Ducommun Incorporated (DCO) Earnings Call Transcript & Summary

Okay. Good morning, ladies and gentlemen. Welcome to the 2021 Annual Meeting of the Ducommun shareholders. Thank you for joining us today. I'm Stephen G. Oswald, Chairman, President and CEO. We're also once again having the meeting for 2021 in a virtual format, which allows us to protect the health and safety of our employees and shareholders as well as leverage our web portal, which we started using last year. I know all of us are optimistic for better days ahead as we move further into the year, and I'm highly confident that we'll be able to have this meeting next April, in person. As is custom, we will conduct the business portion of our meeting first, and answer questions of general interest following the meeting during the designated general question-and-answer period. Though we may not be able to answer every question, we will endeavor to answer as many appropriate questions as time permits. If there are appropriate questions pertinent to the meeting, matters or business that cannot be answered during the annual meeting due to time constraints, management will post answers to a representative set of such questions on Investor Relations website. Questions and answers will be available as soon as practical after the Annual Meeting. It is now shortly after 9:00 a.m. Pacific Time on April 21, 2021, and this meeting is officially called to order. Polls are opened at the beginning of the meeting and we will close the polls on all matters immediately after the presentation of today's proposals and any questions related to them. If you've already voted by proxy, you not need to vote again at this meeting, unless you wish to change your vote and revoke the proxy you submitted previously. If you wish to vote at this time, you may vote online by clicking on the voting button in the right lower hand corner of the virtual meeting website. Stockholders are entitled to one vote for each share registered in their name as of the record date on February 23, 2021. Before we begin the formal business of the meeting, I'd like to make some important introductions. First, your Board of Directors: Richard Baldridge, President and Chief Operating Officer, ViaSat, Inc.; Shirley Drazba, retired Corporate Vice President, Product Launch Strategy and Innovation, IDEX Corporation; Robert Ducommun, Business Adviser; Dean Flatt, retired President, Defense and Space, Honeywell International Inc.; Jay Haberland, retired Vice President, United Technologies. I'd also like to acknowledge Mr. Greg Churchill, one of our existing class of 2021 directors, who will not be standing for reelection at today's meeting. On behalf of the Board and the company, I'd like to thank Greg for his dedication and hard work during his time on the Board. Next, I'd like to recognize the members of our corporate management team: Suman Mookerji, Vice President, Strategy, Acquisitions and Integration; Rose Rogers, Vice President and Chief Human Resources Officer; Jerry Redondo, Senior Vice President of Operations and the Head of Structures; Raj Tata, Vice President, General Counsel and Corporate Secretary; Chris Wampler, Vice President, Chief Financial Officer, Controller and Treasurer. We're also joined here today by representatives of PricewaterhouseCoopers, our independent registered public accounting firm. Troy Sheen, Audit Partner, Amanda Neal, Audit Director. Finally, the company has appointed [ Mr. Richard Liza ] to act as inspector of election. [ Mr. Liza ] is with us today and took the oath of inspector of election in advance of the meeting. Again, prior to the formal meeting being adjourned, we'll provide time for general questions. Only validated shareholders may ask questions in the designated field on the web portal. As considerations for others, please limit yourself one question. Please also note this meeting is being recorded. However, no one attending via webcast is permitted to use any audio recording device. Finally, and before we move to the formal business of today's meeting, I'd like to call to your attention to the rules of conduct and procedure, which are in place to ensure fair and orderly meeting for all shareholders. You can access the rules of conduct in the meeting materials section of the web portal. We appreciate your cooperation in observing the rules throughout the meeting. Mr. Tata will now confirm proof of notice of the meeting and that a quorum is present.

Thank you, Mr. Oswald. Board of Directors fixed February 23, 2021, as the record date for determining shareholders entitled to vote at this meeting. An affidavit has been delivered attesting to the fact that either: number one, a notice of Internet availability of the notice of meeting, the proxy statement and the 2021 annual report to shareholders; or number two, the documents themselves were mailed on or about March 8, 2021, to all shareholders as of the record date and will be incorporated into the minutes of this meeting. The shareholder list shows that as of the record date, there were 11,833,064 shares of common stock outstanding and entitled to vote this meeting. In addition, we are informed by the inspector of election that they are represented in person or by proxy, shares of common stock, representing 11,221,864 votes or approximately 94.83% of the voting power on the record date. Since this represents more than a majority of the voting power of all issued and outstanding stock entitled to vote on the record date, a quorum is present for purposes of transacting business. Finally, I can also confirm that consistent with Delaware Law, a list of the shareholders entitled to vote at this meeting is available for inspection on the website used to access this meeting.

