Good day, everyone. And thank you for standing by. Welcome to the Second Quarter 2024 Ducommun Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded. Now I will pass the call over to the Ducommun’s Senior Vice President and Chief Financial Officer, Suman Mookerji. Please go ahead.

Thank you. And welcome to Ducommun's 2024 second 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 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 others, the cyclicality of our end use market, the level of US 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 Q2 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 second quarter conference call. Today and as usual, I'll give an update on the current situation of the company, after which Suman will review our financials in detail. Let me first start off this quarterly call with Ducommun’s vision 2027 game plan for investors. Strategy and vision were developed coming out of the COVID pandemic over the summer and fall of 2022, unanimously approved by Ducommun Board in November of 2022, and then presented to investors the following month in New York where we got excellent feedback. Since that time, Ducommun’s has been executing the Vision 2027 strategy, by consolidating its facility or rooftop footprint, increasing the revenue percentage of engineered products and aftermarket content, continuing its targeted acquisition program, executing our offloading strategy with defense primes and high growth segments of the defense budget and by expanding content on key commercial aerospace platforms. All of us here have a high level of conviction in the Vision 2027 strategy and financial goals and believe the many catalysts ahead present a unique value creation opportunity for shareholders. The Q2 2024 results are also a very good example of our strategy working. Q2 was a record revenue and gross margin quarter follows up strong start we experienced in the first quarter. Revenues were $197 million, growing 5.2% over the prior year and this is our fourth consecutive quarter with revenues exceeding $190 million. Strong growth in our commercial aircraft business across Boeing, Airbus and Business Jet helped drive revenue during the quarter. We saw significant growth on the A220 program where we make the skins for the entire fuselage along with good growth in twin aisle platforms as well. Business Jet revenues were higher driven by work we do for…

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 reflected another period of strong performance with growth in both our commercial aerospace and military end markets, as well as continued improvement in our margins. We remain encouraged by the continued strength in domestic and global travel, which would support higher long term demand for aircraft as we work through some of the industry issues impacting single aisle production rates. In addition, we also made good progress on our facility consolidation efforts during the quarter, which will drive savings in 2025 and beyond. With all this, we feel like 2024 is showing good momentum that will continue to drive our performance towards our Vision 2027 goals. Now turning to our second quarter results. Revenue for the second quarter of 2024 was $197 million versus $187.3 million for the second quarter of 2023. The year-over-year increase of 5.2% reflects growth in both commercial aerospace and military and space, highlighted by $9.9 million of growth across our commercial aerospace platform and $3.2 million of growth in our military and space platform. We posted total gross profit of $51.2 million or 26% of revenue for the quarter versus $40.1 million or 21.4% 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 26.6% in Q2 2024 versus 23.1% in Q2 2023. The improvement in gross margin was driven by our growing…

Okay. Thanks, Suman. Just in closing, Q2 was an excellent quarter and a record in some cases with many highlights for the company and our shareholders. We start to realize some of the gains we all expect for the Vision 2027, especially around margin expansion. Our first half position us well to deliver strong performance in 2022 despite some of the current constraints. The progress on gross and EBITDA margin expansion has been excellent. We're not surprised and feel right on schedule. In addition, on two key tenets of our 2027 game plan, we're tracking well against the goals of 18% EBITDA margins and 25% or more of engineered product and aftermarket revenues. With commercial aerospace build ramps still ahead of us and the benefits from our facility consolidation expected to kick in starting in 2025, I'm excited about what lies ahead for us at Ducommun and our shareholders in the years ahead. Stay tuned. Okay. With that, let's please go to questions.

Thank you. One moment for our first question. And it comes from the line of Jason Gursky with Citi.

Steve, maybe start with you and talk a little bit about the pipeline of new opportunities, and maybe just kind of give us a flavor of how things have evolved year-to-date starting at the beginning of the year where you are today and what you see in the pipeline. I'm just curious if anything kind of new and interesting has popped up for you here over the last six, seven months. And when you look out over the next couple of years, what you think the pipeline conversion might look like and book-to-bills, just kind of general demand flavor as well?

