Ducommun Inc (DCO) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ducommun Q1 2016 earnings conference call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Chris Witty. Please go ahead.

Thank you, and welcome to Ducommun's 2016 first quarter conference call. With me today is Tony Reardon, Chairman and CEO; and Doug Groves, Vice President, Chief Financial Officer and Treasurer.

I would now like to provide a brief Safe Harbor Statement. This conference call may include forward-looking statements that represent the Company's expectations and beliefs concerning future events that involve risks and uncertainties and may cause the Company's actual performance to be materially different from the performance indicated or implied by such statements.

All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations are disclosed in this conference call and in the Company's annual report and Form 10-K for the fiscal year ended December 31, 2015.

All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise after the date of this conference call. I would now like to turn the call over to Mr. Tony Reardon for a review of the operating results. Tony?

Thank you, Chris, and thank you, everyone, for joining us today for our 2016 first quarter conference call. I'll begin by providing an overview of our operations, including some market color, after which Doug Gross will go over our financial results in detail.

First, as our investors know, we've made many changes to our Company over the past year to improve overall operating performance. We've cut costs, streamlined operations, and most recently shed non-core assets, such as our Pittsburgh and Miltec businesses.

We did this to focus Ducommun on the core aerospace and defense industry and improve margins and reduce the unpredictability inherent in certain industrial energy markets.

We did sell these operations at attractive prices over 8 times EBITDA, resulting in a gain on the sale that Doug will speak to in a moment. Most importantly, the sales generated net proceeds of approximately $50 million, which we used to pay down debt.

At the end of the quarter, total indebtedness stood at just $190 million, a far cry from where we were a year at $280 million. As you know we are serious about de-levering the Company to strengthen our balance sheet and reduce interest expense, and we've accomplished a great deal in this regard over the past year and a half.

At the same time, our gross margins have rebounded nicely, testimony to the many initiatives taken to reduce costs and improve the efficiency of our operations. Gross margins reached 19% this quarter, versus about 15% last year and in Q4. So while revenue was down year over year, as expected, primarily due to lower military spending, the actions we've taken have boosted our underlying operations and focused the Company for better growth going forward.

Our backlog at $564 million is the highest it's been in over a year, with the primary driver being increased military backlog, which bodes well for the stabilization of that market.

We believe the performance we saw in the first quarter will also lead to improved results as the year plays out. We will continue to focus our streamlining initiatives on such as the previously announced changes to reduce our administrative office in St. Louis, which we concluded early in Q2.

In addition, we will be closing a small integrated electronics facility serving the oil field service industry in Tulsa, Oklahoma within the coming months as we look to further increase the operating leverage at our core manufacturing locations and focus our capabilities on the markets we serve.

Now let me provide some additional color on our end markets and programs and products. I'll start off with the commercial aerospace business where quarterly revenue once again was very strong at nearly $67 million. We saw strong shipments across our large aircraft segment, slightly offset by weakness in the commercial helicopters and the regional and business jet markets. None of this was unexpected. We ended the quarter with a backlog of $268 million, near record highs for another sign that we believe that further growth in this area going forward will be strong.

Ducommun has content on some of the best platforms in the industry, including the Boeing 737, where we'll see an acceleration of revenue due to higher content and production rates as this transitions to the 737 MAX in the coming years.

We also have a strong position on the 777 and the 787, as well as content on the Airbus A320 Neil and the A350. As a matter of fact, we recently announced a new contract with Airbus to provide titanium structures for engine support on the A320 Neil. And with Airbus also awarded us the first work on the A330neo, an engineering design contract in which we will collaborate and improve the manufacturability, cost and function of certain metal structures applications for Airbus.

These are great wins for Ducommun that will expand our support to the Airbus across the A320 and the A330 families, allowing us to demonstrate our manufacturing design expertise and potentially pave the way for other opportunities with this OEM as we go forward.

As a reminder, we currently have over 30 new development programs underway across Ducommun, many of which will begin positively impacting top line results later this year and into next year. To support this growth, we will be investing in certain operations during the second half of this year to cover our titanium, composite and electronics product lines.

Expansion in these three areas has been an integral part of our strategy, and as a result, we need the appropriate facility upgrades, equipment and personnel to support the contracts already in place and ensure the capacity for additional new applications. We will continue to focus on these strategic imperatives and see many opportunities for future growth.

