Synovus Financial Q3 2024 Earnings Call Transcript

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August 2, 2024

There are 6 speakers on the call.

Operator

Good morning, and welcome to the Moog Third Quarter Fiscal Year 20 24 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Aaron Astraken. Please go ahead.

Speaker 1

Good morning. Thank you for joining Moog's Q3 2024 earnings release conference call. I'm Aaron Astrakhan, Director of Investor Relations. With me today is Pat Roche, our Chief Executive Officer and Jennifer Walter, our Chief Financial Officer. Earlier this morning, we released our results and our supplemental slides, both of which are available on our website.

Speaker 1

Our earnings press release, our supplemental slides 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, which are not guarantees. 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 happy to turn the call over to Pat.

Speaker 2

Good morning and welcome to the call. Today, we report another strong quarter demonstrating very positive progress towards improved financial performance. Sales were strong with double digit growth in defense and mid single digit growth in commercial end markets. Industrial, which has been a watch item, held ground despite softening in automation. Adjusted operating margin was up substantially.

Speaker 2

This reflects moving beyond our space vehicle charges, a ramp in better priced commercial business and greater productivity as future long range assault aircraft expands. Adjusted diluted earnings per share increased by almost 40% relative to prior year, driven by margin enhancement initiatives and profitable sales growth. Cash flow improved on the prior year. With 3 strong quarters behind us, we look forward with confidence to closing out fiscal 2024 as another record year in which we deliver improved financial performance. We're increasing our revenue guidance, holding our adjusted operating margin guidance and increasing our adjusted diluted earnings per share guidance for fiscal 2024.

Speaker 2

Now I'll provide some highlights on our operational performance. Starting with customer focus, we recently had the opportunity to meet with commercial and military customers, suppliers and partners at the Farnborough International Air Show and the Royal International Air Tattoo. These engagements were incredibly important to enhance communications and strengthen working relationships as we continue to manage the growth in both markets. At Farnborough, we announced new airline support contracts with Lufthansa, Austrian Airlines, Hawaiian Air, Finnair Plc and Finnair Technical Services, expanding our commercial aftermarket business. In June, we met with defense customers, suppliers and partners at Euro Satori in Paris.

Speaker 2

This is the largest international exposition for land and air defense held every 2 years. Signaled near term growth not seen in decades that is driven by the need to build out defensive strength in Europe. This is creating increased interest in our field proven products and opening opportunities for platform modernization. Our dedicated subsidiary received its full and final facility security clearance at the end of June, enabling it to receive new classified program contract awards. We're excited to work with our customers on new opportunities that apply our unique systems capabilities to solve our nation's most challenging technical problems.

Speaker 2

Moving to People, Community and Planet. In June, I visited San Jose, Costa Rica, home to the largest of our 3 medical device facilities. Clarity of purpose to enhance healthcare and enrich patients' lives continues to be a powerful motivator for our medical employees. This focus has driven a decade of continuous improvement, leading to a reputation as a reliable partner that has secured market share growth, enhanced productivity that has doubled throughput in the facility and secured a bronze shingle award. Costa Rica is a notable example of a purpose driven organization delivering sustainable business performance through lean.

Speaker 2

While in San Jose, we visited a childcare facility run by a local charity within one of the most challenged communities. We are delighted that our contributions help provide a hot meal and peace of mind for parents who struggle to make ends meet. Another community project helping the next generation is addressing the availability of clean drinking water in Baguio City, which is a water stressed region. Our donation and volunteer effort provided a local school 1,000 liters or just over 2 60 gallons per hour of clean, safe drinking water that will, on an ongoing basis sustain around 1800 people. Baguio City in the Philippines is an important manufacturing location for mold.

Speaker 2

Continuing this theme, water stress is a growing humanitarian concern. We recognize that water is already a limited and precious resource in many parts of the world and that access to clean water will be even more challenging in future years. Consequently, we have baselined our consumption of water at all manufacturing locations globally. We're committed to reductions and we will publish our goal later in this year. In the meantime, we've already started multiple projects to reduce water consumption.