So first, let me just tackle commercial aerospace. There's -- I talked about the skins and that's though not a huge number, starting next year, about $3 million or $4 million. I mean, we're only doing less than 10% of the fuselage for the MAX. We do 100% of the fuselage for the A220. So we can do it, right? We have the capacity. We have the machine. So that's something in the pipeline we're very, very excited about. We're also -- and just to kind of disclose it today, we're also working on opportunities more on the commercial aerospace side and specifically around share shift from some of our competitors and we'll get into it today. But we have some nice things happening there. We're going to pick up. I can’t disclose this. We're going to pick up also on the 787, a good amount of business starting in January 2025. And the 787 gets to 5 or 10, that's real money for DCO. So on that side, it's good. We just met with Airbus at the Air Show. We're in a very good position with Airbus. They're going on the way up and we're going to go on the way up with them. So I think on the commercial side, it's all looking very positive and there'll be more news coming. On the defense side, we certainly work on sort of the hypersonic and the other sort of things that we probably can't discuss on the call too much. But I'll just give you one example. This offloading program has been great for us. We're really getting heavy into radar. We make one card so far on the SPY-6 and here today, it's been over $5 million for one card. So we're going to bring on another card next year. So we've got some very nice things happening in defense, not only organically but obviously with share shift as well. And we just met with Raytheon at the Air Show and had a great meeting. And the Tomahawks are going to go to Guaymas, which is going to be a great boost for us from where we are now in Berryville, that's a major program. We've had that since the 80s. Right now, obviously, we built all the buffer to move it. But we have some wonderful margin expansion happening there as well as we go to Guaymas and the TOW. So the TOW is also coming back. We talked about that already in my remarks coming back midyear. We have already have the PO for that in Guaymas. So both on the commercial and defense side, looking good to very good. And then also obviously the build rates, which I think are going to go up eventually, that's going to be some nice tailwind as well.

And then just a quick follow-up. Suman, you mentioned maybe some additional liquidity or capacity, and I think you mentioned M&A on the same sentence. So I'm just kind of curious to get an update just on the pipeline of potential M&A and have you further opened the aperture on potentially doing something larger where we'd be bringing in more revenue than what you had targeted for Vision 2027?

So we continue to look at a number of opportunities. I would say that in terms of us being able to meet and exceed the target we set forth in Vision 2027, which is a $75 million placeholder for revenue from acquisitions, we feel very good about being able to meet and exceed that. So I would agree. Are we looking to do something bigger than or something more transformational at this time? No, we're looking to continue our strategy of doing these tuck in acquisitions of niche product lines in kind of a more manageable size range and be prudent with our leverage at this time. So we aren't looking to change the aperture on size of deals. But we feel good about being able to exceed the Vision 2027 target for acquisition [revenue].

Our next question comes from the line of Mike Crawford with B. Riley Securities.

So Suman, you benefit from absorption as you built some buffered stock now. Can you just walk us through how margins are affected by the ramp up at Guaymas, and as you work through this buffer that you've built up and get into a more normalized cadence?

We did have a significant improvement in our structures segment margins on a sequential quarter basis. And to the point you just made, it was driven to a large extent by Monrovia having better absorptions. Actually, Monrovia had significantly lower revenues in Q1 versus Q4 of last year and Q1 of 2023. So we saw a very low revenue base kind of trying to handle higher fixed cost base in Q1, which led to -- and higher onetime costs related to the transition in Monrovia in Q1. We had lower costs, we had doubled the revenue in Monrovia as we built our buffer stock and look to close out operations. We had doubled the revenue in Q2 versus Q1 in that Monrovia facility. That helped with absorption, again, to the point you made, right. And we also had some slightly better mix. So we feel like the improvement that we're seeing in that structure segment margin in Q2, which is in line with where structures margins have been historically, is sustainable, if that's kind of where you're getting to.

And just related, you're getting near the end of this, I guess, second restructuring program since you guys joined the company and put it on its current trajectory. But I know there's $11 million to $13 million cost savings target, but I imagine a chunk of that has already been realized.