Turning to our military and space sector, revenue fell to $58 million this quarter versus $71 million last year. This was not really a surprise, given what we've said in the past about overall budget curtailments and reduced spending on certain platforms. However some of this decrease was related to shipment timing.

As we said at the beginning of the year, we expect the current run rate for our military business to be in that $60 million to $70 million range for the foreseeable future, so the first quarter was obviously shy of that. However, our defense backlog grew to $261 million this period, the highest level in over a year. This reflects needed electronic upgrades on many platforms we serve and demand in the missile defense business.

So while we're not bullish on this part of the business just yet, the stability I spoke about is clearly there and we anticipate room for growth going forward. We are in much better shape operationally as evidenced by this quarter for the lower run rates currently in place as we look to take advantage of shifts in the budget spending.

With that, I would like to now turn the call over to Doug to go through the financials in detail. Doug?

Thank you, Tony, and good day to everybody. Net sales for the first quarter of 2016 were approximately $142.1 million compared to $172.9 million for the comparable quarter of 2015. The revenue decline reflects a 19% lower revenue in the Company's military and space markets, mainly due to a decrease in US defense spending, as well as procurement delays and a shift in program priorities that impacted both our fixed wing and helicopter programs.

In addition, the overall year-over-year top line shortfall reflects in aggregate a 43% decrease in industrial revenue due to the divestiture of our Pittsburg operation in January of 2016 and the closure of our Houston operation in December 2015. Going forward, as a result of the Houston closure and the divestitures with Pittsburg and Miltec, electronic systems revenue will be reduced by approximately $20 million per quarter.

Commercial aerospace was nearly $67 million during the first quarter. In addition, the Company's overall backlog rose to $564 million versus $546 million at the beginning of 2016 and the highest level in over a year. And this also included a very nice pickup in our military and space orders.

Moving to gross profit, our gross margin was 19% in the first quarter compared to approximately 15% in last year's comparable quarter and the fourth quarter of 2015. This reflects improved product mix and the various cost initiatives over the past year, including supply chain cost savings and other efficiency improvements.

SG&A was down slightly year over year as the impact from cost cutting initiatives reduced headcount and the sale of our Pittsburgh operation were offset by one-time retirement expenses, as well as higher professional fees and the timing of certain research and development costs related to new program wins announced last year. Such one-time items totaled roughly $1.8 million in aggregate in the quarter.

Ducommun's operating profit for the third quarter was approximately $4.3 million or 3% of sales compared to operating income of $3.6 million or 2.1% of sales for the comparable period in 2015. This year-over-year increase was primarily due to the higher gross profit margins achieved in 2016.

The interest expense decreased to $2.4 million in the first quarter of 2016 compared to $6.7 million in the previous year's first quarter. This was primarily due to lower outstanding debt and reduced interest rates as a result of the Company's refinancing in July 2015.

The Company also reported a pre-tax gain on sale of $18.8 million during the first quarter of 2016 in connection with the previously announced divestitures of our Pittsburgh and Miltec operations.

Our effective income tax expense during the quarter was $7.2 million or 35% compared to a 35% income tax benefit for the comparable period last year. The higher rate this quarter was a result of the net gains on the divestitures. This is purely just a timing issue and the tax rate should normalize to approximately 29% for the full year.

We reported net income of $13.6 million, or a $1.21 per diluted share compared to a net loss of $2 million, or $0.18 per share in the first quarter of 2015. The increase in net income was primarily due to the pre-tax gain on the divestitures of Pittsburgh and Miltec of approximately $18.8 million and lower interest expense of approximately $4.3 million.

Adjusted EBITDA for the first quarter of 2016 was approximately $11.1 million or 7.8% of revenue compared to $12.2 million or 7% of revenue for the comparable period in 2015.

Now let me turn to the segment results. Structural systems. Our structural systems segment posted revenue of $64 million in the first quarter of 2016 versus $72.1 million in the prior-year period. The lower revenue was primarily due to a 23% decrease in military and space revenue, reflecting a decline in the US government defense spending, as well as shifting priorities that impacted certain platform deliveries.

Structural systems operating income for the first quarter was $2.7 million or 4.3% of revenue compared to operating income of $2.1 million or 3% of revenue in the first quarter of 2015. This primarily reflected our improved operating efficiencies related to the Company's ongoing cost improvement initiatives.

