Steve Oswald - Chairman, President, Chief Executive Officer Chris Wampler - Vice President, Chief Financial Officer, Controller, Treasurer

Good day ladies and gentlemen, and welcome to Ducommun’s Fourth Quarter Conference Call. At this time all participants are in a listen-only mode. Following managements prepared remarks we will hold the question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded today, February 23, 2022. I would now like to turn the conference over to Ducommun’s Vice President, Chief Financial Officer and Controller and Treasurer, Chris Wampler. Please begin.

Thank you, Lorna, and welcome to Ducommun's 2021 fourth quarter conference call. With me today are Steve Oswald, Chairman, President and CEO. 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 amongst others, the cyclicality of our end use markets, the impact of COVID-19 on our operations or 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 acquisition, 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 other forward-looking statements which 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 Annual Report on 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?

Okay, thank you Chris and thanks everyone for joining us today for our fourth quarter conference call. Today and as usual I would give an update of the current situation of the company, after which Chris will review our financials in detail. The company remains focused first and foremost on the health and safety of our employees. The team has done an excellent job of the safety protocols put in place since March 2020 and we continue to follow our best practices aligned with health authorities throughout our many operations. The total number of cases is roughly 360 since the beginning of the pandemic, and within the company we had 80 cases in Q4 of 2021 with the new variant. Before going over the fourth quarter results, I want to highlight two transactions that were completed during the quarter and previously announced that I’m very proud off. First, we completed the sale of leaseback transaction of our Gardena Performance Center located in Carson, California, which was the first in the long history of the company. The building and land was sold for approximately $143 million, generating more than $110 million in after tax proceeds. This was an extraordinary price based on the very high demand for commercial real-estate in southern California in Q4 and we took full advantage of it. To put in perspective, in 2015 we had the property appraised for a financial project and it was $38 million. This transaction was a major event for our company and shareholders and allowed us to monetize a portion of our Legacy, California owned real-estate portfolio. Second, we completed the acquisition of MagSeal as well in Q4, a leading provider of high impact military proven magnetic seals for critical systems in aerospace and defense applications for $69.05 million net of cash…

Thanks Steve. As a reminder please see the company's 10-K and Q4 earnings release for further description of information mentioned on today's call. As Steve discussed, our fourth quarter results reflected another period of solid performance and completed our full year 2021 commitment of return to growth. The fourth quarter results were clearly bolstered by the significant impact of our sale-leaseback of our Gardena facility. We are pleased to see continued strong aerospace travel demand, which should translate in higher shipments going forward. We are looking forward to building on the 2021 results and our position to do so. Now turning to our fourth quarter results, let me review some of the highlights. Revenue for the fourth quarter of 2021 was $164.8 million versus $157.8 million for the fourth quarter of 2020. The year-over-year increase reflects $4.4 million of growth across our commercial aerospace platforms and $4.9 million of higher sales to industrial customers, slightly offset by $2.3 million of lower revenue within the military and space sector. Ducommun’s overall backlog at the end of the fourth quarter was probably $905 million reflecting recent growth across our commercial aerospace platforms, setting up the company for strong top line performance in 2022. This includes the backlog of our MagSeal acquisition. Our defense backlog of $520 million, which is higher both sequentially and versus prior year has its position for another strong year of defense. As a reminder, we defined backlog as potential revenue based on customer purchase orders and long term agreement with firm fixed price and expected delivery dates of 24 months or less. We posted total gross profit of $37.3 million for the quarter versus $34.8 million in the prior year period, while gross margins were 22.6% and 22.1% in 2021 and 2020 respectively. The slight increase in margin…

Okay Chris, thanks. Let me just a cover few other things before going to questions. I also want to mention that Ducommun was named to Newsweek’s Magazine's Inaugural list of the top 100 most loved workplace for 2021. Ranking number 66 among the top 100 companies recognized nationwide for employee happiness and satisfaction. This list included other companies such as Dell, IBM and FedEx and we are proud of our efforts to ensure Ducommun has the people first culture. In addition in December and partnership with the Los Angeles Chargers and the National Football League and the University of California, Irvine held its Fourth Annual STEM on the Sidelines competition, a regional competition promoting STEM education in the Los Angeles and Orange County California high schools. More than 150 students from 17 different high schools participate in the 2021 contest at SoFi Stadium, and the winning teams were honored before the Los Angeles Chargers game on December 16, 2021. This is part of our company's commitment to serving our local community and promoting technical skills among high school students. Ducommun also welcomed new board member in December, Samara Strycker, Senior Vice President Controller and Treasurer at Navistar International Corporation. Samara will be working on the audit committee as well and she is a great addition to our team. In closing, I’d like to again take this time, every quarter since really COVID began to tell Ducommun employees I’m very proud of them and all their efforts filled with the many challenges, from a pandemic as well as a 737 MAX, all in 2020 and 2021. Our team members show up every day at our operations and though stressful, we get the job done for our customers, our nation and each other. So with that, I’d like to open it up for questions please.

