Good day, and thank you for standing by. Welcome to the Ultralife Corporation Third Quarter 2020 Results Conference Call. All participants are in a listen mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 1 on a telephone. You will then hear automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jody Burfening. Please go ahead.

Thank you, Pavel, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the third quarter of fiscal 2023. Eith us on today's call are Mike Manna, Ultralife's President and CEO; and Philip Fain, Ultralife's Chief Financial Officer. The earnings press release was issued earlier this morning, and if anyone has not yet received a copy, I invite you to visit the company's website, www.ultralifecorp.com, where you'll find the release under Investor News in the Investor Relations section. Before turning the call over to management, I would like to remind everyone that some statements made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. The potential risks and uncertainties that could cause actual results to differ materially include the impact of COVID-19 on related supply chain disruptions, potential reductions in revenue from key customers, acceptance of new products on a global basis and uncertain global economic conditions. The company cautions investors not to place undue reliance on forward-looking statements, which reflect the company's analysis only as of today's date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. Further information on these factors and other factors that could affect Ultralife's financial results is included in the company's filings with the Securities and Exchange Commission, including the latest annual report on Form 10-K. In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful and differ from GAAP. These non-GAAP measures should be considered supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to Mike. Good morning, Mike.

Thank you. Good morning, everyone. Welcome to our call on Ultralife's Q3 2023 operating results. I'm extremely pleased with the team's Q3 progress to stabilize and improve gross margin. Our initiatives have started to deliver with a year-over-year 460 basis point increase in gross margin for the business. Resulting in an operating profit increase of $2.7 million year-over-year. We have a strong backlog position across the portfolio that sustained in Q3 with a strong pipeline of new products that should continue to support our main objective of continued profitable growth. We have mostly recovered from the cash imbalance due to the cyber event reported in Q1 of this year which will allow us to now start utilizing generated cash to pay down our debt, which is our highest near-term priority. This will provide headroom to examine accretive acquisitions and invest in strategic business initiatives supporting overall growth going forward. I will now turn it over to Phil to talk through the Q3 financial results.

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our third quarter results for the quarter ended September 30, 2023. We also filed our Form 10-Q with the SEC and updated our investor presentation which you can find in the Investor Relations section of our website. Consolidated revenues for the 2023 third quarter totaled $39.5 million compared to $33.2 million for the third quarter of 2022, an increase of 18.8%. Government defense sales increased 48.1% and commercial sales increased 5.6%. Revenues from our Battery & Energy Products segment were $31.9 million compared to $28.6 million last year, an increase of 11.7%, reflecting strong year-over-year growth in our medical and government defense markets, which increased 37.9% and 36.2%, respectively. While oil and gas market sales were essentially flat year-over-year due to the timing of shipments to international customers, we experienced a 14.9% decline in other commercial sales, primarily in China due to the timing of certain orders. The sales split between commercial and government defense for our battery business, was 76:24 compared to 78:22 reported for the 2022 year, and the domestic to international split was 50:50 compared to 4.51% last year, demonstrating the continued success of our global revenue diversification strategy. Revenues from our Communications Systems segment were $7.6 million compared to $4.7 million last year, a 62.7% increase primarily attributable to shipments of vehicle amplifier adapters to a global defense contractor for the U.S. Army in integrated systems of amplifiers and radio vehicle amounts to a major international defense contractor under an ongoing allied country government defense modernization program. On a consolidated basis, the commercial to government defense sales split was 61:39 and versus 71:29 reported for the 2022 full year. Our total backlog exiting the third quarter remained over $100 million and it's diverse in…

Thank you, Phil, for the detailed review of the Q3 results. The team's focus on gross margin improvement has yielded promising early results, but we continue multiple efforts on this front, including price realization, lean projects to improve throughput and level loading the factories to improve labor efficiency and utilization. Material flow is key to our production operations. And although we have seen continued improvement throughout the year, we still experience occasional delays from specialized single source components, which disrupts our production lines. We have established the framework of our S&OP process through which our major customers have provided extended forecasts thereby enabling us to order parts within lead time windows avoiding expedite fees. As this process matures, it will have positive impact on both labor efficiency and supply chain cost benefits going forward. Our lean process journey is underway and imperative to offset rising costs and inflationary pressure in the supply chain, direct labor and utilities. The manufacturing teams completed several lean projects in Q3 and with immediate impact with measured increases in throughput per labor hour. We have started to expand this effort globally across facilities. With a focus on these 3 initiatives, I expect to see further improvement throughout the last quarter of this year and into 2024, subject to a stable mix of customer demand. I will now review the organic growth opportunities in the business with a brief update on several key projects. First, on the Battery and Energy side, our ThinCell product line, which is focused on medical wearable products and tracking applications continues to increase in future sales opportunities. We received our flexible production line equipment as expected in Q3, and we'll finish installation and begin line validation in Q4 to support forecasted demand by our customers in 2024 and beyond. On the…

[Operator Instructions] And our first question comes from the line of Josh Sullivan with The Benchmark Company. Your line is now open. Q – Josh Sullivan: Good morning, Mike, Phil. A – Michael Manna: Good morning A – Philip Fain: Good morning, Josh. Q – Josh Sullivan: As cash comes in, you mentioned you started off the call, what do you think the net debt leverage you want to get through, what's appropriate? A – Philip Fain: Josh, I look at past acquisitions. I look at us having -- we paid off the previous acquisition in 32 months. With the positive cash gap based on the EBITDA level that we're seeing, my goal is to extinguish the debt because I see $0.12 staring us right in the eye, right in the face. So that's certainly built into our divertive strategic plan that really enables us to see a nice cash buildup across the next couple of years.

