Air Industries Group (AIRI) Q4 2024 Earnings Report, Transcript and Summary

Hello, and welcome to the Air Industries Group Year-End 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. This call 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 business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date the statement is made. 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 in, contemplated by or underlying the forward-looking statements. In light of these risks and uncertainties, there could 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 solicitation of a proxy, consent, authorization or agent designation with respect to a meeting of the company's shareholders. At this time, I'd like to turn the call over to Lou Melluzzo, President and CEO. Please go ahead.

Thank you, Rob, and thank you all for joining us today. 2024 was a successful rebuilding year. Our financial results showed significant improvement over 2023. Our dramatic improved bookings of new business have led to a record backlog at a level we have never seen before. For 2024 compared to 2023, revenue, operating profit and net income, adjusted EBITDA all improved. Revenue was in excess of $55 million, improvement of nearly $2.6 million or 7%. Operating income by more than 750,000 converting a loss of 2023 to operating profit in 2024. We incurred a net loss for the year but the loss was reduced by $765,000, a reduction of 36%. Adjusted EBITDA as a primary measure of $4 million or $1 million or 35%. As 2024 came to a close, we continue accelerated business development. The aerospace industry uses book-to-bill ratio. The total number -- the total of new business booked divided by sales billed to customers to measure the health of the business. A ratio of 1.2:1 is considered healthy and supportive of a growing business. In January of 2023, our ratio was a dismal 0.75:1. At December 2024, it had improved to 1.29:1, an improvement of 72%, not higher than the industry standard. Our new business sales efforts accelerated at the year-end and into the first quarter of 2025. Beginning in December and continuing to March 11, 2025, we announced 6 major new contracts for LTA's long-term agreements, totaling nearly $60 million of new business spread over 4 aircraft platforms and 4 customers. Bookings meet the backlog. Over the past 2 years in '23 and '24, our full funded backlog and backlog fully supported by firm customers' purchase orders increased by nearly $32 million or 36.7% and is now at almost $118 million. Our total backlog, including unfunded orders also in dramatically and now is in excess of $0.25 billion. During 2024, we enjoyed improving financial results. Our business development efforts during that year continue to accelerate. This has laid a strong foundation for the future. While we do not expect straight line improvement, we do expect improvement to continue in 2025 and beyond. Now let me turn the call over to Scott, who will discuss our results in more detail. And I'll be back to add closing commentary and a bit more specific on the outlook for some preliminary thoughts on 2025 before opening it up to questions and answers. So Scott, let's go over to finances, please.

Good morning, everybody, and thank you, Lou. Before I begin, I would also like to comment on the delay in filing our 10-K. Late last year, our independent audit firm merged. Mergers of accounting firms often result in additional time to complete an audit as new personnel and procedures are involved. The good news is that it was filed yesterday afternoon. It's in the 15-day automatic extension period, so we remain compliant. I, too, share Lou's enthusiasm about the 2024 results. Let me discuss them in some more detail. Our consolidated net sales for the year were $55.1 million. That was 7% higher than the $51.5 million we achieved in 2023. The improvement in gross margin and profit is even more significant news. For the year, gross profit increased by over $1.5 million or 20.2% compared to that of 2023. Gross margin for the year was 16.2%, an increase of 1.7 percentage points compared to 2023. Now while gross margin of 16.2% remains below our historical average, we anticipate continued improvements in the future. Our operating expenses were controlled as well, even though we are in an inflationary environment. For the year, they were $8.5 million, an increase of $750,000 or 9.7% higher than the previous year. I'd like to point out that included in this increase was an additional $315,000 of stock compensation expense, which is a noncash item. The increase in stock compensation expense accounted for 42% of the total increase. Had it not been for this noncash additional expense, our operating expenses would have only increased by $435,000 or 5.6%. Our operating profit for the year was $459,000, which is a significant improvement from the loss we had in 2023. Finally, on the bottom line, we had a net loss of $1.366 million or $0.41 a share. This is a dramatic improvement from 2023, where we had a net loss of $2.1 million or $0.65 a share. Adjusted EBITDA for the year was $3.641 million, an increase of $944,000 or 35% compared to that of 2023. I'm also very pleased to report that we remain in compliance with our loan with our lender. Now let me quickly highlight a few balance sheet items comparing 2024 to 2023. Our total debt is up by about $3 million, which resulted from additional borrowings under our revolving credit facility and additional borrowings due to the completion of our solar power installation in our Connecticut facility. Our inventory is about $1 million lower than the end of 2023, and we continue to monitor our inventory levels very diligently. Accounts receivable are up by about $1 million as our accounts payable and accrued expenses. And with that, I turn the call back to Lou for some other remarks and then to our Q&A. Lou?

