Time to get going. Thank you all for coming. Thank you for having the conference. We're delighted to start with Pat Roche, who presents Moog and Aaron Astrachan. We'll start with what Pat was going to say, but he's probably going to make some forward-looking remarks just so everyone has a round of applause.
Thank you. I'm not going to make a surprise, so we'll then pay attention to the disclosures. The same as we have for any of the earnings calls. So let's get into the conversation.
So I'm just going to ask you one more, Mark, so I'm going to push it. How do you tell what in the world is transformation?
Yeah. So it's hard to say how it's almost been done this stage. It's been very easy. What's allowed us at the start to reset the perception of how this is going to implement in our startups, and then going to pursue the execution of the plan that we have already invested with. So if you take us, might we start? 80/20 is a software out there, so they can fill in more details on how it's readable and then help us do our simplification agenda for that.
So then we've got some clear language. Talk about which of your current initiatives are more customer-led, which more of what we talk about, how we talk about that. So they've also got opportunities to drive margin enhancement in their company. There's challenges with successful pricing and simplification. On pricing, we've done a lot already, and we've made significant progress on our major programs. And that's given us a better recognition for the value that we're creating for our customers. That's an ongoing process. So I think this leads to the fact that we need to continue to review pricing and continue to drive that through the organization. So good progress on many parts of the earnings and variances in line with our plans. On the simplification side, we have a lot of work ahead of us.
But also, working through these issues over the last number of years, I always find organizations are going to be complex over the decades. In the portfolio shaping, which is where businesses that are strategically flat don't have the opportunity to have a profitable growth in the future. So we need to take a look at their respective businesses and see if we can attempt to provide a range that we say is fitting or we take that out and simplify the organization. We've been doing a site rationalization, as I call it, which is looking at a legacy of acquisitions that have gone over two decades, where we have a filtering of sites that doesn't necessarily fit the requirements of our customer base today. And we're looking at consolidating and combining plants that make sense.
And then we have what we call a focus factory, which is saying, if I have a plant that's doing defense products, I'm not going to mix industrial products in the same plant and vice versa, because it's a confusion in terms of the requirements, the level of standard we're walking to in each of those facilities. And we've been doing a lot of other things: convergence of IT systems, driving lean activities, and so forth. But I think the thing that was different at the beginning of this and over the last year or so is pursuing 80/20. And I think that's become an integrating force for all of those other initiatives. So for us, 80/20 has been a revelation. It's allowing us to capture the leaders within the organization with a concept that is really simple to comprehend.
You're taking a look at the products that are going through the site. You're looking at profitability by customer, by product line, and then you're making decisions on it in pretty short order as well. So you asked me at the beginning, how far were we through the journey? And you're using a baseball term, which I thought was pretty difficult for an Irish guy to deal with, but.
Cricket.
Yeah, I learned so much.
I actually checked what you were talking about.
So I would say we've just completed the bottom of the third innings. I mean, if I think of it in terms of deployment of it to different sites, we've deployed to about a quarter of the sites within the organization. We've trained a quarter of the leaders in 80/20 so far. So we're on a progressive journey, rolling it out to the different sites. And then even when we get it to all of the sites, we're maturing our capability in that front as well. So at the beginning, you start off with product line profitability, customer profitability, and then you start looking at velocity, cash velocity at the site. So once you focus in on your A customers and A products, they're the ones you need to invest the time and energy with, lean the time of streamlining supply chain and increasing velocity through the plants.
It's giving us a real focus. I would say it's a mindset rather than a tool in our kit.
So I think you said that it's much easier for people to kind of understand it and embrace it than Six Sigma or other things that are a little bit more complex. What have you done in terms of bringing folks in from the outside to sort of help with the training and help with sort of developing it as part of a culture?
So part of our learning at the beginning was to bring in an outside consultancy to help us. So people who had formerly worked in organizations that practiced 80/20, ITW being the leading example. And so we brought in those consultants. We decided on a couple of pilot sites to try 80/20 at. And we drove it at those sites under their guidance, I would say, and trained up leaders locally. So there's a pretty well-defined process that we have for a rollout to a site now. It involves training the site leadership team, training each of the managers and supervisors, setting up workstream teams on particular areas. So it's either product, customer, operations, supply chain. With those teams set up, there's work to do data analytics. So we do data analytics at each site. You divide products and customers into a quad.
