Ducommun Incorporated (DCO) Earnings Call Transcript & Summary

I guess we're going to get kicked off here. Good afternoon. My name is Keats Sexton from the UBS industrials team. Thank you for coming and for attending on behalf of UBS. We're hosting Ducommun for their fireside chat. I'm joined by the CFO, Chris Wampler, from Ducommun. And the agenda for today is Chris has about 10 or so slides he's going to run through to give you an overview and an update on Ducommun, giving a sense for what the company does and where they focus. And then we're going to pivot to Q&A. [Operator Instructions] So with that, I'll hand it over to Chris, and we're going to run through some slides on Ducommun.

Thanks, Keats, and welcome. Thanks -- welcome, everybody, and thanks for having Ducommun at the event again this year. Looking forward to spend a little time with everybody. First slide, just as everybody puts up, just our disclosures and our forward-looking statement, qualifications. Let's splash that up for a minute. Okay. Then we'll jump right into it. I mean, just talk about the company. And this slide we'll spend as much time as any on just to sort of give everybody context, if you're not as familiar to, sort of the Ducommun story. Ducommun -- it's the oldest continuing company in California, established in 1849. We sort of pick up the story here with our journey that started in 2017 when our -- sort of pivoted our business a little bit and including bringing on our new CEO -- our CEO at that time, was new, Steve Oswald, and he's been leading sort of the transformation and what we've been doing since then and where we're at now. So it's been -- it's interesting several years and certainly, like everybody, a lot of unforeseen curves that everybody had to navigate through. So with that being said, the data set here is really the 2021 numbers, just to give people context on the size of Ducommun, and then we'll talk a little bit about sort of our diverse product mix and customers, et cetera. About $645 million in 2021 with adjusted EBITDA margins north of 14% and a netting backlog right near all-time high of $905 million. Our products by end market look very different if you go -- like many -- if you go right before COVID and versus after. For us, commercial was outweighing military defense as we headed into the pandemic, and then certainly flexed much harder on defense as we sort of worked through 2020, 2021. And you can see then by the time we leave 2021, military carry much more of the percentage for us on the revenue side with about 70% versus commercial. And then we've got a legacy part of our business too that's industrial that's in there for a few percent. From a proprietary content, we do view that the vast majority of our products are proprietary either in process or in actual design and how we do it. There's still -- there's some work there that's not -- but for the most part, we've got proprietary content. And when we think about the recovery and where commercial aerospace is going here over the next several years, we happen to be coming into that with much more of a tilt on the narrow-body platforms, which we think is going to help us as well as we sort of ride through this and ride on this recovery. If you look at the contents on the right, just to give you a little flavor again when you pivot from, okay, $650 million-ish type of company. We were as big as $720 million before the pandemic, were $645 million coming out of last year. But a pretty interesting mix of platforms and markets and customers. And so just to highlight on it for a minute. We've got certainly military aircraft with JSF and Apache being a couple of the key ones that we've headed on for a while. On the commercial side, we'll talk throughout the presentation a little bit about 737 as well as work with Airbus and A320. And then we've got a nice missile portfolio along with getting into some space in UAV platforms as well. And then you look at the customers we're dealing with and really a lot of direct work. So there are a lot of Tier 1 type work with the Raytheons, the Boeings, the Airbus', along with the rest of them sort of listed there. So for a company our size, we feel like we do a lot of things well. We've got a lot of faith in our customers that we'll talk about sort of where that's been built up and how we built that up over the last several years. And we're looking forward for this to continue to be a place to build from. Just a few things to touch on here. When people look at our business and think about, hey, why Ducommun? Why is that the place to put an investment or to think about that? A few things that will come right from the last slide. Really Tier 1 industry player. We're heavily focused in A&D. I mean that's really where we want to grow our business. We know we've got the recovery that's in front of us with our -- also with our narrow-body share and then also the defense business, which we'll talk about a little more. But we feel like not only do we lean on that, that we've got that to a place that's really going to do well for us as we move forward. Proprietary content, we talked about, aftermarket focus. And really, from '17, that's one of the things Steve has been very keen on, is trying to find ways to do what we can with the organic side, but particularly as we go to the M&A side, finding ways to have a little more