Q1 2025 Ducommun Inc Earnings Call
Speaker Change: Good day and thank you for standing by. Welcome to the Q1 2025 Ducommun Earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Speaker Change: To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Ducommun Senior Vice President Chief Financial Officer, Mr. Suman Mookerji. Please go ahead.
Speaker Change: Thank you, and welcome to Ducommun's 2025 First Quarter Conference call. With me today is Steve Oswald, Chairman, President and Chief Executive Officer.
Speaker Change: 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 in historical facts.
Speaker Change: including any statements as to future market and regulatory conditions, results of operations and financial projections, including those under our Vision 2027 game plan for investors are forward-looking statements under the Private Security's litigation reform act of 1995 and are therefore prospective.
Speaker Change: 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.
Speaker Change: Although we believe that the expectations are 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.
Speaker Change: particular risks facing Ducommun Inc. among others, the thickly-cality of our end-use markets, the level of your government defense spending, our customers may experience delays in the launch and certification of new products.
Speaker Change: 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.
Speaker Change: Legal and regulatory risks, including pending litigation matters, the cost of expansion, consolidation and acquisition.
Competition, Economic and Geopolitical Developments
Speaker Change: including supply chain issues, international trade restrictions, the impact of tariffs and rising or high interest rates, the ability to attract and retain key personnel and avoid labor disruption.
Speaker Change: The ability to adequately protect and enforce intellectual property rights, pandemics, disasters, murders, natural or otherwise, and risk of cyber security attacks.
Speaker Change: Please refer to our annual report on Farm 10K, quarterly reports on Farm 10Q, 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 risk.
Our forward-looking statements are subject to those risks.
Speaker Change: The 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.
Speaker Change: This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the gap non-GAAP measures referenced on this call.
Speaker Change: We filed our Q1 2025 quarterly report on form 10Q with the FTC today.
Speaker Change: I would now like to turn the call over to Steve Oswald for a review of the operating results [inaudible]
Steve Oswald: Okay, thanks Suman, and thanks everyone for joining us today for our first quarter conference call. Today, as usual, I would give an update of the current situation at the company.
After which tomorrow we will review our financials in detail.
Steve Oswald: Let me start off again on this quarterly call with Ducommun's Vision 2027 game plan for investors, as we start our third year in 2025.
Steve Oswald: The strategy and vision were developed coming out of the COVID pandemic over the summer and fall of 2022, unanimously approved by the Common Board in November 2022, and then presented to investors the following month in New York where we got excellent feedback.
Steve Oswald: Since that time, the commons management has been executing the vision 2027 strategy.
Steve Oswald: This includes increasing the revenue percentage of engineered product and aftermarket content which finished at 23% for 2024 up from 19% in 2023.
Continuing the Targeted Acquisition Program
Steve Oswald: Executing our offloading strategy with the fence primes and high growth segments of the fence budget, driving value added pricing, and expanded content on key commercial
Steve Oswald: All of us here as well as my fellow board members, the attention to have a high level of conviction in Division 2027 strategy and financial goals.
Steve Oswald: and believe that many catalysts ahead present unique value creation opportunity for shareholders.
Steve Oswald: The Q-125 results are another example of our strategy and initiatives working.
Steve Oswald: Just look at the margin-expatch performance and much more to come this year and in 2026.
Steve Oswald: Despite the challenges discussed on our prior earnings call, I'm happy to report Q1 sales of 194.1 million, which was 1.7% over prior year, making this quarter our 16th consecutive quarter with year-over-year growth and revenue.
Steve Oswald: Team achieved this despite the headwinds and commercial aerospace bill rates. He's stocking at BA and SPR and to continue to achieve a promoting of our non-core industrial business.
Steve Oswald: It was also our seven-second quarter above 190 million in revenue.
Steve Oswald: Strong growth in our missile electronic warfare, along with military helicopter programs to our military and space revenue to 15% growth over prior year.
Steve Oswald: This includes not just order increases, but also major programs I've been speaking about coming online.
Steve Oswald: Sussed with the offload of the next generation jammer from RTX and AMRAN.
Steve Oswald: Our defense business looks great with Apache Blades coming back online in Q2.
Steve Oswald: Tom R. Cable's one with the tall missile case in Q3. We can't wait.
Steve Oswald: I also want to point out that three of our top five customers in Q1 were defense primed and that is consistent with all of 2024 as well.
Steve Oswald: Our team continues to build scale at other defense customers outside of RTX.
which is and has been a long-term goal.
North of Rome is a great example of the strategic effort.
Steve Oswald: The strong growth in our defense business more than offset lower revenue in our commercial aerospace business, which declined 10% in the quarter and was anticipated.
Steve Oswald: This is the first commercial aerospace decline in the patch 15 quarters for DCO.
Steve Oswald: We had tough comparison Q1 as both Bowie and Spirit drove hard a man during this period last year.
Steve Oswald: We have seen steady improvement in demand with both these customers over the course of Q1 2025. Tell me out of the Boeing strike in Q4 last year and the outlook is promising.