Those that are in the fourth quad of that.
Lower left, not the.
Yeah. B products, B customers. That's where you need to start making some decisions. So within about a three-month period of a rollout at a site, you're executing on decisions that says, "You need to do something about this. You need to change the pricing. You need to end the life of the product. You need to sell the product off." And we've done several examples of that demonstrated over the last year. So in short order, people get to a point where they understand profitability and where it's coming from, and then you progressively develop the capability there. We've started doing stuff of segmenting the P&L at the site level. So previously, you've got allocations that are all over the place in terms of the costings, trying to get to a greater clarity around where profit is actually made.
It's not activity-based costing, but you're assessing how many indirect staff are required to support this product line, how many customer support people are required for this customer, and getting a much greater fidelity on our cost base in practice at that site. That's being used then to make the decisions.
Terrific. So I guess you've talked about divesting non-core operations, but also pairing SKUs. I mean, are you just starting that? Does that have a lot?
So if I look at the divestitures, I mentioned earlier that they're typically in the $10s of millions range. They're not very large pieces of the business, but it's cleaning up the operations. We've made divestitures in all of the segments over the last number of years. For instance, we exited our space business in Europe at one point. That's about 5-7 years ago or more. We exited a business of NAVAIDS, which was in the aircraft group. We sold that to Thales. We have 2 underway at the moment within the industrial group. So we have a manifolds business based in Luxembourg, and we're in the process of divesting that. And we have another European-based business, which we haven't disclosed yet, but we're in the process with that as well. So we continue to do that, Kai, and that's an ongoing process of review on strategic fit.
Then you asked about SKUs. When we rolled out 80/20 to two of our recent sites, we actually end-of-lifed 40% of the SKUs that were at one of the sites and 20% at another. That might sound pretty dramatic. These were products that hadn't been ordered for a period of time. Let's say there was a five-year period when there were no orders on those products. We decided to end those products rather than maintaining them in our systems. The reason for that is our customer service people will, for every active product, accept an order without any problem. But if you accept an order for a product, for one piece of a product that hasn't been made in quite a while in our facility, you're driving product through equipment that maybe hasn't run over before with staff who haven't seen it before.
So those stragglers attract a lot of cost in the business in supporting them. And we want to be more focused on that. So that was the reason for ending those SKUs at those sites. So that will continue. As we go from site to site, you'll see that happening. I would say it's tidying up. In your garage, I'm sure, stuff accumulates over time. We need to sort that out. So that's part of the fact that the complexity is insidious within the business. It grows over time, and you need to do something about it.
If we turn to commercial aircraft, I think you've talked about a 20% revenue growth guide this year. How are you aligned with Boeing and Airbus's rates? Because they seem to be moving around.
Yeah. I think for the year, commercial will be up 20%. As you know, with our business, it's driven by wide-body predominantly. So we're on 787 and A350. 20% sounds a lot, but actually, for the quarter, we were nearly 50% up on the prior year quarter. We are synchronized with the production rates from both Boeing and Airbus. We are ramping during the course of this year. So 787 was running at roughly 4 ship sets a month. By the end of the year, we'll be running at just over 7 ship sets per month. And actually, there's quite a step up in Q2 coming already. So we're well into the progress of ramping on the 787 platform. And then on the A350, we're probably at around 5 ship sets a month, ramping to 6 ship sets per month by the end of the fiscal year.
So I would say we're aligned with our plans. We're beyond the pandemic phase where we were driving a four ship sets per month, which was above Boeing's rate at the time. So Boeing is now running at a rate that is aligned with the rate we're manufacturing at.
Do you still have where you've produced more and therefore you're holding the inventory and it still has to be?
Yeah. We don't have a hangover from the pandemic arrangement that we had in place. But we are now adding inventory to keep up with the rate that Boeing is growing at on the 787.
Got it. So military aircraft, remind us, V-280 is really big for you. How's that revenue profile look over the next couple of years?
