Magellan Aerospace Corporation (MAL) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Annual General Meeting of Magellan Aerospace Corporation. I am Murray Edwards, [indiscernible] that, and as Chairman of Magellan Aerospace Corporation, I will be serving as Chairman of this meeting. The meeting will now come to order. We will ask Elena Milantoni, Corporate Secretary of the Corporation Act, the Secretary of the Meeting; and Josette Koffyberg, representative of Computershare, to act as scrutineer. In order to ensure the formal business officially today, we have asked certain employee shareholders to make and second motions. This is designed to facilitate the progression of the meeting and not intended to discourage conversations or comments. We have a forward-looking statement here to remind everybody that our remarks today will make statements about the information that are not [ historical factual ] information. This information may be considered forward-looking information. Statements about forward-looking information are by their very nature, not guarantees of Magellan's future operational or financial performance, and are subject to risks and uncertainties. Actual results could differently materially from what is currently expected through [ little lawyers ] [indiscernible]. While Magellan believes its expectations are reasonable, they are based on risks and assumptions regarding a number or factors -- details regarding the assumptions and factors as well as additional information about the material factors, risks and assumptions that could cause our actual results to differ materially from what is currently expected, can be found on Magellan's website, which is available or in Magellan's information form, which is available on www.sedarplus. Magellan does not assume any obligation to update or revise any forward-looking information except in accordance with applicable securities laws. I've done that now, is it okay? okay. Thank you. We first have a couple of quick housekeeping points. The business matters to this meeting items set forth in the Notice of Meeting and Management Information Circular both dated March 15, 2024, that was mailed, e-mailed or otherwise made available to shareholders. Only shareholders as of the close of business of March 15, 2024, the record date or their duly appointed proxy holders are entitled to submit questions and vote at the meeting. After the formal meeting at its conclusion, Mr. Phil Underwood, Magellan's President and Chief Executive Officer will make a short presentation on the corporation's 2023 fiscal year and plans for the future. The next item is notice of meeting. We have received an affidavit from Computershare as the mailing of the notice of Annual Meeting, management far and instrument of proxy to shareholders. We direct that this affidavit together with the documents mailed to shareholders will be kept by the Secretary of the corporation with the minutes of this meeting. Next item is the scrutineer report and the bylaws, confirming the meeting is regularly constituted for the transaction business. Under the bylaws of the corporation, business may be transacted at this meeting if 2 persons are present at the meeting and they hold the represent by proxy not less than 10% of the total number of issued and outstanding shares of the corporation entitled to vote the meeting. The scrutineer report confirmed that a quorum is present. The scrutineer report shows there are 52 -- let me just check the [indiscernible] -- 52 shareholders and proxies cast for the meeting only represented by proxy 48,327,934 shares or 84.5% of the shares, which are entitled to be voted present at this meeting. Then scrutineer report will be kept with the Secretary of the corporation with the minutes of this meeting. Accordingly, as the quorum of shareholders present, we now declare the meeting where we constituted and properly constituted for the transaction of business. All voting today will be conducted by way of ballot. Voting on the resolution appoint orders will be conducted by a show of hands unless a shareholder or proxy demand about respect to voting on such resolution. I'd like to thank those who have already voted prior to the meeting. These votes will be tabulated along with today's votes and the scrutineer will provide us a detailed breakdown of the vote after polling is closed. We will also post the results on our website and on SEDAR+. The next item of business is the annual report, bank statements and audit report. In this regard, we will table for receipt to 2023 consolidated finance statement of the corporation as included in the corporation's 2023 annual report to shareholders for the fiscal year ended December 31, 2023, and the audit report thereon. A copy of the annual report has been made available to each registered shareholder, either hard copy or electronically. The financial of the corporation of fiscal year ended December 31, 2023, can also be found on the corporation website or at SEDAR+. We now place for the meeting the consolidated financial statements and the audit report thereon for the fiscal year ended December 31, 2023. Any comments or questions on that? Our auditors are here if you have any questions for auditors elements? Any questions you want? No? You don't want questions, right? That's good. Next item of business is the election of directors. The Board has sticks the number to expect at the meeting at 6. We will now entertain a motion for the Directors of the Corporation.

