morning, everyone. My name is Sheila Kailu with the Jefferies Aerospace and Defense research equity Thanks so much for being here. We have the MOG team with us. We have Jennifer Walter, who's executive VP and CFO, and Pat Broch. Again, mispronounced it.
The CEO. So thanks for being here. Maybe if we could just start out with a little bit background on the company for those who aren't as familiar. And there's a lack of aerospace and defense component suppliers out there, so I think you've become more in favor. And if you could talk about some of the growth drivers.
Sure. So I would say we would have the normal disclaimers up on the screen if I could advance the slide, but I we do. Disclosures are there, so you should read those about forward looking statements, but then let me move on. So we're a 75 year old company next year. I would describe us as a technology company from precision components all the way through to engineered systems of systems, and they're known for high performance.
I think they stand out in against our peers in the industry. It's all around motion control in our company, so that can take that takes on many forms. So we're in a whole range of different applications with those motion control platforms. I would describe this as a collaborative culture. I think that's an important thing for us to state about our company.
It's sort of unique to us. It helps us with talent, both attraction and retention of talent within the organization, but I also think it helps us, differentiate with our customers. The way in which we engage with the customers and work with them gets to better quality solutions. So it feeds into the technology company piece. And then thirdly, we take on applications that are difficult to solve, and they're typically either mission critical or have a safety aspect associated with them or have a big economic impact if they're if they don't, deliver to the requirements.
So that's the type of application. So would and typically, in those applications as well, we are sticky. So we have the IP. It's our products that we're introducing into these, solutions, and they typically last for the life of the platform. And we're in then a number of different end markets.
So 50% of our business is in defense, 20% is commercial aerospace, 20% industrial, and just under 10% is medical devices. So that's the makeup of the business. The last part of the question was about how
drivers from here.
Drivers. Defense obviously has got strong tailwinds behind it at the moment. You got The US budget reconciliation with a budget over a trillion dollars. You got the NATO allies all increasing their core defense spending from 2% to three and a half percent of GDP, so on a steady path to to grow spend there as well. So that's a solid set of drivers, and our technologies and capabilities match up with the needs that are in that market as well.
Commercial aerospace is still on a ramp from the pandemic. Wide body production volumes are increasing, and that will drive further expansion within our business. And industrial is pretty stable at the moment. Medical devices expands slightly ahead of market because we win share in that market too. So that's the end markets and their effect on us.
Maybe if we we'll delve delve into each one of those. Can we talk about Moog's leading position on wide bodies, what your content looks like across the different platforms
Yep.
And how you think about production rates today and as, and any content changes as we see going forward.
Sure. So we do actuation on aircraft, primary flight control systems, and secondary flight control systems on the aircraft. We do that also on military aircraft. We do other actuation on these aircraft as well, opening weapons bay doors, things like that. So anywhere where there's moving parts, we you'll find our our content.
Our biggest exposure on the system side is the wide body fleet, so that's predominantly Boeing's seven eight seven and Airbus's eight three fifty fleet. At the moment, we are on a ramp with those as I as I described. Both airlines both OEMs have a plan to be at higher levels. So Boeing at ten by the end of calendar year '26, Airbus at twelve by the '27. Our production plans are all in line with that.
We see greater stability in the market at the moment as well from a supply chain perspective. It was more difficult to say that back six months or twelve months ago, but we have, I think, good stability now. We also see promising signs from the OEMs as well. So our confidence in those plans is is high, and our production levels are aligned with them.
When we think about I think you said 25% of your exposure is commercial aerospace. How much of that is wide body versus narrow body?
It's about 20% commercial aerospace, Sheila, and the wide body is the predominant portion of it, but I would say sixties.
About 50% or something. And
outside of production rates, how do we think about incremental con content or content per you know, as we think about actuation products, what the content per wide body or narrow body looks like?
That's that's all platform specific, Sheila. So it depends when the next platform development comes through. And I think if we think about that, you look at is there a shift towards maybe more electric EM actuation content than hydraulic. That's something we're prepared for as well in our business because we have EM and NEH technology, so it's our technology agnostic in terms of capability.
