Woodward, Inc.

Thank you for standing by. Welcome to the Woodwork Incorporated Fourth Quarter Fiscal Year 2021 Earnings Call. At this time, I would like to inform that this call is being recorded for a broadcast and that all participants are in a listen-only mode. Following the presentation, you will be invited to participate in a question and answer session. Joining us today from the company are Mr. Tom Gendron, Chairman and Chief Executive Officer, Mr. Mark Hartman, Chief Financial Officer, Mr. Don Guzzardo, Vice President of Investor Relations and Treasurer, and Mr. Dan Provasnik, Director of Investor Relations. I would now like to turn the call over to Mr. Guzzardo.

Thank you, Operator. We would like to welcome all of you to Woodward's fourth quarter fiscal year 2021 earnings call. In today's call, Tom will comment on our markets and related strategies, and Mark will discuss our financial results as outlined in our earnings release. At the end of our presentation, we will take questions. For those who have not seen today's earnings release, you can find it on our website at woodward.com. We have again included some presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available by phone or on our website through December 2, 2021. The phone number for the audio replay is on the press release announcing this call, as well as on our website, and will be repeated by the operator at the end of the call. I would like to refer to and highlight our cautionary statement as shown on slide three. As always, elements of this presentation are forward-looking or based on our current outlook and assumptions for the global economy and our businesses more specifically, including the expected and potential effects of the ongoing COVID-19 pandemic. Those elements can and do frequently change. Please consider our comments in light of the risks and uncertainties surrounding those elements, including the risks we identify in our filings. In addition, Woodward is providing certain non-US GAAP financial measures. We direct your attention to the reconciliations of non-US GAAP financial measures, which are included in today's slide presentation and our earnings release and related schedules. We believe this additional financial information will help in understanding our results. Now turning to our results for the fourth quarter, net sales for the fourth quarter of fiscal 2021 were $570 million compared to $531 million for the prior year quarter. Net earnings for the fourth quarter of 2021 were $50 million or 76 cents per share compared to $57 million or 89 cents per share for the prior year quarter. Adjusted net earnings for the fourth quarter of 2021 were $54 million or 82 cents per share compared to $48 million or 75 cents per share for the prior year quarter. And for the full year, Net sales were $2.25 billion compared to $2.5 billion for the prior year. Net earnings were $209 million or $3.18 per share for fiscal 2021 compared to $240 million or $3.70 per share for the prior year. Adjusted net earnings were $212 million or $3.24 per share compared to $254 million or $3.96 per share for the prior year. Net cash generated from operating activities for 2021 was $465 million compared to $349 million for the prior year. Free cash flow and adjusted free cash flow for 2021 were both $427 million. For 2020, Free cash flow was $302 million, and adjusted free cash flow was $315 million. Now I will turn the call over to Tom to comment further on our results, strategies, and markets. Thank you, Don. Good afternoon, everyone.

As some of you know, Don has decided to retire at the end of the year after a 31-year career at Woodward. Don has been an important champion of Woodward's growth and transformation story over the past three decades. and has been a trusted advisor to management. On behalf of the company, I want to express our sincere gratitude for his dedication to Woodward, outstanding leadership, and counsel. We wish you all the best in retirement. Going forward, Dan Provaznik, a 15-year Woodward veteran, will lead our investor relations function. We delivered solid results for fiscal 21 against the headwinds of COVID and global supply chain disruptions. We do expect continued recovery throughout 2022, although uncertainty and volatility around the pace of recovery is anticipated to remain. We believe our proven resiliency and strong financial position will allow us to capitalize on future market opportunities. Moving to our markets in more detail, commercial aerospace continues to recover. Build rates are expected to improve further in 2022 based on announced increases and the anticipated certification of the 737 MAX in China. Commercial aftermarket is being driven by increased passenger traffic and the utilization of a commercial fleet that includes significantly higher woodward content. Domestic travel is nearing pre-COVID levels, while international travel, although steadily improving, is still significantly lagging. Defense markets remain stable, with the exception of guided weapons which we anticipate will continue to soften in fiscal 22. Turning to our industrial markets, in power generation, demand for gas turbines continues to increase, driven primarily by growth in Asia and the continued replacement of coal-powered plants. Additionally, we see strong demand for backup power for data centers. Aftermarket activity has been stable but is expected to increase in 22. In transportation, the global marine market is seeing improvement in orders for new ships, as well as increased utilization, which will drive aftermarket activity. Demand for China natural gas trucks continue to be soft, as expected, due to the absorption of China 5 diesel pre-buy activity related to the implementation of new China 6 diesel emissions regulations, which took effect July 1st. In addition, Global natural gas prices have spiked due to increased demand for power generation and limited supply and weather-related usage. This increase in price is expected to dampen demand for natural gas trucks in the near term. Despite this volatility, China's commitment to reducing emissions is expected to drive long-term demand for natural gas trucks. In oil and gas, prices have returned to pre-2020 levels, from pandemic lows due in part to energy demand increases. Capital expenditures have increased steadily since early 21, and this level of investment is expected to continue. In summary, we've delivered solid performance in a challenging macroeconomic environment. We are seeing improvements in most of our markets. However, COVID-related impacts, including ongoing labor and supply chain challenges and regional market fluctuations, continue to pressure global economic recovery. Looking ahead to 2022, we expect ongoing recovery and improved profitability in our aerospace business as OEM production rates and passenger traffic continue to grow. In industrial, we expect a modest improvement in profitability as our markets continue to recover. Marine cargo rates and volumes are improving. Demand for industrial gas turbines is increasing. and rising oil and gas prices are driving investment. We are optimistic about the continued recovery across our markets and look forward to continued progress in 2022. And I'll turn the call over to Mark Hartman.

