Senstar Technologies Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 4, 2023

There are 6 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Ducommun's First Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we will hold a Q and A session. As a reminder, this conference call is being recorded today, May 4, 2023. I would now like to turn the conference call over to Ducommun's Senior Vice President, Chief Financial Officer, Controller and Treasurer, Mr.

Operator

Suman Lupertji.

Speaker 1

Thank you, Jada, and welcome to Ducommun's 2023 First Quarter Conference Call. With me today is 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 and 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 In addition, estimates of future operating results are based on the company's current business, which is subject to change.

Speaker 1

Particular risks Facing Ducommun include, among others, the cyclicality of our end use markets, the level of U. S. Government defense spending, Timing of orders from our customers, legal and regulatory risks, the cost of expansion and acquisitions, competition, Economic and geopolitical developments, including supply chain issues and rising interest rates, pandemics and disasters, natural or otherwise. These risks and others are described in our annual report on Form 10 ks filed with the SEC, and our forward looking statements are subject to those risks. Statements made during this call are only as of time made, and we do not intend to update any statements made in this presentation, except if and as required by regulatory authorities.

Speaker 1

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 We filed our Q1 2023 quarterly report on Form 10 Q with the SEC to date. I would now like to turn the call over to Steve Oswald for a review of the operating results. Steve?

Speaker 2

Okay, Sumant, thank you and thanks everyone for joining us today for our Q1 conference call. Today and as usual, I will give an update of the current situation of the company, And for which Samad will review our financials in detail. Before that though, I'd like to discuss our CFO transition announced yesterday. First, I'd like to say this transition is not related to any issues revolving the company's financial reporting. I would also like to thank Chris Wampler for his contributions and service as CFO and welcome Sumant Mukherjee to the call and congratulate him on his new role.

Speaker 2

Sumant and I have known each other for over 12 years, worked together at 3 different companies, I have full confidence in him and his abilities. As we announced last week, I'm also delighted that we have the acquisition of BLR after the end of Q1 as we had a 30 day filing period that ended on July I'm sorry, ended on April 24. BLR Aerospace is our 5th acquisition and largest since I joined the company in 2017 And it's 100% in line with the expectations we discussed at the Ducommun Investor Meeting in New York in December. BOLR is an industry leader and innovator, providing engineered products and aftermarket services to rotorcraft, I want to welcome Mike Carpenter, President And the entire BLR team to the common. I'm excited to begin working with them.

Speaker 2

As for the quarter, We're off to a good start in 2023 with very strong top line growth as the company delivered year over year revenue growth of 11% to $181,200,000 As mentioned in the press release, our excellent position in narrow body aircraft Was key to driving overall revenue growth and another positive sign the recovery is in good shape It will only get better in the near and longer term. Turning to the markets, the continued recovery in commercial aerospace is once again a real bright spot In Q1, with Boeing 737 MAX Business up 80% year over year and the Airbus A220 also having significant growth of 66% year over year. Overall, commercial aerospace with Airbus and Boeing and others was up 35% from Q1 2022. Ducommun's Commercial Aerospace business has showed year over year revenue growth now For the 7th consecutive quarter, an excellent sign as the industry and bill rates recover. The defense business was down modestly year over year in Q1, mainly due to timing of programs such as the Apache RotorBlade And GA UAVs among others.

Speaker 2

But once again, Ducommun delivered solid performance of roughly $96,000,000 revenue as we prepare for increasing DoD budgets and FMS in the years ahead. The company posted solid gross profit of 20.3%, Up year over year from 19.9 percent, a good result as we work through our restructuring activities. The team also posted adjusted operating income margins of 7.5 percent and adjusted EBITDA was $23,100,000 an increase of $3,000,000 year over year. SUCCOMA had adjusted EBITDA margins of 12.7% in Q1 as well, And we anticipate adjusted EBITDA to be solid this year with much stronger numbers in 2024. Once the plant 2023 are behind us.

