change: Looking ahead, we intend to build on the momentum evident within our business and remain on track to deliver both revenue and EBITDA growth of over 30% when compared to fiscal year 2024.
Speaker Change: With that I'll turn.
Jeff: Turn the call over to Jeff who is prepared remarks.
Jeff: Thank you Sharon and good afternoon to all those joining us today I will provide a high level overview of our first quarter performance, including a discussion of our working capital balance sheet and liquidity profile at quarter end.
Jeff: We generated net revenues of $16 million in the first quarter up just over 70% when compared to the first quarter last year. The increase was driven primarily by contribution from the recently acquired Honeywell military product line as well as 7% organic growth due.
Jeff: Two in part, including the continued momentum of our new military programs.
Jeff: Product sales were $10 million during the first quarter more than double last year's levels, driven primarily by the recent acquired military product line offset by reduced shipments to the business aviation customers.
Jeff: Service revenue was $6 million, owing largely to the customer service sales.
Jeff: Lines acquired from Honeywell and increased and RV revenue, partially offset by lower legacy customer service revenue.
Jeff: Gross profit was $6 6 million during the first quarter up from $5 5 million in the same period last year, driven by strong revenue growth, partially offset by higher depreciation expense, resulting from the Honeywell acquisition duplicate cost in support of the migration of the recent Honeywell acquisition.
Jeff: <unk> and continued investments in growth initiatives as Sharon discussed.
Jeff: Our first quarter gross margin was 41, 4% down from 59, 3% in the same period last year.
Speaker Change: As I discussed last quarter. There are several factors that have been impacting our gross margin capture in recent quarters, which continued during the first quarter and will remain a factor in the near term.
Speaker Change: These factors include incremental depreciation from recent product line acquisitions and the shift in our sales mix as military sales will be a higher percentage of sales more.
Speaker Change: More specifically during the first quarter the impact of the acquired Honeywell military product line volume, but lower margin was approximately 500 basis points increased third party expenses from Honeywell with respect to their transition services was approximately another 200 basis points and higher depreciation.
Speaker Change: <unk> from recent acquisitions was roughly a 500 basis point headwind to gross margins.
Speaker Change: As it relates to the product mix generally military sales carry a lower average gross margin versus commercial client contracts. However, there is minimal operating expenses associated with these contracts. So the incremental EBITDA margins are strong and given the significant potential we see for absolute EBITDA dollars.
Speaker Change: Growth in military we believe this is good for us and work that we will continue to pursue as it advances our focus on improved operating leverage.
Speaker Change: In addition to these factors during the first quarter, we incurred cost to support the ramp up of recently acquired product lines from Honeywell as well as inefficiencies due to hiring and training additional personnel.
Speaker Change: Many of these costs with Duke lived in nature and will not be factors, we fully transitioned the product line into I S. N S.
Speaker Change: Given these factors we continue to expect our consolidated gross margins will likely trend closer to mid 50% on a normalized basis, which is below historical levels as.
Speaker Change: As we complete the integration and begin to enjoy the scale benefits of these investments we will be able to drive increased adjusted EBITDA margin realization in net profitability overtime.
Speaker Change: Operating expenses during the first quarter 2025 was $5 3 million an increase from $3 9 million in the comparable period last year. This increase was driven by approximately $400000 from increase in product development efforts in support of our long term growth initiatives incremental.
Speaker Change: <unk> from Honeywell acquisitions, including $700000 of amortization expense and 300000 in employee costs, primarily due to increase in head count.
Speaker Change: And another $300000 of acquisitions aren't onetime expenses.
Speaker Change: We've increased our head count by over 25% to support our future growth initiatives across the organization.
Speaker Change: Operating expenses represented 33% of revenue during the first quarter down from 42% in the first quarter of last year, owing to improve operating leverage first.
Speaker Change: First quarter net income was 700000 or four cents a share compared to net income of $1, one nine or six cents per diluted share a year ago.
Speaker Change: EBITDA was $2 7 million during the first quarter up from $2 1 million last year or 28% increase largely due to our revenue growth and operating expense leverage.
Speaker Change: Excluding acquisition related costs and other one time expenses first quarter adjusted EBITDA was $3 1 million up from $2 5 million last year.
Speaker Change: Moving onto backlog new orders in the first quarter of fiscal 'twenty, five or seven and a half million dollars and backlog as of December 31 was $80 million as compared to $14 6 million. This time last year. The backlog includes only purchase orders in hand, and excludes orders from companies or.