So the FLRAA program was a great win for us that was announced in fiscal 2023. It was then protested by Boeing and Sikorsky. And when that was completed, we started into the development activity. And that involved ramping up for what they call the engineering manufacturing development phase of the program. That's about a 3-year period. Our projected revenues during that period are around $60 million-$70 million. We have about 125 engineers on the team, and we're almost at full rate for that. So yeah, that's a significant platform for us. It'll be in production between 2030 and 2050. And it will be of scale roughly similar to Joint Strike Fighter for us. So it's a major platform for our company and a great win.
Got it. Is there anything? I think everyone's discovered that LRIP, low-rate initial production, a lot of those are fixed-price. And so when you get into production initially, you might have to take a reserve. Do you have any sort of exposure there that they're fixed-price or?
I think we're on cost-plus in the development activity. So when you get into LRIP, then we'll be pricing based on what we know at that time.
Oh, okay. So it'll be based on prices.
We're not committed at.
You don't have a price today. That's.
One of the things that we had on the military side of the business is some of the cost-plus on the development side. So that's where it's most risky. So that is transitioning over a period to having a lot of these programs being in the cost-plus and also having it on the production side. So what's happening over time is we are de-risking our profile.
Got it. Got it. So space and defense, that's really been a hot area for you. Give us some perspective on the RIwP and the satellite bus programs. What do the bookings look like? Where can those go?
Both the RIwP and the space vehicle programs are nice programs for us. They both ramped up very nicely in 2022, so a couple of years ago. They're both programs now of substance, especially on the Reconfigurable Integrated- weapons Platform. So happy with both of those. We're looking to expand them as well. So our expansion opportunities is going from more singular customers to expanding to multiple customers. And orders sometimes come in a little bit lumpy. We've actually had a couple of nice orders in the past quarter, so.
Yeah. So the orders in the last quarter were about $80 million. And they were both expansions or extensions of existing programs we had. So M-SHORAD and then M-LIDS, which is a counter-UAS weapon. And so that was really good. That gave us production expanding out through the end of fiscal 2025. So that was maintaining our rate of production on RIwP, while at the same time, we're exploring other U.S. government programs for RIwP and foreign military sales. Probably the lead market for that for us at the moment is probably the United Kingdom.
Got it. So you started with M-SHORAD with GD, and then you moved on to M-LIDS with Oshkosh. I think you're now working with BAE. How big are those opportunities, M-LIDS and BAE, because M-SHORAD turned out to be quite large? Are those others big or medium-sized? Give us an idea on that.
Our belief is there's plenty of road for the RIP turret. I mean, I think it's filling a need for the Army. The use of drones in conflict is increasing. So the ability to take out and track drones that are coming towards your vehicle is really important. So I think it has great application. It fits a need. And we see potential for it to grow further on more programs. I mean, if I look at MSHORAD, MSHORAD was fitting out four battalions. There are more battalions that can be converted on, even on the MSHORAD program. So there could be further expansion on those in the future. And yes, we've diversified our customers: DRS, General Dynamics, BAE. BAE recently completed fire trials at one of the Army bases, which demonstrated the efficacy of the weapons themselves.
The thing, I guess I ask this all the time, but it basically can be retrofitted onto an existing vehicle. I would think that would be really huge for Europe.
It could be retrofitted onto a vehicle. I think the ones that we have today are being built onto new vehicles. The main advantage of the RIP turret is it's reconfigurable. In the field, you can change the weapons that are used on it. It can be loaded under fire. You don't need an operator outside of the vehicle to reload the ammunition. They're the principal advantages of the system.
So I assume now it's nicely profitable. It should be stable through 2025 with maybe some growth if you get more orders.
Yeah. Exactly.
What about the satellite?
You mentioned space.
Space, Meteor, Metro.
Yeah. So as you know, we went through quite a learning curve over the course of the last year. We had some charges on those programs. On the Metro, they're actually a platform, both Metro and Meteor. They're different size classes for satellites, but they share a lot of common components. And they actually share a common software base as well. So what we're learning on one is carrying over to the other. Those programs, we've been progressively working down, risking them, as you know, as we went through that learning phase. We actually have four satellites in Cape Canaveral that we'll be launching within the next couple of days. That's part of our work with L3Harris. So in terms of burning down the technical risk, they've been through all of the ground-based testing. And that's all been completed successfully. And they're ready for flight.
