Good day and thank you for standing by. Welcome to the Q1 2022 Ducommun Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Chris Wampler, Vice President, Chief Financial Officer, Controller and Treasurer.

Thank you and welcome to Ducommun 2022 first quarter conference call. With me today is Steve Oswald, Chairman, President and CEO. I'm going to discuss certain limitation 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 Ducommun include, amongst other things, 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 acquisition, competition, geopolitical developments and disasters, natural or otherwise. These risks and others are described in our Annual Report on Form 10-K, filed with the SEC and our forward-looking statements are subject to those risks. Statements made during this call are only as of the time made and we do not intend to update any statements made in this presentation, except if and as required by regulatory authorities. This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call. We filed our 2022 first quarter Form 10-Q with the SEC today. 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. Today and as usual, I give an update of the current situation of the company, after which Chris will review our financials in detail. The company remains focused first and foremost on the health and safety of our employees. The team has done an excellent job with the safety protocols put in place since March 2020. We continue to follow our best practices aligning with health authorities. Within the company, we had 287 cases of Omicron in Q1 of 2022, with 263 of them occurring in January. Turning to the Q1 financial results. Ducommun's first quarter performance is very solid. The company delivering year-over-year revenue growth of 4%. This was excellent in light of the significant amount of COVID cases mentioned previously among the workforce in January. The commercial aerospace market recovery was a real bright spot in Q1 and Boeing 737 MAX business was up over 100% year-over-year and the Airbus A320 family also had a significant increase of over 80% year-over-year. The company's defense business, after a great progress in the past two years, was down but still delivered a solid performance. Finally, our overall commercial aerospace business showed good year-over-year revenue growth for the third consecutive quarter. We also posted solid gross profit of 19.9%, along with an adjusted EBITDA of 12.3%, despite the challenging start to the year. Team also posted adjusted operating income margins of 7.5% which is good progress for the start of the year, as we continue to build our track record of effective operational leadership and cost management in any environment. The quality of earnings was solid as well. The company reaching GAAP diluted EPS of $0.66 a share versus $0.55 a share for Q1…

Thank you, Steve and good afternoon again, everyone. As a reminder, please see the Company's 10-Q and Q1 earnings release for further description of information mentioned on today's call. As Steve discussed, our first quarter results reflected another period of solid performance. The first quarter results saw a strong increase in commercial aerospace revenue. We are pleased to see their continued strength and overall travel demand which should drive higher shipments going forward. We are off to a decent start in 2022 and are looking forward to building on our Q1 2022 results and are in a position to do so. Now turning to our first quarter results. Let me review some of the highlights. Revenue for the first quarter of 2022 was $163.5 million versus $157.2 million for the first quarter of 2021. The year-over-year increase reflects $18.7 million of growth across our commercial aerospace platforms, partially offset by $14.8 million of lower revenue within the military and space sector. A portion of the year-over-year increase is directly attributable to MagSeal which we acquired in December of 2021. Thus our overall growth was a combination of organic and inorganic. Ducommun's overall backlog at the end of the first quarter was approximately $943 million, an all-time high, reflecting recent growth across our commercial aerospace platforms, setting up the Company for strong topline performance for the rest of 2022 and beyond. Our defense backlog remains strong at $509 million and has us positioned for another strong year for our defense business. 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. We posted total gross profit of $32.5 million for the quarter versus $33.1 million in the prior year period, while…

Okay. Thanks, Chris. Okay. So in closing, it's a very good start to the year despite a few temporary challenges. I'd like to take this time again this quarter to thank our Ducommun employees, along with our investors, suppliers and other stakeholders for their continued support. We've done a great job managing the business and maintaining a level of excellence in 2020 and 2021. And all of our hard and smart work will now pay off in full over the next few years ahead. So we're very optimistic. We thank you for listening and we'll now open up for questions. Operator?

[Operator Instructions] Our first question comes from Pete Osterland from Truist Securities.

This is Pete on for Mike Ciarmoli. First, I just wanted to ask, where you are on production rates for the 737 MAX, are you currently aligned with underlying OEM build rates or are there any differences for your current production rates due to leadx or inventories in the system. And just what are your expectations for where production rates will be going throughout the rest of the year?

