Ducommun Incorporated

Good day and thank you for standing by. Welcome to the second quarter 2023 Due Commons Earnings Conference Call. At this time, all participants are in a listen-only mode. Following speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Dukaman Senior Vice President, Chief Financial Officer, Controller, and Treasurer. Suman Mukherjee, please go ahead.

Thank you, and welcome to Dukaman's 2023 Second Quarter Conference Call. With me today is Steve Oswald, Chairman, President, and Chief Executive 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 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 Dukkhamen 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 and non-GAAP measures referenced on this call. We filed our Q2 2023 quarterly report on Form 10-Q 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. Thanks, Suman, and thanks, everyone, for joining us today for our second quarter conference call. Today, and as usual, I will give an update of the current situation at the company, after which Suman will review our financials in detail. Before I begin discussing our Q2 results, I did want to follow up on a press release and mentioned that we completed the BLR acquisition at the end of April for our initial purchase price of $115 million net of cash acquired. This is a very positive step forward for the company as we continue to build both our electronic and structural product portfolios with more engineered products and aftermarket revenue, a strategic long-term goal. In addition, to help pay for a portion of the BLR acquisition, In May, we completed a public stock offering, resulting in net proceeds of over $85 million, and used those proceeds to pay down the revolver that was utilized for the acquisition. We are thrilled with the BRL acquisition. I want to publicly welcome Mike Carpenter, the President, and his team, and they are off to a very good start. Now turning to the quarterly results. Q2 was an excellent quarter as we grew our top line both year-over-year and sequentially, delivering year-over-year revenue growth of 8%, reaching $187.3 million. As mentioned in the press release, narrow-body aircraft was once again the catalyst in driving overall revenue growth, and another positive sign the recovery is in good shape and will only get better and better. Turning to the markets, the continued recovery in commercial aerospace once again delivered in Q2, with Boeing's 737 MAX business up almost 60% year-over-year, and the Airbus A220 also having significant growth, up almost 90% year-over-year. Overall commercial aerospace with Airbus and Boeing and others was up 37% from Q2 2022. Ducati's commercial aerospace business has now showed year-over-year revenue growth for the eighth consecutive quarter, an excellent sign as the industry and build rates recover. The company's defense business was down year-over-year in Q2, mainly due to timing of programs such as the F-18 and continued softness at GA for UAVs, among others. But once again, we delivered solid performance of $96 million of revenue for the quarter. The company posted improved gross margins of 21.4%. of 150 basis points year-over-year from 19.9%, as we worked through our restructuring activities and benefit from higher volume. The team also delivered adjusted operating income margins of 8.1% and adjusted EBITDA was $26.1 million, an increase of $2 million year-over-year. The Commons adjusted EBITDA margins of 13.9% in Q2 was up as well. And we anticipate adjusted EBITDA to be solid this year with stronger numbers in 2024 once the planned closures restructuring activities this year are completed. The quality of earnings when factoring the effects of the BLR acquisition were good with GAAP diluted EPS of 17 cents a share versus 34 cents a share for Q2 2022. But with adjustments, diluted EPS was 54 cents a share compared to diluted EPS of 76 cents a share in the prior year. Some key drivers for the lower gap diluted EPS include higher interest expense due to debt incurred related to the BLR acquisition, higher restructuring charges, higher GWIMUS and other fire related expenses, and BLR acquisition related expenses. Switching to the total company's backlog performance, I'm very pleased to report the company achieved a major milestone this quarter, reaching $1 billion in backlog for the first time ever. Defense backlog contributed greatly in the quarter by increasing $50 million sequentially, from $444 million at the end of Q1 2023 to $494 million at the end of Q2 2023. an increase of over 11%. This was led by military rotary wing platforms such as the Seahawk and Blackhawk and other military and space platforms. We are very pleased with this and it is in line with my past comments that the overall DCO defense business is in very good shape with more positive news to come. In addition, the commercial aerospace backlog increased sequentially for the ninth consecutive quarter from $266 million at the end of Q1 2021 to $465 million at the end of Q2 2023, an increase of over 74% during that time. This was led by the 737 MAX, Viasat for in-flight entertainment, the A220, A320, and Gulfstream, all which we would expect after a slower than expected recovery in 2022. The other excellent news out of the quarter was the overall book-to-bill ratio for the company was 1.3. For offloading for defense primes, the work continues. We're expecting roughly $90 million for the full years committed to mainly in our circuit card business for Raytheon. As communicated, 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 once the transition work is completed. In Q2, our team delivered another excellent quarter as well, managing the supply chain. And this is not only showing up on our financials, but also we cannot be in a better place with our customers regarding on-time delivery and quality, which shows loud and clear in our $1 billion plus backlog. For revenue guidance in 2023, I'm happy to reaffirm our expectations That should be in the mid to high single digits for 2023. The recovery for commercial aerospace will continue to lead the way for the rest of the year as we see more and more volume return, along with the fence being solid as well. The expected completion of the two plant closings by the end of this year will also have some limited headwinds. But we feel confident in our guidance. Now let me provide some additional color on our markets, products and programs. Beginning with our military and space sector, we posted second quarter revenue of $95.9 million, a decrease versus Q2 2022. Despite being down, as mentioned earlier, it was a solid showing for the business in Q2. We still saw increases in demand for the Mir missile, Apache, F-35, and various other military and space platforms. The second quarter military and space revenue represented 51% of the Commons revenue in the period, down from 61% last year. and this trend will continue to reflect more balance with commercial aerospace, which we like. We also ended the second quarter with a much improved backlog of $494 million, a significant increase of over 11% sequentially, and reversed as a five-quarter downward trend, and this represents 49% of New Commons' total backlog. Within our commercial aerospace operations, second quarter revenue increased 37% year-over-year to $78.2 million, driven mainly by build rate increases on large aircraft platforms and other commercial aerospace platforms as well. Tacoma expects this continued improvement in the commercial aerospace to gain momentum in the second half of 2023. The future is bright across our product offerings. Our delivering quality will also continue to stand out as we move ahead. The backlog within our commercial aerospace sector stands at $465 million at the end of the second quarter. and was up $46 million than Q2 2022. With that, I'll have Suman review our financial results in detail.