Good day, and thank you for standing by. Welcome to the First Quarter 2024 Ducommun 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 your first speaker today, Suman Mookerji, Chief Financial Officer. Please go ahead.

Thank you, and welcome to Ducommun's 2024 First Quarter Conference Call. With me today is Steve Oswald, Chairman, President and CEO. 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 conditions, results of operations and financial projections are forward-looking statements under the 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 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 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, legal and regulatory risks, the cost of expansion and acquisitions, competition, economic and geopolitical developments, including supply chain issues and rising or high interest rates, 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. 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 to non-GAAP measures referenced on this call. We filed our Q1 2024 quarterly report on Form 10-Q 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. Thank you, Suman. Thanks, everyone, for joining us today for our first quarter conference call. Today, and as usual, I will give an update on the current situation of the company. Afterwards, Suman will review our financials in detail. Let me start off with an update on our continued progress towards Vision 2027. For background, this vision and strategy was developed coming out of the COVID pandemic over the summer and fall of 2022. Unanimously approved by the Ducommun Board in November 2022, and then presented to investors the following month in New York. We had excellent feedback. Since that time, the Ducommun management has been executing the Vision 2027 strategy by consolidating its facility footprint, continuing its targeted acquisition program, increasing the revenue proportion of engineered product and aftermarket content, executing our offloading strategy with defense primes and high-growth segments of the defense budget and by expanding content on key commercial aerospace platforms. We all have conviction in the Vision 2027 goals and strategy and believe the near-term and midterm catalysts along with strong results ahead for DCO, present a unique long-term value creation opportunity for shareholders. The Q1 2024 results were a very good example of the strategy at work. Q1 was an outstanding quarter and a great start to the year for Ducommun. Revenues exceeded $190 million for the third consecutive quarter and $190.8 million, growing 5.3% over the prior year. Strong growth in our commercial aircraft businesses across both Boeing and Airbus, along with our rotorcraft business, helped drive revenue during the quarter. Recovery on the 787 was notable, with revenues more than doubling over the prior year period as well as strong growth on the A320 platform where we make the skins for the entire fuselage. Overall, commercial aerospace with Airbus and Boeing and…

Thank you, Steve. As a reminder, please see the company's Q1 10-Q 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 strong performance. Despite industry headwinds, 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 record backlog we achieved in the first quarter, especially in our military and space end user segment. With all this, we feel like we are beginning 2024 with good momentum that will continue to drive our performance. Now turning to our first quarter results. Revenue for the first quarter of 2024 was $190.8 million versus $181.2 million for the first quarter of 2023. The year-over-year increase of 5.3% reflects growth in all 3 of our end user segments, highlighted by $8.1 million of growth across our commercial aerospace platforms and $1.3 million of growth in our military and space platforms. We posted total gross profit of $46.9 million or 24.6% of revenue for the quarter versus $36.8 million or 20.3% of revenue in the prior year period. We continue to provide adjusted gross margins as we have certain non-GAAP cost of sales items in the current and prior period relating to inventory step-up amortization on our recent acquisitions, restructuring charges and the impact from the Guaymas fire on our operations. On an adjusted basis, our gross margins were 25% in Q1 2024 versus 21.1% in Q1 2023. The improvement in gross margin was driven by our growing engineered products portfolio, strategic pricing initiatives, productivity improvements and some…

Okay. Thanks, Suman. In closing, Q1 was an excellent quarter, a record in some cases, with many highlights for the company and our shareholders. The strong start to the year with solid revenue and earnings growth certainly strengthens our path to delivering on the goals we set out in the Vision 2027. 2024 is also our 175th year of continuous operation, a great achievement, and we'll be recognizing that through the year. I did the math recently and the door at the company has been continuously open for over 43,000 business days, a long time in a young country like the United States. What a great story with a very bright future ahead for the company, our shareholders and all other stakeholders. Thank you for listening. Let's now open up for questions.

[Operator Instructions] Our first question comes from the line of Mike Crawford of B. Riley Securities.

Steve, what are some of the main pressure points you're trying to avoid with the strategic inventory buys, like would it be titanium, which is becoming a problem for some? What else do you trying to get.

Yes. Look, titanium is obviously a big one. I mean as the widebody A350 and these other platforms start going up and obviously with the situation in Russia, it's something that we've been very proactive over the last couple of years and are in really good shape with our titanium. The other thing we did on strategic really around the card business. I know there's less drama now than there was in the past. But we did go out and buy ahead on certain things for certain cards, obviously, it's an important business for us just getting even more important. So I'd say those two, I think we're in good shape. We're not going to plan on doing as long as things -- I mean, titanium aside, on things like for the circuit cards, we'll probably just continue to take it day by day, but those are the 2 reports I have.

