Moog Inc.

Good morning, and welcome to the Moog First Quarter Fiscal Year 2023 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Aaron Astrakhan. Please go ahead, sir.

Good morning, and thank you for joining Moog's First Quarter 2023 Earnings Release Conference Call. I'm Aaron Astrakhan, Director of Investor Relations. With me today is Pat Roach, our new Chief Executive Officer, Jennifer Walter, Chief Financial Officer, and Ann Moore, Manager of Investor Relations. I'm excited to join Ann as we serve the information needs of the investor community. We've taken Pat's first investor call as an opportunity to update the format of our prepared remarks. Pat will share his perspective on our strategic direction, priorities, and the business's performance, while Jennifer will provide further commentary on the quarter's results and guidance for the year. You may notice our prepared remarks are shorter than they have been in the past, as we are now focusing on the key drivers of our results. We released our results earlier this morning. Our results and our supplemental financial schedules are available on our website. Our earnings press release, our supplemental financial schedules, and remarks made during our call today contain adjusted non-GAAP results. Reconciliations for these adjusted results to GAAP results are contained within the provided materials. Lastly, our comments today may include statements related to expected future results and other forward-looking statements. These are not guarantees, as our actual results may differ materially from those described in our forward-looking statements. and are subject to a variety of risks and uncertainties that are described in our earnings press release and in our other SEC filings. Now, I'm pleased to turn the call over to Pat.

