Q4 2019 Earnings Call
Thank you for standing by and welcome to the whatever Inc. fourth quarter in fiscal year 2019 earnings call. At this time I would like to inform you that this call is being recorded for rebroadcast and all participants are in listen only mode.
Following the presentation, you'll be invited to participate in a question and answer session join us today.
The company Mr., Tom Gendron, Chairman and Chief Executive Officer, Mr., Jack Thayer Vice Chairman.
Corporate operations, and Chief Financial Officer, Mr., Bob Weber, Vice Chairman and Mr., Don 'cause Auto Vice President of Investor Relations and Treasurer I would now let's turn the call over to Mr. Bazardo, Sir you may begin.
Thank you operator, we'd like to walk them, all but your two Woodward fourth quarter in fiscal year 2019 earnings call.
In today's call Tom will comment on our markets and related strategies, and then Jack will discuss our financial results as outlined in our earnings release.
At the end of our presentation that we will take questions for those who have not seen today's earnings release, you can find it on our website at <unk> Dot com, we having 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 2nd 2019.
No but for the audio replay is on the press release announcing the school as well as on our website and will be repeated by the operator at the end 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 in assumptions for the global economy, and our business is more specifically those elements can and do frequently change. Please consider our comments in light of the risks.
And uncertainties surrounding those elements, including the risk we identified in our filings.
Woodward adopted the FASB accounting standards update number 2014 dashed there were nine revenue for contracts with customers War, yes, see six or six effective October one 2018, accordingly results for the fourth quarter and fiscal year 2019, including adjusted inorganic amounts are presented Andre agassi six or six.
Prior period amounts are presented under prior accounting guidance for revenue.
Better understand the impacts of AMC six was six on Woodward. We have included additional materials in our press release the presentation for this call and the annual report on Form 10-K to be filed on or before November 29 2018.
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 information will help in understanding our results.
Now turning to our results for the fourth quarter.
Sales for the fourth quarter fiscal 2019 were $737 million.
Compared to $719 billion for the prior year quarter, an increase of 2% net earnings were $67 million or one dollar tree centsper share compared to $75 million or $1.16 cents per share for the prior year quarter.
Adjusted net earnings were $79 million or dollar 22 per share compared to adjusted net earnings of $39 million or dollarsthirty nine per share for the prior year quarter.
And for the full year net sales were 2.9 billion.
Fair to 2.33 billion for the prior year, an increase of 25%.
Good luck net sales were up $345 million or 16% year over year.
Net earnings were $260 million or $4.02 per share compared to $180 million were $2.82 per share for the prior year.
Adjusted net earnings were $314 million were $4, an 88 cents per share compared to adjusted net earnings of $246 million or $3, an 85 cents per share for the prior year.
Net cash generated from operating activities for fiscal 2018 was $391 million compared to $299 billion for the prior year.
Free cash flow was $292 million compared to $172 million for 2018.
Now I will turn the call over to Tom to comment further on our results strategies and Mark.
Thank you Don and good afternoon, everyone.
Fiscal year 2019 was another strong year for Woodward, we continue driving solid sales earnings and cash flow growth despite facing headwinds from the 737, Max grounded in customer challenges with present, our renewables business.
In terms of highlights our aerospace business continued to perform very well and both commercial and defense markets.
Industrial business also improved due to the addition of Woodward Raj as well as the returns or get to growth of our organic industrial business, which was partially offset by headwinds from our renewables business.
Now moving to our markets more detail commercial aerospace increasing global wealth in a desire for air travel continues to drive strong demand for more fuel efficient aircraft.
The impact to water to the 737, Max grounding on our fiscal year 2019 was minimal from an OEM perspective, but we did see a more significant effect on initial provisioning cells.
Well the aircraft returned to service, we would expect to recover the initial provisioning that was delayed due to the grounded.
Legacy commercial aftermarket continues to benefit from high aircraft utilization.
Solid global passenger traffic growth and a high volume of engine shop visits.
And defense.
Well budgets and spending remains favorable driving demand for fixed wing aircraft rotorcraft and guided weapons.
Military aftermarket is robust and supported the U.S. defense initiative to improve the combat readiness of the U.S. fleet.
Well as global aircraft upgrade programs.
Turning to our industrial markets in power generation, we continue to see stabilization within industrial gas turbine market and our content wins, a new turban programs are providing some lift as well.
The launch of the Mitsubishi Jay class heavy frame combined cycle turban represents a new program for Woodward and highlights our share gains and expanded content in the space.
