Good day, and thank you for standing by. Welcome to Ultralife Corporation Second Quarter 2024 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to our first speaker today, Jody Burfening, Managing Director of LHA Investor Relations. Please go ahead.

Thank you, Evelyn, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the second 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.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 uncertain global economic conditions, reductions in revenues from key customers, delays, or reductions in U.S. and foreign military spending, acceptance of our new products on a global basis, disruptions or delays in our supply of raw materials and components due to business conditions, global conflicts, weather or other factors not under our 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 factors and other factors that could affect Ultralife's financial results 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. Welcome to our call on Ultralife's Q2 operating results. Earlier today, we reported Q2 sales of $43 million and operating income of $3.9 million, the third consecutive quarter of $42 million or more in sales and $0.18 of EPS. Battery & Energy Product sales increased 8.3% over Q1 to the highest revenue level ever for the segment. Our combined gross margin continued to be strong at 26.9% compared to 24.8% a year ago as our gross margin improvement projects continue a top priority. Our top 3 initiatives for the year: Material cost deflation, lean productivity, and sales funnel improvement, continued favorable progress in Q2, with additional expertise in place to drive future revenue growth. During Q2, we were able to pay down our acquisition debt by over 52%, which will significantly decrease our interest expense going forward and allow for future accretive M&A. As a result of our strong operational performance, I am happy to report that Ultralife was included in the Russell 2000 Index this year, which will enhance our profile in the investment community, which is something Phil and I are focused on. I will now turn it over to Phil to talk through the detailed numbers.

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our second quarter results for the quarter ended June 30, 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 includes a summary and status of our transformational new products. Consolidated revenues totaled $43 million compared to $42.7 million for the second quarter of 2023. Revenues from our Battery & Energy Products segment were $36.7 million compared to $33.9 million last year, an increase of 8.3%. This growth was driven by very strong performance in our sales to government defense and medical markets, which increased 30.5% and 20.1%, respectively. These increases were partially offset by a decline of 10.9% in oil and gas market sales. The sales split between commercial and government defense for our battery business was 75-25 compared to 78-22 reported for the 2023 full year. And the domestic to international split was 53-47 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 Communications Systems segment, of $6.3 million, declined 28.7% from the $8.8 million we reported last year, primarily attributable to shipments in the 2023 period of vehicle amplifier adapter orders to a global defense contractor for the U.S. Army and have integrated systems of amplifiers and radio vehicle amounts to a major international defense contractor, for which shipments have been delayed from earlier periods due to supply chain disruptions. On a consolidated basis, the commercial to government defense sales split was 64-36, identical to that reported for the 2023 full year. Our total backlog exiting the second quarter was $93 million and remains diverse in nature across our commercial and…

Thank you, Phil, for the detailed review of the Q2 results. As I mentioned on previous calls, we have 3 major 2024 priorities to accomplish. First, continued material cost deflation. In Q2, we favorably negotiated our main logistics contracts and expect to realize positive savings of a few cents per year based on current volumes. We continue to work on combine and pull systems with key suppliers to smooth material and cash flow and positively impact inventory turns. Secondly, lean productivity. Continue to reduce waste and inefficiencies in all of our processes throughout the business. We have hired a 25-year lean process veteran in our Newark location to focus on improving manufacturing and back-office efficiencies throughout the organization, with a target of decreasing labor 3% to 5% on several of our high-volume lines. Lastly, sales funnel improvement. We have a larger and increasing pipeline of new products with a healthy funnel of sales opportunities that needs to continue to grow. To that end, we have hired 2 additional sales resources to focus on large program wins with key OEM partners, driving commercial sales growth of both custom and Ultralife branded products. One sales resource is a 30-year battery industry veteran, where the other joins us from a major medical device manufacturer. We are currently transitioning multiple CRM systems to a new global CRM system to better manage global opportunities and funnel status. Next, I will give updates on the organic growth projects and new product development underway for the businesses, which are key to future sales and market expansion. Our Communications Systems business continues to ship EL8000 server cases to several customers, and we are working diligently to elevate our partner status level, which will enable us to work more collaboratively with other partners on the integration and engineering projects…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Josh Sullivan from The Benchmark Company.

Glad to listen on the results here. Just maybe starting off, looking at the impressive debt paydown in the quarter, how should we think of free cash generation going forward? Can we stay at these levels? And then maybe what are the priorities for cash?

Well, certainly, the level-loading has been a major help for us. And it was just a matter of time before we got that functioning across all the various functions. Now you can talk about level-loading in manufacturing, but that is -- it extends downward into the whole supply chain. It extends upward to the customers throughout the S&OP process, and it ends up on the balance sheet in terms of cash if it's all properly operating. And that's exactly what we saw in Q3. Payables down, meaning a more steady supply of products from our supplier, meaning an improved S&OP chain, throughout the supply base, throughout the customers, all the way through the customers. And at the end of the day, we wind up with cash sooner on a steadier basis. So the way I look at what's going to happen with debt, I mean I could tell you right now that we've already reduced our debt by a couple of million dollars in -- just in the few weeks since the second quarter ended. God willing, I expect that to continue. And then going forward, as Mike mentioned, it's a matter of balancing the paydown of the debt with other strategic spending opportunities, including the full spectrum of strategic CapEx, potential acquisitions, and anything and everything that's going to help grow our business profitably.

