Good day, and thank you for standing by. Welcome to the Third 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. I would now like to hand the conference over to your speaker today, Suman Mookerji, Vice President and Chief Financial Officer. Please go ahead.

Thank you, and welcome to Ducommun's 2024 Third Quarter Conference Call. With me today is Steve Oswald, Chairman, President and Chief Executive Officer. 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, among 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. The 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 Q3 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, and thanks, everyone, for joining us today for our third quarter conference call. Today, and as usual, I'll give an update of the current situation at the Company, after which Suman will review our financials in detail. Let me start off again on this quarterly call with Ducommun's Vision 2027 game plan for investors. The strategy and vision were 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, where we got excellent feedback. Since that time, Ducommuns management has been executing the Vision 2027 strategy by increasing the revenue percentage of engineered products and aftermarket content, consolidating its facility or rooftop footprint, continuing its targeted acquisition program, executing our offloading strategy with defense primes in high-growth segments of the defense budget, value-added pricing initiatives and by expanding content on key commercial aerospace platforms. All of us here as well as my fellow Board members continue to 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 Q3 2022 results are another great example of our strategy and initiatives working. Q3 was our second consecutive quarter of record revenue and gross margin and represents another very strong performance for DCO. Revenues exceeded $200 million for the first time ever, growing 2.6% over the prior year, and this quarter is our fifth consecutive quarter above $190 million in revenue. Strong year-over-year growth in our radar, electronic warfare and missile programs drove our military and space revenues to 6% growth over prior year. Defense business has now been over $100 million in revenue for the…

Thank you, Steve. As a reminder, please see the Company's Q3 10-Q and Q3 earnings release for a further description of information mentioned on today's call. As Steve discussed, our third 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. In addition, we also made good progress on our facility consolidation efforts during the quarter, which has benefited us in 2024 and will drive more meaningful synergies 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 third quarter results. Revenue for the third quarter of 2024 was $201.4 million versus $196.3 million for the third quarter of 2023. The year-over-year increase of 2.6% reflects growth in both commercial aerospace and military and space, highlighted by $6.6 million of growth across military and space platforms and $2.8 million of growth in our commercial aerospace platforms. We posted total gross profit of $52.7 million or 26.2% of revenue for the quarter versus $44.6 million or 22.7% of revenue in the prior period. We continue to provide adjusted gross margins as we have certain non-GAAP cost of sales items in the current and prior year period relating to inventory step-up amortization on our recent acquisitions, restructuring charges and the impact from the Guamas fire on our operations. On an adjusted basis, our gross margins were 26.5% in Q3 2024 versus 24.1% in Q3 2023. The improvement in gross margin was driven by our growing engineered product portfolio as well as favorable product mix in our manufacturing services businesses, strategic pricing initiatives, productivity improvements and restructuring savings. We continue to make progress working through…

Okay. Thanks, Suman. In closing, look, Q3, excellent quarter, a record in some cases of many highlights for the Company and our shareholders as we realize the gains we all expect from our Vision 2027 strategy, especially around margin expansion. It's working. We're not surprised, and the progress on gross and EBITDA margin expansion has especially been a highlight. We're also tracking well against the goals of 18% EBITDA margins and 25% or more of Engineered Products and aftermarket revenues for 2027. I could not be happier. Finally, with the BA strike now behind us, commercial bill rates heading higher, along with stronger defense activity, including FMS ahead. I feel great about the next few years for all of us. So thank you again for listening, and we'll turn it over for questions.

[Operator Instructions]. Our first question is going to come from the line of Mike Crawford with B. Riley Securities.

What is it that you're doing new for Northrop Grumman? And where else could you help them?