Can we talk about your aftermarket business? What percentage of sales does it represent? How do you think about the revenue growth there and some of the drivers?
So right now, after commercial aftermarket is very strong, very robust. It's actually, in the last quarter or so, it's approaching 40% of our commercial aircraft segment. So that is really high. The reason it's really higher, a few factors. First, just a lot of air traffic going along.
As Pat talked about, the July and the A350, we've got very significant amount of content on those aircraft and they're both being highly utilized right now. And the third reason is we are securing long term, support agreements and when we do so, we often have an adjustment where we get some additional aftermarket at that point in time. We've seen that in the second quarter and into the third quarter as well. So it's very robust right now. We do expect it to continue to be strong.
However, as a percentage of sales for the segment, we do expect that to decline because the, ramp rates for the July and the A350 are going to outpace the growth that we would see in the aftermarket.
On the commercial aftermarket, you know, how do we think about that being coupled to air traffic, or is it more how much of that is related to engine MRO? So if you could talk about what some of those specific drivers are.
So it's not related to the engine MRO. Generally, it's gonna be, if there's a seal that needs to be adjusted or anything like that. It's not tied to specific number of hours. However, as you have more flight traffic, it has a correlation with that. Got it.
So our route to market on the aftermarket side is threefold. We have direct relationships with the OEMs and supporting their aftermarket clients. We have contracts with the system integrators, so Lufthansa Technique, Finnair Technical Services and so forth And the third channel is direct to the airlines as well. So those that operate large fleets, seven eighty seven, a three fifty, we have long term support contracts with them.
And that's thrust within the business moving from time and material based repairs to ten year agreements with major carriers. So at the Paris Air Show, we signed an agreement with ANA, which was a renewal of a ten year agreement. So they saw value in having a long term partnership with us on their repair and overhaul, and they continued it on for for the ten years. So we continue to grow that piece of the that channel.
And once you provide the content, what percentage of it is IP where you're guaranteed the aftermarket, or is part of the long term agreement strategy a way to secure it?
Part of the long term agreements is our way to ensure that we have that plugged in. But if if someone else wants to try and take some of that share, they have to reengineer as well. So it's not straightforward to do that. So we have, as I said earlier, pretty sticky income coming from those channels of the OEM platforms.
I guess how do you how are you modeling the aftermarket growth? Of course, it'll come down as a percentage of sales just given OE growth, but how are you thinking about modeling it as we head into the end of this year and into '26?
So we haven't given specific guidance on '26. We'll do that in fall with our fourth quarter guidance, but it's been robust. It continues to be robust. Would expect that it will still be very strong for us.
Okay. Any impact from tariffs that you're seeing across the portfolio?
Yeah, so we've been responding to the tariff situation since our third quarter, so since Liberation Day. We had a number of mitigation actions that we pursued as a business that included pricing, maximizing our use of The U. S.-Mexico Canada agreement and being very specific on the administration of repairs coming back into The U. S. From airlines and then going back out to the airline, not wanting to pay a higher level of tariffs than were necessary on those.
So you have to a lot of paperwork and administration associated with that. We put all of those remedial actions in place during Q3, built up our capability in that area, and so they're coming into full effect as we get into Q4. The tariffs themselves during Q3 were on the ninety day pause, so we had 10% on country level and 25% for steel and aluminum. They are the two main ones that affect us. In quarter four, they increase as the country tariffs increase.
And we're looking at rates that are averaging out around 15% to 19% for most of the countries in which we're doing business with. What we have found with the and so the overall impact, to summarize on the impact, it's about 15,000,000 to $20,000,000 of an impact on our operating profit for the full year for the impact that we've experienced in the second half of the year. Mitigation actions continue to be developed, and so exclusions or carve outs for aerospace products that are moving around and also some specific defense programs have been excluded from those tariffs as well. That means that that landscape is still settling down. So you can't take the impact on in in fiscal twenty five and just double it and say that's the impact in '26.