Speaker Change: And customers under long term programs, including flattish PC 24, Textron King air totaling <unk> seven or at half the Boeing KC 46 E and the F 16 with Lockheed Martin.
Speaker Change: We expect these programs to remain in production for several years and anticipate they will continue to generate future sales further due to their nature the product lines from Honeywell do not typically enter backlog.
Speaker Change: Now turning to cash flow during the first quarter 'twenty five cash flow from operations was $1 $8 million compared to $4. Two nine in the year ago comparable period. This decrease is primarily due to the inventory buildup in support of anticipated production and the timing of payables and capitalized costs with the ERP implementation.
Along with the impact of growth initiatives discussed above.
Speaker Change: Capital expenditure was $300000 during the first quarter 'twenty five versus 200000 in the same period last year as a result of these factors free cash flows during the first quarter was $1 $6 million versus free cash flow of $4 million last year.
Speaker Change: Total net debt as of December 31 was $25 9 million, our net leverage ratio at the end of the quarter was 1.8.
Speaker Change: Our total cash and availability on our credit line was $9 million at the end of the first quarter, which provides us financial flexibility to support our ongoing operations and facility expansion.
Speaker Change: That completes our prepared remarks, operator, we're now ready for question and answer portion of the call.
Speaker Change: We will now begin the question and answer session.
Speaker Change: Ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Speaker Change: Okay.
Speaker Change: The first question comes from Gauci three with singular research. Please go ahead.
gauci: Hi, Congratulations guys can you hear me.
Speaker Change: Yes.
Speaker Change: Thank you for taking my call Greg Congratulations.
Speaker Change: In terms so this military revenue being now.
Speaker Change: A significant portion of the growth story.
Speaker Change: What strategies or investments that you're making to remain.
We remain.
Speaker Change: I live and to gain market share I know you mentioned.
Speaker Change: Had a gentleman you hired a couple of years ago, what what are the investments.
Required spend.
Speaker Change: Necessary to continue.
Speaker Change: Continued to take market share.
Speaker Change: So so far for <unk>.
Speaker Change: Most part.
Speaker Change: The second tier supplier to the to the deal that means that we've always worked through.
Speaker Change: An integrated even even.
Speaker Change: Even on some of the Oems walk through I mean to the degree we really haven't had any large size program star rectilinear with.
Speaker Change: With the D O D.
Speaker Change: In order to have those kind of contracts.
Speaker Change: And the prime for it.
Speaker Change: Rich.
Speaker Change: Part of that also applies to the product lines.
Speaker Change: Paul from Honeywell for the F 16 platform.
Speaker Change: We got to be what they call, we gotta be compliant to a wallet.
Speaker Change: Deforest.
Speaker Change: Yes.
Speaker Change: <unk> requirements.
Speaker Change: And so.
Speaker Change: So being an incomplete.
Speaker Change: Compliant in terms of.
Speaker Change: Account.
Speaker Change: Call. It certified government accounting is a is one of those requirements.
Speaker Change: Being able to have on it.
Speaker Change: Organization.
Speaker Change: That meets the requirements of the deal is another one having your system.
Speaker Change: Such a way.
Speaker Change: That you can obtain security clearance U.
Means of protecting government documentation.
Speaker Change: So all of that is required for you to become a tier one supplier.
Speaker Change: Heartlands defense.
Speaker Change: And we have implemented.
Speaker Change: All of those.
Speaker Change: It's all going to be completed within the next few weeks.
Speaker Change: That does that.
Speaker Change: Requires you to bring in consulting.
Speaker Change: Requires you to buy.
Tools new.
Speaker Change: New ERP system, which has been in works for over a year.
Speaker Change: <unk>.
Speaker Change: Putting it in place our ERP system, which was an MLP.
Speaker Change: Coal mix.
Speaker Change: Came into market in the in the 19 eighties and yet and we've got the point, where there were only two companies that that.
Speaker Change: Pat.
Speaker Change: Using this with no support.
Speaker Change: So so.
Speaker Change: So we've put in a modern ERP system in place, which would significantly help us.
Speaker Change: <unk> run the business more efficiently because we cannot readily see information.
Speaker Change: That management needs to see.
Speaker Change: In terms of Varian says Boston Labor variances.