aftermarket presence and help accelerate growth and profitability through that as well. And then number six, certainly key for every business, but on ours. There was a lot of opportunity for OpEx. And just finding ways to continue to move things through the facilities end-to-end a little cleaner and find ways to just perform stronger as a result as well as build a lot of customer trust. So and then M&A strategy and execution. We had a very large acquisition for the size of the company we were back in 2011, and then we were sort of dormant on the M&A side. Then Steve showed up in '17. We sort of got back on the M&A train as an accelerator for us. And then with the goal of really once a year, having an acquisition, we've been working on those. And for the most part, that's really where we've been. And then also just like everybody, certainly trying to spend more time and focus on being able to exhibit the ES&G track record. And we feel like we've got a good foundation for that. And as like everybody we look to continue to improve that as we go. Just a quick one, too, for if you maybe have heard of Ducommun prior or several years ago. There were a lot of things that were either things that we did that we don't do anymore or things that people just thought we did. And so this was really a slide we shared with Investor Day last year that seemed to resonate pretty well because there are people that did view us as more of a build-to-print shop, really not a lot of competitive advantage, sort of low commoditized price products. And that's not where we're at as we more. As we continue to move up the value chain, as we continue to do things organically, that provide a little more specific value to the customer as well as our M&A side. We've moved away. We've moved down the dial on that, which has been great. The view was we were focused on commercial aerospace with really Boeing being the main driver. And what else is there beyond that? There's a lot of other key customers there, viewed as pro formally just structures and large parts of the plane. And certainly, we've got a lot of other activity that happens there. And another one really is just on pricing power and viewed as that we didn't have any ability to do that. And we've got a nice hybrid on both the customer and the pricing side along with the supply chain side that I know we'll get into a little bit as well. This is just to give you, again, a little more context over the types of things we do. And this is -- our business breaks down into 2 areas -- 2 reporting segments. We've got electronics segment which is driven largely by the defense work, and then we'll also talk about a structure segment, which is driven largely by commercial work with some crossover in between there as well. So when you think about our electronics side, we've got the -- again, main product groupings here with missiles, with military aircraft, UAVs, naval work we're doing, space communications and then also the commercial and business aviation, which is a part of electronics as well is certainly a main driver on the structure side. And then you see some of the key programs there. TOW missile, I mean just to talk about that one for a minute. It's a key program that we've had for years for Raytheon on the electronics side. And one of the big pivots for us in the last couple of years was to then be able to get where we can take a product and do -- take it from one facility or multiple facilities on one side of our business and end up sort of doing the finished product on the other side of the business with the structure side as we do the TOW cases and sort of the final assembly with a lot of the components included there. And really, took that work on and got it up to speed for Raytheon in a very quick introductory -- in a very quick window. And so from a -- just from an example for us from like a case study of being able to go across our segments and do a good job with it, that's been one that we've been really thrilled with. And then you get into the other areas there, and you can see a lot of the other platforms and programs that are important to everybody. But those are places we play. And when you think about the types of things that are in there for us, mainly it's circuit cards, it's assemblies. It's box builds that we do. And then also, we've got -- one of our acquisitions last several years was on Lightning Diversion strips. And so we've got that as a key part of electronics as well. On the structure side, commercial listed first tier, commercial aircraft, that's been a historic key driver of what we do with 737, A320 there. And then you also get into the military rotorcraft, missiles, ground vehicles and other with the ground vehicles being a key part of -- a big part of that's related to one of our acquisitions with Nobles Worldwide a couple of years ago. And then we've got our business jet grouping as well. And when we think about this, I mean, I think the headline item here is really about our titanium business. I've been with the company 9 years. Historically, the largest internal really expansion or plant investment that we made was around our titanium business back 5, 6 years ago. And it was $30 million, $35 million for us, which is a large capital investment, really around enhancing our capabilities related to titanium with the hot form and the SPF, the superplastic form. And that