Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Ducommun Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Chris Witty, the moderator. Thank you. Please go ahead.

Thank you and welcome to Ducommun’s 2020 first quarter conference call. With me today are Steve Oswald, Chairman, President and CEO and Chris Wampler, Vice President, Interim Chief Financial Officer and Treasurer and Controller and Chief Accounting Officer. I am 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 question-and-answer 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 Federal Private Securities Litigation Reform Act of 1995 and are therefore perspective. 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 be correct. In addition, estimates of future operating results are based on the company’s current business, which is subject to change. Particular risks facing Ducommun include, among others, the cyclicality of our end-use markets, the impact of COVID-19 on our operations or customers, the level of U.S. government defense spending, timing of orders from our customers, legal and regulatory risks, management changes, the cost of expansion and acquisitions and competition. 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 2020 first quarter Form 10-Q with the SEC today and you will find a link to all our filings with the SEC on the company’s website under the Investor Relations tab. I would now like to turn the call over to Mr. Steve Oswald for a review of the operating results. Steve?

Okay. Thank you, Chris and thanks everyone for joining us today for our first quarter conference call. I also hope that you and your families are healthy and getting through this pandemic as best as possible. Today and as usual, I will give an update of the current situation of the company, after which Chris Wampler will review our financials in detail. Generally, it’s been a time of rapid change and the judgment at Ducommun as we manage through these challenges with the top priority being the health and safety of our employees. I am happy to report that despite having facilities in high impacted areas such as Southern California and one operation south of Albany in New York state, the virus spread has mostly had zero impact on our team with only 1 case reported, which we believe was not contracted at work. We also remain diligent on putting even more effective safety protocols in place. As we move forward, our facilities are sharing best practices and ideas across the company to sustain this performance. Despite the challenges of the pandemic to the nation in the markets, Ducommun’s first quarter performance was excellent. The reasons for this result I believe is our team has been working diligently over the past 3 years, improving all our operations, developing our product portfolio, driving new technologies, focusing on providing high value to customers, having an effective cost structure and making strategic acquisitions. This has been particularly evident recently in the progress of Ducommun’s defense business revenues and orders. Overall, the company’s first quarter revenue rose 1% year-over-year and marked the ninth consecutive quarter of year-over-year growth, so not a material increase. I want to remind everyone that we improved revenue, with not only the impact from the virus in March, but also…

Thank you, Steve and good afternoon everyone. As a reminder, please see the company’s filings and Q1 earnings release for further description of information mentioned on today’s call. As Steve discussed, we were pleased with the first quarter’s overall results, even as we faced the dual challenges of lower 737 MAX production and the growing economic impact from the COVID-19 pandemic. We feel confident that our ability to flex production parameters and rapidly evolve our lean operating structure to external conditions will serve us well in the months and quarters ahead. Now, I will move to the details of our overall results. Revenue for the first quarter of 2020 was $173.5 million versus $172.6 million in the first quarter of 2019. This performance was driven by $24.2 million of higher sales within the military and space sector partially offset by $23 million of lower revenue from our commercial aerospace customers. Industrial sales were essentially flat year-over-year. As mentioned in our year end earnings call, we expected our military and space business to directionally offset the headwind in Boeing MAX, 737 MAX, commercial demand. Ducommun’s overall backlog at the end of the first quarter was approximately $876 million, near record levels. Growth in the military and space backlog continues to drive a sustained, strong backlog. As a reminder, we define backlog as potential revenue based on customer purchase orders and long-term agreements with firm-fixed prices and expected delivery dates of 24 months or less. Once again posted solid gross profit for the quarter as gross margins rose to 21.2% from 20.7% in the prior year’s comparable period. The increase year-over-year was due to favorable mix and lower compensation and benefit costs. Gross profit rose to $36.8 million from $35.7 million last year. We do expect downward pressure on gross profit as…

