Ducommun Incorporated

Good day, everyone, and thank you for standing by. Welcome to the second quarter 2024, the Common Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 again. Please, the advice that today's conference is being recorded. Now, I will pass the call over to the Commons Senior Vice President and Chief Financial Officer, Suman Mukherjee. Please go ahead.

Thank you, and welcome to the Commons 2024 Second 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 due common 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 risks, 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 10-Q, 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 Q2 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. Uh, thank you so much. Thanks everyone for joining us today for our second quarter conference call, uh, today. And as usual, I will give an update on the current situation at the company. Afterwards, Saman review our financials in detail. Uh, let me first start off this quarterly call with the comments vision, 2027 game plan for investors strategy and vision. were developed coming out of the COVID pandemic over the summer and fall of 2022, unanimously approved by the Commons Board in November of 2022, and then presented to investors the following month in New York, where we got excellent feedback. Since that time, the Commons management has been executing the Vision 2027 strategy by consolidating its facility or rooftop footprint, increasing the revenue percentage of engineered products and aftermarket content, continuing its targeted acquisition program, executing our offloading strategy with defense primes and high growth segments of the defense budget, and by expanding content on key commercial aerospace platforms. All of us here have a high level of conviction in the Vision 2027 strategy and financial goals, and believe the many catalysts ahead present a unique value creation, opportunity for shareholders. The Q2 2024 results were also a very good example of our strategy working. Q2 was a record revenue and gross margin quarter, follows up the strong start we experienced in the first quarter. Revenues were 197 million, going 5.2% over the prior year. This is our fourth consecutive quarter with revenues exceeding 190 million. Strong growth in our commercial aircraft business across Boeing, Airbus, and business jet helped drive revenue during the quarter. We saw significant growth on the A220 program, where we make the skins for the entire fuselage, along with good growth in twin IO platforms as well. Business jet revenues were higher driven by work we do for Gulfstream. We also saw an increase in our commercial revenue as we built buffer stock to support the Monrovia facility closure and transferred to DCO's Guaymas, Mexico operation. Q2 was also supported by us building a higher production rate than SPR and VA to allow for efficiencies, workforce retention, and level loading of our production. Overall, commercial aerospace was up 13% from Q2 2023 We have now grown year-over-year revenue on our commercial aerospace business for 12 consecutive quarters, demonstrating the resilience of our business even in a challenging OEM environment with SPR and BA. The other good news for DCO's commercial aerospace business is the Fusilized Skin Project for the 737 MAX at Spirit, which we have been working on. We now anticipate having the FAI approved in September and shipping the first production set in October. 2025 revenue for the four skins should be over $3.5 million at 15 ship sets a month. Keep in mind this is less than 10% of the fuselage, so stay tuned for more news as we move forward and gain more program share. Our defense business grew 3% year-over-year with strong demand for the F-15, Black Hawk, and radar platform as well as selective naval submarine programs. Growth was partially offset by declines in programs such as the JSF, F-18, which we have discussed in the past, and the F-16. A pause in the tow missile production contributed as well, but we now have a new PO from RTX and anticipate starting shipments again in July 2025 from Guaymas, Mexico. defense business with $100 million in revenue for the third time in the last four quarters. And we remain optimistic about the growth ahead. On offloading from RTX, our SPY6 radar circuit card business grew over 100% from Q3 last year, tracking now for over $10 million in revenue in 2024 for just one CCA. We have the next card for the SPY6 program in process, and that will be in production next year. Another record highlight in Q2 was gross margin of 26% for the quarter, up 460 bps year-over-year from 21.4%, and 140 bps compared to the first quarter as we continue to realize benefits from our strategic value pricing initiatives, productivity improvements, favorable product mix, growing engineered product portfolio with aftermarket, and initial restructuring savings. In addition, our Berryville, Arkansas facility is now down to less than 10 people to maintain capability on a single platform until the receiving plant is certified. Our Monrovia, California facility also significantly reduced headcount this month, with most production activities shut down and the team is down to less than 20 employees. The Monrovia plant will be fully closed by the end of September. We will see the cost savings of these moves as the receiving plants ramp up production in 2025. So stay tuned. For adjusted operating income margins in Q2, the team delivered 10.1%, a record performance, and well ahead of the 8.1% number in Q2 2023. This is a great result driven, again, by the continued growth in our engineered product businesses, favorable product mix, impact of our strategic pricing initiatives, and our restructuring savings began to kick in during the quarter. Adjusted EBITDA was another great story in Q2, hitting $30 million for the first time, a big deal, while expanding a robust 130 basis points to 15.2% of revenue compared to 13.9% in Q2 2023. This all provides momentum along with the Q1 results as we work towards the 18% goal in our Vision 2027 plan. The gap diluted EPS was 52 cents a share in Q2 2024 versus 17 cents a share for Q2 2023. And with adjustments, diluted EPS was an impressive 83 cents a share compared to diluted EPS of 54 cents in the prior year quarter. The higher gap in adjusted diluted EPS was driven by improved operating income, as well as lower interest costs due to our hedging strategy during the quarter. The company's consolidated backlog increased both sequentially and compared to the prior year quarter. Total company backlog ended due to a new record of $1.68 billion, increasing over $22 million sequentially and almost $58 million year over year. Defense backlog increased $98 million compared to the prior year quarter, to end at a record of $592 million. The commercial aerospace backlog decreased 14 million year-over-year, primarily due to industry issues with single aisle production rates and the MAX issues with Boeing and Spirit. However, our commercial aerospace backlog still grew on a sequential quarterly basis to $451 million. As for the 2024 revenue guidance, despite continued uncertainty surrounding Boeing, Spirit, and the FAA on the max, we are maintaining our guide of mid-single digits for the year, with Q3 flattish to last year, followed by an uptick again in Q4. While we have seen a significant slowdown in the max build rates at the OEM level in Q2, and anticipate the same in Q3, we are positioned for the recovery as the build rates ramp back up. If BA is at 38 by year end for their most recent communications on the max, This will be a major lift for DCO. I will also add that despite the challenges in the MAX, we are comforted by continued strength on other programs at BA and Spirit, Airbus, and Gulfstream. Now let me provide some color on our markets, products, and programs. Beginning with our military and space sector, we experienced revenues at $101 million compared to $97 million in Q2 2023. Growth was driven by the F-15 program along with military rotary aircraft, notably the Black Hawk program, as well as our radar franchise, again, driven by the SPY-6 program. These were partially offset by weakness in F-35, F-18, and F-16 revenues. The second quarter of military and space revenue represented 51% of the Commons revenue in the period, down from 59% back in 2022 and 70% in 2021. We expect these trends We expected these trends and it reflects more balance with commercial aerospace, which we like. We also ended the second quarter with a backlog of $592 million, an increase of $98 million year-over-year, representing 55% of the Commons total backlog. In our commercial aerospace operations, second quarter revenue continued to see double-digit growth, increasing 13% year-over-year to $87 million, driven mainly by growth on the A220 platform, twin-aisle aircraft, business jets, as well as buffer builds to support the closure of our Monrovia facility. As mentioned earlier, we believe in much better stories ahead for BA and MAX by the end of Q4 and in 2025. The backlog within our commercial aerospace business was $451 million at the end of the second quarter, increasing almost $9 million sequentially, and a solid number given the temporary weakness in the commercial aerospace market. Now with that, I'll have Suman review our financial results in detail. Suman.