We're still finalizing that for the guidance for next year. But I think we've we've developed capability in the area. We've worked actively to mitigate the impact of the tariffs, and we've had reasonable success with that.
Can we talk about the defense portfolio? What are some of the major program drivers for the defense portfolio, and how do you think about the growth outlook?
So defense has been very strong for the reasons I indicated earlier. So you got geopolitical tensions around the world still, concerns over Taiwan. You got the war in The Ukraine. You've got conflict in The Middle East all still pressing urgency and a sense of need to continue to develop capability and also to replenish arsenals that have been depleted over the course of the last three years or so. And so we see a broad based demand coming into our defense business, on programs that we're already on.
So I think I think short term, it's just replenishment. So every missile that has been used, you need to rebuild and replenish the arsenals both here in The US and in the NATO countries, and we see strong demand coming through on the missile side. We got an order in q one, which is over a $100,000,000 from Lockheed Martin on the PAC three program. That was a a win from one of our competitors. Our operational performance over the last number of years on quality and delivery has been such that we found it possible to win that business away from our competitors.
So I think we're seeing growth on the platforms themselves, replenishment of assets. We're seeing modernization programs underway. We've seen those in Europe with the Howitzer system from well, it was Kraumat five Wegmann, and there's investment there. And then on the long term strategic, you've got sixth generation aircraft and CCAs and and a whole other set of developments going on. So I think short, medium, and long term, the drivers are all positive and and and our technologies and products are matching well to those needs.
Maybe if we could talk about some of the defense portfolio, defense programs that you have specific exposure to outside of PAC three. Who did you replace on that program? And of your defense portfolio, how much is missiles versus ground vehicles in space?
Yeah. Well, we haven't said who we replaced on it, but what we I mean, you could look that up. You can look that up. Let me talk about the the portfolio, and I I didn't mention Golden Dome, if I talk about the priorities that the administration has, includes Golden Dome. It includes readiness of the fleet of hardware that the US military has.
It includes the nuclear triad. I think in all of these areas, we have content or we have exposure. So as each of those priorities gets further investment is driving further activity within our business. If I think about Golden Dome as one example, it's an architecture yet to be defined. But if you think about the layered elements of it, it includes space, and we have exposure in space.
We've been supplying components that are used in satellites for sixty years or more. And so you see the demand coming through for specific things that we have that are highly differentiated, like avionics that goes into space vehicles, that is radiation hardened, but can last longer in space than some of the other products that are out there. We have chemical propulsion systems that allow a satellite that's on orbit to be quickly moved from its station position if it's to avoid some incoming missile. And so there are they are finding homes and applications because of the significant need to do detection and tracking of incoming missiles. So that's driving a whole host of capability development in space, and I think our technologies are meeting that need.
If I think about the layer of defense, it includes things like PAC three and THAAD missile defense systems and the nuclear triad. So we have content across all of those, and I already talked about the PAC three element of that. And then if I'm down at ground level, our RIP turret is used in counter US defense and things like that as well. So it's broad based and it's cutting across all of our defense activities.
And I guess how do you think about the growth profile? And with Golden Dome, how are you bidding on some of those contracts that are coming out? When would we see it come into fruition?
I we are active on a a whole host of different opportunity sets. So if I think about things like hypersonic missiles, there are around seven programs that are being developed at the moment. We are on seven of those programs. So as you go through proving out and down selecting and then move into, production of those, our exposure is pretty broad, and I think our chances of having wins in those areas are high. I see that across a whole host of different applications from ground based defense systems like armored vehicles and the modernization of those.
We have exposure there too. We characterize it internally as sort of a once in a generation opportunity for us as a company. There are programs that will have longevity for a decade or two beyond this. Flara is a great example of that. We're on the engineering manufacturing and development cycle of that program at the moment, but when that goes into low rate production towards the end of the twenty twenties, you you go into production for twenty years then thereafter.
So I think we're securing really important programs for us that have long long tail to them in terms of the manufacturing.
Now how can we do the the how much of your exposure is US domestic versus international? And how do we think about international? I know you mentioned NATO budgets and that driving some of the growth, Taiwan, etcetera.