Thank you, Tom. Net sales for the fourth quarter of fiscal 2021 were $570 million, an increase of 7%. Sales for the quarter and the full year were negatively impacted by approximately $32 million due to global supply chain disruptions, which delayed orders scheduled for shipment. Aerospace segment sales for the fourth quarter of fiscal 2021 were $371 million, an increase of 12% from the prior year quarter. Commercial OEM and aftermarket sales were up compared to the prior year quarter by 67% and 23%, respectively, driven by elevated build rates and continued recovery in domestic passenger traffic. Defense OEM sales were down 6% and defense aftermarket sales were down 20% in the fourth quarter of 2021 compared to a strong prior year quarter. Aerospace segment earnings for the fourth quarter of 2021 were $66 million or 17.4% of segment sales compared to $58 million or 17.4% of segment sales for the fourth quarter of 2020. Segment earnings were positively impacted by higher commercial sales volume. For fiscal year 2021, aerospace segment sales were $1.40 billion, compared to $1.59 billion for the prior year, a 12% decrease. Aerospace segment earnings for fiscal year 2021 were $234 million, or 16.7% of segment sales, compared to $310 million, or 19.5% of segment sales, for the prior year. Turning to industrial. Industrial segment sales for the fourth quarter of fiscal 2021 were $193 million, compared to $195 million in the prior year period, a decrease of 1%. The decrease in industrial sales was primarily due to lower industrial gas turbine sales as well as weakness in natural gas engines in China, partially offset by improvements in marine. Industrial segment earnings for the fourth quarter of 2021 were $21 million, or 10.7% of segment sales, compared to $19 million, or 9.6% of segment sales, for the same period of the prior year. The increase is primarily due to favorable impact of foreign currency exchange rates. For fiscal 2021, industrial segment sales were $842 million, compared to $905 million for the prior year, a 7% decrease. Excluding the renewable power systems and related businesses, which I will refer to as RPS, and were divested in the third quarter of 2020, industrial segment sales for fiscal 2020 were $837 million. foreign currency exchange rates had a favorable impact on industrial segment sales for 2021 of approximately $33 million. Industrial segment earnings for fiscal 2021 were $109 million, or 12.9% of segment sales. Industrial segment earnings for 2020 were $100 million, or 11.1% of segment sales, excluding RPS. Industrial segment earnings for fiscal 2020 were $97 million, or 11.6% of segment sales. Non-segment expenses were $17 million for the fourth quarter of fiscal 2020, compared to non-segment expenses of $0.2 million for the same period in the prior year. Adjusted non-segment expenses for the fourth quarter of fiscal 2021 and fiscal 2020 were both $12 million, Adjusted non-segment expenses for the fourth quarter of 2021 excludes the restructuring charges. Adjusted non-segment expenses for the fourth quarter of 2020 primarily excludes the gain on sale of properties. Non-segment expenses for fiscal 2021 were $64 million compared to $95 million for fiscal 2020. Adjusted non-segment expenses totaled $59 million for fiscal 2021 compared to $67 million for fiscal 2020. At the Woodward level, R&D for the fourth quarter of 2021 was $28 million or 4.9% of sales compared to $27 million or 5.1% of sales for the prior year quarter. For fiscal 2021, R&D expenses were $117 million or 52%, sorry, 5.2% of sales compared to $133 million or 5.3% of sales in fiscal 2020. SG&A and adjusted SG&A for the fourth quarter of 2021 were both $38 million compared to SG&A of $41 million and adjusted SG&A of $43 million for the fourth quarter of 2020. For fiscal 2021, SG&A and adjusted SG&A expenses were both $187 million compared to SG&A expenses of $218 million and adjusted SG&A expenses of $196 million for fiscal 2020, which primarily excludes merger and divestiture transaction costs. For the fourth quarter of 2021, the effective tax rate was 18.2%, and the adjusted effective tax rate was 18.8%. For the fourth quarter of 2020, the