Thanks, Scott. We would be remiss if we did not address the question on everybody's mind, the impact of potential tariffs and those effects on budget cuts. Nobody knows the final effect on tariffs, what they may be and what expected damages we might incur. Our business is heavily weighed to the military aerospace. And as such, we are required to source most of the raw materials and hardware from our domestic sources. That said, increased tariffs may be strict imports and restricted imports may reduce supply, perhaps leading to an increase in prices for domestically produced products. We do have one important product in the commercial aviation for which we source material from China. Now thankfully, our contract for its product has a price protection cause, allowing us to pass along any significant cost that is more than 5% lifetime. There's also a widespread concern about cost reductions in the defense budget. We expect that there will be strategic reductions in the budget, but we believe that the programs we support will not materially be reduced and perhaps may be increased. The administration has made it clear that it is maintaining or increasing spending the counter tensions in the Pacific. We are well positioned for this. One of our major aircraft programs is the Navy's E-2D Advanced Hawkeye guide aircraft. This plane is a flying combat information center, surveilling and controlling airspace around any aircraft carrier battle group. We were recently awarded a large $33 million contract for the CH-53K heavy lift helicopter that is now just entering into full rate production. This helicopter function is to transfer U.S. Marines and equipment from ship to land. Aircraft carriers in the new heavy-lift helicopters are obviously critical for the military to counter threats in the Pacific. And although the conversations in Washington changes daily, we do not expect to be materially harmed by reductions in military spending. Thus, we are working tirelessly to continue to take risk out of the business. With that, I would like to turn this over to our questions and answers portion of the call. Rob, can you open up the lines, please?

[Operator Instructions]. The first question is from the line of Howard Halpern with Taglich Brothers.

Congratulations on that [indiscernible]. Just one more question, I guess, regarding potential supply chain. And I mean, I don't know the answer to this, but do any of the raw materials that are in the supply chain? Are there any rare earth elements that come from China in your supply chain?

Howard, not in the products that we make, we're not aware of any, to be honest with you. So on all the military programs, there's an EDAC to make sure that the products are sourced out of American soil, American mines. We have one product that is a commercial product that we do piggyback off the OEM's contract and the OEMs has chosen China to be a supplier. So that's kind of we do. But we have price protection on that one contract to a band of 5%, as I stated earlier. So our obligations on that contract is it could only go up another 5%, that would be our incurred costs and everything else will be transferred to the client. Now that doesn't mean that, that product can't be sourced in the United States. It used to be prior to, I guess, maybe 2 or 3 years. 3 years ago in the United States, and we have started those conversations again in lieu of what is happening. And actually, we started long before. But again, the ultimate decision rests on the OEM because they're the ones that placed the purchase order with these mills.

Okay. And the way you've constructed now the operations in 2024, you believe that the efficiency and flexibility you have in 2025, I mean, you have the ultimate flexibility going forward in your operations?

The operations and you're welcome to do it with and we'll schedule and give you a tour. The operations are impeccable at this point. The floors look polished, the machines are clean and new. We've done -- we've solved the problem for the -- we had in the past with bottlenecks and pinch points. We have duplicate machines across the board. And quite frankly, the operations are running in New York are running a smooth as silk in Connecticut. We're a little bit behind because we put a lot of money early in my career here to make sure that our flagship operation in Connecticut -- in New York, I'm sorry, was optimal. But since in the last 2 years, we put about -- Scott, it was about…

$5 million.

We have 2 new large machines being installed in Connecticut right now. One of them just hit the floor about 3 weeks ago and has been installed and is going through final testing. And a very large other second machine is scheduled to commit mid-May and it will probably be operational at some point, mid-June, maybe the end of June. So we've solar paneled that facility in Connecticut. It's got a brand new roof. Now that facility dates back to 1941. And so we are bringing that up to speed and it's making great strides. So yes, the operations are running very efficiently at this point.

Okay. And talking about CapEx, is that still going to be around property and equipment about $2 million? Or might that be a little less this year?

I would expect this year to be a little less. I want to preface that with saying we've already committed for these machines that we're installing and that's kind of straddling -- straddled if you will, 2024 into the beginning of 2025 as far as the timing of the payments and whatnot. However, for the rest of the year, aside from that, those are our largest expenditures that we expect currently for 2025.

I'll also preface that, Howard, with if a client walks in tomorrow, it has $10 million a year of growth to drop off, and I need a new piece of equipment, I'm going to buy a new piece of equipment.

Absolutely, 100%.

But we're not -- you never know. But right now, we feel that we've done a pretty decent job at making the shops efficiently for what we do.

And I don't know if you have a precise answer, but do you know how many potential new program starts you might have this year? Or is it going to be just piling into -- did you have a lot of starts last year and is just full more production?

Yes. In years past, especially coming out of COVID, which were very lean times for orders to go out, we got flooded with a lot of new starts here, absolutely correct power. That's been minimized. Some of the work is repeat. We've gotten follow-on contracts for the E-2D Hawkeye, which we've been making for a while. So that's just going to be a continuation of our existing production. There's no engineering. There's always continuous improvement, but there's no new engineering. We are working with some new clients, and there's always a new start here and there, but it's definitely more controlled.

And that will be the one of the drivers for improved gross margins as time goes by?

Right, right. Once the program becomes mature in the first and the second -- after the first year, we tend to improve efficiencies dramatically.

Okay. And one last one, if you care to comment on it. Q1 relative to Q4, could you give some just a little bit of color?

We're really not going to give that much color on it. Obviously, we just filed the 10-K yesterday which was year-end, as you all know. So I would say our gross margin dollars are in line with our internal expectations. We are still going through the closing process, which should be done in the next day or so. And then in a couple of weeks, we will put out results for further.

Keep up the great work in 2025.

[Operator Instructions]. Thank you. At this time, we have no additional questions. And I'll hand the call over to Lou Melluzzo for closing remarks. Thank you.

Thank you all for taking the time to be on the call today and your interest in Air Industries Group. We look forward to updating on the progress of our next call. Rob, at this point, you may close the line.

Thank you, Mr. Melluzzo. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.