Thanks, Chris. While I hope we have provided some important information to shareholders today as we work through 2020. Again, I thought the first quarter was excellent despite the challenges and believe we have a lot of runway in the long-term, especially in defense and other areas such as Airbus. I would also add that we do have the right footprint, cost structure, discipline and operational leadership to continue developments in the face of this current crisis. I also want to thank our customers, shareholders and all of our other business partners as we work through these difficult times together. In closing and most important, I’d like to take this time to tell the common employees, I’m proud of them and all our efforts, with the many challenges from the pandemic. Roughly 90% of our team members show up at our operations every day. And those stressful get the job done for our customers and our nation. I just want to thank their families for the support. It is never easy when loved ones leave the home with shelter-in-place orders from the authorities. We’ve also given out $700,000 to local area charities, where we operate, and we’ll add another $300,000 to reach $1 million in donations from the company to help our neighbors. Thank you for listening. Let’s go to questions.

[Operator Instructions] Our first question comes from Edward Marshall with Sidoti & Company. Your line is now open. Once again, your first question comes from Edward Marshall with Sidoti & Company. Your line is now open.

Was I am mute? Hi, Steve, Chris, how are you? Well, I hope your families doing well. Thanks, thanks. So last quarter, we talked about MAX program. And I just wanted to – just based on the 216 shipsets that were expected for 2020. Are you anticipating that you’d ship those this year? Or has that been pushed over the right as a result of the COVID?

Ed, right now, we’re at 216. As far as we’re working right now with our customers, but I don’t really have anything. Chris, anything else on that or I think we do.

No. I mean I think beyond – I mean if we all listened to Boeing’s call yesterday, we’ve been in contact with them. I mean certainly, from our year-end call until now, there’s been a little more caution that’s been put out there, but they were fairly confident on their call yesterday that they worked through the slow ramp-up that they’ve got in front of them this year to hit back toward a 31 rate as they get to 2021.

We have no new – yes.

Okay. So as you plan production, first, did you restart production? And you talked about maybe a more even build throughout the year to look at your operating costs. Did that occur in Q1? And do you anticipate that you’ll start that you’ll start that in Q2?

We actually did that in Q1. I mean we got out of the gate early because, obviously, we got the news in December about the shutdown, right? So by the middle of January, we already had furloughs in place and lots of other things. So we managed it. We’re working closely with that. We manage them in Q1. And then Q2, again, we just continue to be as proactive as we can on the cost side.

Got it. You talked about the Electronics margin potentially getting higher than the 10% that it did in Q1 when – or in Q4 that you posted, this quarter you executed toward that. And I’m just trying to get a sense of maybe what’s embedded in that number? How repeatable is that? It sounds like it might be taking a step back. And then I have a follow-up for them.

Yes. No, Ed, I think it is a step forward for us for sure. And did we expect it to take the leap quite that much? I don’t know. There was a nice leap this year, this sort this quarter in Q1. Can we sustain it? Yes, if the volumes do. I mean the key here was getting a little more volume at several of the performance centers, which dropped certainly much stronger than I know we’ve mentioned as we’ve gone through. But also getting all of the performance centers up to a more efficient level, and we sort of had that breakthrough as well. So, in Q1, the shine that Electronics had on it in Q1 certainly helped us balance out the quarter. And we’re going to look for that as we move forward. Yes, there will be a little more headwind. And Q2 is a little bit – as Steve alluded to, is going to be a tough one overall. We do look for Electronics to continue to keep a very strong profile.

So maybe I can ask one step further, the guidance that you provided, whether it’s on the quarter, on the year. Could you talk about what’s embedded from that – the operating profit margin for those two business segments to just kind of roll up to the consolidated number that you’re looking for?

Well, I think I will take a little bit it. First, we are benefiting from scale on the Electronics side, obviously being driven by defense, right? So we have a lot of – our operations are really tight. And so we’re obviously benefiting from that volume. So that’s certainly going to help us. And then on the other side is, as I mentioned earlier, on the commercial side in those factories, I mean we’re very proactive on cost. We know how to do this, and we’re doing it. So that’s why we’re seeing fairly nice numbers, though the revenue is down.