effective tax rate was 16.0%, and the adjusted effective tax rate was 13.8%. The full-year effective tax rate was 15.1% for fiscal 2021 compared to 14.7% for fiscal 2020. The adjusted effective tax rate was 15.3% for fiscal 2021 compared to 17.8% for fiscal 2020. Looking at cash flows. Net cash provided by operating activities for fiscal 2021 was $465 million compared to $349 million for the prior year period. Capital expenditures were $38 million for 2021 compared to $47 million for the prior year period. Free cash flow and adjusted free cash flow for 2021 were both $427 million. For fiscal 2020, free cash flow was $302 million and adjusted free cash flow was $315 million. The increase in free cash flow and adjusted free cash flow was primarily related to effective working capital management partially offset by lower net earnings. Leverage was 1.7 times EBITDA at the end of the fourth quarter. We also have significant liquidity available through approximately $1.4 billion of combined cash on hand and revolver capacity. During fiscal year 2021, $82 million was returned to stockholders in the form of $36 million of dividends and $46 million of repurchase shares under the previously authorized $500 million share repurchase program of which $441 million remained available at the end of fiscal 2021. Lastly, turning to our fiscal 2022 outlook. End markets and supply chain disruptions are anticipated to improve in fiscal year 2022, although the uncertainty and volatility around the pace of the recovery is expected to persist. Growth and profitability in both segments could be negatively affected if COVID and supply chain disruptions do not improve. or if the pace of inflation puts additional pressure on labor and material costs. Total Woodward net sales are expected to be in the range of $2.45 billion and $2.65 billion. Aerospace and industrial sales growth percentages are each expected to be in the low double digits to mid-teens. Our aerospace outlook assumes Further improvement in build rates in alignment with announced increases in the anticipated 737 MAX certification in China. In addition, continued recovery in flight traffic is assumed to drive growth in commercial aftermarket. Guided weapon sales are anticipated to decline, while the remainder of the defense is expected to be generally consistent with 2021. Industrial growth is expected to be driven by higher demand for power generation equipment rising oil and gas investments, and increased ship utilization. China natural gas truck sales are expected to be flat year over year with quarterly volatility continuing due to uncertainty around natural gas prices. Aerospace segment earnings as a percent of segment sales are expected to increase by approximately 200 to 300 basis points, primarily due to the increased sales volume in both commercial OEM and aftermarket, partially offset by lower guided weapon sales, the return of annual variable incentive compensation costs, and inflationary cost pressures. Industrial segment earnings as a percent of segment sales are expected to be approximately flat to up 150 basis points, primarily due to increased sales volume partially offset by the return of annual variable incentive compensation costs and inflationary cost pressures. The effective tax rate for the year is expected to be approximately 21%. Earnings per share is expected to be between $3.55 and $3.95, based on approximately 66 million of fully diluted weighted average shares outstanding. The favorable impacts of sales growth and productivity improvements in both segments are being partially offset by the expected return of annual variable compensation costs, inflationary pressures, and a higher tax rate. Free cash flow is expected to be approximately $315 million, generating a free cash flow conversion rate of greater than 100%. As sales growth returns, we anticipate higher working capital requirements, primarily driven by accounts receivable. Also, capital expenditures are expected to increase by approximately $30 million. This concludes our comments on the business and the results for the fiscal year and fourth quarter of 2021. Operator, we are now ready to open the call to questions.