Yes. Well, look, we're -- again, highlight for me, highlight for the Company. We do a lot of the airborne surveillance, electronics. We do power packs. This whole Mesa program, which kind of comes every two years, which is a huge order for us is all Northrop, and we're sole source on that. So we'll continue to drive that business. So it's a lot of electronics. A lot of it's in our Huntsville operation in Arkansas, but we're doing other things as well. I'm actually two weeks from now, I'm going to be with their leadership out in Baltimore because we're looking for even bigger things ahead. So my point about bringing the whole thing up is that we've talked about this over the years about, okay, RTX is a huge customer for DCO, Steve, that's great. Where else going to be going for bigger scale of defense primes. And I think we're finally starting to crack the code at Northrop, and we love them as far as their partnership, and we do a lot of good things, I think, value-added for them.

Okay. Great. And then on the 787, you've been, I believe, delivering about $90,000 worth of content per aircraft. And where is that heading to now with the share shift that you've won?

Yes. I'm going to have -- I want to wait until the next call. I will tell you that the increase is going to be double digit. I don't want to go too far right now, but this is a major win for us. This is coming from a competitor. I'll have more detail in February, then I'll give you the actual shipset number. I don't want to get too ahead of ourselves right now, but everything is kind of done, done, but we just need to give a little more time and then we'll be ready.

Okay. One last for me. Just from these acquired Engineered Products and aftermarket product businesses, are there any new favorite or, I guess, conversely unruly children among that set of companies that you're now growing?

No, I wouldn't specifically highlight one over the other. We've had good performance across our engineered product portfolio.

That's fair.

Our next question is going to come from the line of Jason Gursky with Citi.

Just a quick question on capacity at the Company. It sounds like there's been an acceleration here, maybe potentially of some outsourcing, both commercial as well as defense. It sounds like you've got plenty of opportunities there. I'm just curious, how much more work can you all take on without the need to ramp up CapEx? And maybe just let's start with that.

Yes, it's a fair question. Why don't you then I'll jump in.

Sure. Thanks, Jason, for that question. So we do believe our structures business has a lot of capacity. MAX production rates are still pretty low versus the 57 we saw back in 2019. So we're not looking at any significant investments expected there in the near term. On the electronics side, the business is doing well. A lot of that is defense. And so we do expect that as the business continues to grow, we will continue to make expansion on the fringes at a number of our facilities, but those are not very capital-intensive expansions. And so we are maintaining kind of our outlook on CapEx spending to be in line with what we had said during our Vision 2027 strategy discussions, and it's going to be kind of in that $20 million range going forward for the next few years.

Jason, let me just jump in here. So also, we're not running heavy second, third shifts at some of these structural plants. We're -- I think we're in very good shape there. So we only -- we not only have the capital in place, but we have the time in the plant, right? So we feel good about where we are and where we're going without capital.

Okay. Great. Yes, that makes good sense. And then just on the M&A front, can you kind of describe the pipeline and the current environment there? I know you've assumed some additional acquisitions here over time. And I'm just kind of curious how that part of the Vision 2027 framework is shaping up for you.

And there is continuous activity on that front. I can tell you, we're super busy looking at things, and we have been for the most part this year. We're seeing even more, I would say, in the past few months. We've got to make the right selection, and we've got to make sure that it's the right fit for us. So we'll -- we're keeping at it. We think there is plenty of opportunity there and stay tuned in the coming few quarters, and we'll continue to have M&A activity.

Yes I think that's fair. I think we are seeing more, okay, deals. And obviously, Jason, we're -- as I say, we're kind of -- we're picky eaters. We've had a lot of success with the things we bought in the past. So we maybe look at things for environmental, other reasons. We just think it's not for us. So we're continuing on though. There are good news ahead for that.

Our next question is going to come from the line of Michael Ciarmoli with Truist Securities.

Good results. I guess either, Steve, just on the revenue guidance, now down at the lower end, I guess it implies a sequential step down into the fourth quarter, maybe 5% or so if you get to that low end. And then I guess I'm just thinking about what does your margin situation look like, try and calibrate us maybe for the fourth quarter and then obviously, with the Boeing strike and disruption and then kind of how we recover to that into '25. And it sounds like is the guide all related to the Boeing strike? I know you called out some of the program movement, but I thought that was kind of already in the plan.