Adjusted EBITDA was $4.8 million for the current quarter, or 7.5% of revenue compared to $4.7 million, or 6.5% of revenue for the comparable quarter of 2015.

Now turning to electronic systems, our electronic system segment posted revenue of $78.1 million in the first quarter of 2016 versus $100.9 million in the prior year period. The divestiture of our Pittsburgh operation, closure of our Houston facility, which I previously mentioned, reduced revenue by about 15%. In addition, there was a 17% decrease in military and space revenue, mainly due to the decline in defense spending and shifting spending priorities, as previously discussed. The impact of these items was partially offset by a 28% increase in the segment's commercial aerospace revenue, where we continue to gain traction.

Electronic systems posted operating income for the first quarter of $7.1 million or 9% of revenue, compared with operating income of $6.3 million or 6.2% of revenue in the first quarter of 2015. Again, reflecting operating efficiencies related to the ongoing cost improvement initiatives.

Adjusted EBITDA was $29.6 million for the current quarter or 37.9% of revenue compared to $10.6 million or 10.6% of revenue in the first quarter of 2015. Excluding the gains in the divestitures of $18.8 million this year, adjusted EBITDA would have be 13.8% of revenue for the first quarter.

Looking at corporate, general and administrative expense, CG&A. CG&A expenses for the first quarter of 2016 were $5.5 million or 3.9% of total Company revenue compared to $4.8 million or 2.8% of Company revenue for the comparable quarter in the prior year. CG&A expenses increased primarily due to higher R&D expenses related to new program awards announced in 2015 and one-time retirement charges of approximately $900,000, partially offset by approximately $700,000 in other cost reduction initiatives.

Now turning to backlog, backlog at the end of the first quarter was $564 million versus $546 million at the end of the fourth quarter, which reflects a significant increase in the military and space bookings.

Liquidity and capital resources. We generated approximately $5.5 million of cash from operations in the first quarter of 2016 compared to $3.5 million in 2015. We remain diligent and effective working capital management and expect our net cash profile going forward to reflect the historical seasonal patterns. We used the net proceeds from divesting at Miltec and Pittsburgh of roughly $50 million to pay down debt, as Tony mentioned. And we continue toward our goal of de-levering to targets of 2.25 to 2.5 times debt to EBITDA over the next few years.

Capital expenditures were approximately $3.8 million in the first quarter and we now expect CapEx to be in the $18 million to $22 million range for the full-year as we continue to invest in new programs and prepare for the next generation platforms ramping up later this year.

In closing, we've taken decisive steps this year and last to right-size our operations to reflect lower defense spending, as well as focus on the core aerospace and defense markets we serve.

Our margins illustrate the results of our actions taken thus far and we believe further performance improvements should be forthcoming as the year progresses. Give our current backlog and demand trends, we anticipate higher growth in the second half, along with a stronger balance sheet, lower debt and streamlined operations, which should fuel better returns heading into 2017.

I'll now turn it back over to Tony for his closing remarks. Tony?

Thank you, Doug. Before turning the call over to questions, let me just reiterate how pleased we are to see the fruits of our labor coming together this year. We posted higher gross margins, paid down a significant portion of debt and sold off non-core assets to focus the Company on markets that we know best.

We're winning new business on some of the most well known marquis platforms in the industry and so our backlog grows on rebound across our military programs. Ducommun remains in a unique position. We believe to provide advanced electronics and structural solutions in the aerospace, defense and high technology markets. In addition, current macroeconomics trends in commercial aerospace demand, as well as platform transitions, will benefit the Company in the quarters and years to come.

We continue to invest in innovative applications and aggressively manage our working capital and drive operating cash flow to strengthen the Company. So we will position ourself for faster growth and reduce our debt going forward.

With that, Catherine, I would like to now turn the call over the questions please.

(Operator Instructions) Mark Jordan, Noble Finance.

A question relative to structures group. Still while starting to improve at 4.3% operating margin is still well below historical goals that you have. I guess my question would -- do you see that margin rate improving sequentially as you move through the year? And do you have a sense of what order of magnitude should it be as you exit the year? Is it still in the 8% to 9% range?