Steve Oswald: I also want to add that everything we're seeing at a Boeing commercial last few months has been very encouraging both on the 737 and 787 our main platforms.
Steve Oswald: We are optimistic that Bill Rates will be at 38 soon on the 7th, 37th [inaudible]
Steve Oswald: Grossmargin also grew 4.7 million to 26.6% Q1, a new quarterly record of 200 basis points year-over-year from 24.6%.
Steve Oswald: As we continue to realize year-over-year benefits from our growing, engineered, product portfolio with the aftermarket, strategic value pricing initiatives, restructuring actions and productivity improvements.
Steve Oswald: We have cease-manufacturing operations, both on Mondrovia, California, and Bavril Larkin's and are already seeing cost savings from this action.
Steve Oswald: We expect to see these savings be higher as the receiving plants ramp up production later this year and fully in 2026. Stay tuned.
Steve Oswald: for adjusted operating income margins and Q1 on the team delivered 9.9%, which was a 90 basis point improvement to per the prior year of 9%.
Steve Oswald: We continue to be pleased with the growth in our engineering products portfolio and our structures visit this quarter which fully recovered from a one-time expense in Q4 2024.
Steve Oswald: We did tell the vests last quarter it was one time and kept all work
Steve Oswald: A dress that EBITDA continues to grow compared to last year at 15.9%, a record for us as the percentage of sales of 3.5 million and almost 31 million.
Fantastic Progress
Steve Oswald: This is our second quarter with adjusted EBIDA above 30 million, and it represents an expansion of 150 basis points above prior year, and continues the strong one method we saw in 2024 as it worked towards the 18% goal in our vision 2027 plan.
Steve Oswald: Gap diluted EPS was $0.69 a share in Q1 2025 versus $0.46 a share for Q1 2024.
Steve Oswald: And with the adjustments, the fluid EPS was a strong 83 cents a share, compared to adjusted the fluid EPS of 70 cents a share in the prior year quarter.
Steve Oswald: The higher gap and adjusted blue to the EPS during the quarter was driven by improved operating income.
Steve Oswald: as well as lower interest costs, due to lower interest rates along with a lower outstanding
Steve Oswald: The company is consolidated, backlog continues to be strong at 1.05 billion, increasing 8 million year-over-year year-over-year- [inaudible]
Steve Oswald: The defense backlog increased over 50 million compared to the prior year quarter [inaudible]
No surprise there, and is now at 620 million.
Steve Oswald: The commercial aerospace backlog decreased by 31 million compared to the prior year quarter due to lower OEM production rates, but fully expected to come back.
Steve Oswald: In December 2022 we set a target of generating 25% plus our revenue from engineering products, which was 9% in 2017 and 15% in 2022.
Steve Oswald: In 2024, we reported that our engineering product business drove 23% of our total revenue of from 19% in 2023, positioning us well ahead of the curve and achieving our vision 2027 goal and certainly pushing for a lot more.
Steve Oswald: We achieved this both through focused investment driving organic growth in our current businesses as well as the BLR acquisition
In Q1 2025, we have maintained this mix at 23% [inaudible]
Steve Oswald: I continue to work on both organic and inorganic opportunities to drive the sire.
Steve Oswald: We made tremendous progress to date, and I'm proud of our team and strategic plans.
Steve Oswald: As for 2025 revenue, we are positioned to benefit from the expected bonus recovery in the second half along with the fence, which includes three programs mentioned earlier coming back online in Q2 and Q3.
Steve Oswald: We are reaffirming our guide of mid-single digit revenue growth for the year.
Steve Oswald: with Q2 being flatters to last year, through the commercial aerospace, including destocking, but anticipate good strength in the second half of 2025.
Steve Oswald: In the district, we also believe terrorists will have a limited, if any impact on our 2025 revenues, a good story for our investors.
Steve Oswald: I want to reiterate as well that Ducommun is a U.S. manufacturer with U.S. employees and 95% of our revenues produced in the U.S.
Steve Oswald: Our only other facility is based in Glimismexco and that production is less than 5% of our revenue and thankfully covered under the USMCA, exempting us from tariffs.
Steve Oswald: The other good news is the common sales in the China is almost entirely one program for an Airbus supplier who is owned by the government, constitute less than 3% of our revenues, and we have not seen any impact at this point on tariffs for ourselves.
Steve Oswald: On the supplier side we do procure some parts from Europe and Asia, but it is manageable and so far the impact has been pretty
Steve Oswald: We will continue the matter as the situation evolves, but at this point, we show you don't see it as being something material to the company.
Steve Oswald: to sum it up, Ducommun and a lot of ways is the new trade policy, with most of U.S. manufacturing operations and U.S. employees.
Steve Oswald: Now let me provide some additional color on our markets, products and programs.
Steve Oswald: Beginning with our military and space sector, we saw a ravage of 114 million compared to 99 million in Q1 2024.