So if I take the defense being half of our business, about 90% of that is US driven and 10% is outside The US and maybe Jennifer, you can talk about the European content.
Yes. Yes. So we do definitely have European content as well currently and we've got opportunities there as well. On the European side, we're positioned nicely because of our industrial business and our defense business. We've got 10 manufacturing sites in Europe, over 3,000 employees.
And in Germany, we've got a facility that is working on defense controls, basically controls for turrets on ground vehicles. And in The UK, we have a facility that works on military aircraft controls. So we've got established business right there, so we're poised nicely with that business and the other facilities that we have to take on additional. And if you think of, some of the activities that we've done in The U. S.
Like the reconfigurable integrated weapons platform, we're doing and pursuing other opportunities like that, for instance, in The UK for the GBAT platform too. So definitely a lot of opportunities. Again, it's a whole geopolitical climate that is creating those opportunities, but we have such a nice presence there that we can leverage that.
And how do we think about some of the new defense programs that are coming out with FLARA with MEV 75 and your content there? How do we think about how significant it is and maybe CCA companies as well?
Sure. On so on the military aircraft, we are a leading supplier of controls for advanced military aircraft. FLARA is a great example of a platform that, has a great opportunity for us where, as Pat mentioned, we're on the EMD phase of that right now, so it is contributing already. But as it goes into production, obviously it will grow even more. What we've done from a technology standpoint is we've built on other things that we've done in the past, for instance, the fixed wing aspect of it because we've got the heritage from the F-thirty five, the evolved tilt rotor applications from the V-twenty two and other technologies.
It's a really important platform for us. And when it goes into production and ramps up in production, will be very important for us. On the CCAs, we are developing product in that space. We are working in partnerships with established companies like the Primes as well as new entrants, for instance, Kratos, and they're working with the marines right now too. So that's, a very interesting, exciting space too, and we are participating nicely in that.
How do we how do we think about your content on something like the m v 75? Is it a $105,100,000?
So we don't give specific ship sites on it, but it's at the place where it's approaching being one of the major platforms that we talk about from a company standpoint. So right now, what we do is we talk about our large programs being like the f 35, the seven eighty seven, the a three fifty. It's it's approaching that type of category. So it's it's becoming substantial for us. Got it.
Maybe if we could talk about your industrial business. Could you just talk about the where we are in the cycle for that and just how you see the growth outlook there?
It's pretty stable on the industrial side. So we've we've had a watch on it for the last twelve, twenty four months or so as we saw bookings coming down. I would say at the moment, I I characterize it as being stable. Our bookings exceeded our sales in the in the current quarter, and our backlog increased quarter over quarter. So I don't have concerns about the industrial business.
I actually the industrial automation piece, which is, you know, large pieces of capital equipment in Germany mostly, has been pretty robust, surprisingly so, so a resilient piece of business. And then on the other side of it, the industrial segment includes our medical pumps business, and that's been performing really well for us. As a company, we typically grow it, in excess of the market growth rate.
How how do you do that? What are some of the competitive advantages?
So on the pump side of the business, we have a pretty focused business with a large manufacturing facility in Costa Rica, an engineering design and sales center in Salt Lake City. I think we succeed in that market because of a focus on compliance and continuous improvement. So we have 600 staff in Costa Rica. It's a Schengo medal winning site for its lean continuous improvement activities. They do an excellent job, and that means that we have no disruption in the marketplace.
And when our competitors trip up, we typically benefit from that and the sale of additional pumps, which has the ongoing revenue coming from accessory sets. Every pump uses replacement tubes every time it's used with a patient.
And maybe if we could just talk about your strong growth and margin expansion, how we think about margin expansion from here.
Yeah. So we've been on a transformation journey since we announced it at the Investor Day back in 2023. Our focus was on driving margin improvement within the organization. We we tackle that using pricing and simplification as the main levers. And, you know, from twin 2022 was our baseline fiscal year for that.