was sort of an entree into supporting Spirit and Boeing as well as providing the capabilities that Airbus would need as they look to establish some partnership over here on some of their processes or some of their products. So that was important for us as well. Then you can also just see from the list, again, the various military programs we're on as well and some of the different things related to metal bond that we do as well as the acquisitions on this side, including the magnetic seal and some of the certified thermoplastic type of products that we have as well. Track record on the acquisitions, and this is really just to highlight the most recent one. Q4 of last year, we did 2 things when we had a sale leaseback transaction as part of our -- sort of our capital maintenance and what we've done. We had not done one before. And then we literally pivoted the same day and were able to close on MagSeal acquisition and deploy some of that equity that was tied up with our real estate immediately onto what we think is a value-added acquisition for us that falls right into the sort of the wheelhouse of what we look for. And I think MagSeal, it's -- here we are several months into it. And it's as advertised for us. We're thrilled with it. Integration has gone well. MagSeal is a leading provider of magnetic seals for systems in aerospace and defense. And really, it's -- they're the only ones that do it in this fashion with the magnetic seals. And then that's what helps them in the high-speed high vibration and other environments that they have. And then when you step back and you think about our M&A over the last 5 years, like I said, we've been trying to sort of do one a year where we can. And other than 2020, that's really played out. We look at the metrics and we're looking for things that are really top of their list, niche type of opportunities with some proprietary content, strong name, places where we feel like we can take it and help them grow quicker and stronger than what they are currently on a trajectory for. And then -- and really help them to do it in a way where as an acquired company or as a part of Ducommun then they're thrilled with sort of a lot of the other things we do, and that's what we've -- had happened so far. So when you look at what they also -- how they performed, they performed really well for us. There's an aftermarket content, and we've done a nice job at those locations and those businesses growing their backlog and contributing very strongly to Ducommun. And this is just to take one further step back and say, let's look at the journey. Just for context, Steve, again, joined the company in 2017, beginning of '17. So as sort of a baseline year, you can see we're mid-500s on revenue, sort of working in a business at that point. We're clearly like everybody, the commercial drivers on the end markets where rates were going up, up and everybody thought up, up and continued up. And that's where we were through the end of '19, driving the top line revenue, getting it up to $720 million, driving margin expansion as well, as well as bringing the leverage down, building the backlog. And then everybody sort of had to go through what they had to go through their own path here through the pandemic. And for us, that was a big lean on to the defense side of the business. And really seeing -- even though the revenue is contracted from $720 million down to $630 million and then last year it was at $645 million still finding a way to do it a little leaner and really try to drive the -- again, the operating side of it and to drive the margin enhancement where we can. And we were able to hold the margins and expand the margins even against the headwind on the top line. And then the debt really hung in sort of in that 3 or a little more than 3 until we got to the end of last year when we did that sale leaseback and we bought MagSeal as well as paid down a little bit of debt. And then that defense business coming to the end of last year, a big part of why that backlog was as high as it was at $905 million. And all that leads to, again, everybody sort of TSR view of what you've got over time. And you can see from the time Steve got here, certainly, the purple line, the top line there is Ducommun. And you can see we separated pretty nicely over the journey through 2019 and even then through 2020. Come back a little bit here through 2021, but the one comparable call out there is really when we look at our peer group because again, A&D took us a while to ride as most anybody. And like we held up pretty well through all that with sort of 10x of where the peer group median was at the $106, and we were up at the $164. So felt like really strong TSR in there and really set up. I think it's the most important thing to sort of leave us with here on the presentation side is, is set up to be a strong platform to continue to do 2 things. One is continue to drive the defense business regardless of where we're at and ride the -- take advantage of and outperform others where we can on the commercial recovery. So at the end of the day, we're a business that people can count to perform strongly in any situation, which we feel like we've demonstrated here, as well as when things are going right, and when we hit the right timing on things it's really a chance to exceed expectations big time. That's what we're looking for.

