Air Industries Group Q2 2023 Earnings Call Transcript

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August 9, 2023

Key Takeaways

  • Air Industries reported Q2 net sales up 5% to $13.2 million, with gross profit dollars rising over 13% and margin expanding to 16.4%, leading to a positive operating income and a 36% reduction in net loss.
  • Sterling Engineering drove profitability through higher sales volume, improved product mix, increased plant utilization, and capital investments in key equipment like a large‐format bridge mill and coordinate measuring machine.
  • The company secured two new contracts totaling $5.2 million for arresting gear components—one from a long‐standing customer and its first non-U.S. award—and leveraged the Paris Air Show to generate additional RFQs.
  • Bookings in Q2 surged over 250% year-over-year, led by inroads into the expanding nuclear submarine market (forecasted 50% U.S. Navy fleet growth) with more projects expected in Q3.
  • Persistent material availability challenges and a 73% year-over-year rise in interest expense—driven by higher prime rates—pose ongoing cost pressures.
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Earnings Conference Call
Air Industries Group Q2 2023
00:00 / 00:00

There are 4 speakers on the call.

Operator

Hello, and welcome to Air Industries Group Second Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. This call and the accompanying webcast may contain forward looking statements as defined in Section 27A the Securities Act of 1933 as amended, including statements regarding, among other things, the company's Regarding realization of its business strategy and growth strategy, expressions which include forward looking statements speak only as of the date of this call.

Operator

These forward looking statements are based largely on our company's expectations and are subject to a number of risks and uncertainties, some of which are beyond our control and cannot be predicted or quantified. Future developments and actual results could differ materially from those set forth and contemplated by or underlying the forward looking statements. In light of these risks and uncertainties, there can be no assurance that the forward looking information will prove to be accurate. This call does not constitute an offer to purchase any securities nor a solicitation of a proxy, Consent authorization or agent explanation with respect to a meeting of the company's shareholders. At this time, I would like to turn the call over to Lou Maluzzo, President and CEO.

Operator

Please go ahead, sir.

Speaker 1

Thank you, Latanya. Good afternoon and thank you for joining us today. I'm pleased to report that we have achieved strong top line and bottom line improvements in the Q2 of 2023. Net sales grew 5% to $13,200,000 Our profitability improved at even a faster pace With gross profit dollars up more than 13% and our gross profit margin increasing to 16.4%. And we recorded a positive operating income in the 2nd quarter after 2 quarters of operating losses, resulting And a 36% reduction in our net loss, the main drivers of our profitability improvement The sales growth and product mix at our Sterling Engineering subsidiary?

Speaker 1

In general, we realized higher margins on the products sold through Sterling, Plus, higher volume and plant utilizations have made a substantial difference in cost absorption and therefore, profit leverage. We're fully focused on increasing Sterling sales, especially through long term agreements. We see additional Citing opportunities for Sterling in the coming months. Additionally, Sterling's performance has benefited from transformation effort we have undertaken through capital investments and project reengineering. This highlights the efficiency of our new equipment.

Speaker 1

Over the past 2 years, we have added critical equipment at Sterling, such as our new large format bridge mill And coordinate measuring machine. We are continuing to invest in machining that gives us unique capabilities and differentiates us in the marketplace. Additionally, a plant modernization project is in the works that includes a new roof and solar panels. Installation of the solar roof and panels will reduce the capacity requirements and further save costs. Companywide business development effort is proceeding at full throttle and we're encouraged by the feedback we're receiving from both our long standing and new customers.

Speaker 1

Last month, we announced 2 new contract awards valued at a total of $5,200,000 for arresting gear components for the U. S. Army E-2D Hawkeye tactical airborne early warning aircraft and for the F-thirty 5 Lightning Combat Aircraft. 1 of the contract was from a long time customer, while the other came from a new non U. S.

Speaker 1

Customer And was our first award from a customer located outside the U. S. The Paris Air Show also proved to be an important source of new business opportunities. For example, we met with a potential customer in France, which led to a meeting with their Canadian operations, and we have now received an RFQ, Request for proposal from a highly interested potential new customer. We made further inroads into the nuclear submarine market in the Q2 and expect more projects to begin in the Q3.