Speaker Change: Important information that now it takes a lot of people to manually generates all of these things all of that will automatically available by the system.
Speaker Change: So it does have significant.
Speaker Change: Now two of them.
Speaker Change: The time and cost savings for us.
Speaker Change: The implementation of that so so.
Speaker Change: We are applying for clearance.
Speaker Change: What was that in place.
Speaker Change: And and then you're.
Speaker Change: It gets us to a point, where we're looking at some of them serious.
Speaker Change: These programs and even even in order to be able to bid on those programs.
Speaker Change: Have to be compliant with the law reform regulation.
If you did.
Speaker Change: The program, which is less than $2 million I think which is the Tina limits, then which is typically in the past we've done.
Speaker Change: If you don't have to have any of this stuff in place as soon as you go above that.
Speaker Change: A whole bunch of regulations.
Speaker Change: Applied to you.
Speaker Change: But that's where we want to grow the business. So we really got serious about it.
Speaker Change: Okay.
Speaker Change: Okay awesome.
Speaker Change: In terms of I know you guys had a foreign military engagement end of last year.
Speaker Change: How does the margin profiles of the foreign military engagements compared to the domestic.
Market I would assume you're able to extract a better margin profiles the pricing from those foreign military programs.
Speaker Change: Yes.
Speaker Change: If you're a foreign military sale doesn't go through the U S.
Speaker Change: D.
Speaker Change: Then.
Speaker Change: It's you treated as a commercial deal.
Speaker Change: If it's.
Speaker Change: So procurement through that because our government but.
Speaker Change: I guess gives funding to some of the.
Speaker Change: Allied nations.
Speaker Change: Two two to procure.
Material.
Speaker Change:
Speaker Change: But essentially that's going through the U S. The budget. So it's still applies to you.
Speaker Change: In areas that kind of in the past when we sold.
Speaker Change: Two two.
Speaker Change: Youre right.
Speaker Change: Airforce or patricide, therefore set that was not coming for U S funded.
Speaker Change: <unk> is.
Speaker Change: He's treated electric commercial deal.
Speaker Change: Some of them.
Speaker Change: Some of the benefits of that.
Speaker Change: Worldwide also.
Speaker Change: Once your system is on a U S Air Force aircraft.
Speaker Change: It puts you in a strong position to put that system in other air forces.
Speaker Change: Aircrafts and and you know if it's just.
Speaker Change: It's not something that's funded by the Dod.
Speaker Change: You get a premium price for it.
Speaker Change: Okay Gotcha.
Speaker Change: And so.
Speaker Change: So with this 40% military mix of business.
As the company's base of excess continues to shift, particularly.
Speaker Change: In favor of the military.
Speaker Change: I know you guys had a 60% usually gross margin target. So what would you anticipate the new margin profile to look like kind of and will that be something you'll be targeting towards the end of the year.
Speaker Change: I think.
Speaker Change: Let me let me, let me put it this way.
Speaker Change: When we look to buy a program.
Speaker Change: Bye bye see a product line.
Speaker Change: Really.
Speaker Change: Take a look at what EBITDA it gives us.
Speaker Change: And Thats hobby.
Speaker Change: Harvey.
Speaker Change: That's how we value our product.
Speaker Change: No.
Speaker Change: At the end of the day gross margins on military programs are.
Speaker Change: It can be lower than commercial.
Speaker Change: But.
Speaker Change: Here's what you don't have you typically don't have any engineering expense because they separately pay for engineering work you have to do as with commercial.
Speaker Change: Our commercial programs.
Speaker Change: <unk> you have a high engineering burden on the products to deal with obsolescence.
Speaker Change: Well as your development efforts and the military they pay for obsolescence engineering they pay for your development.
Speaker Change: So so you don't have the engineering all of US in terms of SG&A the sales side of ESG.
Speaker Change: It's very very minimal military programs.
Speaker Change: Only one tool.
Speaker Change: Do I need to keep on reselling the same teams within minutes.
Speaker Change: Once you've been selective and you're in there we go.
Speaker Change: Programs with USF Lewis.
Speaker Change: We added 35 years of Glenn Theres still continually.
Speaker Change: Just send you. They just send you their equipment they give you orders and when they need the product. So it has a much much lower bad debt and your SG&A.
Speaker Change: Almost zero burden on your engineer.
Speaker Change: So in a way the fact that this margin is not as good.
Speaker Change: But by the nature of defense contract.
