Ducommun Incorporated

Good day and thank you for standing by. Welcome to the Q1 2025 DoCommon 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 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 Duke Commons Senior Vice President, Chief Financial Officer, Mr. Suman Mukherjee. Please go ahead.

Thank you, and welcome to Duke Commons 2025 first 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 and regulatory conditions, results of operations, and financial projections, including those under our Vision 2027 game plan for investors, 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 Dukama 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, our ability to obtain additional financing, and service existing debt to fund capital expenditures and meet our working capital needs. Legal and regulatory risks, including pending litigation matters, the cost of expansion, consolidation, and acquisitions, competition, economic and geopolitical developments, including supply chain issues, international trade restrictions, the impact of tariffs and rising or high interest rates, the ability to attract and retain key personnel and avoid labor disruption, 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 and non-GAAP measures referenced on this call. We filed our Q1 2025 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, thanks, Saman. Thanks, everyone, for joining us today for our first quarter conference call. Today, as usual, I will give an update of the current situation at the company. Afterwards tomorrow, we'll review our financials in detail. Let me start off again on this quarterly call with the Commons Vision 2027 game plan for investors as we start our third year in 2025. The strategy and vision were developed coming out of the COVID pandemic over the summer and fall of 2022, unanimously approved by the Common Board in November 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. This includes increasing the revenue percentage of engineered product and aftermarket content, which finished at 23% for 2024, up from 19% in 2023, consolidating our rooftop footprint and contract manufacturing, continuing the targeted acquisition program, executing our offloading strategy with defense primes, and high growth segments of the defense budget, driving value-added pricing, and expanded content on key commercial aerospace platforms. All of us here, as well as my fellow board members, continue to have a high level of conviction in the Vision 2027 strategy and financial goals, and believe the many catalysts ahead present unique value creation opportunity for shareholders. The Q1 2025 results are another example of our strategy and initiatives working. Just look at the margin expansion performance, and much more to come this year and in 2026. Despite the challenges discussed on our prior earnings call, I'm happy to report Q1 sales of $194.1 million, which was 1.7% over prior year, making this quarter our 16th consecutive quarter with year-over-year growth in revenue. The team achieved this despite the headwinds in commercial aerospace bill rates, destocking at BA and SPR, and the continued strategic pruning of our non-core industrial business. It was also our seventh consecutive quarter above $190 million in revenue. Strong growth in our missile and electronic warfare, along with military helicopter programs, drove our military and space revenue to 15% growth over prior years. This includes not just order increases, but also major programs I've been speaking about coming online, such as the offload of the Next Generation Jammer from RTX and Amran. Our defense business looks great with Apache Blades coming back online in Q2, Tomahawk Cables along with the Tome Missile Case in Q3. We can't wait. I also want to point out that three of our top five customers in Q1 were defense primes, and that is consistent with all of 2024 as well. Our team continues to build scale at other defense customers outside of RTX, which is and has been a long-term goal. Northrop Grumman is a great example of the strategic effort. The strong growth in our defense business more than offset lower revenue in our commercial aerospace business, which declined 10% in the quarter and was anticipated. This is the first commercial aerospace decline in the past 15 quarters for DCO. We had tough compares in Q1. as both Boeing and Spirit drove higher demand during this period last year. We have seen steady improvement in demand with both these customers over the course of Q1 2025, coming out of the Boeing strike in Q4 of last year, and the outlook is promising. I also want to add that everything we are seeing out of Boeing Commercial the last few months has been very encouraging, both on the 737 and 787, our main platforms. We are optimistic that bill rates will be at 38 soon, on the 7th, 37th. Growth margin also grew 4.7 million to 26.6% in Q1, a new quarterly record, up 200 basis points year-over-year from 24.6%, as we continue to realize year-over-year benefits from our growing engineered products portfolio with aftermarket, strategic value pricing initiatives, restructuring actions, and productivity improvements. We have ceased manufacturing operations both on Monrovia, California, and Berryville, Arkansas facilities and are already seeing cost savings from this action. We expect to see these savings be higher as the receiving plants ramp up production later this year and fully in 2026. Stay tuned. For adjusted operating income margins in Q1, the team delivered 