Moog Inc.

Good day and welcome to the Moog second quarter fiscal year 2021 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ann Lohr. Please go ahead.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance and are subject to risks, uncertainties, and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties, and other factors is contained in our news release of April 30, 2021, our most recent Form 8K filed on April 30, 2021, and in certain of our other public filings with the SEC. We've provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have a document, a copy of today's financial presentation is available on our Investor Relations webcast page, at www.mogue.com. John?

Thanks, Anne. Good morning. Thanks for joining us. This morning, we'll report on the second quarter of fiscal 21. Over the last 90 days, we've become more confident that global operating conditions have stabilized to the point where we feel comfortable providing guidance for the second half of the fiscal year. Overall, it was a very good quarter, and we're optimistic that the remainder of our fiscal year will continue this strong performance. I'll follow my usual format today, starting with the headlines under the three headings of macroeconomic, microeconomic, and most specific items. First, on the macro front, we've seen a lot of change in the last 90 days. In the U.S., the new administration is firmly in place in Washington, and federal spending is set to increase dramatically over the next few years as COVID relief, infrastructure investments, and green initiatives are aggressively pursued. Eventually, U.S. taxpayers will have to pay for this spending, and it now seems inevitable that corporate tax rates are set to increase. The only question is by how much and when. For the coming year, the defense budget seems to have averted any major impact, but given that defense is a major portion of the federal budget, we assume that longer-term defense spending will be impacted. On the other hand, global tensions continue to simmer, with China starting to assert itself as the equal of the U.S., Russia threatening the Ukraine and both Iran and North Korea pursuing their nuclear agendas. Trade and national security have become intertwined as the U.S. seeks to reestablish a base in critical capabilities including chip manufacture and supply chains for the key components of tomorrow's cleantech economy. On the COVID front, we're seeing optimism in the U.S. as vaccinations reach over half of the adult population and the top turns to reopening the economy in full. with contrast to the ongoing challenges in Europe and South America, where vaccination rates are much lower, and the emerging crisis in Asia, particularly India, as new variants fuel the next wave of infections. Overall, the global economy is showing signs of renewed strength, driving supply chain shortages in critical components, particularly electronics. Second, on the microeconomic front, our major markets are continuing to perform well, spending on defense and space applications continues to be robust, and we're starting to see a slow recovery in some of our industrial markets. Commercial air traffic is on an upswing, driven by domestic demand. Boeing is ramping up deliveries of the 737 MAX and resumed deliveries of the 787 in the quarter. Production rates at Airbus have stabilized, and the aftermarket is much improved from six months ago. Overall, a much more encouraging picture than 12 months ago as we headed into the pandemic. Third, it was another good quarter for our business. Total sales were down only 4% relative to a year ago, despite a near 40% decline in our commercial book of business. As we discuss our performance relative to the same quarter a year ago, it's important to keep in mind that our second quarter last year was the last pre-COVID quarter we enjoyed. Gap earnings per share this quarter were $1.51, and up marginally from the same quarter a year ago, but included 18 cents of benefit from a curtailment gain on a foreign pension plan. Absent this gain, adjusted earnings per share of $1.33 were the strongest quarter we've had since COVID hit and clearly show the underlying strength of our diverse portfolio of businesses. COVID continues to impact our business globally but our infections have come down over the last quarter and our operations have continued to perform. We've not yet started to bring our folks back into the office but we're optimistic that this will start to happen in select geographies as we enter our fourth quarter. National in the quarter was soft after a blowout first quarter. Despite the soft second quarter, year-to-date we're still running a healthy conversion ratio of over 90%. Looking at our key markets, defense and space continue strong, industrial is showing early signs of recovery, commercial is stable, and medical is solid but coming off a surge in COVID-related demand over the last year. Our supply chains continue to function well, although the emerging component shortages in the industrial markets are a watch item for the coming quarters. Finally, on February 18th, our space team celebrated the successful landing of the Perseverance rover on the surface of Mars. The MOG team provided valves which metered the flow of fuel to the descent rocket motors. We used the phrase, when performance really matters, to illustrate the critical nature of the applications which use our products. Ensuring a safe landing on the surface of Mars after a seven-month, 350-million-mile journey is the perfect example of when performance really matters. My congratulations to all our team members who contributed to this technological wonder. Now let me move to the details, starting with the first quarter results. Sales in the quarter of 736 million were 4% lower than last year. Similar to the story for the last four quarters, sales were up in defense, space, and medical. down slightly in industrial and significantly lower in commercial. Taking a look at the P&L, gross margin was in line, while R&D was up slightly, partly driven by the Genesis acquisition. SG&A was down on a dollar basis, but up marginally as a percentage of sales. Interest expense was in line. We had a one-time $6 million gain in the other line, associated with a pension curtailment in a foreign plan, which Jennifer will explain in more detail. The effective tax rate this quarter was 21.6%, resulting in net income of $49 million, down 2% from last year, and earnings per share of $1.51 up 2% from last year on a lower share count. Fiscal 21 outlook. We continue to assume that COVID will be a major factor through the end of this fiscal year and are planning accordingly. We believe the second half will be very similar to the first, both in terms of sales by market and underlying earnings. I'll provide more detail in the roundup for each segment. Taken all together, we're expecting full year sales of $2.84 billion and full year earnings per share of $5 plus or minus 20 cents. Now to the segments, I'd remind our listeners that we've provided a three-page supplemental data package posted on our webcast site which provides all the detailed numbers for your models. We suggest you follow this in parallel with the text. Beginning with aircraft. Sales in the second quarter of $304 million were 11% lower than last year. The pattern of the past year continued with strong military sales compensating for lower commercial sales. Comparing with the