Thank you. [Operator Instructions] Our first question comes from Mike Crawford with B. Riley Securities. Your line is open.

Thank you. First, you have another one or two facilities in California that you might be able to sell. Is that something you're going to explore this year?

Mike, this is Steve. Yes, and good to hear from you, yes. We’re going to explore it. Nothing concrete right now, but certainly we've gone on this journey to look at these opportunities, especially now with the way the markets are, we felt that the Gardena facility was right at the top. So we moved on that in Q4 and throughout the year we’ll be looking at possibly another opportunity. We'll keep you posted.

Alright, great. And then on these programs that are growing F-18, F-15, F-16, UAV’s, TOW and other missile programs, like what specifically are the key structures and/or assemblies that you're providing for these programs that are helping to drive some of the growth?

Well a lot of it is circuit cards, so a lot of it is circuit cards, a lot of its cables, but you know like with the TOW missiles, you know it's a structural component of the missile. As I mentioned we also just picked up the card on that – or the cards on that program as well as the harnesses. So it's a mix, but we certainly lean heavy on circuit cards. I mean that's one of the things really we’re seeing as well and I mention this off-loading is that you know defense primes are looking at the comments and what we can provide for off-loading opportunities to drive cost savings and we’re working closely with many of them.

That’s great. And then should we expect rotary platforms that continue to decline?

You know this is alright. I’d say it’s TVD [ph]. I mean you know certainly FMS versus the last few years has not been our friend when it comes the rotary. We're going to see a little bit as you know, a little bit more in commercial helicopters I think going forward, especially over the next year or two, but I would say rotary looks to me sort of flat to down.

Okay, excellent! Thank you very much.

Yeah Mike.

Thank you, Mike.

Thank you. Our next question comes from Pete Osterland from Truist Securities. Your line is open.

Hey! Good evening! I’m on for Mike Ciarmoli this evening. Thanks for taking our questions. Just first wanted to ask on the MagSeal acquisition. Could you provide any extra detail on what level of revenue earnings contribution you're expecting in ’22, as well as maybe the margin profile relative to the rest of the structure segment?

Yeah Pete, this is Chris, and on the acquisitions that we've had in the last five years, you know all moved out of the size where they are not – there is no requirement to disclose and you know we’ve had that stance of not disclosing beyond really the acquisition costs than what we're required to. So it's – there's nothing, there's no additional detail to provide their, other than you know the reason we bought it and just really being excited about the product name and wondering if we can do it.

Yeah, I think one other thing. I think you could certainly – we could get out a little bit to say that you know the margins are going to improve the structure situation.

Yeah, they will be the…

I think that the margins are going to be helpful.

Okay, great. And then you know following up on that line of questioning, just on margins within structural systems, just you know given the plan for increased production rates on MAX, how are you expecting margins to trend throughout the course of the year? You know should we be expecting that we’d see just sequential progression throughout the year beyond fourth quarter levels or are there some other puts and takes you should be thinking about?

Thanks Pete. I mean the size of our two business, electronics and structures, they are just such that they do bounce around a little bit. But having said that, you know through the pandemic we saw structures margins sort of head to the single digit level. We've gotten back to double digits. Certainly that's where we’d like to keep it. I think if you look over the course of this year, absolutely, you're going to see it progress. The rates are coming back as that takes hold, as that comes through you know with more volume to the facilities, that will be very helpful to us. So I think the second half of the year, definitely yes, and I think you know it just depends on sort of how much moves through here in these first couple of quarters.

Yeah, let me just add, you know obviously one of our strategies is you know we're going for scale and the way we have the business structured is that you know volume is certainly going to help us quite a bit, especially in the second half of the year and in 2023. So we're pretty excited about where this is going.

That’s great! Thanks a lot.

Thanks for joining us Pete.

