Ducommun Incorporated

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Duke Common Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker today, Mr. Chris Reed, the moderator. Thank you. Please go ahead.

Thank you and welcome to the Commons 2020 first quarter conference call. With me today are Steve Oswald, Chairman, President, and CEO, and Chris Wampler, Vice President, Interim Chief Financial Officer and Treasurer, and Controller and Chief Accounting Officer. I'm going to discuss certain limitations to any forward-looking statements regarding future events, projections, or performance that we may make during the prepared remarks or the question and answer session that follows. Certain statements today that are not historical facts, including any statements as to future market conditions, results of operations, and financial projections, are forward-looking statements under the Federal Private Securities Litigation Reform Act of 1995 and are therefore prospective. These forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. In addition, estimates of future operating results are based on the company's current business, which is subject to change. Particular risks facing to common include, among others, the cyclicality of our end-use markets, the impact of COVID-19 on our operations or customers, the level of U.S. government defense spending, timing of orders from our customers, legal and regulatory risks, management changes, the cost of expansion and acquisitions, and competition. These risks and others are described in our annual report on Form 10-K filed with the SEC, and our forward-looking statements are subject to those risks. Statements made during this call are only as of the time made, and we do not intend to update any statements made in this presentation except if and as required by regulatory authorities. This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call. We filed our 2020 First Quarter Form 10-Q with the SEC today, and you will find a link to all our filings with the SEC on the company's website under the Investor Relations tab. I would now like to turn the call over to Mr. Steve Oswald for a review of the operating results. Steve?

