Good day, and thank you for standing by. Welcome to Ultralife Corporation's first quarter conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jody Burfening, Managing Director of LHA Investor Relations. Please go ahead.

Thank you, Antoine, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the first quarter of fiscal 2024. With us on today's call are Mike Manna, Ultralife's President and CEO; and Phil 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.ultralifecor.com, where you'll find the release under Investor News in the Investor Relations section. Before I turn 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 uncertain global economic conditions, reductions in revenues from key customers, delays or reductions in U.S. and foreign military spending, acceptance of new products on a global basis, and disruptions or delays in our supply of raw materials and components due to business conditions, global conflicts, weather, or other factors not under the company's control. 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 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.

Thanks, Jody. Good morning, everyone. Welcome to our call on Ultralife's Q1 operating results. Earlier this morning, we reported Q1 sales of $42 million and operating income of $4.1 million, the second consecutive quarter of $42 million or more in sales, delivering $0.18 EPS for the first quarter, following the reported $0.17 EPS in the fourth quarter. I am extremely proud of the team's efforts across the business in Q1 and the positive impact realized from our top priority and objective this year, which is gross margin improvement. The sequential Q1 improvement to 27.4% accelerates our incremental cash flow to further invest in organic growth initiatives and to pay down our acquisition debt. I will turn it over to Phil to talk through the detailed numbers.

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our first quarter results for the quarter ended March 31, 2024. We also filed our Form 10-Q with the SEC and updated our investor presentation in the Investor Relations section of our website, which now includes a summary and status of our transformational new products. Consolidated revenues totaled $41.9 million, compared to $31.9 million for the first quarter of 2023, an increase of 31.4%. Government defense sales increased 83.4%, and commercial sales increased 8.6%. As a reminder, our results for last year's first quarter were negatively impacted by the January cyberattack. Revenues from our Battery & Energy Product segment were $35 million, compared to $28.5 million last year, an increase of 22.9%. This growth was driven by very strong performance in our sales to government defense and medical markets, which increased 73.6% and 54.7% respectively. These increases were partially offset by a decline of 13.9% in oil and gas market sales. The sales split between commercial and government defense for our battery business was 69%-31% compared to 78%-22% reported for the 2023 full year, and the domestic to international split was 56%-44% compared to 49%-51% for the 2023 full year, demonstrating heightened domestic demand for our core products and the continued success of our global revenue diversification strategy. Revenues from our Communication System segment of $6.9 million were double the $3.4 million we reported last year, primarily attributable to shipments of EL8000 server cases to a large multinational information technology company, integrated systems of amplifiers and radio vehicle mounts to a major international defense contractor under an ongoing allied country government defense modernization program, and power systems to a U.S.-based global prime. On a consolidated basis, the commercial to government defense sales split was 58%-42% versus 64%-36% reported…

Thank you, Phil, for the detailed review of the Q1 results. As I mentioned in the last call, we refined our 2024 priorities exiting the year with the following being key to continued success. First, material cost depletion, we need to keep driving material cost initiatives, working with key suppliers to produce realized cost savings. We have hired experienced supply chain resources over the past 6 months in Newark, Virginia Beach, and Vancouver locations to work on vendor rationalization and consolidation, critical part dual sourcing, low-cost region sourcing, and streamlining logistics spend across the enterprise. Secondly, lean productivity. Continue to reduce waste and inefficiencies in all of our processes, both on production lines with line balancing projects and automation initiatives, and throughout the support and back office functions, including additional systems integration activities. And finally, sales funnel improvement. We have a larger and increasing pipeline of new products with a healthy funnel of sales opportunities, which most have yet to close, which is required to continue to drive future growth. As the world becomes more portable in critical applications, it is important that Ultralife brand products lead the way. On the direct labor and materials side, we have seen conditions improve over the last 12 months, and our S&OP process has kept us mostly within component lead times and allowed us to deliver strong revenue over recent quarters. We continue to refine the S&OP process and expect this to further level production demand, in turn allowing more efficient utilization of our direct precious resources as we continue to grow the business. Next, I'll give updates on the organic growth projects and new development underway for the businesses, which are key to future sales and market expansion. On the communication system side, first I'll review our EL8000 key systems, which is…

[Operator Instructions] Our first question comes from Josh Sullivan from The Benchmark Company.

Congratulations on a nice quarter here.

Thank you.

Thank you.

As far as the gross margin initiatives, how much of the improvement here is the benefit of volumes versus the strategic initiatives?

It's probably shared at this point. I mean, obviously we're putting more volume across the same fixed costs, which always helps your gross margin numbers. And we are seeing some additional price realization on the sales that we have. So the sales side is a double whammy on the gross margin. So I would say it's shared at this point.

And Josh, I'll just add a little bit to that. The primary example that we use is right where Mike and I are located, is Newark. How did Newark perform? Because the volume was slightly higher, but we did see a very, very nice increase in gross margin. So that goes beyond the volume portion of it. So there's the other items that Mike mentioned really at play here.