Awesome. Chris, thank you for that. And always good to end the presentation with a TSR chart that shows you outperforming the market and all your peers, so that's fantastic. So I have some questions I'll ask, and again I'll open it to the audience. [Operator Instructions]. So let's talk about just the end markets, you're supposed to do first. I think a big theme in this conference is, at least from an aerospace perspective, is what's going on in the commercial side? What are you seeing out of Boeing in terms of recovery on rate? How do you feel about your split on Boeing and Airbus? And might this be a time to increase that exposure to Airbus?

Yes. Thanks for the questions. First on Boeing, Boeing historically has been our #1 customer. And everybody who has a vested interest in Boeing is wanting them to just clear things out and get on this smooth path as soon as they can. Clearly, the last couple of years, it's a little bit of 2 steps forward, 1 step back or some variation thereof. And it's still a little bit of that. I mean the good news is, I think everybody is locked in on -- their rates have moved up from, for example, on MAX, which is by far our largest platform, pre-pandemic multiples of any other platform we had. So when that went to virtually zero or single figures for a while, very difficult for us and wanting to see that get back into first double digits and then into the 20s and into the 30s. They're headed to 30s -- into the 30s now. They talk about a rate 31. That pulls through at different ways for us. Certainly, we'd like to see it happen just sooner and more confidently than I think what it's happening, but it is happening. And I think, Keats, that's the biggest thing for us is, okay, we know that's there. That's a lot of work for us that's going to be there. Exact timing can vary a little bit. But you shift to Airbus and you think about the investment I talked about with our titanium business. I mean that was key, and we're thrilled we were able to sort of establish that and start to earn trust with them before we got into this whole upside down world that was -- that has been commercial aerospace the last couple years. So certainly thrilled with establishing that relationship with them. Last summer after having worked through with them for a few years we were awarded D2P status with them on the titanium work, which tells us, hey, they're going to keep coming to us for that as well as that's a level of confidence with us that has other opportunities are there. We're hoping we can take advantage of because, to your point, we definitely want to continue to expand our presence in content with Airbus. The other key driver we have in that is a product called VersaCore. And that composite technology is something that we've been working through on some of the product that ends up on the A320. And we've made some good inroads there as well over the last few years. We think that's another avenue to some more work with Airbus and/or others, where they value a little lower cost point, a low cost point with similar type quality with a composite type.

Let's spend a minute just on the titanium piece because you mentioned it. I know Ducommun has been building out their hot forming business. Why is that a differentiated capability? How does that stack up relative to your competitors? And then are you seeing any kind of broader issues with supply chain with titanium and kind of what's going on in Russia in a more micro sense?

Okay. On the titanium side, I mean, they're just -- first thing is it's very difficult to do the processes that we have. The hot forming and then the SPF, it's a niche part of that entire titanium supply chain. There are only a handful or fewer people that can really produce these products competently throughout the world. And in the U.S., we're one of just a couple. So Airbus has a very small group that they've come to. We've done these products for Boeing for a long time, too, and there's just very little competition there in terms of people that they can go to. So Airbus does some of it in-house. Boeing tends to just lean on us or a few others to get it done. So it was a great place to sort of put our investment and say we think we can make a lot -- make this be a key part of our growth strategy. And that's really what we've done. Now on the titanium supply side, we do have -- both of those key customers have their own source directed type programs, whether it's through [ Hall Matter ] or through TMX. And so we were in a spot where none of it comes from Russia. We're comfortable with our flow that we have. By the way, as the pandemic hit, I think we all were on a trajectory of headed to rate 50-plus on Boeing and possibly higher on Airbus and inventory builds were sort of there as well. So when things slowed down, that put us in a position we're ready to handle a little bit of a rebound once it starts. So between that, still being able to get our flow, we feel pretty good about the titanium side.

