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spk07: thank you for standing by welcome to the woodward inc second quarter fiscal year 2023 earnings call at this time i would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen-only mode following the presentation you are invited to participate in a question and answer session joining us today from the company are mr chip blankenship chairman and chief executive officer mr mark hartman chief financial officer and Mr. Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Mr. Provaznik. Please go ahead, sir.
spk11: Thank you, operator. We'd like to welcome all of you to Woodward's second quarter fiscal year 2023 earnings call. In today's call, Chip will comment on our strategies and related markets. Mark will then discuss our financial results as outlined in our earnings release. At the end of the 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 and on our website through May 15th, 2023. The phone call 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 trends in our business, drivers in each of our segments, our updated guidance, the expected and potential effects of the ongoing supply chain and labor disruptions, and net inflationary pressures. Those elements can, and do frequently change. Our forward-looking statements are subject to a number of risks and uncertainties surrounding those elements, including the risks we identify in our filings. In addition, Woodward is providing certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. 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, I will turn the call over to Chip to comment further on our results, strategies, and markets.
spk01: Thank you, Dan, and good afternoon, everyone. We delivered strong sales growth in the second quarter, driven by robust demand for Woodward products and services across our end markets. Notably, our industrial business had a strong quarter driven by a sharp increase in shipments. The ongoing industry-wide challenges, including supply chain and labor disruptions and inflation, continue to impact our results. However, we are encouraged by the progress we're seeing from our strategic investments, resource reallocation, and price realization initiatives. In our first quarter call, We announced streamlined aerospace and industrial organization structures designed to enhance the customer experience, simplify operations, and increase profitability through improved execution. Our primary focus has been on transforming the industrial segment where significant change is required to improve performance. I want to provide an update on the three main priorities that we outlined on our previous call. First was right-sizing the industrial business. We took the actions required to align our cost structure with current market conditions. You can see some of these impacts in the restructuring charges. Second was pricing. We are executing multiple work streams to capture prices that better reflect the value we deliver as well as offset significant inflation we have had to absorb from suppliers and our own wage rates. We are on track to achieve our 5% price realization target for fiscal year 2023. Third was product portfolio rationalization, where we have made progress, but there is still more work to do. To provide some context, so far we have eliminated 5% of the approximately 60,000 SKUs in the industrial segment. This is just one lever we are pulling to improve efficiency and expand available capacity, and the team did an excellent job executing this quarter while continuing to take care of customers. In addition, across Woodward, we made notable progress on our efforts to develop and retain talent. We are benefiting from a more stable workforce in the form of productivity improvements and increased production output as our members become more proficient in their roles. Our rapid response machining centers are coming online with contributions made to our second quarter output. We anticipate additional machines on the floor in May with contributions to output in June. We are also using capacity on existing machining centers to provide parts manufacturing support for both supplier bailout and permanent insourcing actions. While we have seen some improvement in supply-based performance, We are still very active managing and problem solving with suppliers as well as their sub tiers. We're taking ground together and holding it, but we are still subject to shortages and unrealized recovery plans. Short summary, Woodward and our suppliers are getting better, but we are not out of the woods yet. I would like to recognize the contributions of our Woodward team. Our newer members have come up steep learning curves, while our experienced members have been good coaches. Many experienced engineering, quality, and sourcing team members remain on temporary assignments to get us stabilized and on solid improvement paths. Thanks to our members for their efforts and results. Moving to our markets. In aerospace, utilization rates for the commercial airline fleet continue to rise driven by increasing global passenger traffic. U.S. and European domestic passenger traffic has returned to near 2019 levels. Domestic travel in China is also increasing as restrictions ease. In addition, international travel continues to improve. In defense, we anticipate near-term U.S. procurement to increase slightly as the full-year 2023 budget was approved at almost 10% higher than the previous year. In addition, rising geopolitical tensions may lead to increased international defense spending. In industrial, demand for power generation remains strong, driven by LNG growth and continued demand for backup power at data centers. In transportation, global marine remains healthy with increased ship utilization and normalizing freight rates. Cruise and ferry operations have recovered back to pre-COVID utilization rates, which should result in increased spare parts demand. Global marine interest in alternative fuels continues to increase, which should enhance OEM and aftermarket opportunities as multi-fuel engines contain greater woodwork content. In addition, limited demand for natural gas trucks in China emerged in second quarter, although future demand beyond third quarter remains unclear. For oil and gas, elevated commodity prices continue to drive higher equipment utilization, which should result in increased aftermarket demand. In summary, we believe our markets are strong, as heightened demand for signals indicate continued growth and opportunity for Woodward. We remain focused on improving operational execution across the company, developing and retaining talent, and innovation, all of which will position Woodward for long-term sustainable growth and enhanced value for shareholders. Before I turn the call over to Mark to review our quarterly results and fiscal year 2023 outlook, I want to thank Mark for his many outstanding achievements and contributions to Woodward over the last 16 years. We wish him all the best in his future endeavors.
