Good day, and thank you for standing by. Welcome to the Q4 2023 Ducommun's Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Suman Mookerji, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, and welcome to Ducommun's 2023 fourth quarter conference call. With me today is Steve Oswald, Chairman, President and CEO. 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 remarks 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 US government defense spending, our customers may experience delays in launch and certification of new product, 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 higher interest rate, the ability to attract and retain key personnel and avoid labor disruptions, the ability to adequately protect and enforce intellectual property rights, pandemics, disasters, natural or otherwise and risk of cybersecurity attacks. These risks and others will be described in our annual report on form 10-K, once it is filed with the SEC and our forward-looking statements are subject to those risks. Statements made during the 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. This year, we expect to file our 2023 Form 10-K on Thursday, February 22, 2024. The additional time is to complete the documentation of our internal controls and preparation of the Form 10-K for filing. In the 2023 Form 10-K, we expect to report a material weakness in our internal controls over financial reporting related to our revenue recognition process. This material weakness resulted in immaterial adjustments to net revenues and contract assets as of and for the quarterly period ending December 31st, 2023. We do not expect the material weakness to result in a restatement or change to the reported financial statements. We will make the necessary changes to the design and operating effectiveness of these specific revenue recognition internal controls during 2024. I would now like to turn the call over to Steve Oswald for a review of the operating results. Steve?

Thank you, Suman, and thanks everyone for joining us today for our fourth quarter conference call. Today, and as usual, I'll give an update on the current situation at the company, after which, Suman will review our financial results in detail. Q4 was a very good quarter as we wrapped up 2023. Revenues exceeded $190 million for the second consecutive quarter to $192.2 million, driving a full year revenue of $757 million with the last high mark set in 2012. Strong growth in our single-aisle commercial aircraft business helped to drive the revenue. The continued recovery in commercial aerospace once again delivered in Q4 with Boeing single-aisle platform business in aggregate being up 46% year-over-year along with Airbus A220 program showing strong growth of 73% year-over-year. Overall, commercial aerospace with Airbus and Boeing and others was up 18% from fourth quarter 2022 despite Boeing's and Spirit's continued challenges with MAX quality issues. We are now in our 10th quarter of year-over-year revenue growth of Commercial Aerospace, a continued excellent sign for DCO and the industry. While our Defense business was slightly down the quarter with sunsetting programs such as the F-18 having an impact, the company also experienced strong demand in the Apache program as well as increases for F-35 and the MIRV missile platforms. The Defense business was over $100 million in revenue once again at $103 million of revenue for the quarter. We remain optimistic about the growth ahead. As we go through a timing transition on certain programs, the ever-growing backlog of Defense tells the story with backlog up $70 million from last year and $33 million from Q3, 2023. Defense backlog now stands at over $0.5 billion at $527.1 million. Another real bright spot in Q4 was gross margins of 21.7% for the Q4, up 120…

Thank you, Steve. As a reminder, please see the company's Q4 earnings release for a further description of information mentioned on today's call. As Steve discussed, our fourth quarter results reflect another period of good performance. We again saw a significant increase in our commercial aerospace revenues. We remain encouraged by the continued strength in domestic and global travel, which should support higher long-term demand for aircraft as we work through some of the industry issues impacting single aisle production rates. In addition, we are encouraged by the strong backlog growth in our military and space business that should help drive our revenues in that end user segment going forward. During the quarter, we also continue to make progress on our restructuring program, and I will provide some more color shortly. With all this, we feel like we have entered 2024 with good momentum that will continue to drive our performance. Now turning to our fourth quarter, results revenue for the fourth quarter of 2023 was 192.2 million versus 188.3 million for the fourth quarter of 2022. The year over year increase reflects 12.1 million of growth across our commercial aerospace platforms, partially offset by 5.6 million of lower revenue within the military and space sector due to lower build rates on various missile platforms and military fixed wing aircraft platforms such as the F-18 partially offset by higher build rates on military rotor wing aircraft platforms such as the Apache New Common's. Total backlog at the end of the fourth quarter was 993.6 million. This includes a record backlog in our defense and end users defense end user segment, which grew by 33 million to a total 527 million. The backlog in our commercial aerospace business increased slightly during the quarter from 440 423 million at the end of…

Thanks, Suman. Just a couple more comments before we go to questions in closing. I think Q4 was a very good quarter with many highlights for the company and our shareholders. In addition, achieving all time highs for annual revenue and adjusted EBITDA of 757 million and 102 million respectively in 2023 are wonderful milestones, and I'm very happy for the hardworking to comment team and all of our other stakeholders for those achievements. I also want to mention that 2024 will be our 175th year of continuous operation here at Ducommun, a great achievement, and we'll be recognizing that through the year. Final note is our 2027 strategy, which we've talked about. We had a strong first year with both engineered products and aftermarket gaining a larger percentage of revenue for the company in 2023 versus 2022, and the future is very bright. With those remarks, I will conclude and open up to questions. Thank you for listening.

[Operator Instructions] Our first question will be coming from Griffin Boss of B. Riley Securities.

So, Steve, you just mentioned the engineered products and aftermarket parts. Are there any more specific details you could give on percentage of revenue there and how you would characterize that trending going forward versus the rest of the business?

I'm not going to disclose an actual number just not at this, that at this time we will probably do something as we go forward in our investor day meeting, but it was certainly, it was certainly up quite a bit. I will say that both in revenue, both in revenue and after market for engineered products and we're moving we have a 25% target for 2027 for revenues, for engineered products. And so we just say that we're tracking very strongly towards that and to beat it.

