Good day and thank you for standing by. Welcome to the Second Quarter 2023 Ducommun’s Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Ducommun’s Senior Vice President, Chief Financial Officer, Controller and Treasurer, Suman Mookerji. Please go ahead.

Thank you and welcome to Ducommun’s 2023 second quarter conference call. With me today is Steve Oswald, Chairman, President and Chief Executive 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 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, among others, the cyclicality of our end-use markets, the level of U.S. government defense spending, timing of orders from our customers, legal and regulatory risks, the cost of expansion and acquisitions, competition, economic and geopolitical developments including supply chain issues and rising interest rate, pandemics 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 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 Q2 2023 quarterly report on Form-10Q with the SEC today. I would now like to turn the call over to Steve Oswald for a review the operating results. Steve?

Okay. Thanks, Suman. And thanks everyone for joining us today for our second quarter conference call. Today as usual, I will give an update on the current situation at the company. Afterwards, Suman will review our financials in detail. Before I begin discussing our Q2 results, I did want to follow up on our press release and mention that we completed the BLR acquisition at the end of April for an initial purchase price of $115 million net of cash acquired. This is a very positive step forward for the company, as we continue to build both our electronic and structural product portfolios with more Engineered Products and Aftermarket revenue, a strategic long-term goal. In addition, the whole pay for a portion of the BLR acquisition, in May, we completed a public stock offering resulting in net proceeds of over $85 million and used those proceeds to pay down the revolver that was utilized for the acquisition. We are thrilled with the BRL acquisition. I want to publicly welcome Mike Carpenter, the President and his team and they are off to a very good start. Now turning to the quarterly results. Q2 was an excellent quarter as we grew our top line both year-over-year and sequentially, delivering year-over-year revenue growth of 8% reaching $187.3 million. As mentioned in the press release, narrow-body aircraft was once again the catalyst in driving overall revenue growth and another positive sign that recovery is in good shape and will only get better and better. Turning to the markets, the continued recovery in Commercial Aerospace once again delivered in Q2 with Boeing 737 MAX business up almost 60% year-over-year and the Airbus A220 also having significant growth, up almost 90% year-over-year. Overall Commercial Aerospace with Airbus and Boeing and others was up 37% from Q2…

Thank you, Steve. As a reminder, please see the company’s Q2 10-Q and Q2 earnings release for a further description of information mentioned on today’s call. As Steve discussed, our second quarter results reflect another period of strong performance. Once again, we saw a significant increase in our Commercial Aerospace revenues. We remain encouraged by the continued strength in domestic and global travel, which would support higher long-term demand for aircraft and are also encouraged by the build rate outlook from our key customers that should drive continued growth in our shipments. During the quarter, we also continued to make progress on our restructuring program and as Steve mentioned, we announced the completion of the acquisition of BLR Aerospace and subsequently completed a public stock offering to help pay a portion of the BLR acquisition, which I will discuss in further detail later. With all this, we feel like we have laid a strong foundation for the second half of the year. Now turning to our second quarter results. Revenue for the second quarter of 2023 was $187.3 million versus $174.2 million for the second quarter of 2022. This year-over-year increase reflects $21.2 million of growth across our Commercial Aerospace platform, partially offset by $10.8 million of lower revenue within the military and space sector. Ducommun’s overall backlog at the end of the second quarter hit an all-time record of $1.01 billion, exceeding the billion dollar mark for the first time in the company’s history. This was a growth of almost $50 million over our backlog at the end of Q1 of this year and was driven by the growth in backlog for our defense business. As a reminder, we define backlog as potential revenue based on customer purchase orders and long-term agreements with some fixed prices and expected delivery…

Okay. Suman, thank you. In closing, look, Q2 was obviously a very important quarter for our company and shareholders. BLR acquisition is off to a good start. Public stock offering was a success. Commercial aerospace continues higher and higher and defense orders in the quarter were very impressive. I also want to mention the margin expansion in Q2, which shows our strategy presented in December 2022 is working and we will continue to generate shareholder value as we move towards our long-term goals in 2027. My continued thanks as well to our employees, investors and all of the stakeholders for your continued support as you build momentum for a strong second half of 2023 and the years ahead. With that, let’s go to questions. Thank you.

[Operator Instructions] The first question comes from Ken Herbert with RBC Capital Markets. Your line is open.

Yes. Hey, good morning Suman and Steve.

Ken, good morning. Thanks for joining.

Good morning.