Okay. Excellent. And then I mean you did call out the F-18 as a legacy platform is in decline. One that might eventually get that way, to be the Black Hawk, although that's going up for you now. What are the -- maybe some of the other key platforms that are growing for you? And conversely, maybe phasing out a little bit just given the transition?

Sure. Sure. I'd say, look, you are spot on, the F-18 is the one, right? So we all know about the F-18, we know what's happening in St. Louis. We are going to see, I think, still good business in depot maintenance and other things. So that's still going to be an okay program for us. That's kind of the biggest one. I talked about the TOW missile. Again, these things are timing related. So we're going to see the TOW come back. We're going to start shipping again we plan in 2025. I mean, we -- as far as on the positive side, I mean, we couldn't be happier with the Black Hawk business. I mean it's -- even though I know there's lots of discussion and everything, that business is going great for us, the Apache. I also mention that we're just starting to move higher and higher in the Seahawk at Sikorsky as well. So our rotary business was terrific. Despite the F-18, we still had great volume in the F-35 and some other programs. And -- so we're feeling very good -- especially with the backlog, Mike, and it's getting the second card.

With some of the other missile programs, if I may add, are also giving us strength, including the MIRV missile, the standard missile, and as Steve previously pointed out, the SPY-6 radar and next-generation jammer. So missiles and radar programs are helping offset the decline in the legacy programs.

As a transition timing.

Okay. Just one final one for me, kind of related to the rotary platform. So -- and last, it's now just over a year since you acquired BLR Aerospace. And I know one of the goals there was to maybe try to get some of their unique structures into military aircraft. Is there some progress there?

We're working on it right now, and Mike just spot on, on that. Our bigger opportunity is really with the Black Hawk, and that's really through the National Guard. So we have a lot of things, I think, that these things obviously take time, right? But we're excited. We think that also with some of the other news about switching out the engine on that, I think, will be -- there's more opportunity for that. So that's -- stay tuned on that.

Our next question comes from the line of Michael Ciarmoli of Truist Securities.

Nice results. Maybe kind of a two-part, I guess, Steve or Suman, just the margins, really strong in the ES segment. You commented on pricing, and I know you threw out the value based, and I think that's something we hear pretty often now. Anything you guys are doing differently with pricing outside of just taking advantage of the whole inflationary environment? And then -- just how do we think about these Electronic Systems margins going forward? I think that was a record level. I'd hate to kind of say, okay, let's extrapolate this. It sounded like you got some mix in there as well. But any color on both of those items?

Yes, Mike, a great question. We're really happy with the Electronic Systems margins this quarter. As you noted, pricing is a key factor. And certainly, as you've seen across the aftermarket in the industry, pricing has been strong, and we have seen the same. Kind of beyond that, there are a couple of other things at play here. Kind of two themes that are key drivers of our Vision 2027 strategy. And one is growing the engineered products portfolio. And as that continues to grow as a percentage of the revenue in the Engineered Electronic Systems business, the drop-through is really good. So we've had good growth in engineered product businesses. And the second is the consolidation of footprint strategy, right? And that has also started kicking in this quarter with programs getting fully transitioned from our Berryville Performance Center to our Joplin Performance Center and us taking out a significant amount of cost early in the quarter out of the Berryville facility, which is now has a skeleton crew and only one active program, those other programs are now being produced out of Joplin without much addition to overhead and SG&A in that business. So that's really driving the margins, those two factors. And outside of some minor impacts of product mix, I think the general trend is sustainable. And I mean, the current margins we are seeing within a narrow band is sustainable going forward.

Okay. Any way to quantify what you saw from the run rate consolidation savings. I know you said 11% to 13% annualized. So it sounds like you got some -- any way to quantify that?

Still in the early stages of that. It's over $1 million during the current quarter.

Yes. I think it's a good story. I mean, look, we're thrilled with the number, right? You're spot on about the 18%. So we're excited about that. We think that, again, as we move into the second year of Vision 2027, these things are coming together, and we're obviously driving value pricing across the board, right? So that's going to help.

Got it. And then I guess, conversely, on structural systems, it sounds like you're just dealing with overhead under-absorption issues as you transition. And it sounds like, I mean, should we expect that margin rate to persist next 2 quarters? And I guess it doesn't sound like anything really out of the normal except for just the kind of wind-down drag.

Yes. I mean our Monrovia Performance Center, which is being wind down, revenues were almost 1/3 of what they were on a year-over-year quarter basis, almost half on a sequential quarter basis. So that's naturally going to create a significant amount of drag on margins. And as you can imagine, in the facility being wind down, it's not that easy, right? So we do expect that to linger for the next 1 to 2 quarters, but gradually improve. The trend is going to be improvement. It's not -- and then really the benefits of the complete closure will only kick in, in 2025 when we not only shut down the facility in Monrovia here in 2024, but then start actively producing some of those products out of Guaymas in 2025.

