Hello, and welcome to the Air Industries Group’s First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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 expectation 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 in, 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 designation with respect to a meeting of the company’s shareholders. At this time, I would now like to turn the call over to Lou Melluzzo, President and CEO. Please go ahead, sir.

Thank you, Alicia. Good afternoon, everyone, and thank you for joining us today. I would like to review Air Industries’ results for the 2023 first quarter, provide some detail on our recently announced contract wins and outline our growth strategy for the balance of this year and beyond. First, it is my pleasure to announce that Pete Rettaliata has been appointed Chairman of the Board of Air Industries and is joining us on this call today. As Chairman, he succeeds Mike Taglich, who remains on the Board. As we noted in the news release issued earlier today, Pete is a highly respected veteran of the aerospace business. He also has served in several leadership roles at Air Industries over a nearly 30-year period, including President of our AIM subsidiary, CEO of the company and a member of the Board of Directors. His perspective and guidance will benefit Air Industries as we move forward and pursue our exciting growth strategies. Pete will add his comments after our formal review and we’ll be happy to respond to questions during our Q&A session. Now looking at our performance for 2023 first quarter. Consolidated net sales for the quarter ended March 31, 2023 were $12.5 million. That was an increase of $487,000 or 4% from the first quarter of 2022, but a decrease of $1.3 million or 9.7% compared with the fourth quarter of 2022. As we have noted previously, our shipments have continued to be negatively impacted by supply chain disruptions that has affected the entire industry, in particular, causing delayed arrival of raw materials. While conditions have continued to improve, the problems are not fully resolved. Gross profit was 15% of sales for the first quarter of 2023 versus 17.2% for the first quarter of 2022. In the fourth quarter of 2022,…

Thank you, Lou. I’m going to provide some additional detail, particularly on our gross margin and gross profit for last year and this year. I will agree with Lou that the first quarter was adequate, but it was kind of lackluster. As we reported, sales for the first quarter were $12.5 million, and that’s an increase of 4% from the first quarter of last year. Profit for the first quarter of ‘23 were $1.9 million, and that was down from $2.1 million in 2022. Gross margin for this year was 15% of sales for the first quarter, and that was slightly higher than the annual gross margin last year, which was 14.3%. So at the risk of going deep into the weeds here, let me take a minute to explain gross profit and gross margin for 2022. So at year-end, you have a normal closing and review in the books and the annual audit. And during that time, it’s normal to have adjustments to inventory. That affects – that generates adjustments to gross profit and gross margin. In 2022, there were 2 such adjustments. And these were first: we changed the method of determining our slow-moving or obsolete inventory. Previously, we calculated this amount every year as a percentage of the inventory cost product "not moved", and that is either not sold or returned to work in process over a period of years. Consulting with our auditors, we changed this overtime method to considering 100% of the cost of inventory that had not moved for two years as slow moving and increase the reserve to 100% of that inventory for 2022. Also, during last year, we had a single contract that was consistently losing money. And this contract was not complete. These losses will continue into 2023 when we will…

Good afternoon, everyone. I’d like to say that I was delighted when Mike Taglich asked me to step up my involvement as Chairman of the Board. I believe that his feeling was that it was time to increase our aerospace experience at a time when we are looking to accelerate our growth program and strategy in the new and changing marketplace post COVID. So this is very exciting for me. I’ve always been very close to the company. And now, I continue to be close and will increase my role in helping leadership to address this growth program. Once again, I’m delighted and I think the prospects are terrific. The company has done some great things to prepare itself for this new changing marketplace in terms of increased capability and talent. So this is very exciting for me, and I hope it’s all very exciting for you to watch us go through this period. Thanks.

Thank you, Pete. We’re excited to have you.

So good to be back, I guess.

With that, Alicia, we would like to open up the call to our Q&A session if you may.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Howard Halpern with Taglich Brothers. Please proceed with your question.

Good afternoon, guys, and welcome back, Pete.

Good afternoon, Howard.

Good afternoon.