Speaker 2

These include improved water stewardship through metering, awareness campaigns on water usage and rainwater harvesting at several facilities. Our Bengaluru manufacturing facility has already seen a 40% reduction in water consumption. And finally, let me move to financial strength. We continue to drive margin enhancements through pricing and simplification. We see impact and growing momentum.

Speaker 2

We continue to ensure that our pricing reflects the value we create for our customers. We've already made great progress in delivering on our Investor Day plans. The work continues with bottom up site level data analysis and action, complementing top down large account management. We persist in simplifying our business, further building our eightytwenty capability. We've now deployed to almost half of our manufacturing locations with the addition of a further 6 sites this quarter.

Speaker 2

We have trained over 7 50 leaders with 200 trained within the quarter. Training has extended to functional leadership such as finance who can better support data analytics, which enable better informed decision making across the organization. With the launch of our eightytwenty playbook and standardized training programs, we anticipate accelerated deployment to the remaining sites. We now have a talented team of well trained dedicated eightytwenty champions within the business who are acting as catalysts for this transformation. We're actively developing eightytwenty tools and templates to embed the eightytwenty mindset into our organizational DNA.

Speaker 2

This commitment ensures that our approach to Eightytwenty becomes a fundamental part of how we work and drive sustained success. On footprint and portfolio shaping activities, we took changes in the charges in the quarter arising from ongoing consolidation of our Radford, Virginia facility into our Murphy, North Carolina facility. Murphy is a focused factory for industrial motors, having transferred avionics products out of that site over the last year. The sales of 2 small European businesses near completion and we expect both to close in the coming quarter. Now turning to macroeconomic and market end market conditions.

Speaker 2

We're still in the midst of ongoing conflicts in Europe and the Middle East. The war in Ukraine has become a war of attrition. This reality drives the pressing need to replenish depleted arsenals. The shifting geopolitical reality is leading to growing security concerns in Europe where nations are increasing their defense spending and in Asia Pacific where a conflict would require a different balance of capabilities. As a result, we're seeing strong broad based demand in defense and notable strengthening in Europe.

Speaker 2

In the United States, a limited increase in Department of Defense budget is anticipated in calendar year 2025. Given inflationary pressure, this means difficult prioritization decisions in the near term. This could result in replenishment and sustainment being favored over some long term strategic programs for a limited time. Despite this budgetary context, we have strong platform positions. We continue to ramp up our engineering efforts on FLARA and as Bell has indicated that the next program milestone is imminent making FLARA a program of record.

Speaker 2

Lockheed has resumed deliveries of F-thirty 5 to the United States government and is bullish about foreign military sales. And we've continued to deliver on our remote integrated weapons platform. As for the longer term, we're seeing once in a generation type opportunities that could become important future platforms for MOG. Within these applications, we can leverage our component and system of systems engineering capabilities. There are multiple examples starting with 6th generation fighters and unmanned collaborative aircraft programs in play.

Speaker 2

In the United States, opportunities include the Navy's FA XX and the Air Force's next generation air dominance aircraft. At Farnborough, the Tri Nation's Global Combat Air Program concept model aircraft was revealed. Whilst there may be uncertainty on budget and timeline, there is clear need for these next generation aircraft. In addition to aerial platforms, there are also next generation armored vehicle platforms, including the mechanized inventory combat vehicle known as XM30 and vehicle modernization programs such as the United Kingdom's ground based air defense. Finally, we see ample opportunities for missile, hypersonic and strategic weapons programs.

Speaker 2

We look forward to playing our part on these platforms of the future. Turning to commercial aircraft, the number of people flying continues to increase. Data shows that more people traveled over the last couple of months than pre pandemic. This is driving aircraft flight hours and consequently aftermarket demand is increasing. While Farnborough was light on aircraft orders in general, we did note that 5787s and 25 A350s were added to backlog.