Speaker 1

That market is experiencing expansive growth Given the projected 50% increase in the number of submarines required by the U. S. Navy over the next few years. We have targeted this market because we have identified a need for suppliers like Air Industries to deliver components that meet The ultra high quality standards required. Our business development effort has translated into increased bookings, It's just more than 2 50% in the Q2 of 2023 from the Q2 last year.

Speaker 1

The quoting activity continues to be very high across the board. On our last call, I discussed the strategic analysis We conducted with the help of an outside consultant to identify our most compelling market opportunities. As a result, we have defined the intermediate to longer term opportunities we plan to pivot toward, With the potential to further drive profitability growth, we have identified markets that are attractive and actionable And fit our capabilities where we can compete effectively. And importantly, we will target markets where We have significant near to mid term visibility into the volume and profit potential. Specifically, We intend to expand our penetration of existing platforms, continue to add new platforms and capture new markets.

Speaker 1

The additional B2D and F-thirty five awards are two examples of our expansion of existing military platforms. With a strong second quarter behind us, we are very optimistic that the momentum we have gained and the outlook for the future of the company. We demand excuse me, the demand drivers are pointed to the last quarter remain intact. The evolving geopolitical landscape, the need to modernize U. S.

Speaker 1

And air enable resources and the recovery and growth of commercial aerospace. Let me conclude by asserting the following. Our team is primed and ready. We have made the capital investments In the equipment to further differentiate our capabilities, while also refiling our delivery processes and reinforcing customer service. I'm confident that we are seeing the onset of a sustained period of improved order flow trajectory.

Speaker 1

In short, We are in a position to take full advantage of the current upcycle. And now let me turn the call over to Mike Grech, our CFO, for his report, which we will follow with a Q and A and some concluding remarks. Mike? Thank you, Lou. I'd like to start

Speaker 2

by saying I agree with Lou that the second quarter was very encouraging. Let me provide some additional detail. As reported, our 2nd quarter sales were $13,200,000 That was up 5% from the Q1 of 2020 and of those, it would have moved 5.7% lower in the Q2 of 2022. Year to date sales for the 6 months were $25,800,000 essentially flat with the prior year. Our gross profit for the Q2 was $2,200,000 which is up around 13% from the $1,900,000 in the Q1 of 'twenty three We're down about 10% from the $2,400,000 in the Q2 of 'twenty two.

Speaker 2

Gross profit margin, and this going to get a little complicated. Gross profit margin was 15.4 percent of sales for the 2nd quarter, and that's an increase of 140 basis points, 1.4 percentage points from 15% in the Q1. Now gross profit margin recorded for the 2nd quarter For 2022, it was 17.3%. So it looks like our gross profit margin is down. But The 1st 3 quarters of 2022, from January through September, our gross margin was 17.3%.

Speaker 2

At year end, we determined that our gross margin for the full year was only 14.3%. The reduction resulted from a new, more conservative method of calculating and reserving for slow moving inventory And anticipated future losses on one particular contract, and that's a contract that will be completed in 2023. So when comparing our Q2 2023 gross profit margin against the full year margin of 2022, that is 14.3%. Our 2023 gross profit dollars and our gross profit margin percentage exceeded the prior year. Operating expenses were $2,100,000 That's only 2% higher than the Q1 of 2023 And 4.3% lower in the Q2 of 2022.

Speaker 2

And so lower operating expenses In an inflationary environment, our operating income turned positive in the Q2 of 2023, totaling $90,000 And that compares to an operating loss of $158,000,000 in the Q1 of 2023. Operating income of and operating income compared to operating income of $250,000 in the Q2 of 2022. Interest expense has gone up and increased about 5% from the Q1 and was up 73% In the Q2 of 2022, our interest rate on our bank loan, that's the majority of our debt, is calculated at the prime rate, which

Speaker 1

is currently 8

Speaker 2

0.5%, that's 0.65%, 650 basis points with a floor of 3.3. So until mid June last year 2022, the Federal Reserve interest rate increases did not affect us. Since then, our interest rates and thus our interest expense have doubled. Our net loss for the Q2 of 2023 was reduced $395,000 net loss versus a net loss of $618,000 in the Q1 of this year. Net loss in the Q2 was $7,000 Again, keeping in mind the gross profit, gross margin differences, Our performance improved.