So the 5.5%, 6%, what’s embedded from – at the segment level? I mean that’s kind of what I was getting at?

Yes. I mean directionally, Ed, we’re – the volume – Q2 is going to be a tough one to repeat for Electronics. So I don’t know that it would stay quite there. You saw the step back in structures in Q1’s operating margin. It’s going to be a challenge to take that one much higher. So I think if you build it out more of what you see in Q1 with Electronics until we get our volume back to this level we were at, that’s probably a fair look.

Got it. Got it. And thanks, by the way, for providing the guidance. I think this is probably the first time I can remember Ducommun doing that, so thank you. Maybe a little bit of an easier question then. So if I were thinking about your interest expense and tax, would there be any meaningful changes from what we saw in Q1? I got to assume no.

Well, the only place is going to be – from what you saw in Q1, yes. I mean I’ll take them both. I mean interest expense, we certainly – the whole market changed a little bit as we got toward the end of Q1. So with our with our variable debt facilities, I mean we are – we should come through a little cleaner in Q2 through Q4 than the $4.2 million that you saw and get there in Q1. So definitely where we were at the year-end call, it’s a more favorable interest rate environment. And so that number should probably be more in the $4 million a quarter versus what we were talking about at the year-end call. So that will help out at that line. And then on the tax side, I think we’re still – we’ve gotten to a pretty decent repeat process on where we’re at under the new tax laws over the last couple of years. And pointing you to a 19% to 20% full year is probably still the right answer. We definitely cut some favorability with some of the SBC tax laws hit in Q1, that were a discrete item for us. But generally, it should be back to that 19% to 20% as we go through the year.

Stay safe and do well.

Thank you. Our next question comes from Ken Herbert with Canaccord. Your line is now open.

Hi, Steven and Chris. Really nice quarter. Steve, I just wanted to first ask on the cost takeout in the first quarter, can you maybe comment on how much of this is permanent maybe versus temporary and how much sort of buffer or excess capacity are you going to have to carry this year on the cost side in order to support MAX rates back up to 30 next year or depending upon when Boeing gets to those numbers?

Yes. Ken thanks. So look, first, obviously, we got to make some tough decisions on furloughs. And we try to do the best we can with that, but the orders aren’t there, and the outlook isn’t where it needs to be. We furlough. And if there’s no real light as far as being able to bring people back, we do something for them and then we move forward. So I think on the people side, we’ve got a good handle on it. It’s variable. The other thing I’ll say is that we’re – we really try to drive low capital intensity where we can. So we do have obviously operations, that carries maybe some more machines than others. But I think overall, as you can see from our margins that we do a pretty good job managing the overheads, and we manage the variable costs. So I think that throughout the year, again, we’ve been through this before, management, myself. So as long as you’re proactive and stay ahead of it, like we used to say companies to work at using in good shape. So I think overall, this year, we’re going to be okay on both ends.

Okay. And then I guess it’s fair to say that you won’t need to be looking to add much cost to support rates, higher rates on the MAX, if and when Boeing is able to execute and push that up?

Yes. That’s good. Yes. I want to confirm that. Yes, we are in good shape.

Okay.

So just – that’s a check mark on that.

Okay, perfect. And I just wanted to – you’ve talked obviously a lot about the defense side and clearly benefiting from a lot of the actions you’ve made and initiatives there. What are you seeing, Steve, in terms of your customers and payments? I mean you are actually starting to see a benefit in terms of any accelerated either contract awards or payments from the government or through the prime contractors. I mean there has been obviously a lot of talk about ensuring that the industrial base on the defense side is well supported in light of COVID-19. But what are you seeing on that front?

I’ll take that one, Ken. I mean we – there is a little – I mean there’s chatter that some of that may be happening, but reality is we’re seeing a lot of business as usual on the defense side. I mean there can be a contract or a situation where we might get quicker agreement on an advanced payment to cover some long lead time items or something like that. But overall, I mean it’s essentially – it’s very business as usual on the defense side and what we’re seeing on the cash flow.