Hello and good morning to you all. It is an honor and a privilege for me to lead our amazing company. I look forward during this call to share my thoughts on the future and together with Jennifer, reflect on a great quarter and a year that is holding together nicely. Before I proceed, I would like to acknowledge John's leadership. Over the last 11 years, John has led with passion, conviction, and integrity. Under his guidance, we have become financially stronger, with sales growth from 2.3 to $3 billion, and more innovative, which has led to new startup opportunities. John's compassion for our people shone through in his leadership through the global pandemic. with a focus on protecting the well-being of our employees and the financial health of our company. On behalf of all Moog employees, thank you, John, for your wonderful contributions. Now, turning to the future, I want to highlight my thoughts on our vision for the company and my key priorities. Over the last 23 years with the company, I've been inspired by the energy, passion, and creativity that our talented staff apply in solving real-world problems for our customers. It all started with a spark of inspiration, Bill Moog's innovative servo valves, and an application to defend naval ships and crew members. Over the last 70 years, our positive impact on people and our planet has grown significantly. At heart, we are a technology company with deep capabilities in motion control systems and critical components. Our highly collaborative culture delivers innovative solutions for our customers' most difficult technical challenges. We target applications when performance really matters across a range of end markets. Today, our people, products and technologies affect the lives of millions across the globe. Moog solutions are critical to our national security, to safe transportation, to reducing factory emissions, and to enhancing patients' lives, just to name a few. To continue on our path of growth and success, I see our talented people making a difference together by building a sustainable Moog for current and future generations. We will do that by concentrating on three areas, customer focus, people, community, and planet, financial strength. I'll share some brief details on each. First, customer focus. Customer focus is about meeting our commitments, delivering programs on schedule, shipping products on time. It's about creating value now and in the future by being responsive to changing needs. It's about having a clear advantage over our competitors and being able to sustain that advantage. Second, people, community, and planet. Our culture defines us as a company. It enables great collaboration with customers and across the company. Our culture is a competitive advantage for Moog and a key attraction for our employees. I want to ensure that we remain true to our values, that we have a clear sense of purpose across the company, and that we create the opportunities to challenge and develop our people. Furthermore, I believe that our workforce should be more diverse and reflective of the communities that host us. I'm convinced that this will strengthen our company. Turning attention to our planet. I believe that we all share a moral responsibility to be good stewards of our planet for the next generations. The solutions we develop for our customers are part of our contribution to a better planet. And in addition, we will do more to reduce emissions from our own manufacturing operations. Third, financial strength. I believe that we must do better financially and that we have a clear view of how to do it. Our focus is on enhancing our operating margins. We will simplify our business. We will focus on businesses, customers and products where the value that we create is reflected in the profits we make. We will focus our manufacturing capability by end market, located as necessary to serve our customers and of sufficient scale to be economically sound. We will drive further profitability through continuous improvement activities and the convergence of systems and processes. We will grow revenue through established businesses and new areas of activity. We have a solid core with positive growth drivers, higher defense spending, the recovery of commercial travel, more investment in energy efficiency, and ever increasing health spending. In addition, We have really exciting growth opportunities beyond the core. We're entering new markets and redefining our position within existing markets. We will also focus on our cash generation. We will work to reduce the amount of cash it takes to run the business. For example, we see opportunities to increase our inventory turns. Now, let me briefly summarize. we're building a sustainable business that has a positive impact on people and planet for generations to come. We have three areas of focus, with our immediate priorities in each being as follows. Customer focus, enhancing our operational performance. People, community, and planet, driving employee engagement and workforce diversity. Financial strength, driving business simplification. I look forward to sharing more specific information on our key initiatives and on our long-term goals during an investor day to be held later this year. Now, let me turn our attention to the quarter. First, from a macroeconomic perspective, the war in Ukraine close to one year on has strengthened the resolve of Western governments to support Ukraine and to increase domestic spending on defense. The deployment of increasingly sophisticated defense systems to Ukraine could boost sales of our existing defense components and systems. The planned increase in defense spending long-term will lead to increased sales of existing platforms and increased development activity. The recovery of global air travel continues. Wide-body aircraft flight hours are already above pre-pandemic levels. demonstrating the value of these efficient aircraft to the airline industry. The opening of travel to and from China should further accelerate that recovery. We were pleased to see the resumption of 737 MAX flights in China, and on another note, Comac C919 achieved flight certification in China during the first quarter. The potential impact of recession in our major industrial markets appears to have lessened, being either less severe or less imminent than first anticipated. Several risk factors have diminished. European economic activity appears more resilient to the pressures of inflation, high interest rates, energy constraints and war. China could rebound now that it has abandoned its zero COVID policy. Inflation appears to have peaked in the US, UK and Europe. On the other hand, industrial markets have begun to soften following a post-pandemic surge with the manufacturing purchasers managers index for our main industrial markets indicating contraction. On balance, given our increased backlog quarter over quarter, we are confident in our FY23 forecast. Next, from an operational perspective, winter storms in Western New York led to the closure of our manufacturing operations for a few days in the quarter. We estimate this at a 7 cent EPS drag on our performance. We managed to overcome that impact through other operational gains. Supply chain challenges are a continuing cause of uncertainty that is no better or worse than 90 days ago. While some component constraints have eased, Sporadic decommits interfere with production shipments and productivity. We continue to diligently work these issues in order to meet customer commitments, but recognize the impact on both past due and inventory. We anticipate that supply chain constraints will begin to ease later in FY23. Labor attrition has slowed over the last number of months, but we do see some specific hiring challenges. As supply chain constraints are resolved, the ability to quickly clear past due is somewhat constrained by labor. Turning our attention to notable events in the quarter, Bell Textron won the Future Long Range Assault Aircraft Award from the US Army on December 5th. We have been part of the Bell Textron team for nine years, and we are excited by this success. The award was protested by Lockheed We look forward to a favorable ruling by the Government Accountability Office in April. FLARA will drive development activity over the next few years and substantial production orders throughout the 2030s and beyond. Hopefully, we can start to ramp our activities in April, albeit three months later than originally anticipated. Our customer NASA successfully launched the uncrewed Artemis I on November 15. This restarts lunar exploration with many more launches anticipated over the next decade. MOG components play a crucial role in thrust vector control of the Artemis rocket and environmental control within the Orion crew module. Space market expansion is driven by exploration, commercialization, and defense, and we are seeing growth in our core component business and space vehicle business. Our partner Komatsu exhibited a full electric wheel loader in October at Bauma, the world's largest construction trade show held every three years in Germany. This demonstrates another original equipment manufacturer in the construction industry turning to Moog for solutions as electrification and autonomy continue to disrupt that market. We see construction as a significant growth opportunity for Moog. Finally, financial headlines. I would now like to turn our attention to the strong performance in the quarter. Organic sales grew 9% and adjusted EPS grew 14%. We delivered in line with our forecast due to strong operational performance. Our sales growth was driven by robust commercial aftermarket, higher reconfigurable integrated weapons platform production, and stronger industrial automation activity. Adjusted margins improved 130 basis points year over year. This was supported by increased industrial systems volumes, sales mix in aircraft, and operational improvements. Adjusted EPS was in line with forecast at $1.25, an increase of $1.15, sorry, an increase of 15 cents, or 14% versus prior year $1.10. Our cash flow was pressured due to continuing supply chain challenges already mentioned, leading to increased past due and higher inventory as we purchased additional stock in certain circumstances to partly mitigate material lead time and availability issues. Now, I'll hand over to Jennifer for a more detailed analysis of our performance in the quarter and the outlook for the year.