Yes. So the Boeing piece is definitely a key driver, right? If you look at where we were expecting commercial aerospace build rates to be for the MAX coming into the year versus where they actually panned out and then even versus where things stood at the end of Q2 when we last spoke about our outlook for the year, things have deteriorated dramatically. And we have seen shipments to Spirit go to kind of the low 20s, and we are seeing shipments to Boeing come down to zero on the MAX in September. So that is certainly -- I mean, the MAX is still less than 10% of our revenues in the current year, but it is just under. And so it does -- while it doesn't have an outsized impact, and we've been able to stay broadly in the ballpark of where we had previously guided, there was a little bit of a haircut to accommodate for the MAX changes we have seen in the quarter.

And Mike, let me jump in a minute just on these programs. So look, the Tomahawk, for instance, is 17 different harnesses. And pretty much, as I've mentioned in the past, OEMs are busy with other things, and we've really had a fight to get this approved. We have final buy-in now. So that's going to come soon. But that's one of the reasons, too, in Q4, we just had some delays with OEMs. I mean it's not anything other than just trying to push this thing over the line, and we're very close on this. And we feel great about these transfers. So more coming. And margins should be good. Margins should be good.

Got it. I mean margins though in the fourth quarter, I mean, it sounds like structural if -- I mean, MAX at zero, it sounds like you're going to be dealing with some decrementals and excess overhead there. And then do we kind of just sort of snap back maybe to this level in that 14, 15-ish back in the first quarter?

No, great question, Mike. And while MAX shipment rates might be at zero, we will still see some revenue and production activity as required by ASC 606. So we're going to see some -- because we don't want to shut down the facility and restart again. So there's going to be some continuing activity. So it won't technically come down to zero, even though shipments are at zero. I would say margins are going to stay in the same ballpark. There's going to be maybe some minor impact of volume and product mix, but we're not expecting -- and again, we don't guide on margins, but there isn't any reason for us to believe that there's going to be any material change there.

Yes, Mike, we're in good shape. And that's one of the things about the Vision 2027 coming in with -- we're getting more and more engineered products and aftermarket, right? So it might take a little bit on the chin with the MAX, but we got other things coming in. So that's the beauty of this thing.

Got it. Got it. Helpful. And then just the last one. How much -- is there a lot left of pruning on the industrial sort of piece of the business? I mean it's kind of subscale now. I'm sure there's just some natural product adjacent, but anything else you're either in industrial or anywhere else you're looking to prune?

Yes. Let me jump on just because I looked at it the other day. So look, the only real game that we have in there is there's pretty much card business, which is legacy at Appleton and then a few other things we might do on our plastic extrusion. But our business year-over-year is down about 50%. So we're really winding down on this, which is what we want, right? Well, if it's a great business for us, we can make some cards and make 40% margin, okay, Jeremy, but the customer is generally going to move on at some point. So that's winding that down. We feel good about it.

[Operator Instructions]. There appears to be no further questions. And I would like to turn the conference back over to Chairman, President and CEO, Steve Oswald, for closing remarks.

Okay. Thank you very much, and thank you, everyone, for joining us today. Look, we feel great about the print. Obviously, we're thrilled that the strike is now over for BA in Seattle, and we look forward to many, many great years now, and we have full trust in Kelly and the team up there, and that's going to be a big lift for us. I mean our Airbus business was fantastic. And as I've talked about, it's really coming on now because they have internal operations. But we're way up on the A320 -- and that's what we want, right? So it's all coming together for DCO. And obviously, our Vision 2027, which is the most important thing, is working, and we're seeing that in our margins and our profit and our engineered products and aftermarket mix. So, all good news from here. I just want to wish you a great day and a safe day. Thank you.

This concludes today's conference call.