In terms of – I guess, my focus and maybe your focus too is on what are going to be the primary factors that are going to help improve gross margin over time?

I think the biggest factor is that we have made some big investments in better equipment and that allows us to really more efficiently produce those things that we’ve produced in the past and to quote in a more competitive way for some of the projects we’d like to do it in the future. There has been over some time a real concentration on increasing our capability and capacity, which has not really exhibited itself in the way that you’d like to because of the COVID period was a very difficult period for decision-making with our customers, supply chain issues all of that clouded really some of the operational performance that we’re seeing and that we’re capable performing to in the next couple of years. Does that make sense?

Yes. But in the near term, will we continually see improvement as the supply chain issues abate? And could that drive gross margin back to at least that 17% area?

I’m confident that we will be, if not at 17% for this fiscal year, we’ll be banging on the door they’d be very close to it. We have new contracts, which we have better pricing on. There appears to the prospects for our Sterling engineering, operation are much improved and better absorption of overhead costs there. We’ll have a – could have a dramatic effect on gross margin if those have materialized.

And Mike, I think I’m not wrong in saying some of our best products have been slower delivery products because of slower raw material deliveries.

There’s no question about that.

Right. And as the gross margin improves, that will drive you towards operational breakeven profitability as the quarters move forward?

There’s no magic in this business. Gross profit is everything. We have been, I think, extremely good at managing our operating costs, gross margin. If we keep the operating cost straight, I’d like to tell the Board, we can keep our operating cost level. We get to keep the increases in our gross margin, although we are giving some of them to the bank to as a result of higher interest rates.

Yes. Well, with inflation cooling, maybe things will level out at this point.

They went from 0% to 5%, they’re not going to go from 5% to 10%. So I think we – if we’re not at the top, we’re looking at the top.

Okay. And just in terms of the perspective on some of the new areas, like the sub area, nuclear sub. Is that a higher-margin business? Or I guess, could you describe the type of business we could expect over the next maybe two, three, four or five years from that category?

So in the sub business, Howard, we’re – the parts that we are concentrating on are the high-end items. So you’re not going to make – they’re not making 100 submarines a year. They make it two or three. So the pricing for these components is definitely priced in that respect, where you’re not doing a high production rate. You’re doing a couple at much better margins, more sophisticated material with a lot more content in them. So we’re not shipping parts that are $100 or $200. We’re shipping parts that are in the tens of thousands and better. So those kind of things tend to fare better when we could put more labor into them. And the margins will show we’re doing agreement of crop work on some green work right now, which is a lot of valves.

I think, one of the things that’s happening in the submarine business as they have become more advanced and more incredible actually is that subs are looking more like airplanes in terms of close tolerance and performance and less like battleships, less welding, more high-precision fits and requirements. So our hope is that there’s going to be more money in that.

And we’ve looked at a number of companies in that business, both recently and years ago. And historically, they have significantly higher margins than we have experienced.

Okay. And once a contract – once awarded a contract and you supply and like you said, they produce one or two a year or so, it’s going to be highly sticky once you get that contract, right?

Yes, very sticky because they are desperate for new suppliers. Electric boat had an advertisement the other day, they want to hire 10,000 people in Southeastern Connecticut. I’m not sure there are 10,000 people in Southeastern Connecticut. And so the – you talk about they’re increasing from two to three boats, big deal. That’s from $4 billion to $6 billion a year.

What we were told, Howard, is if you’re doing a work now, you’re going to do it again. They just – they don’t have the personnel to actually shop this out and then do what needs to be done. So your panic kind of guaranteed this work as soon as you’re in it.

Okay. And they will – I assume would be very helpful in gaining the – making sure the spot for you to produce product necessary?

Absolutely. So we’re finding that they’re very helpful.

Okay. Well, thanks, and keep up the good work.

Thank you, Howard. Thank you for the question.

Thank you.

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

Thank you, Alicia. So with that, once again, thank you all for taking the time to be on the call today and for your interest in Air Industries Group. We look forward to updating you on the progress on our next call. Alicia, you may close the call.

All right. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.