With that, we will now proceed with the formal business of the meeting. And I hereby declare that the meeting has been duly called and that business may be conducted. Proposal 1 is the election of a Director. The Board of Directors has nominated Shirley G. Drazba for election as a Director, to hold office until the 2024 Annual Meeting of Shareholders or until her successor is duly elected and qualified. The Board of Directors unanimously recommends that you vote for Ms. Drazba. Proposal 2 is the advisory vote to approve the compensation of our named executive officers as described in the proxy statement. While this is a nonbinding vote, Compensation Committee and the Board will certainly take the results of the vote into account when making future compensation decisions. The Board of Directors unanimously recommends that you vote for proposal #2. Finally, proposal 3 is to ratify the selection of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the year ending December 31, 2021. The Board of Directors unanimously recommends you vote for ratification of the selection of PricewaterhouseCoopers as the company's independent registered public accounting firm for 2021. As stated at the outset, the polls are open from the beginning of the meeting. Any shareholder who has not yet voted or wishes to change their vote, may do so by clicking the voting button on the web portal and following the instructions there. Shareholders who have sent in proxies or voted via telephone and/or Internet and do not want to change their vote, do not need to take any further action. Are there any questions regarding the meeting of these proposals before we close the polls? Please remember that Troy Sheen and Amanda Neal of PricewaterhouseCoopers are participating in today's meeting and are available for questions relating to the appointment of PwC as auditors. I will now pause for questions.

Mr. Oswald, I have reviewed the meeting platform, and I do not see any questions on these matters. We'll now briefly pause to allow for voting. [Voting]

Now that everyone has had the opportunity to ask questions about the proposals and vote, I hereby declare the polls for 2021 Ducommun Incorporated Annual Shareholder Meeting closed at 9:11 a.m. Pacific Time on April 21, 2021. May I please have a report on the vote.

We have been informed by the inspector of election that the preliminary vote report shows that with respect to Proposal 1, the nominee for election to the Board, Ms. Shirley G. Drazba has been duly elected. For Proposal 2, the compensation of the named executive officers has been approved by advisory vote. Finally, with respect to Proposal 3, selection of PricewaterhouseCoopers as the company's independent registered public accounting firm for the year ending December 31, 2021, has been ratified. We will be reporting the final vote results on a Form 8-K to be filed with the Securities and Exchange Commission within 4 business days of the date of this meeting.

Thank you, Mr. Tata. As I know of no other business to be brought before this meeting, the meeting is hereby adjourned. Now we would like to open things up for general shareholder questions. Please follow the instructions provided on the virtual meeting web portal, submit your questions. We'll attempt to answer as many questions as possible in the time allotted. The only those that are germane to the meeting will be addressed.

Mr. Oswald, I've reviewed the meeting platform, and I do not see any questions.