Well, look, we're right aligned with Boeing and right aligned with Airbus, as far as the bill rates. One of the, I think, the bright spots for Ducommun is, we're in very good position with our titanium inventories. We have -- we feel very good about where we are, we're sort of shoulder-to-shoulder with both companies as well as with Gulfstream and other manufacturers. So we feel great about where we are with inventory. We are pretty much aligned and I'll mention Spirit as well, because they are a big customer of ours. So I think we're in very good shape.

Let me add one thing. Just to add, Pete, just add real quickly too. Your other part of your question on the inventory that they have. I mean that's the wrinkle we're still, like everybody working through as we've come out of the pandemic, is where -- their rate is with the rate we've got in the plan, that's what we're working towards. But what we see, we're still working back to the sort of published rates. We're still as I work through their inventory, we see some of that come from their inventory, some of that come from us.

All right. And then just -- I also had a question on margins. Just given the year-over-year drop in electronic systems, I understood that some of the impacts were you called out was from COVID and weather and they seem like they'd be contained over to the first quarter but you're expecting that the product mix headwinds that you called out will continue impacting the segment in the second quarter and are you seeing any meaningful inflation from labor or other input costs that might be an additional headwind heading into 2Q?

No, I wouldn't say significant. I'd say, certainly we're working with a lot of the dynamics that everybody is in terms of inflationary pressures with you see from labor or what you see from the supply chain but we're covered and feel like we're in a good spot, especially as we move forward on that. But the margin itself, Q1 tends to be sort of the toughest margin quarter for us, really across the board but particularly with electronics and as we look forward, we're planning on the mix coming back to a more normal state and so we can do that. We'll look forward to snapping back from where we're at here in Q1.

Okay, great. And then just one, one last one, if I could.

This is Steve. Let me just say I want some more color on that. So obviously a lot of manufacturers struggled in January. Sure, you've heard it from other companies. We had to certainly work very hard in February and March and make for some absenteeism which I think we did but I think one of the bright spots going forward on the margins and those type of things, we have our all-time record backlog. So that's going to help a lot as we go forward through the next few quarters.

Understood. Makes sense. And then just one last one if I could, just on the defense side, are you seeing any demand signals from your defense prime customers suggesting that there might be any additional opportunities or volume increases as a result of the Russia-Ukraine situation and just what is your overall outlook for the global defense spending environment moving forward?

Yes, we look, we've built really built our defense business. So we feel really good about it. Yes, there is more activity, absolutely with the threats going on and continued threats just legacy and in general, so the competition with Russia, competition with China, Ukraine. So we absolutely are seeing activity that we're working on and we feel good about. The other thing, just mentioned again in my remarks, is that outside of programs and other things, I mean, customers are eager to work with us on sort of non-core manufacturing as these defense primes were looking at things and saying, do we really want to make circuit cards in our factories at the kind of costs an OEM has, or do you want to send it to Ducommun, so I think not only this year but certainly next year, we're going to have some nice tailwind with that off-loading on top of the order activity now.

Our next question is from Ken Herbert with RBC Capital Market.

This is Keith [ph] on for Ken Herbert. I was hoping, you guys could just discuss some of the weakness we saw in military and space, in terms of the programs?

Yes, I think a couple of things, Keith. And I'll let Chris jump in too, is that a lot of it was timing of orders. As we took a look at some missile programs that we've had, there tends to be some movement, when you have military sales and our TOW missile cases as well, those things kind of going a little bit of variable as far as orders go. So overall, again, I thought it was a very solid quarter for us. Cards were good, harnesses were good but I think in just top level markets, a little lightness in missiles and then on TOW case.

Yes, no, I think on the military side, just on the fixed wing F-35, down a little bit was a part of it but I'd say the other theme really is the volume is a matter too of what we can produce. And one was the issues that we sort of pointed to with Q1 with working through COVID and working through weather, that's just a constraint on what we're able to produce on the military side. So I'll point that back to the strong backlog at over $500 million, we feel really good about, where we're at but that's a little bit about why Q1 played out the way it did.

