Ducommun Incorporated (DCO) on Q1 2021 Results - Earnings Call Transcript
Operator: Welcome to the First Quarter 2021 Ducommun Earnings Conference Call. My name is Anna, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to the investor relations advisor, Chris Witty. Chris, you may begin.
Chris Witty: Thank you, and welcome to Ducommun's 2021 first 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 perspective.
Steve Oswald: Okay. Thank you, Chris, and thanks everyone for joining us today for our first quarter conference call. As in our prior quarter calls, I hope you and your families are healthy, for those that have received vaccines that have went or is going well. And we all get through this pandemic as best and fast as possible. Today and as usual, I will give an update on the current situation at the Company, after which Chris Wampler will review our financials in detail. Company ratings focus first and foremost on the health and safety of our employees. Team has done an excellent job with the safety protocols put in place since March 2020. We continue to work with authorities on best practice throughout our operations. Now, the cases at Ducommun is roughly 200. Since the beginning of the pandemic, we have seen a significant drop-off starting in February of this year, and we remain diligent on communication with weekly updates through our human resources team.
Chris Wampler: Thank you, Steve. Good afternoon, everyone. As a reminder, please see the Company's 10-Q and Q1 earnings release for further description of information mentioned on today's call. As Steve discussed, our first quarter results were very solid. During Q1, we continued to demonstrate our ability to perform well at reduced volume levels, which we have had since the onset of the COVID-19 pandemic over one year ago. We're looking forward to leveraging the expected increase in demand for our commercial aircraft components and systems, as well as the strength of our defense business as we return to growth in 2021.
Steve Oswald: Okay. Thanks, Chris. Certainly proud of the results this quarter, and we look obviously forward as everyone does to better market conditions in commercial aerospace later this year. We've met our commitments despite some very difficult headwind. And this is really due to our people and leadership at the end of the day. I would add as well that we do have the right footprint, operating system, cost structure and discipline. We intend to performing at a high level and feel very confident in the future. As in the Q4 call, I also want to thank our customers, shareholders and all our business partners for their continued support as we worked through these difficult times together both last year and in Q1. I'll take this opportunity as well as, Chris mentioned, to let you know that the investor day I mentioned earlier in the year will take place on Wednesday, May 26 and start at 9 a.m. Pacific Time. I'd like to invite everyone to this important meeting, where we discuss our plans for the future, and appreciate your support in attending. In closing, I'd like to, again, take this time to thank the common employees that I'm proud of them and all their efforts dealing with the many challenges from the pandemic that began in 2020 and now will continue in Q1 2021. Our team never showed up at the operations every day, and, though stressful, they get the job done for our customers, our nation and for one of them. So with that, let's go to questions please. And thank you.
Operator: Thank you. We will now begin the question-and-answer session. And we have a question from Pete Osterland from Truist Securities. Please go ahead.
Peter Osterland: This is Pete Osterland on for Mike Ciarmoli. So it looks like your operating margins took a step back versus the fourth quarter instructional systems despite sales being pretty flat there on a sequential basis. So I was just wondering if you could give some color on what drove this, if there was anything specific in the first quarter or just a change in mix or just any help you can give there.
Chris Wampler: Yes, Pete. No. Q1 is really -- with structures, it's all about the mix. Again, year-over-year, it was a nice change favorably, but sequentially, yes, that's what caused us a little bit of headwind there.
Peter Osterland: Okay. And then it looks like your backlog has stabilized in commercial aero over the course of the last couple of quarters. So I was just wondering how order flow is trending there and if you could be expecting to see any meaningful increase for commercial aero sales on a sequential basis in the second quarter, or if you think it's really just going to be in the second half before that materializes.
Steve Oswald: Pete, this is Steve Oswald, and welcome to the call, by the way. And certainly we're optimistic about our order flow the rest of the year, probably more leaning towards the second half of 2021, but we definitely anticipate that we're going to see orders go up. And I think overall, the story is going to be a very good one, not only a near term, but mid-term.
Peter Osterland: Great. And then just one more. I was wondering if you could comment on how your M&A pipeline is looking, if there are any areas you'd call out that are currently a priority and just what you're seeing in terms of available opportunities and valuations.
Steve Oswald: Sure. Well, look, we're active. We've been active. When I came in and took this role, we stood up our BD team and we have some excellent people running that function, and we're highly engaged in the market. We're looking at things. There's certainly a little bit less on the commercial side you would anticipate versus on the defense side, but we like what we see as we've done three deals since we started here in 2017. I think they've all been real winners. So we're careful about what we do, but we're certainly leaning in and we hope for something to maybe happen this year and we continue to work hard at it.
Operator: And we have a question from Mike Crawford from B. Riley. Please go ahead.
Mike Crawford: Steve, what, if any, program capture goals do you have in '21 similar to what you did with TOW missiles in 2020?
Steve Oswald: Yes. Can you say that again? I'm sorry, man. I got to turn the phone up a little bit in this room. Can you say that again, please? I apologize.
Mike Crawford: Yes. Just as you captured the TOW missile program from another competitor in 2020, do you have any goals you can share regarding additional program capturing this year?
Steve Oswald: Yes. I can't share it as far as we're constantly. I will tell you this, is that, and I think it's good news for investors, is that there are opportunities for us for the share shift, but we're only going to do it where we can really add value. Okay? And that's a case of the TOW missile. I mean, the days of us just competing on price are over, because generally it didn't work out so well. So I will tell you that we are active, not only share shift, but also offloading. That's another theme we're going to see more and more to common, is offloading from defense primes that we can pick up. And the nice thing is that we're able to make the TOW missile happen, and that's a significant project and it's not an easy part to make. So I think all of it's pointing in the right direction. And when we have something more material or significant, we'll let you know.