Thank you. [Operator Instructions] Our next question comes from Ken Herbert with RBC Capital Markets. Your line is open.

Hey! Good afternoon Steven and Chris.

Ken, good afternoon.

Steve, was the uptick in defense structures backlog in the quarter sequentially, was that all MagSeal that sort of $20 million increase or was there something else driving that?

MagSeal was definitely a key piece of it Ken. This is Chris. It was a key piece of it, but there were – you know there were other puts and takes, but I think that’s certainly the biggest piece of it.

Okay, and so if we look at the, look at obviously the total, the defense backlog, is there any way – was it – anyway to maybe second that out. Was it maybe flattish or I'm sorry, you know flattish sequentially, up some sequentially. I mean how do we think about the backlog in defense right now and then I guess more importantly, either if you want to discuss this sort of with or without MagSeal, how do we think about growth specifically in defense and space in ‘22.

Yeah Ken, I think a couple of these. First, you know that's why I brought up the off-loading theme here, that – look, you know there's movement among the different programs up and down, but you know we feel a couple of things. First, we're certainly a supplier of choice on lots of things, for either new or current programs. You know we have this off-loading. 2022 is going to be very good; 2023 is going to be you know almost $100 million. So that's really going to help us. And we’re still doing the share shift. As I mentioned, you know we thought missile case was the share shift you know from another supplier. So we think you know we feel good about defense. You know going forward we have a very nice backlog. We feel good about decent growth in 2022.

Okay, okay, that's great. And then can you just comment, maybe and a little more granularity on your MAX ship set. Is that – are you still essentially in line with Spirit and I guess how much growth are you expecting for the MAX in particular in ’22?

Yeah Ken, this is Chris. So a couple of things. One, we certainly are expecting the pull through to start happening you know a little more in line with the published rates that are out there. You know if you look at Max right now, it’s more the 24 rate. It's going to work its way up you know into the low 30’s, but we're still you know getting – part-by-part it's a little different story, so there's no one answer there on the parts. I will – also we’ll circle back just on your question on the backlog on commercial. I'm not sure I caught the question exactly right, but I mean commercial structures backlog, I mean there was a nice uptick there from – you know from what we have going on with MAX, as well as A320.

Yeah Ken, let me also just throw in here that you know look, we feel really good about our position with Spirit and we think it's only going to get better. Obviously we have our relationship directly with Boeing and you know one of the real bright spots is after quite a long time we're starting our spoiler line against, so the 737 MAX in our [inaudible] facility, which you know is a big revenue driver. So that's starting to get online and we're going to be back on that, which was down for at least, roughly 18 months, so… [Cross Talk]

Yeah, thanks. And if I could, just one final question. I know off-loading has been a really nice sort of secular story on the defense side. I know you've taken some share on the commercial side. How do we think about or what's your view Steve on incremental share opportunities in the commercial market in particular as the supply chain seems to be pretty stressed as it looks to support both OEMs over the next one to two years and the rate increases.

Yeah, well first – I mean look, one of the real bright spots and I already mentioned, I think we are in really good shape with Boeing and we tend to – especially on our titanium operation, which you know I talk about. We tend to really be you know the supplier of choice there, for not only Boeing products, for the most part, but also Airbus. Airbus has a captive titanium operation, as well as some others, but we're sort of also a very high level supplier for them and we believe that you know over the next year or two, as you mentioned with ramp-up and suppliers struggling with our – I think really good track record, I think we've been for the most part 100% onto the Airbus for us over two years now, even though the volumes been down a bit. We feel like you know that’s, so that’s going to come our way, even from their internal operations. So we think everything is heading in the right direction for both, some share gain and obviously you know for the rates going up.

Great. Well thank you very much, I’ll pass it back then.

Okay, thanks Ken.

Thank you. Our next question comes from Brian Perri with Reece [ph] Street. Your line is open.

Hey! Good afternoon. Hi Steve, hi Chris, how are you guys?

Hey! Good Brian.

First, I wanted to offer my congratulations on being named to Newsweek's list of the top 100 most loved workplaces. It’s really an incredible accomplishment.

Thank you.

We’ll take it. I appreciate it.

And the after tax sale lease back proceeds came in $20 million plus above what you are guiding to last quarter, which I think was $90 million plus, is that right?