Speaker 2

Quality of earnings was solid with GAAP diluted EPS of $0.42 a share versus $0.66 a share for Q1 2022. But with adjustments, the diluted EPS of $0.63 a share was comparable to diluted EPS of $0.67 a share in the prior year. Some key drivers for the lower GAAP diluted EPS include restructuring charges and higher Guaymas fire related expenses. Switching to the company's backlog performance, the commercial aerospace backlog increased sequentially For the 8th consecutive quarter, from $266,000,000 at the end of Q1 2021 to $464,000,000 End of Q1 2023, an increase of 74%. This was led by the 737 MAX, ViaSat for in flight entertainment, the A320, A220 and Gulfstream, All which you would expect after a slower than expected recovery during 2022.

Speaker 2

Defense backlog decreased modestly sequentially from Q2 twenty 22, but remained solid at the end of Q1 as well and ended the quarter at 444,000,000 I also want to share with you some great news on the 737 MAX. We recently received our first order ever From Spirit AeroSystems for MAX Fusilized Skins, similar to what we make currently for the A220. This is an initial order for 4 skin sections, which comprise of roughly 5% of the total fuselage. So we expect this to grow as we move forward. Initial 4 skin orders projected to be $4,000,000 in revenue yearly and we're excited about what is ahead.

Speaker 2

Keep in mind, we provide close to 100 percent of the skins for the A220 fuselage as a sole source or a fifty-fifty split with Spirit for certain areas. So we are ready to do a lot more after this initial order. The 4 skin sections will be fully commercialized by year end. We're offloading for Defense Prime, the work continues. We're expecting roughly $90,000,000 for the full year as committed to with a great deal of that in circuit card business for Raytheon at such sites as Appleton, Wisconsin and Tulsa, Oklahoma.

Speaker 2

Long term run rate of these defense programs already commercialized for offloading will be over $125,000,000 for Ducommun by 2025. One item to note is that there are lags with these types of projects, We not only have to transfer legacy or buy test equipment, etcetera, but we do have initial headwind on revenue with the OEM supplying material from their So the numbers with these large OEMs do take some time. The company's actions and organizational structure also continuing to pay dividends. Our team delivered another excellent quarter as well in Q1 managing the supply chain And this is not only shown in our financials, but also we cannot be in better shape with our customers regarding our on time delivery and quality. In addition, we were honored in Toulouse in March by Airbus with an award for being a top performing supplier for hot form and super plastic formant titanium parts.

Speaker 2

Ducommun put out a press release on this and we are very proud of our work. For context, we did not have any business with Airbus before 2016. It has been a great success And Airbus is a very high global standard for these awards. It is a select group. For revenue guidance for the year, we're happy to update it to mid to high single digit for 2023.

Speaker 2

Based on better news on commercial aerospace along with a very successful win with DLR and the acquisition. Just a few comments on our win. These are never easy and require a great deal of effort and excellence. I'm happy to report that the seller due to our approach went exclusive with Ducommun early on and this provides beneficial this provides On the commercial aerospace side, the recovery will continue to lead the way And revenue will be very good for the rest of 2023 as we see more and more volume return with the fence also being solid. The 2 plant closings later this year will also have some limited headwinds on revenue as we seek to prune non strategic and low volume business, but feel very confident in our much improved guidance for 2023 revenue.

Speaker 2

Now let me provide some additional color on our markets, products and programs. Beginning with our military and space sector, we posted 1st quarter revenue of 96 $400,000 a modest decrease versus Q1 2022. Despite being down as mentioned earlier, was a solid showing for the business in Q1. We still saw increases in demand on our other military and space platforms, MIR missile, The first quarter military space revenue represented 53 percent of the commons revenue in the period, down from 61% last year and this trend will continue to reflect more balance with Commercial Aerospace and we like that. We also ended the Q1 with a solid backlog of 444,000,000 Biosil down modestly and sequentially still represents 46% of Ducommun's total backlog.