Mike Crawford: Okay. And then as your commercial line spin back up, is there a delay on when margins pick up as well? Or is it just primarily just a function of scale?
Chris Wampler: Yes. Mike, it's primarily a function of scale. I mean, there should not be a “delay”. I mean, we're just going to pick up efficiency as we leverage up and we're looking forward to that, because we're clawing back from a pretty significant fall back last year Q1, Q2. Yes.
Mike Crawford: Great. And this last question is -- excuse me?
Chris Wampler: Go ahead. No. Just say with that, I mean, it's not happening just yet. So as we work through this year, as Steve and I mentioned, that's what we're looking to see as we work through this year.
Mike Crawford: Okay. And then just the final question is how many different programs are you on with GA? Is it just one unmanned platform? Or is it multiple…
Chris Wampler: I can only say so much, because I've got to be respectful of GA. And if you know them at all, they asked me to be sort of high level on things, but we're on multiple core ramps.
Operator: And we have a question from Ken Herbert from Canaccord Genuity. Please go ahead.
Ken Herbert: Yes. And Chris, I just wanted to first ask about cash in the quarter. I know the first quarter is typically seasonally soft, but free cash flow was a little bit lower this quarter than we'd expected and it looked like working capital had some pretty significant investments. Can you just talk about any particular programs that may have been driving the use of cash in the quarter, or if there was anything in particular that stuck out in the quarter on a cash standpoint?
Chris Wampler: Yes. Thanks, Ken. It's Chris, when you look at the cash, I mean, you were hitting on the right themes for sure. And it's all to support our growth, and we're looking out over the next few quarters. We're trying to line up what we need to build, what we've got the ability to build and to meet that customer demand to hit the sales growth that we're talking about, now as we go sequentially quarter to quarter. So that's where it related to the inventory and the unbilled. That's where some of that investment is done at this point, so that we can manage through a little stronger and meet customer demands the next couple quarters.
Ken Herbert: Can you just comment, Chris? Is it maybe more on the commercial side in anticipation of maybe max bill rates or is it still predominantly on the defense side?
Chris Wampler: Yes, no, more on the defense side. I mean, if you think about, so just the great question, if you think about the structure side and the commercial side, we certainly had a quick stop to a lot of the bills last year. So that's what left us with a little inventory, more inventory on that side of the business. So we've got that sort of as our jump off point as we hit the growth rate. Defense wise is where we've got a little more of that build coming at us that we need to keep ahead of.
Steve Oswald: Yes. Ken, this is Steve. It's definitely leaning towards the sense, I mean we're busy. And we're building things up, we've got a lot of new programs coming online, we're pretty active, so yes, it's leaning a little bit towards that as far as the cash at least to get started in the year.
Ken Herbert: Okay. And Steve, you made a comment early in your prepared remarks as you're building defense towards the right scale. Can you just share, maybe you'll get the purchase later on in May, but what do you view as sort of the minimum threshold in terms of scale for your defense business? I mean, you clearly put up some pretty impressive growth numbers, but how do we think about what you view as the right scale for this business to really get the leverage out of the model?
Steve Oswald: Yes. Look, I think I'm going to basically talk a lot more in May. I think that's the appropriate time. But I will tell you this, that we have our performance center concept, right? So we have performance centers that make harnesses, performance centers that make assemblies, make cards, those types of things. And we have a pretty good idea, at least the game plan, a certain way to get those centers up to scale, which is going to be, I think, terrific for, for investors and for our margins. So stay tuned. We'll have more and May, I promise.
Ken Herbert: Okay. Well, just one final question for me. If we look at electronic systems segment margins, you were down quite a bit from the first quarter of last year and I know the first quarter of last year was particularly strong, but can you just remind us anything in particular relative to a year ago, and then how we should think about the margins in that segment, sort of get back to the run rate here in the second quarter, or is it maybe a couple of quarters out?
Chris Wampler: Ken, this is Chris. Yes. Let me jump in a little bit here. So, so you're right. I mean, when you look at last year's Q1, everything sort of clicked right in to get us to our north of 15% margin, with our electronic segment in that quarter. When you get to this quarter and we sort of, as we went through the year, started to say, historically, we were looking at 10%, 11%. And then as we continue the journey, now it's more 11%, 12%, 13%, even though 15 was sort of the outlier. You get to this quarter, it wasn't a perfect one in terms of mix, but it also, we did have some significant weather in the Midwest in the middle of the quarter one in February. And we had quite a bit of downtime that was there as well, that had an impact. So a couple of those things sort of led us to that point, but as we move forward, Ken, we should be thinking about that 11% to 13% is sort of the range. And like we've talked about with these segments, it doesn't take a lot to sort of move around. So that's why we've got that range out there.
Steve Oswald: Yes. Ken, this is Steve. Yes, so the polar vortex was real for Ducommun. Okay. So that was real for us in February, unfortunately, so, impacted a lot of our operations.
Ken Herbert: So I guess there is some trade off when you think about Kansas and other locations relative to Southern California. Right, Steve?
Steve Oswald: So there's a few that comes to mind, Ken, there's a few.
Operator: And at this time, there appears to be no further questions in the queue. So I'll turn it back to Mr. Oswald for any closing remarks.
Steve Oswald: Okay. Well, let me wrap it up here. First again, I want to, I want to thank everybody for joining us for the first quarter call. We're certainly looking forward to better days and we know they're coming. In opening remarks here, our focus, through this whole thing has been employee safety first and foremost. And I think that for overall, we've done a really, really good job. I just want to thank you for your support. We're working hard here to comment and we're looking forward to better days. And again, we appreciate your interest and your time today on the phone.
Chris Wampler: Thanks, everyone.
Steve Oswald: Thank you.
Operator: Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
