Ducommun Inc (DCO) 2021 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ducommun Second quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, August 12, 2021.

I would now like to turn the conference over to your Investor Relations adviser, Chris Witty.

Thank you, and welcome to Ducommun's 2021 Second Quarter Conference Call. With me today are Steve Oswald, Chairman, President and CEO; and Chris Wampler, Vice President, Chief Financial Officer, Controller and Treasurer.

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 impact of COVID-19 on our operations, our customers, the level of U.S. government defense spending, timing of orders from our customers, legal and regulatory risks, management changes, the cost of expansion and acquisitions, competition and disasters, natural or otherwise. These risks and others are described in our annual report on Form 10-K filed with the SEC and 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 2021 second quarter Form 10-Q with the SEC today.

I would now like to turn the call over to Mr. Steve Oswald for a review of the operating results. Steve?

Well, thank you, Chris, and thanks, everyone, for joining us today for our second quarter conference call. Today, as usual, I'll give an update on the current situation of the company, after which Chris Wampler will review our financials in detail. Company remains focused, first and foremost, on the health and safety of our employees. Team has done an excellent job with safety protocols put in place since March 2020. We continue to work with authorities on best practice throughout our many operations. The total number of cases is roughly 214 since the beginning of the pandemic. And within the company, we had 14 cases in Q2 2021.

As mentioned in the press release, Ducommun second quarter results were very strong with the company delivering year-over-year revenue growth of 9%, all organic, for the first time since Q1 2020. The company's defense business continues to be a major success with upward momentum growing again year-over-year and with the main contributor to the quarter. The challenges in the commercial aerospace market were overcome again by the team. So we have seen some good signs, for example, with growth at Spirit AeroSystems in Q2. We're optimistic that we will start seeing meaningful OEM build rate increases starting in 2022. In addition to revenue growth, we posted gross margins of 23%, which is the highest level reached in 10 years of the company, along with adjusted EBITDA margins of 14.6%, which is an increase of 80 basis points year-over-year. The team also posted adjusted operating income margins of 9%, which is excellent progress.

The quality of earnings was high as well with the company reaching GAAP diluted EPS of $0.69 a share versus $0.43 a share for Q2 2020 and adjusted diluted EPS of $0.74 a share versus $0.48 in 2020. These numbers reflect the return to revenue growth we anticipated along with strong operating management. This is also a great story for our investors and this quarter was the beginning of a return to revenue growth for the full year of 2021 with the commercial aerospace market signed to recover in the quarters ahead. The company's second quarter revenue was higher with the Ducommun's defense business, as mentioned earlier, leading the way being up 20% versus prior year. Our defense business revenues continue to show excellent progress on shipments and a robust business development approach. The majority of the gains in Q2 include the radar systems for Northrop Grumman, Raytheon TOW program, F-18, Apache helicopter, UAV to general atomics, Falex and other missile programs.

Our approach to the market is innovative products and processes that provide significant value to the customer, along with striving for the highest level of service. The numbers show that we continue to be rewarded for this strategy. I also want to mention as I have in the past, the Raytheon Missile and Defense business and the progress since signing the strategic supplier agreement with them in July of 2019. We've been hard at work in 3 areas: new programs, offloading, and share shift. I'm happy to report that 2021 will be a record year overall with this legacy Raytheon business, growing from less than $90 million in 2020 and to over $115 million in 2021, an increase of more than 25%. What a great story. The defense results also show great opportunities when we leverage our structural product lines with defense OEMs. As previously mentioned, we have wins now in the TOW missile, which was a share shift from another supplier and other new programs such as the Standard Missile to dorsal fin assembly, both for Raytheon Missile and Defense. Along with our acquisitions, this part of the business will be north of $110 million in revenue for 2021, where it was under $80 million in 2019.

