Good day and thank you for standing by. Welcome to the Q1 2025 Ducommun Earnings Conference Call. At this time, all participants are in a listen-only mode. [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, Mr. Suman Mookerji, please go ahead.

Thank you, and welcome to Ducommun’s 2025 first 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 as regulatory conditions, results of operations, and financial projections including those under our Vision 2027 game plan for investors 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 defer 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 and 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, our ability to obtain additional financing and service, existing debt to fund capital expenditures, and meet our working capital needs. Legal and regulatory risks, including pending litigation matters, the cost of expansion, consolidation and acquisitions, competition, economic and geopolitical developments including supply chain issues, international trade restrictions, the impact of tariffs 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 2025 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. Thanks, Suman, and thanks, everyone, for joining us today for our first quarter conference call. Today, and as usual, I will give an update of the current situation of the company. Afterwards, 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 as we start our third year in 2025. 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, then presented to investors the following month in New York, where we got excellent feedback. Since that time, Ducommun's management has been executing the Vision 2027 strategy. This includes increasing the revenue percentage of engineered product and aftermarket content, which finished at 23% for 2024, up from 19% in 2023 consolidating our rooftop footprint and contract manufacturing continuing the targeted acquisition program, executing our offloading strategy with defense primes and high growth segments of the defense budget, driving value added pricing and expanded 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 unique value creation opportunity for shareholders. The Q1 2025 results are another example of our strategy and initiatives working. Just look at the margin expansion performance and much more to come this year and in 2026. Despite the challenges discussed on our prior earnings call, I'm happy to report Q1 sales of $194.1 million which was 1.7% over prior year, making this quarter our 16th consecutive quarter with year-over-year growth in revenue. Team achieved this despite the headwinds in commercial aerospace bill rates, destocking…

Thank you, Steve. As a reminder, please see the company's 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 in another period of solid performance with strong growth in our military and markets. We also continue to make good progress on our facility consolidation projects, which are nearing completion and will drive further synergies in late 2025 and into 2026, as we close out the recertification of the various product lines as the receiving facilities over the next few months. As Steve highlighted earlier, we also made great progress in continuing to build up our engineered product portfolio with those revenues now contributing 23% to our mix. These actions along with our strategic pricing initiatives for continued margin expansion in Q1 and is keeping us on pace to achieve our Vision 2027 goals. Now, turning to our first quarter, results, revenue for the first quarter of 2025 was $194.1 million versus $190.8 million for the first quarter of 2024. The year-over-year increase of 1.7% reflects strong growth in military and space of 15%, driven by increases in electronic warfare, missiles, and radar systems. This was partially offset by weakness in our commercial aerospace business, mainly driven by lower revenues on the 737 MAX. We posted total gross profit of $51.6 million or 26.6% of revenue for the quarter versus $46.9 million or 24.6% of revenue in the prior year period. We continue to provide adjusted gross margins as we had certain non-GAAP cost of sales items in the prior year period relating to inventory step-up amortization on our acquisitions and restructuring charges. On an adjusted basis, our gross margins were 26.6% in Q1 2025 versus 25% in Q1 2024. The improvement in gross margins was driven…

Okay, thanks Suman. In closing, Q1 was an excellent start to the year despite the anticipated headwind from commercial aerospace. As mentioned, several times we achieved another record for gross margin percentage at 26.6% and just keep in mind, a few years ago we had a run rate of roughly 20% for an entire year, and that was back in 2022, so we've come a long way in two years and could not be happy about that. Adjusted EBITDA percentage was great and a record as well at 15.9% of sales. We're also very well-positioned to meet and exceed our Vision 2027 target of 25% plus of engineered product revenues with 2021 -- 2025 Q1 coming in at 23% and we're getting this as high as it is our no one strategic focus. Finally, with commercial bill rates heading higher in the second half, getting past destocking, along with stronger defense activity, I'm very optimistic about what lies ahead in the next few years for DCO, its shareholders and other stakeholders. Okay, let's go to questions please. Thank you.