Steve Oswald: Roth was driven by missile programs such as the TOE, and AMRAN, Electronic Warfare, and RAR programs, including the NGJ, Aegis Combat System, Gator, and on the F-16 and Black Hawk for fixed and rotary wing platforms.
Steve Oswald: These are partially offset by a weakness on the F-35, Patriot and the V-22. We also ended the first quarter with a backlog of 620 million and increased the 51 million year over year representing 59% of the comments total backlog.
Steve Oswald: We've got our commercial app, Aerospace Operations, first quarter revenue to the step backwards.
Steve Oswald: Declining 10% year-over-year in the quarter to 72 million driven mainly by lower rates on the 737 max commercial helicopters and
Steve Oswald: As I mentioned earlier, we believe that finally a much better story is ahead for PA and the Max
Steve Oswald: Now the production is ramping up again after the strike. We have seen demand pick up at both Boeing and Spur over the last few months.
Steve Oswald: The backlog within our commercial or space business is 411 million at the end of the first quarter, decreasing 31 million compared to prior year driven by Boeing strike late last year, and its impact on production rates.
Steve Oswald: We expect us to recover as production rates ramp up in 2025.
Steve Oswald: Revenue in our industrial business declined to 9 million during Q1 as we continue to strategically throw non-core business from the portfolio.
Steve Oswald: This will benefit the company in long-term as we transition that capacity to our core, aerospace and defense platforms.
Steve Oswald: with that. I'll have Suman review our financial results in detail. Thank you, Stephen.
Suman Mookerji: As a reminder, please see the company's 10Q and Q1 earnings release for a further description of information mentioned on today's call.
Speaker Change: as we close out the recertification of the various product lines at the receiving facilities over the next few months.
Speaker Change: and Steve highlighted earlier, we also made great progress in continuing to build up our engineering product portfolio with those revenues that are contributing to our
23% to our mix.
Speaker Change: These actions, along with our Strategic Pricing Initiatives, pro-continued margin expansion in Q1 and is keeping us on pace to achieve our vision 2027 goals.
Now turning to our first quarter results.
Speaker Change: Revenue for the first quarter of 2025 was 194.1 million versus 190.8 million for the first quarter of 2024
Speaker Change: The year-over-year increase of 1.7% reflects strong growth in military and space of 15% driven by increases in electronic warfare, missiles, and radar systems.
Speaker Change: This was partially offset by weakness in on-commercial aerospace business mainly driven by lower revenues on the 737 MAX.
Speaker Change: We posted total gross profit of 51.6 million or 26.6% of revenue for the quarter versus 46.9 million or 24.6% of revenue in the prior year's period.
Speaker Change: We continue to provide adjusted gross margins as we had certain non-cap cost of sales items in the prior year period relating to inventory step-up amortization on our acquisitions and restructuring charges.
2025 versus 25% in Q1 2024.
Speaker Change: The improvement in gross margins was driven by our growing engineered products portfolio, strategic pricing initiatives, productivity improvements and restructuring savings across both our structural systems and electronic systems segments.
Speaker Change: We also continue to make progress on supply chain and labour. Through our proactive efforts including strategic buys and our inventory investments, we have been able to avoid any significant impacts as far on our business.
Speaker Change: Going forward, we will continue to improve the working capital terms in the business and improve our cash flow.
Steve Oswald: I also want to add that we did not see any measurable impact from tariffs in the first quarter, and the Steve mentioned do not anticipate any significant impact to our PNL
Steve Oswald: We are a U.S. manufacturing business with U.S. employees and generate 95% of revenues from our domestic facilities.
Steve Oswald: The other 5% comes from Mexico, and all that revenue is tariff-free through the USMCA [inaudible]
Steve Oswald: Our sales are also largely due to domestic customers, with US sales being an excess of 85% in 2024.
Steve Oswald: Tails to China were less than 3%, mostly to one customer for Airbus and there has been no impact to those volumes or orders at this time due to the tariffs.
Steve Oswald: Our supply chain is also largely domestic, with less than 5% of our direct suppliers being
Steve Oswald: Some of our domestic suppliers do source materials from outside the United States.
Steve Oswald: but even that is a very manageable spend with China being a low single digit percentage.
Steve Oswald: We expect to mitigate the impact of tariffs on our materials spend through military duty-free exemptions, alternate sourcing of materials from domestic suppliers or by passing on the impact to our government.
Steve Oswald: You come and reported operating income for the first quarter of 16.6 million or 8.5% of revenue compared to 12.6 million or 6.6% of revenue in the prior year period.
Steve Oswald: Adjusted operating income was 19.2 million or 9.9% of revenue this quarter, compared to 17.1 million or 9% of revenue in the comparable period last year.
Steve Oswald: The company reported net income for the first quarter of 2025 of 10.5 million or 69 cents per diluted share compared to net income of 6.8 million or 46 cents per diluted share a year ago.
Steve Oswald: On an adjusted basis, the company reported net income of 12.6 million or 83 cents per compared to an adjusted net income of 10.4 million or 70 cents in Q1, 2020, 4.