Yes. No change here, Ken. Pretty much been the same thing. I know there’s been some news about Lockheed and some other folks, but to comment, it’s just standard call.

Okay. That’s great. And if I could, just one final comment, I know obviously, commercial markets are a bit pressured today, but can you maybe help to just sort of level set us or quantify where you are with the VersaCore product line? Because I know, obviously, you put a lot of resources into that, and it was, obviously, some great share gain and growth. But what’s the outlook for that product line now and what are you seeing there?

Yes. Sure. Thanks for that question. And so [indiscernible] VersaCore, we’ve been working on for a few years. We commercialized it. And now we have it fully operational, actually in our Guaymas, Mexico facility. We started with a small [indiscernible] the LEAP engine and now we are working in other areas such as the blocker doors. And we’re right now in the middle of that. Obviously, it’s been pushed off a bit. But we are still planning on fulfilling that commercialization target probably second half for the blocker doors camp, which is a majority of that contract. And without a big disruption, we feel like coming out of the end of this year, we’re going to at least have a $15 million run rate on VersaCore. And now we’re looking at other things with other companies. So we think it’s got a big future. We think it’s – check the box with Guaymas, check the box this fall with the blocker doors which is a big part of them to sell, as you know. And then we are having conversations with other OEMs for new things that we can maybe talk about later in the year.

Great. Great to hear. Thanks a lot Steve and Chris.

Thank you. And our next question comes from Mike Crawford with B. Riley FBR. Your line is now open.

Thank you, Steve. I am glad to hear that you think you still have the right footprint after all the actions taken previously and no need sounds like to do any further kind of shuffling. But could you couch the expected gross margin decline with fixed cost absorption and capacity utilization level? Is that within your existing footprint?

Yes. I mean I’ll take that one, Mike. I mean it’s we do have the sort of the tale of two cities here with the different setup of the two businesses with electronics and structures. But I mean we’re – I think your pointing too is clearly on the structure side, as we’ve got the headwind that they’re – what is that going to translate to us? I would – I’ll say it this way, we – a lot of reasons that the performance center structure we have still works well for us. It does allow us to flex pretty quickly. The fixed cost structure that we do have at any one facility isn’t so heavy that we could handle significant headwind and still be able to make money at a various performance center. And that’s really what this first four months, five months of the – four months of the year has been about. As the new information comes forward, as the new – most of it’s been headwind, clearly on the structure side. But as it comes forward, what does that mean? Back to sort of Ed’s question earlier, how is that going to – what’s that going to do to our approach on how we want to build, how we want to fulfill the different products and being able to flex it that way. So with that being said, that’s one of the benefits we have with where we are at on how we’ve got the structure set up, to your point, that’s why we’ve not talked about consolidating footprint – physical footprint at this point. It’s just been more around flexing and trying to scale to it as best we can.

Okay. Thank you. And then, Chris, given the decline in revenue for the rest of the year, I imagine you’ll be taken in some of these working capital accounts and really having outsized free cash flow relative to EBITDA. So, that should further – even further improve your balance sheet where net leverage is now down just 3x. So you are getting to a level where the company could do more M&A to further accelerate this move up-market into strong niche applications with high margins and few competitors. And so to that end, what does that pipeline look like? And are people answering phones and just not able to in this environment?

Is the question more on the working capital lead in or on the acquisition tail part of that, Mike?

Well, I mean question one, am I thinking in the right way in terms of free cash flow? And then, two would be is M&A kind of a standstill?

Okay. Let me take the first part. Yes. I mean, Mike, absolutely. So as you laid it out, there’s uncertainty with sort of each piece of that puzzle. But if they happen the way you said it, then absolutely, the end game would be some additional free cash flow. I think a big part of it is, as we mentioned, the messaging, you heard from Steve, related to top line and profitability, here on April 30 is very different than where it was in February. So that part of the equation and how profitable we will be is a key part of that as well as some of that give and take between what we drop-through from the facilities. And then to the working capital question, again, we’ve got tail of two cities. So there’ll be some places as we look to grow the business on the defense side this year, where there are going to be some investment there while hopefully pulling down some of the working capital taken on the structure side as we gain right size over the next several months.