Another defense structural highlight in Q2 was that Nobles worldwide has secured significant content to supply integrated ammunition handling systems as part of the Stryker and CWS increased lethality program recently awarded to Oshkosh defense. The total program for 6 years can be worth up to $943 million to Oshkosh and their partners. I am also overall still optimistic about the fence opportunities for Ducommun going forward. Despite concerns regarding the recent budget discussions in Washington and the change in administration. This is again due to our value offering and still a modest revenue base. A good amount of runway is still ahead of us here to come. In regards to defense backlog, it remains strong in ending Q2 with a backlog of $501 million. The commercial aerospace backlog also began to show some signs of recovery, increasing sequentially from $266 million at the end of Q1 million to $276 million at the end of Q2. This is certainly a good sign. The total backlog was $814 million for the company and this is very good. So a very good number based on the environment.

Now I want to take a few minutes to discuss my thoughts on the commercial aerospace business. We were notified in May with press release approval in July that Ducommun was recognized as an Airbus, detailed parts partner and award a long-term 5-year contract. The commitment from the current industry leader allows us to provide a titanium work package for key products on the A320 and A330 programs. We were and are thrilled and honored to be awarded for the first time at D2P partner recognition, which is a major accomplishment at Airbus representing preferred supplier status along with a long-term 5-year contract. This is a significant step forward for Ducommun and its industry-leading titanium structural component business. To me, it is the highest level of endorsement. And as I mentioned in the press release, a major milestone in the 172-year history of our company. This contract extends through 2026 and will provide many years of great value to Ducommun and its shareholders.

Company's cost actions are also continuing to pay dividends. You can certainly see that even before the pandemic, the company was working on initiatives to offset the 737 MAX, the effectiveness of our operational leadership and actions show the gross profit margins year-over-year and a solid operating income percentage along with the diluted EPS. I also want to mention our efforts on pricing and this is also having a positive impact on the company's financials. In regards to the outlook, our significant backlog in defense with the many growth programs mentioned earlier will provide good revenue in 2021. We estimate that revenue will be led by defense, but over the quarters ahead, we'll see more commercial aerospace volume returned to Ducommun. We're also very well positioned with a high narrow-body to wide-body ratio for our business and have the capacity and strong operating team to deliver on the forecasted rate increases.

We will return overall revenue growth this year, anticipate Ducommun's total revenue to grow in the low to mid-single digits versus 2020. Future growth will be accomplished by leveraging our newly built-out defense business, strong positions in commercial aerospace, especially on narrow-body revenues, with Airbus being a big part of our future as well as our 3 acquisitions which continue to deliver. We also remain active in the market for M&A for new companies that fit our model and believe this will only be an accelerator to higher results.

Now let me provide some additional color on our markets, products and programs. Beginning with our military and space sector, we posted second quarter revenue of $113 million, once again representing strong organic growth versus 2020, up 20%. We drove revenue on some key defense platforms. As mentioned earlier, we saw increased demand for our radar systems, TOW missile, F-18, Apache helicopter, UAVS, Falex and other missile programs. The second quarter's military and space revenue represented more than 70% of Ducommun's revenue in the period. We also continue to be very well positioned for further growth across defense platforms over the next several quarters in all sectors, especially at Raytheon. And again, ended the second quarter with a strong backlog of $501 million, which represents 62% of Ducommun's total backlog.

Within our commercial aerospace operations, second quarter revenue declined year-over-year to $37.6 million, as expected, driven by bill rate declines on a number of commercial aerospace platforms, impacted by the COVID-19 pandemic. However, decline in revenue was not as sharp as in prior quarters. Ducommun also has effectively adjusted cost and managed the downturn and is well-positioned once rates stabilize and increase over the long term. Ducommun expects a meaningful improvement in this market in the second half of 2021, and as mentioned earlier, has a very bright future. The backlog within our commercial aerospace stands at roughly $276 million at the end of the second quarter, slightly increased sequentially, as I mentioned earlier, compared to Q1. We stand ready with the team, processes and capital in place to support the expected bill rate increases in the next few years and we are excited to get started.

With that, I'll have Chris review our financial results in detail. Chris?