spk16: Thank you, Chip. Net sales for the second quarter of fiscal 2023 were $718 million, an increase of 22%. Sales were impacted by approximately $14 million from unfavorable foreign currency exchange rates. Aerospace segment sales for the second quarter of fiscal 2023 were $437 million, an increase of 17%. Commercial OEM and aftermarket sales were up 30% and 28%, respectively, driven by continued recovery in both domestic and international passenger traffic and increasing aircraft utilization. Defense OEM sales were down 10% in the quarter, primarily due to lower sales of guided weapons. With the exception of guided weapons, defense OEM demand remained stable at elevated levels. Defense aftermarket sales increased 16%. Aerospace segment earnings for the second quarter of 2023 were $73 million, or 16.8% of segment sales, compared to $60 million, or 16.0% of segment sales. The increase in aerospace segment earnings was primarily a result of higher commercial OEM and aftermarket volume, as well as price realization, partially offset by inflation, higher manufacturing costs, and annual incentive compensation. Turning to industrial. Industrial segment sales for the second quarter of fiscal 2023 were $281 million, compared to $214 million, an increase of 31%. The increase was driven by volume increases across all markets. The sales increase was partially offset by the negative impact of foreign currency exchange rates of approximately $11 million in the quarter. Industrial segment earnings for the second quarter of 2023 were $38 million, or 13.4% of segment sales, compared to $17 million, or 8.1% of segment sales. Industrial segment earnings increased due to higher volume and favorable product mix, partially offset by inflation, higher manufacturing costs, and annual incentive compensation. Non-segment expenses were $58 million for the second quarter of 2023 compared to $15 million. Adjusted non-segment expenses were $23 million for the second quarter of fiscal 2023 compared to $17 million. Adjusted non-segment expenses for the second quarter excluded costs primarily related to specific charges for excess and obsolete inventory, product rationalization, and restructuring to optimize the cost structure. At the Woodward level, R&D for the second quarter of 2023 was $38 million, or 5.3% of sales, compared to $32 million, or 5.5% of sales. SG&A for the second quarter of 2023 was $76 million, compared to $44 million. The effective tax rate was 11.8% for the second quarter of 2023, compared to 11.4%. The adjusted effective tax rate for the second quarter of 2023 was 17.8% compared to 11.0%. Looking at cash flows. Net cash provided by operating activities for the first half of fiscal 2023 was $40 million compared to net cash provided by operating activities of $50 million. Capital expenditures were $44 million for the first half of 2023 compared to $24 million. Free cash flow was negative $4 million for the first half of fiscal 2023 compared to $26 million. Adjusted free cash flow was negative $1 million for the first half of fiscal 2023 compared to $27 million. The decrease in free cash flow was primarily related to increased capital expenditures. Leverage at the end of the second quarter was 2.2 times EBITDA, compared to 1.8 times EBITDA. During the first half of fiscal 2023, $51 million was returned to stockholders in the form of $25 million of dividends and $26 million of repurchase shares under a board authorized share repurchase program. Lastly, turning to our fiscal 2023 outlook. We continue to expect year over year improvement in the second half of fiscal 2023. Due to our better than expected results experienced in the second quarter, as well as anticipated lower income tax rate for the full year, we are raising certain aspects of our full year guidance. Total net sales for fiscal 2023 are now expected to be between $2.70 billion and $2.80 billion. Aerospace sales growth is unchanged at between 14 and 19%. Industrial sales growth is now expected to be between 14 and 19%. Aerospace segment earnings as a percent of segment net sales are still expected to increase by approximately 150 to 200 basis points. Industrial segment earnings as a percent of segment net sales are still expected to be flat compared to fiscal 2022. The adjusted effective tax rate is now expected to be approximately 16%. We still expect adjusted free cash flow to be between $200 million and $250 million, and capital expenditures to be approximately $80 million. Adjusted earnings per share is now expected to be between $3.50 and $3.75, based on approximately $61 million of fully diluted weighted average shares outstanding. This concludes our comments on the business and the results for the second quarter of 2023.
