Good day and thank you for standing by. Welcome to the Fourth Quarter 2024 Ducommun Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Suman Mookerji, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, and welcome to Ducommun's 2024 fourth quarter conference call. With me today is Steve Oswald, Chairman, President and Chief Executive Officer. I'm going to discuss certain limitations to any forward-looking statements regarding future events, projections, or performance that we may make during the prepared remarks or the Q&A session that follows. Certain statements today that are not historical facts including any statements as to future market conditions, results of operations, and financial projections are forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are, therefore, perspective. 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 level of U.S. government defense spending, our customers may experience delays in the launch and certification of new products, timing of orders from our customers, our ability to obtain additional financing, and service existing debt to fund capital expenditures and meet our working capital needs, legal and regulatory risks, the cost of expansion, consolidation and acquisitions, competition, economic and geopolitical development, including supply chain issues, international trade restrictions, and rising or high interest rates, the ability to attract and retain key personnel and avoid labor disruptions, the ability to adequately protect and enforce intellectual property rights, pandemics, disasters, natural, or otherwise and risk of cybersecurity attacks. Please refer to our annual report on Form 10-K, quarterly reports on Form 10-Q, and other reports filed from time-to-time with the SEC as well as the press release issued today for a detailed discussion of the risks. Our forward-looking statements are subject to those risks. Statements made during this call are only as of the time made, and we do not intend to update any statements made in this presentation, except if and as required by regulatory authorities. This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call. We filed our 2024 annual report on Form 10-K with the SEC today. I would now like to turn the call over to Steve Oswald for a review of the operating results. Steve?

Okay. Thank you, Suman. Thanks everyone for joining us today for our fourth quarter conference call. Today, and as usual, I will give an update of the current situation at the company, after which, Suman will review our financials in detail. Let me start off again on this quarterly call with Ducommun's Vision 2027 game plan for investors. The strategy and vision were developed coming out of the COVID pandemic over the summer and fall of 2022. We unanimously approved by the Board, the common board in November 2022 and then presented to investors the following month in New York, where we got excellent feedback. Since that time, Ducommun management has been executing the Vision 2027 strategy by increasing the revenue percentage of engineered product and aftermarket content, which finished at 23% for 2024, up from 19% in 2023, consolidating our rooftop footprint in contract manufacturing, continuing the targeted acquisition program, executing our offloading strategy with defense primes and high-growth segments of the defense budget, driving value-added pricing and expanding content on key commercial aerospace platforms. All of us here as well as my fellow board members continue to have a high conviction in the Vision 2027 strategy and financial goals and believe that many catalysts ahead present a unique value creation opportunity for shareholders. The Q4 2024 results are another example of our strategy initiatives working with much more to come in the next few years. Q4 was our 15th consecutive quarter with year-over-year growth in revenue, growing 2.6% over prior year to $197.3 million despite significant headwinds in commercial aerospace build rates, destocking at BA and SPR and the strategic pruning of our non-core industrial business, which I've mentioned in the past. It was also our sixth consecutive quarter above $190 million in revenue. Strong growth in our…

Thank you, Steve. As a reminder, please see the company's 10-K and Q4 earnings release for a further description of information mentioned at all. As Steve discussed, our fourth quarter results reflected another period of solid performance with our commercial aerospace and military end markets. We also continue to make good progress on our facility consolidation projects which are now nearing completion and will drive further synergies in late 2025 and into 2026. As we close out the recertification of the various product receiving facilities over the next few months. As Steve highlighted earlier, we also made great truck build up our engineered product portfolio with those revenues now contributing 23% to our mix. These actions, along with our strategic pricing initiatives, drove strong margin expansion in 2024 and has put us on a strong footing to achieve our Vision 2027 goals. Now turning to our fourth quarter results. Revenue for the fourth quarter of 2024 was $197.3 million versus $192.2 million for the fourth quarter of 2023. The year-over-year increase of 2.6% reflects growth in both commercial aerospace and military and space, highlighted by $5.1 million of growth across military and space platforms and $3 million of growth in our commercial aerospace platforms. We posted total gross profit of $46.4 million, or 23.5% of revenue for the quarter versus $41.7 million, or 21.7% of revenue in the prior year period. We continue to provide adjusted gross margin as we have certain non-GAAP cost of sales items in the current and prior period relating to inventory step-up amortization on our recent acquisitions and restructuring charges. On an adjusted basis, our gross margins were 24% in Q4 2024 versus 23.2% in Q4 2023. The improvement in growth by our growing engineered products portfolio, strategic pricing initiatives, productivity improvements and restructuring savings,…

Okay. Thanks, Suman. Just in closing, Q4 was another very good quarter for DCO to finish, I believe, an excellent year. In 2024, we achieved record revenues with record margin expansion and the Vision 2027 strategy in its second year really kicked in. We also delivered full year EBITDA margins of 14.8%, which was an expansion of 140 basis points during the year. Solid progress towards our target we've been mentioning this morning of 18% by 2027. We also discussed our Vision 2027 target of the very important 25% plus of engineered product revenues and 2024 coming in at 23% was terrific news. Finally, with the BA strike now behind us, commercial bill rates heading higher, along with, I believe, a very good defense backdrop for DCO, including FMS, I feel great about what lies ahead in the next few years for us, our shareholders and our other stakeholders. So with that, let's go to questions. Thank you.