Speaker 2

In our commercial aerospace operations, 1st quarter revenue increased 35% year over year to 73,100,000 driven mainly by bill rate increases at Boeing, Airbus and others. ComEd expects this to continue to gain momentum in 2023 and the future is very bright across our product offerings. Our delivery and quality also continue to stand out as we move ahead. The backlog within our commercial aerospace sector stands at $464,000,000 at the end of the first quarter And was $87,000,000 higher or had a 23% increase year over year from Q1 2022. With that, I'll have Saman review our financial results in detail.

Speaker 2

Saman?

Speaker 1

Thank you, Steve. As a reminder, please see the company's Q1 10Q and As Steve discussed, Our first quarter results reflect another period of strong performance. Once again, we saw a significant increase in our commercial aerospace revenues. We remain encouraged by the continued strength in domestic and global travel, which should support higher long term demand for aircraft and are also encouraged by the build rate outlook from our key customers that should drive continued growth in our shipments. During the quarter, we also continued to make progress on our restructuring program.

Speaker 1

And as Steve mentioned, we announced the acquisition of BLR Aerospace in Q1 and subsequently closed on the transaction on April 25. With all this, we feel like we have laid a strong foundation to the year in the Q1. Now turning to our Q1 results. Revenue for the Q1 of 2023 was $181,200,000 1 $163,500,000 for the Q1 of 2022. The year over year increase reflects 19,000,000 of growth across our commercial aerospace platforms, partially offset by $2,900,000 of lower revenue within the military and space sector.

Speaker 1

Ducommun's overall backlog at the end of the Q1 was approximately $961,000,000 similar to the level at the end of Q4 2022 and $18,000,000 higher than at the end of Q1 2022. This reflects recent growth across our commercial aerospace platforms. Our defense backlog was $444,000,000 and we remain positioned for continued solid performance as we move through the remainder of 2023. As a reminder, we define backlog as potential revenue based on customer purchase orders and long term agreements with firm fixed prices and expected delivery dates of 24 months or less. We posted Total gross profit of $36,800,000 or 20.3 percent of revenue for the quarter versus 32,500,000 or 19.9 percent of revenue in the prior year period.

Speaker 1

We continue to share adjusted gross margins as we have a higher amount of non GAAP related after sales this year, mainly driven by our Guaymas fire related impact. On an adjusted basis, Our gross margins were 21.1 percent in Q1 2023 versus 20.8% in Q1 2022. We continue to work through a difficult operating environment with supply chain and labor. However, through our proactive efforts, Including strategic buys and our inventory investments, we have been able to avoid any significant impacts on the business. Ducommun reported operating income for the Q1 of $6,400,000 or 3.5 percent of revenue, compared to $9,100,000 or 5.6 percent of revenue in the prior year period.

Speaker 1

Adjusted operating income was $13,600,000 or 7.5 percent of revenue this quarter compared to $12,300,000 or 7.5 percent of revenue in the comparable period last year. The company reported net income for the Q1 of 2023 of $5,200,000 or $0.42 per diluted share compared to net income of $8,100,000 or $0.66 per diluted share a year ago. On an adjusted basis, The company reported net income of $7,900,000 or $0.63 per diluted share compared to net income of 8,300,000 or $0.67 in Q1 2022. The lower net income relative to operating income was driven by higher interest costs during the period. Adjusted EBITDA for the Q1 of 2023 was $23,100,000 or 12.7 percent of revenue compared to $20,100,000 or 12.3 percent of revenue for the comparable period in 2022.

Speaker 1

Now let me turn to our segment results. Our Structural Systems segment posted revenue of $75,600,000 in the Q1 of 2023 versus $66,000,000 last year. The year over year increase reflects $14,000,000 of higher sales across our commercial aerospace applications, partially offset by $4,400,000 of lower revenue within the company's military and space markets. Structural Systems operating income for the quarter was $4,700,000 or 6.3 percent of revenue compared to $4,900,000 or 7.4 percent of revenue last year. The year over year operating margin decrease was primarily due to higher restructuring charges.