And then so we saw a sequential, slight sequential decline in gross margin. Just curious if you can add a little bit more color on what you're seeing there and how you're thinking about that in the next quarter and going into ‘24.

Repeat that question once more, Griffin?

Yes.

We saw a sequential decline in gross margin. I was just curious if you could give some more color on what was driving that and how you're thinking about that trending going into ‘24. So the sequential decline was driven by one product mix, but also because we have two facilities that we are in the process of winding down and we are just producing inefficiently there given the much lower volume of operations versus the size and scope of those facilities. And that's causing a drag particularly on the electronic system side, but also some drag on the structural system side. And we expect that headwind to linger, but casually go down as we close those, both those facilities in the first half of 2024.

I think that's good. Let me just put some color on that for Berryville, for instance, during a quarter, obviously we have a lot less people that were, during a quarter we would run sort of 7 million a quarter at Berryville, and now we're less than a million just making the tomahawk. So that's why there's a little bit of a timing issue where we have some headwind.

And then just last one for me. I apologize if I missed this in the prepared remarks. Can you give us an update on how the offloading opportunities are trending and how you're thinking about potential upside to those 2025 targets on that front?

Well, this is, I've been talking about this, we think there is some potential above the 125, though we still have a little more work to do here. It's all very positive. It's actually moving us in, as I mentioned in my remarks, more into the radar business for this is a lot of it is cards, but so what happens is just it's when you're dealing with an RTX and you're moving work out of their facility, they have lots of inventory. They have lots of different things we have to overcome. They have test equipment that they either want to keep or they don't want to keep. They have that test equipment has lead times. It's over a million dollars for some of these test equipment machines. So there's a lot that goes into it. But once it gets to Tulsa or gets somewhere else in Appleton, we're off to the races here. So, we are actively heads down working very hard in 2024 to get a lot of this past sort of the finish line here. So we'll have an update later in the year, but we're feeling real good about where we are and hope to have better report on the 125 plus towards the end of 2024.

[Operator Instructions] Our next question will be coming from Michael Ciarmoli of Truist Securities.

Afternoon guys. Thanks for taking the questions. Steve or Suman, I guess if we look maybe to piggyback on the offloading, but if we look at defense revenues down sequentially. You finished the year I guess down two years in a row and I guess you haven't really parsed out the guidance, but it sounded like there was more conservatism in there around the MAX. What's the biggest headwind? I mean, I know you called out the F-18 wind down, but is there anything else impacting the Defense revenue growth?

Good to be with you. It's a little bit of a mix. I mean, look the F-19 This is significant right? Not for the total business, but the FHA. We also, earlier in 2021, 2022 we did these toll missile cases for Raytheon and they were running 15 or 20 plus a year. And what happens with the toll missile cases, they have problems with supply chain and they can't get the motor for the missile and then all of a sudden, the case of business dries up for a year or two. We're a little bit in that valley right now. There's just a couple. There's nothing systemic to the business. We like where we are. We're getting pinched here and there a little bit, but we think that coming out of this thing we're in really good shape. The F-18 was we had a great run with it, but those things sometimes they come to an end.

Okay. Did I hear it right, the offloading was $90 million expected to be in '24 because I think you called out maybe seeing that step up to $125 million in '25?

Yes, that's where we're heading. Again, one of the big rocks here is the SPY6 and there is a number of cards, right. We have the first cards already being made at Tulsa and that's just those cards alone are $15 million, $20,00,000 a year, right? We have those going. But we've got two other layers of cards that are just they are in handover. It's tough to get them over here, we are working it right. Initially we get all the material from them because they get all the inventory right, so our revenue is tamped down a lot. We're feeling very good about 2024 on these changes. It's great business, but unfortunately coming out of a big OEM is a bit of a long time coming.

Just I'd like to highlight again our defense backlog is the highest it has ever been in the last few years. Yes, that's some decline in the current year, but the backlog is at the highest and that's kind of a 2 year look, on our backlog numbers, so that's a good position to be in.

No, noticed that. Definitely positive there. And then just I guess what's the level of conservatism or prudence that you've sort of built in for the MAX in '24, can you even give us a sense of what you are delivering to the Spirit? What you are assuming? I know we’ve heard kind of several commentary from Boeing about lower first half picking up second half, but where exactly are you guys and what are you embedding?

Yes, I hate to say a little bit of a moving target. We are seeing better things ramping up a little bit of Spirit and at Boeing, and now things are -- as from the reports on January, we feel that too. But we're probably speaking for Sumon here, we're probably in the 32, 34 range for 2024, I'd say. We would like to see it higher, but again, we have to -- I think this momentum is just going to push us forward, hopefully after we get through this FAA audit and rightly so. But we're being a little modest right now, but we certainly expect things to ramp up. The good news is, Mike, we have the capacity and we have the people. We just need yours.

And I'm showing no further questions. I would now like to turn the conference back to Steve Oswald for closing remarks.

Let me finish up here. Look, I just want to thank everybody for joining us today. Obviously, we had a very, very good year in 2023. I'm thrilled that we're able to break through our record lasts established in 2012, and we're marching towards our 2027 commitments, and we're building more engineered products, and we're driving more aftermarket and we're cleaning up our contract manufacturing and taking costs out of that and driving, hopefully, much better day once we get these two factories closed. I believe that's gonna be the case. Looking forward to a great year ahead. We again thank everybody for their support. And I want to again, thank our employees for all their hard work in 2023. Thank you.

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