Woodward, Inc.

Thank you for standing by. Welcome to the Woodward, Inc. first quarter fiscal year 2023 earnings call. At this time, I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen-only mode. Following the presentation, you are invited to participate in a question and answer session. Joining us today from the company are Mr. Chip Blankenship, Chairman and Chief Executive Officer, Mr. Mark Hartman, Chief Financial Officer, and Mr. Dan Provoznick, Director of Investor Relations. I would now like to turn the call over to Mr. Provoznick.

Thank you, Operator. We'd like to welcome all of you to Woodward's first quarter fiscal year 2023 earnings call. In today's call, Chip will comment on our strategies and related markets. Mark will then discuss our financial results as outlined in our earnings release. And at the end of the presentation, we will take questions. For those who have not seen today's earnings release, you can find it on our website at woodward.com. We've included some presentation materials to go along with today's calls that are also accessible on our website. An audio replay of this call will be available by phone or on our website through February 13th, 2023. The phone number for the audio replay is on the press release announcing this call as well as on our website and will be repeated by the operator at the end of the call. I'd like to refer to and highlight our cautionary statement as shown on slide three. As always, elements of this presentation are forward-looking or based on our current outlook and assumptions for the global economy and our businesses more specifically, including the expected and potential effects of the ongoing supply chain and labor disruptions and inflationary pressures. These elements can and do frequently change. Our forward-looking statements are subject to a number of risks and uncertainties surrounding those elements, including the risks we identify in our filings with the SEC. In addition, Woodward is providing certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release and related schedules. We believe this additional financial information will help in understanding our results. And now, I will turn the call over to Chip.

Thank you, Dan, and good afternoon, everyone. Our first quarter earnings were in line with our expectations, although our industrial segment had a challenging quarter. We continue to see strong demand from our end markets. The ongoing industry-wide challenges from supply chain and labor disruptions and inflation impacted profitability in the quarter as we anticipated and negatively affected our cash flow. These supply chain and labor disruptions are anticipated to begin to subside in the second half of the fiscal year as our strategic investments and mitigation actions translate into improved financial results. Our past due commitments to customers remain elevated as a result of the supply chain and labor challenges, but also because of sustained, strong demand. We continue to focus our efforts on improving our supply chain by securing additional capacity with trusted suppliers, making strategic investments into the creation of rapid response centers, and maximizing our current machining capabilities to increase deliveries to customers. We continue to focus on developing and retaining talent. I'd like to recognize our Woodward members who are working hard to serve customers better and improve our company's results. During the quarter, we announced streamlined aerospace and industrial organization structures with leadership designed to enhance the sales experience for customers, simplify operations, and increase profitability through improved execution. Within the aerospace segment, this new structure enables advancement of our missiles and space programs. In December, Randy Hobbs joined Woodward as president of our industrial segment. Randy is an accomplished executive with significant global leadership and lean manufacturing, lean enterprise management expertise. Randy and I are working closely to transform Woodward's industrial segment as significant change is required. He is already driving multiple initiatives to improve our operational execution. We have three priorities in addition to accelerating operational recovery. First is right-sizing the business and improving our cost structure. We are already well on that path with the announced consolidation of engine systems and turbine systems business units inside the industrial segment. Second is pricing. We are executing multiple work streams to capture prices that reflect the value we deliver. And third is product portfolio rationalization, which will reduce complexity and maximize profitability over the longer term. I'm confident in Randy's ability to lead this segment and improve near-term operational results, as well as improve long-term returns for shareholders. I look forward to discussing our progress on these priorities during our next call. On a somewhat related note, we are moving the date of our June 2023 Investor Day to later in the calendar year. Our internal strategy work related to the transformation of the industrial segment is ongoing. We want to demonstrate progress and establish a firm foundation before we present our long-term targets for industrial and the rest of the company. As we indicated in the last call, but were unable to name names, we are proud to announce that Woodward was selected to work with Airbus to provide the fuel cell balance of plant solution for the Zero E demonstrator. This project leverages our leading fuel control technologies to enable a more sustainable form of air travel based on hydrogen propulsion. This Airbus demonstrator program aims to support zero emission aircraft development for entry into service by 2035. This project goes hand in hand with multiple carbon emissions reduction projects already underway at Woodward for aerospace and industrial end markets. Moving to our markets. In aerospace, utilization rates for the commercial airline fleet continue to rise. driven by increasing global passenger traffic. U.S. and European domestic passenger traffic has returned to near 2019 levels. International travel continues to improve. Passenger traffic in China is increasing, and we are pleased to see that the Boeing 737 MAX is beginning to fly in China again. In the defense market, we are seeing U.S. procurement increase. while rising geopolitical tensions may lead to increased international defense spending. In industrial markets, robust demand for power generation continues to be driven by strong growth in Asia, increases in global aftermarket activity, and consistent demand for backup power at data centers. In transportation, the global marine market remains healthy with increased ship build rates, higher utilization, and elevated freight prices, all of which drive increases in current and future aftermarket activity. Ferry and cruise activity is near 2019 levels, which should result in increased spare parts demand. In addition, the global marine market continues to show increasing interest in alternative fuels as more projects are announced and under development. Woodward content is greater on multi-fuel engines. which should enhance OEM and aftermarket activity in the future. On the other hand, demand in China for natural gas trucks remains at depressed levels. In the oil and gas market, elevated commodity prices continue to drive higher equipment utilization, which should, in turn, result in increased aftermarket demand. In summary, we anticipate continued market strength as heightened demand signals point to growth and opportunity for Woodward. We are committed to improving operational execution across the company, developing and retaining talent and innovation, all of which will position Woodward for long-term success and value creation for our shareholders.