Yes. Hey. Steve, maybe just to start off, you have had several quarters now of down defense sales, but obviously some really nice bookings momentum. Do we maybe start to see defense sales inflect positively here in the third quarter? And how should we think about sort of the second half for the defense business in terms of top line?

Yes. I guess a couple of things. First, we are very happy with the bookings in Q2, right, so that’s a big positive for Ducommun and for our team there. I think if you look at going forward here, we are going to still moderate at least through the end of the year, but we certainly feel much better about 2024. I will tell you that just if you look at sort of what happened in Q2, I mean a big part of that was GA and UAVs. I mean again, when I have talked in the past on these calls, a lot of it is just timing of orders, and they just are not getting the orders this year. And that was a big takeaway as well as there is a little bit of Patriot and a few others. So, these are again just things that are happening in the market, but again I feel very good about our defense business. We have this offloading that’s coming. I mentioned in my remarks last quarter that these massive moves from internal manufacturing at Raytheon to our facilities, okay, include not only machines and everything, that’s called inventory. So, there is a lot of things here that are going to pick up on our revenue side once we start buying all the material versus having it funded from the customer. So, I think some good things ahead, Ken.

That’s great. And on your comment on offloading, I mean there is just a lot going on within defense markets today. Do you – are you seeing incremental opportunities? I mean part of the narrative has been the ability to take the success with Raytheon and expand it to other defense customers. You have maintained the targets on offloading which I think are great and ambitious, but are you starting to get a sense that maybe there could be some upside to the offloading opportunities?

We absolutely do. I mean look, we are obviously working, especially with companies like Northrop and others, where we had a good start with GA, had a great start with Raytheon. We are looking at the other defense primes working with Northrop. And one of the best things for us is our performance, because talking to defense prime CEOs, they will not move work out of their facilities unless they can trust the supplier. And we all know that and it all makes sense. So, that’s one of the things we are getting [ph] in this game because of our performance.

Great. And if I could just finally, as I take your comments and I think about margins in electronic systems, it sounds like maybe a little bit more of a muted second half and should we think about sort of a second quarter run rate as a good margin assumption for that segment, just considering timing around the defense sales?

Yes, let me – I will throw – why don’t you comment on that, Suman?

That’s right. No, I think you are on the point that it is – we will probably see a similar trend, but with improvement ahead, especially as we complete the restructuring program by the end of the year, we should start seeing an uptick in those marginal projects.

Great. Alright. Thanks guys.

Thanks Ken. Appreciate it.

Please standby for the next question. Our next question comes from Jason Gursky with Citi. Your line is open.

Hey, good morning everyone.

Jason, good morning. So, you are speaking a little bit, volume is down.

I am in downstairs. How is that?

Better, yes. Perfect. Thanks.

Okay. Great. Sorry about that. So, speaking with Ken’s line of questioning on the pipeline and the amount of business that’s out in front of you, appreciate the comments on the defense side. Can you talk on the commercial side? I know you have talked over the last quarter or two quarters about some of the success that you have had with Spirit in particular. So, I am just kind of curious to get an update from your perspective on the outlook for the pipeline on the commercial side?

Yes. So, we certainly – we are very upbeat about it. I mean it’s not only the rates, which we all know are going up and we are on all these programs for the most part that are all going to really sort of hit it hard in ‘24 and ‘25, but we are also gaining a share on the programs, okay. So, we are not just standing still here. So, for instance, the skins that I talked about for the MAX, okay, right now we have been public about 175,000 per shift set for the 737 MAX. And we think in the next 12 months-plus, I mean we are going to be at 195,000, maybe pushing 200,000. So, that’s a little bit further out, but we feel good about not only the rates, but the program share. And one of that is the skins. And that’s going to happen. We are right now in the middle of tooling and everything [Technical Difficulty] January and February we are looking to start shipping to Spirit for skins for their MAX production.

Okay, great. And then on the restructuring side of things, as you look out, based on some of the bookings that you have had here of late, are you still thinking that the restructuring cost savings that you are going to see, as you wrap things up here are going to accrue 100% to you all, or are we beginning to see some of that kind of leak out and return to customers?

So, we feel – we continue to feel good about the savings range that we have talked about of $11 million to $13 million. We are in ongoing discussions with each of the customers where we need approvals to work through that transition. And there is no reason to believe that we would come in at this point anywhere less than that range that we have committed to.

Yes. We don’t see a lot of leakage. I mean we are – for instance, just Monrovia for instance, there is only two major programs we have to move. And one we have already sort of locked up with Boeing Mesa for the back-weighted Apache. And the other one we are working on right now for the spoilers going down to Mexico. So, the nice thing about these moves are there is not a lot of complexity. So, we feel good about that. As far as leakage to customers, we are not planning on that.