spk01: Thanks, Mark. Before we open the call for questions, I want to share that our Investor Day will be held in New York on December 7th, 2023. There will be more information to come, and we hope to see you there. Operator, we're now ready to open the call to questions.
spk07: Thank you, sir. The question and answer session will begin at this time. If you are using a speaker phone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your push button phone. Should you wish to withdraw your question, it is also star one. Your question will be taken in the order it is received. Please stand by for your first question, sir. And our first question comes from Rob Spingarn, Milius Research.
spk05: Good afternoon. Good afternoon, Rob. First, Mark, best wishes to you.
spk15: I appreciate that. Thank you, Rob. And, you know, Chip, I'm just going to focus at least to start here on industrial because I think we're all a bit surprised both at the sales strength and at the margins. So first on the sales, you talked about volume. What about price? If we take that sales growth, can we parse that out a little?
spk01: we're not really, we don't break out the price between the segments, but it was largely in line with the overall 5% mark.
spk15: I mean, you know, to what extent were you surprised by this? Because it just, again, in both in terms of sales and margins, it's just, it seems pretty strong.
spk01: Well, from the sales side, it's what we've been working on, you know, since, you know, since the challenges post-COVID on trying to achieve the customer demand. So, you know, every other conference call, you were kind of making the point that we're not making progress there, but it's starting to come through. The increase in output was really across the board at industrial. Our Woodward-La Ronge facilities are achieving top levels of shipments and our Fort Collins campus as well. came on strong this quarter. We've made a number of changes in leadership. We have a lot of new members here in Fort Collins anyway that are getting more proficient at either machining or assembly and test. And so all these activities across the board with the supply chain getting healthier are contributing to our ability to increase the output. As far as profitability goes, it's a story of product mix. So we've had a better aftermarket mix coming out of Woodward-La Ronge, and that's helped us along with China OH coming back. You know, not to the highest levels you've ever seen, but some healthy orders that dropped in and were convertible inside the quarter because we had inventory prepared.
spk15: Okay. And then just to close the loop on this, it seems just the way the guidance was adjusted here, That the second quarter is, we'll see some moderation in industrial in the back half of the year. In other words, you know, the sales growth tails off a little bit, the margins come back down. Is that fair? Was Q2 just, was it, you know, pent up shipments in addition to everything else you said?
spk01: As far as the – I think it's fair to say we expect the second half to moderate on profitability in industrial, but we do – we are seeing enough customer demand that if we can continue to have improvement in our supply chain as well as the output in our factories, we'll be able to deliver largely at these kinds of rates. Okay. Thanks so much. You bet.
spk07: Up next is Scott Deschaux, Credit Suisse.
spk13: Hey, good evening. Mark, can you say what China natural gas truck sales were in the quarter and how that compares to a year ago? Also, if you can give us a sense for how the China natural gas truck market is trending in 3Q so far, that would be very helpful. Thank you.
spk16: Yeah, so we don't break China natural gas out specifically. It did recover some from the very depressed levels that it has been at for the last year-plus timeframe. we don't have much visibility, I think as most of you know, we don't have much visibility in that market beyond really our Q3 at this point. And so that's what we're pausing on at this point. We don't really forecast continued improvement in China.
spk13: Are the natural gas price and diesel spreads basically the same now in that market as they were in Q2? Basically just trying to with the underlying driver if that's changed at all?