Got it. And then as you look at strategic opportunities, I mean, what are you comfortable going to back up to on the leverage?

Well, it certainly depends on the opportunities that we see in today's economy, it's not just one opportunity that we're seeing. It's multiple opportunities that we're seeing. And at any one point in time, we have a couple of books in front of us some of which are intriguing, some of which we've seen before. So it really depends on the opportunity. I would be comfortable with the level of where our business is going. And you can see over the last couple of quarters, the pace of where our business is going, I look at Q3, I look at Q3 being almost similar to Q2 had it not been for a couple of the parts that were pushed out. So you can see the trajectory. You can see the EBITDA. And I'm not looking for any specific multiple. I'm looking at -- I'm just focused on the actual dollars, knowing that we're not going to vary whatsoever from our acquisition criteria which are very, very -- has been very disciplined. You look at Accutronics, you look at See, look at Excel, all performing just admirably.

Got it. And then on backlog, you mentioned $35 million release just as supply chain improved manufacturing efficiencies. Is there a natural level of backlog we should think about as run rate going back to 2021 levels. Just curious on what we should expect in '24 as kind of the run rate there? I know it's hard to estimate, but.

It's hard to judge at this point, Josh. I mean, last year, we were 1/3 of this level. So now it's -- we've been lucky to be at over $100 million now for multiple quarters in a row. My guess is as supply chain loosens up and everything else happens depending on what's going on in the world, there's probably somewhere between where it was and where it is now, probably that $60 million to $75 million range is probably where it's going to settle short term. Especially if we execute and ship it out the door. I mean ultimately, we're not trying to hold shipments. We're trying to ship as quickly as we can based on component availability, labor and et cetera.

And from what I see from that, I couldn't agree more with Mike. I see the leverage -- the leverage of our business model by our ability to move it out quicker.

Got it. Got it. And then how should we think of the margin profile at this point with that backlog release is going to be beneficial in Q4. But what are your thoughts on the run rate margin profile as we get into next year?

Sure. The way I'm looking at this, Josh, I think we're going to see approximately 150 basis points improvement this year over last year. I would expect to see that same improvement and whether it's 150 or 170 does make a difference. I'm looking at 150 next year, 150 in the following year, 100 the next year, and that's the base case. And the reason why that's so important to us is that every 100 basis point improvement in gross margin yields us $0.07 of EPS after tax. So that's why we're so focused on gross margin. So I'm looking at 150, 150, 100.

And then on the EL 8000 services to order, it's great news. Are you able to say how large that order was? Are there milestones where that order could expand? And then what do you maybe see as the opportunity over the next 2 years?

Well, we're not going to comment right now on the size of that order, but I mean it's not insignificant to the Con Systems business, let's just say that. So it's a huge market. I mean our strategic partner has a huge backlog, multibillions of dollars of servers that need to go out in the marketplace. We are the preferred and only real vendor in this space to package that equipment to get it to the edge. So I don't even think I can quantify what the opportunity really could be. We know it's going to be significant or we wouldn't be investing the time, energy and resources into the effort, but we'll have to see how it develops just like you.

Sounds good. And then just on -- staying within communications, the $6.9 million order on the ground fleet upgrade. You mentioned some additional programs coming down the pipe. Should we expect those to be about the similar size, or are those potentially larger opportunities?

They're about the similar size at this point?

Got it. Got it. And then just broadly, obviously, just looking at industrial markets, do you have any comments on kind of broader themes within industrial, energy, or consumer markets? Just any dynamics you're seeing and obviously a focus of investors right now?

Well, there's still a lot of activity in certain spots. I mean, obviously, oil and gas is still strong. I mean that market definitely has not went away. We don't anticipate that it's going to anytime soon. The monitoring and telemetry of a lot of the industrial markets continues to be strong. Everybody wants to monitor everything these days. So there's sensors and things on every pipeline, every water line, every power line, every switch gear, there's just a lot of activity. And then all of that's going into a lot of AI equipment to monitor for failures and other things to predictively try to maintain some of the systems and reduce costs. So that's what kind of what we're seeing in our end.

Good. Well, again, congratulations on the quarter, and thank you for taking the time.

Thank you, Josh.

Thank you.

[Operator Instructions] And I don't see any questions at this time. I will now turn the call back over to Mike Manna.

All right. Thanks, everyone. We will talk next time in 2024 the Q4 conference call. Bye now.

This concludes today's conference call. Thank you for your participation. You may now disconnect.