Steve Oswald: The higher net income and the adjusted net income during the quarter was driven by the higher operating income and adjusted operating income.
Now let me turn to our segment results
Steve Oswald: A structural system segment posted revenue of 84.4 million in the first quarter of 2025, versus 83.3 million last year.
Steve Oswald: The year-over-year increase reflected 2.3 million of fire sales across our military and space applications, including Black Hawk and Dove.
Steve Oswald: Commercial Aerospace was down just 2% driven primarily by a decline in 737 mags and commercial
Steve Oswald: Structural systems operating income for the quarter was 10.4 million or 12.3% of revenue compared to 2.9 million or 3.4% of revenue for the prior year quarter.
Steve Oswald: Excluding restructuring charges and other adjustments in four years, the segment operating margin was 14.9% in Q1, 20, 25.
vs. 7.8% in Q1 2024.
Steve Oswald: In Q4 2024, we had noted unfavorable program mix and one-time costs impacting the profitability of the segment.
Steve Oswald: We had highlighted these as temporary with an expected recovery in Q1 2025. Our performance here in Q1 2025, validate those comments.
Steve Oswald: as we saw a strong recovery in the margins of the structural systems.
Thank you.
Steve Oswald: Our electronic system segment posted revenue of 109.7 million in the first quarter of 2025, versus 107.5 million in the prior period.
Bruno, Non-Cort-Wart
Steve Oswald: We have been pruning our industrial business now for multiple quarters maintaining only slight customers that are accretive to our business.
Steve Oswald: Electronic systems operating income for the first quarter was 18.1 million or 16.5% of revenue versus 19 million or 17.6% of revenue in the prior year period.
Steve Oswald: Excluding restructuring charges and other adjustments in both years, the second operating margin was 16.9% in Q1 2025 versus 18.4% in Q1 2024.
Steve Oswald: The year over your decrease was primarily due to lower manufacturing volume and higher manufacturing costs, partially offset by favorable product mix in the quarter.
Steve Oswald: Next, I would like to provide an update on our ongoing restructuring program.
Steve Oswald: as a reminder and as discussed previously, we commence a restructuring initiative back in 2022.
Steve Oswald: These actions are being taken to position the company for stronger performance in the short and long term. This includes the shutdown of our facilities in Manrovia, California, and variable Arkansas and the transfer of that work to our low cost operation in Guamus, Mexico and to other existing performance centers in the United States.
Steve Oswald: We continue to make progress on these transitions and are working diligently with our customers, Boeing and RTX to obtain the requisite approvals which are expected to be completed by the end of Q3.
Steve Oswald: Later this month, we expect to start full production of rotor blades for the Apache helicopter at our Oksaki New York facility.
Steve Oswald: which will complete the transition of that program from Armon, Rovia, California, and
Steve Oswald: We are also working through the transition of 77 max spoilers, Tomahawk harnesses, and the tow missile case, which are all expected to go into production in Guimus in the second half of this year.
Steve Oswald: During Q1 2025, we recorded 0.4 million in net restructuring charges. We expect to incur an additional 0.5 to 1 million in restructuring expenses as we complete the program.
Steve Oswald: As previously communicated, we expect to generate 11 to 13 million in annual savings from our actions and have already seen some realisation of savings in 2024 and the first quarter of this year.
Steve Oswald: We expect the Synergy to ramp up in late 2025 and into 2026 as the product recertification is complete and the receiving facilities move up the learning curve and ramp up production.
Steve Oswald: We anticipate selling the land and building at both Minerovia, California and Berryville, Arkansas.
Steve Oswald: During the quarter, we re-classified the very will-land buildings and building improvements to assets held for sale and are making progress towards the sale of that property in Q2.
Turning now to liquidity and capital resources.
Steve Oswald: In Q1 2025 we generated .8 million in cash growth from operating activities which was an improvement compared to use of 1.6 million in Q1 2024.
Steve Oswald: As of the end of the first quarter we had available liquidity of 221.7 million comprising of the unutilized portion of our revolver and cash on hand.
Steve Oswald: Our existing credit facility was put in place in July 2022 at an opportune time in the credit market, allowing us to reduce our spread, increases the size of our revolver and allowing us the flexibility to execute on our acquisition strategy.
Steve Oswald: Interest Expans in Q1 2025 was 3.3 million compared to 3.9 million in Q1 of 2024
Steve Oswald: The year over your improvement in interest cost was primarily due to lower interest rate.
along with a lower dead balance.
Steve Oswald: In November 2021, we put in place an interest rate hedge that went into effect for a seven-year period starting January 2024 and pegs the one month term so far to 170 basis points for 150 million of our debt.
Steve Oswald: The hedge will continue to drive significant interest savings in 2025 and beyond.
Steve Oswald: To conclude the financial review for Q1 2025, I would like to say that the first quarter is the ultimate strong start to the year, building on the momentum from 2024, the decision does well for the rest of 2025 and beyond.