Speaker 2

The focus of industry debate was the ability of Boeing and Airbus to hit targeted build rate, especially for narrow body aircraft. For our part, we are well prepared to meet our customers' planned build rates. Finally, turning to industrial markets. Manufacturing activity in the heart of Europe continues to be weak, affecting our industrial automation business. However, this impact has been partially compensated for by other sub segments such as simulation and energy.

Speaker 2

On a positive note, orders in the quarter were higher than the average trailing 4 quarters. Now let me turn the call over to Jennifer for a detailed review of the financials.

Speaker 3

Thanks, Pat. I'll begin with our Q3 financial performance. I'll then provide an update on our guidance for FY 'twenty four. We had another great quarter from a sales and earnings perspective. Sales of $905,000,000 were very strong.

Speaker 3

Adjusted operating margin of 12.3 percent was robust and adjusted earnings per share of $1.91 exceeded the high end of our guidance range. Sales in the Q3 were 6% higher than last year's Q3. Aerospace and Defense sales were up nicely, while Industrial sales were fairly flat. The largest increase in segment sales was in military aircraft. Sales of $207,000,000 were up 18% over the Q3 last year.

Speaker 3

Activity on the FLARA tiltrotor aircraft program began to ramp in the Q3 last year and has steadily increased since that time, accounting for half of the increase in military aircraft sales this quarter. In addition, over the past couple of years, certain other development work has shifted into production, and we're now beginning to see the ramp up in production that will continue for the next few years. Space and Defense sales of $258,000,000 increased 7% over the Q3 last year. There continues to be strong defense demand across our portfolio associated with U. S.

Speaker 3

Defense priorities and European defense needs. In addition, launch vehicle activity increased in our space business. Commercial aircraft sales of $189,000,000 increased 6% over the same quarter a year ago. This reflects increased production in our wide body business. Industrial sales were $250,000,000 in the 3rd quarter.

Speaker 3

That's down 1% from the same quarter a year ago or flat when considering the changes in foreign currency rate. Industrial Automation sales were down from the very strong quarter a year ago, reflecting slowdown in orders we've seen in recent quarters. The other subsegments, energy, simulation and test and medical were all up from the Q3 last year. Demand for flight simulation systems continues to be strong. In this quarter, auto test demand drove the increase in this sub segment.

Speaker 3

We also benefited within medical devices from a competitor's challenges this quarter. We'll now shift to operating margin. Adjusted operating margin of 12.3% in the 3rd quarter increased 210 basis points from the Q3 last year. Adjustments to operating profit this quarter and the same quarter a year ago were $6,000,000 $2,000,000 respectively. These adjustments reflect restructuring and asset impairment charges, largely in our Industrial segment as we continue to drive simplification.

Speaker 3

Adjusted operating margins increased over the Q3 last year in each of our segments. In Space and Defense, operating margin increased 4 90 basis points to 12.7%. This increase is associated with improved performance on space vehicle program, offset partially by investments to fund once in a generation Pursuit. The operating for military aircraft was 11.9%, up 140 basis points, reflecting cost absorption on the FLAR program this quarter. Commercial aircraft operating margin was 13.1%, up 190 basis points over the 3rd quarter last year as we saw benefits from both pricing and volume as well as mix.

Speaker 3

Industrial mix. Industrial operating margin was 11.7% in the 3rd quarter, up 20 basis points. This increase was attributable to benefits from pricing initiatives, offset by pressures associated with lower industrial automation sales and planned product transfers. Our adjusted effective tax rate in the 3rd quarter was 19.3% compared to 16.0% in the 3rd quarter last year. We're benefiting from high levels of R and D tax credits and have captured these benefits in our return to provision 3rd quarter adjustments in both years.

Speaker 3

Putting it all together, adjusted earnings per share of $1.91 were up 39% over the same quarter a year ago. Operating margin expansion, along with increased operating profit associated with higher sales, drove the increase in earnings per share. Compared to our previous guidance, adjusted earnings per share for the Q3 came in well above the high end of our range. Higher operating profit associated with strong sales and margin expansion, along with a lower than forecasted effective tax rate drove the increase in earnings per share. This was partially offset by higher non operating expenses.