Speaker Change: You'll have to justify all your.
Speaker Change:
Speaker Change: It kind of dilutes your gross margin.
Speaker Change: It's probably going to be adverse.
Speaker Change: Around 50.
Speaker Change: 50% gross margin.
Speaker Change: What we wanted to focus on gross margin.
Speaker Change: Actual EBITDA and profit margin.
Speaker Change: The business.
Speaker Change: We believe that even though the.
Speaker Change: Military platforms have lower gross margin.
Speaker Change: In terms of.
Speaker Change: In terms of EBITDA as a percentage of revenue.
Speaker Change: Meet the same margins as the collateral, which what really matters.
Speaker Change: Gotcha Gotcha.
Speaker Change: And just my final question before I jump back in line.
Speaker Change: In terms of leveraging the balance sheet, how will you balance the need for the significant infrastructure spend investments required.
Speaker Change: In terms of the expansion of production capacity.
Speaker Change: And with the pursuit of strategic acquisitions.
Speaker Change: Yes, so right now the building and even new strategic initiatives are really gaining funded through operations and our credit facility that we have today as I mentioned right now the availability with our cash on hand, and our availability on our line is about $9 million. This provides enough.
Speaker Change: As we look at acquisitions.
Speaker Change: That profile can change we want to stay around.
Speaker Change: Around the three times leverage ratio on a go forward basis.
Speaker Change: We're being very diligent with any acquisition.
Speaker Change: Being very.
Speaker Change: Mindful of the leverage ratios, we want to be.
Speaker Change: Yes.
Speaker Change: Hi.
Speaker Change: Yes, Scott.
Speaker Change: Definitely in the impact of this quarter.
Speaker Change: Because of the investments that we've made.
Speaker Change:
Speaker Change: But.
You know if you were to adjust for them it would have been significantly higher than last year.
Speaker Change: Okay.
Speaker Change: Awesome, Thank you guys and congratulations.
Speaker Change: Okay.
Speaker Change: The next question comes from Doug Ruth with Lenox Financial services. Please go ahead.
Doug Ruth: Hi, Sean Jeff. Thank you for hosting the conference call.
Speaker Change: I was curious.
Doug Ruth: Could you.
Speaker Change: Share with us your strategy.
Speaker Change: With where are the acquisition opportunities are coming from are you working with an investment banker, how how exactly are you finding.
Speaker Change: The opportunities.
Speaker Change: So we have the.
Speaker Change: We have a.
Speaker Change: Business development.
Speaker Change: Vice President.
Speaker Change: That.
That has significant experience.
Speaker Change: In the merger and acquisitions, he ran mergers and acquisition for Rockwell Collins for many years.
Sure.
Speaker Change: And Ts you retire.
Speaker Change: It's working for US returned from Rockwell Collins.
Speaker Change: Is working for US we also.
Speaker Change: Talk to a lot of the bankers.
Speaker Change: And he does.
Speaker Change: As well as well as we have we have our marketing guys in the field and talking to the cost.
Speaker Change: I think most of the industry by non Nos.
Speaker Change: Our strategy for acquisitions, and we get we get them fall off.
Speaker Change: Yeah.
Speaker Change: These product lines when they come out.
When they come up for sale a licensee.
Speaker Change: As well as as well as.
Speaker Change: Small avionics companies we get.
Speaker Change: The portfolio from.
Speaker Change: As soon as the bankers that we talk to as well that deal with our bikes.
Speaker Change: Most of the stuff that comes out in our industry.
Speaker Change: Orders of magnitude larger than.
Speaker Change: We could afford.
Speaker Change: But when the ones that are within our Bard sites come about we get to know them.
Speaker Change: And we evaluate.
Speaker Change: Probably one or two a quarter of small companies.
Speaker Change:
Speaker Change: But we're only going to do it if it if it makes sense.
Speaker Change: Well I mean, one of my thoughts.
Speaker Change: Yes.
Speaker Change: If our government starts within tariffs on imports from from other countries a lot of the smaller.
Speaker Change: [noise] small aviation manufacturers and be honest factors.
Speaker Change: Yes.
Speaker Change: I know.
Speaker Change: They outsource their production they don't have production capabilities will be a kind of a very unique.
Speaker Change: In that area.
Speaker Change: We.
Speaker Change: Manufacturing capabilities in house for everything.