So just going back to markets for a second. Military space is about 70% of the business today. Is that a high watermark? And where would you expect that to be in kind of a more normalized level with commercial returning?

And again, before the pandemic, commercial slightly outweighed the military defense. So that pivot has been in the last 2 years. And I haven't talked about it yet, but it really one of -- when Steve jumped the Board in '17, we sort of did a normal type of CEO assessment and restructure and sort of said, let's lean out this business. Let's do a little bit on the footprint and we got past those. And then his next step was, okay, on the defense side, how do we reenergize a little bit of the BD effort. And that's really taken us from where we're just a Raytheon, sort of viewed as a Raytheon company on that side and trying to get more customer intimacy and more confidence with the rest of the defense primes. And that's really what happened in '18, '19, built that backlog that I pointed out sort of on the slide. And then during this last couple of years, that's what got us to where we tilt heavily with defense. And as we move forward from there, I do think it's -- I think we're somewhere in that vicinity of high watermark, Keats. The commercial market is going to be -- it's going to have its rebound, but it won't totally shift back the other way because of the progress we've made with defense. We anticipate that continuing over the next several years, to continue to grow with what we've done so far with the business. So the 70% split is probably about -- toward the high watermark. We're picturing it more of a 60-40 sort of range is where we're at.

And does that impact your proprietary versus nonproprietary mix in terms of defense and commercial?

Yes. No, good question. The proprietary side for us is a little more on the electronic side or the defense side. So as we pick up more on the commercial work, that should even minimize it a little more.

Sure. And in terms of just platforms, what's driving the growth? I think on the commercial side we know it's MAX. We know it's 871 once it starts coming back, A320. What about on the defense side? And what are the platforms that you guys are looking? I know you have a lot of missile exposure.

Yes. And we tend not to talk quite as -- well, we cannot talk about the platforms, so to speak. But I would say, I think of a grouping, missiles. I mean, I think are really -- it's a place where we tend to -- regardless of which programs get emphasis, who lands with them, we tend to get good business with on the missile side. I think, unfortunately, some of the unrest that's going around the world probably keeps the missile business a little more robust than just from a view of that, that we'd all like. But nonetheless, we participate in that. So I think that's a key part of it as well as just, again, the acquisitions and seeing them sort of come through and continue to grow.

Right. And you mentioned changing budget environment. Obviously, a high level of dysfunction in D.C., which maybe is becoming par for the course. Missiles is certainly kind of an area of growth, I think we could all agree, in DoD budget. Other areas of the budget where you have exposure that you can see growing the top line?

Yes. I think what I'd say is just to frame up our defense business a little bit and for a second compare it with our commercial side. On the commercial side, I mentioned the MAX was 6, 7x of our other programs, pre-pandemic. And it was in the $120 million, $130 million range for a company that's $700 million. So it's a huge program for us. The military side is much more of a balance of small- to medium-sized programs. So a lot of programs that are in the $10 million to $20 million, $25 million type of range. And with that being said, no one program turns into a huge home run for us. At the same time, no one program's sunsetting or getting defunded cripples us. So we like our diversity even within the defense side, and we're pretty comfortable where we're at there really across the board.

So we actually received a question that's kind of consistent on that. The question is supply chain issues in defense didn't show up right away, but have in the last couple quarters. At the same time, most people are pointing to a second half recovery this year. What have you seen in your biz on the supply chain issues, specifically in defense?