Yeah and it was basically because we were in the middle of a very competitive bid process. You know Steve sort of hit the highlight on the industrial market out here and how sort of red hot it is. So once that competitive process took hold, that’s just what took it beyond really the range that we thought for sure we can get to.

That’s terrific. In the earnings release, you call it industrial growth as being somewhat timing related. Could you flush that out a little bit?

Yeah, I think a couple things. One is, the industrial backlog, this was the starting point. You know it definitely has some long lead time items to it and we are seeing an increased uptick in demand there, and that certainly you know keeps us in a position to put some more produce though there. I would say you know the industrial product Brian is, if you watch our company, it's not one that we highlighted as a high priority, it’s one that we do in these facilities where it makes sense, because we don't have a facility dedicated to industrial, so we can produce those products within another performance center and so it's when the things work out right and when we can get to the right place with the customer, we'll take the work and we’ll build it and that’s going to be good.

Yeah Brian, this is Steve. This industrial is really – you know, I think there is a point ahead a little bit with yours, but in general, that's just really kind of opportunistic business that if we can do it and make good money, we’ll do it.

Terrific! I guess last one from me. If I could circle back on the MagSeal one more time, I think on the Nobles acquisition you did at least give us an EBITDA multiple headline. Would it be possible to get some color just on the purchase price discipline on that one?

Well, I'll help – I’m going to help you directly I guess. If you go back to those last several, we went and Steve talked specifically that you know we were really disappointed and kept it under 10x I would say, due to the pandemic and through all the different variables in the M&A market, particularly with attractive assets, the value has just went higher. So we were still in that, gaining recognition to the market got a little more frothy. We were still disciplined, we will not say that it was below 10x, yeah.

I think that's right, I think you know look, just for our investors and you know we try to be careful here overall, but I think you can count of us and you will still have a good discipline in MagSeal.

Well, congratulations again on the strong results and the really terrific sequential organic growth in the backlog, love to see that.

Thanks Brian, more to come. Take care

Thank you. I have a follow-up with Ken Herbert with RBC Capital Markets. Your line is open.

Yeah, hey thanks. Chris I wondered if you could just walk through a bit more of the detail. On the cost structure associated as a result of the sale leaseback transaction, how should we think about for modeling purposes, you know the tax impact and maybe the, obviously the annual lease expense. And if I understand well, obviously this will flow through structures, but how should we think about the moving pieces of this, here moving forward.

Yeah, thanks Ken. Yeah, I mean you are right, it will go through structures. We've talked certainly a lot about the very good news of what this sale has done and the least back has done, the sale of done to our capital, capital structure or capital resources and our headroom on being able to do things. The flip side of that is, we've got the lease and so with that we've got roughly, I’ll call it $4 million to $5 million when you count, so $4 million roughly for the lease and $1 million for incremental property taxes. So you got about a $5 million run rate coming at you annually, that in this market we're going to look to that facility to do everything they can to offset as much of that through just being – running an aggressive business and pricing where it makes sense and everything else, so that we can help offset that along with obviously you know spending the money on MagSeal and other things to make it a big win.

Yeah Ken, we just mentioned, our Gardena facility you know made some pretty unique things in the industry. So you know we feel as we move forward over the next you know 12 to 18 months we have, we have really good pricing power and we're going to move on that too. So that's our plan and at the end of the day we still think you know despite some near term headwind, we think the sale leaseback is a homerun for us and for the shareholders.

Yes, thanks. And if I could Steve, just one final question. Now that you’d done MagSeal, I know you had a real focus on acquisitions and more IP within your portfolio and more aftermarket. Can you level set us here heading into ‘22 as to what percentage of the total business now represents aftermarket for both defense and commercial customers?

Ken, I think what I want to do is, we're going to have – we are going to have some more communication throughout this year. I would like to get back to you on that, as you know I usually do. Okay.

Okay, no, that’s perfect. Alright thanks Steve.

Yeah we’ll tell you this. Its growing and we are happy with it and it’s a strategic priority as I’m sure you know, so more to come on that.

Alright, perfect!

Thank you. And at this time there are no other callers in the queue. So I'll turn the call back over to Mr. Oswald for any closing remarks.

Thanks very much. Just want to thank, first thanks for all the questions and the dialogue, we appreciate it. I also once again thank my team and thank as well our investors. We really appreciate all the support. It’s been obviously a very challenging two years for everyone, the world, our nation, companies, etc. We feel very good about where we're heading with the company. We hope you do as well. So have a nice evening. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day!