Speaker 3

Let's now shift over to cash flow. Free cash flow for the Q3 was a $2,000,000 use of cash. Our cash performance was driven by growth in net working capital. Customer advances were a use of cash this quarter, reflecting the achievement of significant progress across several major defense programs. We also had strong billings resulting in higher receivables that were used of cash, which should be collected over the next quarter or 2.

Speaker 3

Physical inventories, which has been a consumer of cash over recent quarters, were relatively flat in the 3rd quarter. Capital expenditures were $32,000,000 in the 3rd quarter, down from the levels of the past few quarters. We expect our capital expenditures to return to a more typical level next quarter. Our leverage ratio calculated on a net debt basis at the end of the third quarter was 2.2 times, near the low end of our target range. Our capital deployment priorities, both long term and near term, are unchanged.

Speaker 3

Our current priority continues to be investing for organic growth. We'll now shift over to our updated guidance for this year. We're raising our sales guidance, affirming our adjusted operating margin and increasing our adjusted earnings per share guidance for FY 'twenty four. Fiscal year 2024 is measuring up to be a great step towards achieving our long term financial targets. This year, our sales will grow by 8%.

Speaker 3

Adjusted operating margin will expand by 150 basis points, and adjusted earnings per share will increase by 20%. We're projecting sales of $3,580,000,000 in FY 'twenty four with sales growth in each of our segments. Commercial aircraft sales will grow related to the production ramps on wide body and other programs. Military aircraft sales will increase due to having a full year's worth of FLARASales. Space and Defense sales will increase due to strong defense demand.

Speaker 3

Sales in Industrial will increase slightly with softening in Industrial Automation being compensated for by growth in other submarkets. We're increasing our guidance for FY 'twenty four sales by $25,000,000 from 90 days ago. For Industrial, we're increasing our sales guidance by $40,000,000 to reflect the strong level of sales in the 3rd quarter and an improved outlook for the 4th quarter. We're increasing our sales guidance for military aircraft by $15,000,000 based on our performance this past quarter. First, base and defense, we're increasing our sales guidance by $10,000,000 to reflect strong defense demand.

Speaker 3

We're reducing our sales guidance for commercial aircraft by $40,000,000 primarily due to a change in the timing of orders, which is causing a short term delay in sales and a temporary increase in inventory. Let's shift over to operating margin. We're projecting our adjusted operating margin in FY 'twenty four to be 12.4%, the same as we guided to a quarter ago, so different mix between segments. We're increasing guidance in Commercial Aircraft to reflect the strong 3rd quarter performance, and we're bringing down Space and Defense for planned cost to fund business pursuits. Our other two segments will be down just marginally.

Speaker 3

This results in operating margins of 13.0 percent in Space and Defense, 11.9% in Military Aircraft, 12.0% in Commercial Aircraft and 12.5 percent in Industrial. For FY 'twenty four, we're projecting adjusted earnings per share of $7.40 plus or minus $0.10 We've increased our guidance from 90 days ago by $0.15 which reflects the benefit associated with the lower effective tax rate in the 3rd quarter and higher operating profit largely realized in the 3rd quarter, offset partially by higher nonoperating costs. Compared to FY 'twenty three, earnings per share will be up 20%. This reflects strong operational performance and growth in the business, partially offset by higher nonoperating expenses and higher effective tax rate. Finally, turning to free cash flow.

Speaker 3

Our cash situation is somewhat more pressured than previously guided. We've consumed $77,000,000 of cash year to date, and we expect that we will generate roughly that amount in the 4th quarter. Working capital improvements will drive our cash generation with physical inventories coming down due to strong shipments. In addition, we expect receivables to generate cash on strong collections. Customer advances will remain a use of cash as we continue to work them down.

Speaker 3

For the year, we're projecting capital expenditures of $150,000,000 down from our previous guidance, reflecting the lighter spend in the 3rd quarter. Overall, our Q3 financial performance was solid, and we're confident in a strong finish to the year. And now I'll turn it over to Pat.