spk16: Yeah, I mean, they've been approaching the spread level that historically has produced opportunities to capture some of the on-highway heavy-duty truck demand that's out there from the end truck buyers. And so it's been in that ballpark that spread's been appropriate to potentially have that be some of the reason for the demand that's happened.
spk13: Okay, great. And then Chip, another question just on the initial provisioning sales into China. I think you've called that out as a potential upside driver in the past as they reactivate their max fleet. Has any of that come through in Q2 so far, or excuse me, in Q2, or is that still to come? Thank you.
spk01: We haven't seen any activity on that. You know, we're just, we're waiting to see how that develops like everybody else.
spk05: Great. Thank you, guys. Welcome to all of them.
spk07: We'll go to Pete Skibitsky, Alembic Global.
spk09: Hey, good afternoon, guys. Nice corner. Chip, I think Rob might have touched on this a little bit, but in terms of sales as core and industrial, was this more you were surprised by your ability to deliver as opposed to end market demand? Is that the right way to characterize it?
spk05: Well,
spk01: I would say we were pleased with our output versus surprised. We've been trying to get to these levels of flow in our factories for a few quarters now because the demand has been sustained and high. As far as that goes, we made progress each month. It wasn't a hockey stick kind of performance, so that gives us confidence that we are achieving a sustainable flow in our facilities. as long as we can keep working with our suppliers and making sure we have the right parts at the right time, we can keep achieving these kinds of levels because the demand is there, I can assure you that right now.
spk09: Okay, okay. So maybe a little of both, demand got better and your ability to supply the demand got better as well, is that fair?
spk01: Well, we've had the demand for a number of quarters now, but I'd say our ability to perform is what's improved. It's really largely what I've said before about our team members coming up to speed because maybe even half of our direct workforce has less than two years in the role. But, you know, every quarter they get more proficient at their roles, and that's really helping us to perform.
spk09: Okay. And just curious, I think last quarter you had about $60 million in revenue at Industrial that was still kind of – You categorize it as COVID disrupted revenue. Did you work down that $60 million kind of, you know, I don't know, disruption or backlog, however you want to call it?
spk01: We're making progress on past due commitments to customers. We're not really calling that out anymore because it got to be such a number that it doesn't really represent an in-period discontinuity. So we have plenty of backlog, which we're excited about, and we have past due commitments. backlog that we're trying to get current on. So all that's a function of our ability to increase output. And we made some really good progress on that this quarter.
spk09: Appreciate it. Last one for me, sorry to be a pest everyone on this, but Chip, just given the market in China and kind of the political situation, are you guys reaching the point that maybe, you know, you're not all that interested in the risk reward in China anymore on the LNG side?
spk01: It's a challenging market. I'll just say that right now. And we have our business, and we're going to run it as best we can. And that's all we have to say about that at this time.
spk05: Fair enough. Thanks, guys. You're welcome. Thank you. You're welcome.
spk07: Your next question comes from Sheila . Thank you, guys.
spk08: Good afternoon, Chip and Mark. And Mark, thank you for all the help over the years.
spk01: Hi, Sheila.
spk08: Hi. Chip, I want to talk about two things you mentioned in your prepared remarks. First, I guess, you know, on the line of questions, Pete just had the rationalization, the 5% of SKUs and industrial. Sort of what are the metrics that you use to rationalize products? And, you know, how do you think about, like, the portfolio overall?
spk01: So some of the, you know, key metrics we've used to as part of the rationalization is, you know, demand in terms of consistency of demand. Is there an alternative part that's a newer part? Where it is in its product lifecycle? Is it, you know, in the sunset period and there's an opportunity to replace that with a newer part at that customer? So all that sort of product lifecycle type of metrics are what we're using. well as profitability and so when you when you put all that together that's how we're making our decisions the biggest the biggest opportunity for us really is to move customers to parts that we have a better ability to supply to them at a lower cost to us and a better value to the customer and if we stop introducing these discontinuities into our factory and our supply base we can achieve more with our capacity
spk08: Okay, great. And then maybe just switching gears, whether it's in Arrow or in an industrial, you know, when you think about improving your labor pool, you mentioned you're seeing some improvement in the process. Where are you in terms of your improvement, and when do you expect to be normalized, whether that's 2019 levels or for current, you know, capacity outlooks that you have?