Thank you, Steve, and good afternoon, everyone. As a reminder, please see the Company's 10-Q and Q2 earnings release for a further description of information mentioned on today's call. As Steve mentioned, Ducommun's second quarter marked our first quarter of top-line year-over-year growth since the pandemic began early in 2020. This growth all driven organically, combined with our strong margin performance in the second quarter helped deliver outstanding overall performance. We anticipate the favorable year-over-year compares on revenue to continue throughout the remainder of 2021. We see this as we expect measured improvement in the commercial aerospace market, while military demand remains strong.

Turning to our second quarter results. Let me review some of the highlights. Revenue for the second quarter of 2021 was $160.2 million versus $147.3 million in the second quarter of 2020. The 8.7% increase year-over-year primarily reflects $18.5 million of higher revenue within the military and space sector, partially offset by $2.1 million of lower revenue across our commercial aerospace platforms. Ducommun's overall backlog at the end of the second quarter was approximately $814 million, slightly higher than that at the end of Q1, reflecting program timing, slowly improving commercial demand and an uptick in industrial orders. As a reminder, we define backlog as potential revenue based on customer purchase orders and long-term agreements with firm fixed prices and expected delivery dates of 24 months or less.

We posted total gross profit of $36.8 million for the quarter versus $32.7 million in the prior-year period. Gross margin rose 80 basis points to 23.0% from 22.2% in the 2020 second quarter, with the increase primarily reflecting favorable manufacturing volume, along with a strong product mix and cost control efforts. The 23% gross margin was our highest quarterly gross margin performance in more than a decade. For the past few years, we've talked about our margin expansion journey that we are on, the second quarter margin highlights that progress. SG&A was $23.7 million in the second quarter versus $22 million last year with the increase reflecting higher compensation and benefit costs. Ducommun reported operating income for the second quarter of $13.1 million or 8.2% of revenue compared to $10 million or 6.8% of revenue in the prior year period. The year-over-year increase was due to the higher revenue, partially offset by increased SG&A expenses.

Excluding restructuring charges and Guaymas-related expenses, adjusted operating income for the second quarter of 2021 was $13.8 million or 8.6% of revenue compared to $10.7 million or 7.3% of revenue in the comparable period last year. Interest expense was $2.9 million in the second quarter of 2020 versus $3.7 million in the prior-year period, driven mainly by lower interest rates, along with the impact of a decrease in total debt outstanding. The company reported net income for the second quarter of $8.4 million or $0.69 per diluted share compared to net income of $5.1 million or $0.43 per diluted share for the second quarter of 2020. Excluding one-time expenses in both periods, adjusted diluted EPS for the second quarter of 2021 was $0.74 versus $0.48 in 2020. Adjusted EBITDA for the second quarter was $23.4 million or 14.6% of revenue compared to $20.3 million or 13.8% of revenue for the comparable period in 2020, reflecting the items I just discussed.

Now let me turn to our segment results. Our Electronic Systems segment posted revenue of $102.8 million in the second quarter of 2021 versus $92 million in the prior-year period. These results reflect an $11.6 million increase in the sales of the Company's military and space customers, along with $2.8 million of higher revenue across commercial aerospace platforms, partially offset by lower industrial sales. Electronic Systems operating income for the second quarter was $14.4 million or 14% of revenue versus $10.4 million or 11.4% of revenue in the prior year period. The higher-margin reflects favorable product mix and higher volumes. Our Structural Systems segment posted revenue of $57.4 million in the second quarter of 2021 versus $55.4 million last year. The year-over-year increase reflects $6.9 million of higher revenue with to come -- within the Company's military and space markets, partially offset by $4.9 million of lower sales across our commercial aerospace applications.

Structural Systems operating income for the quarter was $5.6 million or 9.7% of revenue compared to $6.2 million or 11.2% of revenue last year. The year-over-year operating margin decrease was largely due to unfavorable product mix. Excluding one-time charges in both periods, second quarter adjusted operating margin was 10.9% in 2021 compared to 12.4% last year. CG&A expense for the second quarter of 2021 was $6.9 million or 4.3% of revenue versus $6.6 million or 4.5% of revenue in 2020.