Thank you. The question and answer session will begin at this time. If you are using a speakerphone, please speak up the handset before pressing any numbers. Should you have any questions, please press star on your push button phone. Should you wish to withdraw a question, Press the pound key. Your question will be taken in the order it is received. Please stand by for your first question, sir. Your first question is from Sheila Kayaglu of Jefferies. Your line is open.

Thank you guys for the time, and Don, congratulations on an amazing 31 years. Thank you. Maybe if we could start off with just guidance implications. It's I'm going to actually focus on industrial because I think low double digits is pretty robust, just considering what the segment's done over the last decade. So what gives you the confidence? How's the backlog looking? Can you maybe talk about sub-segment moving pieces there?

Sure, Sheila. One of the reasons you see that type of growth rate is we're definitely coming off a bottom, as you know, in some of our markets where power generation was down, oil and gas was down. China natural gas was down. So as you look at it, we see good growth in our turbo machinery business, so covering gas turbines for power, compressors, steam turbines, used in process plants. We're also seeing good recovery in the marine market, and we're starting to see aftermarket pickup in the marine market, but also across the board. Some of the auxiliary engine applications, such as backup power, is increasing significantly. Equipment sales are increasing, so we're starting to see the economic recovery flow through to demand. A lot of that has shorter order cycles, so we are seeing orders come in, but a lot of it in discussions with our customers are looking at volume increases, and we're building the plans around that.

Okay, thank you. And then maybe on just aerospace OE in particular, you know, how do we think about max rates and 787s that you've built into your plan? Is it fair to say you're kind of assuming, you know, 25 a month on the max and two or three a month on the 787? And where are you at currently?

Yeah, you know, on that, Sheila, for, you know, the max and the neo, the 87, you know, obviously the max and the 87, you know, have had those disruption everybody's aware of. We're really tracking you know, to the Boeing and Airbus production rates. I think as most of you know, especially the ones that have toured our facilities, we're capacitized for much higher rates than they're announcing right now. So we're in good shape to handle the rates. We're planning to meet the rates that they're looking at. You know, there definitely is the uncertainties, you know, will those rates materialize, you know, are heavily dependent on, you know, the FAA releasing the production quality issues on the 8-7 and also for China to certify the max. But the rates that have been quoted by our customers, both plan and those happening as we move forward in the following quarter. So that's where our plans are built around it. Those are going to recover and those rates are going to be met.

Okay. Thank you, guys.

You bet.

Your next question is from Pete Skibitsky of Olympic Global. Your line is open.

Hey, good afternoon, guys, and Don, best wishes. Thanks, Pete. I guess, yeah, so I guess, you know, Tom, so coming off of two quarters of the supply chain issues, it kind of feels like you guys maybe feel like the worst of that is behind you because you've given fiscal 22 guidance. So Can you kind of walk us through why you feel like the worst of these supply chain issues are in the past maybe, and maybe you can even ballpark your expectation for the first quarter revenue in case there's any residual impact?

Yeah, so first I'll answer that last question, Pete. I think it'll take into the second half of the fiscal year to recover a lot of the past due that was driven by supply chain disruptions. The reason we have some confidence, so there are mechanical type components, and then we got electronics. I think everybody's real familiar with the electronic shortages and disruptions. We're seeing some improvement in that happening, and so we anticipate as the year moves on that we'll see electronics starting to recover. The mechanical side, if you say, look at that, A lot of that disruption was tied to our supply base, you know, reacting to the pandemic, cutting back, closing, you know, consolidating factories, laying off, you know, workers. And then demands were turning and, you know, there was disruptions there beyond what we could overcome. I think I shared in the past, you know, we put together at Woodward, and invested in what we call a rapid response team. We knew there were going to be supplier disruptions, and we mitigated quite a few, but there were more than we had anticipated. We have a full team working with those suppliers. We got recovery plans. We have some confidence in those recovery plans. Like I said, they're taking a little bit of time, but we'll overcome those. We're kind of dependent on the global electronics supply chain, but we see promising improvements there. That's why you have some faith that we're going to see as we move into the second half of the year that we're having recovery. Okay, okay.

And anything on the first quarter in terms of level setting us on the revenue side?

Well, you know, we don't give or talk to really quarter to quarter. So I think it will follow on our normal pattern, Pete. You know, we always have the holidays, shorter amount of work days, you know, in the first quarter, as you know. And so that pattern will continue.

Okay, okay. And last one for me, you know, there's chatter that for the Defense Department we could have essentially a full year continuing resolution. And it sounds like your expectations are fairly modest for defense, you know, maybe kind of flattish to down it sounds like overall. Would you guess if there's any, you know, risk to that from a full year CR if we have one?