And Mike, on the acquisition, certainly, right now, we’re in a pause phase. But we still have our people engaged and in place. And so we’ll see how the second half looks in early 2021. But right now, for the most part, we’re on pause probably for the next few months at least.

Okay, great. Thank you very much.

Yes. Thanks Mike.

[Operator Instructions] Our next question comes from Michael Ciarmoli with SunTrust. Your line is now open.

Hey good evening.

Good evening guys. Thanks for – how re you guys doing? Thanks for taking my question. Glad to hear everybody is safe and healthy. Maybe just some housekeeping ones first. Chris, would you guys disclose organic revenue growth in the quarter or tell us what the Nobles contribution was?

Sure. Let me – it’s less than 5%. Okay. I’ll leave it there, Mike.

Got it. And then just on the MAX, did you guys actually restart? And are you shipping product on the program now?

We are – basically, we work through the first quarter, the best we could, obviously. We do have relationships with Boeing for certain products that are you really just can’t make one a week, okay? So we are working with them on ship in place and some other things. So I’d say it’s a bit of a mix, but we’re certainly getting started now with Spirit. Obviously, we need to give these guys time to get going, but we’re on a bin program with Spirit. So once the bin starts – once things start moving forward, the bin moves up again. But we are moving forward.

Yes. And we did have a decent stretch in Q1 there, Mike, and into the start of Q2 here where those temporary shutdowns did – they did impact us. I mean they did impact our ability to ship, absolutely.

Yes. Absolutely, yes.

Maybe that’s a good lead in to, especially with the comment on Spirit with the bin programs. I mean how are you – obviously, appreciate the guidance and obviously, nobody really knows what’s going on here. But do you expect further pressure from either supply chain realignment to these lower rates? Do you get a sense that there is a lot of buffer stock in the system that has to be drawn down? And I guess as I’m looking at this, you guys already had the MAX headwind built into this year. Do you expect any of these pressures, even something like 87 does it last into ‘21 as some of these rates are coming down pretty significantly?

Mike, as I sit here right now, my answer will be no, okay? I mean as far as – I think we are going to see some production. I think things are going to – who knows for sure, right? But I think that the activity, I think we’re going to continue to roll forward. I think that the 87 reduction is a little further out. It’s okay. So I think overall, I would say, a top level would be no.

Okay. Okay. And then last one, just on the Electronics segment, obviously, defense business as usual across the board. But as you guys are looking at your product lines, the demands there, do you see any risk in that supply chain, either from COVID-related disruptions or any of your suppliers in different geographies, dealing with facility shutdowns, anything that would pose a threat to your planned growth there or expected shipments deeper in the supply chain?

Yes. I mean I think what I would point to, Mike, is, as Steve mentioned, I mean the whole team lived through something like this before. So we’re not trying to be naive. And definitely, there are data points where we can have issue. It could be a supplier here. It could be a push out of the supply there or a shutdown. But having said that, when you look at a high level, the answer is no. Again, benefited from the various ways that we’ve got the performance center set up, where the product lines are set up and how much on the supply chain side, how invested we are with any one particular. I mean we have got a diverse supply chain, so if we hit a bump in the road with one that we can shift and we can keep moving. So overall, we can – it’s not a prevalent problem that we see right now, but we still got room to go.

And we don’t see anything material right now, Mike.

That’s right. Yes, okay. And then even on inventory, I mean, it sounds like that could potentially be a source of cash for you as you kind of just right sized to new levels. But you don’t envision having a stockpile anything or do any pre-buying there?

No.

No.

Okay, perfect. Alright. Thanks guys. Stay safe.

Thanks, Mike.

Okay. I appreciate it.