Mr. Chairman, my name is Karen Yoshiki-Gravelsins and I am a shareholder. I nominate N. Murray Edwards, Phillip C Underwood, Beth M. Budd Bandler, Larry G. Moeller, Steven Somerville, James P. Veitch as Directors of the Corporation to hold office until the next annual election of Directors or until their successors are elected or appointed. Subject to the provisions of the Business Corporation Act, Ontario and the bylaws of the corporation.

Thank you. Karen, so what's your title with the company?

Vice President of Corporate Stewardship and Operational Excellence.

Okay? And how are we doing?

Really well.

Are we? And at the Board meeting, Karen, you reported on a meeting you attended [indiscernible] recently with the community on best practice for environmental sustainability and government practices. And your slide of the meeting was how does our corporation rank that was -- not rank, but how do we like to most of our peers in terms of our standards and what we've done on those matters.

I would say we're one of the leaders in the [indiscernible] community. And in fact, [indiscernible] to discuss how we [indiscernible] started and where we are.

I see this journey, the [indiscernible] rate across our operations around the world, where ASI, ISO certified, [indiscernible] plans here?

That's right. So we have ISO 14001 at each facility, globally for our division, and we are working on aligning ourselves with the health and safety standard ISO 45001.

So -- and by 1400, what does that mean, Karen?

It's an environmental management system. So it helps us to identify all applicable legislation, to put programs in place to make sure that we meet our objectives and not only compliance objectives, but could I get my risk for corporation and have plans in place to meet those.

So that's -- those are good objectives. How do you make money for us, Karen?

Okay. All right. Good question. So it's always been Magellan's goal to be a sustainable business to be profitable. And what that means is [indiscernible] excellence. So we have objectives in place, in fact that in any place for many years to reduce our scrap, to reduce our rework to make sure our machines operate efficiently to make sure that our processes operate efficiently. And when we do that, we use -- sorry, less water, we use less energy, and we generate less waste and all of those are found environmental objectives.

So we're very lucky, she is very good, right? Okay. Thank you, Karen. Sorry. Do we have a seconder?

Mr. Chairman, my name is Michael Gribe, and I'm a shareholder and I second the nomination.

Michael, what are you -- what's your title Mike?

I'm the Vice President of HR at Magellan Aerospace.

Vice president of HR. And you've been with us now Michael for 2 years. And has it been okay journey? Or has it been...

It's always a learning journey.

Is it dull?

It's never dull. It's never a dull moment in HR.

Yes, we have a nomination. Are there any further nominations in the corporation. As there are no further nominations, we now declare nomination close. To vote for or withhold from voting for each nominee, you need to mark and sign a ballot and provide it to representative of Computershare. I already provided my ballot. Is there any other ballots out in the room? No other ballots there, okay. As the ballots have all been collected, and I can confirm in the report provided by the scrutineers that each director of the corporation has been elected with a vote in excess of 95% of those provided for the meeting. So I then hereby declare that all those nominated as directors of the corporation being Phil Underwood, Beth Bandler, Larry Moeller, Steve Somerville, and J. P. Veitch and myself, we duly elected to direct this corporation until the next annual election of shareholders. The next item we bid this year is the appointment of auditors. Do I have a motion in this regard?

Yes. [indiscernible] to confirm BDO Canada Charter Professional Council be appointed auditors of the Corporation until the next annual meeting or until their successor are appointed and there was [indiscernible].

But you're in HR, what do you know about accountants?

I am a shareholder.

Okay. Then you can. Thank you, Mike. But do we have a seconder?

I second the motion.