As we look forward, we remain confident in the long term global fundamentals of natural gas power generation as well as our ability to drive share gains as we see continued recovery in the two or Turbomachinery market.
Our renewables business remains uncertain in part due to the ongoing bankruptcy proceedings of our customers Sylvia.
In September .
Thats, Good Mesa announced an agreement to acquire partisan beyond we continue to closely monitor the situation.
Cypriot platforms remain an important source of aftermarket revenues for us.
This has been a challenging market and we are in the process of determining appropriate actions.
The transportation consistent with our expectations production of natural gas trucks was softer in the fourth quarter as a market absorbed the large prebuy, China five compliant trucks and our third quarter ahead of China six regulations that were implemented in July .
We started to see a strong recovery in China six compliant truck sales at the end of September and expect this positive trend to continue into the fiscal year.
China's rigorous enforcement of the new regulations, including the restriction of diesel from certain cities is promoting the rapid transition to the new engines.
We're also seeing natural gas engines secure a growing share of the on highway market with current share rise into approximately 20%.
In addition to volumes recovery, we have a higher system content on this on the China six compliant engines.
And Marine we had very strong year 2019, mainly driven by aftermarket sales, we expect to strengthen aftermarket to continue into fiscal year 20, as robust ship utilization rates drive the need for replacement parts and service.
Oil and gas markets are pressured due to global economic uncertainty access to capital oil price fluctuations and weaker demand.
Our products are prevalent in the entire value stream at the wellhead as well as downstream applications, such as pipelines processing plants and import export terminals, where we have a large installed base that drives aftermarket activity.
As the global economy has slowed utilization expansion of these facilities has also slowed.
In summary, we delivered strong results in 2019, which included robust revenue and earnings growth significant free cash flow generation.
Leveraging of the balance sheet.
The addition of new members to accelerate our true North operational excellence journey and good execution on new platform wins, which all translated into strong shareholder returns.
Looking ahead to 2020, we anticipate continued growth and our aerospace business as a 737 Max returns to service.
This is expected to remain strong at both OEM and aftermarket in commercial aftermarket is expected to remain solid.
And our industrial business, we expect improved profitability in 2020, despite modest flat revenue growth.
We see improving gas turbine market dynamics, and accelerating natural gas trucks sales in Asia, which will be partially offset by slowing economic growth.
Try to try to trade headwinds softening oil and gas investments.
We are up we're optimistic about our ability to deliver another record year in 2020 and remain focused on driving long term shareholder value through delivering on our financial targets.
In particular, we expect a significant increase in free cash flow again, delivering greater than 100% conversion rate.
After significant period of investments to support New program wins in aerospace and industrial we're entering a period of lower capital expenditures and higher earnings growth, which positions woodward's that deliver significant free cash flow for the foreseeable future.
Now before turning the call over I want to thank Bob whoever will be retiring the January for his dedication invaluable contributions during his more than 14 year tenure at Woodward.
It's been a tremendous asset to our company and has delivered.
Exceptional value to our shareholders over his career he has been a tremendous partner and front to me. We're excited for him as enters this next phase of is like.
Probably which Patti and you all the best.
I'd like to that once again welcome Jack as our new CFO and now I'll turn the call over 10 discuss further financials.
Thank you Tom Aerospace segment net sales for the fourth quarter fiscal 2019 were $506 million compared to $461 million for the fourth quarter, a year ago, but 10% increase aerospace segment sales benefited from strength in defense, OEM and aftermarket as well as commercial OEM.
Commercial aftermarket sales were up 9% in the fourth quarter of 2019 as compared to the prior year quarter.
As anticipated initial provisioning was softer in the quarter due to the grounding of the Boeing 737 Max.
Defense sales growth in the quarter was primarily driven by smart weapons fixed wing aircraft, an aftermarket, which we anticipate will continue to benefit from increased military spending.
Aerospace segment earnings for the fourth quarter of 2019 were $111 million or 22% of segment sales compared to $105 million were 22.7% of segment sales for the fourth quarter of 2018.
Segment earnings were positively impacted by higher sales volumes.
Partially offset by increased capacity expansion costs.
For fiscal year 2019, Aerospace segment net sales were $1.88 billion compared to $1.56 billion for the prior year, a 21% increase in 2019 commercial OEM sales grew 15% commercial aftermarket sales were up 18%.