Thank you. And our next question comes from Ken Herbert with Canaccord. Your line is now open.

Yes, hi, Steve and Chris. Just a couple of real quick follow-ups. On that – the free cash flow discussion, it sounds like from your comments that the second quarter is likely a use of cash, again, just with everything going on, but you inflect positively in the second half of the year to get to positive free cash flow for the full year, is that the right framework?

I think it’s a little more optimistic than that, Ken. I mean we are still – even though there’s the headwind on the top line and profitability year-over-year for Q2, we’re still anticipating being able to generate some cash flow here in Q2 and then build from there, the momentum as we go through the rest of the year.

Okay. That’s great. And then second, considering where rates are going to go on 787 and sort of a 35% to 40% volume reduction between Boeing and Airbus. Do you see any potential risk to goodwill or intangibles when I think about LDS in particular and some of this exposure to the 787?

Yes. I mean – so to answer that question, I mean there’s been – as the COVID pandemic has taken hold, like all companies, we’ve gone through a lot of scenario planning and looking at what risks are out there. And that includes physical assets as well as intangibles and goodwill. And no, I mean as those reporting units are evaluated, and we look at what’s in front of us right now with various scenarios, we are comfortable with having quite a bit of cushion before we would have to get into that from where we sit right now. Clearly, every quarter is going to be a new quarter. But right now, we don’t anticipate any issues.

We feel good about it, Ken. We feel good about it.

Great. Thank you.

Thank you. And we have a follow-up from Edward Marshall with Sidoti. Your line is now open.

Two quick follow ups. One, we’re focused on kind of the near-term with commercial. But as we kind of step – we step to the next generation, let’s say, 777, 777X, what is the potential – we always think of Ducommun as narrow-body, but with the larger aircraft coming through, I know you do quite a bit of work on the Dreamliner. What’s your thought on the 777X and maybe Ducommun’s participation on that program?

It’s light. It’s light. It’s – 777X is light. We do have a few things on there. I think that if you look at – just in general, you look at our single-aisle bookings or single-aisle revenue versus wide-body, we generally run 2x, okay?

Okay, okay.

So we are generally 2x. And I think we do have things on the 777X, but we are definitely in the 2x range, much more players in single aisle, and that’s going to continue.

Got it. The second part of that is any further developments on the topic we brought up last quarter on wind, wind energy and LDS.

So look – yes, Ed, first, we love LDS. It’s been a great thing for the company. It was our first acquisition that myself and the team did together. So it’s been a great thing for us. We are – we’ve got a product in the field. We’re working with at least one company on doing some trials, and we should have more information at probably midyear.

Got it. Thanks very much

Okay, thank you.

Thank you and we have a follow-up from Michael Ciarmoli with SunTrust. Your line is now open.

Hey guys thanks for taking this one Steve, I think you mentioned some progress on UAVs and defense. Can you maybe just elaborate there what you’re saying?

Yes. I guess I want to put it in there because I think we’re going to be talking more about in the future. I can’t disclose it right now. Just let you know, I did tell you that we did book an order in UAVs. I’ve got to be careful here, it’s not commercialized yet. I don’t have a authority to say anything, but I just – I thought it was important to put it in here because it’s a new area for us, and I thought it was important for the shareholders and analysts to know that we’re moving forward in that area. It should be good.

Can you give us a hint of structure side or Electronic Systems?

Electronic – electronics.

Okay, okay perfect. Thanks guys

See you, Mike.

Thank you. And at this time, there appears to be no further callers in the queue. So I’ll turn the call over to Mr. Oswald for any closing remarks.

Thank you very much. Well, thanks, everybody. Obviously, thank everyone who joined us today. Thank our analysts. I’d just to wrap up here, that we had a great conversation. I appreciate again the support. We’re all working arm and arm here, trying to do the best we can, the most important and keep our people safe, help out our communities and obviously take care of our customers. So I want to want to wish everybody good health and safety, and we look forward to seeing you – talking to you soon. Take care.

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude your program and you may now disconnect.