I won't ask you anything this time, Karen, I promise, thank you. All favored signified can raise their right hand. Any opposed? Seem none. Carried. That brings us the end of voting [indiscernible] upon. As I stated earlier, we've been advised by the scrutineers that the ballots and proxy deposit [indiscernible] are in favor of each of the resolution. As such, each nominee who has directed this corporation duly elected to direct the corporation, and BDO Canada chartered professional accounts has been approved as the Auditor Corporation for the forthcoming year and the Board of Directors have been authorized to fixed remuneration. The directors and auditors of the corporation will hold their roles and positions until the next annual election or until their successors are elected/appointed, [indiscernible] of the Business Corporations Act Ontario and the bylaws of the corporation. We now direct that the scrutineers report in respect to the voting be careful with the minutes of the meeting. Unless there are any questions on the formal part of the meeting, I would undertake a motion that the meeting be terminated.

So moved.

Is there a second of motion?

I second the motion.

Are you guys like a team here or? All in favor as soon as I raise in the right hand. Any opposed? Kerry? We now declare the meeting be terminated and now pass the meeting forward to Phil Underwood, who'll provide a business update. Before I do that, if I just would quickly like to say a few comments. First, I would like to thank the Board of Directors here, both Phil and myself were considered non-independent directors. So we're very blessed. We have at the front row here, 4 individuals who are very diligent. I know when we have meetings, they've read the material in advance, provide good comments and do a good job. So front row here, Steve Somerville, who is the Chairman of our Audit Committee and our Pension Committee; J. P. Veitch, who's Chairman of our Governance and Nominating Committee; Beth Bandler, who's Chairman of our Human Resource and environmentally -- Human Resource Committee -- Human Resource and Compensation Committee and the Environmental Health Safety Committee; and then Larry Moeller, who's on the committee, but no chair. So thank you to you for your advice and support. It is appreciated, and we are making progress in an industry that challenged. I think that COVID in 2020 was very hard on this sector, both in terms of the airline business and travel and it rolled rate back into our sector. We see there are some, I think, some reshoots of positivity coming out now. That being said, we are concerned right now about what's happening with Boeing. It's clearly going to impact our business. Boeing is one of our largest customers. And they're -- what they're taking now is below our expectations in terms of deliveries, and we need to get some stability there to see where they are long term, but we cannot predict that. The other thing I would like to also thank on behalf of the Board as a management here, you met Karen and Phil to our -- Karen and Michael to our leadership team. We also have the President and CEO, Phil Underwood; Corporate Secretary, Elena Milantoni; and Hector Marti -- Haydn Martin, and then our plant managers here, Don Boitson for North America; Jeffery Jeff from the U.K.; and Jason from India. So thank you all. I appreciate all your efforts. And you have the privilege of -- or the burden of talking to me every second Tuesday, Phil for our management meetings call. .

I look forward to it.

You look forward to it. Yes, I wish they do. I'll turn it over to you. You get in trouble.