Turning to liquidity and capital resources. We have available liquidity of $97 million and generated $6 million of cash from operations this quarter compared with $9 million in the prior-year period. We generated $3 million of free cash flow for the quarter compared to $8 million in the second quarter of 2020. We expect to return to historical cash flow and free cash flow generation levels as we move through the remainder of 2021. Our leverage ratio was 3.3 at the end of the second quarter. In terms of purchases of property and equipment, we spent $3 million during the second quarter, reflecting a lower investment requirement in the current economic environment. For 2021 in total, we anticipate spending between $16 million to $18 million to support ongoing product development and sustaining capital.

In conclusion and echoing Steve's comments, we are certainly pleased with our second quarter results and look forward to continued strong performance in the second half of the year and beyond. Through our operational focus and the strength of our defense business, along with the favorable impacts of the trends for commercial aerospace, domestic air travel demand and the 737 MAX production, we look forward to continuing delivering top-line -- continued top-line growth and strong underlying performance heading into and through 2022.

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

Okay. Thank you, Chris. And well, look, we're certainly proud of the results this quarter. It just gets us better positioned for when commercial aerospace rates go meaningfully higher in 2022. We met our commitments and have strengthened the company through this difficult period, really due to our effective strategy, our dedicated people, and our operational leadership. I'd also like to take this time to welcome our newest Board member to Ducommun, Sheila Kramer, who currently serves as Vice President and Chief Human Resource Officer at Donaldson Company, Inc. Sheila will bring important expertise to the company as we work through the pandemic and drive the long-term growth of the company.

In closing, I'd like to again this quarter take this time to tell our team, our employees that I'm very proud of them and all their efforts with the many challenges since the pandemic started back in March of 2020. Our team members show up the operation every day and they'll stressful, continue to get the job done for our customers, our nation, and one another.

So with that, I will turn it over for questions. Thank you for listening.

(Operator Instructions) And our first question comes from the line of Mike Crawford with B. Riley Securities.

Of your near $250 million in structural system sales, what percent of that is titanium?

And again, Mike, here just came across. We got a -- can you say that again, please?

Yes. Around what percent of your structural system sales are titanium?

Well, yes, I don't think, Mike, we've typically disclosed that percentage. But I would say that everything that those key components, those key programs and the ones Steve alluded to with Airbus. Those are the core of what we have, along with whatever is growing back here through the rest of the commercial recovery.

It's a meaningful number.

And what about -- versus core? At one point, I think you were particularly excited about that proprietary process and technology. And I think that's probably a very small portion of your overall titanium sales, but where do you see that growing to in the coming five years?

Yes. So first, it's composite. It's not titanium, just let you know, but we're excited. Just certainly, because of the pandemic and the slowdown on the build rates, that's put the VersaCore part of the business back at least probably, I don't know, maybe roughly a year. But we're picking a momentum again. This product is for the LEAP engine what we're working on for the Airbus 320. So good things head there, right? So we'll have more to say about it in the future but just doesn't note that we're excited about our prospects for VersaCore, though we have been slowed down a bit because of, obviously, all the challenges on the build rates.

And then is there anything in the forthcoming government fiscal year budget that you're particularly looking out for that would help or not to call them?

Yes. I was just saying, look, I mean, I know there was an extra $25 billion put in by the committees, and I know that's -- things are being worked through. We're obviously -- we're missile people, we're electronic people with cards and we make interconnects. We do a lot of things. We're very, very comfortable that as we go forward in time that what we see the defense budget leaning into, in certain ways, is going to benefit us. So what we -- again, to my remarks earlier, we feel overall very good about where we're going to be in the next few years.

(Operator Instructions) Our next question comes from the line of Michael Ciarmoli with Truist Securities.