Speaker 1

Excluding restructuring charges and other adjustments in both years, the segment operating margin was 12.9% in Q1 2023 versus 11.7 percent in Q1 2022. This is a solid operating performance from our from the Structural Systems segment. Our Electronic Systems segment posted revenue of $105,600,000 in the Q1 of 2023 versus $97,500,000 in the prior year period. These results reflect $5,000,000 of higher commercial aerospace revenue and $1,500,000 of higher revenue across the company's military and space customers. Electronic Systems operating income for the Q1 was 10,000,000 or 9.5 percent of revenue versus $9,400,000 or 9.7 percent of revenue in the prior year period.

Speaker 1

The lower operating income as a percentage of revenue was primarily due to higher restructuring charges. Excluding restructuring charges and other adjustments in both years, The segment operating margin was 11.6% in Q1 2023 versus 10% in Q1 2022. Now an update on our restructuring. As a reminder and as discussed previously, we commenced a restructuring initiative Back in Q2 2022. These actions are being taken to accelerate the achievement of our strategic goals and to better position the company stronger performance in both the short and long term.

Speaker 1

This includes the shutdown of our facilities in Monrovia, California and Berryville, Arkansas and transfer a majority of that work to our low cost operation in Guaymas, Mexico, with the remainder going to other existing performance centers in the United States. We are progressing well on these transitions, both with employee retention and engagement and with customer alignment. During Q1 2023, we incurred $4,200,000 in restructuring charges. The majority of these charges were severance and benefits related. We expect to incur an additional $8,000,000 to $12,000,000 in restructuring expenses during the rest of 2023.

Speaker 1

Upon the completion of our restructuring program, we expect to generate $11,000,000 to $13,000,000 in annual savings from our actions. Once we wind down production at Monrovia and Berryville, we anticipate selling the associated land and building at both locations. Turning to liquidity and capital resources. We have available liquidity of $217,000,000 at the end of the Q1. The Q1 of each year is typically our largest net usage of cash in operations, primarily due to the payout of year end accrued incentives.

Speaker 1

And this year, we also made an estimated tax payment of approximately $8,000,000 to cover changes in tax rules for R and D expenses, which now need to be capitalized and amortized, and thus used $18,900,000 in cash flow from operating activities during the quarter. This was similar to the prior year, which also saw net cash used in operations of 18,900,000 Our 12 month debt to adjusted EBITDA ratio was 2.5 and is among the lowest in the last several years. However, going forward, as a result of the completion of the BLR acquisition in Q2, we expect our debt to adjusted EBITDA ratio to increase. While our debt refinancing during 2022 was timely and beneficial, The rising interest rate environment drove the increase in interest cost to $4,200,000 in the quarter versus $2,400,000 in Q1 2022. This was expected.

Speaker 1

In November 2021, we put in an interest rate hedge for $150,000,000 which goes into effect in January 2024 and will help with our interest costs. To conclude the financial overview, We are off to a good start in 2023. And with the BLR acquisition now completed in Q2 and the expected completion of the restructuring program later this year, There is much to look forward to for the rest of 2023 and beyond. I'll now turn it back over to Steve for his closing remarks. Steve?

Speaker 2

Okay. Thanks, Sumant. In closing, it was a looked a very good quarter to begin the year. The Beale acquisition is another step in the right direction It certainly meets the expectations we communicated at our Investor Day in December. In addition, all the meetings I've been attending now that we're Meeting in person again with top customers and all the industry news that I read, it just shows some great opportunities Over the next several years, the Comma team will be ready to capture the upside.

Speaker 2

My thanks is always to our employees and investors for the support As we embark on the New Year and build momentum throughout 2023 towards an even stronger 20 24. I will now open up for questions. Thank you for listening.

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from Ken Herbert of RBC. Your line is now open.

Speaker 3

Yes. Hey, good morning, Steve, and congratulations, Juman. Thank you. Good morning, Jen. Hey, Steve, maybe to start off, you called out some pretty significant growth in the Q1 for the MAX, and it sounds like you've taken some share On that program, which is nice, but there's been a lot of headlines recently about this program and some issues with Spirit.