Speaker Change: And thats kind of always been the strength of ours when it comes to.
Speaker Change: The there is tariffs.
Speaker Change: The supply chain issues.
Speaker Change: Our cost of material.
It's small relative to our self prices because of all the all the value added things that we do in house. So even if material goes up it doesn't significantly impact our profitability.
Speaker Change: So so.
Speaker Change: That that that combination in that formula.
Speaker Change: Laos us.
Speaker Change: Two if they start putting tariffs on a lot of these guys getting the board's made in southeast Asia, where prices are going to go along.
Speaker Change: And we may be able to pick them up for a full for a good price and then bring their production in your house.
Speaker Change: And benefit from it.
Speaker Change: Just two.
Speaker Change: Sure.
Speaker Change: Idea.
That we believe May payoff, if you pick the right company.
Speaker Change: Now this this one to two per quarter is that number is that generally been fairly stable is it seemed like it's increasing is it decreasing or what what do you see there.
Speaker Change: Is that that's been pretty stable.
Speaker Change: Okay.
That's true.
Speaker Change: However for majority of them you look at it.
Speaker Change: And you see there's nothing that are interested in buying the unless you're digging into all of the into a we just looked at long.
Speaker Change: Couple of weeks ago.
Speaker Change: And kind of.
Speaker Change: Yeah.
Speaker Change: Sure.
Speaker Change: They really.
Speaker Change: One product.
Speaker Change: Is that of interest the rest of the business is losing money.
Speaker Change: I don't think if we get it they're going to be losing money on it as well.
Speaker Change: You can buy that product client from them that's good.
Speaker Change: But some of them are like this ever.
Speaker Change: We're being very disciplined with the approach and it has to fit in our bailiwick, So really want to make sure.
Speaker Change: You know something that that makes sense for ice ines.
Speaker Change: Okay, well I appreciate you answering my questions I want to wish you all the best and we're looking for or looking for Rob Yeah. I'm. Just this growth to continue so thank you for taking my question.
Speaker Change: Thank you.
Speaker Change: Okay.
Andrew: The next question comes from Andrew <unk> with <unk> partners. Please go ahead.
Speaker Change: Hi, gentlemen.
Speaker Change: Can you just remind us.
Speaker Change: On our fourth quarter call you guys talked about this pull forward effect.
Speaker Change: Not that you weren't expecting to come in the second quarter, just any revised thoughts that you have now that we're in it.
Speaker Change: Right. So I think youre, saying, Andrew it was when we talked a little bit there might be a little bit of an uptick in Q around.
Speaker Change: The military product line that we may see so yes, there is a potential there might be an uptick in the revenue side from the Honeywell military product line a lot of that is still being operated at Honeywell under the transition services agreement. So we do have visibility there but.
Speaker Change: We're in constant contact with them on a weekly basis. Some of those deliveries may begin delayed a little bit and they're having some.
Speaker Change: Potential issues, that's why we wanted to get a transition to Isis.
Speaker Change: Timely fashion, but there potentially could be an uptick in the revenue on that product line in Q2.
Speaker Change: So it's still on the plan that that.
Speaker Change: Manufacturing will transition over in the second quarter or maybe someone that pushes in the third quarter.
Speaker Change: So it's going to be in the third quarter.
Speaker Change: Second quarter is.
Speaker Change: Sure enough.
Speaker Change: And Brian.
Speaker Change: So that the transition is going to happen in the third quarter.
Speaker Change: Okay.
Speaker Change: Hoping that it will happen in the third quarter, let me put it that way.
Speaker Change: Because.
Speaker Change: Because right now I think they're talking about may right.
Speaker Change: And and they they have Honeywell has to build sufficient amount.
Speaker Change: Backlog and delivery to Lotte cheat.
Speaker Change: Before they can shut down the line and go through the transition.
Speaker Change: And and I think there was some some some heat sink part one of the.
Speaker Change: The issue, we've actually told them that we can manufacture it for them here in house.
Speaker Change: To try to expedite it but.
Speaker Change: In the drawing for it.
Speaker Change: But but but but it's going to be somewhere around I would think either may or June.
Speaker Change: Timeframe.
Speaker Change: Hopefully one.
Speaker Change: You won't get into July.
Speaker Change: But.
Speaker Change: But definitely not this quarter.
Speaker Change: Okay and then.
Speaker Change: Jeff is there any financial benefits that.