And since then, we've delivered 260 basis points of improvement. So I think pretty solid performance in delivering margin enhancement across the businesses in all segments of the organization. We're still working to deliver on our Investor Day targets for fiscal twenty six, and I see continuous improvement being possible beyond that as well, especially when I compare ourselves with with other companies. I think we have the headroom at the margin in which to expand further.
Maybe if we could talk about the acquisition of KotzWorks. I I you just announced it in July. How large is it? I don't know if you've disclosed it, to be honest. And how do we think about the margin contribution and competitive positioning there?
So that's a nice acquisition for us. It has about $30,000,000 in sales just to size it. It's a business that provides fiber optic components and systems for ruggedized environments. It complements the technology that we have in our slip ring business very nicely and we're actually collaborating with them so that we can provide data transmission at higher speeds and capacities for defense products. So it's a very nice complement.
And when we look at that type of acquisition, we're also looking to make sure that we are focused on not adding to the complexity. One of the things that we had worked on that, Pat has mentioned is on the simplification journey, and we wanna make sure that we're doing something in a not overly complex way. And so this, blends in very nicely, for us providing solutions for our customers. So it's a slip Slipping. Yeah.
Slipping? Is that a slip rug? Is that
So a slip ring is a rotating where you transfer data and power over a rotating interface. Got it. So for instance, on a rotor of a helicopter or in a CAT scan machine or something like that where you have to have data transmission. Got it. And it adds to
your space and defense portfolio. They add It is. Some content
on existing platforms.
Exactly. They share a similar customer group to us as well. So it's it fits nicely with the organization, and they have a they have an influence on architecture going forward as well. So they're well positioned within the industry and well recognized with the capability. It might it's surprising to think of a data transfer as being part of our business, but if I think about motion control and the existing slippering business we had, that is about moving data and power around vehicles or helicopters or whatever platform it is that we're on, all for military applications.
And and this expands that capability, and the mega driver that's involved there is higher levels of information being transmitted between sensors and components and being assimilated into the vehicle and then transferred around the vehicle as well. So it's that's a natural add on to that piece of it.
It's hard to think of a piece of metal and electrical equipment transferring data. So Yeah. It must have some technology inside of it that allow you
to We're market leader on slip rings, both military and industrial.
Who are other competitors?
Schleifring in Germany would be one, for instance.
Yeah. Didn't know that, so I learned something new today. How do we think about your margin expansion potential from here, I guess? Do you look at it on a volume leverage, labor productivity? And how do you think about pricing contributing?
Yes. So opportunities, what we have for margin expansion, we're continuing the pricing and the simplification journey, so we do have opportunities in there. Earlier on the Investor Day period, we've shared that we've had significant contribution from our pricing. We still have opportunities from our pricing and now it's an embedded way in which we work. So it's nice to see that that's taken hold as far as making sure that we're getting the value that we're contributing for our customers.
On our simplification journey, we're also making progress here. It's eightytwenty as an example. It's also our focus factory. It's our portfolio shaping and pruning that we're doing. And as we're doing those things, we're making sure that we're keeping the pieces of business that are strategic to us and make financial sense as and taking the other pieces out to simplify the business.
That's Right. How do you think about some of those criteria? Is it growth or margin focused and how you could expand margins? How long the long term contracts are?
Yeah. When we look at that, I think our focus is expansion. I think that's where we've got the greatest opportunity to, provide value to shareholders. So we're really focused on the margin expansion. The sales growth is wonderful because we have an incredible amount of organic sales growth opportunities that are waiting there.
As Pat mentioned, defense is such a significant part of our business and with the overall climate in that space, there's, tons of opportunities. We've seen, so many opportunities. There's more opportunities that are coming on the defense part of the business that's really, providing growth opportunities. And then when you look at the commercial aircraft part of the business and you add that on, you've got the ramp rates in, significant programs, the wide body programs that are coming up. So the growth is there.
You have to execute on that growth. You have to capture that growth, but it's naturally there. The margin are things that we are actually actively doing in order to increase in those
Have quantified how much the simplification strategy has benefited profitability in terms of dollar value and how you think about it going forward?
