Moog Inc.

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

Good morning, and thank you for joining Moog's Fourth Quarter 2023 Earnings Release Conference Call. I'm Aaron Astrakhan, Director of Investor Relations. With me today is Pat Roach, our Chief Executive Officer, and Jennifer Walter, our Chief Financial Officer. Earlier this morning, we released our results and our supplemental financial schedules, both of which 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 am pleased to turn the call over to Pat.

Good morning and welcome to the call. Today, we will share an update on a superb quarter. notable for record sales, record 12-month backlog, strong operating margins, and strong cash flow. It is a tremendous performance from our teams to deliver three consecutive quarters of record sales and to continue to drive our margin enhancement initiatives. And for that, I wish to thank our Moog employees globally who contributed to our financial performance in the quarter and the operational improvements over the last 12 months. Before we get into the detail on the quarter, let me first reflect on what has been an exceptional year for our company. We delivered record sales, we increased operating margin, and we built an all-time high 12-month backlog. We have grown revenue over 11% organically to $3.3 billion. Each of our three segments contributed double-digit organic growth. The growth was led by recovery in commercial aircraft by broad-based demand for our defense and space applications, and by strength in our industrial automation and flight simulators. In addition, we have been successful in winning new business with exceptionally strong order intake on the defense side of the business, increasing our total backlog to just over $5 billion. We have expanded adjusted operating margin by 70 basis points from 10.2 to 10.9%. This is notable progress and a great start to our margin enhancement journey. The effort invested in both pricing and simplification are already delivering improved financial outcomes. Adjusted earnings per share improved by a solid 11% to $6.15 and would have been even stronger if not for increased interest costs. We certainly have had challenges through the year with supply chain and specific labor availability issues, especially in the first two quarters. Those challenges have eased in the back half of the year, and we saw further improvement in Q4, finishing the year with strong cash generation. Now, let me turn my attention to the operational actions that we are taking to drive our performance improvement. Firstly, customer focus. We have completed the separation of aircraft into military aircraft and commercial aircraft segments. The business leaders have direct responsibility for the focused factories, the dedicated staff, and the production resources for their respective businesses. They are fully accountable for operational and financial performance of the business, and each leader can now better align the business model with the distinct end market needs. Our forward guidance provides you financial visibility of these new segments. We have also completed delivery of our first four meteorite satellites to our customer. Payload integration and testing of hardware and software have been completed successfully. This is significant progress for us in our space vehicles programs. On a further positive note, we are making progress slowing the growth of physical inventory. This is a sign of improving supply chain and labor market conditions, resulting in better production flow and labor utilization. This is enabling us to better meet our customer commitments. Next, people, community, and planet. As I stated in my first earnings call, I believe that we have a moral responsibility to be good stewards of our planet for the next generation. I want to let you know that we're making good progress in characterizing and measuring emissions and we've already published a sustainability and disclosure report last year. We've now baselined, within our own facilities worldwide, our CO2 emissions, water usage, and hazardous waste production. We are strongly committed to drive improvement, and I can announce today that we are targeting a 40% reduction in Scope 1 and Scope 2 greenhouse gas emissions by 2030. Finally, turning to financial strength. we are making excellent progress in driving margin enhancement through pricing and simplification. On pricing, we have had good success working with our customers across all end markets to adjust pricing so that it better reflects the value that we deliver. Those negotiations have taken place over months and in some cases years. The impact is now feeding through to our financial results, notably within industrial in the second half of the year and within aircraft in the current quarter. Those agreements, already concluded, deliver a substantial portion of our planned operating margin expansion out to fiscal 26. On simplification, we've increased the pace of simplification throughout the organization. This is evident in various initiatives. Firstly, portfolio shaping. We are well advanced in the sale of our industrial hydraulics business in Luxembourg, which we hope to complete before the end of the second quarter, fiscal 24. We will also dispose of another industrial business before the end of fiscal 24 and have consequently taken a substantial charge in this quarter. Footprint. We have closed six sites in fiscal 23, a mix of sales offices and remote engineering sites. We also sold three factory buildings that we had previously vacated through prior footprint closures. We announced a further two manufacturing site closures, the first of which will complete in fiscal 24. On Focus Factory, we continue to segregate product by end market in order to simplify our manufacturing plants. We have several changes underway, including moving aerospace products out of our industrial facility in Murphy, North Carolina, and using the growth of our space business as an opportunity to tease apart the physical operations of our space and defense businesses since each are driven by different end market requirements. We continue to build 80-20 momentum in this quarter. Our pilots are demonstrating significant progress in both pricing and simplification. We're also seeing improvement in customer satisfaction and employee engagement. We trained a further 250 leaders in the approach. In addition, we agreed to transfer several MoB product lines on mature end-of-life aircraft platforms to specialized third-party organizations, from which we expect to see a gain in efficiency. Finally, we added two more sites to full implementation under 8020, bringing the total to 10. Now, before I turn attention to the macroeconomic environment, I'd like to share two further updates. First, we report a positive impact in Q4 from the settlement of litigation. We are not able to provide specifics since the terms of the settlement are confidential. We are pleased to have this concluded. Secondly, I'm also happy to report that we're making good progress on revalidating our security clearance with the Defense Counterintelligence and Security Agency. And in the meantime, we continue to work without interruption on awarded defense contracts. We have submitted a mitigation plan that we believe meets the DCSA requirements As we noted previously, we expect the plan to involve standing up a subsidiary with an organizational structure and procedures to ensure the protection of classified information. We're hopeful to have the situation resolved within the next two quarters, and we'll provide an update when we have additional information to share. As a reminder, this matter relates solely to classified U.S. military programs. Now, turning to macroeconomic and market conditions. It is shocking that we now have war in Ukraine and the Middle East. Simmering geopolitical tensions are leading most nations to reassess their national security and to increase commitment to defense spending. Defense constitutes half of our book of business. The commercial aircraft market continues to strengthen. We have a clearly defined wide-body production ramp over the next few years towards 10 and 9 shipsets per month in fiscal 26 for 787 and A350, respectively. We see no change in those plans. Industrial markets continue to soften. There has been a gradual reduction in book-to-bill ratio over the last six months. Market data, such as the Manufacturing Purchasers Managers Index and the survey data from the German Engineering Federation, or VDMA, all indicate contraction. We expect this to continue, and we are managing our business accordingly. now looking forward to guidance for fiscal 24 we continue to execute on our investor day initiatives of growth and margin enhancement our fiscal 23 performance was in line with our expectations and we are building momentum going into fiscal 24 for that reason I'm confident in laying out our guidance for 24 which includes solid revenue growth of 4% year-over-year and yielding a 7% CAGR growth from fiscal 22 to fiscal 24. Secondly, strong margin enhancement with adjusted operating margin up 110 basis points to 12%. And thirdly, modest free cash flow. Our guidance is in line with our stated investor day targets. Solid revenue growth, strong margin enhancement, and modest cash flow. Our growth in 24 is driven by the continued commercial recovery, a full year of V280 development, broad-based growth in defense and space, offset by a decline in industrial automation. We continue to execute on our pricing and simplification initiatives, and we will update you on progress throughout the year on portfolio shaping, footprint rationalization, and building our 80-20 maturity. Now, let me hand over to Jennifer for a more detailed breakdown on the quarter and on our guidance.