Speaker Change: And that we can expect over time from <unk>.
Speaker Change: ERP implementation.
Speaker Change: Yeah. So I think when you you haven't ERP system, what does that give you. It gives you better data so management can make you know.
Speaker Change: Long time.
Speaker Change: Reaction to information so I think we'll see efficiencies throughout the organization, how we manage the business. So my expectation is people will then be able to look at the data to make better decisions than trying to I don't want say create the data, but trying to extract data to make it an unusual form so now they'll have time to analyze it we can.
Speaker Change: And labor changes even products.
Speaker Change: With suppliers too so I'm envisioning will have some.
Speaker Change: Better information for all the users that are financials.
Speaker Change: I think in general today.
Speaker Change: Everybody.
Speaker Change: Once anything it go in.
Speaker Change: Therefore, the data export it to excel spreadsheet and they tried to manipulated on XL and then generates.
Speaker Change: And consume.
Gerry charts.
Speaker Change: It takes time to do that as as.
Speaker Change: The new ERP system all of these are all available in your.
Speaker Change: Alright.
Speaker Change: On your screen.
Speaker Change: Correct.
Speaker Change: Alright, and then.
Speaker Change: It sounds like there's a lot there's a lot going on I mean, you've got that acquisition.
Speaker Change: And then I guess in conjunction with that you talked about some of the things that you're at.
Speaker Change: It system the ERP.
Speaker Change: Getting in compliance with the military standards.
Speaker Change: And then obviously you've got the construction project, which.
Speaker Change: Is it up and running.
Speaker Change: Will you be kind of a normalized.
Speaker Change: By the time you exit.
Speaker Change: 25.
Speaker Change: With all of this stuff.
Speaker Change: Stuff going on.
Speaker Change: I like to think that by Q4.
Speaker Change: It should be in good shape.
Speaker Change: With all of this.
Speaker Change: No.
Speaker Change: I would not go and I think we should be able to be normalize depending on any other acquisitions.
Speaker Change: From what we have in front of us, but by the end of Q3.
Speaker Change: Should be yes.
Speaker Change: Building will be done and our people.
Speaker Change: And listen I mean, barring a big delay from Honeywell to do that.
Speaker Change: This is a transition.
Speaker Change: It should be.
Speaker Change: Because right now we are paying in a way we paying double duty here.
Speaker Change: We're paying cost of goods sold.
Speaker Change: We also have a team here.
Speaker Change: Getting trained to do the job.
Speaker Change: So that affects our gross margins.
Speaker Change: And your profitability.
Speaker Change: Yeah.
Speaker Change: As soon as the transition happens over here.
Speaker Change: The hiring of technicians.
Speaker Change: As you know, we're just paying us.
Speaker Change: And then.
Speaker Change: Jeff if I understood. Your comments right. Maybe this quarter is kind of the low point for <unk>.
Speaker Change: Gross margin and then they can kind of improve but I'm also kind of wondering if we should really just maybe just thinking about this business don't worry to hyper focused on gross margin and just maybe focus on.
Speaker Change: EBITA margin.
Speaker Change: That's correct I think you really want to focus on those EBITDA margins because again, if we had that big check in Q2 on the military volume and the product mix, that's going to impact gross margins, but even as I mentioned you know this.
Speaker Change: This quarter depreciation expense was 501000 hours higher than it was.
Speaker Change: At this time last year Q1 last year, so that impact that.
Speaker Change: Those margins are about 500 basis points.
Speaker Change: So, yes things like that with these acquisitions. So yes, I would say EBIT is the better metric to look at.
Speaker Change: From that perspective, and then focus on our margins because again, it's going to be around product mix.
Speaker Change: So if we kind of look out at.
Speaker Change: In a more normalized.
Speaker Change: What is your current expectation for what that can look like.
Speaker Change: EBITDA margins, so we're actually projects yet.
Speaker Change: EBITDA year over year by 30% and we feel confident about that number today.
Speaker Change: Yeah, even with Q.
Speaker Change: I mean Q1 was 28% of a break there so we still feel confident with the 30%.
Okay Alright.
Speaker Change: Alright.
Speaker Change: Nice quarter, Thanks, a lot guys.
Speaker Change: Thank you and I appreciate it.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Sharon Oscar poor for any closing remarks.
Speaker Change: Thank you operator, and thank you all for your time and interest in <unk>.
Speaker Change: Good day.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Yeah.