Speaker 2

Thanks, Jennifer. I'm pleased with another impressive performance this quarter and I look forward to continued strength as we close out the year. We continue to deliver improved financial performance. Now let's turn it over to questions.

Operator

Thank And we'll go first to Michael Ciarmoli with Truist Securities.

Speaker 4

Hey, good morning guys. Thanks for taking the questions. Pat or Jennifer, I guess the change in the commercial aircraft revenue maybe pretty significant this late in the year. I guess that's widebody driven. Jennifer, I think you said timing of orders there.

Speaker 4

Can you maybe give a little bit more color, I guess, against the backdrop of what we've seen from Airbus with their downward revision and Boeing's sort of ongoing challenges?

Speaker 2

Yes. Michael, I wouldn't read too much into it as a reflection of a trend. It's a timing issue within the course of Q3 and Q4, the placement of orders from one of our significant customers and that's affecting the sales level we're recording within the quarter. It doesn't reflect the change in production rates we're running on any of the wide body programs.

Speaker 4

Okay. Are you where are you right now on the wide body rates? I guess more specifically 787, I think you had been delivering ahead. Is that still kind of the plan? And do we have to worry about an inventory destock situation at any point?

Speaker 2

So we're delivering to Boeing at a rate of about 5 shipsets per month, and we have an in house production rate that's in line with their plans. So we're in a lot of communication with Boeing about the master production schedule. We don't see impact here at the moment. We're continuing to monitor the situation closely with them. So Jennifer, do you have anything additional?

Speaker 3

Yes. I think you described, Pat, is fair. It's the constant communications that we're having with our customer right now so that we can find a solution that meets our needs and their needs. We're all looking for a healthy supply chain as we ramp up. And so that's something that's certainly important to us.

Speaker 3

And we're also mindful that we come to resolutions on these things that make sense from a financial perspective for us as well.

Speaker 2

Yes. I mean, the stability of the supply chain is crucially important to both us as we manage a whole tier of sub suppliers, but also to Boeing as they acknowledged in their earnings call yesterday as well.

Speaker 4

Got it. What, within commercial, I guess, can you give any color as to what was happening in the quarter and expectation for the aftermarket side?

Speaker 2

So as I said in the end market comments in general, Michael, aftermarket is strong for us as a business. We expect that that will continue within our numbers. We signed up additional contracts with more airlines bringing them under our support contracts. So we feel positive about the aftermarket business.

Speaker 4

Correct. Does that Yes, go ahead, Jennifer.

Speaker 3

There's just some shifts also that we're seeing in aftermarket right now between OE and aftermarket that's making our OE a little bit stronger this quarter versus our aftermarket. That tends to normalize. It depends on just the prioritization of work that we're putting through the factory. So you'll see a little bit of shift to that, but that's again similarly not a trend that we'd expect to continue.

Speaker 4

Got it. And maybe I'll try and sneak one more in, Pat. You guys are going to be maybe in the unenviable position of reporting 4th quarter with an election, everything that's going on in this market. Any sort of early read you'd be willing to give us on fiscal 2025?

Speaker 2

No. We'll give the guidance for 2025 in the November call, Michael. But in general, we as an organization, as I said, are making good progress with the initiatives we're driving on margin enhancement. We expect that to continue. Our sales have been strong and are growing.

Speaker 2

We expect that to continue as well. So I think we're looking into 2025 with a degree of optimism that we will deliver on all of the plans that we've laid out previously. So whatever happens in the election, I don't think it knocks us off path at all.

Speaker 4

Got it. Perfect. I'll jump back in the queue, guys. Thanks.

Operator

We'll go next to Christine Liwag with Morgan Stanley.

Speaker 5

Hey, guys. Great to see you at Farnborough. Pat, Jennifer, you're now guiding to minimal free cash flow this year. So what's the path of some of the working capital unwind in 4Q to get you to the positive territory? And then I think, Jennifer, you highlighted that there's some pressure on receivables.

Speaker 5

Is there a change in what you guys are charging your customers to get basis on the receivables at a shorter and have cash conversion at a faster cycle?