For us, I think we're soon approaching a milestone within our space vehicles business where we will have space flight-proven satellite buses, which we hadn't had before. We had a 50-year history of components in space, but never a full satellite. That's pretty important for us. That then leads us to the further expansion of that business. We have L3Harris business, but we're also quoting other customers as well.
So I was wondering, so is the L3Harris, is that on Tranche 2 of the tracking?
That was actually a Tranche 0 tracking. Many of the applications we're pursuing for both Meteor and Meteorite, I would classify as demanding applications. We have rad-hardened electronics on those that allows them actually operate at a slightly higher orbit. So I would classify them as high reliability, especially beneficial for challenging military applications.
So the interesting thing about Tranche 2 or the tranches is if it's tracking satellites, what, every three-to-four years, the satellites give out, you put a new satellite up there. So you essentially have a replacement business. But if you're not on with a customer, is L3Harris likely to use you if they win as we move forward? They use the same bus. They put updated electronics on downstream. Or is it the type of business where they could just go to get a quote from someone else? Or can you get on other programs easily?
So my answer to it is yes, we can. We have multiple customers who are talking to us at the moment about using the bus. The bus is modular. It can be customized with software to the payloads that are being installed on it. So that's the customization that's required with each of those new applications. And we're targeting not necessarily volume, but profitable niche applications that really build on the differentiated capability of those satellites' guide.
Got it. Now, how risky is that? Because basically, SDA does business under fixed price, essentially fixed revenue OTAs. And you've had a fair number of losses in this sector. Is this something where we should worry about this? Kind of continuing losses? Or if you turn the corner and now it's?
So I would say we've turned the corner in terms of the learning that we took from those initial programs. We've built that learning into subsequent bids that we've submitted. And we're setting it up such that it is delivering on the margin targets that we have for the company overall, guys. So we're not chasing business at low margin. We're pursuing opportunities that we think we have the capability to deliver on. And going back to the comment on modularity, we've proven most of the satellite out. So the technical risk is quite well diminished at this stage.
Got it. So shifting to industrial, I mean, I guess your guide is that it's going to be down 6%, and yet you're up 6% in the first quarter. So.
What's happening?
Yeah.
So just putting industrial in context, industrial is about 25% of our business. We've been signaling a slowdown in the industrial market for about nine months. Incoming orders have started to contract. So I think the slowdown is already here with us. Incoming orders in this quarter past were the lowest in five quarters. Book-to-bill has been below one for the last four quarters. So we are well aware of the slowdown coming in the business. We had a strong backlog, though, coming into Q1. And we ended up clearing through more of that backlog than we had anticipated. We still have quite a portion of the bookings for the entire year in hand. So I'm pretty confident with our projections for the year. As you say, we're projecting down 6%. Most of the reduction is our industrial automation business.
We're also divesting a business that I mentioned earlier, which was Luxembourg. That counts for 1 point of the 6 points down. That's a portion of it. But yes, we are expecting it to slow down. We've already taken the steps that we need in our European operations. We've started flexing staffing levels in those sites. We've agreed to go into a short work week in our German operation.
Got it.
That started from the 1st of February. I think we're proactively taking the steps we need to manage the business and maintain profitability.
The idea is profitability should remain relatively stable? I mean.
So while industrial automation is down, our simulation business is actually quite robust at the moment. That's within the industrial business as well. I mean, if we talk to our main customers in the simulation market, they're looking at the next 2-3 years being exceptional years for them.
Got it. So on your investor day, you talked about the electric construction loader. Where is that? You haven't talked about it much recently.
So within construction, we have a few main avenues of pursuit. The first one is electrification of construction equipment. We've talked about working with Bobcat and Case New Holland. At this point, we probably have accumulated about $50 million of orders. We got orders of about $10 million in the last quarter. They're predominantly Bobcat, Case New Holland. I would say that's near-core business for us. It's control of an electric vehicle. It's control of all the electric actuation on that vehicle. And really, the pace at which that business will grow is based on market demand. As a market pull, has to draw those equipment through the OEs themselves. But we're well able to supply them at the volume levels that we're working at. And we have a book of business in hand at the moment.