Speaker 3

Can you maybe level set us here in terms of What build rate you're currently going in on the MAX? Maybe how you see that progressing over this year? And then Maybe the revenue contribution this year, how much you expect it to grow across the full year? Because it sounds like you haven't been impacted by some of the slowdown that we're seeing at Spirit.

Speaker 2

Yes. Well, thanks, Ken. Good question. I guess a couple of things. First, I was up at the Boeing supplier meeting not too long ago.

Speaker 2

So if it's Dan Diehl and the team there. So a couple of things. First, we came out of the gate pretty much in a modest way at 31 a month. But we do despite Some of the issues at Spirit and we wish them all the best to get that cleared up. We're more on the front end of this thing and we think that, okay, there'll be a little bit of a hiccup, but We still see things heading up from 31 to 38 by the end of the year.

Speaker 2

We're fairly confident in that. We're all capitalized for that. We've got a little bit of hiring to do, but we're optimistic. So Certainly, it's an issue. Certainly, the repairs, I mean, there's a lot of things that Spirit team Have to get done there.

Speaker 2

But also, as I mentioned, we have a major development with them on the skins. And that was a long time coming. We worked very hard on that for over, I'd say, it was 16 months at least. So we got that across the finish line just recently. We already do we're already for Rollform and Stretchform, we're already big players in fuselage skins on the A220.

Speaker 2

So we think that Not only we're going to see better rates, I mean, okay, we'll have a little bit of headwind right now, but we're planning to get to 38 Very close by the end of the year. But we're also very optimistic that to go forward with Spirit, we're going to Pick up more of this program share. So I think good things ahead for us.

Speaker 3

Okay. That's helpful. Thank you. And I guess as you think about that to segue into the better outlook for revenues this Shear, up mid to high single digit. Is that predominantly the BLR acquisition?

Speaker 3

Or is there any assumption in there about Sort of better performance out of aerospace. I mean, it looks like BLR could add maybe 3 to 4 points of growth this year.

Speaker 2

Yes. So it's a mix, Okay. So, certainly, BLR is going to contribute. We just picked them up at the end of April, right? So, we're not going to get a full year of revenue, but we're going to pick up some nice revenue.

Speaker 2

And then also, again, we started the year at low single. We We're still obviously a little, I wouldn't say nervous, but just being a little more modest at the beginning of the year. But we feel better about our

Speaker 1

I would say BLR is kind of on the lower end of the range You suggested, Ken, and so there is substantial organic growth in the outlook.

Speaker 3

Okay, great. And Sumant, just finally, I think the cash use this quarter was probably consistent with expectations. But Can you reset us on maybe an expectation for full year 'twenty three free cash flow?

Speaker 1

So, we expect to have a better free cash flow year this year than we did last year. There are some headwinds as we do these facility transitions and have to build up some inventory to Support those moves, but we're looking at ways to offset some of those headwinds and come out net positive versus where we did On working capital and cash flow last year.

Speaker 2

Yes. Ken, we got some to strip the Monrovia, we got the Apache backplate We have the max spoilers. So we got some major industry impact moves here. So we got to make sure we're taking care 1st, the customer and making sure we got enough buffer for these moves. So a little bit of that too.

Speaker 3

Great. All right, guys. Thanks a lot.

Speaker 2

Thanks, Ken.

Operator

One moment for our next question, please. Our next question comes from Mike Crawford of B. Riley Securities. Your line is now

Speaker 4

Thank you. Just to make sure, are you not comfortable talking about the Rough annual revenue run rate of BOR as well as Added working capital that's going to put on in the balance sheet next time we see a print?

Speaker 2

So we're going to we'll be we'll have more to say I think at the end of the Q2 call. Okay, Mike, we're just getting started here. I mean obviously, VLR is an Your product was aftermarket, so it's going to be accretive to the P and L and to our current business. So we're excited about it. I think earlier with Ken's comments, it's a couple of points for this year for us on the revenue side and more to come.