Okay. Thank you, Mr. Tata. This concludes the formal business of the 2021 Annual Meeting of Shareholders of Ducommun Incorporated. I will now, as in the past, provide a brief update on the company. Okay. Thank you. Show the disclosure, please -- disclosure page, please. Okay. Just to mention on Page 2, the disclosures, you can please read those, if you like, as far as forward-looking statements. Let's go to Page 3, please. Okay. I'd just like to spend a little bit of time. And again, thank you for joining us today for our Board meeting. And I want to just go over some of the highlights. Certainly, a very, very tough year for the world, our nation, citizens and Ducommun employees and their families. But I do want to go over some of the highlights. Certainly, our first and top priority was to make sure that we took care of our employees from COVID and made sure our facilities were safe. And as well as we kept our workforce engaged in delivering for our customers, being an essential business. And where we could, we also supported our suppliers to make sure that we all work together to get through a very, very difficult 2020. We also utilized our Ducommun Foundation that we started in 2019, and we're able to provide, I think, a significant amount of money for relief efforts for families and individuals and communities where we operate. So $1.3 million was what we donated roughly. We did lean heavily on our Defense business. We were up 30% year-over-year in revenue. I really think this is a significant accomplishment. And certainly, the commercial aerospace industry was devastated, and -- but we're able to at least, with our balance of our portfolio, drive our business, at least in the defense area. One of the real highlights is, in 2020, we had 52 defense programs, over $1 million in revenue, and if you look back a few years ago when we started this journey together, we had 34, so it's a very nice increase. We did do everything we can on cost, you can see we expanded our margins and we also posted net income, which for our business being half commercial aerospace going into 2020, I think was a major, major accomplishment by the team. And we appreciate everybody's support, including our shareholders. We did have an increase in our stock price in 2020. Our backlog remains strong and heavily into defense, as you would think. And we're always happy to be recognized positively in our local business journal. We're recognized for a second year in a row as one of the fast-growing public companies and they look at it more than just in the 2020 time frame, so we're obviously happy with that. Let's go to next page, please. Just the company snapshot for those joining us. You could see that we're heavily involved in commercial and military fixed wing aircraft. We talked a little bit about our defense business, which continues to grow. And we also are pretty strong in rotary aircraft, so I think overall, we have a real nice balance and that really helped us in 2020. So we see our customers below. You can see that we're fairly strong in the industry. We're primarily a Tier 1 supplier. We do, do a few things as a Tier 2 supplier, but generally, we're working directly with these large OEMs and helping the industry, both on defense and commercial aerospace move forward and meet the challenges. So Ducommun continues to work hard and do their part. Just a minute on our investment highlights. We certainly talk about this throughout the year but, again, our balanced portfolio really helped us in 2020. As I started here in 2017, we continue to really develop the portfolio for any value to our customers. I mean that's why we're here. And through that, we do get rewarded with a higher-margin business, which I think helps everything, helps our stock price, helps our investment portfolio. So there's lots of positive things there. We'll continue to do that, and we're investing both in organic and we're looking, obviously, at strategic acquisitions throughout the year. We do really are thoughtful about being in more of a niche marketplace, certainly with our engineered solutions and our products such as our titanium business, among others, talked about our Tier 1 position. So it's very helpful with getting involved in the new programs and also getting the thought leaders and decision-makers at all the industry leading companies. And again, I think we're in very good shape for the next few years, as commercial aerospace comes back and then we also have a built-out stronger defense business. So I think as far as our position in the market, I think, is very, very good. And obviously, we take our commitments and our financial numbers very seriously. We're committed to growth, but making sure that it's profitable, and we're always looking for scale opportunities. We are looking forward to building the company and getting to higher revenue levels. Margin expansion will continue and we have a lot going on there to drive margins, and we'll continue to do that. And one of the things, if you look across the industry and you're looking Ducommun's cost structure, especially on SG&A, we're real leaders in how we run the business lean. We certainly invest where we should be, but as far as our corporate costs and lots of other things that we do, we're in very good shape, and it really helped last year. You can read about other companies that have unfortunately had a -- we did have layoffs as well, but they had layoffs throughout even to the top level of their leadership, and we did not because we continue to run lean, and it certainly helped us when the business went down last year that we could keep our leadership, so I think that was very, very positive. Okay. Our revenue segment, we certainly took a step back, as you would think in 2020 with commercial aerospace. But again, built-out our business in defense. We certainly drove our defense on the structural side, and electronic systems was very strong as well. So as going into 2021, as we move further into the year, this defense business is going to continue, I think, to be very good for shareholders and for the company. And we certainly look forward to the bounce back in commercial aerospace. Next page, please. And then you can see our backlog. Again, goes with the story of military and the work we're doing there in the defense industry, but we certainly, again, have more business and more bookings on structures for defense than in the past. And I would say, electronic systems has always been a strong -- has a strong position in defense. Next slide, please. Just for, again, for grounding for our guests today on our call. Reading left to right, we have our Electronic Systems business and our Structural business. Electronic Systems is mainly our defense -- mainly has defense, but certainly has commercial aerospace as well. Left to right, you can see our engineered products. You can see we make