9.9%, which was a 90 basis point improvement compared to the prior year of 9%. We continue to be pleased with the growth in our engineered products portfolio, and our structures business this quarter was fully recovered from a one-time expense in Q4 2024. We did tell investors last quarter it was one-time and kept our word. Adjusted EBITDA continues to grow compared to last year at 15.9%, a record for us as the percentage of sales up 3.5 million and almost 31 million. Fantastic progress. This is our second quarter with adjusted EBITDA above 30 million, and it represents an expansion of 150 basis points above prior year and continues the strong momentum we saw in 2024 as we work towards the 18% goal in our Vision 2027 plan. GAAP diluted EPS was 69 cents a share in Q1 2025 versus 46 cents a share for Q1 2024. And with the adjustments, diluted EPS was a strong 83 cents a share compared to adjusted diluted EPS of 70 cents a share in the prior year quarter. The higher gap in adjusted diluted EPS during the quarter was driven by improved operating income, as well as lower interest costs due to lower interest rates, along with a lower outstanding debt balance. The company's consolidated backlog continues to be strong at 1.05 billion, increasing 8 million year over year. The defense backlog increased over 50 million compared to the prior year quarter. No surprise there, and is now at $620 million. The commercial aerospace backlog decreased by $31 million compared to the prior year quarter due to lower OEM production rates, but fully expected to come back. In December 2022, we set a target of generating 25% plus our revenue from engineered products, which was 9% in 2017 and 15% in 2022. In 2024, we reported that our engineered product business drove 23% of our total revenue up from 19% in 2023, positioning us well ahead of the curve in achieving our Vision 2027 goal and certainly pushing for a lot more. We achieved this both through focused investment driving organic growth in our current businesses as well as the BLR acquisition. In Q1 2025, we have maintained this mix at 23%. and continue to work on both organic and inorganic opportunities to drive this higher. We've made tremendous progress to date, and I'm proud of our team and strategic plans. As for 2025 revenue, we are positioned to benefit from the expected bone recovery in the second half along with defense, which includes three programs mentioned earlier coming back online in Q2 and Q3. We are reaffirming our guide of mid-single-digit revenue growth for the year. with Q2 being flattish to last year to the commercial aerospace, including de-stocking, but anticipate good strength in the second half of 2025. In addition, we also believe tariffs will have a limited, if any, impact on our 2025 revenues, a good story for our investors. I want to reiterate as well that Tacoma is a U.S. manufacturer with U.S. employees, and 95% of our revenue is produced in the U.S., Our only other facility is based in Guaymas, Mexico, and that production is less than 5% of our revenue, and thankfully covered under the USMCA, exempting us from tariffs. The other good news is the common sales into China is almost entirely one program for an Airbus supplier who is owned by the government, constitute less than 3% of our revenues, and we have not seen any impact at this point on tariffs for our sales. On the supplier side, we do procure some parts from Europe and Asia, but it is manageable and so far the impact has been pretty de minimis. We will continue to monitor it as the situation evolves, but at this point we certainly don't see it as being something material to the company. To sum it up, to comment in a lot of ways is the new trade policy with most of the U.S. manufacturing operations and U.S. employees. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, we saw revenues of $114 million compared to $99 million in Q1 2024. Growth was driven by missile programs such as the TOW and AMRAAM, electronic warfare and radar programs, including the NGJ, Aegis Combat System, Gator, and on the F-16 and Black Hawk for fixed and rotary wing platforms. These are partially offset by weakness on the F-35, Patriot, and the V-22. We also ended the first quarter with a backlog of $620 million, an increase of $51 million year-over-year, representing 59% of the Commons total backlog. Within our commercial aerospace operations, first quarter revenue took a step backwards, declining 10% year-over-year in the quarter to $72 million, driven mainly by lower rates on the 737 MAX, commercial helicopters, and in-flight entertainment, partially offset by growth on the A320 and 787. As I mentioned earlier, we believe that finally a much better story is ahead for BA and the MAX. Now the production is ramping up again after the strike. We have seen demand pick up at both Boeing and Spirit over the last few months. The backlog within our commercial aerospace business was $411 million at the end of the first quarter, decreasing $31 million compared to prior year driven by Boeing strike late last year and its impact on production rates. We expect this to recover as production rates ramp up in 2025. Revenue in our industrial business declined to $9 million during Q1 as we continue to strategically prune non-core business from the portfolio. This will benefit the company in the long term as we transition that capacity to our core aerospace and defense platforms. With that, I'll have Suman review our financial results in detail.