Steve Oswald: I'll now turn it back over to Steve for his closing remarks.
Steve Oswald: Okay, thanks, Emma. I'm closing. Q1 was an excellent start to the year, despite the anticipated headwind from commercial aerospace.
Steve Oswald: As mentioned, several times we achieved another record for gross margin percentage at 26.6 percent.
Steve Oswald: and just keep in mind a few years ago, we had a run rate of roughly 20% for an entire year and that was back in 2022. So, we've come a long way in two years and could not be happy about that. Adjusted even a percentage was great and a record as well at 15.9% of sales.
Steve Oswald: We're also very well positioned to meet and exceed our Vision 2027 target 25% plus of engine or product revenues.
with 2021-2025 Q1 coming in at 23 percent.
Steve Oswald: and we're getting this as high as possible as it is our number one strategic focus.
Steve Oswald: Finally, with commercial bill rates heading higher in the second half, getting past destocking, along with stronger defense activity, I'm very optimistic about what lies ahead in the next few years for DCO, its shareholders, and other stakeholders.
Okay, let's go to questions please. Thank you
Speaker Change: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile the Q and A roster. Thank you.
Thank you. I appreciate it. I appreciate it.
Speaker Change: Our first question comes from the line of Mike Crawford with B. Riley Securities. Your line is now open.
Speaker Change: Thank you. Starting with commercial aerospace, I mean, we know Boeing is increasing their monthly build rates. But how would you characterize any delay and when your ship set rates to Boeing? [inaudible]
Speaker Change: and Spirit would increase if falling does get production up to 38 a month.
Speaker Change: Rates from Boeing in the low 20s were seeing Rates from Spirit ramp up to the mid to high 20s as we went through Q1 and into April .
Speaker Change: So there is some destocking impact that we are seeing but the rates have continued to progress and go up over the last four months this year
Speaker Change: and so we are very optimistic that they will continue to be despite the destocking continued growth in the demand for us on both those platforms.
Speaker Change: and the expectation is that Boing is able to get to their rate of 38 by the end of this year.
Speaker Change: Yeah, Mike, this is Steve. I'm very confident where they are. They had a great April as you can see from the
Speaker Change: from the announcements they made. March to April was really impressive. I think their efficiency and everything they're doing with Intrusion Sound has gotten a lot better. I think 38 in the cards, probably maybe by September , October . So we're going to see a lift.
Okay. Okay. Thank you. And then
Speaker Change: Some weakness, but you also have some, quote, selected rotary link platforms with higher rate, but I take about a patchy or patchy blades are coming on in Q2. So what was performing higher in Q1 and and and how much of this would you contribute to a BLR aerospace.
Speaker Change: So, we did, you rightly pointed on the, on the defense side of our business, see...
Thank you. Bye-bye.
Well...
Speaker Change: The weakness that he pointed out we saw on the commercial side, we have some transitions ongoing with production moving.
Speaker Change: from Menrovia to Koksaki, and so some demand with the Bell helicopter.
Speaker Change: Some issues we work with materials on Ciarmoli records which drove temporary softness in the quarter on commercial helicopter.
Speaker Change: But we are going to see the Apache production here, ramp up, which should be really positive in Q2 and beyond on the road to craft side for now. Let's microur on the Apache engine with Max Hill.
Speaker Change: So that's also, they're going great with with the engine business there. So that's that's a part of that lift but you know, we might have this in that with with blades right now, but now we're just on to get ramped up we cut the blades, but we looked at them, everything's looking great. We get everybody trained out in New York.
Speaker Change: So hoping you know obviously these are high energy parts you got to be careful but you know we're hoping in May we're going to start really ramping up and we got the orders we just got to get the production in place [inaudible]
Speaker Change: Okay. Thank you. I'll just end with the DSO increase in Q1. Is that anything structural or contractual that changed or should we look for those DSOs to come back down? Thank you.
the seasonality of one time kind of thing during the quarter.
Ken Herbert: Alright, thank you. Goodbye, thanks. Thank you. Our next question comes from the line of Ken Herbert with RBC Capital Market. Your line is now open.
Yeah, hi, good morning, Stephen Suman.
Ken Herbert: I wanted to ask first on the M&A pipeline, you obviously have, you know, placeholder for M&A contribution as we think about Vision 27.
Speaker Change: It's been quite recently on the deal front. Are you still tracking towards the placeholder you've got in place for 27 from M&A and maybe can you give any more detail on how the pipeline looks now and do diligence efforts and maybe expectations for M&A this year?
Speaker Change: So we can thank you for the question and good morning to you as well. We continue to track multiple opportunities in our pipeline.
Speaker Change: See enough in the pipeline for us to feel fairly confident in being able to get a deal done this year and I think that's what I'm saying. I would say that the deal volume is good, you know, we just...
Speaker Change: We just looked at something fairly hard and did a lot of a lot put a lot of hours in on it and turned out it just wasn't for us So we're we're involved in the diligence as you asked and we're looking forward to getting one sooner than later, Ken.