Defense OEM sales increased 33% and defense aftermarket sales grew 22% all as compared to 2018.
Arab Aerospace segment earnings for fiscal year, 2019 were $389 million or 20.7% of segment sales compared to $309 million or 19.8% of segment sales for the prior year.
Turning to industrial.
Industrial segment net sales for the fourth quarter fiscal 2019 were $231 million compared to $258 million in the prior year period, a decrease of 11%.
Industrial segment sales declined primarily due to the reduced demand for natural grass gas trucks in Asia, resulting from the large prebuy in previous quarters of China. Five compliant trucks ahead of the implementation of China, six emissions regulations as well as the impacts to sales of the semi on bankruptcy.
Industrial segment earnings for the fourth quarter of 2019 were $11 million or 4.8% of segment sales compared to $8 million or 3.3% of segment sales for the fourth quarter of 2018.
Adjusted Industrial segment earnings were also $11 million and 4.8% of segment sales for the fourth quarter of 2019 compared to $35 million or 13.4% of segment sales for the fourth quarter 2018.
The decline in adjusted Industrial segment earnings was mainly due to lower sales volumes higher manufacturing costs and an engine product warranty expense.
In the fourth quarter of 2019, we recorded a pretax charge of $13 million to write off assets related to the some young bankruptcy.
These charges were recorded in non segment and excluded from adjusted results as we mentioned last quarter, while the loss of this customer would have a substantial impact on our renewables business. It is not material to Woodward as a whole on a prospective basis. We expect to continue to have aftermarket sales and support of the installed base and beyond wind turbine fleet.
For fiscal 2000 fiscal year 2019, industrial segment net sales were $1.02 billion compared to $768 million for the prior year.
A 33% increase.
Organic industrial segment net sales for fiscal year, 2019 were $688 million compared to $665 million for the prior year, a 3% increase.
Foreign currency exchange rates had an unfavorable impact on segment net sales of approximately 20 with $21 million for 2019 and no significant impact on segment earnings on a constant currency basis organic sales would have increased approximately 7%.
Industrial segment earnings for fiscal year, 2019 were $94 million or 9.2% of segment sales compared to $50 million or 6.5% of segment sales for the prior year.
Adjusted Industrial segment earnings for fiscal year, 2019 were $115 million were 11.2% of segment sales compared to $84 million or 11% of segment sales for the prior year.
As Tom highlighted 2019 was a particularly challenging year for renewables business.
Adjusted Industrial segment earnings excluding the renewable power systems business for 2019 were $127 million or 13.3% of industrial segment net sales, excluding the renewable power systems business compared to $81 million or 12% of industrial segment net.
Sales, excluding the renewable power systems business in the prior year.
We are exploring other means of improving industrial profitability, we will leverage our truenorth process. In addition to reviewing other opportunities for improvement. This long term efforts should enable 16% or better sustainable industrial margins.
At the Woodward level, selling general and administrative expenses were $51 million for the fourth quarter of 2019 compared to $53 million for the fourth quarter of last year.
For fiscal year, 2019, SGN expenses were $211 million compared to $194 million last year. The increase in SGN expenses for the full year was primarily due to the addition of Woodward launch and an asset impairment charge related to the same beyond bankruptcy.
R&D spending for the full year 2019 was largely in line with our expectations at approximately 5% of sales.
The effective tax rate for the fourth quarter, 2019 was 12.8% compared to 5.7% in the fourth quarter of 2018.
The adjusted effective tax rate was 15.5% for the quarter compared to 18.9% for the fourth quarter of 2018.
For the fiscal year 2019, the effective tax rate was 19% compared to 17.9% for the same period of the prior year.
The adjusted effective tax rate for the full year was 17.5% compared to 16.8% for 2018.
Looking at cash flows net cash generated by operating activities for fiscal year, 2019 was $391 million compared to $299 million for the prior year.
Capital expenditures were $99 million for 2019 compared to $127 million for the prior year.
For fiscal year 2020, we anticipate capital expenditures to be approximately $80 million.
Free cash flow for 2019 was $292 million compared to $172 million in the prior year free cash flow for 2019 was positively impacted by increased earnings and moderating capital expenditures.
During the fiscal year 2019, $150 million was returned to stockholders in the form of $40 million of dividends and $110 million of repurchase shares.
Lastly, turning to our fiscal 2020 outlook.
