Air Industries Group (AIRI) Q2 2023 Earnings Call Transcript

Air Industries Group (NYSE:AIRI) Q2 2023 Earnings Conference Call August 9, 2023 4:15 PM ET

Company Participants

Luciano Melluzzo – President and Chief Executive Officer

Michael Recca – Chief Financial Officer

Conference Call Participants

Howard Halpern – Taglich Brothers

Operator

Hello, and welcome to Air Industries Group Second Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

This call and the accompanying webcast may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, including statements regarding, among other things, the company’s expectations regarding realization of its business strategy and growth strategy. Expressions, which include forward-looking statements speak only as of the date of this call, these forward-looking statements are based largely on our company’s expectations and are subject to a number of risks and uncertainties, some of which are beyond our control and cannot be predicted or quantified. Future developments and actual results could differ materially from those set forth and contemplated by or underlying the forward-looking statements.

In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. This call does not constitute an offer to purchase any securities nor a solicitation of a proxy, consent, authorization or agent declination with respect to a meeting of the company’s shareholders.

At this time, I would like to turn the call over to Lou Melluzzo, President and CEO. Please go ahead, sir.

Luciano Melluzzo

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 second quarter of 2023. Net sales grew 5% to $13.2 million. Our profitability improved at even a faster pace with gross profit dollars up more than 13%, and our gross profit margin increasing to 16.4%.

And we recorded a positive operating income in the second quarter after 2 quarters of operating losses, resulting in a 36% reduction in our net loss.

The main drivers of our profitability improvement were the sales growth and product mix in our Sterling Engineering subsidiary. In general, we realized higher margins on the products sold through Sterling plus higher volume and plant utilizations have made a substantial difference in cost absorption and, therefore, profit leverage. We’re fully focused on increasing Sterling sales, especially through long-term agreements. We see additional exciting opportunities for Sterling in the coming months. Additionally, Sterling performance has benefited from transformation effort we have undertaken the capital investments and project reengineering.

But this highlights the efficiency of our new equipment.

Over the past two years, we have added critical equipment at Sterling, such as our new large format bridge mill and coordinate measuring machine. We are continuing to invest in 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 panels will reduce [indiscernible] requirements and further save costs.

Company-wide business development effort is proceeding at full throttle, and we’re encouraged by the feedback we’re receiving from both our long-standing and new customers. Last month, we announced 2 new contract awards valued at a total of $5.2 million. For our resting gear components for the U.S. Army E-2D Hawkeye tactical airborne early warning aircraft and for the F-35 Lightning combat aircraft. One of the contract was for a long-time customer, while the other came from a new non-U.S. customer and was our first award from a customer located outside the U.S.

The Paris Airshow 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 second quarter and expect more projects to begin in the third quarter. That market is experiencing expansive growth given the projected 50% increase in the number of submarines required by the 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, which jumped more than 250% in the second quarter of 2023 from the second quarter last year. The quoting activity continues to be very high across the board. On our last call, I discussed the strategic analysis that we conducted with the help of an outside consultant to identify our most compelling market opportunities. As a result, we have defined the intermediate to longer-term opportunities we plan to pivot toward, with the potential to further drive profitability growth. We have identified markets that are attractive and actionable and fit our capabilities where we can compete effectively.

And importantly, we will target markets where we have significant near- to midterm visibility into the volume and profit potential.

Specifically, we intend to expand our penetration of existing platforms, continue to add new platforms and capture new markets. The additional E-2D and F-35 awards are 2 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 — the demand drivers I pointed to the last quarter remain intact. The evolving geopolitical landscape, the need to modernize U.S. air and naval resources and the recovery and growth of commercial aerospace.

Let me conclude by asserting the following: our team is primed and ready. We have made the capital investments in the equipment to further differentiate our capabilities while also refining our delivery processes and reinforcing customer service. I’m confident that we are seeing the onset of a sustained period of improved order flow trajectory. In short, we are in a position to take full advantage of the current up cycle.

And now let me turn the call over to Mike Recca, our CFO, for his report, which we will follow with a Q&A and some concluding remarks. Mike?

Michael Recca

Thank you. I’d like to start by saying I agree with Lou. The second quarter was very encouraging. Let me provide some additional detail.

As reported, our second quarter sales were $13.2 million, that was up 5% from the first quarter of ’23. And those were 5.7% lower in the second quarter of ’22. Year-to-date sales for the 6 months were $25.8 million, essentially flat with the prior year. Our gross profit for the second quarter was $2.2 million, which is up around 13% from the $1.9 million in the first quarter of ’23, was down about 10% from the $2.4 million in the second quarter of ’22.