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

Thank you. Starting with commercial aerospace, I mean, we know something about Boeing is increasing their monthly build rates, but, how would you characterize any delay and when your ship set rates to Boeing and Spirit would increase if Boeing does get production up to 38 a month?

We are seeing rates from Boeing in the low-20s. We're seeing rates from Spirit ramp up to the mid to high-20s as we went through Q1 and into April. We know publicly that Boeing is likely producing at around in the low-30s at the moment. So there is some destocking impact that we are seeing, but the rates have continued to progress and go up over the last four months this year. And so we are very optimistic that there will continue to be despite the destocking continued growth in the demand for us on both those platforms. And the expectation is that Boeing is able to get to their rate of 38 by the end of this year.

Yeah. Mike, this is Steve. I'm very confident where they are. They had a great April as you can see from the announcements they made. March to April was really impressive. I think their efficiency and everything they're doing within fusion sound has gotten a lot better. I think 38 is in the cards probably maybe by September, October. So we're going to see a lift.

Okay. Thank you. And then just turning to rotary wing, you had some weakness, but you also had some selected rotary wing platforms with higher rates. I take it as Apache or Apache blades are coming on in Q2. So what was performing higher in Q1 and how much of this would you attribute to BLR Aerospace?

So, we did, as you rightly pointed on the defense side of our business, see well, the weakness that you pointed out, we saw on the commercial side. We have some transitions ongoing with production moving from Monrovia to Coxsackie, and so some demand with the Bell helicopter. Some issues with materials on Sikorsky platforms, which drove temporary softness in the quarter on commercial helicopter. But we are going to see the Apache production here ramp-up, which should be really a positive in Q2 and beyond on the rotorcraft side for us.

Yes. Plus, Mike, we're on the Apache engine with MagSeal. So that's also they're going great with the engine business there. So that's a part of that lift. But we might have this and that with blades right now. But now we're just starting to get ramped up. We cut the blades, looked at everything is looking great. We get everybody trained out in New York. So we're hoping, obviously, these are high energy parts, you got to be careful, but we're hoping in May, we're going to start really ramping up and we got the orders. We just got to get the production in place.

Okay. I'll just end with that the DSO increase in Q1, is that anything structural or contractual that changed? Or should we look for those DSOs to come back down?

It's a good point. So we need to have just some seasonality in the sales in Q1. We had a slightly bigger March, we had some items that went out towards the end of the quarter that drove it, there isn't any structural change. It was just the seasonality a onetime kind of thing during the quarter.

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

Good morning, Steve and Suman. I wanted to ask first on the M&A pipeline. You obviously have a placeholder for M&A contribution as we think about Vision '27, it's been quiet recently on the deal front. Are you still tracking towards the placeholder you've got in place for '27 from M&A? And maybe can you give any more detail on how the pipeline looks now and due diligence efforts and maybe expectations for M&A this year?

So we -- Ken, thank you for the question, and good morning to you as well. We continue to track multiple opportunities in our pipeline. And we've got to be disciplined and make sure we execute on the right one. We see enough in the pipeline for us to feel probably confident in being able to get a deal done this year. And I think that's what --

I would say the deal volume is good. We -- and I know just -- we just looked at something fairly hard and did a lot of hours in on it and turned out it just wasn't for us. So we're involved with diligence as you asked, and we're looking forward to getting one sooner than later, Ken.

Okay. That's helpful. And are you seeing more in Aerospace or Defense or combined or anything maybe we should just keep in mind?

I would say the businesses that we look at tend to be kind of niche engineered product businesses, which often will span across some defense platforms as well as Commercial Aerospace. So it is a mix of both. It isn't necessarily skewed one way or the other.

Yes, I would say that's right, Ken. I'd say we usually have sort of a mix. It's usually never 100% one way or the other. So that's so we're seeing and what we've seen.