same quarter last year, military OEM sales were up a third on increased funded development work and higher F-35 sales. We also booked $8 million in sales from our Genesis acquisition, which completed at the end of December. In contrast to the OEM, Thank you very much. 787 and the A350 were both down over 40%, while sales on business jets were down almost 50%. Commercial aftermarket was down 34%. On a sequential basis, Q2 sold shows some encouraging signs over the first quarter. Military sales remained strong, albeit down slightly from the first quarter on lower aftermarket sales. Commercial OEM sales showed nice improvements across almost the entire portfolio, as production rates stabilized and Boeing deliveries of 787s resumed. The commercial aftermarket was also up as domestic flight operations continued to improve. Aircraft margins. Margins in the quarter were 7.2%. In reviewing the margin performance this quarter, three comparisons helped tell the story. First, as expected, margins were down from Q2 fiscal 20 on the lower commercial sales. Second, also as expected, margins were down sequentially from our first quarter. 90 days ago we explained that we had an unusually favourable mix in the first quarter and were anticipating lower margins in subsequent quarters. Third, and most important, margins were up significantly from the adjusted run rate of 3.5% in the second half of fiscal 20. This improvement in the underlying business is a result of the continued strength in the military book the firming demand in the commercial book and the actions we took last year to resize the business. Aircraft fiscal 31. We're projecting the second half of our fiscal year will be very similar to the first. Sales into the military market will remain strong with OEM sales in the second half marginally lower than the first half but aftermarket sales marginally higher. On the commercial side, the production rates on the major programs have now settled and will probably remain stable well into next year. In the aftermarket, global flight operations continue to pick up, but we believe we've already seen this benefit flow through in our first half as sales increased almost 20% from the run rate of the previous six months. Taken all together, we're forecasting a second half in commercial in line with the first half. The net result is full-year sales of $1.18 billion, including $40 million from the Genesis acquisition we closed in December. This total is down just 2% from fiscal 20 sales. Second half margins will be approximately 8%, bringing full year margins to 8.2%. Turning now to space and defense, sales in the second quarter of $206 million were 7% higher than last year. Space business continues to drive the growth, with sales up 19% from a year ago. We have continued strength in our NASA work, as well as growth in our integrated space vehicles product line. Over the last decade, we've strengthened our component offerings and worked to combine these components into integrated space vehicles. Our Orbiting Maneuvering Vehicle, or OMB, was the first product of this effort, and over the last couple of years, we've continued to broaden that offering to include small satellite buses. The boom with low cost satellites and the availability of cost-effective launch capability is now fueling our growth in this business. Sales into the defense market were in line with last year with some shifts in the mix. Sales of components on military vehicles were up as were sales into naval applications. These increases were offset by lower sales of thin steering systems for tactical missiles and into security applications. Margins in the quarter were 12.9%. This margin performance is particularly strong given the high proportion of funded development work in this business combined with the challenges of COVID. Space and Defence Fiscal 21 We're projecting full year sales of 795 million. We believe both the space and defence businesses will remain strong and will each have sales in the second half pretty much in line with the first half. Full year margins will be 12.3%. Coming now to our industrial systems business. Sales in the second quarter of $226 million were marginally lower than last year. Adjusting for foreign exchange movements, real sales were down over 5%. Sales were lower in our energy and simulation test markets. Compared to last year, energy sales were adversely impacted by delays in various exploration projects. On a more positive note, the run rate for energy sales has been fairly stable over the last few quarters, and we're seeing signs of modest growth going forward. Sales of motion bases for full-flight simulators were down over 50% from the same quarter a year ago, as the demand for additional simulator capacity has plummeted. Sales of product into industrial automation were in line with last year after adjusting for Forex. On a positive note, sales into industrial automation are up sequentially from the last three quarters, indicating that this market is starting to strengthen. Sales into the medical market were up 7% from a year ago and in line with our first quarter. Margins in the quarter were 10.5%. Margins in this business are starting to improve as we see the first signs of recovery, particularly in the industrial automation market. Industrial systems fiscal 21. For the full year, we're projecting sales of $865 million. Similar to our other two groups, this assumes a second half total in line with the first half. We will, however, have some slight changes in the mix. Comparing the next six months to the last six months, we think sales into the energy and industrial automation markets will strengthen marginally, sales into simulation and tests will be flat, and sales into medical markets will be down slightly. This slowdown in our medical markets It's caused by the reduced need for COVID-related equipment, which drove a spike in our pump demand over the last 12 months. We're projecting full-year margins of 10%, in line with the first half. These margins are down slightly from the second quarter as a result of additional organic investments we're planning to make in emerging opportunities in the industrial off-road electric vehicle market. Summary Guidance We're pleased with our performance in the first half of the year and are looking forward to repeating that performance in the second half. Our businesses continue to operate effectively despite the ongoing imposition of COVID restrictions. Over 60% of our businesses in the US and with vaccines now widely available, we're hopeful that our fourth quarter could be the start of the transition back to a more normal work environment. Our operations in Europe and in some Asian countries are probably a quarter or more behind the schedule. but we're optimistic that our fiscal 22 will be the start of the post-pandemic era. Market diversity and financial prudence have guided us through the pandemic and will continue to be the core of our business going forward. Our capital allocation strategy is unchanged. We look to invest in growth and return excess capital to shareholders through our dividend and buyback programs. As we emerge from the pandemic, we're seeing increasing opportunities to invest in organic growth and a combination of capital expenditures and R&D. We also continue to be active in the M&A market, but with debt almost free and excess capital looking for a home, prices remain at levels we find unattractive.