Gross profit margin, this is going to get a little complicated. Gross profit margin was 16.4% of sales for the second quarter, that’s an increase of 140 basis points, 1.4 percentage points from 15% in the first quarter. Now gross profit margin recorded for the second quarter of ’22 was 17.3%. So it looks like our gross profit margin is down, but the first 3 quarters of 2022 from January to September, our gross margin was 17.3%.

At year-end, we determined that our gross margin for the full year was only 14.3%. The reduction resulted from a new, more conservative method of calculating and reserving for slow-moving inventory and anticipated future losses on one particular contract, and that’s a contract that will be completed in 2023. So comparing our second quarter 2023 gross profit margin against the full year margin of 2022, that is 14.3%. Our 2023 gross profit dollars and our gross profit margin percentage exceeded the prior year.

Operating expenses were $2.1 million, that’s only 2% higher than the first quarter of 2023 and 4.3% lower in the second quarter of 2022. So lower operating expenses in inflationary environment. Our operating income turned positive in the second quarter of 2023 totaling $90,000 and that compares to an operating loss of $158,000 in the first quarter of ’23. Operating income — and operating — and compared to operating income of $250,000 in the second quarter of 2022. Interest expense has gone up and increased about 5% from the first quarter and was up 73% from the second quarter of 2022.

Our interest rate on our bank loan that’s the majority of our debt is calculated at a prime rate, which is currently 0.5% less 0.65%, 650 basis points with [indiscernible] 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 has doubled.

Our net loss for the second quarter of 2023 was reduced $395,000 — a net loss of $618,000 in the first quarter of this year. Net loss in the second quarter was $7,000. Again, keep in mind, the gross profit, gross margin differences, our performance improved. Balance sheet remains more than adequate and our accounts payable and receivables are very current. Our inventory, which has increased significantly in 2021 — ’20 and 2021 is now in line with historical averages.

And that concludes what I have to say. Let me turn the call back to Lou.

Luciano Melluzzo

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 up cycle. We are highly excited about our opportunities, and we are vigorously executing our strategy.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Howard Halpern with Taglich Brothers.

Howard Halpern

Congratulations. Nice quarter, guys. Nice quarter. In terms of gross margin, what are we looking at are the key elements to keeping it add to 16.4% or improving it over the second half of the year?

Michael Recca

Howard, this is Mike Recca. I believe the gross margin will improve as the year progresses for a couple of reasons. First, we have one contract that 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 accounting is pretty accurate. So that means we have a bunch of sales at essentially zero margin or a very slight profit or a very slight loss. I don’t have the exact numbers in front of me.

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 variable depending on the volumes. In the second quarter, the gross margin was 18 some-odd percent, and that’s a significant improvement of 0.2% that we had in the first quarter. And we expect those margins and better product mix are going to continue and in fact, continue to improve. So the combination of 18% at Sterling plus — well, I think it’s going to be more like 17% to 18% at Long Island. We should have some improvement over the 16.5%.

Howard Halpern

Okay. That’s nice. That’s very encouraging. In terms of — Lou, 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?

Luciano Melluzzo

So one of the areas we were investigating last — earlier on last year is the submarine business, and that seems to be taking our 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 in both — in our New York and Connecticut facilities. So that’s been a big plus.

Our trip to the Paris Air Show in June of this year has 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 are talking to the world’s largest overseas [in India] 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 the Air Show was only maybe a month or 1.5 months away ago. Well, there’s substantial amount of RFQ activity right now based — coming out of that business, so that it’s very, very promising in the respect that we will hit something, and it will start a new relationship. We’ve always been a domestic supplier.

So we supply to the places like Northrop Grumman — and our product one way or another, do end up overseas somewhere, but not directly to us, and now we’ve — we’re doing business with some overseas companies direct which you know is kind of going in the right direction for the type of work that we do because there’s a lot of foreign countries that fly U.S. jets. So on the spare side [indiscernible] that we are kind of pursuing.

Howard Halpern

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

Luciano Melluzzo

The supply chain issues are still mostly centered around materials availability. And they seem to be easing in areas and then getting worse in other areas. So it’s a fine balance. One of our biggest running product, which is our [indiscernible] in New York. That’s been an ongoing product for most of this year towards the fourth quarter of this year.

Supposedly, we’re being told by the mils that some of these material supply issues will start easing up and material should start flowing hopefully in ’24. But I’m talking about supply chain issues. Right now, that seems to be the biggest contributor to the problem is materials.

Operator

[Operator Instructions] There are no further questions in queue at this time. I would like to turn the call back over to Mr. Melluzzo for closing comments.

Luciano Melluzzo

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, you 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. Have a great day.