Speaker 3

Yes. Thanks, Christine. It was nice seeing you there as well. For the Q4 and our cash flow, we've got we're expecting positive cash flow essentially to make up for the use of cash that we had in the Q3. We're going to see it in a few places.

Speaker 3

First of all, receivables. So our receivables grew putting pressure on cash in the Q3. We're because we've got the strong receivables, we'll be able to collect much of that. Different parts of the business have different collection terms, and so I made a reference to in the next quarter or 2, but a large portion we will be able to collect off of the strong receivables that we had in the 3rd quarter. So pressure in the 3rd quarter becomes a benefit in the 4th quarter on the receivables.

Speaker 3

From a physical inventory, this is actually kind of a nice story for us. It's a slow story. But in this quarter, we've had flat levels of physical inventories from a cash perspective. And we're going to actually see that be a slight benefit as we look into next quarter. We're going to work down some of those physical inventories.

Speaker 3

So it's really starting to turn after we've had some growth over the past couple of years in the physical inventory. So this quarter is nice that we got to that level space and we'll have a small benefit next quarter as we're doing it. As we look to what happens, I look longer term, there's structural opportunities that we have that will be beyond 'twenty four and 'twenty five because it takes time to make those structural changes. Those are involve things like condensing the flow as we build inventory in our processes. However, some of those things that we are on and seeing the beginning of benefits associated with that are going to be our inventory management that we can impact and have a greater more near term impact like vendor inventory management systems, planning and procurement.

Speaker 3

And we're doing this while we're supporting a growing business. So we've got that natural pressure of the growing business, but we are making a down. In the Q4, the other thing that we're having is pressure on customer advances. So and that's a timing thing. We're going to continue to work it down.

Speaker 3

We did have really nice customer advances in the back half of FY 'twenty three and even into the Q1 of this year, But we don't have any new advances that are coming in of significance in the Q4. So we are having that pressure as we continue to work that down. So that's largely where we're going to get the free cash flow benefit in Q4. And as you know, the timing a lot of a lot of this is with timing. And as you can see, customer advances is a big portion of that for the 3rd quarter type of results, and that pressure does continue on.

Speaker 3

But we are making some nice progress in the physical inventories, and then we're positioned nicely on the receivables as well. With respect to you're also asking about the what are we charging customers and how are we working. We work when we're looking at our customers, we're looking at comprehensive negotiations with our customers that involve pricing and terms, whether we're opening something up that isn't normally open or we're renegotiating something like that. So we look at that as a balanced perspective, sometimes depending on and it's on the customer side, but it's also on the vendor side as well. We need to make sure that we're coming up with what makes best sense for us as well as the person, the parties that we're negotiating with so that we can come out with the best outcome.

Speaker 3

Sometimes there is a benefit of pricing at the cost of a term and sometimes it could be different. So it's looking at everything in a holistic type of way to get the economic answer for us that works in that circumstance. So we are mindful of both our terms and pricing, because it's obviously not just the sales, the margin, it's the cash aspect of it as well.

Speaker 5

Great. Thank you for the detailed answer, Jennifer. I really, really appreciate it. And if I could follow-up, I mean, your previous guidance for 2025 free cash flow was 75% to 100% conversion. With all the timing issues that are happening and these changes, I just wanted to check to see if this is still intact or if any of these concerns in fiscal year 2024 kind of spill over to 2025?

Speaker 3

Yes. We'll comment more specifically in our November call, but we are still working towards our Investor Day commitments that we put out there. And we're looking forward to being able to report and demonstrate our continued success in our financial metrics.

Speaker 5

Well, great. Thank you very much.

Speaker 3

Thanks,

Operator

And at this time, there are no further questions.

Speaker 2

Okay. So I would like to thank everyone for joining the call. I appreciate your attendance and your questions. It's been another strong quarter for us on the path to a really good fiscal 2024. I look forward to talking to you again in November as we report out on that.

Speaker 2

Thank you very much.

Operator

This does conclude today's conference. We thank you for your participation.

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