Speaker 2

Balance sheet remains more than adequate and our accounts payable and receivables are very current. Our inventory, which has increased significantly in 2020 2021 is now in line with historical averages. And that concludes what I have to say. Let me turn the call back to Luke.

Speaker 1

Thank you, Mike. Let me reiterate. Our team is primed and ready. We made the capital investments to further differentiate our capabilities, And we are in a position to take full advantage of the current upcycle. We are highly excited about our opportunities and we are vigorously executing our strategy.

Speaker 1

And with that, Latoya, I would like to open up the call to any questions.

Operator

Thank you. We will now conduct a question and answer session. The confirmation Our first question comes from Howard Halpern with Taglich Brothers. Please proceed.

Speaker 3

Congratulations. Nice quarter, guys. Nice quarter.

Speaker 1

Good afternoon, Howard.

Speaker 3

In terms of Gross margin. What are we looking at are the key elements to keeping it at the 16.4% or proving it over the second half of the year.

Speaker 2

This is Mike, Rick. I believe the gross margin will improve As the year progresses for a couple of reasons. First, we have one contract at Air Industries Machining, Our biggest company that was operating at a loss last year, we accounted for what we anticipated the future losses were. For this year, that account is pretty accurate. So that means we have a bunch of sales at essentially zero margin or a very slight profit or very slight loss.

Speaker 2

I don't have the exact numbers in front of me. So once that goes away, it will no longer pull down the average of the remaining sales. And second, up at Sterling, the gross margin is highly, highly Variables depending on the volumes. In the Q2, the gross margin was 18 some odd percent, And that's a significant improvement over the 0.2% that we had in the Q1. We expect those margins and better Product mix is going to are going to continue and in fact continue to improve.

Speaker 2

So the combination of 18% at Sterling Plus, well, I think there's going to be more like 17% to 18% at Long Island. We should be have some improvement over the 16.5

Speaker 3

That's nice. That's very encouraging. In terms of when you talked about Being prepared for the up cycle. Now and you also talked about receiving some RFPs. Going forward or included right now, are the new areas that you're investigating, are you getting RFPs For those areas or is that still yet to come?

Speaker 1

So one of the areas we were investigating last Earlier on last year with the submarine business and that seems to be taking a life of its own. There's very much interest from several customers. So that's going in the right direction. There's a lot of quoting activity and we have orders in house Both in our New York and Connecticut facilities. So that's been a big plus.

Speaker 1

Our trip to the Paris Air Show In June of this year, it's really led to some additional opportunities that we've been after for a long time and you finally get to talk to the right people. So we are now we're talking to the world's largest overseas Lending gear company, which is something that we were not able to crack in the past for one reason or another. And the interest is high, Both in us doing business with them and just as importantly with them doing business with us. And although that the air show was only maybe a month, 1.5 months away ago. Well, there's substantial amount of RFQ activity right now Based on coming out of that business, so it's very, very promising in the respect that we will hit something, and it will start a new relationship.

Speaker 1

We've always been a domestic supplier. So we supply to places like Northrop Grumman And our product, one way or another, do end up overseas somewhere, but not directly through us. And now we're doing business with some overseas companies direct, which It's kind of going in the right direction for the type of work that we do because there's a A lot of foreign countries that fly U. S. Jets.

Speaker 1

So on the spare side,

Operator

Okay.

Speaker 1

Full avenues that we are kind of pursuing.

Speaker 3

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

Speaker 1

The supply chain issues are still mostly centered around materials availability. And they seem to be easing in areas and getting worse in other areas. So it's a fine balance. One of our biggest running product, which is our thrust struts here in New York, that's been an ongoing product most of this year Towards the Q4 of this year, supposedly, we're being told by the mills that some of these material supply issues will Start easing up and material should start flowing hopefully in 2024. But Thanks.

Speaker 1

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

Speaker 3

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

Speaker 2

Thank you. Howard, can you speak to John Mendeo, tell him I said hello, please.

Speaker 1

I will. I will. Thank you, Howard. There are no further questions in queue at this time. I would like to turn

Operator

the call back turn Mr. Meluso for closing comments.

Speaker 1

Thank you, Latanya. So with that guys, I want to thank everybody for being on the call today And for your interest in Air Industries. We look forward to updating everyone on the progress on our next call. With that, Latanya, I can end the conference.

Operator

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

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