That is correct. So I would say that from our Berryville and Joplin facility, we are right now tracking at a run rate of I would say, $2 million to $3 million of savings annually. So an annual run rate of $2 million to $3 million, I would say, is where we are right now from the shutdown of Berryville. Of course that will ramp-up later in 2025 when we actually start production of some of those product lines in Guaymas, Mexico. So that hasn't started yet.

I wouldn't say a good chunk, Mike. I would say it's -- I think two to three is fair. There's a lot more coming.

[Operator Instructions] Our next question is from Michael Ciarmoli with Truist Securities.

Steve or Suman, the buffer stock, I think coupling that with maybe, I think, you said you're building ahead right now. How should we sort of calibrate ourselves just on the revenue? I think you said 3Q would be down a little bit. But do we have to go through an unwind period here or as we look out over the second half of the year, even into early '25? Just depend -- I mean, I don't think we have a crystal ball with Boeing's rates or Airbus's for sure. But how should we think about maybe the impact of the build ahead and buffer on revenues?

So we -- during Q2, we had about, I would say, between the buffer build and the build ahead, somewhere between $5 million to $6 million in revenue that you could say was pulled ahead from Q3 and Q4. And so that's kind of how I would think about how Q3 comes out in line with what Steve said a little earlier, Q3 being flattish on a year-over-year basis and then seeing improvement in Q4. So that kind of, all in all, we come out at that mid single digit guidance for the full year.

Mike, I think that's the right way to think about it. I think overall it's light, the impact is light. So it's not anything I'm very concerned about. But just for everyone on the call, I mean, we're little -- Parsons is a big manufacturer for both Spirit and for BA. And we just don't want to have to layoff 40 people and then four months later hire them again.

Right. Yes, of course.

So there's a little -- there's some retention -- employee retention in there that I think investors, I think, hopefully, will agree it's smart.

And then just on the aerospace, I mean, I know we can kind of see it in our models. You've got the slide out there. Highest quarterly revenue rate since 3Q '19. Is there any way to measure that on a same store sales basis? I mean, you've obviously had some acquisitions in there. You've picked up some new programs like the A220. But just knowing that MAX had been one of the biggest programs, just trying to get a sense as to -- if I were looking at that on same store sales versus that 3Q, how much runway do you still have? Because I mean, we were still well below prior peak production rates here.

I think we have a lot. I think when you go back that long, I mean, if you think about us now, it's a lot more defense business than we had back then. So that's one thing to think about. And also -- and which is extremely important, we have a good deal more engineered product and aftermarket. So -- and that could also fall into commercial, right, Mike? But we're much more -- we're certainly different back then. And so you're right that we have the -- I think the right kind of base and then we have good balance. And I think that we're very active, I know it's Kelly's first day. So we're going to cheer for him. And we certainly feel like things are going to get better. And we're going to ride the ramp up and I think that's going to be great for our revenue.

Just one thing I’ll add there, Mike, as you help -- as you think about modeling our commercial aerospace revenues relative to where we were in 2019. A little over half of our revenues come from -- our commercial aerospace revenues comes specifically from Boeing and Airbus platforms. So you couldn’t apply build rates directly to our entire commercial aerospace revenue. There are other elements including business jets, commercial helicopters and other in flight entertainment stuff and things that we do. So if you were looking really at build rates across Boeing and Airbus platforms, a little more than half is [Multiple Speakers] that will grow higher. But right now, it's that much.

And then just the last one. Any thoughts, Suman, on free cash generation? I know you kind of mentioned that inventory being down sequentially, but just I know you've got the guidance out there on the top line, talked a little bit about the margins and where we should be. But how should we think about cash generation second half of the year here and into 2025?

Yes, that's an important focus area for us, Mike, as a company. And Q2, as you noted, was impacted by build up in contract assets as we did some of these buffer builds. We did some amount of build ahead on the commercial aerospace platforms. We do expect that Q4 will be really strong for us in terms of cash flow to end out the year on a much more positive note. And that is a priority for us. I mean, I would expect Q3 to be marginally better but not significantly but with a real ramp up in cash flow towards the end of the year.

