Ducommun Inc (DCO) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Q2 2005 Ducommun earnings conference call. My name is Jean. I'll be your conference coordinator. At this time all lines are listen only mode and towards the end of conference call we will be taking questions. (OPERATOR INSTRUCTIONS)

At this time, we will turn the call over to your host, Mr. Joseph Berenato, Chairman and Chief Executive Officer. Please proceed, sir.

Thank you, Jean. Good morning. I am Joe Berenato, CEO of Ducommun and I want to welcome you to Ducommun's second quarter 2005 conference call. As reported earlier today, we have a strong second quarter with sales of 61,998,000 the second quarter -- and a very long time that we were over 60 million in sales -- and a gross profit margin of 22.8%, the third quarter in a row of increasing gross profit margins and the best since the second quarter of 2004.

Operating income was 6,359,000 better than the year ago quarter and substantially better than the first quarter of 2005. Net income was 4,073,000 -- down about 5% from the year ago quarter which benefited from a lower tax rate and on a par with the first quarter of 2005 which also benefited from lower tax rate.

EPS of $0.40 per share fully diluted versus $0.42 a year ago and $0.40 in the first quarter of 2005.

For the six months of 2005, sales were 125.8 million versus 115.6 million for 2004, an increase of 9%. Gross profit margin was 20.4% for the first half versus 21.2% for the first half a year ago, down 8/10ths of a percent. Operating income of 11.1 million versus 9.8 million for the first half of 2004 is an increase of 13%; and net income for the first half of 8.2 million versus 6.5 million for the first half of the year ago is an increase of 25%. EPS of $0.80 versus $0.64 from a year ago, likewise, is an increase of 25%.

The tax rate for the second quarter was 35.9% and as we've seen for the last several quarters for Ducommun, we have seen our tax rate move around quite a bit because of the benefit of R&D tax credits. The second quarter of 2004 was 29.1%. For the first half of the year we are at 25.9% versus 31.6% for the first half of 2004 and as we have commented before, we believe the full year tax rate will come in in the range of 26 to 30%.

In terms of business mix, military for the second quarter was 63% of our sales versus 61% from the year ago quarter. Commercial was 33% versus 35% from the year ago quarter and space was constant at 4% in both periods.

We continue to make progress in achieving our 2005 goals. The first being drive to one company, there, during the quarter our Ducommun Aerostructures business installed the Bond MIS System at its largest facility, Monrovia. By the end of the year we should have Bond across all of the Ducommun Aerostructures facilities which will provide us significant benefits. We continue to drive our common policies and procedures across the entire corporation, including our performance measurement system.

Our second goal of improving operations through lean and the advent of Six Sigma later this year of the third quarter as I mentioned -- the second quarter as I mentioned earlier was the third quarter in a row of improving gross profit margins.

Our executive operations leadership meetings seem to be paying real dividends in moving operating efficiencies across the entire business; and we continue to do a significant number of lean events on a monthly basis across the Company.

Our third goal of driving strategic growth has been advanced by our strategic sales and marketing efforts through the auspices of 2 new VPs of Sales and Marketing, who have been on board now almost a year and we have seen really a strong shift in the focus of our Sales and Marketing efforts since they have come on board.

We are exploring offshore capability and hope to have a capability offshore in 2006; and we continue to look for the engineer product acquisition opportunities.

Finally, the fourth goal of organizational development. We continued to do more training this year and where we have selected GAAPs we look outside to bring in people of real talent.

So we've got a lot going on in a positive direction; and we think we will continue to improve as we go through the year.

With that, Jean, I'll be happy to take more questions.

(OPERATOR INSTRUCTIONS) Peter Arment of JSA Research.

Questioned regarding profitability -- you have nice gross margin improvements, maybe you could just talk about the individual Ducommon air structures in technologies. How did they progress during the quarter? I imagine quite well.

I think we saw more improvement from Ducommon Aerostructures than we did Ducommon technologies this quarter because as you remember a year ago we took some lost contract reserves on the Aerostructures side; and so while that inhibits the growth of gross profit margins because that work goes out of the zero GP, they have been making improvements on that work. So we are getting some margin contribution from it. On the other side in terms of Ducommun Technologies, we continue to work on our Phoenix operations, where we've had some operating difficulties over the past year. And we are starting to see improvements in our operating metrics, which -- as we go further into the year, I believe -- is going to show up in the financial metrics as well.

And I assume you're going to be following the Q?

That should be out tomorrow I think.

Regarding -- you mentioned offshore capability. This is more tied I guess to the Aerostructures side or --?

Actually it will be for both sides. In fact the initial products we would intend to put offshore would probably be on the Ducommun Technologies side. The real issue is where do you have work that has a significant amount of labor content? And that is where the advantage is in terms of offshore and meeting competitive pricing.

And do you expect CapEx to ramp up materially because of this or --?

We should see a modest increase in CapEx but when we entered the year we said that we felt we would spend about 10 million in CapEx this year and now we think it will be more like 6 million. So the offshore activities are not driving substantial CapEx requirements for us.

And then, just regarding -- you mentioned the mix that I guess commercial was about 33% down a little bit year-over-year. I was wondering how -- with deliver rights beginning to ramp up on the commercial side, what you're seeing and how that -- is this more of a timing issue this quarter that it was down from an overall -- you had higher deliveries on the defense side if it was just one quarter. Or maybe you could just give us a little color on the commercial OEM production?

Yes I think in terms of the difference in mix, it is too small a difference to signal any kind of a trend. What we do expect on the commercial side is that we will see increasing build rates on the 737 and 777, especially on the 37 side. It is also being impacted by not having the 757 anymore and a lower production rate on the 767. So until we really see the 737 rate start to ramp up substantially above 21 a month, the Boeing commercial business will be kind of flat.

Where we have seen an increase in commercial is actually other commercial, both in terms of helicopters and regional jets. So as the Boeing build rate kicks in, we ought to see the commercial side ramp up.

Just one final, about acquisitions in that they historically have been very conservative on what you want to pay for and what the right fit is. Maybe you could just give us, maybe, a little more idea how that is progressing?

We continue to look for an engineered product which would be complementary to what we already do. We are disciplined in our pricing philosophy; and I don't see that changing. The tighter the fit is of a potential acquisition candidate the more we would be willing to pay. So if we do make an acquisition, which I believe we will, if we do make an acquisition the price will reflect what we think we can do with a business once we own it. I don't think we will see us buy a business for a big price and then try to figure out after we own it what we can do with it. If all we did is to buy a business and run it the way it was being run previously, then we'd probably be overpaying and I think anybody would be.

How about some of the overall flow of deals? Are you seeing any changes in terms of number of properties available for whether it is defense or commercial or -- ?

We are not seeing enough on the commercial side. We are seeing plenty of defense deals. And in terms of builder print versus engineer product we are seeing a lot more build to print deals than we are engineer product. It' the engineer product side that we are looking for opportunities.

(OPERATOR INSTRUCTIONS)

We seem to have no follow-up questions. I'll turn the call back to you for closing remarks.

Thank you, Jean. As I said earlier, we continue to improve operationally -- both the military and commercial cycles should remain positive over the next 2 to 3 years and we should be the beneficiary of those. We have a strong balance sheet and a desire to grow both organically through CapEx and R&D -- primarily the development side of R&D -- and also through acquisition where we are looking for engineer product.

So I'd like to thank you for participating on this call and I look forward to discussing our third quarter results with you in October.

Thank you for joining us on the conference call. You may now disconnect.