Thank you, Murray. Well good afternoon, everyone. So I will be presenting the financial business highlights for 2023. And I will start with the financial summary. So consolidated revenues for the year ended December 31, 2023, were $879.6 million. That's a 15% increase from the $764.6 million achieved last year. The corporation's revenues increased by 10.5% in Canada, 23.3% in the United States and 14.8% in Europe and India. These increases were mainly attributed to the build rate recoveries and the single-aisle programs and cast-in revenues. So gross profit was $89 million for the year ended December 31, 2023, in comparison to gross profit of $35.1 million for the year ended December 31, 2022. The increase in profitability is mainly the result of volume and rehabilitation of contracts on certain programs, favorable product mix and production efficiencies offset in part by supply chain disruptions and -- supply chain disruptions and increases in purchase on materials. So adjusted EBITDA increased $37.4 million or 105.4% to $73 million for the year ended 2023 compared to $35.5 million in 2022, mainly as a result of the revenue and gross margin improvements. So Magellan's investment in capital in 2023 was $19.2 million, which was approximately 2.2% of revenue. And the general recognizes the importance of investment in capital and technology improvements, not only to increase productivity and cost savings, but to improve safety and life spend. So we recognize the importance of improving working capital and with the significant revenue growth post pandemic, our inventory has also grown significantly over that period. This has been influenced by a number of factors. Supply chain shortages have led to increased manufacturing lead times, especially for such items as forgings and to protect on-time deliveries, customers are requiring increased buffer stocks and dual sourcing to minimize risks. This is a shift from just-in-time to just-in-case inventory. We've also seen challenges in the supply chain, quality performance and increased transportation lead times, which all contributed to increased inventory. So Magellan continues to work closely to manage these issues to improve the use of our working capital. Contract assets will continue to be monitored closely, but have not really increased significantly since pre-pandemic levels. Now moving on to the business overview section. So Magellan is a global business with 19 divisions and over 3,850 employees worldwide. And that chart shows where they were. So in this section, I will give an update on the commercial and military market. So I'll start with the commercial market. So commercial air travel continued its recovery in 2023. The International Air Transport Association reported the industry-wide travel we covered to within 1% of 1990 levels by November. With domestic travel exceeding 2019 by 6.7% and international travel lagging by 5.5%. Strong demand for new commercial aircraft is driving record order backlogs. Airbus set 3 new industry record in 2023. First, reaching an order backlog of 8,598 aircraft; second, procuring the highest gross orders of 2,319 aircraft in a year; and third, recording the highest net orders of 2,094 aircraft in the year. Boeing also set new company all-time record backlogs of 6,216 aircraft. Build rates have continued to grow in order to fill this growing demand. Unfortunately, as mentioned, Boeing's numerous production and quality issues are causing significant concerns over the build rates, with ongoing delays negatively impacting the supply base. And the FAA is currently as the 737 MAX rate cap at 38 per month, whereas Boeing had originally planned to ramp up to 50 aircraft per month by -- through 2025 and 2026. Airbus A320 build rate is currently at 56 per month with 62 per month planned by the end of the year and 75 per month by 2026. A350 rates will reach 7 per month in 2024 and A330 goes from 3 per month to 4 per month. While Boeing's 777 remains at 3 per month, 787 is transitioning to 5 per month. So ignoring Boeing's current situation for a moment, both [indiscernible] and Airbus have healthy aircraft order backlogs to fully -- to meet the demand going forward. And there's no doubt -- the demand for commercial aircraft continues to grow. So moving to the defense market. So the defense market is robust due to the rise in geopolitical tensions and a heightened urgency for defense readiness and fleet modernization. Although fiscal constraints are unavoilable, these dynamics are driving worldwide increases in defense budgets. Europe, for example, have seen the highest increase in military expenditure in 30 years. In the United States, the 2024 defense budget is up 3.2% over 2023, which represents a total increase of 13.4% since 2022. Within this budget, there are USD 43 billion allocated to aircraft procurement, including a $3 billion boost on top of the original request. Notable programs receive an increased funding our Boeing's P8 Maritime Patrol aircraft, their CH-47 Chinook helicopter; Sikorsky's H-60 helicopter; Bell Boeing V-22 tiltrotor and Lockheed C-130J tactical transport aircraft. On the downside of this budget, the U.S. Air Force plans to purchase fewer Boeing F-15 fighters and slowed the pace of Lockheed Martin's F-35 and Boeing's T-7A Trainer acquisitions. These funds are being redirected towards sixth-generation fighter development and associated autonomous combat fighters. So Lockheed delivered just 98 of their F-35 aircraft in 2023 as compared to the 153 planned. This was primarily due to the U.S. DoD delay in delivery