Ducommun Incorporated

Good day, and thank you for standing by. Welcome to the first quarter of 2024 Due Common Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll 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 your first speaker today, Suman Muguchi. Chief Financial Officer, please go ahead.

Thank you, and welcome to Duke Commons 2024 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 Dukaman include, amongst others, the cyclicality of our end-use markets, the level of U.S. government defense spending, our customers may experience delays in the launch and certification of new products, timing of orders from our customers, legal and regulatory risk, the cost of expansion and acquisitions, competition, economic and geopolitical developments, including supply chain issues and rising or high interest rates, the ability to attract and retain key personnel and avoid labor disruptions, the ability to adequately protect and enforce intellectual property rights, pandemics, disasters, natural or otherwise, and risk of cybersecurity attacks. Please refer to our annual report on Form 10-K quarterly reports on Form 10Q, and other reports filed from time to time with the SEC, as well as the press release issued today for a detailed discussion of the risks. 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 2024 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, thank you, Suman. Thanks, everyone, for joining us today for our first quarter conference call. Today, and as usual, I will give an update on the current situation of the company Afterwards, Suman will review our finances in detail. Let me start off with an update on our continued progress towards Vision 2027. For background, this vision and strategy was developed coming out of the COVID pandemic over the summer and fall of 2022. Unanimously approved by the DeKalb and Board in November 2022, and then presented to investors the following month in New York. We had excellent feedback. Since that time, Tacoma Management has been executing the Vision 2027 strategy by consolidating its facility footprint, continuing its targeted acquisition program, increasing the revenue proportion of engineered product and aftermarket content, executing our offloading strategy with defense primes and high growth segments of the defense budget, and by expanding content on key commercial aerospace platforms. We all have conviction. in the Vision 2027 goals and strategy, and believe the near-term and mid-term catalysts, along with strong results ahead for DCO, present a unique long-term value creation opportunity for shareholders. The Q1 2024 results were a very good example of the strategy at work. Q1 was an outstanding quarter and a great start to the year for Dukama. Revenues exceeded $190 million for the third consecutive quarter and $190.8 million, going 5.3% over the prior year. Strong growth in our commercial aircraft businesses across both Boeing and Airbus, along with our rotorcraft business, helped drive revenue during the quarter. Recovery on the 787 was notable, with revenues more than doubling over the prior year period, as well as strong growth on the A220 platform. where we make the skins for the entire fuselage. Overall commercial aerospace with Airbus and Boeing and others was up 11% from Q1 2023, despite Boeing and Spirit's continued challenges with max quality issues. We have now grown our year-over-year revenue in our commercial aerospace business for 11 consecutive quarters, demonstrating the resilience of our business even in a challenging OEM environment. Our defense business grew 1% year over year, a strong demand for the Blackhawk, Apache, and F-35 platforms, as well as selected naval programs, including the phalanx, close-in weapon system, and other weapon systems for submarines. Growth was partially offset by declines in legacy programs such as the F-18, which we have talked about in the past, and a pause in the tow missile production, for which we expect a new contract and anticipate starting shipments again in 2025. Defense business was almost 100 million in revenue in the first quarter. We remain optimistic about the growth ahead. As we go through a timing transition on certain programs, the ever-growing backlog in defense tells the story of 125 million from last year and 42 million from Q4 2023. Defense backlog now stands at over half a billion at $569 million. Significant wins with RTX and Q1 were an important driver for the increased defense backlog. The SPY-6 program is part of the US Navy's family of radars that performs air and missile defense on seven classes of ships as a giant leap for the fleet. SPY-6 radars are integrated meaning they can defend against ballistic missiles, cruise missiles, hypersonic missiles, hostile aircraft, and surface ships simultaneously. DeKalb has been providing one card for the program, as this is part of the offloading strategy we've been working on, and I'm very happy to report that we've been awarded a second card from RTX for the SPY-6 and Q1 after 18 months of work. These are a slow transition as I've mentioned in the past, and it should be. But now it pays off, and the order for two cars in Q1, one new and one a follow-on, was over $50 million. This is also great news as we are now building out a much bigger business in radar support, complementing our long-term track record in missile support. The new card award deliveries are expected to begin in 2025, and the current card shipments are ongoing. As communicated on the overall offloading program, we anticipate that the long-term run rate of the SPY-6 and other defense programs already commercialized or in development will now be $135 million in 2025, an increase of $10 million over our prior target of $125 million for 2025. It has been a long