It should improve sequentially quarter over quarter. As we mentioned in the remarks, we begin to really gain momentum as we get into the second half. You saw it obviously improve over the fourth quarter and we would expect to continue into the second, third and fourth quarter as the volume picks up given the nature of the programs that we're on and the new ones that we're working on as they come online. So those margins do get back to that sort of historical level as we get through the year and into 2017.

The corporate expense levels, you said obviously there's a retirement expense of $900,000 flowing through there. I thought you'd mentioned other items that were abnormal or not potentially nonrecurring that in aggregate all of them are $1.8 million. So should we look at that $3.7 million or $3.8 million quarterly corporate expense rate as what we should see moving forward? Or is there something else we should be attuned to?

That's right. We did have some one-off items in the first quarter, as mentioned, as outlined in our 10-Q. So if you subtract that aggregate out of that corporate line, probably getting back, yes, closer to sort of a $4 million number as we move forward is what we would expect.

Final question for me. If the gains on the asset sales had not occurred and you had a more normalized tax rate, do you have what the earnings number would have been without, again, without that transaction?

If we normalize the quarter and take out the divestiture gains and even the $1.8 million and one-time SG&A costs at the 29% rate that we expect to be at for the full year, that would have came to about $0.23 a share on the EPS line.

Edward Marshall, Sidoti.

I wanted to touch on the structural systems again if I could. The margin in particular around the operating line. And it's quite noticeable that your gross profit -- the gross margins rebounded, but that's not really translating into much operating profit. What's going on in the operating expense line that's really dragging that number down? Q1 looks pretty high there from an operating level. Just curious to give your thoughts.

Ed, is your question specific to the structures business?

Well it's to the structures -- yes, it's to the structure system in particular. But then looking at the core business as a whole, I mean 19% is one of the better gross margins that you've put up in several periods. So it looks like your business is rebounding at the gross margin level, but then you're not translating that to higher operating income.

We've got a couple of things going on. We've talked about our supply chain initiative and the initial rollout of that was to really go after the electronics businesses that we have because we saw that we had a quicker win. So a lot of the supply chain savings for structures doesn't start to show up for another couple of quarters or two. And with structures, the volume, as that picks up, because we've got a lot of investments that we've made last year and even early into this year, we'll see that start to -- the operating margin start to improve.

I mentioned some R&D in the first quarter that was really related to the structures business itself. Again, more of a timing issue year over year, but expect to see the benefit of that as we get into the second half of this year. So we should see sequential improvement in the operating margin for structures.

Do you think that's an 8% or 9% margin business or do you think it gets back to the legacy double-digit rates?

I think we've said it gets back to 8% or 9% as we walk out of this year and into early next year.

And then the tax rate. Was it higher on the divestitures for a reason? I mean was there a portion that was not subject -- was all taxable?

Yes, there was a potion of it in the way that the gain got a portion, particularly on the Pittsburgh sale, because when you looked at the total gain of $18.8 million, $18.3 was related to the Pittsburgh operation. So that's what drove it up just in this quarter. But again, we'd expect the full-year rate to normalize back down at around 29%. So it's just a timing issue. Obviously the more money you make in the quarter, the more taxes you pay.

And what do you talk about for interest expense for the full year now that you've paid down the bulk in Q1 that was originally slated for later in the year?

That will come back down to probably the $2 million range as we continue to pay down. It was slightly higher in this quarter because under the accounting standards you have to take your deferred financing fees off using the effective interest method. You can't just straight line them. So as we paid down a big chunk of debt we had to write-off a little bit more of the deferred financing fees into interest expense. So it should be coming back down to that range as we go into the next quarter.

What range? $2 million a quarter? I mean it seems to be high, given that you paid down inter quarter here, kind of that midway through the quarter.

It'll step down. I mean we've said that we'll continue to pay down that sort of $7.5 million in debt per quarter, which is what we've historically averaged. So we can, depending upon what happens with LIBOR, which is what the debt is tied to, it should come down.

What's the mark now, 3.5 LIBOR plus?

No, it'll come down to 2.5.

LIBOR plus 2.5.

Yes.

Christopher Van Horn, FBR & Company.

This is Dan Drawbaugh on the line for Chris. I was just wondering if you could take a minute to talk about the end markets. So first of all, can you give me a sense of what industrial's organic revenue growth would have been? I know that given the divestiture it was down pretty significantly year over year.