Yes. And Mike, just for everybody on the call too, Monrovia is very close to Los Angeles. It's in that area. And it's a size of an aircraft carrier, okay? So that's not a small plant, all right? So it's been around for a long time, too. So good things ahead there. I'm very -- we're at the 3-yard line here, so in Monrovia facility.

Got it. Last one for me, Stephen, I don't want to put words in your mouth or numbers here. But I think you started the defense offloading. I don't know if that was really in earnest in late '20 or '21. But if you're thinking $135 million by '25. I mean I could go back and take your '20 defense revenue run rate, and I could get something north of $550 million by '25. Obviously, you're losing some work in there, F-18, I'm sure there are some other programs. But how should we think about this defense growth trajectory. Again, it might not be apples-to-apples the way I'm thinking about it, but I can come up with some pretty sharp growth there.

Yes. It's -- you're right. It's some -- like even I'm looking at the numbers here as we speak here, like a company like GA, right? So we've had a lot of -- a couple of really good years with GA. But as you know, that whole market has been disruptive for them because of these lower cost UAVs and everything, right? So our volume is down on there. The F-18 we talk about some other stuff. But a lot of what we're seeing, we're seeing a lot of repeat orders, but we're getting like the next-generation jammer that's coming out of RTX and we are getting at Appleton. So we consider that outlook right? Consider that -- I mean -- so even though you might say, well, no, they had it. They went to us and said, we love what you guys are doing, take it, same thing with the SPY-6. So I think it's not apples-to-apples, but I think overall, the story, I think, holds pretty well. And that's what we want. We want to -- going to, as you know, there's a lot of new programs out there, and these things delay and you know all that, but we want the stuff that's got a long, long life like the SPY-6, right? It's got to be in the fleet forever. And we want that current business, and that's what we're doing. I mean, as well as the new stuff ones, right? That's as well. So I think more to come on that, okay, as well we get in '26 and 2027, but let's hold it now at $135 million.

Our next question comes from the line of Ken Herbert of RBC Capital Markets.

Steve, when we look at the gross margins in the first quarter, is there any reason that they don't -- that they would step down in the second quarter? Or is this gross margin run rate now something we should model moving forward?

I'll take a first stab with that, Ken. And we're really happy with the gross margins in the first quarter. As I said, on the electronics side, driven by Engineered Products, restructuring savings, and that really were the key drivers. If you look at the overall company, they were partially offset by the headwinds we had in Monrovia in the structured business. These outside of I would say, marginal benefits from product mix during the quarter. These gross margins within a fairly narrow band are sustainable. And I mean, if you were to look at our adjusted gross margin in Q4, it was 23.2% of last year. And it's now 25%. So it's -- if you look at year-over-year, it's a big difference, and especially with some of the adjustments, but I think we've been able to take more of the adjustments into the GAAP gross margin, which is a really good thing. And I would say we feel really good about these margins going forward within the narrow range.

Great. And can you level set us on your expected, I guess, either MAX deliveries this year or sort of a monthly or quarterly production rate because it sounds like there's maybe a step down sequentially from the first to the second to the third quarter, but maybe an anticipated uptick in the back of the year. Can you maybe sort of comment on where you are on that program and how we should think about the cadence for the year on the MAX?

Yes. So Ken, yes, good question. So look, we had a fairly good first quarter because there was a lot of things still happening, right, until this terrible thing happened, obviously, in January, then lots of things came after that. So Q1 was pretty good. April was a bit light. So we're going to anticipate a little bit lighter action on it. Because remember, we're both feeding Spirit, which is a major customer as well as Boeing OEM, right? So BCA. Right now, we're thinking maybe it's in the mid-20s, lower to mid-20s for the second quarter. We'll have to figure out the third when we get there, right, based on their progress. But we see it coming back. The nice thing is, too, for our shareholders and for all of us. If you were working real hard with -- and I don't want to can't go making the announcement right now. We're working on gaining share on the MAX, okay, as well as the A320. So we're working on those types of things. So I think, Ken, we're going to get a little shallower, maybe mid-20s. Certainly, it's been a little lighter in April, but nothing we're concerned. We want to be transparent, but we have the 787, which I know has its own problems, but we're seeing a nice bounce back there. And we're happy with our Airbus business as well as GS.

Great. And just finally, Steve, where would you see the opportunity on the A320 or even the A220 to take share? And what could be the timing around some of the share gains with Airbus on the narrowbody portfolio?

Yes. We -- again, we're looking probably within 12 months. So we're working on something right now. We'll see how it goes, right? Because these things are -- these things take time. But we think within 12 months, we might have something going again on the A320. And the A320, we could discontinue to -- or continue to grow. As you know, that's a major program for us and good things ahead there.

[Operator Instructions] Our next question comes from the line of Jason Gursky of Citi.