Our goals with that business are to continue to optimize our offering for those customers.
So I think at Investor Day, you were talking about the demand is really huge for this thing. The complexity is, how do you scale it? Is that still an issue? Or could you scale?
Yes. So scaling will be part of the challenge for us. But it's not coming at the pace that maybe we thought maybe a year ago, Kai. That's why I mentioned the fact that it's a market pull has to develop to bring those products through the OEs themselves.
Got it. Okay.
There is another opportunity, though, that we're exploring at the moment. That's retrofit of existing fielded fleet. There are, let's say, 300,000 pieces of equipment around the world. There's a stronger regulatory drive in Europe than there is in the U.S. In Europe, municipalities are specifying that they want electric vehicles on construction sites before they'll permit those sites. There's an opportunity to maybe offer a solution there to retrofit existing fleet. We're exploring that at the moment. That's the second thread of it. The third thread is to do with automation and autonomy. We've been doing some pilot programs on that at the moment. We have a pilot starting in the summertime on a solar field. That's really trying to prove out that there's a productivity gain for the operators.
But again, it's building capability for us as well, which can go into any of those pieces of construction equipment.
Right. So Jennifer, turning to cash, you've talked about you're going to have a modest level of cash. Remind us of the puts and takes to get to a modest level of cash this year.
Yeah. So for FY24, there's a few things going on. First of all, we'll have strong earnings. So that's a nice contributor for us. We will have a use of working capital. And there's two things that are working against us this year. The first is our growth in physical inventories. We're seeing the growth in physical inventories associated with the growth in our business, which is a positive thing. But we're also seeing challenges and constraints still on the supply chain side. So that's another contributor to the use of cash for physical inventories. The other thing that's happening within working capital is the use of cash for customer advances. We got a lot of customer advances last year. This is the year that we're working them down. So that, again, is a detractor going into working capital and our needs for working capital this year.
The final piece on that for this year is a continued elevated level of capital expenditures. We're investing for growth in our business. Again, that's coming through the working capital and the physical inventories. It's also coming through in our capital expenditure investments as well.
Got it. You mentioned supply chain. And so we're trying to ask everyone here at the conference, is the supply chain today getting better? Is it about the same, still pretty disrupted? And in terms of labor, do you have good availability of labor? Is attrition rate going down? How do those things look?
So if I deal with labor first, that's not a challenge for us at the moment. We had challenges maybe a year or so ago. I think attrition is well down on the peaks that we had after the pandemic. We're back to more normalized rates now. And the ability to find staff is not a problem for us. Maybe some niche areas like software, some types of software skills that we want, or machining has been a problem in the past for us. They do seem to be easing. So that's not the challenge. On supply chain, I would say it's less challenging than it was six months ago. We still deal with, from time to time, shortages of particular components. But I regard that now, Kai, as more business as usual. We're working through those issues.
They can cause a delay on one program or platform from time to time. It seems to be part of business as normal now. I think there's less disruption to our manufacturing than there was six months ago.
Got it. So you've talked of getting to 75%-100% conversion and fiscal 2025. What gets us there?
Okay. So I'll go through those same categories again. We're going to have even stronger net earnings. So that's a great contributor for us. We're still going to use working capital, use cash for working capital, but not to the extent that we are this year. We'll continue to grow our inventories with the growth of our business. But we're not anticipating as much of the supply chain pressure as you just heard about. In addition, instead of working down customer advances, we think the timing is going to be such that we'll get customer advances in FY25. So that will help offset within working capital. And then finally, in capital expenditures, we're going to start to see it tick down a little bit.
Got it. Okay. And so remind us of your capital deployment hierarchy now that you're starting to generate some cash.