Our next question is from the line of Noah Poponak with Goldman Sachs.

Suman, maybe just picking up there. How should we think about where free cash to net income conversion or EBITDA conversion go over the medium term if you kind of think about more normal times where you're not having to build ahead and you don't have so much uncertainty at the customers, and things are kind of coming along a little bit more visibly?

In the longer run, we do want to get our free cash flow closer to the net income number. We're not going to get that here in the next few quarters or next year as we continue to have significant amount of inventory and contract assets on the balance sheet. And supply chain pressures, while these are still significant, we continue to have close to two years of lead time on inventory. We have fluctuations in build rates, which often means we're stuck with raw material inventory. We've ordered two years in advance sitting on our balance sheet. So as those supply chain pressures ease, there is more predictability in production rates. We will be able to continue to wind down our strategic inventory that we have been holding for the past few years. And it will get us, over the next couple of years, closer to that target of getting our free cash flow in line with our net income.

I also think that some of the restructuring is going to help. I mean, there's other things -- bigger rocks on the market and troubled companies and strategic buying and everything, but it also is going to help us on the manufacturing services side to have a smaller footprint and I think better management over our inventory and our processes.

On the margins -- the segment margins, I guess, would it be possible to just speak to how you expect each segment's margin in the second half to kind of directionally compare to the first half? Just electronic systems has had this pretty sizable increase year-over-year. Structurally, you talked about the difference between 1Q and 2Q but that's a pretty big difference. How do each of those shape up second half versus first half?

So we don't -- why we don't give guidance at the segment level for margins, I can give you some comments which are directionally help you. So if you look at the -- our electronics margins, they have jumped in Q1 of this year and they've kind of stayed in the ballpark here in Q2. And that was driven by a shift in the mix within our electronic systems portfolio towards more engineered product revenue and growth in the profitability, as well as those engineered product revenues on a year-over-year basis. So that was a significant driver for the electronics segment margins. And we, I would say, would expect margins to stay in the ballpark of where you're seeing them here in Q2 for the rest of the year, right? There is always a range of, I would say, 50 basis points to 75 basis points within which they may fluctuate based on product mix in a particular quarter, but they're in that ballpark. On the structures side, you saw margins this quarter get back to historical levels. We had an unusual situation with Monrovia, which had unusually low revenue and other one-time costs as we were shutting down the facility in Q1, which subdued the overall structure segment margins. That got back to normal here in Q2, helped the structures business improve. We also had some better mix in there, which helped, in Q2, get the structures margins up. Now with Monrovia costs being further cut down in Q3, and as Steve mentioned, we have less than 20 people now in that facility, we do believe that we will have similar levels of structures margins for the second half. And of course, margins will continue to improve in 2025 as the restructuring savings start to kick-in and other initiatives take hold. So long term trajectory, margins improve. Second half, I would say, margins are expected to stay in the same ballpark. Q2 margins, I would say, probably have about 75 basis points of favorable mix in them, just overall at the DCO level. But that's typical for us and we expect to stay in that range.

We're on hold serve for the most part.

Last one I had was just your defense revenue had a bit of a, I guess, transition with F-18 and the timing of missile, I think, was how you described it. And it looks like maybe you've now lapped the former and then have had some orders on the latter. Should we expect your defense revenues to kind of be stable going forward here or can the growth rate accelerate?

We're probably flattish here in the rest of 2024 as we continue to face tough compares on the F-18, in particular, as well as the TOW missile program. But with TOW coming back in 2025 as well as other programs, such as the SPY-6 ramping up in 2025, we should have better times in defense starting next year.

And we better next year, for sure.

Thank you. And there appears to be no further questions. I will turn the call back to Stephen Oswald for closing remarks.

Okay, thank you very much. And just wanted to thank everyone for joining us. Obviously, we're very enthusiastic about our numbers, about our performance as we close the second quarter. We feel great about where we are and we look forward to continuing to build a performance story as we move to our Vision 2027 financial goals. So again, we appreciate all the support and wish you a good day. Thank you.

And thank you all for participating in today's conference. You may now disconnect.