I will net sales are expected to be between $3 billion and $3.1 billion aerospace sales are anticipated to be up approximately 6% compared to the prior year, while assay six so six favourably impacted aerospace sales growth in fiscal year 2019, and is expected to have an unfavorable impact on sales growth in fiscal year.
2020, due to the timing of sales orders and inventory levels.
With regard to the assumptions for the Boeing 737, Max and our 2020 projections. We are estimating a return to service in the second quarter of our fiscal year with production rates ramping in line with the Boeing build rates communicated at the end of September .
We assume initial provisioning will not ramp up until the second half of the fiscal year. As a result, we anticipate a year over year headwind to commercial aftermarket in the first half of the fiscal year and a tailwinds in the second half.
Industrial sales growth is expected to be flat to up in the low single digits compared to the prior year, we expect strong natural gas truck sales in Asia, and an improving turbine market outlook to be somewhat offset by softening and our oil and gas markets as a result of economic uncertainty and reduce spending on equipment.
Aerospace segment earnings as a percent of that sales are expected to be approximately 21% and industrial segment earnings as a percent of net sales are expected to be approximately 14%.
The effective tax rate for the year is expected to be approximately 22%.
Earnings per share are expected to be between $5.30 and $5 in 60 cents per share based on approximately 64 million of fully diluted weighted average shares outstanding.
The higher projected effective tax rate for 2020 represents an approximately 37 headwind to earnings per share.
Earnings before taxes are expected to grow in the mid to high teens range as compared to 2019.
For 2020, we anticipate free cash flow to be approximately 40 $400 million inline with our long term target of 100% or better free cash flow conversion.
As you can see we're expecting another strong year for Woodward as both our aerospace industrial segments continue to improve operating performance, resulting in double digit earnings growth and substantial free cash flow acceleration.
Before turning the call back over I'd like to remind everyone that historically, our fiscal first quarter is sequentially lower due to normal business trends and fewer working days as a result of the holiday schedule and plant shutdowns for 2020, we anticipate this similar pattern.
This concludes our comments on the business and results for the fiscal year and fourth quarter 2019.
Operator, we're now ready to open the call to questions. Thank you Sir.
The question answer session will begin at this time, if you are using the speakerphone. Please pick up the handset before pricing any numbers should you have a question. Please press star one on you push button well should you wish to withdraw your question. Please press the pound.
Your question will be taken and in the order. It is received please stand standby for your first question.
And our first question is going to come from seamless.
Hi, Atlanta with Jefferies. Your line is now open.
Good afternoon, everyone, Congratulations Bob and Jack.
Thank you. Thank you I guess the first question for you.
Industrial earnings.
You had some onetime items in there how do you think about you know your guidance for 2020, and I think you talked about a 16% target you're holding to that long term just the puts and takes them.
What are the options for the renewal, but does not from here.
Right. So she'll as as you will note from our from our.
Prepared remarks, we're expecting margins of about 14% in that business versus the 11 two in 2019.
And of that improvement, we'd expect about half to be related to the renewables business. The other half to be true north improvements that will make to our operations.
This really gets us back to the margins that we were experiencing in the first half of 2019.
So absent these.
Headwinds related to some beyond and some of the other issues were really getting back to where we'd expect to the business to be longer term and than we see.
As Tom mentioned, we are accelerating our true north journey.
And that's where we really expect the longer term improvement to 16% margins.
And did you quantify the engine product warranty expense.
For the quarter.
We did not but but it is a relatively speaking onetime item and we wouldn't expect to Turkey.
Okay, and then Tom.
You have your guiding towards I think 33% free cash flow growth, a big number out there with 400 million.
Versus low double digit EPS growth. So very good I guess, how do you think about what you do what we're all that with all that cash as you mentioned, you're coming off major capex that that investment periods like how do you think about cash to clean up from here.
Yes first thing is we've we've got a commitment is returning 50% of net income to shareholders. So that'll be the first.
Use of the cash then we'd be looking at both.
Organic growth and then potential inorganic growth.
If we see things that make sense and that can deliver.
In excess of our cost of capital so.
We probably lean more towards the growth side, but if we don't have the growth opportunities Sheila we're going to return more shareholders.
Great. Thank you.
Thanks, Sheila thank you.
And our next question comes from Pete Skibitski from Elbit local.
Please state your question.
Hi, guys have yeah Bob.
Good luck, it's my pleasure.
Thank you.
Let me just getting back to the to the industrial margins and the engine issue. If we exclude the warranty expense did you still come in below your expectations and if so I just want to understand what the biggest surprise was for you guys. If it was kind of oil and gas or something else.