Yep. Our focus right now is investing for organic growth. We see a lot of organic growth opportunities. And so we want to make sure that we're making the right investments. Those investments include investments in our facilities and making our facilities more efficient to help us with our margin profile. So we're making the investments consistent with achieving the targets that we want to do for both growth and margin. So that's our primary focus. However, we still are looking at acquisition opportunities. We want to make sure that they make sense from both a strategic fit and a financial fit as well. On the dividend policy, we are committed to our dividend policy. We just increased our quarterly dividend from $0.27-$0.28 per share. And then from time to time, we may also do share repurchases.
But right now, our focus is really on investing for organic growth. And where you see that is the investments that we have in our capital expenditures at those higher levels. But historically looking and looking into the future on a longer-term basis, I would expect it to be balanced.
Got it. Way back when Bob Brady was running the company, you did a lot of acquisitions. Then you've sort of done much less recently. What's your feeling, Patrick, in terms of do you see good opportunities? What kind of things are you looking at?
Yeah. So I think your characterization is right. We had about two decades of a lot of acquisitions through Bob's time building up the business, which was great. And then John slowed that down for a period of time. Right opportunities weren't there. My primary focus is delivering on our margin enhancement goals. So that's sort of first and foremost for me. If we see opportunities that add to our core business and that make sense, that don't create too much additional complexity, and that we can acquire at a price that we think is reasonable, we could move on those. So I think adding into our defense or our space business might be something we'd consider. It's in line with whatever opportunities come up. But I mean, we pay attention to them. And we review them. So there could be ads like that.
Or it could be something that accelerates one of our new ventures, like space vehicles or Agility Prime, which we talked about in the past as well. So they could be add-ons that make sense. We did a small acquisition in Q1, which was basically a piece of technology that added on to our Digital Airfield Solutions. So sometimes technology elements that come up, we look at. But they're not normally big in terms of acquisition targets.
So you're a leader in high-performance systems. I mean, technological complexity. You're in strong-end markets. And yet, the targets you've laid out for margins, if you get there, you're still going to be trailing Curtiss-Wright, Woodward, Parker Hannifin in terms of profitability. So where can these ultimately go? I mean, how do you think conceptually of where profitability ultimately can go?
So right now, our focus is on achieving our investor day targets. So those are the ones that we set out in June of last year to get to our FY26 targets. And specifically on operating margin, we're looking to get, on average, 100 basis points a year. So starting from where we are, our focus is on the pricing and the simplification. And we're committed to achieving the results, the targets that we've got out there. There's various puts and takes. There's risks and opportunities in the numbers that we have from FY26. Some of the bigger ones are what's happening with the commercial ramp, defense spending, what's happening with supply chain, and also how quickly can we realize the benefits from the pricing and the simplification. So there's opportunity within that set as well in this time period. But we're not done with the FY26 targets.
It goes well beyond that. We needed to set out something that was reasonable, achievable, and trackable. And that's what we're measuring to right now. So we're very committed to that. But that's not where we end. We keep going after that. And at a later time, we'll share what are the drivers for that.
Absolutely.
Terrific. So one of the things investors are a little concerned about is that you have two classes of stock. Any thoughts about changing that? What's the rationale for keeping that?
So the dual-class stock has been a part of our history. I mean, when we had a founder, it was put in place. Unlike the tech companies today, there isn't one individual who has a controlling voice in our organization. The Class A stock is held mostly by investors. The Class B stock is held in 401(k)s from our employees. So I think we have two separate groups of individuals and organizations that are both vested in increased value for the corporation. And so I think there's a great alignment of interests in our case and not a distraction of having a founder who says what he wants to do with the stock. So there's no plan to change it.
But it isn't really, I mean, the way investors see it is, and you're right that you don't have the situation that a lot of companies may have for having two classes of stock. But why not change it? Just because I think, in terms of attracting investors, you probably could do better if there was only one class of stock.
We like our employees having an interest in the success of the company as well. We think that keeps them vested as well as the investors.
Terrific. This has been really wonderful. Do you have any last thoughts about what people should think about Moog or look at Moog?
I think over the last year, we've demonstrated that we can drive value within the corporation. I mean, we set out a clear plan. We're executing on the plan. Because once we get beyond this point, we'll update our plans. Maybe that's in a year or so's time, go beyond the 2026 time period. But for now, we're focused on doing what we said we would do.
Terrific. Thank you very much.
Thank you.
Thank you.