Yeah, no, not overall. And, Pete, you're definitely in the ballpark with what we're anticipating on overall defense, that there will be some softness, as we've pointed out, on the guided weapons. And so down slightly is what we're anticipating.

Okay. Thanks, guys.

Yep.

Thanks, Pete.

Your next question is from Matt Akers of Wells Fargo. Your line is open.

Hi. It's actually Erician from Matt. Thanks for the question. Just on the guided weapons, I think you mentioned, yes, there will be much decline in 2022. So just thinking where we are in the JDAM slowdown or any other guided weapons, if we're at a normal run rate or further to fall?

Yeah, so what you have with our guided weapon portfolio, the JDAM – And the current lot by the government is down. Our other controls for guided weapons are actually going to go up. So net-net, it's still down because JDAM is the largest program. I think we're starting to approach, you know, maybe the steady state going forward on JDAM. The one thing that could change a little bit on that is we are seeing some activity around foreign military sales. That could add some volume, but that has not come through yet. But we do anticipate as we move forward in 22 and 23, we might see some foreign military sales start to fill in. But those are still unknown at the moment, but we do think that could happen.

Okay, got it. If I could do one more. Just regarding the magnesium shortage people recently talk about, do you see metal production supply as a potential risk for you guys going into 2022?

Not really a risk in terms of the metals we use and our ability to procure them. We are seeing inflationary pressures around materials as well as labor. So that's one headwind, but we right now are not anticipating that we'll have shortages of required materials.

Okay, thanks.

You're welcome.

Your next question is from Christopher Green of Oppenheimer. Your line is now open.

Thanks. Good afternoon. Good afternoon. I apologize for the dog in the background. Nothing I can do. I'm curious about price-cost timing. I think you have a fair amount of OEM relationships and customers and industrial, and typically there's a lag to price realization, runoff, some old contracts. I wonder if there's a dynamic where, you know, that kind of rolls into new pricing, you know, maybe into the new year, your fiscal second or, you know, however you want to comment on that.

Sure. You know, logistics costs, you know, have risen, as you're pointing out. Most of our OE sales are tied to long-term agreements. So the ability to move price is limited now. However, our long-term agreements have escalation clauses in them. So once a year, we do reset based on indices and inflation. So we will see some recovery. Other parts of our business where we have a shorter cycle, not LTAs or aftermarket, we do have the ability to have some price realization in those areas. So it's a mix, but the benefit of long-term agreements we have, like I said, they're there. We know we have the programs, but we do have to wait once a year for prices to be adjusted for the escalation indices.

Okay, but on the net equation, what I'm understanding is, you know, you're within the lag effect, though, so it's a little pinchier presently than it's likely to be, you know, a quarter or two out, maybe.

Yeah, and, you know, one of our outlook charts that you see there is, you know, we do have, without a doubt, we're experiencing inflation, you know, whether it's You know, you look at materials, wages, logistics, you know, across all these categories. But we're also offsetting a lot with productivity, and we're driving through. You know, we still have that pressure. So that combined with, you know, the contracts coming through, we're really netting and offsetting, you know, mostly all of that.

Okay, that's helpful. Thank you. You're welcome. And the $32 million kind of holdback from supply chain issues, I'm presuming that's mostly in the industrial segment, but I didn't really catch it if that was clarified at all.

Yeah, it's split generally evenly across both industrial and aerospace.

Great. Thanks for the caller.

You're welcome.

Your next question is from Gautam Kama of Cowen. Your line is open.

Hey, and I echo my thanks and congratulations to Don. It's a pleasure working with you. You'll be missed. You know, Tom, I was just going to follow up on the aftermarket. So are you seeing – what are you seeing month to month? You know, were you seeing kind of an improvement throughout the quarter? Are you seeing fits and starts still? You know, how would you characterize kind of the trend line? You know, was it still kind of spotty? Sorry, Tom.

Yeah. No, please. Go ahead. Good question. We're seeing accelerating aftermarket activity. And you're asking, you're specifically on commercial aerospace, I take it?

Yes. Yes, I am.

Yeah, commercial aerospace, we're seeing, you know, accelerating activity. We're also seeing initial provisioning pick up. So, you know, all good signs. You know, obviously, fleet utilization is a big driver of that. We feel very positive that the fleet flying has very good woodward content, so that's a positive tailwind. Initial provisioning, like I said, has come back. We anticipate a good increase in 22, but that also still is dependent on the production rates being met and China certification coming through, but we believe those will happen. Yeah, aftermarket's looking good. We still anticipate tail end in 23 is where you see closer to 2019 levels. But we're on a good path.