[Operator Instructions] And our first question comes from the line of Ken Herbert of RBC Capital Markets.

Hey, good morning, guys. Stephen, Suman. Maybe just to kick off. I appreciate the 2025 mid-single-digit top line outlook as we think about the year. Specifically, can you provide any color on expectations for defense and commercial markets, commercial aerospace? And then I guess within commercial aerospace, where are you shipping today on maybe the MAX? Or I guess what do you see as continued destocking risk on that particular program into the first part of year 2025?

All right. Ken thanks for the question. First, let me just tackle the commercial part. I mean a big part of our MAX business is through Spirit, right? So that's a large part of our shipments, including what we sent to Boeing as well, less or so. We think that -- everything we're hearing is that the first quarter and probably through the first half, there's certainly destocking headwinds in Spirit, okay? So I can't tell you exactly what, but that's why we feel like first half of the year is first quarter, especially the first half of the year is a bit challenging on the destocking. I think after that, things will open up a bit. Really, all indications are that they're going to get to the mid-30s at least, okay? We're hoping, and we think that's in the cards now. So we think the second half is going to be better than the first. Our military side, I mean, I know the services companies and lots of other folks are seeing tremendous headwinds. I mean I can only talk to our backlog. Our backlog is real good. We're on these programs that we like. I mean, I mentioned this new customer can who -- it's just one of many, but this whole Natel buy that we got in Q4 that just because we're good at cabling really good and we've been working with Raytheon in the past, we were able to get that order. So feel good about defense. I think that we're going to write up more commercial aero in the second half of the year. First half, destocking and sort of still moving build rates higher, I think, is the story for DCO.

Okay. So…

I also add that we are seeing improvements between January and February this year in our shipments, both to Spirit and Boeing. So we have seen a ramp-up and from kind of the teens into the 20s, both with Boeing and Spirit going from January to February. So that bodes well for Q1 and rest of the 2025.

This Spirit has a lot of fuselages, as you know, Ken.

Yes. No, I appreciate that. So if I think about, again, relative to the mid-single-digit, maybe upper end of that range in defense and lower end of that range or better growth in defense, I guess, in military and space in 2025 relative to commercial. Is that the right way to think about it?

I think we're going to see -- we are expecting to see good growth in commercial as well, but it's going to be more back half. I think defense growth is going to be more even through the year.

Okay. Perfect. And just a clarification, what percent of your maybe defense sales ultimately end up in Europe? And how much will you benefit just from what's expected to be a surge in defense spending there?

Yes, that's a good question. This whole order we got, this $40 million-plus order is, frankly, one of our first, okay? So we are getting lift with the Polish order for the Apache helicopters and kind of -- those type of things. We get a big lift from that, but that goes through our U.S. defense price. This is a new thing for DCO. So we're hoping for more on that. It's early but this is a direct shipment into Germany. So it's -- I think it bodes well for, hopefully, more this year and next year.

Perfect. Thanks. I’ll pass it back there.

All right, Ken. Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Mike Crawford of B. Riley Securities. Your line is now open.

Thank you. I know it's a little early, but with potential offsets to defense budget spending where things are reprioritized under the new administration, as much as 8% targeted. Where does Ducommun sit in the mix? Like let's just take, for example, growing platforms like the Exon 30 that is like a new -- next-generation combat vehicle that's probably okay, but maybe some other older platforms might get hit on reprioritization of spending. So as you look at it now, how would you characterize your position amid all this?

Yeah, Mike, I hate to give you that answer. I'll give you two parts to the answer. First, it's tough for us to know right now. So that's the first answer I'll give you. The second answer is that we feel like when we look across what we have, we feel very good about where we are with our circuit cards, with our cabling, we've got truck full orders for Apache even though that program, as I mentioned, is offline right now, and it will be certified in the next couple of months and will be made in New York, at our Krosaki facility. The Tomahawk missile is going to be there, as you know. So SPY-6, maybe here, maybe there, we feel like at least what we know today, we feel good about the breadth. That's what I would say about our defense business.

We don't have a strong reliance on any one program. No individual program is more than 10% of our defense revenues, including programs such as the F-35, the F-16 or F-18, so I think we are diversified in that way. And also the focus, as Steve mentioned on our missile, missile defense, electronic warfare, our focus in those strategic areas, I think, is going to bode well if there is that pivot that you're talking about. And we should hopefully see further growth in those areas offsetting weakness on the more legacy platforms.

The only thing, Mike, we've been writing down is the F-18, which we've signaled the last, I guess, year or two on the call, right? So we'll be writing that down. But the good news is, is that a lot of that lower revenue now is in the base. So we're not going to see as much headwind on that. That's our view.

Okay. Thank you. And just to switch gears a little bit. So in the IMC business, you have this great relationship with ViaSat that has just about 4,000 commercial planes in service and another 1,570 planes in backlog. So that's still going to continue for a few more years, but this has been a great growth business for you in the last few years. But at what point do you start planning for capacity where that business will slow down at some point, if it's not next year or 2027 is going to happen at some point. So when do you start planning for that transition?