Yes. Well, specifically in defense, so a couple things. It's a little bit of a hybrid there for us from the supply chain side. And when I say that, I mean we've got some -- we've got 2 things. One, we've got pretty assertive supply chain management and that put in place some pretty good agreements for us. And we've got good LTAs and good flow and good prioritization from the folks that we're getting our product. So we've also done some strategic bets on where we think there could be a little tougher roads. We think that's helped us out as well. And so overall, we're navigating it. But the last piece of the puzzle is a little more specific just to Ducommun. I mean we operate with 15 performance centers. Over half of those are electronics, defense type performance centers. And so they're not huge. Break up the size of the business, you think about that sizing. If we run into a particular component problem, then we can sort of flex and try to work around that in the short term. But certainly, we're not immune to -- and we said that on every call. I mean we're not immune to it. We do bump into things. We think trying to buffer -- what we're going to run into helps us and having a little flexibility when we do run into it helps us. And at the end of the day, we've not seen game-changing issues because of supply chain. But definitely, it's as tough of an environment as we've seen for a long time.

Yes. Sure. And then we have another one just on -- from a platform perspective on the commercial side. I'm not sure you'll be able to give us a specific answer, but what rates are you currently being pulled at on 37 and on A320 and on 87.

Yes. Well, I mean, 87 is virtually the stance here. Yes. I mean it's just we're sort of on hold there. I think Airbus is sort of as advertised. I mean they continue to be pointing more towards things are going up versus be ready and can you support as things go up. So we're comfortable that's as advertised. And Boeing, I'd say their 831 that they have out there, I mean we're not -- number one, we provide several components into 737 MAX, and each one has its own sort of journey. So it's not as though in this recovery we're going to see full rate pull through on our own behalf, let alone anytime they're moving some of their inventory through the process, et cetera. But saying all that, a little less than what they're saying would make sense.

So you talked about how you've been shifting away from Raytheon. You're not just a Raytheon house. You're winning more electronics work. And I think you're doing it in some cases defeating some primes. I mean, can you just speak to that a little bit?

Yes. And some of it might be defeating, some of it might be because they're choosing to as well as sort of pulling in some of this work from the defense primes. And when things get tough and people focus on where is the business that they really want to be doing and where do they have opportunities to have somebody else jump in and help, we weren't in a position 5, 6 years ago to be -- to raise our hand because we weren't quite to the level of necessarily trust on quality delivery, everything else. And we were still trying to get things sort of running full steam. And that's what's been over the last few years is, again, whether it was the Airbus on the commercial side or whether what we've done with defense primes, just getting them to recognize, okay, here's a trusted supplier. So once you get there, then it's like, okay, what's our operating situation? A good example is some of the circuit card work that we pull into the Midwest, whether it's into our Oklahoma facility or Wisconsin facility. And it's coming out of an OEM that's in the Northeast. And so the rates are very different and what they can do it for is a little different. And it's not their gravy of where they necessarily make their money. But when we get it and whether it's a circuit cards or whether it's some of the assemblies and things like that, we take it and we do -- we feel like we do a great job with it. And that's -- those are the opportunities we're looking for. And I didn't really mention as we went to the product side, but on all those components, I mean, again, there's not -- there aren't a ton of people that can take that work as well because of sort of the type of niche product. It's ruggedized. It's a tough environment work for -- as for where these products have to perform, and we've really got a good history now of being able to do it.

Who do you say you're competing with in that market specifically?

It's so different in every -- literally every submarket and that defense electronics market for us is really -- it's broken down heavily.

Fair enough. Let's talk a little about aftermarket in terms of where you're playing specifically. I've seen there's limited opportunity there on the structure side, probably more on the electronic side. But just give us a sense for kind of where that is and how that's evolved over time?

Yes. And I think coming into the M&A push in '17, it really was an item on each side. I mean we had some of the sort of the legacy work with some of our Carson electronics, which is some of the more antiquated work versus what we're doing now. And on the structure side, we had -- we've got some Apache blades that we do repair. We do things like that, that happen. They come through the cycle as well. And that's sort of what gave us our 5%, 6% type of history on aftermarket. And then each of these items as we come up and each of these acquisitions that we have is to bring with a much higher percentage of aftermarket for them. So that's what nudges us up from the 6% up towards double digits, 10% plus. And that's a focus going forward. And with our business, it's not as though we can snap our fingers organically, create a lot of aftermarket opportunity, but there are certain places it can happen. But it's also very much a key part of the acquisition -- sort of the acquisition motto and really what Suman Mookerji, our leader on the M&A side, is really -- drives towards.