And then if we look at the recent defense funding for Ukraine and elsewhere, should we expect that to benefit your defense work or needs? Or is there anything that's been pulled forward into recent quarters?

Well, we would hope that it does help our defense business and funnel through. The money usually is unfortunately as much as they're saying that it's an immediate funding, it's going to primes typically, and then the primes are giving orders to us. So it is taking probably 4 to 6 weeks for us to even have any mention that orders are possibly coming our way.

And then on the inventory side, how should we think about the cadence through the year?

The way I look at inventory is it absolutely depends on the POs in hand, the timing of deliveries, and some great lessons that we learned during the lean COVID years with all the supply disruptions to put ourselves in a position where we're going to get the orders out on time to support our level loading. In level loading, Josh, if there was one thing that helped us more than anything with gross margin, it's level loading. And level loading is not just trying to do the same level of production on a day in and day out basis. It goes all the way through our purchasing process, all the way through our materials planning, through our manufacturing, all the way through cash collections. That is in the perfect world. But there certainly are exceptions because you get to know your suppliers very, very well. And one of the reasons why inventory went up over year-end is specifically because of that. We know the orders, we know the suppliers, we know their supply chain. We do not want to be cut short. So could inventory go up $2 million or down $2 million compared to any future quarter? Yes, it absolutely can just because we want to be able to serve our customers. And this does cost, the cost of that in some points is the pay down of the debt. But that will all get caught up.

And then just on the thin cell opportunity, any update on timelines as far as FDA certification or any trials that we can keep an eye on?

Well, we're still being told over the summer they should be through some of their initial testing. They're still positive that we're going to see production orders this year. And we do continue to ship in small quantities to the customer for other applications. But it's not the big announcement or the bigger award that we're hoping for in the future, for sure.

And then how should we think about the EL8000 cadence? Are these orders lumpy or do you think this is the beginning of a more kind of consistent flow here?

It's a little early to say definitively which way that's going to go, Josh, and there's a couple of different components with this business. In some cases, we're doing the actual integration of actually placing the server in the cases. In other cases, we're just selling cases and someone else is doing integration work. So it really depends on which scenario it is and unfortunately for us on the integration side are the servers available, number 1. And number 2, just the cadence of the customers' orders going out in the field.

And then maybe just one last one on the decline in the oil and gas market. Is that end market dynamics or is anything else going on there?

Well, we don't think it's end markets dynamics at all. We had 1 customer, who we believe, overbuy in Q4. They've been slow through Q1. We're starting to see some orders pick back up now, but we don't believe it's a long-term impact to the business. I think we kind of look at things as a yearly run rate and we think we're still on track to have a really strong year in that business.

[Operator Instructions] Our next question comes from Samuel McColgan from Breakout Investors.

Congratulations. Great quarter. Well done. Well done. I just had a couple of questions. One was on operating expenses and they came in a little bit lower. I just wondered if, how do you think that will kind of progress through the year? Are you hoping to kind of stay at a little bit lower level? Or are they just going to kind of fluctuate around where they are? Just wondering how that might look?

Well, our goal is to keep our operating expenses as low as possible. I mean, in Q1, I think we underspent a little bit on the R&D side, we thought we'd probably spend a little bit higher, but it's just a matter of timing on some of that spend. We want to add a little bit of expense on the marketing and sales side, just to really drive that funnel growth. But overall, we're not looking for huge swings in that expense line at this point.

And the other question I had was about debt. I know you're hoping to kind of ramp up how quickly you're paying that down. Obviously you don't know how the year will quite turn out yet, but I just wondered if you had kind of a goal in mind of how much you were hoping to reduce the debt by through 2024? I don't know if you can comment on that.

I can comment on that, I previously have commented on that, Sam. And my goal going into any quarter is to reduce debt on a quarterly basis by $2 million and that is -- that is through solid operations. What we have in hand with an unknown expectation date of when we're going to see it is the ERC claim that we have with the IRS. We announced that in Q2 of last year, that's $1.5 million, not sure when we're going to see that and I'm not sure the IRS knows that either. And then the -- the business interruption insurance claim that we have spoken about the last couple quarters, that's still in process with the insurance underwriters and with the volume of work they have, those do take some time. But those I would absolutely earmark to debt reduction. But in an ongoing basis, all things being equal, I target $2 million going into any 1 quarter.

Yes, that would be an impressive reduction through the year, if you're able to funnel all of that in. That's it for me. Well done, really impressive quarter.

[Operator Instructions] I am showing no further questions at this time. I would now like to turn it back over to Mike for closing remarks.

All right. Thanks everyone for listening to today's call. We look forward to talking to you next time during the Q2 2024 earnings call in July. Talk to you then. Thanks, everyone. Bye now.

Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.