The businesses that we've got left there are really heavy industrial and medical. And those peak and valley, but they've generally been in that sort of 1% to 3% range. So we've got some very good strategic customers that we're focused on as we move forward, but that's historically what those markets, I mean obviously have been masked by our exposure to energy and oil and gas over the last several quarters. But with all the actions we've taken with Houston, with Pittsburgh, and as Tony mentioned, a small facility we had in Tulsa, we really have no exposure to that going forward. So we'd expect those industrial businesses to be sort of in that range.

Specifically on medical, are there any particular growth opportunities there that you'd want to highlight just to give us some more color?

It's now such a small -- smaller part of the business. I mean we do think that there's growth there and we've got a few key strategic customers that we're really focused on with some unique applications.

The important thing, Dan, is the growth that we're going to see there is probably not going to move the needle on the top line, but there are a couple of major customers that we're doing some significant development work for that we think will turn into some production programs. But I think all in all it's at a level where the revenue base would not significantly move the needle if we moved up a million or two.

Then moving to -- I guess just moving down to the defense section. Can you speak to if there were any, I guess, delays in terms of spending in the quarter that we might see have been pushed out into second quarter? Or can you just talk about how the cadence looked in the first quarter? And I guess how things are looking so far in second quarter.

I think that when you looked at the first quarter, we did have some scheduled slides or delays in release on two missile programs in particular. And we have picked those orders up and where we anticipate the revenue base to be in the third quarter it'll probably be late third quarter to the fourth quarter because of delay in the release. But still the program looks strong, one of them in particular is on the Paveway missile.

So we've seen a nice up tick on that, there were some scheduled slides on the military helicopters as well on some spares applications, but they just moved to the right by a quarter. So I think the changes on the military side and some of the late releases will cause a little bit of a dip, but we should see some stabilization in the second and third quarters going forward.

Finally on the 30 development programs that you've got in the works there, is there any kind of incremental you can give us? Some kind of -- how that breaks out around the second patient. Maybe -- I know you probably don't want it quantified, but said that they're going to be positive for the top line later in 2016. Is there any sense you can give us -- is that just offsetting roll offs or is that potentially (inaudible) than you see rolling off.

I think the pickup that we'll see at the end of the year will be on the commercial side. The aerospace and mostly I think it's primarily going to be driven by the tooling sold as the customer buys off the tooling sales so we should see some tool sales come up with some initial production deliveries and I think we'll see more production deliveries in the second half of the year and that pertains to the 737 MAX wins, as well as the Airbus wins that we have announced recently.

There are other wins that we have in place that we haven't announced, but they're primarily in the commercial side, but we've had a nice pickup on the military side on a program that we haven't announced as well.

(Operator Instructions) Mike Crawford, B. Riley & Company.

Of the $27 million in revenue from Boeing, how does that breakout between commercial and military roughly?

For military it's obviously mostly the helicopter platforms that we're on. So it's about 60%-plus commercial, 65% commercial and 35% or so in the military. Because we've definitely got the (multiple speakers).

And then I think Airbus, I think on the last call you mentioned that you'd had around, correct me if I'm wrong, $15 million of Airbus revenue last year.

Um-hmm.

Is that something you expect to grow sequentially throughout 2016 or how should we view the Airbus ramp as you ramp up on some of these new platforms?

I would expect that the Airbus would grow about 3% this year and a little bit higher next year as we ramp up on A320 and the A350, so in that 4.5% range, if that helps you.

And then on the backlog you had, the military and space backlog, not only in structures, but also in electronic systems. So are those related to the same program or are those different programs -- different sets of programs all growing?

No, it's a mixture of programs that are growing. So we had a nice pickup on the missile and defense side. We picked up on follow-on orders on the radar systems, particularly on the F18 program, so that was nice boost. And then on the structure side it was primarily some military follow-on orders.

And then just to clarify, the $1.8 million of one-time expenses that affect your EBITDA, if you -- for your bank agreement, do you add that back in and you say that your adjusted EBITDA was more like $12.9 million for the quarter? Or --?

The answer's yes, through the bank covenant agreements we are allowed certain add backs for one-time type of expenses like that, whether there are restructuring charges or in this case retirement charges.