a tremendous amount of circuit card assemblies, but these are very high-end cards that -- and on the lower volume side that are really where we can have some niche capabilities. We do, do, box builds and do a lot of wire harnesses and cables, but these are ruggedized products. These are high-temperature, high-pressure things that are difficult to make. Those are the things that Ducommun is interested in. You can see the performance centers below listed there. We're proud of our performance centers. I'm proud of our people. On the right is our Structural Systems business. You can see the different things with spoilers, rotor blades, and we do a lot of titanium, we do aluminum forming, chem mill, and we have our engineered products business as well, which was -- as well as our ammunition handling systems business. So you can see the bottom there, the performance centers and the people that are leading that business. And again, very proud of our team, in 2020, especially, and even as we go into 2021 and still deal with the pandemic. Just a little more detail. You can see, as I mentioned earlier, the defense business and commercial aerospace, one is way up and one is way down, and you can see the backlog there. So we've got a lot of -- I think, we run a lot of excellent platforms in the defense business and we don't see that stopping and we continue to -- as I mentioned earlier, we're just -- how do we provide value to customers, that's what we're interested in doing. And commercial aerospace run some great programs, and we know the build rates are going to come back. So just need to be a little patient, but they'll come back, and we're in a great position there. Just a word on the defense industry being that we're a major defense supplier. We certainly need to know more about the new administration's plans, but we still feel very confident in the next few years that we're going to have great opportunities throughout all the defense primes to continue to drive our business. We've done some wonderful work in structures and everything keeps moving towards on the electronics side. So that all plays into our favor with cards and build boxes and lots of things, so we feel good about where we are in defense and, especially, for the next few years. Next slide, please. Just to comment on, again, our defense back. I give you some historical sense. You can see from left to right, 2018, 2019 and 2020. And I also want to mention that these kind of numbers on defense, though we have had a good market, this has a lot to do with our restructuring of our business in 2017. Our new BD approach, certainly outstanding team work, and also quite frankly, much better operating performance by our teams in the field, okay, where customers more and more trust Ducommun. They trust our expertise, but also trust our quality and delivery, and we pride ourselves and keep driving a quality culture, and that is not going to stop. I mentioned earlier about COVID and the priorities, just for our shareholders to know that certainly, I think, we've got out ahead of it early last year, obviously, learning with the rest of corporate America and the rest of the nation about how to handle COVID, and we've implemented a lot of strict practices, which were all still in place regardless of states opening up or not at this point. We're able to keep the business going. And -- but also, as I might mentioned that, we try to do the best we can as well on mental health. And we're -- we felt like we need to do something for a plan for a day or two. That's what we did as far as giving people a day off or something else to make sure that people are the top priority. And as I mentioned earlier, we are a successful company, and we're able to do things and we did support the community, I think, in a big way. And we spent every penny we have in the foundation because if you're not going to do it in 2020, when are you going to do it? Page 14. Just give us a little more detail. Certainly, a big partner. We have our headquarters in Orange County, so a big partner of Orange County United Way as well as we also highly supported the LA County as well United Way. And then we have factories, performance centers throughout the country, and these are just highlights of activities locally. We have a plant in Coxackie, so this is in Albany in the middle with Ronald McDonald House obviously doing tremendous work. And then, Berryville, we have a Performance Center as well in Arkansas, and then they work with the Mercy Health Foundation. So let me just wrap it up here. And again, thank you to our shareholders for their support in 2020 and continued in 2021. I think that -- I certainly hope we're through the worst of it. I think we can all say that but we still have more work to do. And I'm optimistic as we move forward here, that we'll come out of this, and we're going to be stronger. And we're going to be back in the growth mode, as I've mentioned in the past in 2021. So we feel great about the next few years. So why us and why we win? Certainly, I mentioned this throughout the presentation, we have a dedicated team, but we also do our best to follow Ducommun values, okay, and that includes teamwork and professionalism and other key areas. Integrity, where we always try to run the company the best way and the right way. Second, I talked about our sort of niche position in the market, value-add solutions, things that are tough to make, tough technical challenges. Innovative products, that's really where we want to be. And that's where we'll continue to drive our strategy. We certainly like our engineered products. We're certainly building our aftermarket as well. So we're excited about that in the future. I mentioned our capabilities in electronics and structures. And we continue to grow and continue to build our business. I'm proud of our agile, flexible and efficient operating model in the organization. We're a pretty flat group as far as people are, I think, fairly close to the customer in the market. I think, that's positive. I think that's important to drive shareholder value and customer value. And we also continue to develop our engineering design and rapid prototype services and things in that area to really help our customers and help our industry because -- so that's why we're here. Okay. So that concludes my slide deck presentation. Hopefully, it was informative. I, again, want to thank our Board for their support in 2020. I want to thank my leadership team for all their hard work in 2020. I want to thank our shareholders for their support last year. I want to thank all our partners including PricewaterhouseCoopers for their help, so we go on, obviously, continue on this journey. And I just want to wish everyone a good day, and I look forward to hopefully seeing everyone in person in April of 2022. With that, I will close the meeting. Thank you for attending.