Suman? Thank you, Steve. As a reminder, please see the company's 10Q and Q1 earnings release for a further description of information mentioned on today's call. As Steve discussed, our first quarter results reflected another period of solid performance with strong growth in our military end markets. We also continue to make good progress on our facility consolidation projects, which are nearing completion and will drive further synergies in late 2025 and into 2026. as we close out the recertification of the various product lines at the receiving facilities over the next few months. As Steve highlighted earlier, we also made great progress in continuing to build up our engineered product portfolio with those revenues now contributing 23% to our mix. These actions, along with our strategic pricing initiatives, drove continued margin expansion in Q1 and is keeping us on pace to achieve our Vision 2027 goals. Now turning to our first quarter results. Revenue for the first quarter of 2025 was $194.1 million versus $190.8 million for the first quarter of 2024. The year-over-year increase of 1.7% reflects strong growth in military and space of 15%, driven by increases in electronic warfare, missiles, and radar systems. This was partially offset by weakness in our commercial aerospace business, mainly driven by lower revenues on the 737 MAX. We posted total gross profit of 51.6 million or 26.6% of revenue for the quarter versus 46.9 million or 24.6% of revenue in the prior year period. We continue to provide adjusted gross margins as we had certain non-GAAP cost of sales items in the prior year period relating to inventory step-up amortization on our acquisitions and restructuring charges. On an adjusted basis, our gross margins were 26.6% in in Q1 2024. The improvement in gross margins was driven by our growing engineered products portfolio, strategic pricing initiatives, productivity improvements, and restructuring savings across both our structural systems and electronic systems segments. We also continue to make progress on supply chain and labor. Through our proactive efforts, including strategic buys and our inventory investments, we have been able to avoid any significant impacts thus far on our business. Going forward, we will continue to work to improve the working capital trends in the business and improve our cash flow. I also want to add that we did not see any measurable impact from tariffs in the first quarter. And as Steve mentioned, do not anticipate any significant impact to RP&L. We are a U.S. manufacturing business with U.S. employees and generate 95% of revenues from our domestic facilities. The other 5% comes from Mexico, and all that revenue is tariff-free, through the USMCA. Our sales are also largely to domestic customers, with US sales being in excess of 85% in 2024. Sales to China were less than 3%, mostly to one customer for Airbus, and there has been no impact to those volumes or orders at this time due to the tariffs. Our supply chain is also largely domestic, with less than 5% of our direct suppliers being foreign. Some of our domestic suppliers do source materials from outside the United States, but even that is a very manageable spend, with China being a low single-digit percentage. We expect to mitigate the impact of tariffs on our material spend through military duty-free exemptions, alternate sourcing of materials from domestic suppliers, or by passing on the impact to our customers. Newcomen reported operating income for the first quarter of $16.6 million, or 8.5% of revenue. compared to 12.6 million or 6.6% of revenue in the prior year period. Adjusted operating income was 19.2 million or 9.9% of revenue this quarter compared to 17.1 million or 9% of revenue in the comparable period last year. The company reported net income for the first quarter of 2025 of 10.5 million or 69 cents per diluted share compared to net income of 6.8 million or $0.46 per diluted share a year ago. On an adjusted basis, the company reported net income of $12.6 million, or $0.83 per diluted share, compared to adjusted net income of $10.4 million, or $0.70 in Q1 2024. The higher net income and adjusted net income during the quarter was driven by the higher operating income and adjusted operating income. Now let me turn to our segment results. Our structural systems segment posted revenue of $84.4 million in the first quarter of 2025 versus $83.3 million last year. The year-over-year increase reflected $2.3 million of higher sales across our military and space applications, including Blackhawk and TOW. Commercial aerospace was down just 2%, driven primarily by a decline in 737 MAX and commercial helicopters. Structural systems operating income for the quarter was $10.4 million or 12.3% of revenue compared to $2.9 million or 3.4% of revenue for the prior year quarter. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 14.9% in Q1 2025 versus 7.8% in Q1 2024. In Q4 2024, we had noted unfavorable program mix and one-time costs impacting the profitability of the segment. We had highlighted these as temporary with an expected recovery in Q1 2025. Our performance here in Q1 2025 validates those comments as we saw a strong recovery in the margins of the structural system segment. Our electronic system segment posted revenue of $109.7 million in the first quarter of 2025 versus $107.5 million in the prior year period. Higher revenues from tow and AMRAAM missiles, as well as from electronic warfare and radar programs, were partially offset by lower revenues from F-35 in flight entertainment electronics, along with a reduction in our industrial business, as we chose to selectively prune non-core work. We have been pruning our industrial business now for multiple quarters, maintaining only select customers that are accretive to our business. Electronic systems operating income for the first quarter was $18.1 million or 16.5% of revenue versus $19 million or 17.6% of revenue in the prior year period. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 16.9% in Q1 2025 versus 18.4% in Q1 2024. The year-over-year decrease was primarily due to lower manufacturing volume and higher manufacturing costs, partially offset by favorable product mix in the quarter. Next, I would like to provide an update on our ongoing restructuring program. As a reminder and as discussed previously, we commenced a restructuring initiative back in 2022. These actions are being taken to better position the company for stronger performance in the short and long term. This includes the shutdown of our facilities in Monrovia, California, and Perryville, Arkansas, and the transfer of that work to our low-cost operation in Guaymas, Mexico, and to other existing performance centers in the United States. We continue to make progress on these transitions and are working diligently with our customers, Boeing and RTX, to obtain the requisite approvals which are expected to be completed by the end of Q3. Later this month, we expect to start full production of rotor blades for the Apache helicopter at our Coxsackie, New York, facility. which will complete the transition of that program from our Monrovia, California facility. We are also working through the transition of 737 MAX spoilers, tomahawk harnesses, and the tow missile case, which are all expected to go into production in Guaymas in the second half of this year. During Q1 2025, we recorded 0.4 million in net restructuring charges. We expect to incur an additional 0.5 to 1 million in restructuring expenses as we complete the program. As previously communicated, we expect to generate 11 to 13 million in annual savings from our actions and have already seen some realization of savings in 2024 and the first quarter of this year. We expect the synergies to ramp up in late 2025 and into 2026 as the product recertification is complete and the receiving facilities move up the learning curve and ramp up production. We anticipate selling the land and buildings at both Monrovia, California and Berryville, During the quarter, we reclassified the Berryville land buildings and building improvements to assets held for sale and are making progress towards the sale of that property in Q2. Turning now to liquidity and capital resources. In Q1 2025, we generated $0.8 million in cash flow from operating activities, which was an improvement compared to use of $1.6 million in Q1 2024. The improvement was due to net income growth of 3.7 million offset by investments in working capital. As of the end of the first quarter, we had available liquidity of 221.7 million, comprising of the unutilized portion of our revolver and cash on hand. Our existing credit facility was put in place in July 2022 at an opportune time in the credit market, allowing us to reduce our spread increase the size of our revolver and allowing us the flexibility to execute on our acquisition strategy. Interest expense in Q1 2025 was $3.3 million compared to $3.9 million in Q1 of 2024. The year-over-year improvement in interest cost was primarily due to lower interest rate along with a lower debt balance. In November 2021, we put in place an interest rate hedge that went into effect for a seven-year period starting January 2024 and pegs the one-month term so far at 170 basis points for $150 million of our debt. The hedge will continue to drive significant interest savings in 2025 and beyond. To conclude the financial review for Q1 2025, I would like to say that the first quarter results are a strong start to the year, building on the momentum from 2024, positions us well for the rest of 2025 and beyond. I'll now turn it back over to Steve for his closing remarks.