Okay. And just finally, you seem to be running ahead of your '27 targets in terms of contribution from the Engineered Products. And if you do another deal this year, I'm assuming it would be very focused on the Engineered Products. How should we think about the -- maybe the margin contribution from these Engineered Products? You talked obviously a lot about the sales contribution. Can you maybe help us understand how impactful this could be as you grow that mix to the EBITDA? I mean I can imagine it's been a big component of obviously just the margin improvement on the gross margins and EBITDA. But any help you can give in framing that as we think moving forward on the Engineered Products would be nice.

Great question, Ken. And these are significantly accretive to our margins, right? These are engineered proprietary product businesses with access to the aftermarket and in line with some of the other aftermarket peers that you cover, like margins are in line with those. So they tend to be accretive, they tend to provide also significant margin runway for us to execute on post-acquisition. And so we believe that this is going to continue to be as we do additional acquisitions, a key driver of margin expansion for us into 2027.

Yes. Ken, I'll also add, we have as far as the value we provide for these products, I mean we have very good pricing power. So that's the other thing, which is important for investors to know.

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

Really nice margins here. Maybe Steve or Suman, just to kind of level set us and unpack maybe the revenue guidance for the rest of the year, mid-single-digit growth. Defense obviously had a really strong quarter here but the comps do get a bit tougher and you're obviously going to have some of this recovery in commercial aero. But maybe how are you thinking about the growth rates between commercial aero and defense for the remainder of the year?

Yes, just let me jump in the first. I think first thing, Mike, just to note, in this is a real benefit for shareholders that we have this mix of defense and commercial, right? We've had a lot of peer groups that or peers that have more commercial and they're struggling a bit. But as you can see, our defense business, we've been talking about really came to the fore as they say in Q1. So first of all, we're really pleased with our balance. As far as what I can see, obviously, we're flattish in Q2, but we feel very good about destocking and commercial rates going up, not only on the 37, but on the 87, right because we have very good content mix there. So very positive on the back half. And I think maybe defense going forward, maybe not 15, but certainly a very respectable growth number. Suman anything to add?

The only thing I'd add there, Steve, is that there is -- we're going to see the ramp-up in the programs that have been transitioning, right? So we have the TOW missile cases, spoilers and the Tomahawk program. So across commercial and defense, we're going to get some lift in the back half from those programs coming back online.

That is going to be great for everyone.

Okay. Got it, got it. What about the A220? I know Airbus' commentary around both the 220 and 350 have been a little bit squishy just given the Spirit facilities. Do you expect that to be a material contributor to the A220 this year?

Look, yes, so a couple of things. First, that A220 program is great for us, as we talked about, we make the fuselage skins, we're a suppliers to China. We haven't seen any headwind yet, so we feel very good about that. So that's going to continue. We feel as far as where we sit here today, it's going to again be good business this year leading to next year. I understand about the Spirit issue and the engine issue, and I'm hoping sooner or later, they're going to work through that. But we're running rates higher than what they're shipping, that's for sure. And we're happy about that. The other thing is on the A350, we're really -- we're not a player on the A350. So I know the struggle and it won't impact us.

Got it, got it. And last one for me. I think you called out the in-flight entertainment side of commercial as being weak. I just wondering if you could potentially size that business? What are the thoughts there just given that's may be viewed as more discretionary spending from the airlines. Does that continue to be a headwind for the remainder of the year? Or was that just kind of short term here temporary?

That -- it's not a huge portion of our business. It's a low single-digit percentage of our total business. I think we'll continue to see some softness there through the rest of this year. That we expect will be offset by other things in the portfolio.

Mike, the other than I think the compares get a little bit easier. We had a really good Q1 2024 with in-flight. I mean it's one customer. So -- and obviously, we didn't have a great rest of the year where things kind of tamped down a bit. So I think going forward, we'll probably moderate around that on a -- basis.

Our next question comes from the line of Jason Gursky with Citi.

Steve I wonder if you could just spend a few minutes talking about the potential for new work scopes for you all. And maybe start with the commercial side. Obviously, Spirit AeroSystems is going through a thing here. And I'm just wondering if there won't be some more opportunities there for you as those assets land in different hands. So is there opportunity here either Boeing or Airbus as a result of what's going on at Spirit AeroSystems for you guys? That would be the first part. Yes. And then the second part would be on the defense. I'm just kind of curious if you are beginning to see any signs of increased outsourcing initiatives by any of the big cap defense companies?