spk01: So, you know, we've been forecasting sort of getting to that place here you're talking about in terms of being at a level of proficiency and capability that we're targeting on a go-forward basis by the end of this fiscal year. And so I feel like we're on track for that with our team. We're seeing the supply base improve as well. But like I said, the prepared marks, we're not out of the woods yet. We graduate some suppliers from the escalated you know, watch list, but we add some to it as well. We graduated more this quarter than we added, so that's a good sign. But, you know, we're forecasting fighting through this, you know, probably the rest of this calendar year at least.
spk08: Okay, great. Thank you.
spk01: You're welcome.
spk07: Next, we'll go to Christopher Glenn Oppenheimer.
spk10: Thanks. Good afternoon. I wanted to go back to the industrial margin outlook. So, you know, in the back half, it implies about flat year over year for the back half. While, you know, you're making a lot of changes and improvements and certainly some evidence in the second quarter. So just wondering what's masking that read through?
spk01: Well, we don't want to get ahead of ourselves, Chris, in terms of our capability to deliver. The mix was what it was in second quarter from a profitability standpoint. And first quarter, we were short on profitability. So we want to have a balanced view on the second half. We're doing everything we can to make it better than planned. and if it flows through in a way that we get a favorable mix and we achieve the price levels that we want and we get the productivity then you know it could be better but right now we're we're sticking with that forecast because uh there's a lot of ground to cover between now and then okay understood and um relative to the five percent uh sku reduction um any way to kind of ballpark or
spk10: benchmark, what the ultimate target is, what range of SKU reduction you might have in mind?
spk01: Well, there really isn't because the number isn't necessarily the goal. We're trying to set up our ability to serve customers with the most profitable mix that we can supply so that our customers are happy and our shareholders are happy at the same time. That's what we're driving forward towards. And I just wanted to give those numbers, not necessarily as a tracker, but just to have everyone understand the size of the effort that is involved here, because it is substantial. I think we've got a ways to go, but I wouldn't put a number on it because that's not really the goal.
spk10: Okay. And then just switching to defense, you know, Are you seeing actual RFPs or inquiries or foreground shaping up for an international demand renaissance? And maybe remind us what proportion you serve internationally.
spk01: Well, as far as new business goes, we haven't really seen much along those lines. We've seen one or two RFIs, but nothing that we could really point towards a change in demand levels associated with that. That's more of a sort of looking at the environment and saying that something might develop there. That's what those remarks were about. So we haven't really seen that turn into any specific programmatic demand.
spk16: And related to how much is international related, a lot of our sales do go through uh you know through the dod directly so we don't always have a specific number on that as it relates just knowing that some of our sales to the us government you know do end up with our foreign military partners got it thanks for the answers welcome your next question comes from david strauss barclays thanks good afternoon and uh mark thanks for
spk12: Yeah, and Mark, thanks for all your help and best of luck. Back on the defense side, I mean, the defense drawdown that we're still seeing on the OE side, is this still JDAM? And if so, how much more downside is there to JDAM?
spk16: Yeah, so the softness on the defense side is still the guided weapon programs. There is still some softening based on the orders that we've seen you know from the DOD if you will on that now the upside always there is there if there are foreign military partners that put some orders in but as chip was just mentioning we haven't seen anything on that front so there is still some softening there that we'll see going forward okay
spk12: The non-recurring items you called on the quarter, access inventory, restructuring and so on, I assume most of this is related to the industrial business. Is that correct? And should we expect to see more of these non-recurring items as you go through kind of the rationalization there?
spk16: Yeah. So on the, you know, obviously there was a few different ones on there, you know, the rationalization piece of it was mainly on the industrial side, as Chip mentioned, with the number of SKUs that we're looking at there. There were some other items that went across the whole business from that perspective. The restructuring charge was another one that was primarily on the industrial side of the business. We call those out. We consider them discrete and just trying to give a flavor for operationally what happened in the quarter. And so that's why we called those out specifically. Going forward, we would continue to call out anything that may come up. But obviously, in the quarter, we had a lot of adjustments, a lot of items in this quarter that we would not anticipate that would be occurring again.