And then as far as charges related to closing, say the Tulsa office in Q2, what level of one-time charges should we look for in Q2?

That was a very small operation, so it'll be a few hundred thousand dollars. So it's not very big.

Edward Marshall, Sidoti.

I want to ask a follow-up. Talk about you had some small awards with Airbus, you increased content on the Boeing planes. The military seems to be maybe a better atmosphere for you in 2016 than it was in 2015, arguably. But when I think about maybe kind of projects that you're going out to bid on, can you kind of talk about maybe your hit rate? Is there some way to measure kind of the success of winning new businesses? And kind of just, I guess that's the first question.

I'm not going to give you a hint right off the top and so it's kind of competitively sensitive data. But I will tell you that we're pretty laser focused on certain applications that we've been very successful at. We are doing a lot more upfront development work for customers as evidenced by our contract with Airbus on the A330neo, which has given us a better hit rate on applications that are coming out.

So I would say that we've got an improved hit rate over let's say the 2014 and early 2015 time period and that keeps expanding. So there's a number of applications that we're winning and this is both on the military and the commercial side of the business where we're spending a lot more time up front. There's a lot more work with the customers direct early on, on a number of applications that are boding well for the follow-on orders. So the hit rate is improving.

And so what's driving that improvement? I mean is it driving by the new leaner Ducommun and that's getting -- is it the available capacity, is it pricing? What's driving your customers? I mean sounds like you're doing -- is it some engineering work? It doesn't make sense I guess because you just sold the engineering firm. But how are you getting more up front and then kind of developing (multiple speakers).

The engineering that we do is more manufacture of engineering, but basically essentially we've been doing this for the last three years or four years really. We're just trying to be more innovative with our solutions to our customers. So we have our -- we have set up labs in most of our businesses where we sit down with the customers and walk through the issues that they're having on the manufacturing side. And then spend some time with them so that we can develop solutions that they can use from the manufacturing process to solve their problems.

So we've had a couple of pretty nice wins in the last two years that are a direct result of us just being -- working closer with the customers and helping them solve the problems. So the engineering is more along the lines of how we're going to manufacture it and ease of manufacturing and also in some cases on the electronics, reducing the size of the application, shrinking the boards, things of that nature.

Got it. So you're gaining traction there. When I think about your gross margin, there's been so many changes in your business over the last year, whether it's headcount or just divestitures and so forth. Does this follow the same orderly -- the same trends that we've seen historically? Q1's probably -- it's one of the highest, Q2's a little bit higher, then it tails off in the back half of the year. Kind of how do I think about the gross margin for your business? Give me some direction with all the changes.

I think as we mentioned in our last call, our goal has been to get back to this historical margin. So I think we see sequential improvement the fourth quarter just because the number of work days and holidays is always a little softer, so there is a little bit of seasonality in there. But depending upon the product mix in the given quarter, we think that there will be continued very, very modest improvement at the 19% we're at now.

I thought 19% was pretty good, but you're saying you're not satisfied?

No, well we're never satisfied, Ed.

Never satisfied.

So that goes without saying. But I think that one of it is that look, we did exactly what we said we would do last year and that is we got after the cost basis and we think that from a gross margin standpoint last quarter we talked about moving back to that 18% to 19% range. So we think that we can be in that range and then with what we're doing on the supply chain, we're hopefully that we'll get a little bit of a boost going forward. But we should be in a position where we're a pretty steady state in that 18% to 19% range and hopefully we get a pickup as we walk through the rest of the year.

So it's wouldn't be unnatural to see you kind of hit that 20% range at some point. I won't hold you to it now, but eventually I will.

Well that's the goal. I mean that's really what we would like to see happen. So we're moving in that direction, I won't say that we're going to hit that.

Look, we were very pleased with the performance that we had in Q1 and the team is really focused on maintaining improved margins as we go forward. We still have a little work to do on the SG&A side, but from a gross margin standpoint I think that we've got some -- we had the cost reductions in place and as Doug talked about earlier, the supply chain improvements are starting to kick in a little bit.

Thank you. And I'm showing no further questions at this time. I'd like to turn it over to Tony Reardon for any further remarks.

Thank you very much, Catherine. And thank you, everybody, for joining us today. And we look forward to talking to you in the second quarter. Thank you very much. Bye now.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.