Ducommun Incorporated

Good day, ladies and gentlemen, and welcome to do comments first quarter 2023 conference call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we'll hold a Q&A session. To ask a question, please press star followed by one on your touch tone phone. If anyone has difficulty hearing the conference, please press star zero for operator assistance. As a reminder, this conference call is being recorded today, May 4th, 2023. I would now like to turn the conference call over to Duke Commons Senior Vice President, Chief Financial Officer, Controller, and Treasurer, Mr. Suman Luperchi.

Thank you, Jada. And welcome to Duke Commons 2023 first quarter conference call. With me today is Steve Oswald, Chairman, President, and CEO. 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 Q&A 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 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 have been correct. In addition, estimates of future operating results are based on the company's current business, which is subject to change. Particular risks facing the common include, among others, the cyclicality of our end-use markets, the level of U.S. government defense spending, timing of orders from our customers, legal and regulatory risks, the cost of expansion and acquisitions, competition, economic and geopolitical developments, including supply chain issues and rising interest rates, pandemics and disasters, natural or otherwise. 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 Q1 2023 quarterly report on Form 10Q with the SEC today. I would now like to turn the call over to Steve Oswald for a review of the operating results. Steve.

Okay, Suman, thank you. And thanks, everyone, for joining us today for our first core conference call. Today, as usual, I'll give an update of the current situation at the company, after which, Suman, we'll review our financials in detail. Before that, though, I'd like to discuss our CFO transition and NLGS today. First, I'd like to say this transition is not related to any issues revolving the company's financial reporting. I would also like to thank Chris Wampler for his contributions and service as CFO and welcome Suman Mukherjee to the call and congratulate him on his new role. Suman and I have known each other for over 12 years, worked together at three different companies, and I have full confidence in him and his abilities. As we announced last week, I'm also delighted that we have completed the acquisition of BLR after the end of Q1 as we had a 30-day filing period that ended on July, I'm sorry, it ended on April 24th. BLR Aerospace is our fifth acquisition and largest since I joined the company in 2017, and it's 100% in line with the expectations we discussed at the Common Investor Meeting in New York in December. BLR is an industry leader and innovator, providing engineering products and aftermarket services to rotorcraft, fixed wing business aviation OEM customers, and fleet operators. I want to welcome Mike Carpenter, president, and the entire BLR team to Dukama. I'm excited to begin working with them. As to the quarter, we're off to a good start in 2023. with very strong top-line growth as the company delivered year-over-year revenue growth of 11% to $181.2 million. As mentioned in the press release, our excellent position in narrow-body aircraft was key to driving overall revenue growth, and another positive sign of recovery is in good shape and will only get better in the near and longer term. Turning to the markets, the continued recovery of commercial aerospace is once again a real bright spot in Q1. With Boeing 737 MAX business up 80% year-over-year, the Airbus A220 also having significant growth of 66% year-over-year. Overall commercial aerospace with Airbus and Boeing and others was up 35% from Q1 2022. The Commons commercial aerospace business has showed year-over-year revenue growth now for the seventh consecutive quarter, an excellent sign as the industry and bill rates recover. The company's defense business was down modestly year over year in Q1, mainly due to timing of programs such as the Apache Rotor Blade and GA UAVs, among others. But once again, Ducama delivered solid performance of roughly 96 million revenue as we prepare for increasing DOD budgets and FMS in the years ahead. The company posted solid gross profit of 20.3%, up year-over-year from 19.9%, a good result as we worked through our restructuring activities. The team also posted adjusted operating income margins of 7.5% and adjusted EBITDA was $23.1 million, an increase of $3 million year-over-year. Tacoma had adjusted EBITDA margins of 12.7% in Q1 as well. And we anticipate adjusted EBITDA to be solid this year with much stronger numbers in 2024. once the plan for 2023 are behind us. Quality of earnings was solid with GAAP diluted EPS of 42 cents a share versus 66 cents a share for Q1 2022. But with adjustments, the diluted EPS of 63 cents a share was comparable to the diluted EPS of 67 cents a share in the prior year. Some key drivers for the lower gap diluted EPS include