Okay. Great. And then last one for me, as you look at that $1 billion backlog that you have got now, what does the mix of that look like from a margin perspective? I know we will bake in this $11 million to $13 million of savings. But as you execute on that backlog itself, is it going to be margin-accretive backlog based on what you are seeing today?

So, the short answer is, yes. And it’s going to be supported by growing operating leverage in some businesses. It’s going to be supported by better pricing and it’s going to be supported by cost efficiencies through the restructuring. All three of those is going to result in margin enhancement in 2024 and beyond. So yes, we do expect that backlog as it flows through into revenue to start coming in at higher and higher margins over the next several quarters.

And I think that’s fair.

Great. Thank you, gentlemen.

Okay. I just want to take a moment here, I just want to welcome you on the Citi team, okay, to our Ducommun call. We very much appreciate your support.

Please standby for the next question. Our next question comes from Mike Crawford with B. Riley Securities. Your line is open.

Thank you. You cited, Steve, strength in military rotary-wing platforms, in particular, Seahawk, Blackhawk. How much of that is due to BLR?

Mike, none of it.

None of it.

None of it. It’s all organic, mostly coming out of the New York facility, Coxsackie, but yes, we just – things are starting to move in that area, so we have benefited quite a bit in Q2 for that.

Excellent. And then, on the other side of that coin was you talked about unfavorable mix and margin in electronic systems. And what was unfavorable about the mix?

So yes, I mean there were some performance centers which are suboptimal, right, including, we are shutting down Berryville and that facility is clearly not operating. There are one or two other programs where pricing was currently not favorable under the existing contract that we are producing to, but we know that kind of the next contract is going to be at a different pricing and so margins will get better. So, there has been a mix of a few things which has resulted in the lower margin, but we expect those things to resolve over the coming quarters and it isn’t a long-term change by any means in the margin profile of the business.

Yes.

Excellent. And do you think, like, if you look out several years from now that the one segment, the Structural Systems segment will continue to have a higher EBITDA margin than the EFC, or do you think they will come together?

Well, we certainly hope for both. But I will tell you that we are – whether it’s structural or electronic, we are doing the same type of operating principles. We are driving the business. We are making sure we are getting pricing for our work. We think that they are going to come – still grow and come together nicely. So, I would say both.

Okay. Thanks Steve. And then last question is, given the location of the Monrovia plant, it looks like it’s in an area where it might not be highest and best-used to try to have a new buyer come in and continue to operate that as an industrial plant and perhaps a buyer might come in and convert it to a mixed use. And I am just wondering what ranges of values you are seeing for either similar properties in that area or that property in particular?

Well, you are right about that. Monrovia facility is in kind of a neighborhood, if you look at some legacy building, but it’s still nine acres of land, so it’s a big piece of property. Mike, we just don’t know yet. We are committed to our shareholders. We are in the next month or two months actively going to market it and we will see where things go. So, no other report for that other than its movement.

Okay. Thank you very much.

Please standby for the next question. Our next question comes from Michael Ciarmoli with Truist. Your line is open.

Hi. Good afternoon guys. Thanks for taking the questions here. Steve or Suman, just on the structural systems margins, I mean really stood out here, post-COVID high and I think maybe an all-time high. How do we think about these margins going forward, especially with the commercial aerospace volumes continuing to ramp? I mean is this sort of level – I don’t want to put it out there as a new floor, but you are going to get the restructuring benefits as well. So, how do we think about structural going forward here as you continue to see rate increases on some of the commercial aero programs?

So I mean, I would say that the margins that we have seen in this business, certainly driven by improving product mix, but also as the businesses have scaled, I don’t know whether they are exposed to commercial aerospace and rates have come back compared to last year, we have seen improvement in margin. But we are also seeing pricing actions which we expect will stick across our commercial aerospace structures business and also in our engineered products businesses. So, the margin trajectory to some extent is also influenced by where the engineered products have fit in between our Structures and Electronics segments. And we do have today a fair bit of the – a number of the acquisitions we have done in the past few years that fit into that Structures segment. So, that helps a little bit too.

So Mike, I have just – I am glad you brought it up, because this morning I was reflecting on my – one of the first calls I had with 2017 and the operating margin was 4% of structures. So, I am happy to see that number. I know it’s been 7 years and COVID and other things, but I feel good about the number, will probably moderate a little bit, but that’s where we are heading. I mean it’s only going to get better.

