Woodward, Inc.

thank you for standing by welcome to the woodward inc second 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 Provaznik, Director of Investor Relations. I would now like to turn the call over to Mr. Provaznik. Please go ahead, sir.

Thank you, operator. We'd like to welcome all of you to Woodward's second 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. 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 have again included some presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available by phone and on our website through May 15th, 2023. The phone call 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 would 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 trends in our business, drivers in each of our segments, our updated guidance, the expected and potential effects of the ongoing supply chain and labor disruptions, and net inflationary pressures. Those 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. 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. Now, I will turn the call over to Chip to comment further on our results, strategies, and markets.

Thank you, Dan, and good afternoon, everyone. We delivered strong sales growth in the second quarter, driven by robust demand for Woodward products and services across our end markets. Notably, our industrial business had a strong quarter driven by a sharp increase in shipments. The ongoing industry-wide challenges, including supply chain and labor disruptions and inflation, continue to impact our results. However, we are encouraged by the progress we're seeing from our strategic investments, resource reallocation, and price realization initiatives. In our first quarter call, We announced streamlined aerospace and industrial organization structures designed to enhance the customer experience, simplify operations, and increase profitability through improved execution. Our primary focus has been on transforming the industrial segment where significant change is required to improve performance. I want to provide an update on the three main priorities that we outlined on our previous call. First was right-sizing the industrial business. We took the actions required to align our cost structure with current market conditions. You can see some of these impacts in the restructuring charges. Second was pricing. We are executing multiple work streams to capture prices that better reflect the value we deliver as well as offset significant inflation we have had to absorb from suppliers and our own wage rates. We are on track to achieve our 5% price realization target for fiscal year 2023. Third was product portfolio rationalization, where we have made progress, but there is still more work to do. To provide some context, so far we have eliminated 5% of the approximately 60,000 SKUs in the industrial segment. This is just one lever we are pulling to improve efficiency and expand available capacity, and the team did an excellent job executing this quarter while continuing to take care of customers. In addition, across Woodward, we made notable progress on our efforts to develop and retain talent. We are benefiting from a more stable workforce in the form of productivity improvements and increased production output as our members become more proficient in their roles. Our rapid response machining centers are coming online with contributions made to our second quarter output. We anticipate additional machines on the floor in May with contributions to output in June. We are also using capacity on existing machining centers to provide parts manufacturing support for both supplier bailout and permanent insourcing actions. While we have seen some improvement in supply-based performance, We are still very active managing and problem solving with suppliers as well as their sub tiers. We're taking ground together and holding it, but we are still subject to shortages and unrealized recovery plans. Short summary, Woodward and our suppliers are getting better, but we are not out of the woods yet. I would like to recognize the contributions of our Woodward team. Our newer members have come up steep learning curves, while our experienced members have been good coaches. Many experienced engineering, quality, and sourcing team members remain on temporary assignments to get us stabilized and on solid improvement paths. Thanks to our members for their efforts and results. 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. Domestic travel in China is also increasing as restrictions ease. In addition, international travel continues to improve. In defense, we anticipate near-term U.S. procurement to increase slightly as the full-year 2023 budget was approved at almost 10% higher than the previous year. In addition, rising geopolitical tensions may lead to increased international defense spending. In industrial, demand for power generation remains strong, driven by LNG growth and continued demand for backup power at data centers. In transportation, global marine remains healthy with increased ship utilization and normalizing freight rates. Cruise and ferry operations have recovered back to pre-COVID utilization rates, which should result in increased spare parts demand. Global marine interest in alternative fuels continues to increase, which should enhance OEM and aftermarket opportunities as multi-fuel engines contain greater woodwork content. In addition, limited demand for natural gas trucks in China emerged in second quarter, although future demand beyond third quarter remains unclear. For oil and gas, elevated commodity prices continue to drive higher equipment utilization, which should result in increased aftermarket demand. In summary, we believe our markets are strong, as heightened demand for signals indicate continued growth and opportunity for Woodward. We remain focused on improving operational execution across the company, developing and retaining talent, and innovation, all of which will position Woodward for long-term sustainable growth and enhanced value for shareholders. Before I turn the call over to Mark to review our quarterly results and fiscal year 2023 outlook, I want to thank Mark for his many outstanding achievements and contributions to Woodward over the last 16 years. We wish him all the best in his future endeavors.