Steve, I wanted to ask about a little bit more about Vision 2027. And in particular, the M&A component, of the Vision there because you've got some inorganic growth, I think you'd like to get done. So yes, the question -- I guess this is maybe a bit of a 2-part question. We've got a company that recently went public that's now got access to some more money that claims that it's going to go out and be heavily involved in buying up proprietary product type companies. So I'm just kind of curious what the competitive environment looks like these days for assets. So I guess, a, the pipeline, what's the pipeline looking like? What's the competitive environment look like? And then I also want to just kind of get your take on the size and scale of things that you guys would be willing to chew off. And maybe talk a little bit about the dynamic that's going on there with one of your big customers in Spirit and the Airbus work because that seems like if Boeing buys Spirit, that Airbus work has got to go somewhere. And just kind of curious what kind of appetite you guys might all have for taking on some of that work, all in the context of your M&A strategy.

Good to be with you. On the first, just on our Vision 2027 and the acquisition piece, we have a placeholder for $75 million, right? So we're a bit modest on that because obviously, it's only 2024. We got several years ahead of us. So we feel good about that. And again, it's a bit modest. But we're -- right now, as we move forward in time, we've really been happy with what we're doing in acquisitions. I think it's been a real great thing for shareholders and for the company. And so -- but we're looking more where we can do some maybe look at acquisitions where they can, again, help our current engineered product portfolio. We're committed to that to build the business on that side. I think that's smart and it's a winning formula for our shareholders. I think $75 million again is low. I think we're going to do more bolt-ons. But again, if we can find something where there can be some consolidation, we're going to do that as well. So I think for the next couple of years, that's sort of where we sit. As far as Spirit, just let you know for Airbus, we ship directly into Toulouse for A320. So we're really just working with them directly. We don't really do anything for Airbus, for Spirit. Spirit is much more, I think, in the A350 world, which we're not right now. So we'd be open to it. I mean, I think it's -- as I read the notes this morning on some of the situations in the Europe last night, it's going to be difficult. But we're there. I mean we have the capacity that could be an upside for us. We have nothing to report on it, but we certainly think we could help out. And Airbus, again, for all the business we do right now is a first tier, we do everything with Toulouse direct.

Okay. Great. So the $75 million placeholder looks like that through the '27 time frame, you think is going to be pretty achievable. I'm just kind of curious, though, what does the pipeline look like today? What do you think the cadence of -- or potential timing of those acquisitions might be? Is this going to be near term, more back-end weighted towards 2027? And just kind of what the competitive environment looks like, and pricing on the kinds of assets that you might be chasing?

Let me jump in, Suman can say a few things, okay? So we're always in the market. So I'll just say that, all right? So we're looking at things. We have, I think, an excellent team here led by Suman on M&A. If something comes up this year, we're going to do our cadences, so that obviously slowed down from COVID for everybody. But we'd like to do at least one, if not two a year. This -- again, this year, we just did BLR back in last May, so -- or last April and May. So we've had a little bit of time now. So we're always in the market. It's competitive. I mean I know you follow the companies and many of them, and it's a crowded lobby. But I will tell you that for what we want and what we've done, I mean, we've got a really good hit rate. We've had a lot of success for the things we've gone after, not every single one, but it's up there. So we're excited about building that part of the business. It's a big -- a big thing for me when I came in 2017, and so I'll let Suman, do you want to say anything else on it?

Yes. I mean we've been actively looking at businesses. I would say there's been a pickup in deal flow in late Q1 and coming into Q2, we're seeing more assets come to market. A competitive environment, I wouldn't say necessarily has dramatically changed. The company you referenced that went public recently has been around and looking for similar assets for over 10 years. So we've suddenly come across them in the past. So I don't see that dynamic changing now. . So we will continue to be aggressive for businesses that we really like and where we really think we can drive a lot of incremental value for our shareholders. So we will continue to be aggressive with those opportunities. And as we have demonstrated in the past 5 years, we can, despite the competitive environment, win assets at a price at which we can still drive additional benefit and ROI for our shareholders. So we feel good about being able to continue doing that. And timing, as Steve said, it's difficult to predict. There's active work ongoing on several opportunities, but timing is always difficult to predict on M&A.

And Jason, just to chime in here. We're also very excited about organic growth. Okay, we really want to get, hopefully, the MAX will find its way by the end of the year. I mean if they're at 50, at some point in the future, a drop through and everything else, we feel very good about our current operation, too, delivering.

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

Okay. Thank you very much, and thanks for joining us today. Obviously, we're -- we couldn't be happier with our Q1. I want to thank my team, all the people working hard every day to come in and with our relentless approach to things. That's what we do here. And we are very encouraged as we grow up, come out of March to have a, I think, a super year for everybody, for our shareholders and for our company and for all the other stakeholders involved with us. So again, thanks for joining us. Have a great and safe day. Thank you.

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