Sure. So I'd be remiss if I didn't ask an ESG question. So you referenced ESG in your investment highlights page. Give us a little sense for any specific initiatives or metrics that you can point to that kind of underpin that ESG story?

Yes. And I think it's across the board. I mean when we say that, we tried to, over the last few years, just take a step back and say, okay, how do we move the needle? Because like so many things, I mean it's not ESG journey. It's not a light switch. It's a progression. It's how do we keep getting a little better and so on things like the emission side, on the environmental. I mean we're demonstrating that we are trending in the right direction, trying to do things to help us continue to move that needle. When it comes to things like diversity in the workplace, we've got our Board. Our Boards recalibrated a little bit, and we definitely have more diversity related to there as well as on the management team. And then you get into things like safety and what we've been doing there. It's been very, very strong. We've heard what we do. We feel like we've got a really good protocol and the way we operate with little or no lost time situations or things that are causing any other damage. And then other things, too, is just being active and present in our communities that we're in. And one example is -- 2 examples, really. One is we've got a foundation that we end up moving. We utilize quite a bit, and that's what reaches out and that foundation ends up moving money into these local communities for all the various types of situations that you would be. And it's specific to the location. And that's what the foundation tends to do. And then in the Orange County area, we've got something that started a few years ago with the Chargers -- with the LA Chargers related. It's called STEM on the Sideline. And it really highlights -- in the Orange County high school area, it's become a pretty competitive situation on the STEM side with science tech, engineering, math and they do a football-related project, and they get together. And like the finals this year were out at SoFi Stadium in the parking lot and they got to take it to the stadium and compete and some people got to walk away with some nice prizes and things.

Do you have any spare tickets, let me now, I'll get out there. So just a couple more just going back to supply chain, labor. What's the overall pricing environment look like? Pre MAX, Boeing was obviously getting pretty aggressive with the supply chain. I assume that's ameliorated somewhat. But now there's concerns that Airbus might start to put more pressure in price as they start to ramp up kind of on their end. But what are you seeing?

Yes. I mean I'd say coming out of the pandemic, I mean we're -- I think things have been more focused on just getting the supply chain moving versus moving chairs around or really being dynamic with the supply chain. So we've not seen as much of that. But there's always -- I mean, every customer wants it -- as our pricing pressure, wants it for less. And I don't think it's been night and day just because of what we're going through or anything else. And I think the biggest thing is, is there confidence in the supply chain? And can they -- that's -- I mean if you think about a constraint to either, right, Airbus' or Boeing's, I mean the constraint is probably on the supply chain with whether it's certain components or whether it's the labor. And I think that's their concern, and we want to just continue to demonstrate that we're ready to help them where they need us.

So you mentioned labor. That seems to be increasingly a big issue for supply chain ramping back up. Perhaps more pronounced on the MRO side right now, but what are you seeing?

Yes. I mean, we definitely -- I would call it as tough just like on the supply chain. It's as tough as an environment as we've seen. We -- with those performance center sort of build-out that we have, we're a couple of hundred employees in a lot of small towns, and we tend to be pretty much -- a pretty favored employer so that helps us to have that reputation. A lot of people want to work for us. But at the same token, right now, you -- all of a sudden, people coming into Ducommun at an entry level have other opportunities that can pay them similarly to what they did years ago. So that's different. And so it's about making sure people understand what they can do to grow with our company and what a career could look like for us. And the other piece of that good news is, I mean, we've got a lot of people. Of our 2,500 employees, we've got many of them that have been with the company quite a while. And so they're in there doing a good job, and it's not at that entry level sort of labor point.