And then do you kind of expect that could be a bit more positive in 2Q? And then just if I could, just kind of a full year outlook for defense as well?

Yes, I mean, I'll start and Steve can jump in here but I mean we definitely, yes, we don't anticipate the same type of complexities on the workforce with COVID, weather, things like that. In Q2, usually is where we can start to stretch our legs a little bit just as we operate. So we feel good about that part of it, getting to utilize what we have out there in the backlog. And from a full year, I mean we knew, we've come through a couple of really strong years of defense growth. And so, this year with the story as we have a business now that we certainly flex hard toward defense coming from '19 through 2021, seeing commercial tick back up is going to be really helpful. Defense, we've got a strong business now. There we're going to continue to make some inroads like Steve mentioned but overall it's the good commercial business is what's going to drive a lot of the high-single growth, that Steve talked about.

[Operator Instructions] Our next question is from Mike Crawford with B. Riley Securities.

Regarding the latest restructuring initiative, how much is that related to M&A integration? Do you still think of these acquired entities like LDS, CTP, Nobles and MagSeal, separate subsidiaries or they are more integrated into structural and electric systems?

Yes, Mike. So look, they are definitely more integrated. This really is sort of outside of those companies and much more into some of our legacy footprint that I've been dealing with since I've been here. And I think just for on the call, I mean, we did the only other restructuring in November 2017 when I first started and I felt that now in five years into the job, I talk to the team. We have some opportunities. I'll give you one example on the calls, I think it is important is that we have a facility in Thailand that really does have -- doesn't really fit for us as far as strategic value. It's very far away, tough for governance and those types of things. So that's an opportunity, we're going to move forward on. So it's those types of things, Mike, we're getting ready for the next five years here, we're trying to get things right and get to our long-term goals.

Okay. And then, further regarding your footprint, what's the current capacity [indiscernible] is following the fire you had there earlier?

Well, they have a brand new building and I'm proud of the team. So we're, by the end of Q2, we're going to be right back where we are as far as production for background. We had to move all that work up to Gardena, our Gardena facility and we did. And we built a new building. We feel really good about it. All the work is being transferred back in Q1 and in Q2. So we'll be ready to go. I think on our capacity, Mike, I think right now we've got a lot of runway, we're certainly looking to double that business, we're looking at other opportunities, because as I mentioned in previous calls, the LEAP engine block door is now fully commercialized in Middle River. We have closed out panels, we have the faring. So we'll look to do more in that space. We like themselves a lot, we think VersaCore could do a good job there. So more to come.

Okay. Just one last one. You mentioned, things like the SPY-6 radars and NGJ for commercial offloading. But what about like captive titanium operation at Airbus that you could, work to do. Has there been any progress on that or?

Yes, nice. I wish now as it came, Mike. Look, we have our place to play, our lane with Airbus. We're certainly interested if there is more opportunity there. I don't see, we've benefited from higher volume when Airbus gets busier which they will. We certainly anticipate. We're going to see more share, okay. That's sort of what's happened in the past, now that we're coming out of COVID. So we think that's more of the play for Ducommun titatium, is that we --whereas they go higher and other suppliers may struggle. We have -- we've been on time with Airbus over two years now. So, straight. So we feel good about our position there. We're going to benefit once we keep going on these bill rates, so again stay tune on that too.

I am showing no further questions at this time. I would like to turn the conference back to Mr. Oswald.

Okay. Thank you very much and thanks everybody for your time today. We feel obviously we had a bit of a tough start, as I mentioned in January, a lot of absenteeism and that was just our reality. But I think we had a very good start to the year. We're very optimistic about the next few quarters. So that's a good feeling among our team here and the all-time backlog number is something that obviously we're proud of. I mean customers, they vote for orders, okay, that's how they vote. So our customers are behind us. We have the team. We have the footprint. We have the supply chain. So I think more good things ahead. Again as I've always said in my calls, thank you for your support. Have a nice afternoon or evening.

This concludes today's conference call. Thank you for participating. You may now disconnect.