Certainly, it's funny to ask that we have our Senior VP out of Spirit actually today meeting with them in Wichita. So we have a very close relationship with Spirit, they're obviously a top customer of ours. And we do see more opportunity especially as things ramp up, okay? So for instance, we just got going on the 737 MAX skins. And early on, right? So we do 4 or 5 skins and we do 15 a month. That's the deal we have, right? So it's not paid by the drink. And we feel very good about increasing business there, we understand there's delivery challenges were pretty much 100% on time. We're pretty close to both Airbus and Spirit and Boeing so our operations are very strong. So we think there is growth there. We're continuing to work with them. I think the skins is sort of in the lead as well as maybe some other things as well as Airbus, we're getting quoted heavily by Airbus, frankly, because some of the other suppliers are not getting the job done, whether that changes hands, we'll have to see. But we see a lot of growth activity as far as quoting at this point. So I think that's, I think, a good story. I think -- if you look at our just percentage of what we have on the programs in general and our operation performance, it's all very positive. You want to add on the second part?

On the defense side, I think we are continuing to see numerous opportunities to bid for work, RTX is a big customer for us, our biggest customer and we are actively bidding both a lot of new work with them. So I think stay tuned for additional wins for us then on the defense side as well.

Yes. The only thing I'd say as well, Jason, is that look, seriously, like the card businesses, CCAs, those type of things are very difficult applications. I mean we're really good, right? So we picked up a lot from RTX that needed to make these cards in Massachusetts. And now that's coming our way in Tulsa, and we have other things we're working on with Northrop. So that's not changing. And I've been bullish on defense. I've been telling investors, look, these things take time and they do because when you're moving something from an internal operation, at RTX to Tulsa. They're not going to give you everything at first. You got to get 50%, you got to get testing machines. So all this is going to come together for us, I believe, in this year and next year. So I was very happy with the 15%. I'll say that in defense this quarter.

Our next question comes from the line of Tony Bancroft with Gamco Investors, Inc.

Congratulation, well done. Based on the $1 trillion PBR, you sort of talked about this a little bit, but -- and then on top of that, a sort of a two-pronged attack here and then the increase in European defense spending. Maybe you could talk a little bit more in detail about how you see yourselves seeing position for that growth trajectory and maybe a little further out, there have been questions of being able to continue that growth. How do you see this maybe playing out over the next few years? And what programs that you're on that are going to have the best exposure to the growth?

Yes. Tony, I'll jump in and then you can. So, I think first and I think just in general, our whole portfolio around electronic warfare, missiles, radar. Obviously, things are going to be happening with the Golden Dome and some other things we're still trying to figure out. So we really feel very good and strong about being a part of this $1 trillion budget being able to support all these customers. I mentioned in my remarks that we've -- in the past, right or only, we were a big Raytheon house, as they would say. And now we're moving in much more to Northrop. We're moving into BAE systems. We're moving into some of these other companies on purpose, right? To kind of build out this customer base. And we got a lot of things to provide. Cabling, we're great at that, we're great at cards. So we think that we're in the right position. And as I mentioned earlier, not only the budget, but also customers like RTX are offloading, right? They're offloading and driving margins. They might be 3 or 4 years into a program with 7-year fixed pricing, and they have nowhere to go. So they're going to move stuff out and they're going to try to drive margins that way as a company. So it's all looking good, Tony.

A nice job positioning yourself. Good job, Steve. Thanks.

Thanks very much. Good to hear from you.

[Operator Instructions] Our next question comes from the line of Noah Poponak with Goldman Sachs.