Ken Herbert: Okay, that's helpful. And are you seeing more in aerospace or defense or combined or anything maybe we should just keep in mind?
Ken Herbert: I would say the businesses that we look at tend to be kind of niche engineered product businesses, which often will span across.
Ken Herbert: in some defense platforms as well as commercial aerospace. So it is a mix of both. It isn't necessarily skewed one way or the other. Yeah, I would say that's where I can. I'd say we usually have sort of a mix. It's usually never, you know, 100% one way or the other. So that's that's so what we're seeing and what we've seen. [inaudible]
Speaker Change: Okay. And just finally, you seem to be running ahead of your 27 targets in terms of contribution from the engineered products. And if you do another deal this year, I'm assuming it would be very focused on the engineered products.
Speaker Change: How should we think about the maybe the the margin contribution from these engineered products? You talk obviously a lot about the sales contribution to maybe help us understand how impactful this could be as you grow that mix.
Ken Herbert: Great question, Ken, and these are significantly creative to our margins. These are engineered proprietary product businesses with access to the aftermarket.
Ken Herbert: and in line with some of the other aftermarket peers that you cover, like margins are in line with those, so they tend to be a creative, they tend to provide also significant margin runway for us to execute on post acquisition. And so we,
Ken Herbert: I believe that this is going to continue to be as we do additional acquisitions, a key driver of Margin Expansion for us in 2020.
Speaker Change: Yeah, California we have, you know, as far as the value we provide for these products, I mean we have a very good pricing power.
Speaker Change: So let's see the other thing which is important for investors to know [inaudible]
Thanks. Thanks, Steve. Thanks, Suman. Thanks.
Thank you.
Speaker Change: Our next question comes from the line of Michael Ciarmoli with truest securities. Your line is now open.
Michael Ciaramolli: Hey, good morning guys. Thanks for taking the questions. It was a really nice nice margins here.
Michael Ciaramolli: Maybe Steve or Suman just to kind of level set us and unpack maybe the revenue guidance for the rest of the year, mid-single digit growth, defense obviously had a really strong quarter here.
Michael Ciaramolli: But the comps do get a bit tougher, and you're obviously going to have some of this recovery in commercial arrow. But maybe how are you thinking about the growth rates between commercial arrow and defense for the remainder of the year? [inaudible]
Michael Ciaramolli: Yeah, just let me jump in there first. That is the first thing I just denote and it's this is uh
A real benefit for shareholders and others.
Michael Ciaramolli: that we have this mix of defense and commercial, right? We've had a lot of peer groups that or peers that, you know, have more commercial in their struggle a bit, but as you can see, our defense business we've been talking about really came to the...
Michael Ciaramolli: came to the fore as they say in Q1. So, first of all, we're really pleased that our balance
Michael Ciaramolli: As far as what I can see, obviously we're flatish in Q2 but we feel very good about destocking and commercial rates going up not only on the 37 but on the 87 right because we have very good content to mix there so very positive on the back half and I think maybe defense.
Michael Ciaramolli: going forward, maybe not 15, but certainly a very respectable growth number.
Thank you very much.
Speaker Change: Okay, got it. What about the A220? You know, I know Airbus' commentary around both the 220 and 350 have been a little bit squishy just given the spirit facilities. Do you expect that to be a material contributor to the A220 this year? Look, you know, yeah, so a couple of things. First, you know, the A220 program has been great for us. As we talked about, we make the, you know, the fuselage skins.
We're a supplier in China. We haven't seen any... any...
and he had one yet, so we feel very good about that, so that's...
That's going to get to you, we feel good.
Speaker Change: You know, as far as we're sitting here today, it's going to again be good business this year leading to next year, right? Understand about
Speaker Change: The spirit issue and the engine issue and you know I'm hoping sooner or later they're going to work through that but you know we're running rates higher than what they're shipping. That's for sure and we're happy about that. The other thing is on the A350 we're really we're not a player on the A350 so I know the struggle and it won't impact us. [inaudible]
Speaker Change: Got it, got it. And last one for me, I think you called out the...
Speaker Change: the Inflite Entertainment side of commercialist being weak. I was just wondering if you could potentially size that business. What are the thoughts there or just given?
Speaker Change: You know, that's that's maybe viewed as more discretionary spending from the airlines. Does that continue to be a headwind for the remainder of the year or was that just kind of short term here temporary? No, it's not temporary.
Speaker Change: That, you know, it's not a huge portion of our business, it's, you know, low single digit percentage of our total business. I think we're continuing to see some softness there to the rest of this year, that respect will be offset by other things in the portfolio.
Speaker Change: Michael, I think the compares hit a little bit easier. We had a really good Q1224 within flight. I mean, that's one customer. So and obviously we didn't have a great rest of the year. Things kind of tamped out a bit. So I think going forward, we'll probably moderate around that.
Oh, they got their basses [inaudible]
Okay, perfect. Thanks, guys. I'll jump back in the queue.
See you this week.