Speaker 4

Okay. And then regarding the mid to high Single digit growth guidance implying some high $700,000,000 of revenue versus your 12 month backlog, which is closer to 650,000,000 ish. So where is the main book and ship business that makes up that difference?

Speaker 1

So we see book and ship in a lot of our engineered product businesses. And so that is a big driver of that. And then we may see Some incremental in our structures business as well and some drop in orders in our electronic manufacturing services business as well from time to time, Though their typically lead times are longer, but mainly in our Engineered Product business is where we have more hook and ship business.

Speaker 4

Okay, great. Thank you. And then,

Speaker 2

I

Speaker 4

don't know, Well, I guess, the last call, you weren't really prepared to talk about this, but once you do get out of Monrovia and the other factory, like, Do you have any more sense you can share on potential timing of the sale Of these of the real estate underlying these facilities and perhaps what you might get from it?

Speaker 2

Yes. I think it's a little tricky right now because we've got some major things to move, right? And customers, They get nervous, so we have to make sure that we're doing the right things on the front end. We would like to move 1, if not both properties, Probably by the year end, if not by Q1, Mike. So it's not something we're going to we're in a hurry a bit here, but we got to make sure we do the right things for the market.

Speaker 2

So But sooner than later.

Speaker 4

Okay. All right. Thank you very much.

Speaker 2

Thanks, man.

Operator

Our next call comes from Michael Ciarmoli of Chorus Securities. Your call is now open.

Speaker 5

Hey, can you hear me guys?

Operator

Yes, we can hear you. We can hear you Mike.

Speaker 3

How are you? Hey. Maybe just going

Speaker 5

back to the facility transitions, I think you talked about the MAX spoilers and the Apache Is there any sort of requalification risk needed to shift that work or any sort of technical challenges that we should be aware of there?

Speaker 2

No, Mike, we're making that stuff forever. So, we're just going to make it somewhere else. So, No issue about that, but obviously we have to work with the customer because it's going into a new facility, right? So There's always a lag dealing with the French prime or major OEM on the commercial side, but we feel good about where we are. The one thing I'd say too just For investors is that and I give a lot of people credit at Berryville and Monrovia.

Speaker 2

I mean, we announced this in November of last year and we still have a Pretty much a full workforce. So people are committed to finishing the job and getting it transferred properly. So I would say at least on the technical side, the answer is no.

Speaker 5

Okay. And then just back to the MAX. Can you just circle back one more time on the content? You talked about the $4,000,000 Is that Does that assume a specific run rate? Are you on every plane?

Speaker 5

I know the MAX was your biggest program pre pandemic, but just trying to get

Speaker 2

Yes. So, it's like I said, I mentioned about It's a good start. Let's put it that way. It's going to sort of increase our ship rates. It's roughly around 15 shipsets a month for those skins.

Speaker 2

So we're pretty happy with that. Spirit makes it internally too. So But we're in the game. That's the big deal. We're in the game.

Speaker 5

Okay, perfect. That's what I was looking for. And then maybe, Suman, on the Structuring, you called out the and I think you have done this, the annualized savings starting in the second half of twenty twenty three. How should we think about that? I don't know if it's, call it, dollars 5,500,000 or so of savings.

Speaker 5

How should we think about the margin? Should we expect to see A significant uptick in operating income and margins as we get into 3Q and 4Q?

Speaker 1

I think you're going to see it towards more towards the end of the year. And yes, so I think you're going to see the benefit really Both pronounced in 2024, yes.

Speaker 3

Okay, got it.

Speaker 2

Yes. All good news then, Mike. Yes.

Speaker 5

Perfect. Okay, perfect guys. That's all I had. Thanks.

Speaker 2

Okay. Thanks, Michael. It's good to be with you.

Operator

There appears to be no further questions. I would now like to turn it over to Mr. Oswald for closing remarks.

Speaker 2

Okay. Thank you very much. Look, again, I think it's a very good start to the year. We have a lot going on here, But I think all very positive for our customers, our company and our shareholders. It should be a consequential year for Ducommun On the upside and again, my thanks for attending today and wish you a good afternoon.

Operator

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

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