Steve? Okay, thanks, Jamon. In closing, Q1 was an excellent start to the year, despite the anticipated headwind from commercial aerospace. As mentioned several times, we achieved another record for gross margin percentage at 26.6%. And just keep in mind, a few years ago, we had a run rate of roughly 20% for an entire year, and that was back in 2022. It's come a long way in two years and could not be happier about that. Adjusted EBITDA percentage was great and a record as well at 15.9% of sales. We're also very well positioned to meet and exceed our vision 2027 target 25% plus of engineered product revenues with 2025 Q1 coming in at 23%. And we're getting this as high as possible as it is our number one strategic focus. Finally, with commercial bill rates heading higher in the second half, getting past destocking, along with stronger defense activity, I'm very optimistic about what lies ahead in the next few years for DCO, its shareholders, and other stakeholders. Okay, let's go to questions, please. Thank you.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. withdraw your question please press star 1 1 again one moment while we compile the q a roster our first question comes from the line of mike crawford with b riley securities your line is now open um thanks thank you starting with commercial aerospace i mean we we know that boeing is increasing their monthly build rates but uh how

Would you characterize any delay in when your ship set rates to Boeing and Spirit would increase if Boeing does get production up to 38 a month?

We are seeing rates from Boeing in the low 20s. We're seeing rates from Spirit ramp up to the mid to high 20s as we went through Q1 and into April. know publicly that Boeing is likely producing in the low 30s at the moment. So there is some destocking impact that we are seeing, but the rates continue to progress and go up over the last four months this year. And so we are very optimistic that there will continue to be, despite the destocking, continued growth in the demand for us on both those platforms. And the expectation is that, you know, Boeing is able to get to their rate of 38 by the end of this year.

Yeah. Mike, this is Steve. I'm very confident where they are. They had a great April, as you can see from the announcements they made. March to April was really impressive. I think their efficiency and everything they're doing within Puget Sound has gotten a lot better. I think 38's in the cards probably maybe by September, October. So we're going to see a lift.

Okay, thank you. And then just turning to rotary wing, you had some weakness, but you also had some, quote, selected rotary wing platforms with higher rates. I take it that's Apache, or Apache blades are coming out in Q2. So what was performing higher in Q1, and how much of this would you attribute to BLR Aerospace?

So we did, as you rightly pointed, on the defense side of our business, see, well, the weakness that you pointed out, we saw on the commercial side, we have some transitions ongoing with production moving from Monrovia to Coxsackie, and so some demand with the Bell helicopter. Some issues with materials on Sikorsky platforms, which drove temporary softness in the quarter on commercial helicopter. But we are going to see the Apache production here ramp up, which should be really a positive in Q2 and beyond on the rotorcraft side.

Plus, Mike, we're on the Apache engine with Max Seal. So that's also, they're going great with the engine business there. So that's a part of that lift. But, you know, we might have this and that with blades right now. But now we're just starting to get ramped up. We cut the blades. We looked at them. Everything's looking great. We got everybody trained out in New York. So we're hoping, you know, obviously these are high-energy parts. You got to be careful. But, you know, we're hoping in May we're going to start really ramping up. And we got the orders. We just got to get the production in place.

Okay, thank you. I'll just end with the DSO increase in Q1. Is that anything structural or contractual that changed, or should we look for those DSOs to come back down? Thank you.

Yeah, that's a good point. So we did have just some seasonality in the sales in Q1. We had a slightly bigger March. We had some items that went out towards the end of the quarter that drove it There isn't any structural change. It was just the seasonality, a one-time kind of thing during the quarter.

All right. Thank you.

Okay, Mike. Thanks.

Thank you. Our next question comes from the line of Ken Herbert with RBC Capital Markets. Your line is now open.

Yeah. Hi. Good morning, Steve and Suman. I wanted to ask first on the M&A pipeline. You obviously have placeholder for M&A contribution as we think about Vision 27. It's been quiet recently on the deal front. Are you still tracking towards the placeholder you've got in place for 27 from M&A? And maybe can you give any more detail on how the pipeline looks now and due diligence efforts and maybe expectations for M&A this year?

Ken, thank you for the question and good morning to you as well. We continue to track multiple opportunities in our pipeline and we've got to be disciplined and make sure we execute on the right one. We see enough in the pipeline for us to feel fairly confident in being able to get a deal done this year. And I think that's what I would say.

Yeah, I would say the deal volume is good. You know, we just looked at something fairly hard and put a lot of hours in on it, and it turned out it just wasn't for us. So we're involved in diligence, as you asked, and we're looking forward to getting one sooner than later, Ken.

Okay, that's helpful. And are you seeing more in aerospace or defense or combined or anything maybe we should just keep in mind?

I would say the businesses that we look at tend to be kind of niche, engineered product businesses, which often will span across some defense platforms as well as commercial aerospace. So it is a mix of both. It isn't necessarily skewed one way or the other.

Yeah, I would say that's right, Ken. I'd say we usually have sort of a mix. It's usually never 100% one way or the other. So that's sort of what we're seeing and what we've seen.

Okay. And just finally, you seem to be running ahead of your 27 targets in terms of contribution from the engineered products. And if you do another deal this year, I'm assuming it would be very focused on the engineered products. How should we think about maybe the margin contribution from these engineered products? You talk obviously a lot about the sales contribution. to maybe help us understand how impactful this could be as you grow that mix to the EBITDA. I mean, I can imagine it's been a big component of obviously just the margin improvement on the gross margins and EBITDA, but any help you can give in framing that as we think moving forward on the engineered products would be nice. Thank you.