acceptance of further aircraft until the latest technical refresh -- 3 configuration is approved. Despite this, Lockheed continues to maintain a higher build rate. Positive news was received recently when the U.S. Navy announced additional new orders for the F-18 EF fighter, which would extend Boeing's production into 2027. Previously, production was ending in 2025. So defense manufacturers are expected to build 3,400 new fighter aircraft between 2024 and 2022 across all programs. Meanwhile, legacy helicopter programs are expected to remain consistently strong through the same period. In all, it's a positive outlook for the defense market. So now I'd like to talk about a few key announcements that we made during 2023. So on March 6, 2023, Magellan announced the signing of a significant long-term agreement extension with Collins to manufacture complex magnesium and aluminum castings for various military and commercial aerospace programs. The castings will be produced by Magellan's facility in Haley, Ontario and Glendale, Arizona. In addition, F-15, F-16 and F-18 castings for Collins legacy programs in the agreement, and it also includes the supply of castings to the F-35, KC-46, A320neo, 787 and 777X programs. So on March 10, 2023, Magellan announced the contract with the government of Canada to design, build, launch and operate the Redwing microsatellite directed by Defense Research and Development Canada, the $15.8 million Redwing contract represents the next generation of spacecraft technology for space domain awareness technology demonstration, which launched in 2026. Redwing will perform space object tracking to characterize an increasingly congested orbital environment to observe higher detail on space objects and provide near real-time tasking to respond to evolving space events, right? On May 30, 2023, Magellan announced the signing of a contract extension with Boeing, providing the continued manufacture of large and complex cell exhaust systems for the Boeing 767 program. The fabricated metallic assemblies will be produced and delivered from Magellan's facility in Middletown, Ohio. The continuation of this agreement with Boeing will ensure the continued supply of Magellan [indiscernible] plug and nozzle exhaust assemblies for the Boeing 767 program. Magellan's Metallic Honeycomb is manufactured, utilizing material suitable for high temperatures and offers advantages in weight savings and acoustic attenuation. On December 19, 2023, Magellan announced an agreement with the Canadian government for the provision of LUU-2 illumination flares for the Royal Canadian Air Force. The $39 million 4-year contract involves a manufacture, assembly, delivery of [indiscernible] from Magellan's Winnipeg propellant plant in Manitoba, Canada. On February 28, 2024, Magellan announced an agreement between Magellan Aerospace U.K. Limited and Airbus to continue to supply major structural wing components for Airbus' single or family of aircraft. The high-strength lightweight components will be delivered from Magellan's leading-edge long bed machine facility in our Rexon facility from January 2024. The agreement focuses on the production of wing spars for use on the A320 family of aircraft. And these are components that provide support and strength for the wing structure, okay. So moving on. Continuing with the business overview. So these charts show the revenue by customer and market segments in 2023. So on the left, you can see that 36% of our revenues is directly with Airbus and Boeing combined, which is down on 2019 levels to 40%. 2023 revenues for Boeing continue to be affected by the challenges that the company faces surrounding quality and supplier deliveries. On the top right, of our -- on the top right, you can see our business -- is a split of our business. Aerostructures -- 55% of our business is in aerostructures; 24% aeroengines, which include repair and overall, 13% castings 8% is specialty products. And on the bottom right, you can see that our business is 63% of our revenue is derived from commercial business and our defense business is 37%, which has decreased from prior years due to the increase in the commercial build rates. Strategic summary. So in this section, I want to discuss the challenges and opportunities as we recover from the pandemic. So Magellan has been faced a number of challenges over the past year, which in turn have presented us with a number of opportunities. The impacts of hyperinflation have been severe -- with rise in utility costs, record CPI levels and demanding workforce expectations. We are addressing these unusual levels of inflation through rehabilitation of customer contracts, and working towards realistic labor agreements. Underutilization is significant with revenue down from pre-pandemic levels, resulting in high levels of underabsorption and idle plant and equipment. However, this has allowed us to continue restructuring of our business and consolidation of our products to underutilized factories and facilities and to lower cost facilities. When we look at our product mix, higher single-aisle programs and lower long-range programs reflect lower margins. In addition, the business has also been impacted by limited new platforms and the 737 MAX delays. It's encouraging that long-range programs are now recovering, and the 787 is back in production, -- and Magellan is also continuing to address legacy contracts and rehabilitations. We're also targeting programs to diversify our product mix. So the disruption in the supply chain has caused shortfalls in forgings and raw