Okay. And on the commercial arrow OE side, in the past you guys have indicated those shipments are profitable. And I'm just on a follow-up to one of the earlier questions on inflation and your escalators. Are you seeing compression, you know, in OE profitability next year? Or should I say, did you see it throughout this year, and therefore it's a positive year-to-year dynamic next year as price resets?

Actually, right, right. We will have price changes due to the escalation clauses taking effect in 22. I would highlight, and... We talked on previous calls that during the downturn, we invested more in our True North continuous improvement activity. We actually did quite good on OE margins, and we really anticipated driving those up through productivity improvements. Now we have to offset all this inflationary pressure, but I think overall we're still in good shape there, and we're still working hard to drive that through. Obviously, As volume increases through our factories, that's a big plus as well to get that volume leverage.

Yep. And last one for me, you guys are capacitized for much higher levels of demand. So CapEx through the cycle from here presumably will be subdued relative to the last cycle. What is the plan with capital allocation? What are you hoping to do? Is M&A the priority from here? Is it share repurchases? Besides organic growth and the core business stuff.

Good question. Mark might jump in here with me, but just to highlight, you're correct on CapEx, and Mark, we're approximately looking at $50 million plus or minus, you know,

It's just timing on CapEx, right? So we've guided in the past. We anticipate to be around $50 million because you're accurate. We're fully capacitized, so we're in a maintenance mode for CapEx. There's timing differences. That's why we're lower than $50 million in fiscal 21, higher than $50 million in fiscal 22, but you're right on that.

And so on the capital deployment, we are – last quarter we talked about we're returning to our – capital deployment strategy, and returning 50% of net income to shareholders through dividends and buybacks, and you saw that we were buying back in the quarter. In addition, we do have a very strong balance sheet, and with that, we will continue to look for growth, so both in good investments and organic growth, and if we can find attractive M&A that builds on our strategies, fits our business, we will look at that. So it's a combo of that. And as everybody knows, M&A is not something you can predict timing of. So if we have excess cash, we'll return it to shareholders.

Thank you.

You're welcome.

Your next question is from David Strauss of Barclays. Your line is open.

Good afternoon, guys. This is Brad Barton on for David. Thanks for taking the question. Good afternoon, Brad. I was wondering if you could talk to working capital and how much of a headwind you expect to see from here.

Yeah. As sales returns, obviously we're anticipating good growth in 2022. We do anticipate having that working capital increase. or need investment, but it's mainly going to be in receivables. One thing that you've probably seen throughout the last couple years is we've done a very good job of managing our inventory balances. We're anticipating to continue to do that as we move forward. So really, it's just really going to be related to the sales overall. And as we're growing here quarter to quarter, we will have to invest into accounts receivable overall. And that would be the main working capital component that we'd be speaking to going forward.

Got it. Thanks. And then just quickly looking at headcount in Arrow and Industrial, how much have you increased from bottom?

Yeah, so we've been hiring overall, obviously, as growth has come. I don't have the number right off the top of my head, but it's been significant, especially as we've anticipated the growth as we're moving forward here. It's mainly been on the direct labor side, and some of that's been bringing back members that were laid off, and then others are bringing in new members and getting them up and trained on the line overall. But it's several hundred across the company over the last year timeframe as growth has been occurring.

We do anticipate the need to hire a significant number of members in the coming year. We've put together hiring strategies and plans to get ahead of the curve. With that growth, we've got the capital, we've got the facilities, we will have to add headcount to support the growth.

All right, great. Thanks for taking the question, guys.

You're welcome.

Your next question is from Michael Shimoli of Tourist Securities. Your line is open.

Hey, good evening, guys. Thanks for taking the call. Congrats, Don. It's been a pleasure working with you over the years. Good luck. I guess, Tom, just on, I guess, back to what Gautam was asking around, you know, kind of your facilities, what you're sized for. You mentioned, you know, kind of that end of 23, you know, but how should we think about aerospace margins? I mean, do you need aerospace revenues to get back to the prior peak? or do you think you can get back to that level of profitability given some of the actions with True North? And I realize, you know, inflationary environment, labor costs, that that might be a, you know, open-ended kind of challenge right now. But what are the thoughts there?