spk12: Okay. And last one, I guess, again, for you, Mark. I mean, I was a little surprised, given the sales growth in the quarter, we didn't see more of an inventory drawdown. When would you expect us to start seeing the inventory balance come down?
spk16: Yeah, so as the year progresses, and this is what we even called out even last quarter, that this was going to be a second half improvement story. I think we even talked about in the last quarter that we didn't anticipate a significant inventory working capital improvement in the second quarter. We do anticipate as part of our $200 to $250 million guide on free cash flow that we will have working capital improvement, including a decrease in inventory. And so that's what we always expected the year. And I would say that we're on track with our expectations.
spk12: All right. Thanks very much. Welcome.
spk07: We'll now hear from Gautam Khanna, Cowen.
spk05: Hey, good afternoon, guys.
spk12: Good afternoon.
spk14: And we'll miss you, Mark. It's been great working with you. Best of luck.
spk16: Thank you. Appreciate that.
spk14: Of course. So I was wondering, I don't know if you said this, but do you guys have any past dues at this point? You've quantified that level in the past couple quarters by segment. Do you guys have that?
spk01: We do have quite a bit of past due, and we just don't think it's that helpful to quantify that going forward because The past due isn't what's impacting our quarter sales, so we are burning that down. We do forecast to make improvements significantly on that in the second half. But as we go forward through the year, we've been continually impressed with the demand that the customers are placing upon us. So as we improve our output, we continue to to pile up some past dues in the backlog. Like I said, we don't anticipate quantifying that going forward.
spk14: Okay. This is always a tricky one for us. The non-segment for the year, what do you anticipate that's going to be? What's implied in the guidance?
spk16: Recently, we've been three, three and a half percent range is kind of what's implied in the guidance. Okay. Of sales.
spk14: Of sales. Thank you. I appreciate it. And just on the portfolio review within industrial, is it pretty much limited to SKUs or is it SKU rationalization or are there entire markets you're reconsidering participating in?
spk01: At this time, Gautam, it's really just looking at the products and doing good old-fashioned product management, product lifecycle. Is this early in its adoption phase? Is it at its peak? Is it on a sunset path? How should we treat it in the marketplace? How should we price it? Is there a product that comes behind it that offers more value to the customer that we can sell and get behind in a way? In terms of running our supply chain and our factories, you've got those runners, repeaters, strangers, and aliens in terms of how often do you see this come through the factory, and should we be thinking about planning differently or eliminating some of our strangers and aliens, as we say in the supply chain world, and having our operations be more efficient. There's a lot of hidden costs and a lot of hidden capacity tied up in running some of those through assembly lines. So it's really more about that than getting out of markets.
spk14: Okay. And just last one, Chip. One of the things I'm curious about is on the leap after market, you know, CFM talks about a 60% attach rate on OEM service contracts, power by the hour, which is about 2X what they did on the CFM. Does that have any different economics? economic implications for Woodward? Is GE now just a, is CFM a bigger customer on these aftermarket sales than it was in the past? And does that matter? I'm just curious how we should think about that OEM.
spk01: The short answer for us about how we think about it is no. I mean, there may be some subtleties in there, but frankly, we see the we see the units come in from the same types of overhaul shops, and that's where things happen at the transaction basis for us. So we wouldn't really know the difference, I don't think, and we wouldn't treat it differently ourselves.
spk05: The pricing would be similar in either case, in other words. Yes. Thanks, guys. You're welcome.
spk07: Up next, we'll hear from Michael Charmoly, Truist Securities.
spk03: Hey, good evening, guys. Nice quarter. Thanks for taking the questions. Thank you. Mark, best wishes going forward. Thank you. It's been a pleasure. I guess just one question on industrial. Did the industrial backlog grow in the quarter? I mean, based on everything you're seeing, it sounds like orders continue to be robust. And even though there's lots of chatter of recession, it seems like you guys aren't seeing that. Just any color on the backlog there?