Yeah. We're actually -- how about lucky and good, right? So all that work really comes out of Appleton, Wisconsin. That's all the card work we do for ViaSat and they're great partners. And we have Next Generation Jammer going in there. We have lots of things that are queued up. So we actually are probably in the next year or two looking for more space, even though the ViaSat work will go down. We've got lots of high demand for our Appleton products. So I'd say at least from where I sit today, we're in good shape.

Okay. Thank you. And just the last one is what, if anything, are you seeing that's different or interesting in your M&A pipeline?

So we are continuing to work on multiple opportunities. The deal flow in the lower mid-market for the engineered product businesses that we have seen has been slower in the past 12 months. but there are active things in the hopper that we continue to work on, and we remain optimistic about being and confident about being able to execute our acquisition strategy and meeting the Vision 2027 goals.

Yeah. Thank you.

Thanks, Mike.

Thank you. One moment for next question. Our next question comes from the line of Jason Gursky of Citi. Unknown Analyst

Hi. This is Jeremy Jason on for Jason Gursky. I just kind of wanted to understand sort of how much of the margin hit this quarter in Structural Systems was like mix as opposed to like costs that would fade away once Mexico is up and running. And so like if it's mixed, how long does that mix sort of persist for?

Right. Great question. And I would say it's kind of about evenly split between mix as well as onetime expenses that were specific to the quarter. and the mix as well was unusual to the quarter, and we do expect the margins in the structures business to fully recover in Q1.

Got you. Got you. I really appreciate that. And so my follow-on question is just if that's the case. So it sounds like Boeing programs are a bit more profitable than Airbus so first of all, is that the case? And also, what can you guys do to like improve Airbus program profitability.

I think we would -- we avoid talking about specific customer profitability or product line profitability. That being said, we ensure that we're getting paid for the value that we bring to the customer, and we continue to work on opportunities with both the customers you mentioned to raise projects where it is appropriate and make sure that we are earning sufficient margin. And those actions have taken place over the last year as you've seen growth in our margins. and there are active ongoing initiatives to drive that going forward in 2025 as well.

Perfect. And then one last one. Thank you so much for this. So how much of like additional costs did you guys sort of incur in this past quarter that were not backed out like? And sort of when do those potentially go away?

So are you referring to the Structures segment?

Yeah.

So it's about half of the drop in margin was on account of onetime expenses.

Just for this quarter.

Just for this quarter

For Q4.

Got you. I appreciate the color. I'll pass it back.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Alexandra Mandiri of Truist Securities. Unknown Analyst

This is Andre Mandiri [ph] on for Michael Ciarmoli with Truist Securities. Thank you for taking my question. I just had a question on the cash flow statement. It looks like there's one item titled legal fees for unsolicited non-binding acquisition offer -- in 4Q and $3.145 million year-to-date. Can you just add more color on this item and what it entails?

Yes. So, it's not an expense we are happy about that we didn't want to spend certainly be spending shareholder money on something like this, but it was the right thing for us to do to protect shareholder interest and make sure that we preserve the value of the company for our existing shareholders. And so in making sure that we were properly -- the management and the Board was properly advised in response to the offer received from Albion River, we did engage both financial advisers as well as legal advisers over the course of the year, and those are the fees that were paid to both those legal and financial advisers that advise Board and management. Now, since in Q4 and then in February of this year, we did see a 13G filing stating that Albion no longer holds position in Ducommun, and they have sold off their entire position. So, we are not expecting these expenses to continue in 2025.

Okay, great. That's a lot of sense. And I just had a quick follow-up related to defense exposure and programs. So, do you have any thoughts on those and potential changes for the better or worse as a result of those? Thanks.

Yes. Thank you for the question. I know it's top of mind for everyone. We don't really have a viewpoint right now. Again, we've mentioned earlier on the call, we feel we have a wide breadth of products that we make for defense. A lot of it is electronic warfare. A lot of it is things, cards, cabling, things that are important for missiles and missile defense, and we do feel good about all our programs. I mean, I did signal a year or two ago for the F-18, and that's the one program which we are winding down and most of that's already in the base. So, we feel good. But again, we don't we're not we don't have any view as yet as far as on the Dodge side. We just have the DCO view.

Okay, great. Awesome. Thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Noah Poponak of Goldman Sachs. Your line is now open. Hello, Noah, your line is now open.

I think there may be a connection issue, let's move forward.

Okay. I'm showing no further questions. I would now like to turn it back to Chairman, President, and CEO, Stephen Oswald, for closing remarks.

Okay. I want to thank everyone for joining us. I very much appreciate it. Again, I felt we had a very good quarter. I think we're well-positioned. I know there's lots of discussion about defense right now. Again, let me reiterate finally that our view is, at least from our product line, we feel very good about this year. So, we'll have to see what we that's our view. We feel strongly about our Vision 2027 and look forward to speaking with you after the first quarter. So, thank you again for your support, and have a great and safe day.

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