Steve, can you give us -- or Chris, I guess, a little bit more maybe detail on this Airbus deal? And I guess, specifically, where your content per platform or annual revenues would be tracking now? I think from one of your old decks, you had showed the A320 maybe was kind of running around. I guess it was just under $20 million. So can you give us any directionally what does it -- is it a 2x deal? Does it -- just -- maybe any more color on where you are in terms of...

Absolutely. So it's going to be a bit difficult because of our expectations from the customers as far as disclosure, just from Airbus. So let me just out there. But obviously, this is on the A320, which is the big part of the game here. A330, obviously, is less than what the A320. But I know we've disclosed in the past, it's going to be a meaningful increase. The one thing that I do want to mention about that is that this is the first time we're recognized as a partner with Airbus. We kind of got in the game here in 2016, 2017, and I came in, in early 2017, and this has been a long road. And we really weren't even in the game before 2016, 2017. So for us to kind of get in there, the expectations at Airbus is sky-high and be able to meet their operational and other value propositions. I think it's just -- it's a big deal, like I said in my press release. So it's going to be meaningful. It's going to be A320. We're hoping, obviously, it's going to continue to evolve because now we're a partner where we weren't before.

Can you give any more detail as to how you won the selection? Was it Airbus looking for more suppliers? Or they -- are you -- did you displace or take a more material amount of share from the previous vendor? Or any details on how this came about?

Look, at the beginning, I think this titanium business, which I'm on record in saying, outside an OEM, we're really the world leader here on this SPF to hot form. They source something that comment they like and they gave us a [shaft]. And it took us 4 or 5 years to kind of operationally value-added. I would say as far as where the business came from, it probably came from other partners and maybe aren't there anymore, and they also have internal operations for titanium. So I think it's a mix.

What about -- can you give us any sense as to where you are on production rates, maybe the MAX, obviously, the 787 is the blemish out there. You talked about seeing more work from Spirit, presumably on the MAX there. But are you kind of in sync with where everyone else is? Are you kind of tracking and thinking about this 31 per month in early '22?

Yes. Yes. Well, let me first say the headline is for 100. Okay. I mean, we got the processes, we got the capital. We've got the right people in place now running all our operations. So we're definitely leaning into everything. I think you point it the right way. I mean, we're obviously supporting the customer, but we're excited. Hopefully, this 31 is going to come. That's going to be a big deal for us, as you know. And obviously, what we're hearing out of Airbus to ever get to 70 a month would be an absolute home run for Ducommun. So, we're ready to go. That's what I would say.

Any updated thoughts on kind of the M&A environment, capital deployment? I know you called out nobles with some of the success there, but what's the latest pipeline? How are you guys looking at deal flow?

Yes. Well, obviously, thanks for bringing that up. The nobles things, I mean, we're this was a big deal for us to win that back in October 2019 and it's got a great future. And when we look at our model, we're looking for engineered products so we can kind of improve our mix there as well as growth opportunities. So that's been very positive. All 3 of those have done well for us. I will say the current environment is competitive. I think you're probably hearing that from other folks. There's a lot of money out there, but we have our functional people. We still have the same team as we quiet last year and we're active. So we like acquisitions. We think we can integrate them well. We think that our track record has been to shareholders and grid our P&L. So hopefully, more to come sooner than later, Mike.

I am showing no further questions at this time and I would like to turn the conference back over to Mr. Oswald for any further remarks.

Great. Well, again, thank you, and I want to thank everybody for joining us today, both our analysts and most importantly our shareholders and our team. We're obviously pleased with the return to growth, as I talked about, I think it was in my Q2 remarks in 2020 that we were going to return to growth this year. And this is our first quarter doing it. So you can't argue with organic growth. I mean, 9%, it's more than respectively, even though it was of a lower base in Q2 2020. It's still a great number. We're thrilled with gross margins at 23%. And I think we're doing a lot of the right things. So again, we always appreciate your support and your commitment and we look forward to speaking to you again soon. Thank you.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.