spk01: Yeah, we are not seeing the R word. We saw our backlog grow in spite of our record deliveries out of some of our plants.
spk03: And then just shifting gears, aerospace, the aero margins, pretty impressive this quarter, I think, multi-quarter high. Was there any benefit there? I think you kind of mentioned maybe last quarter or the quarter before that there was going to be some skew rationalization in aero. Any color you could provide on maybe benefits there, or was it just mixed and volume that drove the margins?
spk01: For Arrow, the margin improvement is largely getting the volume back, getting productivity with the learning curve of our newer members, some price at the target we're trying to achieve this year, and that price improvement and cost improvement delivered the margin improvement. Really no rationalization going on in the aerospace segment to speak of at this time.
spk03: Got it. uh last one uh just in terms of oem production rates can you give us any maybe color in terms of underlying assumptions you know what's in the guidance in in terms of build rates by specific platform you know what are you thinking in terms of leap are you specifically aligned with with ge and saffron right now on the narrow bodies or or anything you tell us there
spk01: Well, I think I, you know, I like to say that we're somewhat removed from the, you know, published build rates that the air framers announce and support. You know, we're, depending on where we are in the tier, we're closer to it, obviously, on the engine components that we provide. We are right in line with the demand from GE and SAPRA on the CFM side. and Pratt & Whitney on the pure power side. So we just, they supply us the demand and we do our very best to ship on time. Got it.
spk03: All right, perfect. Thanks, guys.
spk01: You're welcome.
spk07: We'll go to Scott DeShow, Credit Suisse.
spk13: Hey, thanks for taking my follow-up. Chip, my understanding is that part of what's constraining profitability in aerospace is the long-term agreements on the defense side. which it sounds like in many cases don't really have any inflationary protection on them. So I guess my question is, are we at a point where you're getting some of those contracts are in price now, but you still have cost increases? So defense profitability is kind of stable from here, or are you at an inflection point up or down that we should be aware of? Just trying to think about defense profitability and how it trends in the year term and medium term.
spk01: I think from a defense standpoint, you should stick with the idea that that's stable. I was referring to price actions on the commercial side.
spk05: Okay.
spk13: And then any preview for what's going to be the focus at the investor day?
spk05: A preview.
spk01: It's a little early for the preview. We're looking to deliver on the second half, and let's call that the preview.
spk05: All right. Fair enough. Thanks, guys. Yep. You're welcome.
spk07: Next, we'll hear from Noah Poponek, Goldman Sachs.
spk05: Hey, guys. Thanks.
spk06: Thank you for the time. How much of the adjustments between the The gap earnings and the non-gap earnings are cash. And which of those do you expect to occur again in the back half, if at all?
spk16: Yeah, we had a minor difference between, I'll call it reported free cash flow and adjusted free cash flow. It was $3 million or so. So in the quarter, there was not much significance in cash. Going forward, there'll be some difference, mainly related to some of the restructuring charge. But, you know, it isn't a sizable number.
spk05: Got it.
spk06: And Mark, to get to the full year, you know, the back half is obviously pretty strong. You have that historical seasonality to some degree. Maybe can you just talk for a minute about the visibility into that and how much of that is working capital release?
spk16: Yeah, so if you look at the back half, you know, compared to the front half, obviously there's an earnings component and an earnings improvement component for the second half. And then the rest will be a working capital improvement, which includes, as I was speaking earlier on the call, the improvement on the inventory side. So there's, you know, there's opportunity on the working capital side also as part of that 200 to 250 million guide that we gave. Okay.
spk06: Chip, when you were speaking about the industrial revenue performance and kind of where it goes from here, I think you stated if supply chain improvements and the operational improvements you've made keep up, that you could keep running at these levels. The industrial quarterly revenue has kind of been low 200 million for a while. It's a pretty significant step up to the 281. The guidance implies that steps down sequentially 3Q, 4Q. But I guess I just want to make sure if I take what you said literally, is it in your scenario analysis that industrial works higher sequentially off of what you just posted for the second quarter?
