Astronics Corporation

Good day and welcome to the Astronics Corporation first quarter 2024 financial results call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Debbie Pawlowski, Investor Relations for Astronics Corporation. Please go ahead.

Thank you, Megan, and good afternoon, everyone. We certainly appreciate your time today and your interest in astronomy. Joining me on the call here today are Pete Gunderman, our Chairman, President, CEO, and Dave Burney, our Chief Financial Officer. You should have a copy of our first quarter 2024 financial results, which crossed the wires after the market closed today. If you do not have the release, you can find it on our website at astronics.com. As you are aware, we may make some forward-looking statements during the formal discussion and the Q&A session of this conference call. These statements apply to future events that are subject to risks and uncertainty, as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed with Securities and Exchange Commission. You can find these documents on our website or at sec.gov. During today's call, we'll also discuss some non-GAAP measures. We believe these will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release. So with that, let me turn it over to Pete to begin. Peter?

Thanks, Debbie, and good afternoon, everybody. Thanks for tuning in to the call. We feel our first quarter was a reasonably solid start to 2024, and we think it sets us up pretty well for what's going to be a positive and exciting year. Sales of $185 million exceeded both our guidance and our internal forecast, frankly, up 18% year over year, down slightly from the fourth quarter where we recorded sales of $195 million. But the two together represent a near return to pre-pandemic revenue levels, which we're pretty excited about. The sales level has been enabled by positive trends that continue to propel us forward. We've talked about these before, and they're widespread throughout industry, so I'm not going to spend a whole lot of time on them, but supply chain for us continues to improve. That was a major handicap over really the last year and a half, two years, but it's coming into line nicely now. It continues to get better. Also, our workforce churn, which was a big deal in 2021 and 2022, has moderated, and efficiency of our team of employees has improved and continues to improve. Inflation has moderated, despite recent travails with the Fed, and price increases are taking hold and becoming more of a positive influence on our results. None of these things are done yet. They're all in work, but they're all continuing to improve, and in that sense, create significant tailwinds, whereas they were headwinds not that long ago. The sales level approaching pre-pandemic levels certainly helps our bottom line. Dave will talk through the puts and takes in a little bit, but From my perspective, adjusted EBITDA has improved and is improving in the first quarter up to 10.3% compared to 3.9% one year ago. That is improvement, and we expect more of it as we go through the year, as our sales continue to climb and we continue to get the tailwind benefits that I just talked about with respect to supply chain workforce efficiency and pricing in particular. Also, now that we're back at pre-pandemic levels or pretty close to it, we have had an opportunity to review and reassert our promise that our business generally works with a 40% marginal contribution model. So as we continue to ramp over the next few quarters, that'll be a useful measure to try to anticipate our performance. The segment analysis in the press release shows that our aerospace segment had a pretty nice quarter, but our test segment was pretty weak. Aerospace had 21% growth over a year ago and reported $12 million of operating profit, whereas test was up 2% and had an operating loss of $3.1 million. The evidence is that aerospace, our aerospace segment is on a very good track and we think has a really bright path ahead of it, but our test business needs to improve. To help bring that about, we executed a restructuring just a couple weeks ago in late April that we think is going to save in the order of $4 million annually beginning in the third quarter. We also announced the closure of one of the smaller facilities in our test segment and a planned consolidation over the next couple months into our Orlando headquarters for our test business. The other thing that we continue to do in our test business, which I know people are going to be curious about, is working on our radio test contract that we are trying to get in place with the US Army. We're not there yet, but we're making really good progress. For those who don't know, we expect this to be a $200 to $300 million program over the next few years. It's an IDIQ program, so the absolute timing is unknown, but there is good momentum at the moment. Some of the pre-award things that need to happen are happening, facility audits, financial audits, fact-finding regarding pricing, so on and so forth. And we are at this point expecting that to happen in the coming months, perhaps late in the second quarter or early in the third quarter. Finally, with respect to the quarter, demand continues to be very strong. We had Q1 bookings of 205 million. That's a book to bill of 1.11. It was pretty strong in aero and lighter in test. And it's really driven by what I would refer to as a groundswell of demand. There was no one big thing or even a few big things that really drove that booking performance. It's rather a rising tide lifts all ships. We're getting good demand across the business, across our product lines. And it's encouraging and sets us up, I think, for a really good remainder of 2024. We ended the quarter with a record backlog, again, of 612 million. And interestingly, 12 months of bookings, rolling 12 months, ended with the first quarter was totaled 772 million, which is very supportive of our 2024 guide. which remains at 760 to 795 million. Digging into the guide a little bit, it's early, just one quarter into the year and there are many moving parts. I wanna talk through some of the moving parts which we're sensitive to and some of the watch items, which will help dictate how our year is gonna play out. One of the trends is just the overall strength of the business. That groundswell of demand is encouraging, and the evidence is it's going to continue. The record backlog and strong bookings suggest upward opportunity for the year, enabled by continuous improvements in the supply chain workforce and pricing, as I mentioned earlier. A watch item is the radio test program with the Army. We have it slated for somewhere in the neighborhood of $8 to $10 million of impact on our 2024 revenue at this point. That assumes a mid-year award. That contract will obviously be much bigger in 2025 and 2026, but we need to get it going in the middle of 2024 in order for that to happen. And even just for 2024, an $8 to $10 million impact on our revenue business plan is substantial. And then, of course, there's the elephant in the room, and that's production rates at Boeing, our biggest customer, and specifically with the MAX. I'm going to be a little transparent here with some of our thinking and some of our numbers. The MAX production rate is down in the first quarter by pretty well documented by all accounts. And Boeing has expressed that they want to increase it as quickly as possible. They have not been clear with the world or certainly with us as to what that ramp is going to look like. So lacking any other information, we are currently planning on about 35 ships a month for the MAX. Will they slow down suppliers? They might. It's unclear. We have not heard anything at this point. But for information sake, Line Fit, we put about $95,000 of product on each 737 that goes down the production line that gets delivered. That Line Fit content, if they were to reschedule us, could be affected. What would they reschedule us to? I mean, it's kind of a wild guess at this point. Nobody really knows. And we certainly, again, have no indication of anything. But a conservative number that I've seen in a number of places is 20 shipsets a month. That would be a reduction of what we have loaded of about 15. So if you take 15 ships times $95,000 a ship times eight months for the rest of the year, you're talking about a potential reduction downward reduction in our volume of about $11.5 million of revenue. We put another amount of content on each airplane, which is generally BFE, buyer furnished equipment. At this point, our general feeling is that that's unlikely to be adjusted in a substantial way. So it's really the line fit equipment that could come into play here. So how would this affect our range Our internal forecast right now is really at the high end of our revenue guidance range. So right around that $795 million level. So from my perspective, we've got upward potential with the general ground swallow demand. If you take a pessimistic perspective on the army radio contract, you'd be down 10 million. If you took Boeing, you'd be down If the rate went down to 20 maxes a month for the rest of the year, that would be another 10, 11 million. So that would take our internal forecast down right to the middle of our range. So we think our range is reasonable and adequate at this point. As we get through the next couple months, we'll know what the radio test contract looks like and what the timing is. We'll know what the production rate for max is likely to be for the rest of the year. And we'll know if that groundswell of demand, the strong bookings and the record backlogs continue. From my perspective, there's very little downside risk to our forecast beyond the published range. And there is upside potential, depending on how the max shakes out and how the Army contract goes. We will undoubtedly clarify this and update it next time we talk or maybe even before, depending on how things go. I'd like to turn it over to Dave now to talk about some of the fine points.