Yeah, right now, you know, our outlook is that as we hit the end of 23, we'll be at that 20% plus run rate there. on arrow. Got it. I want to make sure you run rate at the end of 23.

Yep. Yep. Got it. Got it. Okay. And then, um, I guess just staying with an arrow, you know, defensive, it sounds like you're, you're pretty cautious in general. Did, You know, aside from the guided weapons, anything incremental? I mean, obviously, you've got some some good content on the Joint Strike Fighter, you know, that those rates coming down, you know, some of the other legacy platforms that you've got, you know, big exposure to, you know, v 22 Blackhawk Apaches, I mean, is, you know, defense seemingly all manageable, you know, and, again, it seems to be a cautious view. But have you if you contemplated all that into the into the forecast?

We have. We are well represented. Some of the new programs you're all familiar with, but there's been a new buy for F-15EX, including the GE F-110 engine. Those have good content for us. F-18 is good content. Some of those legacy are still moving along and provide good base for us. We're We're kind of in that flattish area with guided weapons taking us down single digit, low-mid single digit. As we move forward, I don't think the world's getting any safer, so we may just right now say, hey, it's more towards the flats, plus or minus. single digits, low single digits, up or down around that. That's kind of what we're planning.

Yeah, and the other opportunity on the defense side of the business, of course, is on the aftermarket with, you know, upgrade programs and the like. So, you know, that's always been a good positive for us.

You know, another area that it's not really defense, we're not categorizing it under defense, but we've been making a bigger push into the space market. So some is on the defense side, but a lot of that's commercial. And we're starting to win programs there and, you know, moving quickly on some of that activity. So that over the next few years will fill in some growth as well.

Got it. Got it. And last one I had, just back to the pricing. Obviously, you know, the OE pricing. But what are you seeing in the aftermarket? You know, presumably as some of this used and serviceable material, green time maybe runs its course. Are you able to get kind of real-time price increases, or are you seeing a better pricing environment in the commercial aftermarket?

We're still able to get reasonable price in the aftermarket, and so we are, you know, seeing price increases. You've got to look at some of the, you know, it goes program by program. on what's being retired or what's being parted out. And, you know, maybe you've seen some of the data on this. A lot of the aircraft that we're on that some people thought were going to be retired are not, and they're in service. They're being brought back in service. So right now we're not seeing that pressure. And so, you know, we still have a good pricing position.

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

Thank you.

As a reminder, should you have a question, please press star 1 on your push button phone. Should you wish to withdraw a question, press the panty. Your next question is from Noah Popona of Goldman Sachs. Your line is open.

Good evening, everybody, and congrats and all the best to you, Don, with retirement.

Thanks, Noah.

So the revenue guidance for 22, upload double-digit to mid-teens, that would be an acceleration in the quarterly revenue growth rate pace compared to what it's been over the last several quarters, despite the compares getting tougher. I guess I'm wondering, are there some outsized you know, big contributors to 22 that you didn't have in 21 that I'm missing, whether that's, you know, the initial spares provisioning on the aftermarket that can be pretty sizable or, you know, just what's happening in the energy world, in your oil and gas business, or is there the capture of the slipped revenue from supply chain and logistics? Does that land in the second half of next year and create, you know, a big growth rate in the back half? I guess I'm just struggling a little bit on how the pace will accelerate on tougher compares.