Yes, well, we definitely saw oil and gas drop.
We did see some we highlighted headwinds.
China, both from trade, but also from the pre buy on China.
Fibers, China six natural gas engines, and then we had said to be on issues and renewables and then we had the weren't so that combined headwind.
Did hit us in the fourth quarter.
Going forward.
We see China picking back up the trade war still uncertain in our minds, but that's kind of six.
The kind of six sales are growing nicely right now.
We think we got the renewables under control and as Jack already said the warranty was onetime thing that we won't see again in 2020 so.
It gives us confidence to get back on that 14%.
Earnings on our path to 16.
Okay, and Tom just one follow up just given the importance of wind right now.
Can you level. So thats what were when what was when revenue in fiscal 19, and I'm just trying to get down again in fiscal 2000.
Now, we actually expecting when sales.
To move up.
And.
2019, 20% 2020, 2019, we had a loss and basically going to be breakeven in that business in 2020.
Okay. Thank you will drag it's a drag on the overall industrial.
Got it thanks guys.
Thank you.
And our next question comes from Chris how from Barrington Research.
Please stay good afternoon.
Good afternoon, Tom Jack carbon Don.
Bigger system, just a few questions.
Going off with some of your comments.
In regard to these strong.
Aftermarket that you're seeing the strong growth there.
As we think about.
The delay or the pushing the timing of the initial provisioning revenues related to the 737, Max how should we look at the mix of aftermarket as we move into 2020 and do you anticipate recapturing.
All of the initial provisioning in 2020 or will some push.
For the following year, Yeah, well I'll just set last one first is.
None of the initial provisioning in our view is lost its delayed.
And how fast we gain that will really depend on how fast the aircraft are turned back into service in which operators in which order so its little uncertain, but I would say.
220 20 in early 2021, we should gain back that initial provisioning so.
We have to wait and see how Boeing returns aircraft to get a firmer handle on that.
The remaining what we call legacy.
Commercial aircraft.
Is actually very robust shop visits are high.
The the MRO activity is strong.
And all the market dynamics.
Point to continued strength in that market. So that's again and then the defense as we highlighted.
The defense budgets and the need to get.
Aircraft back in service, we're seeing strong orders and our order book this year is healthy already in.
We look at that continuing through 2020 and into 2021.
That's our lineup visibility at this moment.
That's very helpful and I have one follow up question.
As it relates to your 2020 outlook and just as we move from the top line to the bottom line how should we look at.
Your outlook in terms of different opportunities that you see an increase in the operational efficiencies.
Whether it's through.
Optimization of R&D spend versus SP, and then just different leverage opportunities that may be on the horizon, whether near term or long term for the company.
Yes, so one of the.
Points, we've made over the last couple of years.
We made the large investment and facilities.
We've added a lot of.
Members to our organization to handle the volume increases.
I'd say our indirect.
Spend on.
People and.
And then ill translate that to Capex.
It's kind of flattening and that means that sales leverage through our existing plants will lead to higher margins as we lever that investment. So we are in that phase of the cycle.
So I think those are positive as Jack highlighted R&D.
It's come to.
Point, where we're looking at the five and 500.
I haven't 5% of sales.
For 2020, and we've talked about that between five and 6% is where we would see R&D going so you could start seeing as we increased sales were leverage.
Through the income statement on those on those dynamics.
And then Chris obviously, that's that's underpinning the this.
In part the significant growth of free cash flow.
So were.
Delivering double digit earnings growth in terms of cash conversion spending less on Capex and then we're improving our working cap primarily through our inventory levels.
That's very helpful. Thanks for taking my questions.
Welcome.
In Q.
And next question comes from Robertson gone from Credit Suisse. Please state your question.
Hey, guys.
I'll add my congrats to you Bob.
And welcome Jack I guess, it's not really welcome, but [laughter] I'll start with you anyway.
Could you bridge the cash flow from 19 to 20, obviously the capex improves the taxes go up I guess, the net earnings go up but could you just walk us through the big pieces.
Sure going back to Sheilas question 300 to 400, just the right. So as you think about the the 292 million growing to 400 plus.
Primary drivers that double digit earnings growth and I mentioned.
In terms of Capex.
We'll spend roughly $20 million less this year, so $80 million versus 99 $99 million in 2019.
And then you should expect to see our inventory levels improve.
Even with the 6% topline growth so improving both in.