Got it. And was there anything unusual in this quarter? And it sounds like, Suman, you are saying maybe there is a little bit more of the proprietary aftermarket-type products that I am assuming carry higher margins flowing through this unit and that that should probably be fairly consistent going forward as well?

Right. I mean there are always – we try not to give guidance by a quarter, right, on margins. But yes, there are always things that move in and out, but anything that was unusual was – that we don’t expect would recur is marginal. I think most of it is solid, yes.

And Mike, it really just – I think it just sort of supports our strategy, right, where in these products and it’s just – it’s goodness for the whole P&L.

Got it. And then where are you right now on current production rates for the MAX, for the 787, some of the other needle-moving programs?

I tell you, this number is fine all over the place. I would say that the 787 were probably three or four. So, I think that’s I can stand on solid ground and tell you that. I would say the MAX, there is numbers from Spirit, there are numbers from Boeing, there is destocking. I mean we are probably high-20s right now if I am being generous from our perspective. So, we are looking for these numbers, we are hearing, but we are not seeing 30s yet. That’s what I would say, Mike.

Okay. Got it. That’s helpful. And then just the last one, any other – I mean the bookings too, I mean you were – obviously been talking about the bookings to backlog. Anything else, I mean, that was also – I think the bookings number might have been a record as well. But any other color, I mean is there offloading in that number or anything to speak of the bookings, any new market share gains or wins that you could talk to?

Yes. I mean look, I am thrilled with the bookings, right. So, it’s again, a long journey. It is our all-time high. We – as I have talked about these timing of these defense orders are a little tricky. So, we had some really heavy orders come in, in Q2 for things that we have been waiting on or working on such as the Seahawk and other things up in our New York facility. And just continued strong even though we didn’t – sequentially didn’t go much on commercial aero, that’s just going to continue to build as well. So, overall we are very upbeat.

Okay. Thanks guys. I will jump back in the queue.

[Operator Instructions] And it comes from Kim Herbert with RBC Capital Markets. Your line is open.

Hey Steve. Appreciate the opportunity with the follow-up. I wanted just to dig into that a little bit more. The backlog within commercial aerospace was pretty much flat sequentially from the first quarter to the second quarter. There has certainly been a fair amount of disruption and distraction at Spirit over the last month or two months. Is there anything – are you seeing maybe any slowdown in any pull from your customer as we think about the backlog on commercial in particular? And how do we think about maybe the movement on the MAX in particular into the second half of the year?

Yes. It’s a good question. I think a little bit of Q2 was a little bit of taking a breather after a pretty strong run. I think that the Spirit disruption certainly didn’t help things. I do from everything I read and talking to Tom and Spirit and other folks, all this increase is going to happen, so I think that’s going to be a positive catalyst for DCO in the second half, especially in 2024. But it wasn’t a – as far as the headline numbers, I think that it was sort of a, how can you say it, just a little bit of a stalemate Q2 on bookings, just for lots of reasons, but I don’t think they are all – I think they are all transitory.

Okay. Great. And with BLR now closed, maybe I don’t – I am not sure how specific you can be here, but as we think about the commercial portfolio, how would you think about that business from an original equipment versus aftermarket standpoint? Is that – can you give any granularity on that within commercial?

For BLR specifically, a large percentage, more than a majority of that business is aftermarket.

Yes.

Okay. I know. I was asking now that BLR is in the portfolio, how do we think about total aerospace, total commercial aerospace in terms of OE versus aftermarket mix?

Okay. So, I mean we were – at the end of last year, we were at 10% and we are looking to go to 15% by 2027. I would say, BLR, given that a large percentage of it is aftermarket. We have made significant strides already towards that 500 basis point increase. I would say we are well on our way on that front. So, I mean beyond that we haven’t really broken out aftermarket and OEM and we don’t report that on a quarterly or even annual basis. But there is a material improvement in that aftermarket.

Yes, it’s certainly going to – it’s a shot in the arm for us as we go on this journey now for the next 5 years to get the 15%-plus on aftermarket. It’s important to us and investors.

Perfect. Okay. Thank you, guys.

Thanks Ken.

At this time, there is no further questions. I would now like to turn the call back to Steve Oswald for closing remarks.

Okay. Thank you very much. Just want to just extend my thanks again for the support to all our folks calling in today. Certainly have new investors with our product, with our stock offering, so I want to absolutely welcome them as well. I feel very good about where we are. I thought Q2 was a very good print for the company, certainly bodes well for the second half of the year. I have said on my remarks earlier on the questions that I am very upbeat and I look forward to speaking again after Q3. So, thank you again.

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