Just kind of thinking through the pace of growth through the rest of the year. I think you had last quarter talked about 1Q being flat, 2Q a little better, the 1Q actual is a little better. Still feel the same about 2Q? Or is that looking better? And I guess, the defense growth rates quite high in the quarter as others have noted, the compares get a little tougher there through the rest of the year, but not that much tougher. And Aero was just down a ton in the first quarter and Boeing was on strike and had things turned off. And or I guess, was coming out of the strike. So I don't know, maybe I'm splitting hairs on the mid-single for the full year, but it's a little tough to get there, I guess, if things break the right way, maybe it's just early in the year and there's a bit of dynamic macro being conservative. But how do you see the growth rate playing out through the year? And what's the upside of where things going to land?

Great question. On the commercial aerospace side, I would say that -- so if you look at Boeing and Airbus, they're about 50% of our total commercial aerospace business. So we do expect that to ramp up in the second half of the year, but I wouldn't apply that growth rate on our entire commercial aerospace revenue, right? So 50%, the other 50% includes business jets and rotorcraft and other things. But there will be growth there, there will be continued strength in the defense business, as Steve mentioned earlier, may not be at the 15% mark, but we do expect based on the programs that -- and the visibility we have to the rest of the year, there's going to be continued strength there. And then we have also the ramp-up on the programs that have moved from one facility to another and are currently kind of in hibernation but expected to ramp-up in the second half of the year. They include TOW missile case, they include the spoilers and the 737 MAX as well as the Tomahawk harnesses, along with the Apache blade. So those are all expected to give us some lift in the second half. So we see good growth in commercial aerospace, good growth in defense to kind of get us to that mid-single digit number for the full year.

Yes. No, I'd also say, look, we're -- okay, is it a little conservative right now? Yes, we want to really see how the second quarter goes with BA and Spirit. Obviously, that's a big part of our growth story. So we'll probably have a firmer number we will in the next call, but that's kind of where we see it right now.

Okay, that makes sense. Where do you expect your mix of revenue from Engineered Systems to be as you're exiting the year?

It will kind of depend on the acquisition. I think if we do get an acquisition, it's likely to exceed or get very close to kind of the 25% we have said. I don't know it depends on the timing also of the acquisition and how much your revenues have contributed. But we expect it to be in that 23% to 24% like you see and with an acquisition ramping up to beyond 25% in the next 12 months.

Yes, I think that's right. I think we're going to -- we're obviously job one right now is another acquisition, right? So we're -- everybody is working hard on that. So once we do that, we think we'll be over that. And then come next year, we'll have new thoughts about the next 5 years, right? So we're holding right now with the Vision 2027 and we're happy where we are.

Okay. Should we expect the first quarter segment operating margin to be the low watermark for the year and you work higher sequentially off of it? Or is there seasonality or expense timing or mix that could drive a lower quarter at some point in the year?

So I would say there is some goodness in the Q1 margin, so at 15.9% EBITDA margin were also. And if you linearly space out our Vision 2027 goal, we would kind of have to be at 16% by the end of the year. So we kind of are there already in Q1. But it does have 50 to 75 basis points of, I would say, mixed goodness in it. So we'll continue to see, I think, good margins for the rest of the year, but I wouldn't say this is a low watermark. But with that 50 to 75 basis point range, I think we're -- is how I would say.

Around 16 should be good, right? For the year.

Yes, to the end at the end of the year.

Makes sense. And then just last one, Suman, what are you expecting for full year 2025 free cash conversion, whether from your adjusted net income or EBITDA?

So we did have -- we had 40% free cash flow conversion last year. In 2024, we had a little over 30% free cash flow conversion in 2023. We expect 2025 to be continuing that path of improvement. I wouldn't guide to a specific number for the year. We don't typically provide free cash flow guidance. Our end goal here over the next few years is to get back to 100% free flow as a percentage of adjusted net income. But that will happen over the next couple of years as we unwind our working capital investment.

That will be better this year.

But it will be better this year than it was.

Continuing this reduction.

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

Okay, just wrapping up here. Thank you again for joining us for the call. Again, just to reiterate, we feel great about our start this year. We appreciate the thoughtful questions, the support from our shareholders. I feel very optimistic about this year and next year, and we look forward to reconnecting after Q2. Have a very good day and safe. Thank you.

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