spk01: No, I didn't mean sequentially higher. And really the other variable that I perhaps left off was the China on highway is quite lumpy and we don't foresee much demand in the second half. There's a little bit in 3Q, so taking that out would bring the top line down a little bit. But from the baseline products in industrial coming out of our Colorado facilities and Woodward-La Ronge, we foresee the ability to deliver like we delivered in March.
spk06: Okay, great. That helps me better understand that.
spk05: Okay. Thank you so much. Great. Appreciate it. Thank you. You're welcome.
spk07: Your next question is Louis Raffetto, Wolf Research.
spk02: Hey, good evening, Mark. Best of luck to you as well.
spk04: Thank you.
spk02: Maybe if I just go back to the last question. Can we attribute some of the margin strength in the quarter to the China natural gas? And that's kind of what the POP which drove the pop, and then given that you don't necessarily see a lot of it in the back half, or you're not going to guide to it in the back half, that that's what's going to bring those margins, I guess, back down.
spk01: Yeah, Louis, I'd attribute it to two things, the China OH as well as the aftermarket product mix coming out of Woodward-La Ronge and to some extent Colorado, but mostly from our German plants. So it was the combination of
spk02: that aftermarket mix and the china oh that made the quarter uh better than predicted okay great and then maybe just to stick with industrial do you happen to have the segment uh growth between machinery and uh it can be injured i'm sorry i'm sorry i couldn't understand the last few words oh sorry just the the growth the growth of uh reciprocating engines and industrial turbine machinery in the quarter, so the underlying businesses of industrial?
spk16: Yeah, they both grew very strong in the quarter. Recip Engines was up over 30 percent, and turbine machinery is up over 25 percent.
spk02: Great. So another real good quarter there. And then just one more, the interest rate guide or interest guide, is it still sort of plus 10 million year-over-year, or any change there?
spk05: That's accurate.
spk02: All right, great.
spk05: Thank you very much. You're welcome.
spk07: You're welcome. Next is a follow-up from Pete Skibitsky, Olympic Global.
spk09: Yeah, thanks, guys. Just one follow-up. Industrial does have a lot of sort of short-cycle, economically sensitive businesses, or at least some proportion of it. I was wondering if you could characterize kind of what you're seeing in these short-cycle businesses Are you seeing any kind of global economic weakness, or are things fairly steady-state demand-wise for you?
spk01: It's pretty steady-state demand-wise. We're looking really hard at that because we kind of are poking at the same thing you're hinting at there, that that should be our canary. That should let us know that, you know, hey, challenging times are coming, but we don't see any let-up on the demand right now from the short or the longer term.
spk04: cycle part of our industrial customer base yep okay appreciate it thank you welcome reminder everyone that it is star one if you have a question today we'll go to tony bancroft cabelli funds thanks for taking my question uh jen's chip and team congratulations on the quarter mark uh fair winds thanks for all your support and hard work um looking out for uh farther Yeah, look how far they are. Woodward, they did look at, I realize it's a different team, but Woodward looked at a merger a few years ago. Now that your markets are looking pretty healthy, you guys got good aftermarket position. You've got good positions everywhere overall in aerospace and defense. Where do you see yourself in the next five years? Has anything changed your longer term strategic plan to be the leader in energy conversion, decarbonization, you know, now that wide bodies, you know, are looking more favorable. Does Excel still make sense? Is that a possibility? Could you just give me maybe any kind of update or change?
spk01: Well, no update to announce at this time. You know, you can tune in on Investor Day for how we see the longer-term future, but I would say we're focused on, you know, fulfilling our mission as the Woodward
spk07: uh uh company right now that's that's where we're focused got it thanks so much and Mr. Provost Nick there are no further questions at this time I will now hand the conference back to you thanks operator we want to thank everyone for joining today's call and we look forward to continuing our conversations ladies and gentlemen that concludes our conference call today If you would like to listen to an audio replay of this conference call, it will be available today at 7.30 p.m. Eastern Time. The telephone number to access the replay is 1-800-770-2030 or 1-647-362-9199. Reference access code 427-8216. It will also be available at the company's website, www.woodward.com, for 14 days. We thank you for your participation on today's conference call and ask that you please disconnect
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