Great question, Ken. And these are significantly creative to our margins, right? These are engineered proprietary product businesses with access to the aftermarket and in line with some of the other aftermarket peers that you cover, right? Margins are in line with those. So they tend to be accretive. They tend to provide also significant margin runway for us to execute on post acquisition. And so we believe that this is going to continue to be as we do additional acquisitions, a key driver of margin expansion for us into 2027. Yeah.

Ken, I'll say we have, you know, as far as the value we provide for these products, I mean, we have very good pricing power. So that's the other thing which is important for investors to know.

Thanks, Ken. Great. Thanks, Steve. Thanks, Jamon. Appreciate it.

Thanks. Thank you. Our next question comes from the line of Michael Chiarimoli with Truist Securities. Your line is now open.

Hey, morning guys. Thanks for taking the questions. Really nice margins here. Maybe Steve or Suman, just to kind of level set us and unpack maybe the revenue guidance for the rest of the year, mid-single digit growth. You know, defense obviously had a really strong quarter here. but the comps do get a bit tougher and you're obviously going to have some of this recovery in commercial aero, but maybe how are you thinking about the growth rates between commercial aero and defense for the remainder of the year? Yeah, just let me jump in there first.

I think first thing, Mike, just to note, this is a real benefit for shareholders that we have this mix of defense and commercial, right? We've had a lot of peer groups that or peers that have more commercial and they're struggling a bit. But as you can see, our defense business, which we've been talking about, really came to the fore, as they say, in Q1. So first of all, we're really pleased with our balance. As far as what I can see, obviously we're flattish in Q2, but we feel very good about destocking and commercial rates going up, not only on the 37, but on the 87, right? Because we have a very good content mix there. So very positive on the back half. And I think maybe defense going forward, maybe not 15, but certainly a very respectable growth number.

I don't think I'd add that, Steve, is that we're going to see the ramp up in the programs that have been transitioning, right? So we have the... The toll, missile cases, spoilers, and the Tomahawk programs across commercial and defense, we're going to get some lift in the back half from those programs coming back online.

Yeah, which is going to be great for everyone. Okay, got it. What about the A220? You know, I know Airbus' commentary around both the 220 and 350 have been a little bit squishy just given the spirit facilities. Do you expect that to be a material contributor to the A220 this year?

Look, you know, yeah, so a couple things. First, you know, that A220 program's been great for us. As we talked about, we make the, you know, the fuselage skins. We're a supplier into China. We haven't seen any... any headwind yet so we feel very good about that so that's that's going to continue we feel you know as far as where we sit here today it's going to again be good business this year leading to next year i understand about the spirit issue and the engine issue and you know i'm hoping sooner or later they're going to work through that but you know we're running rates higher than what they're shipping that's for sure and we're happy about that the other thing is on the a350 we're really we're not a player on the a350 so i know they're struggling it won't impact us Got it. Got it.

And last one for me, I think you called out the in-flight entertainment side of commercial as being weak. I was just wondering if you could potentially size that business. What are the thoughts there? Just given, you know, that that's maybe viewed as more discretionary spending from the airlines. Does that continue to be a headwind for the remainder of the year? Or was that just kind of short term here, temporary?

That, you know, it's not a huge portion of our business. It's, you know, low single-digit percentage of our total business. I think we'll continue to see some softness there for the rest of this year that we expect to be offset by other things in the portfolio.

Mike, I think the compares get a little bit easier. We had a really good Q1 2024 with InFlight, you know what I mean, this one customer. So, and obviously we didn't have a great rest of the year with things kind of tamped out a bit. So I think going forward, we'll probably moderate around that on a fair basis.

Okay, perfect. Thanks guys. I'll jump back in the queue. See you this week.

Thank you. Our next question comes from the line of Jason Gursky with Citi. Your line is now open.

Hey, good morning everybody. Steve, I wonder if you could just spend a few minutes talking about the potential for new work scopes for you all. And maybe start with the commercial side, obviously. Spirit Aerosystems is going through a thing here, and I'm just wondering if there won't be some more opportunities there for you as those assets land in different hands. So is there opportunity here, you know, either at Boeing or Airbus as a result of, you know, what's going on at Spirit Aerosystems for you guys? That'd be the first part. Yeah. And then the second part would be on the defense. I'm just kind of curious if you are beginning to see any signs of increased, um, outsourcing initiatives by any of the, uh, the big cap, um, defense companies. Thanks.