Sure, yes. Let's pivot a little bit. We only have a few minutes left, capital allocation. Kind of what are your priorities? I assume M&A is still a focus. Kind of where -- how do you feel in terms of leverage, speak to that, if you can?

Yes. So on a leverage perspective, we've been running -- in the last few years, we're running north of 3 and into the mid-3s. And as I mentioned in last Q4, we did a sale leaseback. And we bought MagSeal with it. We paid down some debt with it. So we're currently running in the 2s with it -- and on the debt to EBITDA. And as we go forward, we expect to really use our -- first of all, use our cash flow, for the most part, sustaining capital. but then some growth capital, but then also acquisitions, along with -- that's where the leverage could bounce up a little more if we find the right acquisitions in the right time frame here over the next couple of years because that's -- it's -- the acquisition side is a key accelerator to us growing this business. And so we've got, again, a leader with that, that does a fabulous job and has helped us get 4 over the last 5 years. And we're going to look for more of that as well. So when you think about the different places we could spend our money or utilize some of our capital structure besides just running our business better, it's on the M&A side.

Sure. And then just last call for any questions, if anyone would like to submit in the last few minutes we have. So just a few more from me, Chris. So we talked a little bit about margins in the presentation. It's a great story. It consistently improved really over the last 5 years. Is that really -- is that a reflection of increased aftermarket? Is it a reflection of more proprietary content? And how much more runway is there for further improvement?

Yes. I mean, we do believe there's good runway. We -- Investor Day last year, we talked about margins, EBITDA margins going from 14% by 2025, which is our Vision 2025, up toward 18%. And so continuing to expand that. Doing it in a sort of a flat and down environment was helpful in terms of a lot of confidence on how we're doing it. And it's everything. I mean, so again, first off, it's having facilities across the board that are running as clean as they need to be running. And when you're a business of our size, it doesn't take too much headwind to make it very tough for everybody else to sort of overcome it. So that's where it really is important to get everybody sort of running there. We do have, I mentioned earlier, some of the price capabilities in terms of pricing that we can incorporate. And I would say before Steve got here until after, the biggest thing is just trying to make sure we're assertive in getting our fair value. And we are a key part of these different supply chains that we participate in, and we've got some great customers. And we're not looking for -- necessarily for more than that, but we want our fair value. And that historically was a place we weren't necessarily there. And that's recalibrated quite a bit. So I think that's a big part of it as well. And then the M&A side certainly is a piece of the puzzle as we keep moving down the track, and we anticipate staying on that front.

So last one from me, and I will give you a chance to make some closing comments. Backlog, it looks like it's basically near an all-time high. What's driving that? And how should investors think about how that's going to be burned off over the next 12, 18 months?

Yes. Well, the burn off side, I mean, we do burn off a little more than half in the year that's in front of us, so probably more like 60% or so. Our different business products have a different backlog life cycle as you would expect. We're in a position where we have that high of a backlog because of our defense business and how it grew over these last couple of years. That's what put us in a position to be at an all-time high, even against the backdrop that we've all been living with for a couple of years. But in the most recent quarter then the commercial business really gave us a thrust and really helped us on the backlog side because as these rates start coming back, as people think that, that's going to materialize into shipments, we view backlog as sort of firm fixed over the next 2 years. So the more that's coming into that window, and we think we're going to ship out in the next couple of years, the more that helps our backlog number that we put out there.

Excellent. So we're basically at time. Any closing comments?

No, I mean -- yes, well, I guess, one. Just thanks for the time. And also just to say, I've been with the company 9 years. I've seen a huge change from '17 when Steve Oswald took the helm with this company and where we've been. And we feel like we're focused on the things we need to be, and we want to continue to just demonstrate that we can perform in all kind of situations as well as grow this business and have a business that all of us are proud of.

Excellent. Great content. Great insight. Thank you, Chris, on behalf of UBS. Really appreciate it. Thanks for attending the conference and for your time.

Thank you Appreciate it.

Thanks all for joining today. Appreciate it.