restructuring chargers and higher Guaymas fire-related expenses. Switching to the company's backlog performance, the commercial aerospace backlog increased sequentially for the eighth consecutive quarter, from $266 million at the end of Q1 2021 to $464 million at the end of Q1 2023, and increased over 74%. This was led by the 737 MAX, Biasat for in-flight entertainment, the A320, A220, and Gulfstream, all which you would expect after a slower-than-expected recovery during 2022. The defense backlog decreased modestly sequentially from Q2 2022, but remained solid at the end of Q1 as well, and ended the quarter at $444 million. I also want to share with you some great news on the 737 MAX. We recently received our first order ever from Spirit Aerosystems for MAX fuselage skins, similar to what we make currently for the A220. This is an initial order for four skin sections, which comprise of roughly 5% of the total fuselage, so we expect this to grow as we move forward. The initial foreskin order is projected to be $4 million in revenue yearly, and we're excited about what is ahead. Keep in mind, we provide close to 100% of the skins for the A220 fuselage as a sole source or a 50-50 split with Spirit for certain areas, so you're ready to do a lot more after this initial order. The foreskin sections will be fully commercialized by year end. For offloading for defense prime, the work continues. We're expecting roughly 90 million for the full year as committed to with a great deal of that in our circuit card business for Raytheon at such sites as Appleton, Wisconsin and Tulsa, Oklahoma. The long-term run rate of these defense programs already commercialized or in development for offloading will be over 125 million for the common by 2025. One item to note is that there are lags with these types of projects. as you not only have to transfer a legacy or buy test equipment, et cetera, but we do have initial headwind on revenue with the OEM supplying material from their on-hand stock. So the numbers with these large OEMs do take some time. The company's actions and lean organizational structure are also continuing to pay dividends. Our team delivered another excellent quarter as well in Q1, managing the supply chain, and this has not only shown our financials, but also we could not be in better shape with our customers regarding our on-time delivery and quality. In addition, we were honored in Toulouse in March by Airbus with an award for being a top performing supplier for hot form and super plastic forming titanium parts. The company put out a press release on this and we are very proud of our work. For context, we did not have any business with Airbus before 2016. It has been a great success And Airbus has a very high global standard for these awards. It is a select group. For revenue guidance for the year, we're happy to update it to mid to high single digit for 2023, based on better news on commercial aerospace, along with a very successful win with BLR and the acquisition. Just a few comments on our win. These are never easy. and require a great deal of effort and excellence. I'm happy to report that the seller, due to our approach, went exclusive with Dukama early on, and this provides beneficial benefits for everyone. On the commercial aerospace side, the recovery will continue to lead the way, and revenue will be very good for the rest of 2023 as we see more and more volume return, with defense also being solid. The two plant closings later this year We'll also have some limited headwinds on revenue as we seek to prune non-strategic and low-volume business, but feel very confident in our much improved guidance for 2023 revenue. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, we posted first quarter revenue of $96.4 million, a modest decrease versus Q1 2022. Despite being down, as mentioned earlier, was a solid showing for the business in Q1. We still saw increases in demand on our other military and space platforms, Mir missile, other military rotary aircraft platforms, and other military fixed-wing aircraft platforms. The first quarter military and space revenue represented 53% of the Commons revenue in the period, down from 61% last year. And this trend will continue to reflect more balance with commercial aerospace. And we like that. We also ended the first quarter with a solid backlog of $444 million, while also down modestly sequentially still represents 46% of the government's total backlog. In our commercial aerospace operations, first quarter revenue increased 35% year-over-year to $73.1 million, driven mainly by bill rate increases at Boeing, Airbus, and others. The government expects this to continue to gain momentum in 2023, And the future is very bright across our product offerings. Our delivering quality also continues to stand out as we move ahead. The backlog within our commercial aerospace sector stands at $464 million at the end of the first quarter and was $87 million higher or had a 23% increase year-over-year from Q1 2020-2022. With that, I'll have Saman review our financial results in detail. Saman?