journey, but well worth it. Another real highlight in Q1 was gross margin. of 24.6% for the quarter, up 430 basis points year-over-year from 20.3%, as we continue to realize benefits from our strategic value pricing initiatives, productivity improvements, growing the engineered product portfolio, and initial restructuring savings. We also made significant reductions in the scope of our operations at our Berryville, Arkansas facility during Q1, with several programs fully transitioned to New Commons, Joplin, Missouri facility roughly 200 miles away. This has allowed us to start realizing a portion of the savings expected for Berryville closure during the first quarter, with one more program left to transition with RTX. We also continue to make a full effort with Boeing Commercial and Boeing Defense on the MAX spoilers and Apache tail rotor respectively, working with them on approvals and building buffer. We are in the final transition phase with some headwinds in Q2 and Q3 of this year, But long term, we are driving to a great outcome for the common, Boeing, and our shareholders. For adjusted operating income margins in Q1, the team delivered 9% compared to 7.5% in Q1 2023. A great result driven by the continued growth in our engineered product businesses and with our restructuring savings beginning to kick in during the quarter. Adjusted EBITDA was another great story in Q1 at 14.4% of revenue compared to 12.7% in Q1 2023. 170 basis point improvement year-over-year gives Dukama a great start to 2024, as it worked towards the 18% for the Vision 2027 goals. The GAAP diluted EPS was $0.46 a share in Q1 2024 versus $0.42 a share for Q1 2023. And with the adjustments, diluted EPS was a solid $0.70 a share compared to a diluted EPS of $0.63 a share in the prior year quarter. The higher gap and adjusted dilute EPS was driven by improved operating income as well as lower interest costs during the quarter. The company's consolidated backlog increased sequentially and compared to the prior year quarter. Total company backlog ended Q1 at a record of $1 billion, $46 million, increasing over $52 million sequentially, and it was $85 million year over year. Defense backlog, as mentioned earlier, also increased $125 million compared to the prior year quarter. to end at a record $569 million. Strong defense backlog reaffirms that the commons defense business remains well positioned with more positive news to come. The commercial aerospace backlog decreased slightly year over year, primarily due to industry issues with the single aisle production rates and the max issues mentioned earlier with Boeing and Spirit. However, our commercial aerospace backlog still grew relative to Q4 2023 at $442 million. In Q1, our team delivered another good quarter, managing the supply chain as evidenced by another quarter of positive revenue growth and significant growth margin expansion compared to the prior year period. For revenue guidance for the remainder of 2024, we continue to believe that the uncertainty surrounding BA, Spirit, and the FAA at this point on the max, the best approach is to again guide to middle, mid-single digit, and look to further updates on the next earnings call. We do see a slowdown in the max bill rates, not for the wrong reasons, in Q2 and Q3 for this year, where commercial aerospace will be a bit lighter due to the situation. Despite softness in the max, which is a major program for us, we are comforted by continued strength on other programs, such as the 787 and Airbus programs, including the A220. The best part is the max bill rate will actually be at a much higher level, and we continue to work on gaining more share. Strong bookings and growing backlog in our defense business is also supportive of our revenue outlook. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, we experienced revenue just below $100 million at $98.9 million compared to $97.7 million in Q1 2023. While growth was muted, we saw positive signs in our military helicopter products, including strong demand on the Blackhawk program, with revenues growing over 70% and also for Apache tail rotor blades, which grew more than 50% year over year. Our naval business also performed well. We saw strong growth on the phalanx closing weapons system used on surface ships, as well as other weapons systems for submarines. First quarter's military and space revenue represented 52% of the commons revenue in the period, down from 59% back in 2022 and 70% in 2021. We expect that this trend will continue, reflecting more balance with commercial aerospace, which we like. We also ended the first quarter with a backlog of $569 million, an increase of $125 million year-over-year, representing 54% of the common total backlog. Then our commercial aerospace operations first quarter revenue continued to see double-digit growth, increasing 11% year-over-year to $80 million, mainly by bill rate increases on large aircraft platforms, including the 737 MAX. 787, and A220 platforms, along with growth on commercial rotary wing, aircraft platforms, and regional and business jets. As many of you are aware, the FAA announced in January that it will increase its oversight of Boeing, require Boeing to get FAA approval for production rate increases for the 737 MAX. This will likely cap production on the 737 MAX. We do, however, expect the long-term trend to remain very positive once the issues are fully addressed. This rate limitation did not have a significant impact on our first quarter results. The backlog within our commercial aerospace business was $442 million at the end of the first quarter, increasing over $12 million sequentially, a solid number given the temporary weakness in the commercial aerospace markets. With that, I'll have Suman review our financial results in detail.