Thank you [inaudible]
Speaker Change: Our next question comes from the line of Jason Gursky with City, your line is now open.
Jason Gursky: Hey, good morning everybody. Stephen, one of you could just spend a few minutes, you know,
Jason Gursky: New Work Scopes for you all. And maybe start with the commercial side, you know, obviously.
Jason Gursky: Spirit Aerospace Systems is going through a thing here, and I'm just wondering if there won't be some more opportunities there for you as those assets land in different hands.
Jason Gursky: So is there opportunity here, either a Boeing or Airbus as a result of what's going on at Spirit Aerosystems for you guys? That would be the first part. Yeah, and then the second part would be on the defense. I'm just kind of curious if...
Jason Gursky: You are beginning to see any signs of increased outsourcing initiatives by any of the big cap defense companies. Thanks.
Jason Gursky: Okay, thanks. Certainly, you know, it's funny you're asked that we have our senior VP out of spirit actually today meeting with them.
Jason Gursky: in Wichita. So, you know, a very close relationship with spirit, there obviously a top customer of ours. And then we do see more opportunity
Jason Gursky: especially as things ramp up. So, for instance, we just got going on at 737 max skins.
Jason Gursky: and you know that's early on right so we do four or five skins and we do 15 a month that's the deal we have right so it's not pay by the drink
Jason Gursky: and you know, we feel very good about, you know, increasing business there. We understand there's delivery challenges, we're...
Jason Gursky: Pretty much 100% on time. We're pretty close to both Airbus and Spirit and Boeing [inaudible]
Jason Gursky: So our operations are very strong. So we think there is growth there.
You know, we're continuing to work with them.
I think that Skins is sort of in the lead.
Jason Gursky: as well as maybe some other things. And as well as Airbus, we're getting quoted heavily by Airbus frankly because some of the suppliers are not getting the job done. You know, whether that changes hands, we'll have to see, but we see a lot of growth activity as far as quoting.
at this point so.
Jason Gursky: So I think that's a good story. I think if you look at our percentage of what we have on the programs in general and our operation performance, it's all very positive.
Jason Gursky: on the second quarter. On the defense side, I think we are continuing to see numerous opportunities to bid for work.
R T X is a big customer for us, our biggest customer.
Jason Gursky: and we are actively bidding both a lot of new work with them.
Jason Gursky: as well. Yeah, the only thing I'd say as well, Jason, is that look, you know, it's really like on card businesses, CCAs, those type of things on very difficult applications. I mean, you know, we're really good, right? So, you know, we picked up a lot from RTX that used to make, you know, these cards, the Massachusetts.
Jason Gursky: You know now that's coming our way in Tulsa and we have other things we're working out with Northrop in Tulsa.
Jason Gursky: So you know that's not changing and I've been bullish on defense I've been telling investors look you know these things take time and they do because when you're moving something from an internal operation. You know what I'm saying?
Jason Gursky: at RTX to Tulsa, they're not going to give you everything at first, you're going to get 50% you're going to get testing machines so all this is going to come together for as I believe in this year next year so I was very happy with the 15% I'll say that.
and the Fences Corps.
Yeah, good enough. All right. Thanks guys
Thanks very much.
Thank you.
Speaker Change: Our next question comes from the line of Tony Bancroft with Gamco Investors Inc. Your line is now open.
Tony Bancroft: Hey, good morning, James. Congratulations. Well done. You know, based on the $1 trillion PBR, we sure talked about this a little bit, but...
Tony Bancroft: You know, and then on top of that, a sort of a two-pronged attack here, and then whether the increase in European defense spending [inaudible]
Speaker Change: Maybe you could talk a little bit more in detail about how you see yourself and seeing position for that growth trajectory and maybe a little further out, you know, there's been questions of being able to continue that growth. How do you see this?
Speaker Change: They'll be playing out over the next few years and what programs that you're on that are going to have the best exposure to the thrill. [inaudible]
Yeah, Tony, I'll jump in and you can do so Tony, I think first you know and good afternoon. I think just in general our whole
So, a portfolio around electronic warfare there.
to figure out, you know, we really feel, you know,
Very good and strong about...
Speaker Change: being a part of this trillion dollar budget, being able to support all these customers. As I mentioned in my remarks that, you know, we've...
Speaker Change: In the past, right or only, we were a big rafian house, as they would say, and now we're moving in much more to Northrop.
Speaker Change: We're moving into BAE systems, we're moving into some of these other...
Speaker Change: company is on purpose, right? To kind of build out this customer base and we got a lot of things to provide cabling, we're great at that, we're great at cards, so you know we think that...
Speaker Change: We're in the right position and you know as I mentioned earlier, you know.
Speaker Change: Not only the budget, but also customers like RTX are offloading, right? They're offloading the driving margins.
Speaker Change: They might be three or four years into a program with seven-year fixed pricing and they have nowhere to go. So they're going to move stuff out and they're going to try to drive margins that way as a company. So it's all looking good, Tony.
A nice job positioning yourself, great job, Steve, thanks.