No, actually, you're hitting on a lot of them, so I'll just knock them all off as you went and maybe start with the latter. Yeah, our assumption on the supply chain disruption and the holdback there is that updates in the second half of fiscal 22, so that would be a tailwind there. But if I step back just generally to our markets, Commercial OE is going to be growing with the build rates. Tom mentioned previously we're anticipating that the OEMs, both Boeing and Airbus, reach the build rates that have signaled out there overall. So that would be significant growth for us on a year-over-year basis. The other thing you have to be thinking about is early FY21, we were down at the bottom. So we've been growing off of that, but it was a significant reduction from prior periods. We've talked some already about on the commercial aftermarket side that with the utilization, the use of the green time on engine, the fleet that's actually flying has more Woodward content on it overall. So we would anticipate significant aftermarket growth in 2022 and ramping as the year progresses. As we've been talking, the summer season was a busy season. Overall anybody that was at an airport traveling all I think saw that and so you know if that green time continues to get used and You know overall that will have to come in for you know repair and upgrades as we move forward Moving over to the industrial side of the business You know you hit on some of it if I start first started on the power generation side of the business, you know power generation needs you know in Asia and developing countries is growing and You kind of see that across a lot of the companies in that space overall are anticipating growth there as they either have the generation needs or in the more developed world trying to replace coal-powered plants with natural gas and turbines overall would be positive for us. The other, I'll say, major driver for us is the return of the marine market. You know the utilization for marine transportation is high So, you know twofold one is, you know, the ship order activity has increased and you know That's a that's a lagging market for us overall that it typically takes a couple years that as those Ships get ordered that we would see the Recognize the revenue and the units shipments there. But overall, you know, we did see that increase and But the other opportunity for us, of course, is with the strong utilization in the freight world today. Those are going to have to come in. We mentioned it early, I'll say in the pandemic, that a lot of the aftermarket cupboards were run bare. They destocked everything, they used everything they could, and they didn't ramp back up. So we're anticipating that to be an opportunity also. The other on the industrial side, Tom mentioned a little bit earlier on the oil and gas, obviously with prices where they're at today on the oil side, we're anticipating that there'll be growth there from production needs and people actually looking to drill more. And so that will be positive for us. And so that's how we get to even on tougher comps as you move forward since we've been ramping. But with all those opportunities and the Those favorable market dynamics and the Woodward position in those markets, that's how we get to that growth that we're talking about.

Okay. Appreciate all that detail. The first half will have the easier compares, but still have the lingering supply chain issues. Second half, maybe you're making that up, but you have the tougher compares. I guess the growth rate, total organic revenue growth rate for the year, Should the quarterly progression be somewhere near that growth rate every quarter, or is the growth back end loaded?

Yeah, I mean, Tom mentioned it some earlier too, right? I mean, so year over year, of course, we're going to have the Q1. Both Q1s have the less number of working days with all the holidays and all that. But we do see the markets ramping as the year progresses, The supply chain disruption is going to be abating in the back half, so I wouldn't anticipate it to be significantly different, but there will be an upward trend as the year progresses from a sequential basis.

Okay. And then just lastly, going back to the aerospace segment margin, it looks like the implied incremental in the guidance is kind of 35, maybe even a little higher. Um, you've done that before, but you know, sometimes it's not, not quite that robust. So, and Tom, I think you made a comment about getting to the 20 plus, you know, on a run rate basis, exiting 23, but it would seem like the, you know, to get to the guidance, you'd have to kind of be there exiting 22. So maybe you could just speak a little bit more to the, to the margin progression this year and, you know, how much of it's mixed versus cost out versus something else.

Yeah. Well, We definitely have a number of factors coming in. Mix plays in. The aftermarket's picking up, so that's a positive. We're going to get leverage on the volume that's coming through, so you're going to see that. As you can see, Mark highlighted that we do have a nice increase in margins anticipated in 22, and we anticipate to continue that improvement as we move forward into 23. I think we're tracking pretty well. I think that'll be pretty accurate. And, you know, I did put a 20-plus on that.

When do you think you achieve the 20-plus?

Well, that's what we said, you know, on a run rate basis, exiting 23. And we'll be making steady progress through 22 into 23 on all that.

Okay. Thanks so much.

Thank you.

Your next question is from Christopher Glenn of Oppenheimer. Your line is open.

Thanks. Curious, I had an OE question for the commercial OE markets. You know, look at the narrow bodies, the MAX and the NEO. Obviously, you've got really nice content, step-ups from prior cycle. I'm wondering with, you know, the supply chain stresses going way down and then way up, if you're seeing any

potential reallocation of awards that might accrue to your narrowbody shipsets even more you know we are talking to a variety of our customers where they're having problems with with other suppliers and you know can we you know help them out of those problems that And we're looking at those and we're working some. It does take a little time for, you know, those type of transitions to occur. But, you know, there is the possibility to add to our content.

Okay, thanks. Good luck. And just a housekeeping question. What are we thinking for corporate spend levels, the kind of unallocated expense for fiscal 22?

Yeah, it's in our normal range, 2.5%, 3% of sales, somewhere in there.

Okay, thanks, Mark.

Welcome.

Mr. Gendron, there are no further questions at this time. I will now turn the conference back to you.

Well, I appreciate everybody joining us today, and we always appreciate the questions. And just as a reminder, we're still planning March to have an Investor Day in person. We're getting more details out to everybody. I hope many of you can join us for that. Thanks, and I hope you all have a great holiday coming up. Good night.

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