materials. Sailing suppliers are also impacting our performance and necessitating dual sourcing to protect customers, who have also increased their buffer stock demands. As a result of this disruption, numerous products are now dual-sourced and we are now focusing on reliable strategic suppliers. We have managed to reduce customer claims and we have more agility in our supply chain management. Workforce engagement is vital to our business. Over the past year, we've made significant investment in training and development. Our global leadership development training program has been launched, and we are piloting, accelerated training and development with over 15,000 courses online. Also, a company-wide engagement survey is again scheduled for this year. A number of union negotiations were concluded in 2023, but some have resulted in protracted negotiations into 2024. So on the next slide, I'll be discussing our high-level strategy. So, Magellan will continue to position itself as a global and key supplier for our customers. In order to achieve this, the corporation will continue to develop its people, technical expertise and add value to our products to enable growth in selected markets. We will maintain a solid balance sheet through inventory and working capital management to support our business goals. We will leverage our technology and engineering capabilities and continue to assess our facilities and products to further exploit our low-cost footprint, thereby improving our financial performance and competitiveness. Examples are the implementation of the SAP system, introduction of automated kitting in Winnipeg, site consolidations in the U.K. and continued improvement of work to our low-cost sources in Poland and India. Continued improvement in our quality through our zero defects program, which has been deployed across all our sites, and continue to drive 100% delivery performance utilizing our Magellan operating system. We want to inspire, develop and invest in our people and drive success. Over the last year, we've directed resources towards employee engagement. We've also seen participation grow in our continuous improvement incentives program, which has been enabled employees to better address the root causes of issues and share improvement ideas and successes across the corporation. Each ESG expectations include growing concerns about climate change, as well as an increase in the level of mandatory disclosures on all ESG matters. To meet this challenge, Magellan will continue to provide information critical to our sustainability efforts and monitor evolving permit-related risks and expectations of all our shareholders. Magellan continues to uphold environmental, social and governance principles in conducting our business. Our greenhouse gas reduction, water conservation and waste reduction programs are well established and continue to track our progress. This past year, we launched our corporate sustainability policy, which is posted on the Magellan ESG website. We successfully completed certification of all our sites, as we mentioned, to ISO 14001 standard on environmental management systems and we're on track for implementing, as Karen said, ISO 45001, which is the health and safety standard. We're closely monitoring the evolving ESC disclosure standards and global reporting framework to ensure continued compliance -- and our focus on operational excellence continues to be aligned with the ESG principles. Under environmental, we are decreasing our demand on energy and water, generating less waste and lowering our carbon footprint through operational efficiency improvements. Under social, we take measures to engage and train our employees and create a safe workplace to lower employee turnover, and improve our ability to deliver quality products on time. And finally, under governance, our policies ensure we operate with integrity, accountability and transparency. So in summary, so revenue has rebounded a healthy $115 million or 15% growth year-on-year, contributed to a $14 million improvement in profits. Our strong balance sheet has allowed us to weather the inflationary pressure and supply chain disruptions the industry experienced in 2022. We are fostering a principle of right first time and have made progress with our zero defect program across all our sites. We've renewed significant contracts with major customers and secured new work packages and made significant progress in rehabilitating contracts that have been adversely affected by hyperinflation. We've launched our employee engagement program with a survey that results in a number of initiatives that the company has or is in the process of implementing. We've established our ESG framework and achieved ISO 14001 certification across all sites. And a key priority is returning the business to previous levels of revenue and profitability through cost containment, good supply management and pricing initiatives. Also to improve our working capital ratio through inventory reduction initiatives. So we need to be well positioned to meet our customers' needs with robust operational plans and continued focus on operational excellence, utilizing Magellan's operating system. As part of the engagement program, a follow-on survey will be carried out in 2024. And we will continue to monitor evolving ESG standards and reporting requirements to strengthen our path to sustainability. So that concludes the presentation. So I'd like to take this opportunity to thank all our stakeholders, customers and employees for their continued support and commitment to Magellan.