As a percent of sales out right, but also in actual dollars.
As we leverage some of the the true north improvements that we've made around build rates and operating efficiency within the within the plants that.
Toms referenced earlier.
Okay, and then just move moving back to industrial.
You talked about 14%.
Obviously, we we had the tough fourth quarter, 11% this past year.
What's the cadence of improvement do you come out of the gate.
At the below that and then rise throughout the year, we think about that come a quarterly perspective.
So from a from a quarterly cadence we're back to making money again in the renewables business.
We will.
We won't have that onetime item related to warranty expense.
As well as Youre seeing roughly a return to the margins experienced in the first half of 2019 so.
Field.
Good about our visibility on 14%.
Okay, and then 787 I assume that rate adjustment how is that factored in I know it so we work but.
Yes, it's in our outlook.
So you when do you actually expect that to start showing up in the factory given that it's I guess a beginning of.
Of 2021 rate for Boeing.
We usually see at about six months in advance Rob.
Okay.
Okay.
Thats it thanks very much.
Thanks.
Thank you.
And our next question comes from Michael ceremony.
From Suntrust. Please state your question.
Hey, good evening guys. Thanks for taking the questions and congrats Bob and Jack.
Hey, guys just on the on on the Max have you sort of looked at any other sensitivity store.
I guess, what's implied in the in the outlook is it sustaining at that 42, a month or you actually.
Baking in some pickup in the production rates, just maybe I missed it but just for clarity there as well were highlight is where.
We're tracking what Boeing has relief.
So we're we're in line with that subject to our lead times.
And also.
Units that we produce for initial provisioning so.
That that specialty Italians, we're tracking with volume.
Okay.
Got it and then just on the on the aerospace margins guiding to 21% next year. I know you guys have had the long term, 20% I mean can you.
Give us a sense of you know maybe is there a little bit of a disproportionately.
Positive effect from the provisioning.
Or is this 21% I mean do you guys. Thank you can sustain this on a go forward basis, just just trying to get a sense as to what what's driving the continued margin expansion there.
Yes, I'd like to remind you, we always said 20% plus.
20, plus right.
Yeah, and so I think this is on the plus side.
So we anticipate we can hold this margin.
And even if even if the continued kind of ebb and flow in the aftermarket you still think you'd be at that level.
Yeah, I'd say, so could you know the legacy MRO, yeah. The fleets huge a lot of the fleet is only seen like 25%.
The fleets.
The current narrow bodies have only seen there for shop visit so there's going to be some good emerald as you move further the new programs. We've won are going to start hitting.
The maintenance cycles, so we see consistent.
Alex at commercial aftermarket and aftermarket growth going forward.
Got it and then just the last one I'll get out of the way just give us a little bit more color as it relates to the industrial segment, maybe what you're seeing in terms of some of the ordering trends in different geography. It certainly seems like theres a lot of different crosscurrents out there but.
We've seen any particular strength in any geographies in product lines, maybe any color on on bookings have you maybe seen a bottoming in certain areas just maybe a general sense there.
Sure.
Well I think a in the prepared remarks, you heard from is that we actually were calling the bottom of the turbo machinery market.
In 2019, and we did.
To that so we've been seeing.
Slight so we're seeing the turned up in that market that you may see from some of the Oems that they're seeing 2020 as the bottom the difference between.
Their outlook in ours is the new machines have a lot more woodward content. So weve turned the corner. There. So we're seeing that on the uptick and that we expect that to grow slowly over the next few years, we don't expect the fee type recovery, but we do see some steady growth in there.
You know China in general.
Has some uncertainty to it like you're saying that particular, where trade goes however, when you narrowed down to some of the things regarding the new emission regulations were seeing that really positive for our small on highway natural gas engines are also seen a positive.
For our larger fuel injection and diesel business and in particular, our launch business. So those are positive.
Tempered by the trade dispute.
So that's why we're going to we have some uncertainty in the outlook or.
Up and down.
It could go either way to pan out things materialize.
The other than the renewable we took big Big hits in 2019, as we described actually 2020 sales some new programs are turning up.
But thats still business, that's under a lot of pressure.
And there's obviously uncertainty that in that business as well.
So that combination has a little bit why we said flat to up.
Low single digits.
Margin improvements or come as we're highlighting from.
You know improvements in our operations improved prevents.
Product mix improvements from these onetimers not being in there so.
We have some good confidence and being able to achieve the margins.
Got it helpful. Thanks, guys.
