Good day, ladies and gentlemen, and welcome to the MtronPTI Third Quarter Earnings Call. [Operator Instructions] On today's call, we will have Mike Ferrantino, CEO; and James Tivy, CFO. I would now like to turn the call over to James. Please go ahead.

Thank you. Good morning, everyone, and thanks for joining our Q3 2023 earnings call. Please note that this call will be recorded, and we anticipate making the recording available on our website at www.mtronpti.com, shortly after the call. We issued our 10-Q last week, Thursday, reporting the results for our third fiscal quarter of 2023. Before getting underway, we're required to advise you and all participants should note that the following discussion should be taken in conjunction with the most recent financial statements and notes thereto contained within our 2022 10-K, which has been filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance. With that, I'll now turn the call over to Mike Ferrantino, our CEO.

Thank you, James. Good morning, and thank you to our shareholders for your interest in MtronPTI and attending our Q3 2023 earnings call. The completion of the third quarter also marks the completion of our first year as a public company. As a brief reminder, MtronPTI has been providing RF solutions to the marketplace since 1965. We are a global company with 3 manufacturing locations in the U.S. and India. With consistent investment in research and development, we have a robust product pipeline averaging over 260 new product introductions a year. Our customer base is growing with over 300 active customers today. We continue to focus on our core markets of Defense and Aerospace, Avionics and Space, each of which continues to demonstrate significant tailwinds. Design wins in these markets tend to be very sticky, and program life cycles are long. Let me now summarize for you where MtronPTI stands for the third quarter 2023. Compared to prior year, revenue for the 3 months ended September 30 increased 29.4% to $10.9 million, and revenue for the 9 months increased 31.2% to $30.4 million. The revenue increase for the quarter and year-to-date periods over the prior year numbers reflect strong Defense product shipments. Gross margins were 42.8% for the 3 months compared to 32.4% for the prior year, and 39.7% for the 9 months compared to 35.6% for the prior year; benefiting from the favorable product mix, along with increased product volumes. Backlog was $50.3 million at September 30 compared to $46.2 million at the beginning of the year and $44.1 million at the end of the third quarter of 2022. Backlog increased during 2023, primarily due to an increase in Defense product orders. The company reported operating income of $4.4 million for the 9 months ended September 30 compared to…

[Operator Instructions] Your first question comes from the line of Anja Soderstrom with Sidoti & Co.

So I just wanted to get a sense, you're talking about strong Defense product shipments helping the third quarter results. But, what are you seeing in the other end markets you serve, the Avionics industry, for example?

So the other end markets are -- we're seeing strength in those markets as well, but to give you some background, so our Aerospace and Defense market over the last 4 years has been growing at a CAGR of about 8.3%. Avionics in that same time frame has been 7%, and our Space business is growing at 17%. We see the biggest change in the Defense, because that's our largest base market today.

Okay. And in terms of the gross margin improvement, you said that's due to favorable product mix and increased product volumes. Can you sort of bucket that? And how should we think about gross margin going forward?

Sure, sure. So about 50% of that is volume related and 50% product mix. In terms of going forward, we're implementing significant improvements in efficiencies, which should impact margins moving forward as well. So, although product mix will continue to play a factor. I think it will be a little bit less than it has been in earlier quarters this year.

Okay. But that might be then made up for increased product volumes or?

Correct. If you recall, in the second quarter, we did have an end-of-life product that has some high revenue shipments at a lower margin that impacts in the second quarter, so that's behind us. So within the mix that we're offering today, there's less variability than what we've seen in the past. And we do expect to see some additional improvements through efficiencies.

Okay. And your cash position improved quite a lot. Are you at all looking actively at M&A? And what are you seeing -- if so, what are you seeing in that area?

Yes. We're actively looking in that space. I just don't have anything to discuss at this point.

Your next question comes from the line of [ Akhilesh Kumar with ITI Investment. ]

I have a question. First question is regarding customer concentration. I say that our concentration has been increasing, while one would expect a decrease in concentration like over the years. I see that 34% is generated in this 9 months from the largest customers, so how do you perceive it to be the concentration towards single customer? And like how stable is our franchise, I mean, or coupling EBITDA like top 2 or top 3 customers that you would talk about, sir?

Sure. So we definitely have seen some increase in customer concentration, but that's largely been driven by mergers within our customer base. As an example, when Raytheon merged with United Technologies, we had positions with both of those companies that combine them. And within any one of those customers, they are very large, and we are generally doing business with multiple locations within those customer bases. So while it may be with the same end customer, there is quite a bit of diversity within that customer.

Got it. Got it. What would be an aspirational concentration that you would see? I mean, say, which we can target for top 5 customer within like the next 5 years?

I think over time, as we grow our customer base and take some of our smaller [ customers ] up the food chain, if you will, we'd love to have nobody greater than 15% to 20%.

Okay, okay. Nice sir. Yes. The second question is, if I were to classify your products as to be catered to aftermarket versus new bids, so what would be the share that you would say, between like say, if there is any aftermarket for your products and -- versus like those going into new base, what percent you will attribute to?

The vast majority of what we're doing is going into newbuilds as opposed to an aftermarket business. Where there is aftermarket business, it would be maybe upgrades on a plane, but it would be a new system going into that plane, a new radar system, for example.

So it's sort of a maintenance demand itself, you would say, replenishing or evergreen demand, you would say?

That is not a huge portion of our business. We do have a fair amount of product in what I would describe as consumables where we have missile programs, for example, that are used once and then done. But in terms of this program, it's not a big piece of our business.

Might I know how much percentage would be consumables that you would call as?

Probably less than 10%. But we -- I can see that I can get a better number on that.

Okay. Okay. Fine, sir. And the last question is with regard to our increase in Defense orders. So does it have anything to do at all with the macro scenario that's playing the part with respect to Russia-Ukraine or Israel-Hamas? And I mean, is this sustainable? Or is it -- if at all this has any role to play and the increase in Defense, would you say that it is sustainable or market share or whatever you call as?

So in addition to growing with the overall market, which is clearly growing based on what's going on in the global environment right now, we believe we are gaining market share within that space. So -- and when I look out over the horizon, certainly within what's visible, I believe it's sustainable. As -- even if things begin to calm down a bit, I think, there'll be a fair amount of continued purchasing as not only the U.S., but other friendly nations rebuild their supplies.

Thank you. Your next question comes from the line of Anja Soderstrom with Sidoti & Co.

Sorry, I just had a follow-up on that last question on the geopolitical environment and most recently, the Hamas-Israel war. Have you noticed that in your backlog already? Or is it too soon and that could create some sort of tailwind made in the coming quarters?

So certainly, we have noticed it from the Ukraine side, but not from the Israel-Hamas side, no.

Thank you. Ladies and gentlemen, there are no further questions at this time. I will now turn the call back over to Michael Ferrantino for closing remarks. Please go ahead.

Well, thank you. And once again, I would like to thank everybody for joining, and for your interest in MtronPTI, and please have a great day and a great holiday season.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.