Okay, thank you, Chris, and thanks, everyone, for joining us today for our first quarter conference call. I also hope that you and your families are healthy and getting through this pandemic as best as possible. Today, as usual, I will give an update of the current situation at the company, after which Chris Wampler will review our financials in detail. It certainly has been a time of rapid change and adjustment at the Common as we manage through these challenges with the top priority being the health and safety of our employees. I'm happy to report that despite having facilities in high impacted areas such as Southern California and one operation south of Albany in New York State, the virus spread has mostly had zero impact on our team with only one case reported which we believe was not contracted at work. We also remain diligent on putting even more effective safety protocols in place as we move forward. Our facilities are sharing best practices and ideas across the company to sustain this performance. Despite the challenges of the pandemic to the nation and the markets, DeCommon's first quarter performance was excellent. The reasons for this result, I believe, as our team has been working diligently over the past three years, improving all our operations, developing our product portfolio, driving new technologies, focusing on providing high value to customers, having an effective cost structure, and making strategic acquisitions. This has been particularly evident recently in the progress of New Commons defense business revenues and orders. Overall, the company's first quarter revenue rose 1% year-over-year and marked the ninth consecutive quarter of year-over-year growth. Though not a material increase, I want to remind everyone that we improved revenue with not only impact from the virus in March, but also over $25 million of 737 max headwind from last year. which for the size of our P&L is impressive. As mentioned previously, the commons defense business has really started showing its strength, especially in Q1. The majority of the gains in the quarter include increases from our new weapons system business, Nobles Worldwide, with the Clouded Leopard armored fighting vehicle, the F-35, the Patriot missile, the Apache helicopter, F-15, F-16, and F-18, and other industry programs. In many areas of defense, we're just getting started, including some great progress in developing business in UAVs. One of the things we're most proud of and a highlight is the continued defense revenue growth of Atheon. As you may recall, Ducan was the first company selected to sign a preferred supplier agreement last July with the former Raytheon Missile Systems business, now known as Raytheon Missile and Defense. Through that relationship, I am happy to report that we have fully commercialized our first structures product for them, which is the missile case for the Toll Missile Program. This is a major step forward, as all of our other current deliveries for Raytheon are electronic products. This win also continues to build a value offering in the area of defense within the commons, structures, business. Withdraw the opportunity and book the $20 million plus order for the program in Q1. In addition, another major story is the rotation of our customer rankings. Although it was only one quarter, the top five companies ranked by revenue now are Raytheon, Boeing, United Technologies, Northrop Grumman, and Spirit Aero Systems. For context, since I arrived at the company in January of 2017, each and every quarter, Boeing and Spirit always held you the first, second, or third place. It should be a clear indicator that the diversification of our portfolio and balance is working yet to come, showing material strength while the commercial aerospace business is significantly impacted by the pandemic and the 737 MAX. We believe at least in the next year or two, this trending will continue in favor of defense, and the team is driving every opportunity. Also, despite the tough news and current situation with commercial aerospace, Tacoma continues to gain share at Airbus, achieving positive growth year over year in Q1. As you may recall, Airbus was not even a customer of the company four years ago. Though the rates are down, opportunities still exist for a larger percentage of the A320 program. The other bright spot for the quarter ending in Q1 was the backlog of 876 million. It is sequentially down from Q4, but still a great number based on the environment. Boasted by strong orders across numerous key defense platforms, which included Apache, the toll missile case previously discussed, UAVs, weapons systems for ground vehicles, F-35, F-18, and others. This part of the comment continues to deliver. Obviously, the strength helped offset commercial aerospace order pressure. Overall, the company is off to a solid start in 2020 in both revenues and earnings. As previously communicated, the comment took action early in January to ensure all costs that our effective operations were proactively managed due to the 737 MAX production shutdowns at Boeing and Spirit Aerosystems announced in December 2019. Actions have continued as we now deal with the pandemic to ensure the company adjusts its costs. You can certainly see the effectiveness of our actions within this tough environment at Q1 with both very positive gross profit and operating income percentage posted. and the team has certainly done a great job. We continue to be proactive in the area of costs. I also want to mention our leadership team has the experience in the background for the managing through the financial crisis in 2008-2009 to be affected through this difficult time as well. In regards to the Q2 outlook, we see our strong backlog in defense with the many growth programs mentioned earlier, including the strategic supplier agreement with Raytheon providing year-over-year growth. The Nobles acquisition will also help provide additional inorganic growth, but with the unprecedented challenges of commercial arrow, along with the 737 max, the company revenue should be lower in Q2 in the range of 16% to 20% year over year. We think that within the current circumstances is a very good effort and also expect operating income percentage for the quarter to be between 5.5% and 6%. As you look to the second half of the year, we estimate that defense revenue will improve again, but the business overall will be down year-over-year by 8% to 12% due to commercial aerospace. Operating income, we believe at this time, will be between 6% to 7%. As you saw, though, in the first quarter, overcoming $25 million plus for max in the beginning of the pandemic All the hard work the past three years, including process improvements, restructuring, leadership development, cost discipline, and others, have clearly made a material difference. And despite the short-term outlook, the business has a great long-term future. Now let me provide you some additional color on our markets, products, and programs. Beginning with our military and space sector, we posted first quarter revenue of $100.8 million up 32% versus 2019. We drove sales across a broad variety of defense platforms, including nearly every aspect of our product portfolio. As mentioned earlier, we saw increases in demand for our military fixed-wing aircraft programs, with particular strength in shipments for the F-15, F-16, F-18, and F-35, as well as top-line expansion for helicopters like the Apache. In addition, the Patriot missile system rose again this quarter. We saw significant growth across many other military and space applications. We were well-positioned with further growth across our defense platform over the next three quarters in all sectors. It ended the first quarter with a backlog roughly 474 million for defense, up an impressive 36% year-over-year. I'm also happy to announce that Ducon was recognized as the Blackhawk Supplier of the Year in 2019 by Sikorsky, a Lockheed Martin company. Within our commercial aerospace operations, first quarter sales declined year-over-year to 62.5 million, but we did see continued share gain at Airbus, and despite the rates, posted year-over-year gains with this customer. The common also continues to work on adjusting costs and managing the downturn, and is well-positioned once rates start to stabilize and in the long term. Dukama's expansion with Airbus since 2017 is clearly helping and puts important balance in our portfolio. The Airbus A320 and Airbus A220 families represented a larger and larger share, both directly and indirectly, in Dukama's commercial revenue in Q1. The backlog within our commercial aerospace sector stood at roughly 376 million at the end of the first quarter, with the majority of the client for the 737 MAX program. At this point, I'll turn it over to Chris.