Thank you and our next question comes from Gautam Khanna from Cowen and company. Please.
Please state your question.
Yes, Thank you and congratulations to both Bob the Jack.
Hey, guys best of luck.
I was wondering if you could just aggregate that guidance for next year at Arrow in terms of.
The aftermarket gonna grow kind of inline with the SEC average deposit.
And just if you could give us some color on.
The other pieces within the segment.
Right. So you know on the on the back of obviously the strong growth that we saw across the board and 19.
We continue to expect growth within each of those constituent segments roughly in line with the 6% topline growth that we signaled for the year.
So both across commercial aftermarket OEM as well as defense aftermarket OEM.
Mid mid to upper single digits.
But obviously on top of very strong growth in 2019.
Yes, the mix within the OE business, improving as you move forward given you've gotten down the learning curve.
On a single I'll stop or can you comment on that.
Yes, that's definitely part of that margin expansion that you're seeing and.
And I know got him you've been tracking us for years. So if you watch this is all part of bringing those programs on line.
Getting through the learning curve getting the leverage on the facilities. So that's a part of getting.
Above this 21% range. So feel good there as we move forward. We're also with the volume we're seeing the aftermarket were also get leverage on the facility investment for aftermarket. So that also help with margins.
So it's kind of working as.
We believed it would you use as planned and it is sustainable so that's the other thing to take away. So we're getting into the numbers. We said the volumes are coming through.
More volume.
Ideally as the Max.
Comes back to service and gets to the higher rates at Boeing wants to achieve so.
We're being good shape for that and we are facilitized are ready to handle those rates. So we just need them to to get get back back into service get moving and we've got a lot of confidence in that aircraft and I think the market will as well once it's in service.
Just to be clear, where do you guys that 42 through the quarter and argue there now.
Yes on your product.
Yeah, we're operating to the 42, plus plus a little bit depending on the product based on yes. There is some inventory builds that were working on with our customers or providing for aftermarket. So it's right about that number.
Sure.
And we'll be doing is moving forward as they get back into service and then ramping as you've seen their ramp rate we're ready we're.
We have our planning system in place to go to those volumes and work hand in hand with them to ensure.
We support that ramp.
One last one I apologize for all that much but.
The two year stack on the aftermarket is pretty pretty challenging obviously.
Could you just give us any comments on the stated the aftermarket currently what is your forward visibility on the commercial aerospace aftermarket.
Because.
You guys think blown away all the targets.
I thought you guys are guiding for down 15 in Q4 to get to the full year to do better.
Have you seen any slowdown whatsoever.
Now as I, just highlighting the a shop visit rate is very strong.
And we did have good initial provisioning on on programs other than the Max So those are still in there the Max was a headwind, but the other initial provisioning I was strong and.
So.
It's something we've been highlighting for quite a few years, we've got a great presence.
In the commercial market with products that are just coming up there.
Lot of their for shop visits and then some.
Second so that.
Our market dynamics are quite good and as we move forward on those legacy.
Yeah, that's some highlighting we're going to have the new ones coming behind it so.
Those are some pretty big growth numbers as you're highlighting but we see good aftermarket solid aftermarket and continued growth going really for the long term.
Just based on the products. We've won how many components you guys I think of all remember from our Investor presentations, we have a significant mount more heller use per application than we did in the past, which means more aftermarket as they hit their repair cycle. So the dynamics are good we're starting to see Evan we think.
Are you kind of count on good aftermarket for many many years.
Thank you guys.
Thank you.
The next question comes from David Strauss from Barclays. Please state your question.
Hey, guys. Thanks for the question. This is Matt on for David actually.
I may have missed this but you guys.
Called out the assay six of 6.2 headwinds.
For Aero heavy size, how how big that it had one.
For the for the full year.
2020, it so it's a seven cents headwind on the back of Tencent tailwind.
2019.
Got it okay.
And then I guess.
Just industrial margins.
I mean do you guys in the path of talked about that business going into 16% and I know some things have changed since then but that's still a target that's out there and how do you think about sort of what would have to happen to get to 16% at industrial.
It's very definitely at.
Targets that were that we're pursuing and I think given the areas, where we're seeing growth.
Those are.
Those are good margin businesses for us.
We have had some of our lower margin businesses taper off.
And and maybe to clarify something I said earlier I think we'll see a ramping up margin.
From a throughout.
2020.
Within the industrial segments as as we.
Seeing an improvement in that throughout the year.