Okay. Thanks. Certainly. Uh, you know, it's funny you asked that we have our, uh, our senior VP out at spirit, uh, actually today meeting with them in Wichita. So, you know, we're very close relationship with spirit. They're obviously a top customer of ours, and then we do see more opportunity. especially as things ramp up. Okay. So for instance, you know, we just got going on a 737 max skins and, uh, you know, that's early on. Right. So we do four or five skins and we do 15 a month. That's the deal we have. Right. So it's not paid by the drink. And, uh, you know, we feel very good about, you know, increasing business there. We understand there's a delivery challenges. We're pretty much a hundred percent on time. We're pretty close to both Airbus and Spirit and Boeing. Uh, so our operations are very strong. So we, we think there is, there is growth there. Uh, you know, we're continuing to work with them. I think the skins is sort of in the lead, uh, as well as maybe some other things that as well as Airbus, we're getting quoted heavily by Airbus, frankly, because some of the other suppliers are not getting the job done. Uh, you know, whether that, whether that changes hands, we'll have to see, but you know, we see a lot of growth activity as far as quoting, uh, at this point. So. So I think that's a good story. I think if you look at our percentage of what we have on the programs in general and our operation performance, it's all very positive. You want to add on the second part?

On the defense side, I think we are continuing to see numerous opportunities to bid for work. RTX is a big customer for us, our biggest customer.

and uh we are actively bidding both you know a lot of new work with them so i think uh you know stay tuned for uh additional uh wins uh for us there on the defense side as well yeah the only thing i'd say as well jason is that look you know especially like on card businesses ccas those type of things on very difficult uh applications i mean you know we're really good right so you know we picked up a lot from rtx that used to make you know these cards in massachusetts and You know, now that's coming our way in Tulsa, and we have other things we're working on with Northrop. So, you know, that's not changing. And I've been bullish on defense. I've been telling investors, look, you know, these things take time, and they do. Because when you're moving something from an internal operation at RTX to Tulsa, they're not going to give you everything at first. You've got to get 50%. You've got to get testing machines. So all this is going to come together for us, I believe, in this year and next year or so. I was very happy with the 15%. I'll say that in defense of the score.

Yeah, good enough. All right. Thanks, guys. Thanks, Susan.

Thank you. Our next question comes from the line of Tony Bancroft with Gamco Investors, Inc. Your line is now open.

Hey, good morning, Jens. Congratulations. Well done. You know, based on the $1 trillion PBR, we sort of talked about this a little bit, but And on top of that, a sort of a two-pronged attack here, then the increase in European defense spending. Maybe you could talk a little bit more in detail about how you see yourselves seeing positions for that growth trajectory. And maybe a little further out, there have been questions of being able to continue that growth. How do you see this? maybe playing out over the next few years and what programs that you're on that are going to have the best exposure to the thrill?

Yeah, Tony, I'll jump in and you can. So, Tony, I think first, you know, and good afternoon. I think just in general, our whole portfolio around, you know, electronic warfare, missiles, radar, and obviously, you know, things are going to be happening with the Golden Dome and some other things we're still trying to figure out. You know, we really feel, you know, very good and strong about being a part of this, you know, trillion-dollar budget, being able to support, you know, all these customers. I mentioned in my remarks that, you know, in the past, right or wrongly, we were a big Raytheon house, as they would say. And now we're moving in much more to Northrop. We're moving into BAE Systems. You know, we're moving into some of these other companies on purpose, right? to kind of build out this customer base. And we got a lot of things to provide. Cabling, we're great at that. We're great at cards. So, you know, we think that we're in the right position. And, you know, as I mentioned earlier, you know, not only the budget, but also customers like RTX are offloading, right? They're offloading the driving margins. They might be three or four year into a program with seven year fixed pricing and they have nowhere to go. So they're going to move stuff out, and they're going to try to drive margins that way as a company. So it's all looking good, Tony.

Nice job positioning yourself. Great job, Steve. Thanks.

Thanks very much. Good to hear from you.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Our next question comes from the line of Noah Poppenack with Goldman Sachs. Your line is now open.