Got it. And then Mike, as far as the efficiency efforts you're pursuing here on a number of levels and have over the previous quarters, what inning do you think we're in here as far as kind of your strategic plan as you look at it?

We're early in the game still, Josh. I mean we're -- we've, I guess, attacked the easy things, obviously, and tried to get those quickly mitigated in functioning and producing results. There's things in all of our businesses. We've done a -- I'll start with the back office side. The back office, we've had a host of acquisitions over the last decade. They've been at different levels of integration and whatnot. We have a new CIO that we brought on board almost a year ago now, well, 9 months ago. And one of our functions there is to really get all the locations really functional as one. So we can all share systems and collaborate properly and get rid of some of that waste and multiple licenses at multiple facilities, et cetera, et cetera. And then you've got the operations. And we're -- it takes time to go through the variety of products we have and actually lean things out. So we're starting with the things that we think are going to give us the biggest bang for the buck right upfront. But with all lean journeys and efficiency journeys, they never really end because as you get done with leaning it out once people get better at doing their jobs, they find better ways to do things. And all of a sudden, you're in a line in balance situation and you need to really rebalance the line again. So it's a continual process. But we're in anything like 2 out of a 9-inning game.

Got it. And then on the -- within the battery segment, the products in the government and defense that are driving some of the near-term strength, as we look at the 2025 defense budget, do you feel this type of growth can continue?

Well, there is a review on the 2025 budget, there's really no, what I would call, significant decreases in any of the programs that we're involved with through our prime customers. So we don't expect to see a dramatic change to that short term. But it's also -- part of it is we're hostage to our customer supply chain difficulties as well. So if they're not pulling product, we're not selling products. So it's a two-way street there.

Got it. And then just on the decline in oil and gas. Anything going on there cyclically? Is there anything in the offshore activity that we should be thinking about?

For us, it really seemed like it was more of an overbuy with one customer that -- 1 or 2 customers towards the end of late last year, and then some reorganization in their part where I think they got a little bit flat-footed, and we expect to have volume to rebound pretty well in the back half of the year. But who knows on that stage, a lot of things can happen in the oil and gas market over the next couple of years.

Got it. And then just...

And then we have, Josh, is that our oil and gas portfolio is really diversified. It's diversified between -- 50% is international, 50% domestic. And the domestic breakdown is pretty evenly split between the blue chip companies and, I guess, what I call the wildcatters.

And we do a little bit of everything also, Josh. We're down-holing on the drills, but we're also in pipeline inspection, we're in monitoring of devices. There's a lot to the whole flow of oil from the ground to your car or to a plastics processing facility or wherever.

Got it. And then as we think of the Thin Cell opportunities, the update in Q3 you're anticipating, could this be a major gating event? And then how quickly can you ramp up to support that product?

Well, we always hope it's going to be a major event. I mean -- and to be clear, I mean, all these initiatives are relatively in production stage, and we are selling all of the products. It's just, I would say, we haven't landed that, what I would call, anchor customer where it's an announceable type of an event that would make people excited. So we're going through a lot of different calls with a few different customers. And they have to get through all their stuff with the FDA and whatnot before they're going to pull from us. Again, we're not driving the bus, so to speak. So it's frustrating. I wish it would happen quicker. But I've been involved in the medical side for a lot of years, and one of our largest medical customers that we now have, it took 6 years for us to really start seeing any real production volume. So I also know it takes time.

And then on the new sales resource investments, where are their efforts going to be? Maybe what are they shading in areas where you couldn't touch before?

Well, the first resource I mentioned, the industry veteran, I mean, he's really focused in on how do we move Thin Cell, how do we move Thionyl. I mean, how do we get into some of these bigger accounts. And we've we need to have more conversations going with bigger OEM customers. And that's really where his focus is. If we get in the door and have the conversations, we have the technical people that can offer a solution. And as far as the manufacturing side, we're pretty agile and able to respond very quickly. So I think once we get those conversations going, we're going to be much better. The second resource, she's really focused on some of the major medical companies that we don't necessarily have relationships with. I look at the top 100 device manufacturers in the medical space, and we have some relationship or sales with probably 20% of them. So there's 80 major medical device manufacturers that we have to go out and we've got to develop the relationship. And she's got a list and she's going out to do just that.

And then I guess just one last one on the IVAS battery. Just given the increasing need for power by foot soldiers kind of globally, you mentioned some international efforts there, but could you just expand on why you're continuing to invest and maybe what other programs you see where that technology could be used?

Well, all our technology, we try to develop it so that it's agnostic and it's a toolkit in the -- or, a tool in the bag, so to speak. So we've learned a lot going through the conformal development. We've been developing various versions of this battery for the last 12 years. We sell one and have been selling one version or UBBL35 for the last decade. And we think that there's going to be need for conformal. We want to recoup, obviously, some of the investment that we've made in developing the technology. But on the military side, the power is going to – like you said, it’s going to continue to be more and more needful. The power requirements are not going away. The conformal is a premium product. And we still sell a lot of Land Warrior batteries because the price point per energy is just way better. And we expect that we want to be a complete soldier supplier – soldier power supplier. So we’re going to have a conformal in our product portfolio, along with some of the legacy Land Warrior battery products.

Thank you, Josh. [Operator Instructions] I'm showing no further questions. I'll now turn the conference back to Mike for closing remarks.

All right. Thank you. Thanks for listening to today’s call. We look forward to talking to you all next time during the 2024 Q3 earnings call. Bye now.

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