We haven't given a specific on it. However, I would say that both over that Investor Day period that, started as a base year of twenty two to '26, Both pricing and simplification were both meaningful contributors to our margin expansion journey of 100 basis points on average a year.
And can I add on in terms of more to go? I mean, Jennifer said that pricing has become an embedded part of how we're running the business, and there are still contracts that come up for renewal that we are pushing forward with that pricing agenda. And so that's an integral part of what we do today. But on the eighty twenty side of it, eighty twenty has become central to our improvement activities within the organization. So you might have seen it at the beginning as more of an initiative, but now it's it's it's helping define where we go next with the improvement activities, and we have more road to go with that.
So we've learned the technique. We've deployed it to, let's say, 85% of the sites by revenue, in revenue terms, and that starts out with basic simplification of our business. Where's the profitability by customer, by product line, and making business decisions at a local level at the site to drive and meet the expectations we have on profitability. As we mature, we're expanding it out to look at value stream p and l's where we get a much clearer view of the indirect costs associated with supporting that value stream. And when we do that, we're more better informed, data driven decisions can then be made about what we wanna do to improve profitability within that unit.
So that continues to mature, and then that allows us focus more time and energy on what I might call a customers and a products. So we really want to drive the business with those customers that are well strategically aligned with us to see the value we're contributing to them and give them more time and attention. So we actually have a clear set of differentiations where we can improve the service to those eight customers and secure more business from them. So that's the growth phase of the eightytwenty. So it's not just the simplification, but it allows us to focus our energies on where we want to grow the business.
And so that continues to mature in the organization, and eventually, you get to a point where when you're focused on delivering for those customers, you can optimize flow within the organization as well. So I think over the next number of years, we continue to get benefit from eightytwenty as an approach in our organization, and it becomes integral to how we work as well and part of our mindset. So we've looked at a lot of the operations in the plants. Now you start looking at our supply base as well with the same eightytwenty type lens.
How do we think about some of the KPIs you're monitoring when it comes to operations in the plant or the supply chain? What do you look to? What are some of the best metrics you have, and what are the ones for improvement?
Obviously, we're looking at all of our financials as measures at the individual site level. I think one of the key things we did and as part of our transformation was organization to have better alignment and accountability down through the organization and set clear expectations on performance, Sheila. I think they within a month of taking on the role of CEO, we split the aircraft group, which is 1,300,000,000.0 at the time, into into a commercial and a military business. Each of them has a different focus, and actually, they have some they have different business models as well, different customer groups, different ways of operating. And so each of those leaders now can optimize those businesses more effectively around what they're trying to deliver.
Last question, how do we think about free cash flow conversion and CapEx needs going forward?
Yes. So free cash flow, when we look at a more macro basis over a period of time, in the interim, we have some lumpiness. So for instance, we'll have a strong fourth quarter for timing of collection of receivables, customer advances and some of those types of things because of the receivables that we built up in past quarters. When we look at a longer, more broad type of view, we're targeting to be in the 75% to 100% free cash flow conversion as a percentage of net income basis. We think that's something that's achievable for us.
The things that impact us the most as far as if we're in that target range or where we are in that target range is going to be our sales growth. So our sales growth opportunities, especially on the A and D side of the business are very high. When it's high, obviously, we're going to have more working capital types of requirements and that will push us down towards the lower end of the range. However, we also have some opportunities that are maybe not immediate, but they're in the short to mid term And that's a structural realignment of the activities that we are having in our commercial aftermarket or our commercial aircraft business. Our parts travel the world.
They go through many suppliers and many types of activities. They're outsourced along the way. And so managing all of that is quite complex. We're looking to simplify that. We're taking action already to help simplify that.
When we do simplify it, we'll have a shorter lead time for our products, which will require less inventory, and so that will help bring that down. So when we do realize those, it won't happen in one chunk of period of time, but over a period of time, that will help us, achieve a greater amount. So that must might put us towards the higher part of it. So overall, I would say that, you know, that's the type of