Hey, guys. Just kind of thinking through the pace of growth through the rest of the year. I think you had last quarter talked about 1Q being flat, 2Q a little better. You know, the 1Q actual is a little better. Still feel the same about 2Q, or is that looking better? And I guess, you know, the defense growth rate's, quite high in the quarter, as others have noted. The compares get a little tougher there through the rest of the year, but not that much tougher. And Arrow is just down a ton in the first quarter. And Boeing was on strike and had things turned off, or I guess was coming out of the strike. So I don't know. Maybe I'm splitting hairs on the mid-single for the full year, but it's a little tough to get there, I guess, if things break the right way. Maybe It's just early in the year, and it's a dynamic macro, and you're being conservative. But how do you see the growth rate playing out through the year, and what's the upside of where things could land?

Hello, Noah. Good afternoon. Great question. On the commercial aerospace side, I would say that if you look at Boeing and Airbus, they're about 50% of our total commercial aerospace business. We do expect that to ramp up in the second half of the year, but I wouldn't apply that growth rate on our entire commercial aerospace revenue, right? So 50%, the other 50% includes business jets and rotorcraft and other things. But there will be growth there. There will be continued strength in the defense business, as Steve mentioned earlier, may not be at the 15% mark, but we do expect, based on the programs and the visibility we have, the rest of the year there's going to be continued strength there and then we have also the ramp up on the programs that have moved from one facility to another and are currently kind of in hibernation but expected to ramp up in the second half of the year they include uh the toe missile case they include the spoilers in the 737 max as well as the tomahawk harnesses along with the apache blade so those are all expected to give us some lift in the second half So we see good growth in commercial aerospace, good growth in defense to kind of get us to that mid-single digit number for the full year.

Yeah, no, I'd also say, look, you know, we're, okay, is it a little conservative right now? Yeah, we want to really see how the second quarter goes with BA and Spirit. Obviously, that's a big part of our growth story. So we'll probably have a firmer number. We will, you know, in the next call. But that's kind of where we see it right now.

Okay. Okay. That makes sense. Where do you expect your mix of revenue from engineered systems to be as you're exiting the year?

It will kind of depend on the acquisition. I think if we do get an acquisition, it's likely to exceed or get very close to kind of the 25% target that we have set. And again, it depends on the timing also of the acquisition and how much your revenues are contributed. But we expect it to going to be in that 23% to 24% likely this year, and with an acquisition ramping up to beyond 25% in the next 12 months?

Yeah, I think that's right. I think we're going to, you know, we're obviously, you know, job one right now is another acquisition, right? So everybody's working hard on that. So once we do that, we think we'll be over that. And then, you know, come next year, we'll have new thoughts about, you know, the next five years, right? So what we're holding right now with Division 2027 and You know, we're happy where we are.

Okay. Should we expect the first quarter segment operating margin to be the low watermark for the year and work higher sequentially off of it? Or is there seasonality or expense timing or mix that could drive a lower quarter at some point in the year?

So I would say there is some goodness in the Q1 margin. So at 15.9% EBITDA margin, we're also, and if you linearly space out our Vision 2027 goal, we would kind of have to be at 16% by the end of the year. So we kind of are there already in Q1, but it does have 50 to 75 basis points of, I would say, mixed goodness in it. So we'll continue to see, I think, good margins for the rest of the year, but I wouldn't say this is a low-water mark.

But, you know, with that 50 to 75 basis points range, I think we're, is how I would say it.

Around 16 should be good, right?

Yeah, to the end of the year.

Makes sense. And then just last one, Suman, what are you expecting for full-year 2025 free cash conversion, whether from your adjusted net income or EBITDA?

We had 40% free cash flow conversion last year. In 2024, we had a little over 30% free cash flow conversion in 2023. We expect 2025 to be continuing that path of improvement. I wouldn't guide to a specific number for the year. We don't typically provide free cash flow guidance. Our end goal here over the next few years is to get back to 100% free cash flow as a percentage of adjusted net income. But that will happen over the next couple of years as we unwind our working capital investments.

That will be better this year.

But it will be better this year than it was.

Continuing that trajectory.

That's right.

Okay. Thank you so much.

Okay. Thanks, Noah. Thanks for joining us.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Steve Oswald for closing remarks.

Okay, just wrapping up here. Thank you again for joining us for the call. Again, just to reiterate, we feel great about our start this year. We appreciate the thoughtful questions, the support from our shareholders. I feel very optimistic about this year and next year, and I look forward to reconnecting after Q2. Have a very good day and a safe day. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.