Got it okay. Thanks.
Thank you and our next question comes from Carl pose pulled associates. Your line is now open.
Hi, guys great year.
Thank you.
I'm just looking for some clarity on the commercial aftermarket on a six so five basis.
It appears that growth might have been negative.
It looks like.
The adjustment to six so six additive all 15 million in aerospace sales this quarter, what I think 9% growth is on a six so six basis and in the first half of the year you disclose growth on a six so five basis. So we just trying to compare apples to apples on a six so five.
Basis, if you add 420 million of commercial aftermarket sales last year about 105 per quarter is it fair to assume that theres about a 1000 basis points of delta between the 9% that that you're reporting I think on a six so six basis.
And what it would be under six so five.
Commercial aftermarket would have been roughly 9% year over year.
Okay. So five sorry under six so five.
So would it be high and on the six so six basis.
On a six so six basis.
19%.
Okay, and then for the full year I think you guided Q.
Mid to high single digits.
Excluding only in line.
Change what would it have been on a full year basis.
I'm sorry repeat that please.
Excluding the adjustment.
Six so five to six those six what would have commercial aftermarket growth and on a full year basis.
We're not we're not really forecasting in six of five anymore. Because we've made the transition at the beginning of fiscal year 2019 to six or six.
So I don't I apologize, we don't have that from a comparability standpoint.
All right. Thank you.
Yes.
Thank you.
Thank you.
And we have a follow up question from Pete Skibitski.
From Alembic Global your line is now open.
Yes. Thanks, just one housekeeping question do you guys have a fully restaurant for DNA for fiscal 2000.
Yes.
Most of DNA for.
Yeah.
Depreciation and amortization progress.
Yes.
[laughter] provided head, yes, I think I think up modestly as probably the right way to think about it.
Okay got it thanks, guys yep. Thanks.
Thank you.
And again, ladies and gentlemen, if you have this question that is star one again, ladies and gentlemen, if you have a question that is star one. Our next question comes from Georgia offers from C.L. King.
Please state your question.
If you phones on mute please UN mute it.
George Scoffing at 1000.
Thanks, Tom you touched on this that you put the capacity in place to ramp up production as Boeing needs to take that higher are you anticipating what do you see any issues with the rest of the supply chain that could impact you that those production targets going from 40 to 52 to 57 could perhaps be more challenging to meet into.
2020.
It was definitely.
George as you probably know already is there's definitely a pressure in the supply chain.
I was looking in some of the materials weather forgings castings.
Bearing all those are some pressure on capacity.
So we're trying to work that.
I think the whole industry experience that so everybody's working to make sure those capacity a numbers are there for those type of commodities, but that's what I'd say there is some pressure.
We're working at but.
Hope.
That could become a constraint.
And could temper the ramp rate, but I think people working it really hard and I think.
The ramps should the inline with what Boeing's perspective.
Great. Thanks for taking my question.
Thanks, Sir.
Thank you and we have a follow up question from the Tom conduct Cowen. Your line is now open.
Just wanted to ask where you are on low Ron bringing their technology to the U.S. have you had any revenue synergies you have there.
Yeah, we have we've won.
Program and we've won some in China, So we're starting to see that leverage.
And we see more coming and just as a reminder, those those do have a fair amount of.
Development cycle times.
Not as long as aerospace, but synergies are happening and.
We're seeing.
Also.
Better supports customers. They like the fact that we're bringing not just a fuel injection system of bringing the controls and actuation involving as well so.
That that's progressing very well, we're really quite happy with.
The way launches are moving forward with the company.
Hello, Rob just broke rate implied next year.
We haven't broken that out.
So it's not a number we've we're providing separately at this time from the industrial so it's embedded in a flat to slightly up.
And mainly that is it fair to assume though it before.
If you probably could share.
Well, it's up a little bit.
You can look at it being up but we also have the headwinds you know they had they have strong oil and gas.
Sales that are being tempered.
Some of the sales.
A large diesel engine power Gen have tempered a little bit so I won't be up dramatically more than the whole industrial group in line.
Thank you it's very helpful.
Thanks.
[noise].
Thank you Mr. gendron there are no further questions at this time I would now turn the comps Betsy.
Okay, well I'd like to thank everybody again for joining us today.
I would like to invite all of you to join US at our Investor Day in New York City on December six.
Well have a little more in depth discussion on our markets, our strategies and our longer range outlook. So I hope to see there and thanks again for joining us today.
Thank you.
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