Thanks very much. Good to hear from you.
Speaker Change: Thank you. As a reminder, to ask a question you will need to press star 1-1 on your telephone. Our next question comes from the line of Noah Poponak with Goldman Sachs. Your line is now open.
Hey, guys
Hi, Noah, stay up there.
Speaker Change: just kind of thinking through the pace of growth, through the rest of the year. I think you
Speaker Change: Last quarter talked about 1Q being flat, 2Q a little better. The 1Q actual is a little better.
Speaker Change: Still feel the same about 2Q, or is that looking better? And I guess?
Speaker Change: You know, the defense growth rates quite high in the quarters others have noted the compares get a little tougher there through the rest of the year, but not that much tougher. Kenneth Herbert, Stephen Oswald, Michael Crawford, Michael Crawford, Michael Crawford, Michael
Speaker Change: and Arrow was just down a ton in the first quarter, and Boeing was on strike and had things turned off, or I guess was coming out of the strike. So I don't know, maybe I'm splitting hairs on the mid-single for the full year, but...
Speaker Change: It's a little tough to get there, I guess, if things break the right way. Maybe it's just early in the year and it's a dynamic macro and you're being conservative, but how do you see the growth rate playing out through the year and what's the upside of where things are going to land?
Speaker Change: Good afternoon. So a great question. On the commercial aerospace side, I would say that so if you look at Boeing in Airbus, they're about 50% of our total commercial aerospace.
Speaker Change: Business. So, we do expect that to ramp up in the second half of the year, but I wouldn't apply that growth rate on our entire commercial aerospace revenue, right? So, 50% of the other 50% includes business jets and aircraft and other things.
Speaker Change: is the rest of the year, there's going to be continued strength there. And then we have also the ramp up on the programs that have moved from one facility to another and are...
Speaker Change: currently kind of in hibernation but expected to ramp up in the second half of the year. They include a towed missile case, they include spoilers in the 737 MAX as well as the tomahawk harnesses.
Speaker Change: along with the Apache Blade. So those are all expected to give us some lift in the second half. So we see good growth in commercial aerospace, good growth in defense to kind of get us to that mid-single digit number for the full year.
Speaker Change: Yeah, no, I'd also say look, you know, we're okay, is it a little conservative right now? Yeah, we want to really see how the second quarter goes with
Speaker Change: with B.A. and Spirit. Obviously, that's a big part of our growth story. So, we'll probably have a firmer number, we will, you know, in the next call, but that's kind of where we see it right now.
Okay.
Speaker Change: that makes sense. Where do expect your mix of revenue from engineered systems could be as your action in the year?
Speaker Change: or get very close to kind of the 25% percentage we have set. And it will get dependent on the timing also of the acquisition, how much your revenues are contributed, but we expected to...
Speaker Change: and a B in that 23 to 24% likely this year and with an acquisition ramping up to beyond 25%
Speaker Change: Yeah, I think that's right. I think we're going to, you know, we're obviously, you know...
Speaker Change: Job 1 right now is another acquisition, right? So everybody's working hard on that. So once you do that, we think we'll be over that and then...
You know, come next year. We'll have new thoughts about...
Speaker Change: You know, the next five years, right? So what we're holding right now with Division 2027 and you know, we're happy where we are.
Okay.
Speaker Change: Should we expect the first quarter Steckman operating margin to be the low watermark for the year and work higher sequentially off of it, or is there...
Speaker Change: seasonality or expense timing or mix that could drive a lower quarter at some point in the year.
Speaker Change: plays a space out our within 2027 goal. We would kind of have to be at 16% by the end of the year. We kind of are there already in Q1, but it does have 50 to 75 basis points, I would say mixed goodness in it.
Speaker Change: with that 15 to 75 points range, I think we're, how I would say, around 16 should be good, right, for the end of the year.
Speaker Change: We had 40% free cash flow conversion last year, in 2024 we had a little over 30% free cash flow conversion in 2023. We expect 2025 to be continuing that path of improvement.
Speaker Change: I wouldn't guide to a specific number for the year. We don't typically provide free cash for guidance. Our end goal here over the next few years is to get back to 100% free cash flow as a percentage of adjusted net income.
That would be better.
Speaker Change: this year. But it will be better this year than it was. Continuing that. Continuing that. That's right.
Speaker Change: Okay, thank you so much. Okay, thanks. No, thanks for joining us.
Thank you.
Speaker Change: I'm showing no further questions at this time. I would now like to turn it back to Stephen Oswald for closing remarks.
Steve Oswald: Okay, just a wrap you up here. Thank you again for joining us for the call again just to reiterate, you know, we
Steve Oswald: So, great about our start this year. We appreciate the thoughtful questions.
Steve Oswald: the support from our shareholders. I feel very optimistic about this year and next year and I look forward to reconnecting after Q2.
Steve Oswald: Have a very good day and a safe day. Thank you
Steve Oswald: Thank you for your participation in today's conference. This does conclude the program. You may now just connect.